Institutional trading of interest rate swaps (IRS) on Tradewebs electronic marketplace has increased 71% in the first four months of 2010 (year-on-year). Average daily trading volume for IRS on the Tradeweb platform now exceeds $4 billion.
The industry has crossed the threshold and there is now a clear and unambiguous shift towards the electronic trading of OTC derivatives. Electronic trading is here today and is providing the benefits and safeguards that are being sought by global regulators, said Lee Olesky, CEO of Tradeweb. Legislative reform will undoubtedly accelerate this trend towards greater efficiency and transparency, but the initial vote for change is coming from the market.
Regulators are becoming increasingly focused on increasing transparency in the over-the-counter derivatives market. Japanese Parliament recently passed a bill that will force plain vanilla yen interest rate swaps and iTraxx Japan credit default swaps through a central clearing agency.
New regulation has also given rise to new opportunities. The Mexican Derivatives Exchange recently launched exchanged traded and cleared IRS, becoming one of the first to offer both exchange and clearing services.
More than 55,000 interest rate swap trades, with an aggregate notional in excess of $5 trillion, have now been executed on Tradewebs platform since the original launch. Over 1,600 trades took place in April 2010, an increase of 189% over April 2009, and 38% up on March 2010. In total, more than 280 swap dealers and major swap participants have executed interest rate swap trades electronically on Tradeweb since launch. The total IRS market stands at $322.2 trillion.
A Greenwich Market Pulse study conducted in January 2010 revealed that 70% of corporations and financial institutions around the world think moving OTC derivatives trading to a system of centralized clearing would be an effective means of mitigating counterparty risk. However, financials and corporates also have some serious concerns about the ongoing process of market structure reform, notes Greenwich Associates consultant Andrew Awad. Some of these concerns stem from the fact that market participants are uncertain about details of the proposals being considered. Other concerns involve more informed questions among users of OTC derivatives about how the switch to centralized clearing would impact overall market liquidity and costs, as well as corporates ability to effectively hedge risk positions.