The level of clearing in the US interest rate derivatives (IRD) market continued to grow during the third quarter of 2016, with nearly 85% of the total IRD volume reported to US trade repositories centrally cleared. Trading on swap execution facilities (SEFs), however, appears ‘stuck’ in a neutral gear. While a bit more than half (50%-55%) of the US IRD market is typically SEF-traded, this segment has declined slightly over the past year, even as overall trading volumes have increased.
To better understand the dynamics of this trend, ISDA analyzed cleared IRD data to discern what types of swaps trade on a SEF versus those that are not electronically executed. Doing so uncovers swap market characteristics that drive this decision. Major points of interest include:
The percentage of IRD trading volume that has been deemed ‘made available to trade’ or MAT (which means it is legally required to trade on SEF) averages about 5% of total IRD trading volume reported to US trade repositories. MAT swaps make up approximately 17%-22% of cleared fixed-floating swaps, the only IRD product class, or taxonomy, with a MAT mandate.
Most of the trading volume that occurs on SEFs is a result of the inclusion of Footnote 88 within the Commodity Futures Trading Commission’s (CFTC) final SEF rules. Footnote 88 requires multiple-to-multiple trading venues used by US persons, such as those offered by interdealer brokers, to register as SEFs, even if the products they offer aren’t subject to the execution mandate. As a result, instruments traded by the interdealer community may drive the level of SEF trading for the various IRD product taxonomies. For example, in the forward rate agreement (FRA) space, more than 80% of notional volume reported to US trade repositories occurs on a SEF. For fixed-floating swaps, which mostly consist of dealer-to-client volume, the percentage is 55%. For overnight indexed swaps (OIS), it is 31%. These three taxonomies account for upwards of 85% of total IRD trading volume.
Although some fixed-floating swaps are ‘MATable’, there are a number of reasons why roughly half of the notional volume trades off-SEF. The analysis finds many transactions are denominated in a non-MAT currency, have a non-MAT start type, or have a non-MAT maturity. Combinations of non-MAT and MAT characteristics also contribute to off-SEF volume.