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TriOptima to Expand Cross-Currency Compression Service

TriOptima, a provider of over-the-counter derivative post-trade services, has completed its first USD/KRW compression cycle via its TriReduce service, eliminating $8.8 billion notional principal. The company says 11 institutions took part in the cycle, including international and South Korean banks.

TriOptima launched the TriReduce service for cross-currency swaps in April 2014 with the aim of helping banks relieve counterparty settlement stress and improve capital efficiency by reducing their exposure in these transactions.

Cross-currency swaps are not currently cleared and in a regulatory environment where capital requirements are connected to aggregate outstanding notional they increase an institution’s credit and capital costs. International regulators have recognised the importance of portfolio compression, in particular from a risk mitigation perspective.

Since the launch, TriOptima has completed 13 compression cycles in ten currency pairs, including: USD/CAD, USD/CNH, USD/EUR, USD/GBP, USD/JPY, USD/KRW, USD/MXN, USD/RUB, USD/TRY, and USD/ZAR.

Peter Weibel, chief executive of TriReduce, tells Profit & Loss that the company has eliminated more than $1 trillion in notional principal outstanding to date, with up to 24 institutions participating in a compression cycle at any one time. Around 40 institutions have taken part in the cross-currency compression cycles over the past year.

The service can accommodate all transaction types, whether float/float or fixed/float, resetting and non-resetting, he says. Given the strong customer interest in cross-currency compression, the company plans to launch cycles in USD/AUD, USD/CHF and USD/CNY later in the year.

It is also working on an FX forwards compression service with CLS, which is scheduled to launch in the autumn.

According to Weibel, cross-currency swaps, which are subject to both interest rate and foreign exchange rate fluctuations, are complex to compress because there are more risk factors to monitor. However, with regulation such as Basel III providing an incentive for firms to tackle outstanding swaps, institutions using the service are the recipients of some important benefits.

These, he says, include a reduction in counterparty settlement risk and leverage ratios, the ability to increase trading with parties under currency controls – for instance institutions in South Africa – and a reduction in regulatory capital and risk-weighted assets. Importantly, TriReduce helps firms to simplify portfolios in the event of a counterparty default.

TriReduce first launched for interest rate swaps in 2003 and then credit default swaps in 2005. Since then it has expanded its catalogue of compression activities to include: 27 uncleared interest rate swaps currencies; cleared trades in clearinghouses including LCH SwapClear, SGX and the Japanese Securities Clearing Corp, with CME Group to follow later this year; and precious metals forwards and swaps compressions.

TriOptima is owned by interdealer broker Icap, which last month reported a 10% rise in revenue from its Post-Trade Risk and Information business unit for the year. It attributed this to increased participation in the TriReduce portfolio compression cycles and the uptake of TriOptima’s portfolio reconciliation service, TriResolve Twitter: @Profit_and_Loss

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