TriOptima run eliminates $880 billion in surplus CDS

The company's TriReduce software identified 39,000 CDS held by its 19 subscribers that could be torn up, leading to an overall $16.2 billion reduction in mark-to-market exposures.

The five cycles covered European and US indexes, European and US single name CDS and a special index cycle covering Collins & Aikman Products, which recently filed for Chapter 11 bankruptcy protection.

The $880 billion total tear-up represents 17% of the total outstanding notional value of CDS at the end of last year, which stood at $6.4 trillion, according to the Bank for International Settlements.

TriOptima's managing director for North America, Susan Hinko, said the company conducts tear-ups with all the top 15 to 20 credit derivatives dealers that represent about 90% of the interdealer CDS market.

Despite the high notional value of tear ups, Hinko expects future runs to yield similarly high numbers of contracts eliminated. "I don't think further runs would be smaller. We haven't cycled through all the sectors of the single-name side yet," said Hinko. "On the index side we have made a dent, but on the other hand there has been considerable growth in the market."She said the CDS market has grown by a notional value of about $2 billion already this year. "Therefore we have only terminated one-half of the growth in the market," she adds.

The move to quarterly payment cycles for CDS has limited the time that TriReduce can work, Hinko said. "We can't run a cycle in the month when payments are due, because people have so much work on then, and as payment gets closer the interception between termination and payment can get a little hairy," she added.

Previous single-name runs have covered telecoms, automobile and high-yield CDS. Hinko said the next cycle will cover the top 30 names by liquidity across all sectors.