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Innovations in Trading and Technology

05 March 2014

SEF Trading: Volumes Find Balance in Week 2

Following a precipitous drop in Week 1 of mandatory trading, rate swap volumes on SEFs rebounded in Week 2. Meanwhile, evidence suggests investors increasingly are testing the swap futures waters.

Interest Rate Swap (IRS) volumes on Swap Execution Facilities (SEFs) returned to near normal last week, increasing from their first week lows by approximately 40% on a notional basis. Last week, we observed a notional decline of between 30%-40% during the first week of MAT trading as compared to a pre-MAT daily average for 2014. The latest spike accounts for a notional increase of between $26 billion and $38 billion (depending on the source), bringing the average daily volumes traded on SEFs to 90%of pre-MAT (Made Available for Trade) levels.

[Related: “SEF Trading: What Really Happened in Week 1?”]

It is worth noting that, once again, across the three data ources – the DTCC, ISDAand Clarus FT– the percentage drops in volume were consistent, notwithstanding disparities between total volumes reflected. Both ISDA’s SwapsInfo and DTCC’s daily rates reports reflected a 39% jump week-over-week (Exhibits 1 & 2). Clarus FT’s figures reflected very similar activity, with last week’s numbers indicating a 42% jump in notional volume over the week before (Exhibit 3).

Exhibit 1: Average Daily IRS Volumes Per Week (DTCC)



Source: DTCC, TABB Group

Exhibit 2: Average Daily IRS Volumes Per Week (ISDA)



Source: ISDA, TABB Group

Exhibit 3: Average Daily IRS Volumes Per Week (Clarus FT)



Source: Clarus FT, TABB Group

Daily notional volumes rose last week to:

  • $135 billion from $96 billion (+39%) (ISDA)
  • $130 billion from $91 billion (+42%) (Clarus FT)
  • $92 billion from $66 billion (+39%) (DTCC)

As previously, we limited the scope of our analysis to cleared interest rate swaps across all currencies and tenors and excluded Forward Rate Agreements (FRAs). For all three data sources, during the week ending February 28, IRS notional volumes spiked at the sharpest rate of 2014.

According to data provided by Clarus Financial Technology’s SEFView – which breaks out notional volumes for CDS, IRS, and FXD by individual SEF – both dealer-to-customer (D2C) and dealer-to-dealer (D2D) SEFs turned major corners in the second week of MAT trading. The D2D SEFs, incumbents in the swaps market, experienced a positive notional volume growth of 38% last week. This was the first week of positive trading growth in several weeks for D2D SEFs. Similarly, D2C SEFs, which have been resiliently retaining volumes over the February volume slump, experienced a notional volume growth of 80% over last week – bringing total average daily notional volumes traded among D2C SEFs to the highest mark of 2014.

Over the six weeks leading up to MAT trading, total daily notional volumes traded on SEFs dropped by more than a third. This recent outflow of volume is reflective of several trends within the industry influencing the overall swaps market. While the most recent uptick in volumes might easily be attributed to waning first-mover concerns, initiatives such as swaps futurization are steadily gaining market momentum.

Meanwhile in Swap Futures …

As Dodd-Frank initiatives continue to transition from guidance to trading reality, we can see investors increasingly testing the swap futures waters. Interest rate swap futures open interest (OI) has grown rapidly over the past year. Today, OI in CME Group’s Deliverable IR Swap Future and Eris Exchange’s IR Swap future tallies more than 180,000 contracts combined (Exhibits 4 & 5).

Exhibit 4: CME Group Deliverable IR Swap Futures Volume and Open Interest


Source: TABB Group, CME Group

While this figure pales in comparison to the $10+ Trillion that has already been traded on SEFs, it shows an OI growth rate of 900% and indicates the beginning of a market shift. Considering swap futures volume and OI over a timeline of mandatory clearing implementation, there is a demonstrable correlation between trade/OI upticks and mandate deadlines. Looking forward, it will be interesting to see whether this trend continues as investors weigh the benefits of the standardized, established futures market against the behemoth, albeit unsettled, swaps market.

Exhibit 5: ERIS Exchange Interest Rate Swap Futures Volume and Open Interest

Source: TABB Group, Eris Exchange

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