Research Notes

Review and analysis of timely and topical market issues and trends that is published periodically.


DateTitle / DescriptionDocuments
July 24, 2014
Revisiting Cross-Border Fragmentation of Global OTC Derivatives: Mid-year 2014 Update
Evidence has emerged that over-the-counter derivatives markets have fragmented along geographical lines since the start of the swap execution facility (SEF) regime in the US on October 2, 2013. That trend has been especially notable for euro interest rate swaps, with European dealers opting to trade with other European parties. This development has accelerated since the start of mandatory SEF trading in the US from February 2014, and the market for euro interest rate swaps is now clearly split between US and non-US counterparties. This research note provides evidence of this further fragmentation since February, based on an empirical analysis of cleared derivatives data.
Fragmentation study FINAL.pdf
April 9, 2014
Made-Available-to-Trade(MAT): Evidence of Further Market Fragmentation
On May 16, 2013 the CFTC approved the \\\'made-available-to-trade\\\' (MAT) rule, which gives the market clarity on which products must be, by law, traded on swap execution facilities (SEFs). Once the CFTC issues a MAT determination, a mandate is established for trading that product on SEF, which prevents it from being traded bilaterally by counterparties subject to the SEF requirements. This analysis builds on ISDA\\\'s earlier work on SEFs by focusing on the effects of the MAT regulation and its potential impact on market fragmentation.
MAT Study 20140404_AMENDED_Y_AXIS_LABEL.pdf
February 5, 2014
Interest Rates Derivatives: A Progress Report on Clearing and Compression
How much of the OTC derivatives market is cleared? How much remains to be cleared? What is the composition of the non-cleared segment of the market? Significant changes in the OTC derivatives market in recent years are altering its size and composition. Central clearing, for example, increases notional amounts outstanding, as one bilateral trade becomes two cleared transactions. Compression of both bilateral and cleared trades, on the other hand, reduces notional outstanding. New requirements related to margin for non-cleared trades may drive users of these instruments to cleared products or to other alternatives. Given these dynamics, ISDA conducted an analysis of the interest rate derivatives (IRD) market.
RN IRD Progress 2013-02-05.pdf
January 30, 2014
Adverse Liquidity Effects of the EU Uncovered Sovereign CDS Ban
On November 1, 2012, the provisions of the EU regulation which bans uncovered short-selling of sovereign (single name) CDS came into effect. Market participants who wish to establish a permitted SCDS position must now hold offsetting risk, such as the underlying sovereign bond. This change raised concerns about the impact on portfolio hedging, the potential for a reduction in SCDS liquidity and the implications of a reduction in the ECB’s bond-buying program. In this report, ISDA examines the liquidity impact of the regulation one year after implementation. Findings reveal that EU-regulated SCDS and sovereign indices experienced sharp volume and trade count declines. Additionally, proxy hedges were found to become less effective due to a correlation breakdown with European SCDS.
SCDS Ban Research Note 20140130.pdf
January 21, 2014
Cross-Border Fragmentation of Global OTC Derivatives: An Empirical Analysis
In December 2013, ISDA published "Footnote 88 and Market Fragmentation: An ISDA Survey" (see December 18, 2013 on this page). The Survey’s findings revealed that the October 2, 2013 effective date for Swap Execution Facility (SEF) compliance, the definition of a US person and the Footnote 88 interpretation are clearly having a disruptive impact on OTC derivative trading volumes. Market participants reported that cross-border liquidity has fragmented along US person and non-US person lines. In January, ISDA completed this new analysis that builds on our earlier work and aims to empirically characterize the composition of and changes to cross-border pools of liquidity following the October implementation date. To accomplish this, we use monthly 2013 clearing and reporting data for US dollar and Euro interest rate swaps (IRS) for our use-case.
Cross Border Fragmentation - An Empirical Analysis.pdf
December 18, 2013
Footnote 88 and Market Fragmentation: An ISDA Survey
Earlier this year, the CFTC required that swap execution facilities (SEFs) with temporary SEF registration status come into full compliance with all applicable SEF rules beginning on October 2, 2013. Originally, those rules were thought to apply only to transactions that would be required to trade on a SEF. However, the language of the rule\'s Footnote 88 implies that rules would apply to any transaction the SEF offered, whether or not that transaction is mandated to trade on a SEF. These concerns prompted ISDA to conduct a SEF Market Fragmentation Survey to obtain a clear picture of potential market disruption or fragmentation resulting from SEF rule implementation. This Research Note examines the results of that survey.
Footnote 88 Research Note 20131218.pdf
October 1, 2013
CDS Market Summary: Market Risk Transaction Activity
This edition of ISDA Research Notes analyzes the data on the CDS market and provides insights on recent levels of activity. A good way to understand CDS market dynamics is by looking at trading activity in the market, as opposed to transactions outstanding at a point in time. The DTCC measures market risk transaction activity which refers to the volume of trading (using both transaction counts and notional amounts traded) related to new transactions that affect market risk. It provides a view into current levels of new market activity and enables comparisons of such activity between periods.
CDS Research Note final 2013-10-01.pdf
June 13, 2011
A Note on the Impossibility of Correctly Calibrating the Current Exposure Method for Large OTC Derivatives Portfolios
The Basel Committee permits firms to use a variety of methods to calculate regulatory capital on counterparty risk, including a simple approach – the constant exposure method or CEM – and a more sophisticated models-based approach known as EPE for expected positive exposure.
CEM vs EPE Research Note final.pdf
November 1, 2010
Concentration of OTC Derivatives among Major Dealers
(Number 4, 2010)
ConcentrationRN_4-10.pdf
September 22, 2010
The Economic Role of Speculation
(Number 2, 2010) Research Note / Press Release
SpeculationRN.pdf press092210[1].html