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Foreign Exchange

Capitolis sets new records in FX derivatives compression

Some leading FX banks have struggled to stay competitive in forwards, swaps and swaptions thanks to SA-CCR rules, but compressing portfolios helps.

Tightening Up On Savings
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In the third week of January, Capitolis completed its 19th standardized approach – counterparty credit risk (SA-CCR) optimization run for FX derivatives.

This latest series of compression trades incorporated a record number of participants, while also driving a record reduction of over $290 billion in effective notional.

In aggregate over the past 12 months, the firm has enabled a $2.5 trillion reduction in effective notional.

The leading banks in foreign exchange trading were hit hard in 2022 by the impact of new capital requirements from the SA-CCR rules finally being applied to short-dated FX forwards, FX swaps and swaptions.

In other asset classes, the largest global systemically important banks (G-Sibs) banks long ago grew used first to netting and then to compressing large portfolios for example of interest-rate derivatives positions taken out between one another. They would periodically identify multiple off-setting transactions that could be terminated or replaced with far fewer trades.

It was a way to reduce gross notional exposure while leaving the same net underlying market risk intact.

“It is key for banks to have a detailed understanding of their G-Sib scores, particularly as classification is assessed relative to their peers,” Magnus Jonsson, head of business management triReduce and triBalance, at OSTTRA, said late last year when the firm announced that in a single month it had compressed $26.4