Markit and Creditex today announced the successful completion of four industrywide credit default swap (CDS) portfolio compression runs in North America and Europe during the week ended October 31, 2008.
Compression runs were completed this week in North America for CDS contracts referencing consumer products companies and in Europe for CDS contracts referencing industrial, energy and utilities companies as well as European sovereigns. Compressions carried out across a total of 61 reference entities this week achieved a gross notional reduction of 44%, or $150 billion across all participating counterparties.
This follows the successful completion of four compression runs during the week ended October 24, 2008 when $200 billion of gross notional value was compressed for CDS contracts referencing 62 North American and European companies.
Portfolio compression is a process that reduces the overall size and the number of line items in credit derivative portfolios, without changing the risk parameters of the portfolios. This is achieved by terminating existing trades and replacing them with a smaller number of new replacement trades that carry the same risk profile and cash flows as the initial portfolio but require a smaller amount of regulatory capital to be held against the positions. Markit and Creditex run portfolio compression cycles on a regular basis to compress the most actively traded single name CDS contracts systematically across all major sectors.
Markit and Creditex were selected by the International Swaps and Derivatives Association (ISDA) to provide infrastructure to support commitments made by major market participants to the Federal Reserve Bank of New York relating to improved operational efficiency and risk reduction.
The first North American compression run was held on August 27, 2008 for widely traded telecommunications companies. Compression runs for CDS referencing European technology, media and telecommunications companies occurred on September 4, 2008 and September 11, 2008. Markit and Creditex have now conducted 13 compression runs since August 27, 2008, resulting in a total gross notional reduction in excess of $550 billion.