Clearing house SwapClear reached the milestone of US$1 quadrillion of compressed interest rate swaps, effectively removing a huge chunk of notional outstanding from the derivatives market.
The LCH-owned clearing house said that it had compressed 8.4m contracts on the platform.
Equivalent to one thousand trillion, or one followed by 15 zeros, US$1 quadrillion is estimated to be sufficient to buy all 6.7bn people who live on planet earth an average American home. A quadrillion dollars represents 13 years of global GDP or five times the value of everything in the US.
“Compressing this volume of swaps is a significant achievement for us,” said Cameron Goh, head of clearing solutions at SwapClear. “Capital efficiency is top of mind for many banks, which are looking for ways to drive down their notional outstanding.”
As a result, demand for compression services is at an all time high, Goh said.
A key driver of the huge compression volumes going through the clearing house is its so-called blended-rate compression offering, introduced late last year to enable members and their clients to compress forward rate agreements.
FRAs are typically used to hedge interest rate risk around certain rate reset dates and are well-suited to blended-rate compression, which enables trades with different interest rates but the same payment dates to be compressed.
The first blended-rate compression run for FRAs alone saw some US$1.9trn eliminated.
Basel III capital requirements introduced in 2010 significantly increased the capital that banks are required to hold against their risk weighted assets. The rules removed the previous 50% ceiling for risk weights on OTC derivatives and replaced them new risk weights, which varied according to the type of counterparty.
Under the standardised approach mandated in the US, the US and its agencies generally carry zero risk weights, other sovereigns can carry risk weights of up to 150% and domestic banks generally carry risk weights of 20%. Non-US banks carry risk weights ranging from 20% to 150% while corporate exposures are risk weighted at 100%.
From January 1 next year the standardised method to determine risk weighted assets will be replaced by a new method known as the standardised approach for counterparty credit risk, which is expected to give more recognition to the impact of margin and netting.