ISDA examined the impact of regulatory changes - in particular, the CFTC swap execution rules ("SEF rules") - on the liquidity of interest rate swaps ("IRS"). In a Research Note, ISDA concluded that "any further increase in cross-border trading is likely to require further harmonization of global derivatives regulation."
ISDA noted the following trends and developments since the introduction of SEF rules in September 2013:
- the euro-denominated IRS market between U.S. and non-U.S. regional liquidity pools remains fragmented, which is "a phenomenon that coincided with the SEF rules coming into force in October 2013";
- an increase from September 2013 – when, prior to the introduction of the SEF rules, 70.7% (€1.61 trillion) of euro IRS volume in the European interdealer market was transacted between European dealers – to the end of 2015 – when 91.2% (€2.78 trillion) was transacted;
- an increase of total European interdealer euro IRS monthly notional volumes from €2.27 trillion to €3.05 trillion between September 2013 and the end of 2015;
- a decrease in European-to-U.S. dealer cross-border trading in the European interdealer market for euro IRS;
- a decrease in the evidence of fragmentation in regional pools for U.S. dollar IRS, which is slightly less prominent than in euro IRS;
- a slight increase of European-to-U.S. cross-border flows, which accounted for approximately half of the total monthly volume in both the U.S. and European markets for U.S. dollar IRS;
- an increase in trading by the Canadian dealers of more euro-denominated IRS with European dealers over time; U.S. dollar IRS volume from Canadian banks is split between U.S. and European regional dealers; and
- Asia-based dealers exhibited a preference for transacting in U.S. dollar-denominated IRS with European counterparties (rather than with U.S. counterparties).
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