Year in Review: Interest Rate Derivatives

It’s more than a year since the first trading mandates came into force in the US. How has this affected interest rate derivatives trading on execution venues and in the bilateral market? ISDA makes sense of the data, using information reported to US swap data repositories

The rollout of trade reporting requirements in the US, Europe and elsewhere means there’s now more derivatives trade data available than ever before. Making sense of that data remains a challenge, however. The regulations that have come into force contain a number of differences and inconsistencies. Standard identifiers for entities, trades and products have not been adopted globally, which prevents easy and accurate aggregation. And the exact data format required by the various trade repositories can differ, causing further difficulties (see pages 26-28).

ISDA has worked to decipher and combine the data reported to US swap data repositories (SDRs), launching a swap data analysis site last year called SwapsInfo.org. The site displays price and trade volume data on interest rate derivatives and credit default swaps, using publicly reported information from the Depository Trust & Clearing Corporation’s SDR service and the Bloomberg Swap Data Repository. These firms are required by US regulators to publicly disclose certain trade data.

Last year included some big changes to derivatives markets. Following the implementation of the Commodity Futures Trading Commission’s swap execution facility (SEF) rules in October 2013, the first made-available-to-trade mandates came into force in February 2014, capturing a variety of interest rate swap and credit default swap index instruments. The analysis looks into the impact on electronic and bilateral trading volumes, as well as cleared versus non-cleared volumes for the overall interest rate derivatives market.

Interest rate derivatives summary (Charts 1A and 1B)

Chart 1A: IRD Average Daily Trade Count: SEF, Bilateral, Total

Chart 1A: IRD Average Daily Trade Count: SEF, Bilateral, Total

Chart 1B: IRD Average Daily Notional Volume: SEF, Bilateral, Tot

Chart 1B: IRD Average Daily Notional Volume: SEF, Bilateral, Total

SDR-reported average daily trade counts increased while notional volumes decreased over the course of 2014, suggesting more frequent trading of smaller sizes is taking place. This inverse relationship was observed in both SEF and bilateral trading.

Compared with 2013, however, average daily volume increased on all counts. Average daily trade counts grew by 44.6%, from 2,447 trades per day during 2013 to 3,539 during 2014. Average daily notional volume also increased from $237.6 billion to $519.4 billion. Consequently, the average trade size of an interest rate derivatives (IRD) transaction climbed from roughly $97.1 million in 2013 to $146.8 million in 2014.

Meanwhile, cleared IRD transactions continued to grow as a percentage of total volume in 2014. Average daily cleared trade counts and notional volume accounted for 62.7% and 76.5% of the total in 2014, versus 58.1% and 71.7% in 2013.

SDR-reported SEF trading volume also increased, comprising roughly half of the total volume in 2014. Average daily SEF trade counts accounted for 46.8% of total trading, while average daily notional volume made up 52.4% of the total. Average SEF trade counts increased by 3.9% from the first quarter of 2014 to the fourth quarter, but average daily notional volume decreased 20.4% during that time.

IRD on- versus off-venue (Table 1)

Table 1: IRD Daily Average SEF/Bilateral Trade Count and Notional Volume (US$ billions)

Table 1: IRD Daily Average SEF/Bilateral Trade Count and Notional Volume (US$ billions)

Average total trade counts grew from 3,622 trades per day in the first quarter of 2014 to 3,800 in the last three months of the year, an increase of 4.9%. However, average daily notional volume decreased substantially over the same period, falling 17.6% from $588.0 billion to $484.4 billion per day1. This translates into a drop in the average size per trade from $162.3 million in the first quarter to $127.5 million in the last three months of 2014.

Table 2: IRD Daily Average Cleared/Non-cleared Trade Count and Notional Volume (US$ billions)

Table 2: IRD Daily Average Cleared/Non-cleared Trade Count and Notional Volume (US$ billions)

Looking over the entire year, both average daily total trade counts and notional volumes were higher in 2014 compared with 2013. Trade counts increased by 44.6%, from 2,447 trades per day in 2013 to 3,539 in 2014. Average daily notional volume, meanwhile, increased by 118.6%, from $237.6 billion per day in 2013 to $519.4 billion in 2014.

SDR-reported average daily trade counts increased while notional volumes decreased over the course of 2014, suggesting more frequent trading of smaller sizes

Drilling down to a more granular level, average daily SEF trade counts increased from 1,609 trades per day during the first quarter to 1,672 during the fourth quarter of 2014, a rise of 3.9%. Volume was highest during the third quarter, at 1,723 trades per day. However, average daily SEF notionals volumes decreased 20.4%, from $304.8 billion to $242.5 billion during the same period. Average daily notional volume was highest during the first quarter, at $304.8 billion.

Bilateral trade counts rose slightly more in the year versus SEF trade counts, while notional volumes declined by a smaller percentage amount. Average daily trade counts increased by 5.7%, from 2,012 per day during the first quarter to 2,128 during the last three months of the year. Trade counts were highest in the first and fourth quarters. Average daily notional volume fell by 14.6%, from $283.2 billion to $241.9 billion per day during the same period. Volumes were highest during the first quarter of the year.

IRD cleared versus non-cleared (Charts 2A and 2B; Table 2)

Average daily cleared trade counts decreased 6%, from 2,326 trades per day during the first quarter of 2014 to 2,186 during the last three months of the year. At first glance, it may appear that less is being cleared. However, cleared trade counts made up 58.1% of total daily trade counts in 2013. By 2014, this figure had increased to 62.7%.

Chart 2A: IRD Average Daily Trade Count: Cleared, Non-cleared, Total

Chart 2A: IRD Average Daily Trade Count: Cleared, Non-cleared, Total

Chart 2B: IRD Average Daily Notional Volume: Cleared, Non-cleared, Total

Chart 2B: IRD Average Daily Notional Volume:
Cleared, Non-cleared, Total

Average daily cleared notional volume also decreased over the course of the year, falling 23.7% from $454.2 billion during the first quarter to $346.6 billion during the fourth quarter of 2014. Again, the proportion of cleared trades increased when compared to the year before, with 76.5% of average daily notional volume centrally cleared in 2013 versus 71.7% in 2013.

In comparison, average daily non-cleared trade counts and notionals increased during 2014. The most significant volume was observed during the first and fourth quarters of the year for both metrics. Average daily non-cleared trade counts increased by 24.5%, from 1,296 trades per day during the first three months of the year to 1,614 during the fourth quarter. Average daily non-cleared notional volume increased by 3.0%, from $133.8 billion to $137.8 billion during this time.

In 2013, non-cleared trade counts comprised 41.9% of total daily trade counts. During 2014, this figure decreased to 37.3%. Similarly, non-cleared notional volume decreased from 28.3% to 23.5%.

SEF-reported weekly volume trends: IRD (Chart 3 and Table 3)

Average weekly SEF trade counts displayed an upward trend in 2014, increasing by 4%, from 8,328 in the first three months of the year to 8,661 in the fourth quarter2.

Cleared IRD transactions continued to grow as a percentage of total volume in 2014. Average daily cleared trade counts and notional volume accounted for 62.7% and 76.5% of the total in 2014, versus 58.1% and 71.7% in 2013

However, average weekly SEF-reported notional volumes have drifted lower throughout the year, falling 14.6% from $1,732.3 billion during the first quarter to $1,478.9 billion in the fourth quarter. Although the trend was generally lower, the fourth quarter showed some resilience after a quiet previous three-month period, which can likely be attributed to December interest rate swap roll volumes.

Table 3: SEF IRD Average Daily/Weekly Trade Counts and Notional Volume (US$ billions)

Table 3: SEF IRD Average Daily/Weekly Trade Counts and Notional Volume (US$ billions)

Chart 3: IRD Average Weekly SEF Trade Counts/Notional Volume (US$ billions)

Chart 3: IRD Average Weekly SEF Trade Counts/Notional Volume (US$ billions)

SEF-reported trading patterns suggest more frequent trading in smaller notional size is occurring on electronic venues.

Read the full version of this research paper on the ISDA website: http://isda.link/swapsinforeview

1. SDR data is masked, which results in understated notional volumes. Total capped notional volume increased YoY, rising 33.6% for IRD reported to DTCC and Bloomberg SDRs

2SEF trade counts were taken from the DTCC and Bloomberg SDRs