Swaps Trading Between Europe and U.S. Declines

Terry Flanagan

The International Swaps and Derivatives Association, the trade body for over-the-counter derivatives markets, said European dealers have been choosing not to trade with US dealers since swap execution facilities were introduced in the US.

Electronic trading platforms for swaps that provide access to US persons have been required to register as SEFs with US regulators and comply with new rules since October last year. On February 15 this year the first OTC interest rate swaps and credit index instruments became mandated for trading on SEFs in a process called made available to trade (MAT).

Isda found that the swaps trading between European and US dealers began to fall after October and the decline became more pronounced after February after analysing monthly regional clearing data from LCH.Clearnet between January 2013 and May 2014 for US dollar and euro interest rate swaps.

The Isda report said: “Trading between US persons and non-US persons has declined. Most notably, fragmentation is disrupting the market for euro interest rate swaps as liquidity pools have become more exclusive among European dealers.”

Between January 2013 and September 2013, 75% of total euro IRS volume was between European dealers and this rose to 90% between October 2013, when the SEF rules were implemented, and January 2014.

Since February this year European interdealer volume has risen to 93% of total euro IRS volume.

The MAT determinations have also affected the average percentage of euro IRS trading on SEFs.

Isda said: “Trading in euro-denominated IRS decreased once the MAT determinations came into force – from 13% to 9% – as liquidity continued to move away from US persons.”

Before the SEF rule, an average of $2,708.3bn of euro IRS trades took place among European dealers between January and September 2013 and $899.7bn between European and US dealers.

After the SEF rule, an average notional volume between European dealers increased to $3,338.2bn between October and February 2014, while European trading with US counterparties decreased to an average of $326.3bn.

Tullett Prebon, the UK interdealer broker, said in its interim management report for the six months ended 30 June 2014 said that new regulations affecting the operation of the OTC derivatives markets “has created uncertainty and the fragmentation of liquidity pools which has also reduced market volumes.”

Tullett said its swap execution facility, tpSEF, continues to operate successfully: “Third party analysis of the notional volume of trades reported through SEFs shows that the market shares of the interdealer brokers have been maintained at the levels before the rules were introduced.”

In Europe the first clearing obligations for OTC trades are expected to come into effect next year.

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