TriOptima CDS tear-ups cut risk by $30.2 trillion

Stockholm-headquartered technology company TriOptima has reported that its portfolio compression service, triReduce, eliminated $30.2 trillion in notional principal from the credit default swap (CDS) market in 2008.

TriOptima held 50 CDS compression cycles last year through triReduce - which allows dealers to match and multilaterally unwind over-the-counter derivatives trades in the credit and interest rates markets. The cycles included US, European, emerging market and Asian single name, index and tranche trades, with specific cycles held following credit events at Washington Mutual, Fannie Mae, Freddie Mac, Lehman Brothers and three Icelandic banks.

Highlighting the increased focus of dealers and regulators on addressing counterparty credit risk, the $30.2 trillion figure was 300% higher than the $10.2 trillion of notional eliminated in 2007.

Ten CDS compression cycles have been scheduled between now and the end of February, and the expected wave of corporate defaults could spur a greater number of special cycles in the months ahead.

Meanwhile, the termination of interest rates derivatives could also see significant activity. In the response by the Federal Reserve Bank of New York to the Operations Management Group's October 31 commitments on the OTC market, it said "market participants will start co-ordinated trade compression cycles for interest rate derivatives in early 2009".

triReduce has terminated interest rate swaps since 2003. In 2008, it held 30 rates cycles in 18 currencies, which eliminated $13.6 trillion in notional from the market - up from $7.6 trillion in 2003.

"We are working with the members of the OMG and expect there will be more interest in 2009 given the industry's commitment levels. As with CDSs, this is being driven by the desire to release capital, reduce counterparty credit risk and the regulatory impetus," said Susan Hinko, global head of industry relations at TriOptima.

Although the company is unlikely to increase the number of rates cycles, it expects greater activity from dealers submitting not just trades from flow desks, but other books as well.

Additionally, the company is working with LCH SwapClear and dealers to reduce the build-up of trades at the London-based interest rate clearing house. Currently, trades that go through SwapClear are not eligible for termination on triReduce.

See also: TriOptima reconciling 50% of collateralised OTC derivatives
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