Creditex and Markit announced a joint initiative to launch an industry-wide portfolio compression platform for the credit derivative market.
According to a release from both firms, this process is the first of its kind and represents a improvement over previous tear-up processes. The platform supports commitments made by major market participants to the Federal Reserve Bank of New York that relate to improved operational efficiency and risk reduction.
The platform was developed as a response to a request by the International Swaps and Derivatives Association on behalf of major credit derivative dealers. The platform reduces operational risk and improves capital efficiency by limiting the number of trades and the gross notional outstanding value of single-name credit default swaps (CDS) held by dealers. This will be achieved via a multi-lateral portfolio compression or tear-up process that is scheduled to launch in the third quarter of 2008, according to the release.
The release added that new compression approach improves on previous tear-up processes by delivering better compression results while leaving market risk profiles unchanged.
The process also involves stopping existing trades and replacing them with a far fewer number of new replacement trades that have the same risk profile and cash flows as the initial portfolio, although with less capital exposure.
The initiative is available to both the U.S. and European CDS markets. It will be managed jointly by Creditex and Markit and has the support of 13 major CDS market participants.