From the Financial Crisis to Portfolio Compression

Diana Higgins

"Less is more"
Robert Browning

The financial crisis evolved from 2007 to a point where authorities identified the lack of transparency and poor collateralisation in the OTC derivatives market as key instigators of massive defaults. In 2009, the G20 leaders agreed to a statement by which reporting and clearing was mandatory for OTC derivatives, and that exceptional cases would have capital requirements. This statement is now applied through regulations that include risk-mitigation techniques for those derivatives that are not cleared. One of these techniques is portfolio compression.

The following explains the evolution of the crisis to understand how the G20 statement is aimed at addressing weaknesses in the derivatives markets, and in turn how this statement is reflected through EMIR rules.

FINANCIAL MARKETS CRISIS BETWEEN 2007 AND 2009

The credit crisis affected corporations in the US, Europe and other wealthy geographies. It evolved from the 2007 announcements on increased bad loans provisions for mortgages in the US (HSBC), followed by losses, defaults and the collapse of various mortgage lenders (American Homes, New Century Financial and Basis Yield from