Compression (which is sometimes called trade tear-ups) enables swap dealers with substantial two-way (pay and receive) swap activity to terminate substantial amounts of swap contracts before they expire by their terms. The benefits of compression include reductions in counterparty credit exposure, operational risk and cost as well as lower legal and administrative expenses in the event of a default of any participating dealer. Importantly, since contracts are actually eliminated, under some regimes capital costs can be reduced. Together with expanded clearing of IRS, compression produces tremendous reduction of risk in the derivatives marketplace.
“Compression has quietly become one of the industry’s most successful means of managing interest rate derivatives portfolios,” said Robert Pickel, ISDA Chief Executive Officer. “The commitment to compression of derivatives industry participants, as well as services such as SwapClear and TriOptima, is clear. Further progress in this area lies ahead as firms that currently engage in compression continue their efforts, and as more firms realize its manifold benefits and begin to do so.”
Interest Rate Swaps Compression: A Progress Report [ ISDA ]
