The fracturing of the global interest rate swaps market that emerged in the aftermath of US swap execution facility (SEF) rules coming into force in October 2013 shows no signs of reversing. Although concerns over market fragmentation have been apparent for almost three years, some liquidity pools continue to be split on US and non-US lines.

This has been particularly noticeable in euro-denominated interest rate swaps (IRS). This report, the fifth in a series of research notes charting changes in global liquidity, finds that 91.2% of cleared euro IRS activity in the European interdealer market was transacted between European counterparties in December 2015. In September 2013, immediately prior to the introduction of the SEF rules, this figure stood at 70.7%.

The US dollar IRS market has experienced less change than its euro-denominated counterpart. The percentage of activity transacted between European and US dealers in the US interdealer market has decreased slightly, from 51.2% in September 2013 to 47.3% in December 2015.

Canadian and Asian cross-border flows represent a small portion of the euro- and US dollar-denominated swaps market. While both types of regional dealers prefer to transact euro IRS in the larger, exclusively European liquidity pool, Asian counterparties show a preference for trading US dollar IRS with European counterparties as well. Canadian dealers split their US dollar IRS volume between US and European dealers more evenly.