Regulation pressures firms to eliminate outstanding derivative holdings

Post trade risk management firm TriOptima says it eliminated $84trn in OTC derivatives notional principal outstanding in 2012: $80.5trn in interest rate swap notionals and $3.5trn in credit default swap (CDS) notionals.

Of the $80.5trn, almost $72trn in reduced interest rate swap notionals were the result of ongoing efforts by LCH SwapClear, its member institutions and TriOptima itself, to reduce outstandings in the clearinghouse.

Part of the ICAP Group, TriOptima introduced its triReduce portfolio compression service in 2003. Since then more than $322trn in notional principal outstandings have been eliminated: $245trn in interest rate swap notionals and $77trn in CDS notionals.

Reducing gross notionals contributes to overall financial stability while also eliminating costs, credit and operational risk and capital requirements for the individual participants, the firm said.

“We continue to work with the banks and clearing houses to reduce gross notional exposure as final rules are published by the global regulators,” said Peter Weibel, CEO of triReduce.

“We are pleased that market participants continue to compress CDS and bilateral interest rate swaps while also focusing on cleared trades. We also began collaborating with SGX in 2012, and look forward to supporting other clearing house initiatives as they develop.”

In 2013 the firm plans to expand the range of emerging market currencies for interest rate compression, adding products eligible for triReduce Commodities and introducing cross-currency terminations.

Compression services are offered to swap market participants with significant two-way flow. In triReduce, participants are able to tear up their existing trades at their own mid mark-to-market valuations avoiding the difficult negotiation process of bilateral termination.

Multilateral terminations leverage off the expanded number of participants and result in increased numbers of terminated trades, which reduces costs, credit and operational risk, as well as capital requirements.

Eliminating unnecessary swaps in an OTC derivatives clearing house promotes the efficient use of capital and collateral and contributes to overall financial stability by moderating the pace of growth in outstanding notional principal in the market.

triResolve, used by more than 250 firms globally, includes proactive portfolio reconciliation of OTC derivative portfolios, margin call management, and dispute resolution. triReduce, the portfolio compression service for OTC derivative dealers serves over 169 bank and non-bank subscribers worldwide including the major local and global dealers.

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