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What products does CAPITALAB support and in which currencies?

Our first product is Swaptioniser®, a compression service for Interest Rates Options. We compress in EUR, GBP and JPY. We plan to expand the currency range shortly.

What regulations across the globe mandate Portfolio Compression?

Regulation to mitigate systemic risk and improve transparency in the trading of derivatives instruments is being implemented on a global scale, most notably in the U.S. with Dodd-Frank, in Europe through EMIR, in Japan through the Financial Instruments and Exchange Act of Japan and in Singapore with the Securities and Futures Act. These mandates call for a number of initiatives related to reporting, clearing, and the use of electronic trading platforms along with capital and collateral requirements. Portfolio Compression falls under a number of these provisions both in terms of electronic processing and as a tool to help reduce capital required under the provisions of these regulations.

How does portfolio compression reduce risk, capital costs and ease processing burdens for market participants?

By reducing the number of tickets, the portfolio is simplified. The fewer live trades there are in the book, the fewer expiries there are for traders and operations to manage. By reducing the gross notional outstanding of a portfolio, portfolio compression also improves the Basel III Leverage Ratio (via a reduction of the “add-on” exposure), resulting in less capital required and greater liquidity.

What is Portfolio Compression and why is it important?

Portfolio Compression involves reducing the notional and number of contracts in a derivatives portfolio, without changing the portfolio’s market risk. This market process gained additional traction after the G-20 in 2009 decided to regulate the derivatives markets, and mandates such as Dodd-Frank in the U.S. and EMIR in Europe require or strongly recommend market participants periodically apply portfolio compression on the outstanding positions they hold in their books. In addition the Basel III Leverage Ratio, designed as part of these new regulations, states that banks should set aside capital roughly in proportion to the gross notional outstanding of their derivatives holdings. Because compression reduces the gross notional outstanding for a derivatives portfolio, it minimises capital requirements and hence preserves liquidity and cost efficiency for banks.

For which clients do you provide services?

The services are provided to clients globally from BGC Brokers LP’s London offices.

What are the types of clients that can use your service?

We partner with a wide range of market participants across the globe including major banks, large derivatives dealers and hedge fund managers.

What are the unique characteristics of the Swaptioniser service?

Swaptioniser is the first multilateral compression service that supports Interest Rate Options. While applied to swaptions, our proprietary technology is instrument-independent and can be applied to other products and asset classes.

How often does CAPITALAB perform portfolio compression?

Typically once a month for a multilateral run. CAPITALAB also organises bilateral compression between clients as requested by them from time to time.