Portfolio Compression

Portfolio compression between four traders before application. The bilateral positions have already been netted .

After application: six stores are replaced by three; the gross exposure (Σ R ) has been reduced by approx. 70%.

The portfolio compression (English portfolio compression is) a method of reducing the gross positions in a portfolio . Traders of swaps and other over-the-counter transactions with a future payment flow who act as both sellers and buyers can, in the case of netting options, liquidate part of their transactions before their maturity . This reduces the risk of default and reduces the administrative costs for the portfolio. Under certain conditions, equity is released that would otherwise be tied up to cover the transactions entered into. In addition to trade confirmation and portfolio reconciliation, portfolio compression is one of the legally prescribed measures to reduce systemic risk in trading financial securities and commodities. The legal basis is the Dodd – Frank Act in the USA and Regulation (EU) No. 648/2012 (Market Infrastructure Regulation) in the European Union. Another application of portfolio compression is for portfolio tracking.

Use in portfolio tracking

In addition to the liquidation and reduction of positions actually carried out as described above, portfolio compression can also be used to describe a simplification method for simulation calculations. A real portfolio, which can consist of hundreds of thousands of positions, is mathematically replaced by a comparative portfolio of a few positions that has the same risk characteristics. With the comparison portfolio, for example, computationally intensive calculations of the value at risk can be carried out, which would not be possible with the real portfolio. A US patent was granted in 2001 to implement this method. Another approach uses stochastic programming .

literature

Interest Rate Swaps Compression: A Progress Report. (PDF; 269 kB) ISDA , February 2012, accessed on June 15, 2018 (English).

Individual evidence

^ S. Azhar: Data compression techniques for stock market prediction . In: Proceedings of the Data Compression Conference, 1994 . North Carolina State University, Greensboro (NC) 1994, pp. 72-82. (Conference March 29-31, 1994)
^ Ron S. Dembo, et al .: Computer-implemented method and apparatus for portfolio compression . Patent number 6278981, filed May 28, 1998, issued August 21, 2001.
^ Michael Dempster, Giles Thompson: Dynamic portfolio replication using stochastic programming . In: Michael Dempster (Ed.): Risk Management: Value at Risk and Beyond . Cambridge University Press, 2002, pp. 100-128 .

[1] S. Azhar: Data compression techniques for stock market prediction . In: Proceedings of the Data Compression Conference, 1994 . North Carolina State University, Greensboro (NC) 1994, pp. 72-82. (Conference March 29-31, 1994)

[2] Ron S. Dembo, et al .: Computer-implemented method and apparatus for portfolio compression . Patent number 6278981, filed May 28, 1998, issued August 21, 2001.

[3] Michael Dempster, Giles Thompson: Dynamic portfolio replication using stochastic programming . In: Michael Dempster (Ed.): Risk Management: Value at Risk and Beyond . Cambridge University Press, 2002, pp. 100-128 .