The CME Group has become the latest exchange provider to offer multilateral swaps compression services to its interest rate swap clearing members through third-party provider TriOptima.
The first elimination cycle is planned for early in the second half of 2015 and will enable members to compress US dollar-denominated dealer-cleared trades through triReduce, with additional currencies to be added in subsequent months.
Swaps compression has become a vital service for clearing house operators as dealers accelerate the clear-out of their weighty derivatives portfolios against a backdrop of rising capital charges. In particular, the leverage ratio under Basel III is based on gross notional exposures, driving dealers to reduce costs by running more streamlined derivatives books.
“We’re pleased to work with TriOptima so that our dealer bank members will have the opportunity to use triReduce compression as they focus on reducing line items and cleared gross notionals to improve leverage ratios under new regulatory standards,” said Sunil Cutinho, president of CME Clearing.
“With this step, we are able to continue to deliver the most capital efficient clearing solutions available.”
Elimination of superfluous swaps contracts hit new records in 2014 with US$134trn of tear-ups completed via CCPs and an additional US$50trn compressed outside of clearing firms, according to analysis earlier this year from ISDA.
Total notional value of contracts torn up through triReduce now exceeds US$520trn since the operation got underway in 2003.
“The industry’s efforts to reduce outstandings have contributed to a meaningful decline in the notional outstanding in interest rate derivatives, and triReduce has been a major factor in that achievement,” said Peter Weibel, CEO of triReduce.
“We are delighted to be working with CME Group to deliver triReduce compression to its clearing members as we continue our efforts to enhance the industry’s post trade infrastructure,”
Activity could further increase in 2015 as triReduce expands its services to a growing range of central counterparty clearing firms. In addition, counterparties will be forced to exchange initial margin on uncleared trades such as cross currency swaps, inflation swaps and swaptions at the end of this year, encouraging dealers to further slim their bilateral exposures.
While many CCPs offer clients a unilateral service for clearing members to compress trades on a risk-free basis, third parties are vital for offering multilateral services, where high matching ratios can be achieved within pre-determined risk parameters.
After a long-standing relationship with LCH.Clearnet’s SwapClear, TriOptima ran its first tear-up cycle with the Japanese Securities Clearing Corporation last December, and is understood to be preparing for an inaugural compression cycle with Eurex (IFR 2064 “Japan adds swaps compression”).
Highlighting the growing importance of compression services, SwapClear celebrated its the first ever annual decline in notional outstanding in 2014 after eliminating more than US$250trn of trades through a combination of unilateral and multilateral services (IFR 2061 “Compression drives down CCP swap notionals”).