The post-trade services market value in the interest rate swaps space is expected to skyrocket from USD200m in 2009 to USD500m in 2012, according to a report by research and advisory firm Celent.
The IRS market is divided into the interdealer broker and dealer-to-client segments.
The value of the interdealer broker market in H1 2009 was USD317trn, a growth of 53 per cent since H2 2006. It is expected to grow to USD340trn by H2 2010.
Similarly, the value of the dealer-to-client market in H1 2009 was USD120trn, a growth of 41 per cent since H2 2006. It is estimated to go up to USD135trn by H2 2010.
The infrastructure required for electronic trading in interest rate swaps has been in place for a while, but unlike some of the other derivative markets, electronic trading has not really taken off in the IRS market, mainly due to the preference for voice-based trading, says Celent.
There is, however, some potential for this to change, as regulatory pressures to improve efficiency and increase transparency could provide the impetus to boost electronic trading.
"While electronic trading is only just beginning to come into its own, the post-trading scenario could not be more different. This is where most of the action has taken place in the IRS market," says Anshuman Jaswal (pictured), Celent senior analyst and author of the report.
The improvement in post-trade services has allowed the OTC market to hold its own against competition from the exchanges, which are trying to break the OTC monopoly in the interest rate market.
This is expected to continue, because the main business in the IRS market is conducted by broker-dealers that have created an efficient infrastructure along with service providers in the field of clearing services, portfolio reconciliation and compression, and matching and confirmation, the report says.
For interest rate derivatives on exchanges to compete with OTC IRS, the entry barriers are quite high. Celent believes it would be difficult for exchanges to challenge the OTC business without any regulatory intervention that might work to the detriment of the business.
