DERIVATIVES: TriOptima eliminates record amount of OTC derivatives

Market participants terminated $62trn in over-the-counter derivatives notional principal outstanding last year using TriOptima’s triReduce compression service, the market infrastructure firm reported today.

This included $56.4trn in interest rate swaps – $46.3trn of which had already been cleared through LCH.Clearnet’s SwapClear – and $5.6trn in credit default swaps. These numbers represented a rise of 14% in the amount of CDS terminated compared to 2010, and an increase of 23% for interest rate swaps.

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

“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,” he added.

Basel III uses capital charges to incentivise market participants to use trade compression services to reduce the amount of outstanding trades they have on with each other, both inside and outside of central counterparties.

For counterparty exposures subject to zero threshold collateral agreements, a dealer’s capital charges will be based on its 10-day value-at-risk exposure calculation for netting sets of less than 5,000 trades and the 20-day VAR exposure for sets of more than 5,000. Trades within CCPs, meanwhile, are subject to 2% capital risk weightings.

According to the latest Bank for International Settlements quarterly report, the notional amount of OTC derivatives rose 18% in the first half of 2008 to $708trn, well above the previous peak of $673trn in mid-2008.