Dollar, euro swap prices transparent, fair: Study

NEW YORK, Tuesday, November 9, 2010 – The International Swaps and Derivatives Association, Inc. (ISDA) today released the results of a blind test independently conducted among market participants on the liquidity, price transparency and competitiveness of the “plain vanilla” US Dollar and Euro interest rate swap (“IRS”) markets.

In the test, which was sponsored by ISDA and administered by Atrevida Partners, three large investment firms each solicited price quotes from dealer firms on five separate IRS transactions. None of the dealers knew that the IRS Test was being conducted. The dealer quotes were compared against each other, and to Bloomberg page IRSB, to measure and benchmark their competitiveness and the market’s liquidity and transparency.

“According to the IRS Test’s results, the difference in pricing between the best and worst quotes for any swap ranged from 0.0000% to 0.013% (1.3 basis points),” said Duncan Hennes, Principal, Atrevida Partners, LLC. “The average difference between the best and worst quotes for each swap was a mere 0.0038% (.38 basis points). The extremely narrow spreads evidence the significant price competition that exists in the IRS markets,” he said.

Other IRS Test results include:

  • Only three of the best Dealer quotes for each of the 15 swaps were outside the Bloomberg IRSB screen bid-offers. The fact that the dealer quotes compared favorably to the Bloomberg IRSB screen prices demonstrates the high level of transparency in the IRS market.
  • Firm price quotes came back from dealers within seconds, either via Bloomberg messaging or telephone. Communications between the investment firms and dealers was nearly instantaneous.
  • The traders had access to several "live" dealer screens. Some indicated they often execute transactions through dealer screens. The test strongly suggests that screen prices are good indicators of executable market prices.
  • Nine of the 10 dealers from whom quotes were requested provided the best quote on at least one transaction. Five dealers provided the best quotes on two or more swaps.

“The IRS Test results clearly demonstrate that the market is extremely liquid with excellent price transparency and competitiveness for standard-structure swaps between active market participants and major dealers,” said Conrad Voldstad, Chief Executive Officer, ISDA. “Arguably, the competitiveness of the generic swap market can be viewed as similar to the competitiveness of the US government bond market."

Mr Voldstad also noted that the IRS test indicates that a high level of price transparency can be provided by dealer screens. Finally, pro forma calculations based on the IRS Test suggest that the profitability of interest rate swap customer flow for counterparties with collateralized swap documentation is extremely modest, as would be expected given the competitiveness of the market.

About the IRS Test
The IRS Test was independently conducted by Atrevida Partners, LLC, an investment advisory and risk consulting firm based in Rye, NY. Atrevida advises clients on alternative investments and risk management, offers investment opportunities and manages funds-of-hedge funds and special opportunity funds. Duncan P. Hennes and Stephen A. Sinacore are the founders and principals of Atrevida Partners, LLC, with each having over 25 years’ experience in derivatives, trading, risk management, supervision of traders and capital allocation.

The investment firms who participated in the IRS Test were three large, US-based investment management firms who are active users of the US and international derivatives markets and members of ISDA. They each have trading desks in the US and non-US financial centers and maintain dealing relationships with all major dealers, including having two-way collateralized ISDA swap documentation in place (under which initial and/or variation margin is provided based on the market values of outstanding positions). They are all of equivalent size and stature in the markets. Therefore, they would all be likely to obtain equivalent pricing. The investment firms agreed to participate in the IRS Test as long as their identities would remain anonymous.

The dealers were selected by the investment firms from a list provided to them consisting of firms that are parties to a series of commitments made to the NY Federal Reserve Bank over the last several years. These firms are generally considered the largest derivatives dealers in the world. A total of 10 such firms were ultimately asked to provide quotes. None of the dealers knew that the IRS Test was being conducted.

About ISDA
ISDA, which represents participants in the privately negotiated derivatives industry, is among the world’s largest global financial trade associations as measured by number of member firms. ISDA was chartered in 1985, and today has over 830 member institutions from 57 countries on six continents. These members include most of the world’s major institutions that deal in privately negotiated derivatives, as well as many of the businesses, governmental entities and other end users that rely on over-the-counter derivatives to manage efficiently the financial market risks inherent in their core economic activities. Information about ISDA and its activities is available on the Association's web site: www.isda.org.

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