Swaps compression tools drawing buy-side attention

LCH.Clearnet is expecting to see the first ever decline in the notional value of interest rate swaps, which it is attributing to the uptake of its OTC compression service.

LCH.Clearnet is expecting to see the first ever decline in the notional value of interest rate swaps, which it is attributing to the uptake of its OTC compression service.

Compression effectively ‘removes the clutter’ by combining standardised trades with compatible characteristics and then netting them off, therefore reducing both the notional value and trade count.

The tool then enables market participants to reduce the amount of capital they need to commit to the trade, giving the buy-side respite from tough new rules enforced as part of Basel III.

Similar services offered by TriOptima’s TriReduce business, which has eliminated more than $520 trillion in notional principal, while CME’s coupon blending tool in the US has also seen a 89% decline in line items and 69% decline in margin exposure.

“Less really is more when it comes to notional outstanding,” said Daniel Maguire, global head of SwapClear, LCH Clearnet.

“Market participants recognise that streamlining portfolios reduces leverage ratio, capital and risk as well as boosting efficiency at an institutional and industry level. 

As of the end of October SwapClear, LCH Clearnet’s interest rate swaps clearing business, had processed swaps valued at a notional of $406.9 trillion, compared to $426 trillion at the start of the year.

So far in 2014, SwapClear has compressed 1.95 million trades resulting in an overall reduction in its clearing members’ and clients’ number of trades outstanding from 3.2 million in January to 2.7 million as at the end of October.

“This is a trend which we expect to see accelerate in 2015 as the market further embraces the clearing efficiencies and STP services on offer,” said Maguire.

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