CDS indices) the compression process is fairly straightforward because the majority of economic details are the same (e.g. The original two contracts are torn up and one new contract with a reduced notional amount takes their place. Our first diagram shows how transactions between two parties could be compressed. Indeed the International Organization of Securities Commissions has also recently recommended compression as a standard for mitigating risks for non-cleared OTC derivatives trades. Compression can be done for all or part of the notional amounts concerned.īasel III’s new capital rules and leverage ratio are based on gross notional exposures and so trade compression allows banks to reduce the capital needed to cover their OTC derivatives trading book risk.
This can be done on a bilateral basis where firms cancel offsetting contracts in their own portfolios or a multilateral basis where a group of market players can tear up offsetting trades with each other within agreed parameters. Trade compression is a way to reduce the number of outstanding contracts (and therefore their gross notional amounts) but keep the same economic exposure. The semi-annual report published by the Bank for International Settlements (“BIS”) earlier this month estimated that the notional amount of outstanding OTC derivative contracts as at 30 June 2015 was US$553 trillion, a decrease of approximately 14% from the previous half year.Īccording to the report, it is believed a large part of the decline is due to trade compression.
Friday 20 November 2015 Trade Compression
0 kommentar(er)
