Markit and Creditex have launched an industry-wide portfolio compression platform for the credit derivative market with the first live runs completed successfully for single name credit default swaps (CDS) in the North American and European markets.

"We are pleased to have successfully launched our first portfolio compression runs in North America and Europe with the participation of the largest dealers in the CDS market. As we roll out this initiative across sectors globally, we will help the industry reduce risk and improve capital efficiency in the credit derivative markets," says Kevin Gould, Executive Vice President and Global Head of Data Products and Analytics at Markit.

The first North American live portfolio compression run, which took place on 27 August with the participation of 14 credit derivative dealers, was conducted for CDS contracts referencing several widely traded North American telecommunications companies. It achieved a 56% gross notional reduction of compressible1 contracts and a 49% gross notional reduction across all participating counterparties.

The first European live portfolio compression run was held on 4 September with the participation of 15 credit derivative dealers. The service was run on CDS contracts referencing several widely traded European telecoms companies, and achieved a 53% gross notional reduction of compressible contracts and a 46% gross notional reduction across all participating counterparties.

Michael Heaney, Head of US Credit Trading at Morgan Stanley, says "The results from the inaugural portfolio compression runs in the US and Europe are reflective of the significant efforts market participants are making to improve credit derivative market infrastructure and strengthen the resiliency of the financial system. We welcome the initiative by Markit and Creditex."

Markit and Creditex were selected by the International Swaps and Derivatives Association (ISDA) 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.

Philip Olesen, Managing Director of Credit Trading at UBS Investment Bank, says: "We are pleased with the progress of this initiative. 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."

The new portfolio compression methodology designed by Markit and Creditex is unique in that it reduces operational risk while leaving market risk profiles unchanged. 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. This will reduce the total gross notional outstanding of CDS contracts in the USD 62 trillion market to a significantly smaller net amount.

Brian Archer, Global Head of Credit Trading at Citi, says "This is a significant achievement for the credit derivative market and a core component of the broad efforts being undertaken by major market participants to reduce operational risks and costs."