Interest Rate SwapCompression
“Compression” is a mechanism of reducing and/or compressing open interests (Notional Amounts and trade counts) through simultaneous unwind of multiple cleared trades.Compression needs has been increasing on Participants’ side backed by leverage ratio regulations and needs for reduction of management costs for open interests. In response to such Participants’ needs, JSCC has introduced various Compression schemes as follows:
- February 2014 (Phase 3): Started Vendor-Initiated Compression
- September 2015 (Phase 4)： Started Par Trade Compression and Enhanced Vendor-Initiated Compression scheme (introduction of Unlinked Compression)
- April 2016 (Phase 5)：Started Blended Rates Compression and Member-Initiated Compression
（1）Per Trade Compression
Per Trade Compression is conducted daily upon IRS Clearing Participant’s request. Multiple cleared trades satisfying certain matching conditions are unwound through Per Trade Compression and claims and obligations for a new trade with a netted Notional Amount are cleared as necessary, achieving compression of notional balance and trade counts.
As economic terms of Trade ID1・2・3 match, they are unwound through Per Trade Compression, and replaced by Trade ID 10 (Notional: JPY1 bil). Similarly, Trade ID 4・5 are completely cancelled, and Trade ID 6・7 are replaced by Trade ID 11 (Notional: JPY 3bil).
(2) Blended Rates Compression
Process of a Compression between trades with different Fixed Rates is referred to as Blended Rates Compression. Under Per Trade Compression, trades with the same economic terms, including Fixed Rates, are subject to Compression. So combination of trades with unmatched Fixed Rates is out of the scope of this Compression. In Blended Rates Compression, compression between trades with different Fixed Rates is allowed if certain conditions are met, realizing higher compression effect.
Under Per Trade Compression, because trades with matching economic terms, including coupon (but not Notional), are subject to Compression, only Trade IDs 1 and 2 are subject to Compression, and compressed Notional is JPY 2bil and trade count is reduced from 2 to 1.
Blended Rates Compression is a structure to allow compression of trades with different Fixed Rates if certain economic terms match. In the above example, 2 new trades with Notional of JPY1.933bil and JPY66mil each are newly become effective, and thereby compression of JPY4bil is realized and trade count is reduced from 4 to 2.
Vendor-Initiated Compression is a form of Compression with a simultaneous participation by multiple Clearing Participants, which is now conducted almost quarterly. For operational processing of Vendor-Initiated Compression, JSCC uses service of TriOptima having proven experience in bilateral trades and compression processing for overseas CCPs.
JSCC has cleared 1 IRS trade between Participant A and Participant B and 2 IRS trades between Participant C and Participant D, of which Participant A and Participant C applied for a participation in Vendor-Initiated Compression. Participant B and Participant D have not applied for participation in Vendor-Initiated Compression.
On JSCC side, “receive Notional JPY 10bil x Fixed 5%” from Participant A balances with “pay Notional JPY5bil X Fixed 5.1%” and “pay Notional JPY5bil X Fixed 4.9%” to Participant C, and “pay Notional JPY 10bil x LIBOR 6M” to Participant A balances with “receive Notional JPY 5bil x LIBOR 6M x 2” from Participant C.
Through Vendor-Initiated Compression unwinding these 3 cleared trades at the same time, open interests (Notional and trade counts) can be compressed within tolerable risk variance. In this example, compression of Notional JPY 20bil and 3 trade counts are realized.
Member-Initiated Compression is a structure to realize Compression based on a proposal prepared by one or more Clearing Participant(s) for its (their) trades to be unwound and to be newly established. Detailed operational flow of Member-Initiated Compression is structured based on the flow of Vendor-Initiated Compression using TriOptima.
By using Member-Initiated Compression, various types of Compression, such as a blended spread compression of basis swaps, blended rates compression based on arbitrary logic created by a Participant and blended rates compression across multiple Participants, will become possible.