Compression can be carried out bilaterally with a counterparty, or as a bulk exercise in which many financial institutions take part1. The announcement of the Japan Securities Clearing Corporation (JSCC) splits the number of terminated trades into full terminations and partial terminations2.

Consider a hypothetical example in which a participant holds a pay-fixed trade with a notional amount of 10 billion yen and a receive-fixed trade with a notional amount of 6 billion yen, with the same fixed rate, maturity, and floating-rate index. The participant can terminate the second trade in full and the first in part, by 6 billion yen. The number of trades falls from two to one and the total notional amount from 16 billion yen to 4 billion yen, while the net pay-fixed notional amount stays at 4 billion yen.

What falls is the total notional amount; the terminations are chosen so that the amount of risk stays roughly unchanged1.

Notes

  1. Bank of Japan, "（日銀レビュー）最近のOTCデリバティブ市場の動向 ： OTCデリバティブ統計からみた特徴点" (Bank of Japan Review 2017-J-8, June 2017; recent trends in the OTC derivatives market, our translation), section "コンプレッションの普及" (The spread of compression), page 5 (in Japanese). ↩ ↩2

  2. Japan Securities Clearing Corporation, "金利スワップ取引において一括コンプレッションを実施いたしました。" (Announcement that a bulk compression of interest rate swaps was carried out, our translation) (September 15, 2017); full and partial terminations are reported separately, and the announcement does not say what each means (in Japanese). ↩