During the week of 17 November 2008, multilateral trade terminations administered by Creditex and Markit reduced the notional value of outstanding CDS trades referencing corporations in the consumer products, basic materials and financial services industries by more than $220 billion.
Since August, a total of 14 dealers have participated in 26 portfolio compression runs which have lowered outstanding notional amounts significantly, decreased counterparty credit exposure and reduced operational risk in the CDS market. Creditex and Markit run portfolio compression cycles regularly and systematically across the major sectors to tear up trades in the most active single name CDS contracts.
Portfolio compression reduces the overall notional size and the number of outstanding contracts in credit derivative portfolios without changing the risk profiles of the portfolios. 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 require a smaller amount of regulatory capital to be held against the positions.
Sunil Hirani, Creditex Chairman and CEO, said: âThe portfolio compression runs are a critical component in addressing operational issues highlighted by industry participants and regulators in recent months. We are pleased that our platform has been well received by market participants and will continue to help our clients meet their operational and capital needs at this crucial juncture of the markets.â
Kevin Gould, Executive Vice President and Global Co-Head of Fixed Income at Markit, said: âThe compression of over $1 trillion of CDS notional volumes in three months marks a milestone in the industryâs effort to reduce risk and improve operational efficiency in the credit derivative markets. Our new portfolio compression service has become an integral part of market infrastructure, and we are pleased to have helped major trading firms around the world to reduce risk during a period of market dislocation.â