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 Response on Hedge Accounting Guidance

On August 14, ISDA responded to an exposure draft from the Financial Accounting Standards Board (FASB). ISDA broadly supports the FASB’s proposed targeted improvements to hedge accounting, including allowing interest rate hedging of held-to-maturity (HTM) debt securities, recognizing all Secured...

Joint Response to EBA Consultation

On August 12, ISDA and the Association for Financial Markets in Europe (AFME) responded to the European Banking Authority’s discussion paper on certain taxonomy key performance indicators (KPIs) and other aspects of the Disclosures Delegated Act  under Article 8 of...

Response to JSCC on Clearing Fund Consolidation

On August 12, ISDA responded to the Japan Securities Clearing Corporation’s (JSCC) consultation on its proposal to consolidate clearing fund consumption, calculation and deposit segmentation across six clearing qualifications under the Financial Instruments and Exchange Act. ISDA members broadly support...

Response on CSDD Guidelines

On August 6, ISDA responded to the European Commission’s (EC) consultation on due diligence guidelines under the Corporate Sustainability Due Diligence Directive (CSDDD). While ISDA acknowledges that model contractual clauses can be a helpful resource for in-scope companies, there are...