Creditex, Markit launch portfolio compression platform in effort to reduce CDS market risk

By Angela McDaniels

Tacoma, Wash., Sept. 8 - Markit and Creditex announced the launch of an industry-wide portfolio compression platform for the credit derivative market on Monday.

The first North American live portfolio compression run took place on Aug. 27 with the participation of 14 credit derivative dealers and was conducted for single-name credit default swaps contracts referencing several North American telecommunications companies. The run achieved a 56% gross notional reduction of compressible contracts and a 49% gross notional reduction across all participating counterparties, according to a joint news release.

The first European live portfolio compression run was held on Sept. 4 with 15 credit derivative dealers participating. Markit and Creditex said the service was run on CDS contracts referencing several European telecommunications companies and achieved a 53% gross notional reduction of compressible contracts and a 46% gross notional reduction across all participating counterparties.

The companies said their new portfolio compression methodology is unique in that it reduces operational risk while leaving market risk profiles unchanged. They said this is achieved by terminating existing trades and replacing them with a smaller number of new replacement trades that carry the same risk profile and cash flows as the initial portfolio but have less capital exposure.

The portfolio compression process will be run on a regular basis to compress the most actively traded single-name CDS contracts systematically across all major sectors. According to the release, this will reduce the total gross notional outstanding of CDS contracts in the $62 trillion market to a "significantly smaller" net amount.

Markit and Creditex said they were selected by the International Swaps and Derivatives Association to provide infrastructure to support commitments made by major market participants to the Federal Reserve Bank of New York relating to improved operational efficiency and risk reduction.

"We are pleased with the progress of this initiative," Philip Olesen, managing director of credit trading at UBS Investment Bank, said in the release. "The new risk-neutral compression algorithm is a critical improvement which eliminates the need for involvement by front-office traders, thereby increasing the frequency of compression runs and dealer participation rates."

Markit is a financial information services company based in London. Creditex is a New York-based subsidiary of IntercontinentalExchange, Inc. that provides execution and processing of credit derivatives.

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