OTC post-trade processor TriOptima is claiming much of the credit for a 12% industry-wide decline in outstanding credit default swaps transactions, as dealers move to tear up offsetting deals and reduce the backlogs clogging up back offices.
The notional outstanding volume of credit derivatives was $54,600bn at the end of June, down 12% from the $62,300bn recorded at the end of 2007, according to new figures from the International Swaps and Derivatives Association.
TriOptima, minority-owned by interdealer broker Icap, is claiming responsibility for termination of $17.4 trillion in interdealer CDS notional principal during this period.
The firm, which has been operating regular tear-up cycles over its TriReduce platform since 2003, is facing new competition from a portfolio compression service launched jointly by Creditex and Markit earlier this month.
"As the sole provider of portfolio compression services in the first half of 2008, we can confirm that tear ups were a positive factor in stabilising the growth in notional principal levels that had attracted the attention of regulators," says Brian Meese, Group CEO. "We have long believed that aggressive use of tear ups is one of the most effective ways to manage risk, and a vital complement to central counterparty activities. We include all dealer counterparties, not just a few, and we eliminate, rather than mitigate, the risk associated with those trades."
Despite the industry-wide effort to cut the number of outstanding CDS trades, the market remains under pressure from regulators to develop an industry wide central clearing counterparty that could eventually be extended to other OTC markets.
In May, the dealer-backed Clearing Corporation (CCorp) inked an agreement with the Depository Trust and Clearing Corporation (DTCC) to launch a central clearing facility for credit derivatives in the third quarter, but the project has yet to come to fruition.