TriOptima has worked 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.
triReduce compression cycles eliminated 25 per cent or EUR35.9bn of the European-based ITraxx and 56 per cent or USD189.6bn of US CDX Index Tranche legacy notionals.
Total notionals eliminated in the triReduce index tranche cycles were EUR80.4bn and USD281.3bn including trades with standardized and non-standardized 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,” says 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.”