IAP.L Share News (IAP)

By Helen Bartholomew

LONDON, Oct 24 (IFR) - Swaps compression cycles intended totear up superfluous contracts have been extended toclient-cleared buyside trades for the first time, enablingend-users that are not direct members of a clearinghouse tocollapse redundant exposures.

The latest Canadian dollar interest rate swap compressioncycle, operated by ICAP-owned TriOptima'a triReduce platform andLCH's SwapClear, included trades that are cleared through thecentral counterparty via clearing brokers or futures commissionmerchants on behalf of clients. Multilateral compressionservices operated by triReduce previously included only directmembers of the CCP.

The cycle, which saw C$1.38trn (US$1.05trn) of notionaleliminated, included interest rate trades that had been clearedby Citigroup on behalf of a client.

"In this environment it's very important for clients,investors and banks to run tidy books and operate as efficientlyas possible and that means managing down notional," saidChristopher Perkins, global head of OTC clearing at Citigroup."Compression is a win for the industry."

Citigroup is the largest clearing broker forover-the-counter derivatives, with US$13bn of segregated clientcollateral backing cleared swap trades, according to CFTC data.

Multilateral compression is another tool for swaps end-usersto reduce notional exposures. Many already operate risklessnetting of long and short exposures on a unilateral basis, whileothers have participated in blended coupon compression that seessimilar contracts netted into a single exposure that combinescoupons into an average. Standardisation of contracts throughmarket agreed coupon swaps has enabled netting of cleared swaps,while some swap execution facilities, such as TrueEX offertransaction-level compression.

Extending multilateral compression to non-dealer firmsrequired operational changes by TriOptima and LCH andadjustments to the legal framework. For clearing brokers, anumber of operational developments were also required, includinga review of policies and processes to ensure client tolerancessit within risk limits.

"We have worked hard to build the operational processes tomake sure that clients have the ability to join these cycles."said Perkins. "Our clients are at different stages of readinessbut we're having advanced conversations across all regions andhope to see more and more use the service."

Citadel, the Chicago-based hedge fund with US$25bn of assetsunder management, became one of the first buyside firms toparticipate in the swaps tear-up exercise.

"We have long supported buyside access to these solutionsand look forward to the benefits that this will bring to themarket." said John Naud, COO of global fixed income for Citadel.

Peter Weibel, CEO of triReduce, said increasing theparticipant base of compression cycles generates a larger poolof liquidity, which should improve cycle efficiency for allswaps participants by increasing matching rates.

"This also expands the benefits of risk, capital andoperational cost reductions to a substantial new segment ofmarket participants," said Weibel.

TriOptima has eliminated more than US$130trn swaps notionalthrough its triReduce service so far this year and overUS$860trn since operations began in 2009. In 2015, SwapClearcompleted 45 multilateral compression cycles in conjunction withtriReduce.

Citigroup's Perkins said the service will be extended toadditional currencies and CCPs, many of which operate their owncompression cycles in conjunction with TriOptima. (Reporting by Helen Bartholomew)