Knowledge

Portfolio Compression

Portfolio compression is a risk reduction technique in which two or more counter- parties terminate some or all of their derivative contracts and replace them with another derivative whose market risk is the same as the combined notional value of all of the terminated derivatives. Under EMIR, firms must use a portfolio compression technique to reduce the number of transactions in a portfolio that need to be managed in the trade life cycle. This reduces the overall operational risk of the portfolios by reducing the gross nationals outstanding.