The volume of interest rate swaps (IRS) traded on swap execution facilities (SEFs) dropped significantly in the first week of mandatory trading, according to analysis from consultancy TABB Group.
Figures compiled sourced from three data providers show a slide of between 30% and 40% in SEF-traded IRS volumes as participants adjust to initial ‘made available to trade’, or MAT, requirements that began last week, the report has found. This equates to a drop of between US$23 billion and US$60 billion in notional value traded on SEFs, compared to average levels previously in 2014.
TABB Group normalised data covering the first week of MAT trading from the Depository Trust and Clearing Corporation (DTCC), the International Swaps and Derivatives Association and Clarus Financial Technology. TABB’s analysis included all cleared IRS trades conducted on SEFs for all tenors and currencies, excluding forward rate agreements and block trades
Figures from the DTCC showed a 33% decline in IRS volumes executed on SEFs to US$48.5 billion from a weekly 2014 average of US$72 billion. According to Clarus data, the decline equated to US$60 billion in IRS notional traded on SEFs.
So far, five SEFs have submitted MAT filings with the Commodity Futures Trading Commission (CFTC), which have covered both rates and credit derivatives. The first submission approved was from Javelin SEF and came into force on Tuesday 18 February for IRS products.
The report, ‘SEF Trading: What Really Happened in Week One’, was compiled by TABB Group research analyst Colby Jenkins, and found the dealer-to-dealer SEFs showed a higher rate of decline than dealer-to-client platforms.
“All six of the dealer-to-dealer SEFs, incumbents in the swaps market, reported week-on-week drops in notional volume for this month,” the report stated, while dealer-to-client platform Bloomberg has grown market share by 3% of total volume traded on SEFs since the beginning of February.
“It is worth noting this growth is more a function of retaining volume levels as others fall than a pure increase in volume,” wrote Colby.
The requirement to trade on SEFs is part of Dodd-Frank Act reforms to the OTC derivatives market, which includes central clearing requirements that came into force last year for certain swaps. Market participants fear these reforms are hiking the costs of trading OTC derivatives, but will reduce overall risk in the system.The MAT rule is the de facto mandatory trading requirement for SEFs and requires the platforms to submit to the CFTC a list of products to be traded on its SEF. Approval of a MAT application for a specific set of instruments requires market participants to trade those products on any of the 21 SEFs registered with the regulator.