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News & Insights

The Woodshed

The electronic shift in the interest rate swaps market

As electronic trading continues to grow in the bond market, it’s worth taking a look at what is going on in the interest rate swap market. 

The growth in traded notional interest rates swaps executed on trading venues reported in the EU for the last quarter of 2021 was around 64% – with 44% required to trade on venues under the Derivatives Trading Obligation (DTO).  This implies traded notional executed on these trading venues was more than double the Interest Rate Derivatives (IRD) traded notional that was actually subject to the trading obligation.  

There could be several reasons why we are seeing IRD that are non-DTO transactions executed via a trading venue including the pandemic prompting a rise in electronic trading on all fixed income products or the move away from LIBOR. But probably the most common reason is that it is more effective to bilaterally negotiate some IRD off venues rather than electronically execute them via trading venues.   Using a trading venue makes  the whole trade process more structured and organized. 

According to a study from Coalition Greenwich last year, there has been a large increase in the number of Buy-side firms in Europe executing interest rate swaps electronically – more than half of survey respondents said they expected their share in electronic swaps trading to continue to grow. Swaps typically traded on trading venues are generally executed using a request-for-quote (RFQ) protocol although there has been a significant rise in the request-for-market (RFM). The reason for this rise is that  hedge funds and other buy-side firms prefer to get both a bid and offer quote without showing the side they are on to dealers. The increase in interest in RFM protocol, along with increased engagement from international clients and strong trading activity in emerging markets swaps, led to swaps/swaptions volumes equal to and greater than 1yr average daily volume on one of the main Trading Venue platforms in June this year. 

For traders, being able to cut down on the amount of screen real estate that they need continues to be essential. Having software that will allow traders  to make the best use of their existing systems and aggregate markets, data and trading workflows not just for bond markets but also for interest rate swaps on the same software is a huge benefit. 

AxeTrader has been working to improve the workflow for standard IRS and now supports non-standard IRS, IMM and OIS.  As well as RFQ and RFO tickets, RFM tickets are also supported both for single trades and for compression (list) trading. Users can connect AxeTrader with an external pricing library using the Websocket protocol and a permanently connected session. Incoming IRS requests can be priced by the connected library along with the relevant risk numbers. The structure of the message is designed to support rate and NVP values.

With the increased volatility and predicted interest rate hikes for the rest of the year, we would expect to see continued volume in electronic trading of IRS, and are ready to support our customers during this period of heightened activity.

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