DERIVATIVES-Swaps compression hits US$1 quadrillion

LONDON, June 27 (IFR) - Derivatives users have eliminated more than US$1 quadrillion of notional outstanding in over-the-counter swaps through NEX Optimisation’s triReduce multilateral compression service since its 2003 launch by TriOptima.

The latest figure, which reflects a reduction in swaps notional equivalent to US$1,000trn, or 13 times global GDP, comes after banks embraced compression in response to stringent leverage ratio treatment under Basel III, tearing up superfluous contracts to slim down bloated derivatives portfolios.

Compression, which involves matching identical and offsetting trades between clients and netting them down into fewer line items, emerged as a vital activity following the 2009 G20 agreement, which aimed to reduce systemic risk through new swaps reporting and clearing requirements under Dodd-Frank in the US and EMIR in Europe.

That has piled additional pressure on dealers and buyside firms to eliminate unnecessary swap inventory as they cut the operational burden associated with unwieldy swaps books.

Notional outstanding of OTC swaps fell to US$483trn by the end of 2016, down from a US$707trn peak in 2011, according to the Bank for International Settlements, and largely driven by compression.

“Hitting the US$1 quadrillion mark is a significant achievement for the market,” said Peter Weibel, CEO of triReduce. “Our clients, both dealers and the buyside, are focused on eliminating as much notional principal as possible to meet regulatory goals and to manage their own balance sheets.”


Although operational for 14 years, the volume of swaps eliminated through triReduce tripled in 2014 as the service added more cycles in conjunction with swaps clearinghouse LCH SwapClear. The platform now runs up to 200 cycles each year alongside six central counterparty clearinghouses, with more still to come onboard.

LCH hit its own US$1 quadrillion compression landmark a year ago through a combination of triReduce cycles and its own unilateral service and blended-rate compression, which enables trades with different interest rates to be collapsed.

The process of unlinking trades was added to the triReduce service in 2014, increasing matching rates by enabling contracts to be eliminated without an agreement from the opposite party. Matching was increased by another 20% in 2015 with the introduction of upscaling, which enables counterparties to increase the notional amount of an existing trade to trigger a match and associated tear-up that might not otherwise emerge.

While cleared swaps represent the bulk of compression activity, growth has been high in non-cleared contracts such as cross-currency swaps, which now attract hefty collateral requirements under uncleared swaps margin rules that went live in 2016 for the first wave of participants.

TriReduce compresses across 28 currencies in interest rates swaps, credit default swaps, FX forwards and commodity swaps. (Reporting by Helen Bartholomew)