Minding the Liquidity Gap in Interest Rate Swaps
A recent report from the International Swaps and Derivatives Association (ISDA) highlights an ongoing liquidity split along geographic lines.
ISDA notes that while fragmentation exists for both euro and U.S. dollar interest rate swaps (IRS), it is more pronounced in European markets.
Below are key points of ISDA’s analysis which charts changes in global liquidity pools since U.S. swap execution facility (SEF) rules came into force in October of 2013:
- European liquidity: Exclusive European interdealer transactions continue to lead global market volumes. Since U.S. SEF rules were introduced, European market share has increased from an average of 65.6 to 87 percent.
- U.S. liquidity: Exclusive U.S. interdealer transactions continue to diminish, going from an average of 11.3 percent market share from January to September 2013 to only 0.9 percent between April and June 2015.
- Cross-border liquidity: Shared European-to-U.S. dealer transactions averaged 22 percent of total euro IRS volume between January and September 2013. Volume declined to 8.3 percent in October 2013 and represented only 9.9 percent during Q2 2015.
- Future growth: European dealers are more willing to trade with U.S. dealers on SEFs to gain access to U.S. liquidity. But since the largest pool for euro IRS is in Europe and away from SEFs, additional cross-border growth would likely require greater regulatory harmonization.
To read ISDA’s full research and see specifics of market evolution over time, click here.