ISDA survey: end-users give high marks to transparency, liquidity and pricing in interest rate swaps market
19 October 2010
The International Swaps and Derivatives Association, Inc. (ISDA) released the results of a survey of end-users in the interest rate swaps (IRS) market on such key issues as pre-trade price transparency, market liquidity, price competitiveness and trading practices.
A total of 234 non-financial corporations, asset managers and other financial institutions in North America and Europe who use interest rate swaps participated in the survey. Interest rate swaps comprise the largest segment of the global over-the-counter (OTC) derivatives market.
“According to our survey, corporations, investment managers and other end-users strongly believe that the interest rate swaps market is liquid and transparent,” said Conrad Voldstad, Chief Executive Officer, ISDA. “End-users carefully review pricing from multiple dealers and many use screens from vendors and dealers to ensure pricing is as competitive as possible. The survey confirms what ISDA has long believed -- that interest rate swap markets are liquid and deep.”
“In addition, a strong majority of those surveyed believes the interest rate swaps market equals or surpasses four large cash markets in terms of pre-trade price transparency, the competitiveness of prices and liquidity,” said Mr Voldstad. He noted that upwards of three-quarters of surveyed end-users rate the IRS market favourably on these attributes compared to corporate bonds and asset-backed securities.
Among the survey’s highlights:
Pre-trade Price Transparency: The majority of surveyed IRS end-users give high marks to the current level of pre-trade price transparency in the IRS market. 59 per cent rate pre-trade price transparency at a 4 or 5 on a 1 to 5 scale. Only 17 per cent of IRS end-users rate it at a 1 or 2, the two lowest levels.
Pre-trade Price Transparency vs. Other Markets: A strong majority rate pre-trade price transparency in the IRS market equal to or better than foreign exchange (FX), equities, corporate bonds and asset-backed securities (ABS). 69 per cent of IRS end-users rate it equal to or better than FX and equities, while 77 per cent rank it the same as or better than corporate bonds and 85 percent see it as equal to or better than ABS.
Sources of Pricing: 84 per cent of the surveyed IRS end-users typically get multi-dealer quotes before executing an IRS, reflecting their sophistication and ability to easily access competing price quotes. 67 per cent consult vendor screens, testifying to the availability of prices through electronic platforms and services.
Price Competitiveness: Most surveyed end-users believe the prices they receive from dealers for IRS swaps are competitive and a very few believe they are not competitive. 62 per cent rate IRS price competitiveness at a 4 or 5, while only 10 per cent of IRS end-users rate it at a 1 or 2, on a 5 point scale.
Liquidity: A strong majority of the surveyed IRS end-users rate the liquidity of the IRS market as equal to or better than the liquidity of the FX, equity, corporate bond and ABS markets. 71 per cent ranked it the same as or better than FX, 69 per cent did so vs. equities, 83 per cent vs. corporate bonds and 87 per cent vs. ABS.
Electronic Trading: A majority of those surveyed (77 per cent) believe electronic trading of IRS is beneficial. End-users are positively disposed to e-trading if it results in better pricing or better efficiency.
Two-thirds (67 per cent) of the surveyed IRS end-users do not believe mandatory e-trading would favourably impact their ability to manage risk. On a 1 to 5 scale, 45 per cent of IRS end-users rate the benefits of mandatory trading as a 1 or 2, the lowest ratings. In contrast, only 33 per cent of IRS end-users rate the benefits of mandatory trading as a 4 or 5.
The IRS end-users were also asked whether post-trade price transparency would be beneficial and a majority said it would be. The survey did not probe for respondents’ views on the costs, nature or structure of post-trade transparency.
Survey
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