PRODUCT OVERVIEW. The ClearCompress Service: A New Level of Compression Optimisation

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1 PRODUCT OVERVIEW The ClearCompress Service: A New Level of Compression Optimisation

2 ClearCompress Service Compression activity has increased significantly since 2014, driven by a combination of new regulations and enhancements to clearing technology.

3 Developments in compression services, particularly the unlinking of cleared trades, have helped facilitate this increased activity. The ClearCompress service offers a new, innovative method to achieve high levels of additional compression by creating opportunities to reduce gross and net notionals, thereby lowering capital costs for both parties. ClearCompress provides a mechanism for financial institutions to achieve significant savings in their capital and reductions in operational costs using a highly efficient bilateral compression process with a number of distinct advantages over existing competing compression services. Understanding the drivers for industry compression New regulations have been a significant factor behind the increase in compression activity particularly the Basel III leverage ratio, which has motivated many banks to reduce the size of their legacy derivatives portfolios. This activity has resulted in the total gross notional outstanding for interest rate derivatives dropping during 2014 and 2015 whilst starting to increase again through 2016 as the incremental impact of existing compression tools reach a plateau. New global regulations provide a clear incentive for firms to reduce the size of OTC derivatives outstanding notional and the number of line items in their portfolios. The introduction and rapid evolution of portfolio compression technologies has enabled organisations to do both. Irrespective of its commercial advantage, portfolio compression is now specifically included in new regulatory frameworks. Both EMIR and Dodd- Frank require firms to regularly analyse OTC swaps portfolios for compression opportunities in all asset classes. Benefits of Compression Compressing your derivatives portfolio will decrease both the outstanding notional and the number of line items at the Clearing House, thereby reducing: Capital costs, by lowering outstanding gross notional on derivative positions Operational risk, by decreasing reconciliations and streamlining portfolio management In addition, the introduction of mandatory clearing mandates has resulted in increased trade exposures to CCPs, which has made traditional methods of unwinding swap positions practically redundant. Increased CCP volumes, allied with the implementation of the CRD IV (which removes the 0% risk-weight applied to CCP trade exposures when calculating capital requirements) makes holding large outstanding notionals a potentially costly exercise.

4 ClearCompress: A New Approach to Compression Services ClearCompress The ClearCompress service provides an alternative method of compression, working in close collaboration with partners across closely matched, previously uncompressed positions. ClearCompress offers an innovative and flexible extension to the existing compression services offered by the standard Clearing Houses. It enables clients to reduce positions with varying fixed rates and mismatched bilateral cash flow dates. Working on a multi-bilateral basis and leveraging existing standardised reports, ClearCompress provides a quick and easy mechanism for enhancing existing compression activity with little work required from the client perspective.

5 How ClearCompress Works Initiation Match & Review Risk Reinstatement Execute Run 1. Initiation ClearCompress intermediates between participants to agree risk and match parameters as well as timelines for execution. All parties upload their data securely onto the ClearCompress client portal using standard Clearing House reports, meaning no data is shared directly with other participants and no internal development work is required 2. Match & Review The ClearCompress algorithm matches offsetting positions between participants trade populations and identifies possible offsets. The results of the matching process are shared with each participant, providing the necessary information to assess the benefit available 3. Risk Reinstatement All participants review the algorithm matches and proposed offset trades. ClearCompress then suggests a set of positions designed to keep the overall compressed portfolio risk and NPV neutral. Each participant then confirms whether it wishes to propose any changes before the final compression portfolio is bilaterally agreed with the other party. 4. Execute Run Once a finalised list of compression and risk reinstatement trades has been agreed between the two parties, standardised trade files are transferred to each of the participants ready for execution

6 A Worked Example Using standardised clearing house trade reports, the Banks cleared positions are lined up and offsets identified by the ClearCompress algorithm. Where an offset exists, a new trade is proposed that allows both participants to reduce their outstanding gross notional. Following a Clearing House Compression cycle, the new trade and original positions are collapsed, releasing benefit to both sides. No Match Long 100m Long 100m 1st June 2020 Match Long 90m Short 90m 11th July 2020 Match Short 30m Long 110m 10th Sept 2020 No Match Short 110m 1st Nov 2021 Match Short 180m Long 20m 1st Jan 2022

7 Added Benefits of the ClearCompress Service ClearCompress ClearCompress offers the following specific benefits to participants: Light Touch: ClearCompress uses standard industry infrastructure so that clients can upload portfolios and receive output in a form they can easily and automatically process Summarised Results: Results are available in summary form and offsetting trades are generated in either BAT file format for clients to easily upload into MarkitWire or direct to the Clearing House Control: Matching tolerances can be set by the client for risk management (PV01) and operational (trade volume) control Independent: ClearCompress is an independent service provider all portfolios remain totally confidential within a secure system environment Automated: Designed to require minimal client resource engagement with production runs completed inside half a day On-Demand: The ClearCompress service is tailored to enable compression for clients according to their own timescale, frequency and portfolio scope Flexible: ClearCompress can be utilised to enable compression of cleared trades (both house and client accounts) across multiple Clearing Houses and products Cost Effective: A highly competitive all-in flat fee cost to clients, with a charging structure that ensures clients can control the cost/benefit they release from the service Onsite Assistance and Support: Our experienced and knowledgeable specialists provide bespoke advice to keep operational support costs to a minimum Summary Changes in capital and margin requirements have prompted the major Clearing Houses to roll out a suite of compression services to help firms tackle rising costs. Yet, existing compression services can be costly and are often limited in terms of their scope and impact. While Blended Rate Compression, for example, can yield a significant capital saving (through the reduction of gross notional), it falls short in being able to deal with slightly mismatched maturities. Similarly tear ups only deal with a fraction of the potential capital reduction benefit opportunities. ClearCompress is designed to capture this significant missing segment and can be seen as incremental to existing industry-wide initiatives rather than an alternative. The ClearCompress service offers a higher level of compression optimisation, delivering a flexible, confidential and independent opportunity to further reduce gross and net notionals, thereby cutting capital costs further for both parties. To find out more about the ClearCompress Service, contact us at info@clearcompress.com

8 Based in London, ClearCompress originated from, and continues to have, a strong partnership with New Link Consulting. Run and operated by experienced industry professionals, ClearCompress understands the OTC derivative and clearing industry evolution as well as the associated demands on capital and costs. New Link Consulting provide a comprehensive portfolio of consultancy services to clients, including buy-side, sell-side and market intermediaries. New Link Consulting s core areas of expertise include Regulation, Operational Risk and Control, Process Improvement and Business Integration with deep industry knowledge, gained through years of direct experience working within City financial services organisations. ClearCompress Limited, 1st Floor, 65 Leonard Street London, EC2A 4QS, United Kingdom +44 (0) info@clearcompress.com