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.
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.