The International Swaps and Derivatives Association (ISDA) has shared its great concern over OTC market fragmentation, which may change the nature of derivatives market globally.
The OTC market seems to be represented by the US and Europe separation in swaps trading. The speedy fragmentation of the over-the-counter derivatives globally is made possible by Swap execution facility (Sef) since its commencement in October last year.
The average percentage of the swap market trades in Euro was 75% from January to September prior this year. The figure rose an additional 15% after a series of four months. Earlier this May, the year introduced another 3% rise in the euro interest swap market’s average percentage (93%).
The volumes of total euro interest rate swap trading’s percentage has evidently decline between January and September last year from October 2013 to the start of 2014 (9% from 25%). This year, the downtrend is still exhibited by 6%. The beginning of obligatory Sef-trading for certain interest rate swaps were traced only in February 2014 despite the trading on Sefs launching on October last year.
The matter on fragmentation also triggered foreign exchange traders’ troubles on the similar disintegration that might happen in their market. Currently, people from the United States can use Sef has means of trading FX non-deliverable forwards (NDFs) and options, yet this is not yet prescribed until the end of 2014 and 2015.
Foreign exchange fleeing from the United States is what bothers participants the most. The people stressed out the possibility that FX may no longer come back but move on London, Toronto, and Singapore permanently. The strain may be more emphasized as subsidiaries setup by the financial institutions in United States is pushed through so as to steer away from Sef trading rules.
European dealers are also carrying on swaps of euro-denominated interest rates with other counterparties in Europe since the October commencement of Sef trading. An estimated 90% of activity has now been traced. Tally also figured out that 68% of the Sef trading responses had stopped trading with US persons. From the respondents, 60% found the fragmentation lacking liquidity.
The reality is what ISDA wants to show. It is clear that Sef customers are no longer finding it convenient to agree with arrangement that is lengthy. Responsively, they tend to request participants from the US to stop trading on their platforms. The result is unlikely as exhibited by less efficient markets otherwise the new regulatory framework’s consistent application is guaranteed.