Derivatives counterparty risk reduced with compression tool

Derivatives services firm TriOptima says it eliminated a record-breaking $62trn in notional principal outstanding in OTC derivatives in 2011.

The firm, part of the ICAP Group, offers various services which ‘tear up’ clients’ existing trades at their own mid mark-to-market valuations, avoiding the difficult negotiation process of bilateral termination.

The $62trn included $56.4trn in interest rate swap notional principal, of which $48.3trn were cleared swaps in LCH SwapClear, and $5.6trn in credit default swap notional principal. This represented a 14% increase over 2010 levels overall, and a 23% increase in interest rate swap terminations.

Market participants use the triReduce network community service for portfolio compression, one of the tools global regulators have identified as effective in reducing counterparty credit risk.  

OTC derivative dealers support the triReduce compression cycles in both cleared and uncleared interest rate swap transactions, and also continue to compress uncleared CDS transactions where possible.

“We developed a strong partnership with LCH SwapClear and its members that resulted in significant terminations of cleared IRS transactions,” said Peter Weibel, CEO of triReduce.

“In some months, like October, we actually eliminated more existing IRS notional principal from the clearinghouse than the aggregate notional of new trades submitted to clearing during the same period. We are working to sustain these results in 2012 within the clearinghouse while continuing our expansion in non-cleared currencies around the globe.” 

Currently, TriOptima runs triReduce compression cycles in 25 IRS currencies globally and a range of CDS product types including credit index swaps, single names and credit index tranches.

Multilateral terminations leverage off the expanded number of participants and result in increased numbers of terminated trades, TriOptima said. Participants submit the trades they want to terminate.

These trades are matched with counterparties’ submissions and a proposal of terminated trades is generated based on the risk and counterparty tolerances of participants.

The process reduces costs, credit and operational risk and reduces capital requirements. triReduce serves over 170 firms including all global dealers, regional banks, asset servicers, and buy-side firms, and regularly reconciles nearly seven million trades, representing over 75% of all non-cleared OTC derivative transactions globally. 

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