Electronic Trading of Interest Rate Swaps: Post-Trade Processing Shows the Way

by Anshuman Jaswal, PhD, April 21, 2010
Industry Trends
Global, Asia-Pacific, EMEA, Latin America, North America

Abstract

The post-trade services market value in the interest rate swaps (IRS) space is expected to skyrocket from US$200 million in 2009 to US$500 million in 2012. It is not surprising that the industry is extremely dynamic and continuously geared towards increasing efficiency of OTC IRS trades.

In this report, Electronic Trading of Interest Rate Swaps: Post-Trade Processing Shows the Way, Celent analyzes the growth of electronic trading and post-trade processing in the global interest rate swaps market. The IRS market is divided into the interdealer broker (IDB) and dealer-to-client (D2C) segments. The value of the IDB market in H1 2009 was US$317 trillion, a growth of 53% since H2 2006. It is expected to grow to US$340 trillion by H2 2010. Similarly, the value of the D2C market in H1 2009 was US$120 trillion, a growth of 41% since H2 2006. It is estimated to go up to US$135 trillion by H2 2010.

The infrastructure required for electronic trading in interest rate swaps has been in place for a while, but unlike some of the other derivative markets, electronic trading has not really taken off in the IRS market, mainly due to the preference for voice-based trading. There is, however, some potential for this to change, as regulatory pressures to improve efficiency and increase transparency could provide the impetus to boost electronic trading.

“While electronic trading is only just beginning to come into its own, the post-trading scenario could not be more different. This is where most of the action has taken place in the IRS market,” says Anshuman Jaswal, Celent Senior Analyst and author of the report.

The improvement in post-trade services has allowed the OTC market to hold its own against competition from the exchanges, which are trying to break the OTC monopoly in the interest rate market. This is expected to continue, because the main business in the IRS market is conducted by broker-dealers that have created an efficient infrastructure along with service providers in the field of clearing services, portfolio reconciliation and compression, and matching and confirmation. For interest rate derivatives on exchanges to compete with OTC IRS, the entry barriers are quite high. Celent believes it would be difficult for exchanges to challenge the OTC business without any regulatory intervention that might work to the detriment of the business.

Celent is a research and advisory firm dedicated to helping financial institutions formulate comprehensive business and technology strategies. Celent publishes reports identifying trends and best practices in financial services technology and conducts consulting engagements for financial institutions looking to use technology to enhance existing business processes or launch new business strategies. With a team of internationally based analysts, Celent is uniquely positioned to offer strategic advice and market insights on a global basis. Celent is a member of the Oliver Wyman Group, which is a wholly-owned subsidiary of Marsh & McLennan Companies [NYSE: MMC].

Media Contacts

North America
Michele Pace
mpace@celent.com
Tel: +1 212 345 1366

Europe (London)
Chris Williams
cwilliams@celent.com
Tel: +44 (0)782 448 3336

Asia (Tokyo)
Yumi Nagaoka
ynagaoka@celent.com
Tel.: +81 3 3500 3023

Table of Contents

Executive Summary

3

Introduction

5

Market Overview

7

 

Interdealer Broker Market

9

 

Dealer-to-Client Market

11

 

Single-Dealer Platforms

15

Post-Trade Service Providers

20

 

MarkitSERV

22

 

DS Match

23

 

SWIFT

25

 

TriOptima

27

 

LCH.Clearnet SwapClear

29

 

IDGG

31

Conclusion

33

Leveraging Celent’s Expertise

35

 

Support for Financial Institutions

35

 

Support for Vendors

35

Related Celent Research

36

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