It is Wall Street’s equivalent of a potluck party.
Several times a week, the world’s biggest banks get together, each bringing something for the rest of the group. But instead of casseroles and cookies, the firms come with swaps and other derivatives they aim to pair with offsetting trades held by another bank.
Their goal: to leave these virtual gatherings without any leftovers. Banks are seeking to tear up as many derivatives trades they can to meet new, tougher rules on capital.
Derivatives—contracts between banks and other investors and linked to interest rates, corporate debt, commodities, currencies and other assets—have become a key battleground in the regulatory effort to avoid a repeat of the financial turmoil of 2008.
Since that crisis, U.S. and international regulators have pushed to raise the amount of capital banks must hold against securities and other assets on their books. The proposals have left the largest financial firms scrambling to shrink their balance sheets by reducing, or “compressing,” their overall derivatives holdings valued in the tens of trillions of dollars.View Document