07 June 2016
Reporter: Drew Nicol

Global swaps liquidity fragmentation persists

The aggressive overhaul of the US swaps market to align it closer to European standards continues to drive cross-border liquidity fragmentation, according to a Tabb Group report.

The reports warned that disparity threatens to bring the worries held by market participants since the implementation of swaps execution facility (SEF) mandates in late 2013 into reality.

According to the report’s data, the largest activity shift has been in the markets for euro-denominated swaps, with 91 percent of the global market for euro swaps being captured by the exclusively European dealer liquidity pool, as of April 2016.

US dealers represent less than 1 percent of the global euro swaps market compared to the average of more than 10 percent prior to SEFs going live.

In the report, TABB examined recent inter-dealer cleared trading activity data compiled by LCH 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.

Colby Jenkins, a TABB analyst involved in the study, said: “We’re still a few years away from implementing the Markets in the second Financial Instruments Directive and Regulation and the factors driving liquidity pools to fragment along geographic borders will likely persist until the dust settles around these mandates.”

“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."

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