Cross-border swaps trading activity has dramatically reduced since October between US and European dealers as participants weather the impact of regulations defining a ‘US person’ and the introduction of new swaps trading venues, which will likely continue well into 2014, an analyst from consultancy Celent has said.
In a research note published this week, ISDA have found a 77% drop in volumes of cleared euro interest rate swaps (IRS) between European and US dealers since October and a 47% decrease in total euro IRS cleared volume since January 2013.
The report stated that trading between US persons and non-US persons had declined due in large part to fragmentation in the euro interest rate swaps market as liquidity pools become more exclusive amongst European dealers.
In October, the percentage of European inter-dealer activity in Europe grew to 91% from 71% in September, while the same group’s engagement with the US dropped to 9% in October from 29% in September and remained depressed through to December.
Commenting on the ISDA research, Anshuman Jaswal, senior analyst with Celent, said the combination of the market adjusting to swap execution facilities (SEFs) and continued uncertainty around cross-border rules would see this depression in swaps liquidity continue further into 2014.
“This data shows the impact on the US market of SEFs because it’s still very early in the transition to SEF-based trading,” he told theTRADEnews.com. “It will take time to get trading volumes back to pre-October levels as participants adjust and it could be until early 2015 before volumes truly return."
The report cited the uncoordinated, national approach around swaps rules and confusion over the US person definition as key reasons for the drop in volume as participants remain uncertain over key extraterritorial issues.
Jaswal added the extraterritorial concerns of market participants had severely weakened the cross-border market as the global OTC derivatives market implements national and regional regulations.
“Many participants dealing with US counterparties are in a wait and see situation and have scaled back their swaps trading because of the regulatory uncertainty around these cross-border issues,” he said, adding that this would correct itself as greater clarity on rules arises in coming months.
Quoting a survey of market participants it conducted in 2013, the ISDA report stated that the introduction of SEF trading in October and the introduction of de facto mandatory SEF trading for US entities from February would further fragment the swaps market.
The amount of SEFs and the expected low level of engagement from non-US participants is expected to further fragment swaps liquidity as the market adjusts to SEFs and complies with rules governing the new trading venues.
“Many participants in our survey provided comments stating that the upcoming February MAT date and a lack of regional coordination will further fragment markets,” the report read.