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ISDA®: Fragmentation of Global OTC Derivatives Markets Facilitated by CFTC Regulations
Practical Law Legal Update 9-576-3065 (Approx. 3 pages)
ISDA®: Fragmentation of Global OTC Derivatives Markets Facilitated by CFTC Regulations
by Practical Law Finance
| Published on 30 Jul 2014 • USA (National/Federal) |
ISDA has issued a study on the effect that CFTC swaps regulation has had on the fragmentation of the global OTC derivatives markets, resulting in decreased liquidity for US persons transacting in swaps.
On July 24, 2014, ISDA® issued a study on the effect that CFTC swaps regulation has had on the fragmentation of the global OTC derivatives markets, resulting in decreased liquidity for US persons transacting in swaps.
The study focuses on certain CFTC swap requirements, including:
- Registration requirements for swap execution facilities (SEFs), which became effective on October 2, 2013 (see SEFs Go Live, CFTC Issues Limited No-action Relief from Some SEF Rules).
- Made available to trade (MAT) determinations that require certain swaps to be traded on SEFs or DCMs, which the CFTC began to issue February 15, 2014 (see SEFs Go Live, CFTC Issues Limited No-action Relief from Some SEF Rules).
The study primarily examines the monthly regional clearing data from LCH.Clearnet for US-dollar and euro denominated interest rate swaps (IRS), because of their regional significance, liquidity and price transparency. The study indicates that, among other things:
- The average volume of euro denominated IRS traded among European dealers out of the total euro IRS traded was:
- 75% prior to the regulations, or an notional average of $2,708.3 billion;
- 90% after the registration requirements for SEFs came into effect on October 2, 2013, or a notional average of $3,339.2 billion; and
- 93% after the MAT determinations that began become effective on February 15, 2014, or a notional average of $3,251.6 billion.
- The average volume of euro dominated IRS traded between a European dealer and a US dealer out of the total euro IRS traded was:
- 25% prior to the regulations, or a notional average of $899.7 billion;
- 9% after the registration requirements for SEFs came into effect, or a notional average of $326.3 billion; and
- 6% after the MAT determinations began to become effective, or a notional average of $212.6 billion.
- With the implementation of these regulations, trading volume for euro IRS between European and Canadian dealers has steadily increased, while trading volume for euro IRS between Canadian and US dealers has declined.
The study demonstrates that non-US market participants are moving away from trading with US persons in order to avoid increased regulatory scrutiny and formalized trading requirements. The result is decreased liquidity for US persons transacting in swaps.
This study is part of a series on market fragmentation, which can be found, along with other ISDA produced research notes, at the ISDA website.
"ISDA" is a registered trademark of the International Swaps and Derivatives Association, Inc. (ISDA). ISDA is not a sponsor of Practical Law and had no part in the development of this resource.