Compression

$1.76 quadrillion. That’s a big number. In fact, it’s the amount by which SwapClear has reduced notional outstanding OTC interest rate swaps exposure in the market as of October 2017.

What is Compression?

Compression reduces the number of trades in our members’ portfolios. It simplifies the management of their positions and frees up valuable capital that would otherwise be held unnecessarily against offsetting positions that can be compressed.

The result is a cleaner portfolio, less complexity and the potential to have some relief in terms of regulatory capital requirements.

The Line Item Problem

Sometimes in cleared swap portfolios, trades that share economically compatible characteristics and that can be netted off against each other are not recorded as offsetting trades.

Each time Clearing Members and their clients clear an interest rate derivative at SwapClear, that transaction is recorded in their trade portfolio as a new line item. Over time, these portfolios grow to contain tens or even hundreds of thousands of individual transactions.

Regulations such as Basel III require Clearing Members to hold capital against cleared derivatives trades. More line items mean a larger portfolio on a gross notional basis, potentially meaning a higher capital charge.

Compression: The Line Item Veto

SwapClear’s compression services empower our members and their clients to compress down line item trades within their portfolio that have economically compatible characteristics against one another.

Compression streamlines swap portfolios. It eliminates line items making member and client books smaller, cleaner and far more efficient from risk management and potentially capital standpoints.

Fewer line items means there are fewer positions to have to reconcile, making portfolios easier to manage and also speeding up the auction of a portfolio following a default.

SwapClear’s Compression Offerings

As with all elements of our offering at SwapClear, Clearing Members and their clients enjoy a number of different compression options, allowing you to take control over which trades you want to compress, when you want to do it, and how you want to do it.

Solo Compression – For Members and Clients

Solo Compression gives you autonomy and flexibility to eliminate inefficiencies in your swap portfolio on your own terms.

Best of all, SwapClear’s entire cleared product suite is eligible for Solo Compression. That means ff you can clear it at SwapClear, you can compress it at SwapClear.

Solo Compression with Blended Rates

SwapClear always wants to make things easier for our Clearing Members and their clients. Terminations don’t come any easier than with blended compression.

Blending replaces a number of individual line items with different fixed rates into a single risk replacement trade with one blended rate. With our SMART simulator, you can estimate the netting benefits possible on a portfolio before you even begin. It’s that easy.

Eligible products for Solo Compression with Blended Rates include: Interest Rate Swaps, Overnight Index Swaps and Forward Rate Agreements.

Duo Compression – For Members

Duo is a compression service that is all about partnership. LCH identifies a pair of Clearing Members that have mutual compression opportunities with each other.

The counterparties then work together select matching trades, even if those trades were not originally identified by LCH to those Clearing Members.

Even better, Duo allows the parties to add in risk replacement trades. This means that not only can multiple existing trades be compressed down into a new replacement swap, but since the replacement trade does not have to be an existing position, the two counterparties have the potential to take advantage of current market rates, if beneficial.

 

Multilateral Compression – For Members and Clients

Great things can happen when people work together. That’s the philosophy behind multilateral compression, which lets SwapClear members and clients terminate trades together.

The bigger the pool of participants, the greater the opportunities for offsetting positions against each other. It’s amazing what a little teamwork can do.

Approved Compression Service Providers

SwapClear can receive and process valid compression proposals created by Approved Compression Service Providers (as defined in the applicable LCH rulebook).
 
Below is a list of the Approved Compression Service Providers for SwapClear:
 
 - TriOptima AB

 - Quantile Technologies Limited

 - Capitalab, a division of BGC Brokers L.P.

The initial steps in becoming an Approved Compression Service Provider (ACSP) require LCH to review and agree that the potential ACSP will meet the following criteria:

  • Meets the definition of SwapClear compression services as per LCH rulebook
  • Potential ACSP has robust legal framework under which to provide such compression service
  • Potential ACSP can demonstrate robust controls and operational capability
  • LCH can operationally support the proposed compression service  
  • Potential ACSP has written confirmation of commitment from at least six SwapClear members to use their services
  • Potential ACSP can demonstrate successful testing of its services with a number of potential participants