ISDA: Cross-border fragmentation of global interest rate derivatives - The new normal?

29 October 2015

The global derivatives markets remains fragmented along geographic lines, according to an analysis of data to June 30, 2015. This report is the fourth in a series of research notes charting changes in global liquidity pools since US swap execution facility rules came into force two years ago.

The analysis reveals:

• 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.
• During the second quarter of 2015, an average of €2,345 billion per month of euro IRS, or 88.6% of total euro IRS volume by notional, was transacted exclusively between European dealers. During the third quarter of 2013 (prior to the start of the SEF regime), an average of €1,708 billion per month of euro IRS, or 73.4% of total euro IRS volume by notional, was transacted exclusively between European counterparties.
• As the notional volume of euro IRS transactions between European counterparties has increased, the notional volume of trades between European and US counterparties has fallen, both on an absolute basis and in percentage terms. During the second quarter of 2015, an average of €267 billion per month of euro IRS, or 10% of total euro IRS volume by notional, was transacted between European and US counterparties. During the third quarter of 2013, an average of €598 billion per month of euro IRS, or 25.8% of total euro IRS volume by notional, was transacted between European and US counterparties.
• The percentage of euro IRS trades exclusively between European counterparties in the first (89.4%) and second (88.6%) quarters of 2015 was slightly higher than in the fourth quarter of 2014 (87.6%).
• Although regional pools exist in the market for US dollar IRS, evidence of fragmentation is more subtle than in the market for euro IRS.
• European-to-US cross-border market share for US dollar IRS has surpassed exclusive European and US dealer volumes since the fourth quarter of 2014. Continued growth of the cross-border pool will rely on the harmonization of rules in various regions.

Full research note

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