Interest Rate Swaps Compression: A Progress Report

This paper describes a risk reduction practice, portfolio compression (compression), which is conducted in the interest rate swap (IRS) market. Compression enables swap dealers with substantial two-way (pay and receive) swap activity to terminate substantial amounts of swap contracts before they expire by their terms. The benefits of compression include reductions in counterparty credit exposure, operational risk and cost, as well as lower legal and administrative expenses in the event of a default of any participating dealer. Importantly, since contracts are actually eliminated, under some regimes capital costs can be reduced. Together with expanded clearing of IRS, compression produces tremendous reduction of risk in the derivatives marketplace.

Compression was introduced to the IRS market in 2003 by TriOptima. Through year-end 2011, participating institutions have eliminated $164 trillion of notional principal outstanding with $56 trillion compressed in 2011 alone. Much of the recent progress has been the result of collaboration between TriOptima and LCH.Clearnet Ltd.’s swap clearing service, SwapClear. We estimate that without compression, the size of the IRS market would be approximately 30% larger.

While results have been very positive, challenges remain to improve the scope of compression. Meeting these challenges could result in a marked increase in compression, and might very well enable the derivatives market to shrink in terms of notional outstanding even as annual activity increases.

Documents (1) for Interest Rate Swaps Compression: A Progress Report

ISDA Publishes Equity Definitions VE, Version 2.0

ISDA has published version 2.0 of the ISDA Equity Derivatives Definitions (Versionable Edition) (the “Equity Definitions VE”) on the MyLibrary platform. This publication includes, among other updates, provisions that can be used for documenting transactions with time-weighted average price or volume-weighted average price features,...

Marking a Milestone - IQ January 2025

It was a different time and a very different market, but 1985 remains a seminal year in the history of over-the-counter (OTC) derivatives – the year that ISDA was established and the very first industry standard document was published. While...

Response to FCA on SI Regime

On January 10, ISDA and the Global Foreign Exchange Division (GFXD) of the Global Financial Markets Association (GFMA) responded to questions from the UK Financial Conduct Authority (FCA) on the future of the systematic internalizer (SI) regime. In the response,...

Response to CSA on Clearing Obligation

On December 19, ISDA submitted a response to the Canadian Securities Administrators (CSA) consultation on proposed amendments to the clearing obligation in Canada. The CSA invited comments on the proposed amendments and on the specific question set out in Annex B...