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TriReduce terminates $1 trillion of swaps contracts
In April TriOptima completed its first production run of TriReduce in which 17 banks participated and more than Ł420bn of interest rate swap contracts were terminated. Since launch TriReduce has attracted a further 11 participating banks and has been run in euro, dollar, Canadian dollar and sterling swaps. According to . . TriOptima another 50-60 banks are considering using the service.
The volume terminated by the service so far is approximately 2.1% of the total outstanding inter-dealer interest rate derivative contracts. In terms of gross market value the TriReduce service has terminated $213bn worth of contracts or 5.8% of the total value of outstanding inter-dealer interest rate derivative contracts.
In April TriOptima completed its first production run of TriReduce in which 17 banks participated and more than Ł420bn of interest rate swap contracts were terminated. Since launch TriReduce has attracted a further 11 participating banks and has been run in euro, dollar, Canadian dollar and sterling swaps. According to . . TriOptima another 50-60 banks are considering using the service.
The volume terminated by the service so far is approximately 2.1% of the total outstanding inter-dealer interest rate derivative contracts. In terms of gross market value the TriReduce service has terminated $213bn worth of contracts or 5.8% of the total value of outstanding inter-dealer interest rate derivative contracts.
Hmmm.
TriReduce have put in place safeguards and valuation parameters that seem to satisfy participants judging by the already huge sums cleared or terminated via the system.
But in light of this the discrepancy in transaction metrics above is interesting. They have terminated 2.1% of interest derivatives at notional value but 5.8% at market value: Clearly the dross is not suitable for cancelling out.
This suggests that although the system could considerably reduce the total risk in the system it might also potentially be destabilising in that it could expose the rot that is almost certainly in the black box somewhere.
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TriOptima offers a unique and innovative method for the reduction of credit risk, capital costs, operational risk and operational costs in the OTC derivatives industry. While others have previously addressed the symptoms and not the cause, TriOptima makes it possible to eliminate the source of risk.
The OTC derivatives market has seen a tremendous growth in outstanding gross volumes. However, net outstanding risk positions at market making institutions have hardly grown at all. The logical conclusion is that most inter-bank OTC derivatives, especially swaps, serve no purpose once they become part of the "seasoned book". They could be terminated without effecting the desired risk position, if only there was an effective, systematic way to accomplish this. TriOptima's triReduceŽ Network Service offers exactly this solution.
triReduceŽ creates a network between market makers in OTC derivatives. The triReduceŽ service delivers multilateral packages of transactions that can be terminated early. The unwind proposals presented to each bank are based on the mark-to-market valuations and risk assessments from that bank and fulfil the criteria that that bank has defined, which means that triReduceŽ unwind proposals:
have a total close out amount at or exceeding each banks mark-to-market valuation, enabling banks to agree on the valuation of the package;
* are delta neutral within the tolerance defined, which enables banks to retain their desired risk position and makes the value of the termination package insensitive to different views on the yield curve parties may have;
* reduce credit exposure, which is achieved by finding a group of banks having both debts and claims among each other and where the bilateral values of the unwind proposal is designed to offset the exposures, whereby a reduction in claims on one party is offset by a reduction in debts to another party;
* are cash neutral within the tolerance defined, which eliminates the need for large cash payments when reducing credit exposures.
The triReduceŽ network service, with a consolidated view on the relationships between banks, is in a unique position to provide this type of termination proposals.
During 2001 TriOptima delivered the triReduceŽ network service to seven banks. The results were that 70% of the eligible deals were terminated and the ratio is set to go up when more banks join the service. Effectively, after a continued use of the triReduceŽ service, a bank will only need to retain the few deals necessary to maintain the bank's net position.
Compared to other cost saving techniques, the triReduceŽ service is very simple to implement with minimal intrusion in existing systems and procedures. TriOptima installs no software at the bank.
Whatever capital regime is imposed for current exposures, add-ons or for operational risk, there can never be a capital charge on transactions that no longer exist.
The best netting is early termination. Period.
TriReduce Website
The OTC derivatives market has seen a tremendous growth in outstanding gross volumes. However, net outstanding risk positions at market making institutions have hardly grown at all. The logical conclusion is that most inter-bank OTC derivatives, especially swaps, serve no purpose once they become part of the "seasoned book". They could be terminated without effecting the desired risk position, if only there was an effective, systematic way to accomplish this. TriOptima's triReduceŽ Network Service offers exactly this solution.
triReduceŽ creates a network between market makers in OTC derivatives. The triReduceŽ service delivers multilateral packages of transactions that can be terminated early. The unwind proposals presented to each bank are based on the mark-to-market valuations and risk assessments from that bank and fulfil the criteria that that bank has defined, which means that triReduceŽ unwind proposals:
have a total close out amount at or exceeding each banks mark-to-market valuation, enabling banks to agree on the valuation of the package;
* are delta neutral within the tolerance defined, which enables banks to retain their desired risk position and makes the value of the termination package insensitive to different views on the yield curve parties may have;
* reduce credit exposure, which is achieved by finding a group of banks having both debts and claims among each other and where the bilateral values of the unwind proposal is designed to offset the exposures, whereby a reduction in claims on one party is offset by a reduction in debts to another party;
* are cash neutral within the tolerance defined, which eliminates the need for large cash payments when reducing credit exposures.
The triReduceŽ network service, with a consolidated view on the relationships between banks, is in a unique position to provide this type of termination proposals.
During 2001 TriOptima delivered the triReduceŽ network service to seven banks. The results were that 70% of the eligible deals were terminated and the ratio is set to go up when more banks join the service. Effectively, after a continued use of the triReduceŽ service, a bank will only need to retain the few deals necessary to maintain the bank's net position.
Compared to other cost saving techniques, the triReduceŽ service is very simple to implement with minimal intrusion in existing systems and procedures. TriOptima installs no software at the bank.
Whatever capital regime is imposed for current exposures, add-ons or for operational risk, there can never be a capital charge on transactions that no longer exist.
The best netting is early termination. Period.
TriReduce Website
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