ISDA study shows continued fragmentation of global liquidity pools

22 April 2015

Global derivatives markets are continuing to fragment along geographic lines as a result of divergent regulations across jurisdictions, according to new research published at ISDA’s 30th Annual General Meeting in Montreal.

“ISDA’s research demonstrates that the fragmentation of global liquidity pools continues to be a problem. Fragmentation means less liquidity, less choice and, ultimately, higher costs for end users", said Scott O’Malia, ISDA’s Chief Executive Officer. “It’s important that regulators coordinate and cooperate to eliminate inconsistencies in their rules and ensure derivatives end users can tap into deeper liquidity pools.”

Although regional pools exist in the market for US dollar IRS, evidence of fragmentation is more subtle than in the euro IRS market. ISDA believes certain regulatory changes need to be made to the US SEF rules in order to comply with the ISDA principles and to achieve a harmonised international regulatory regime. The necessary regulatory adjustments would include changing the process for making mandatory trade execution determinations to ensure it is based on objective criteria and supported by data, and to allow greater flexibility in swap execution mechanisms.

Summary of the ISDA fragmentation analysis:

• The cleared euro IRS market remains largely fragmented in US and non-US liquidity pools. This split was first observed in October 2013 after the CFTC’s SEF regime came into force.
• More euro IRS volume is now transacted exclusively between European counterparties than before October 2013.
• The notional volume of the European-to-US interdealer cross-border euro IRS market has decreased.
• The percentage of euro IRS trades exclusively between European counterparties in the fourth quarter of 2014 was modestly lower than in previous quarters. Conversely, the percentage of trades between European and US counterparties was slightly higher. The change reflects a decline in underlying activity in euro IRS between European institutions over the period.
• European-to-US cross-border market share for US dollar IRS has now surpassed exclusive European and US dealer volumes. Continued growth of the cross-border pool will rely on the harmonisation of rules in various regions, as well as participation on SEFs.

Full analysis

Full press release

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