TriOptima is working with industry participants to implement a triReduce compression methodology for Index Tranche trades with non-standard coupons, known as ‘legacy’ trades, as well as the more recent Index Tranche trades with standard coupons.
TriOptima is a provider of post trade risk management services and infrastructure for OTC derivatives. Its service, triReduce, focuses on reducing swap inventory and counterparty risk.
TriReduce compression cycles eliminated 25 percent, or €35.9 billion, of the European-based ITraxx and 56 percent, or $189.6 billion, of US CDX Index Tranche legacy notionals. Total notionals eliminated in the triReduce index tranche cycles were €80.4 billion and $281.3 billion including trades with standardised and non-standardised coupons.
Since 2009, coupons on index tranche trades have been standardised; however many outstanding trades with non-standard coupons remain in portfolios and are difficult to hedge. Currently index tranche trades are not mandated for clearing and remain in bilateral OTC derivative portfolios. Eliminating these trades reduces gross notional exposures and results in higher leverage ratios and lower capital charges.
“We are pleased that we have been able to work with the industry to find a solution that helps to eliminate gross notional exposures and contributes to a reduction in systemic risk,” said Vikash Rughani, triReduce business manager. “We look forward to continuing the Index Tranche compression cycles on a regular basis given that these trades are not currently cleared and the legacy trades are more expensive to manage because of their bespoke nature.”
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