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Electronification eases the way for inflation swaps volume increases

| Derivatives

In addition to the yearly seasonal inflationary increase that typically occurs before the holiday period, rising inflation as a result of Covid driven government spending has been hitting headlines lately. These recent developments have led market participants to carefully assess their long-term exposure to inflation and whether it’s best to hedge now or going forward. Volumes for the inflation swap market have been increasing as a result.

As demand for inflation swaps increases, traders naturally want to boost operational and capital efficiency. Best execution, reporting and straight-through processing (STP) - where trades can be registered directly by the clearing house - means that an entities’ risk is automatically updated both on an internal basis and at the clearing house using this functionality. 

At Tradeweb, we believe that the electronification of inflation swaps is here to stay. 

Leading the way through innovation

Having executed its first cleared inflation swap transaction using request-for-quote (RFQ) protocol over three years ago, Tradeweb has now gone on to become the leader in the inflation swaps electronic trading space. This type of execution had traditionally been conducted by phone or chat, a time-consuming process that carries the inherent risk of the market moving between quotes from different dealers, before the trade is completed. Tradeweb’s innovation has meant that inflation swaps liquidity is aggregated on one single screen, enabling traders to request prices from multiple dealers simultaneously, and complete their transactions more quickly and efficiently, while leveraging STP and innovative tools.

And we have come a long way since that first trade.

Now we are in a position to provide, for example, everything that LCH covers on the clearable side, including swaps product which can be traded bilaterally and cleared. We also offer our clients greater depths of liquidity for three different cleared indexes including the Sterling RPI, Euro CPI, and French CPI, with about 18 banks involved since launch.

As clients have begun to be more comfortable with trading RFQ, some are venturing even further with other Tradeweb products such as list trading, and our multi-asset package (MAP) tool, which builds on our list trading capability to streamline the simultaneous execution of interest rate swaps, inflation swaps and government bonds on a single electronic venue, and in a single trade. We have also recently gone live for U.S. Dollar-denominated inflation swaps, as well as adding inflation curves and inflation forwards as a product.

Another feature that we’re hearing positive feedback from our clients on is the usefulness of the streaming prices being sent by banks to Tradeweb, giving them a benchmark for the prices they are seeing on the platform. It's also worthwhile noting that even though 90-95% of our trades are cleared swaps, we do support bilateral inflation swaps as well. In fact, we executed our first cleared Eurex inflation swap in November 2020.

Forging new paths

What we have found over the past three years is that our offering has attracted a broad mix of clients who trade inflation swaps on the platform including liability driven investors (LDI)’s and asset managers, as well as pension funds, banks, government organisations and hedge funds.

Tradeweb has seen impressive levels of volume flowing through our inflation swaps platform, indeed our compound annual growth has increased to 170% since launch (Source: Tradeweb, up to Q3 2020). From a simple inflation swaps offering to the ability to offer an array of options for this type of swap, our  most recent innovations demonstrate that we are close to the needs of market participants and continue to respond to them. Proof, indeed, of our commitment to connect people and markets, and help new asset classes - such as inflation swaps - on their journey towards electronification.