Introduction of Compression
Compression is a process which allows the Clearing Members (CMs) to reduce the number of individual positions and overall notional value of their portfolios by combining or offsetting trades with economically compatible characteristics.
Through trade compression, CMs can achieve a cleaner and less complex portfolio with enhanced operational efficiency and also potentially optimize their capital and leverage ratio for relief of regulatory capital requirements. In essence, compression can preserve the market risk position of CMs whilst reducing operational costs and hence there is an increasing market demand for trade compression services.
OTC Clear’s Compression Services
Solo Compression
OTC Clear first launched the solo compression service in August 2018. Solo compression allows CMs to net-off trades with equal but opposite economics within their own portfolios. Compression can reduce the number of individual transactions, and therefore leads to lower operational risks and costs involved in portfolio management.
Example:
Multilateral Compression
Effective from 8 Aug 2022, OTC Clear extended our compression service to multilateral compression, which allows multiple CMs to compress trades together and offers far greater compression opportunities, flexibilities and efficiency to optimize CMs’ cleared portfolios.
Multilateral compression is available via a Compression Service Provider, allowing CMs to define their own risk tolerances to achieve optimal compression result.
Compared to the existing solo compression, multilateral compression creates a bigger universe for compression and enable greater number of existing trades to be compressed at one go, as a result achieves greater efficiency in reducing gross notional outstanding.
Example:
Compression Service Provider
TriOptima:
OTC Clear is partnering with TriOptima, a market leading compression service provider whose service has been widely used in the interest rate swap market, to offer multilateral compression services. OTC Clear will notify CMs of the appointment of the Compression Service Provider via circular in due course.
Related Circulars: