The impact of post-financial crisis legislation to move trading of standardised swaps onto electronic venues has been overwhelmingly positive, boosting liquidity and cutting costs, according to a Bank of England staff paper.
The impact suggests that the Dodd Frank mandate should be extended to cover more asset classes, the paper says.
Since interest rate swap trading was introduced on swap execution facilities in October 2013, activity has increased and liquidity has improved. As a result, total daily execution costs on US dollar-denominated contracts traded on SEFs fell by US$20m to US$40m. For end-users costs fell by between US$7m and US$13m daily.
The effect on euro-denominated contracts was also substantial, despite the fact that fewer participants are captured by the Dodd Frank mandate, which covers “US persons”. The reduction in execution costs was measured at US$10m to US$28m daily.
The study finds the rise in liquidity, measured as execution price dispersion, was accompanied by a fall in inter-dealer activity, suggesting that execution costs may have declined because dealer intermediation chains became shorter.
The study is based on data from LCH.Clearnet and the Depository Trust & Clearing Corporation from the beginning of 2013 to the end of September 2014, during which time the portion of SEF trading for US rate swaps rose from 60% to 80%.