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Less is more as market evolves 

August 27, 2014
Mike Kentz, IFR

For years running up to the 2008 crisis, over-the-counter swap dealers and clearing houses boasted of growing notionals in their derivatives books as a way to exhibit their trading and risk management prowess. That the ballooning numbers also served to inflate the perceived importance of the OTC derivatives market was simply a pleasant by-product.

But Dodd-Frank, Basel III and a swathe of other regulations have flipped the narrative on its head. Dealers and clearing houses alike are now scrambling to show they can reduce overall notionals and trade counts through compression, as investors look to minimise operational costs and dealers slash exposures that become painfully expensive under the new regulatory framework.

“It’s a bit ironic, but while it used to be about showing how much notional you were clearing, now it’s about how little,” said Daniel Maguire, chief executive of LCH.Clearnet’s Swapclear, which currently holds US$420trn in notional outstanding within its clearing house.

Read more: IFR

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