![Risk.net](https://www.risk.net/sites/default/files/styles/print_logo/public/2018-09/print-logo.png?itok=1TpHrpuP)
Instant anguish
Risk’s inter-dealer rankings, published in this issue, are meant to reflect the market’s considered opinion on which firms are best at providing liquidity, service and prices in a wide range of derivatives product categories.
But there are times when it would be interesting to be able to do ‘instant polls’ – much like those featured on US evening news programmes. If we had the technology (and traders and end-users had the patience), we would reach out and capture the market’s sentiment at a moment’s notice. We might get some interesting results.
For example, which interest rate swaps dealer proved its mettle on July 31 and August 1? One might imagine that none of the firms in this increasingly concentrated market would get high scores from end-users, based on the way spreads widened sharply on those two days, reflecting how the market’s liquidity evaporated under stress.
Spreads came back in over the course of the following days and weeks, but the episode’s lesson is not easily dismissed: the interest rate swaps market, notionally the largest and presumably the most liquid derivatives market in the world, is very dependent on just a handful of firms.
Perhaps the spate of e-trading initiatives (the Barclays Capital/Bloomberg system, Icap’s and Cantor’s offerings, and Swapstream, among others) will help by providing more transparency and possibly more liquidity for the interest rate swaps market. Barclays says its system – launched in late July – weathered the worst of the market volatility without any long outages, but some of its competitors say it was forced offline for significant stretches. In any case, the success of any electronic platform depends on the willingness of the dealers that back it to continue to do so when times get tough.
Given the monstrous size of the US mortgage market – nearly $5 trillion, according to some estimates – compared with the roughly $3.5 trillion US Treasury market, it’s difficult to imagine that convexity hedging-driven periods of market stress will not become relatively common features as interest rates rise.
Indeed, the markets’ anguish over the increase in interest rates since mid-June is somewhat surprising, since the rates had hit 40-year lows – there wasn’t a lot of room for them to decline further, especially on the short end. The US economy had to begin shaking off its lethargy eventually. Any sign of an improvement in the US economy (or ill-advised official comment on the relative threat of deflation versus inflation) was bound to start medium- and long-term rates marching upward.
So was everyone caught off guard – as it appeared – or is it simply too difficult for most dealers to consistently run a rate book in a volatile market, a market where mortgage-hedging technicals can turn a modest correction into a meltdown? If the latter, we could see even more concentration in the swaps market.
Only users who have a paid subscription or are part of a corporate subscription are able to print or copy content.
To access these options, along with all other subscription benefits, please contact info@risk.net or view our subscription options here: http://subscriptions.risk.net/subscribe
You are currently unable to print this content. Please contact info@risk.net to find out more.
You are currently unable to copy this content. Please contact info@risk.net to find out more.
Copyright Infopro Digital Limited. All rights reserved.
As outlined in our terms and conditions, https://www.infopro-digital.com/terms-and-conditions/subscriptions/ (point 2.4), printing is limited to a single copy.
If you would like to purchase additional rights please email info@risk.net
Copyright Infopro Digital Limited. All rights reserved.
You may share this content using our article tools. As outlined in our terms and conditions, https://www.infopro-digital.com/terms-and-conditions/subscriptions/ (clause 2.4), an Authorised User may only make one copy of the materials for their own personal use. You must also comply with the restrictions in clause 2.5.
If you would like to purchase additional rights please email info@risk.net
More on Technology
Dismantling the zeal and the hype: the real GenAI use cases in risk management
Chartis explores the advantages and drawbacks of GenAI applications in risk management – firmly within the well-established and continuously evolving AI landscape
Chartis RiskTech100® 2024
The latest iteration of the Chartis RiskTech100®, a comprehensive independent study of the world’s major players in risk and compliance technology, is acknowledged as the go-to for clear, accurate analysis of the risk technology marketplace. With its…
T+1: complacency before the storm?
This paper, created by WatersTechnology in association with Gresham Technologies, outlines what the move to T+1 (next-day settlement) of broker/dealer-executed trades in the US and Canadian markets means for buy-side and sell-side firms
Empowering risk management with AI
This webinar explores how artificial intelligence (AI) can strip out the overheads and effort of rapidly modelling, monitoring and mitigating risk
Core-Payments for business leaders: why real-time access to payment data is key to long‑term business success
Business leaders require easy access to timely, reliable and complete information across post-trade processes. Aside from the usual requirements of senior managers to optimise for risk, revenues and costs, they increasingly need to demonstrate to their…
Risk applications and the cloud: driving better value and performance from key risk management architecture
Today's financial services organisations are increasingly looking to move their financial risk management applications to the cloud. But, according to a recent survey by Risk.net and SS&C Algorithmics, many risk professionals believe there is room for…
Machine learning models: the validation challenge
Machine learning models are seeing increasing demand across the capital markets spectrum. But how can firms improve their chances of gaining internal and regulatory approval for these type of models?