Overview
Clearing Members and their clients maximise efficiencies in their cleared portfolios – from blended rate compression to portfolio margining – thanks to the innovative enhancements we have developed. And we have more game-changing ideas in the pipeline.
Here are some of the new tools and services enhancements our team has recently developed.
Customer protection
At SwapClear we understand that peace of mind is important to you when it comes to the protection of your assets.
Whether you are clearing in Europe or the US, SwapClear delivers various innovative segregation options enabling you to determine for yourself the level of protection your assets and positions receive. These range from commingling your positions with other clients, to completely segregating your assets.
Compression
Compression is the kind of pressure that your swap portfolio is pleased to find itself under.
Compression is the process of combining or offsetting trades with compatible economics, reducing the number of line items in your portfolio and the notional outstanding value of your cleared positions.
Fewer line items in your portfolio means fewer trade reconciliations, more efficient portfolio transfers and even the potential to lower your capital requirements. In short, compression squeezes value out of your cleared positions at SwapClear.
What is compression?
Compression reduces the number of trades in our members’ portfolios. It simplifies the management of their positions and frees up valuable capital that would otherwise be held unnecessarily against offsetting positions that can be compressed.
The result is a cleaner portfolio, less complexity and the potential to have some relief in terms of regulatory capital requirements.
The line item problem
Sometimes in cleared swap portfolios, trades that share economically compatible characteristics and that can be netted off against each other are not recorded as offsetting trades.
Each time Clearing Members and their clients clear an interest rate derivative at SwapClear, that transaction is recorded in their trade portfolio as a new line item. Over time, these portfolios grow to contain tens or even hundreds of thousands of individual transactions.
Regulations such as Basel III require Clearing Members to hold capital against cleared derivatives trades. More line items mean a larger portfolio on a gross notional basis, potentially meaning a higher capital charge.
Compression: The line item veto
SwapClear’s compression services empower our members and their clients to compress down line item trades within their portfolio that have economically compatible characteristics against one another.
Compression streamlines swap portfolios. It eliminates line items making member and client books smaller, cleaner and far more efficient from risk management and potentially capital standpoints.
Fewer line items mean there are fewer positions to have to reconcile, making portfolios easier to manage and speeding up the auction of a portfolio following a default.
SwapClear’s compression offerings
As with all elements of our offering at SwapClear, Clearing Members and their clients enjoy various compression options, enabling you to take control over which trades you want to compress, when you want to do it, and how you want to do it.
Solo Compression gives you autonomy and flexibility to eliminate inefficiencies in your swap portfolio on your own terms.
Best of all, SwapClear’s entire cleared product suite is eligible for Solo Compression. That means if you can clear it at SwapClear, you can compress it at SwapClear.
Solo compression with blended rates
SwapClear always wants to make things easier for our Clearing Members and their clients. Terminations don’t come any easier than with blended compression.
Blending replaces a number of individual line items with different fixed rates into a single risk replacement trade with one blended rate. With our SMART simulator, you can estimate the netting benefits possible on a portfolio before you even begin. It’s that easy.
| Trade |
PAY/REC (fixed) | Notional | Fixed Rate | Annualised cash-flow |
|---|---|---|---|---|
| 1 | REC | 100,000,000 | 2.340000% | 2,340,000.00 |
| 2 | REC | 75,000,000 | 2.360000% | 1,770,000.00 |
| 3 | REC | 50,000,000 | 2.380000% | 1,190,000.00 |
| 4 | PAY | -150,000,000 | 2.350000% | -3,525,000.00 |
| 5 | REC | 100,000,000 | 2.280000% | 2,280,000.00 |
| 6 | PAY | -125,000,000 | 2.300000% | -2,875,000.00 |
| TOTAL | 50,000,000 | 1,180,000.00 | ||
Blended rate compression reduces six line items to one in this example
Blended rate
| Annual (coupon/net notional) | 2.360000% |
|---|
Positions reduced to one blended rate
Risk replacement trade
| Trade | PAY/REC (fixed) | Notional | Fixed rate | Annualised cash-flow |
|---|---|---|---|---|
| 7 | REC | 50,000,000 | 2.360000% | 1,180,000.00 |
SwapClear creates a single risk replacement trade to complete the process
Eligible products for solo compression with blended rates include: interest rate swaps, overnight index swaps, forward rate agreements, basis swaps and ZC inflation swaps.
Multilateral compression – for members and clients
Great things can happen when people work together. That’s the philosophy behind multilateral compression, which lets SwapClear members and clients terminate trades together.
The bigger the pool of participants, the greater the opportunities for offsetting positions against each other. It’s amazing what a little teamwork can do.
Approved Compression Service Providers
SwapClear can receive and process valid compression proposals created by Approved Compression Service Providers (ACSP) (as defined in the applicable LCH rulebook).
Below is a list of the ACSPs for SwapClear:
- TriOptima AB
- Quantile Technologies Limited
The initial steps in becoming an ACSP require LCH to review and agree that the potential ACSP will meet the following criteria:
- Meets the definition of SwapClear compression services as per LCH rulebook
- Potential ACSP has robust legal framework under which to provide such compression service
- Potential ACSP can demonstrate robust controls and operational capability
- LCH can operationally support the proposed compression service
- Potential ACSP has written confirmation of commitment from at least six SwapClear members to use their services
- Potential ACSP can demonstrate successful testing of its services with a number of potential participants
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