CFTC Looks to ‘Right-Size’ Swaps Market


The use of notional values may be on the way out as a metric to measures the size of the interest rates swaps market if US Commodity Future Trading Commission Chairman Christopher Giancarlo has his way.

Christopher Giancarlo, CFTC

“It has long been recognized that notional amounts are not indicative of size yet they continue to be used in important regulatory calculations like capital requirements and thresholds,” he said addressing the attendees of the DerivCon 2018 hosted by the Tabb Group.

When measuring the magnitude of risk transfer in the IRS market, the short-term nature of a significant portion of forward-rates agreements, overnight index swaps, and swaptions cause their amount risk transfer capabilities to be exaggerated.

As a result, the market is sized at hundreds of trillions of dollars, which “often confuses the issues and hinders dispassionate consideration and sound policy setting,” said Chairman Giancarlo.

To address the issue, Chairman Giancarlo instructed CFTC Chief Economist Bruce Tuckman and his team to develop a more accurate risk-transfer metric for the IRS market in 2017.

The CFTC has published a paper on the regulator’s website offering an alternative, the Entity-Netted Notional value, today, February 1.

The ENN nets long and short positions between pairs of counterparties within a currency to capture the amount of risk transferred.

Using the new metric, the $179 trillion notional value across of currencies across fixed-for-floating swaps, forward rates agreements, overnight index swaps, and swaptions as of December 15, 2017, becomes a more accurate value, according to Chairman Giancarlo.

“Expressed in five-year risk equivalents, that notional amount falls to $109 trillion,” he said. “Now applying Tuckman’s ENN analysis, the figure drops to $15 trillion, or just over 8% of the notional amount.”

The ENN value puts the IRS market in the same order of magnitude as the US Treasuries market ($16 trillion), corporate bond market ($12 trillion), mortgage market ($15 trillion), and the municipal securities market ($4 trillion), he added.

The ENN metric may be a more accurate regarding sizing markets; it is not a replacement for notional value as a measure of operations risk or the use of gross or net market value and gross or net credit exposure to measure counterparty-credit risk.

The new metric’s methodology also could be extended to other large markets like the credit default swap markets and foreign-exchange swaps markets.

Chairman Giancarlo was firm that even though ENN analysis is suitable for calculating regulator thresholds, such as for registered swaps-dealing activity, he did not intend it to be a specific alternative to the CFTC’s de minimis calculation methodology.

“The purpose was far more broadly to bring greater clarity to the public understanding of the global derivatives market,” he explained.

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