Swaps End-Users Still Reluctant to Trade on SEFs

By Colby Jenkins, Tabb Group

Originally published on Tabb Forum

Notional volume traded in IRD has been on the rise since late 2015 within the US, but off-SEF trading still represents a majority of this volume, and the percentage captured by Swap Execution Facilities has been dropping consistently for months. Meanwhile, the CDX market continues to drop off, as notional traded volume has nearly halved as of May.

The transformation of the US swaps markets is far from over. Trading on Swap Execution Facilities (SEFs) has been ongoing for more than two years; but while adoption has somewhat plateaued, recent trade data reflects that the market is far from reaching a new status quo. For US participants navigating the uncertain waters of US swaps trading, calm is still far off on the horizon.

Notional volume traded in cleared interest rate derivatives has spiked dramatically during the first quarter of 2016. A total of just under $6.8 trillion in cleared interest rate derivatives, excluding FRAs, was traded in aggregate on- and off-SEF during March 2016. This monthly total is a record for cleared IRD volume and represents 74% of total notional IRD volume traded within US markets (see Exhibit 1, below).

The first quarter of 2016 saw an aggregate of more than $10.7 trillion (ex-FRA) in notional traded on SEF platforms for interest rate derivatives. This figure represents the highest-grossing period yet since the inception of SEF trading by a margin of more than $610 billion. This growth, however, has not kept pace with off-SEF notional activity. Recent statistics reflect a continuing reluctance on the part of certain swaps end-users, particularly within IRD markets, to trade via SEF platforms.

Exhibit 2, below, demonstrates that the percentage of total IRD volume transacted on-SEF has dropped consistently each month this year for IRD. April saw the lowest percentage of US IRD volume transacted on SEF platforms (37%) since 2014 and marked the fourth consecutive month in decline for percentage of total US IRD market trading on SEF venues. While the percentage of CDX notional activity traded on-SEF has been consistent, at 78%, for months, the total volume traded in CDX has dropped significantly since year end of 2015 (Exhibit 3).