TriReduce nets out long-duration swaps between multiple dealers using a triangulation system that is significantly more efficient than the current bilateral elimination employed at some dealers. Last year, Brouwer said, interbank swaps participants could save more than $1 billion in capital and future operational costs related to their swaps portfolio by using the system.
Interbank swaps require capital against current exposure and future exposure. Banks are collateralised with their trading counterparties, so current exposure is covered. But there is a future exposure cost. The typical regulatory capital charge for a $50 million vanilla swap is about $1,200, based on a 25% return on equity, counterparty weighting of 20% and risk capital requirement of 8%. The cost of tearing up a four-year $50 million swap using TriReduce is about $200 per contract.
Elimination runs are scheduled to take place on Thursdays through to Fridays. This gives banks the weekend to clear up any teething problems with their internet-based technology hook-ups. The first run is scheduled for the end of March, but due to the proximity of a European Central Bank interest rate meeting, the fist run is likely in a non-euro currency. A euro run is currently scheduled for mid-April.