Yesterday’s Barclays’ results-horror spectacular offered some interesting insights for anyone who works in, or aspires to work in, derivatives trading.
In his speech accompanying the results, new CFO Tushar Morzaria gave an indication how Barclays plans to reduce its leverage ratio in line with the EU’s rules. In particular, he highlighted how Barclays plans to manage its derivatives book, which accounts for 20% of its overall leverage exposure.
“Here we are looking at better application of netting rules within our internal systems, and compaction and tear-ups across a range of derivative products from, for example, cross currency swaps, credit derivatives, exchange traded and Centrally Cleared OTC derivatives,” Mozaria said [our emphasis].
Netting rules and tear-ups are already part of the derivatives lexicon. The New York Times has a good explanation of netting rules here. ‘Tear ups’ refers to the elimination of derivative trades. ‘Compaction’ is a mystery, although we suspect it has something to do with so-called portfolio compression, in which the size and number of outstanding credit derivatives contracts is reduced without changing the risk profile or present value of the portfolio. For more information, click here. Under new leverage rules, ‘compaction’ is likely to become a much bigger thing in future.