Article: Swaps Fragmentation Crystalizes

17 November 2014 | Orlando Almodovar

Swaps Fragmentation Crystalizes

Swaps market liquidity for Euro denominated interest rate contracts has decisively split between US and Non-US Persons, with the former US persons disadvantaged by a smaller pool of trading counterparties due to different regulations and timetables by jurisdiction.  

Cleared EUR rates volume over the past 120 trading days (June 2nd – November 14th) displays a €4-to-€1 relationship in cleared volume, favoring Non-US Persons.  On a monthly basis US Persons EUR cleared rate swaps volume has crystalized between 18%-23%, with a wider band for cleared EUR IRS of 16%-27%.  This contrasts with US Person USD activity ranging between 65%-70%.

On a weekly basis, as shown in Exhibit 1, mid-September through October experienced a pop in the US Person proportion of EUR IRS volume.  Anecdotally this is due to international participants gaining comfort their risk activity is not exposed by the transparency of US reporting requirements, however the trend has faded in the past two weeks.

This analysis considers US SDRs as US Person data, and uses single side EUR rates volume from clearing houses LCH, CME and EUREX to derive Non-US Person levels.  Capped EUR transactions in DTCC made up 25% of the EUR SDR data (31% of EUR IRS) and have been doubled in the analysis, as comparing Bloomberg-SDR to Bloomberg-SEF where actual capped notionals can be observed confirms the reasonability of this practice.

Bill: Please note that this article assumes that all trades in a US SDR are exclusively from 'US persons' and that all trades cleared in SwapClear and Eurex are from non-US Persons, neither of which may be true. Both CCPs can clear for US-person firms, and non-US person firms can report to DTCC. It is also true that the date to benchmark the charts in this article don't show the pre-SEF split of liquidity, so this can only be seen as a snapshot of the market, and isn't easy to be conclusive on the outcome of this analysis.

Daily cleared volumes are displayed in the next Exhibit, with averages of under €100B per day for US Persons compared to €360B for Non US Persons.  For EUR IRS only, the daily levels are €23B for US Persons and €102B for Non US Persons.  The regionalized activity is likely to persist as clearing requirements take place in Europe over the next 2 years, ahead of the European trading mandate.


Regarding the cleared EUR data, Eurex typically has daily EUR volume in the hundreds of millions range, with larger days such as November 12th, seeing single side notional transactions north of €1B.  Over the 24 weeks observed, CME’s EUR volume was 10 times higher than Eurex, while the bulk of EUR activity cleared at LCH, being 8 times higher than CME.  CME captured 19% of Total EUR rates volume among US Persons (34% for EUR IRS).

By Orlando Almodovar

Derivatives Analytics and Market Intelligence