Recent data suggests that the aggressive overhaul of the US swaps market with respect to European implementation schedules continues to drive cross-border liquidity fragmentation, bringing the worries held by market participants since the implementation of Swaps Execution Facility (SEF) mandates in late 2013 into reality.
in TABB Group’s latest research, “Global Swaps Liquidity Fragmentation 2016: Redefining the Balance”, analyst Colby Jenkins (pictured) examines recent interdealer cleared trading activity data compiled by LCH.Clearnet SwapClear and published by the International Swaps and Derivatives Association (ISDA) to establish the new cross-border liquidity pool dynamics for swaps trading activity for interest rate swaps.
Jenkins highlights that the largest activity shift has been in the markets for euro-denominated swaps as exemplified by 91 per cent of the global market for euro swaps being captured by the exclusively European dealer liquidity pool as of April 2016. At the same time, US dealers represent less than 1 per cent of the global euro swaps market compared to the average of 10+ per cent prior to SEFs going live.
“We’re still a few years away from implementing the Markets in Financial Instruments Directive and Regulation (MiFID II/MiFIR) and the factors driving liquidity pools to fragment along geographic borders will likely persist until the dust settles around these mandates,” says Jenkins. “The lack of cohesion between US and European swaps trading landscapes and regional regulatory regimes is a problem still being addressed with distant goals. Issues such as clearing equivalency, certain cross-border application of rules, and implementing technology to comply with transaction level requirements for both regimes will be critical factors in determining the future of liquidity pools.”
