OTC IRS Portfolio Optimisation: how trade compression could save funds $mlns before the 2016 European Clearing Mandate strikes

This white paper describes a new approach to trade compression that allows fund managers to reduce the costs of swap clearing by up to 80% by eliminating excess gross notional from their books. The aim is to increase both trading and clearing efficiency in advance of the impending 2016 European Clearing Mandate, mitigating the economic consequences of the leverage ratio and post crisis reform for fund management costs. 


With the European Clearing Mandate set to apply in 2016 and the US Mandate already in force, FCMs and clearing brokers are looking to increase their fees. Driven by the Basel III leverage ratio, banks must optimise capital: they cannot offer broker services at a loss. Several have pulled out of the market. Those who remain are likely to target a 14% - 15% return on capital, up from 1% - 2% and some have already announced significant rises *1. Meanwhile MiFID II sets the stage for Organised Trading Facilities, divorcing the cross-subsidy from execution to clearing. This new approach to compression allows intra-fund netting and compression while keeping individual strategies flat. This enables any fund trading IRS at reasonable volume to save approximately 80% of clearing broker fees by eliminating excess gross notional from their books.

1. See http://www.risk.net/risk-magazine/news/2401060   /goldman-hikes-clearing-fees-by-75bp-as-leverage-ratio-bites