Creditex and Markit have announced a joint initiative to launch an industry-wide portfolio compression platform for the credit derivative market. This process is the first of its kind and represents an improvement over previous tear-up processes. The platform supports commitments made by major market participants to the Federal Reserve Bank of New York relating to improved operational efficiency and risk reduction. Developed in response to a request by the International Swaps and Derivatives Association (ISDA) on behalf of major credit derivative dealers, the platform is designed to reduce operational risk and improve capital efficiency by reducing the number of trades and the gross notional outstanding value of single-name credit default swaps (CDS) held by dealers. This will be achieved through a multi-lateral portfolio ‘compression’ or ‘tear-up’ process that is scheduled to launch in the third quarter of 2008. The new compression approach improves on previous tear-up processes by delivering significantly better compression results while leaving market risk profiles unchanged. The process involves terminating existing trades and replacing them with a far fewer number of new ‘replacement trades’ which have the same risk profile and cash flows as the initial portfolio, but with less capital exposure. The initiative, available to both the US and European CDS markets, will be managed jointly by Creditex and Markit and has the support of 13 CDS market participants.
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