New approach to compression could help swaps escape leverage ratio pressure
Bill: The headline is a bit bonkers as SwapClear only holds around $400trn of swaps - I think this means a total amount of compression over a couple of years. The story is very interesting, showing that new tools at SwapClear to provide ways to eliminate trades ('compression') will have a major effect on the outstanding notionals within the CCP, and that this may actually result in a massive reduction in trade counts too. Whilst many of the silly stories about the OTC market quote the "$700trn" size of the market, they always miss the point that notional size isn't about exposure or risk, so in this case SwapClear will undermine the sensationalist headlines by appearing to make the OTC market disappear to a fraction of it's former self. What isn't said is that the Initial Margin on the portfolios in question largely remains unchanged, and in some future imagined world this would be reported rather than notional. There are good competitive reasons why this won't happen, but a massive reduction in notional outstanding can only be a PR win for the OTC market, and SwapClear.