TriReduce hits $1 quadrillion in swaps compressions

Demand has been high as banks seek to lower exposures

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Winning number: "Hitting the $1 quadrillion mark is a significant achievement for the market" - Peter Weibel

Nex Optimisation announced on June 28 that participants in its triReduce compression service have eliminated more than $1 quadrillion, or $1,000 trillion, in over-the-counter derivatives notional principal since its introduction in 2003.

The Nex Group-owned, multilateral, risk-constrained service offers compression for cleared and non-cleared interest rate swaps in 28 currencies, cross-currency swaps, inflation swaps, credit-default swaps, FX forwards and commodity swaps. Eliminating unnecessary swap inventory contributes to enhanced credit risk and capital management, reduces operational costs and risk, improves leverage ratios and reduces systemic risk.

Compression is a balance sheet and risk management process through which swap market participants can aggregate their trades and net those that offset each other, to reduce the notional outstanding and the number of line items in their portfolios. It creates fewer trades and therefore provides capital relief, decreases operational risk and simplifies portfolio management.

“Hitting the $1 quadrillion mark is a significant achievement for the market. Our clients, both dealers and the buy side, are focused on eliminating as much notional principal as possible to meet regulatory goals and manage their own balance sheets,” said triReduce chief executive Peter Weibel in a press statement on June 28.

Compression, which is done in cycles and in a single currency at a time, has taken off over the years as banks began using it to manage their derivatives exposures to comply with Basel III capital requirements. Banks use compression to improve their leverage ratios, which European regulators want at 3% to deter institutions from taking excessive risks.

In its December 2015 Quarterly Review, the Bank for International Settlements (BIS) reported that outstanding OTC derivatives positions declined by 12% in the first half of that year, from $629 trillion to $533 trillion, as a result of dealers trimming the size of their derivatives books through compression.

The shrinking outstanding OTC derivatives contract largely resulted from a sharp reduction in notional amounts in the euro-denominated interest rate segment, from $167 trillion to $126 trillion between end-December 2014 and end-June 2015, the BIS reported.

There is continued industry demand to address the costs and risks in the swaps lifecycle
Michael Modlock, triReduce North America

In May 2016, global clearing house LCH announced its SwapClear service compressed more than 8.4 million cleared trades, representing $1 quadrillion in notional, since the firm began offering compression services in 2008. It achieved this through a combination of its own proprietary services and triReduce.

“There is continued industry demand to address the costs and risks in the swaps lifecycle: risk-weighted assets, leverage ratio, G-Sib (global systemically important banks) metrics, operational workload and counterparty credit risk. The growth in compression has been mainly in cleared G10 rates, as well as a widening of focus in the last two years to include more products, such as overnight indexed swaps, forward rate agreements, cross-currency swaps and inflation swaps,” says Michael Modlock, head of triReduce North America.

Excellent growth

He notes additional services that have been launched, such as the company’s collaboration with CLS on FX forwards, have seen excellent growth.

“In addition to the appetite for compression in different currencies, products and clearing venues, we are receiving more interest from clients in new market segments who want to unwind portfolios through their clearing brokers or futures commission merchants. We now have several of these on board, which increases the overall pool of compressible trades, leading to better efficiency,” Modlock adds.

“We are proud to have worked together with our clients and other infrastructure providers where possible to achieve this goal,” Weibel notes on triReduce’s milestone. 

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