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

Launch of ISDA Notices Hub and Protocol

ISDA has launched the ISDA Notices Hub and the ISDA 2025 Notices Hub Protocol, giving users a faster and more efficient method for delivering critical notices and reducing the uncertainty and risk of losses that can result from delays. The...

ISDA response to ESMA MiFIR Review Consultation

On July 11, ISDA submitted a response to the European Securities and Markets Authority's (ESMA) fourth package of Level 2 consultation under the Markets in Financial Instruments Regulation Review (MiFIR), on transparency for derivatives, package orders and input/output data for...