Understanding and Analysing Portfolio Compression

Diana Higgins

"The chess player who develops the ability to play two dozen boards at a time will benefit from learning to compress his or her analysis into less time."
Marilyn vos Savant

One of the main questions before starting a project is to ask what the mission actually is. Is it to reduce risk? Is it to stay within regulations, or to close the company down? Maybe it is to save money so as to be able to finance the cost of running a trading business?

This chapter should help the reader decide if a portfolio can be compressed or not. This can be useful for companies that need to comply with EMIR, as it provides metrics and KPIs that can help supporting the decision of whether to compress a portfolio. Additionally, those coordinating and participating in a compression task can apply the concepts to their own portfolios for preparation purposes, and to present results to their companies.

This chapter includes a section that defines and explains bilateral and multilateral compressions, as well as triangulation, another technique that, if combined with a compression, can help to mitigate credit and other post-trade risks. The reader will notice how the main financial components in the