Swaps exposure slashed by nearly two-thirds

Compression services are increasingly being adopted by banks to reduce derivatives exposures.

Total exposures in the OTC derivatives market were slashed by 62% over the first six months of 2015 due to the use of compression services.

Portfolio compression, which enable banks to offset compatible trades and therefore wipe off trillions of dollars in notional volume, are increasingly being adopted by banks as a means to reduce exposures and post less capital.

According to the research, notional outstanding fell from $505.4 trillion to $434.7 trillion.

In addition, an estimated 67.1% of total notional outstanding was cleared at the end of June last year, reflecting a rise in swaps activity through clearing houses such as LCH.Clearnet and CME Clearing.

The data was compiled by the International Swaps and Derivatives Association (ISDA) on the size of the interest rate swaps market.

“Clearing and compression have become well established in the interest rate derivatives market, in part because of regulatory and capital requirements, but also because of the risk management and operational benefits these services provide,” said Scott O’Malia, CEO, ISDA.

As a result in the reduced size of the market, ISDA found that market activity in the space increased by 4.7% between December 2014 and June 2015

During last year, LCH.Clearnet said that it had eliminated over $100 trillion through its compressions service.