US Swaps 2013: The Future Is Emerging

Dealers are displaying little homogeneity in terms of their overall strategic approach to the swaps market. Clearing and execution have been pursued with varying degrees of emphasis and the revenue stream of each business is shifting dramatically. Given all the changes that came with the Dodd-Frank Act this is understandable – after all, no one had a road map. That said, we now have important new data by which to benchmark and, with the bulk of the compliance deadlines now completed, the voice of the buy side is becoming clearer. This report has been designed to use these metrics so that the future may become clear. It is time to take a step back and assess one’s position. The gun went off in 2013, the winners will be crowned in 2014. In it we estimate:

• The client-driven execution revenue pool in plain vanilla, cleared interest rate swaps and the impact that Swap Execution Facilities (SEFs) will have on dealer revenues;
• Current and future swaps clearing revenues across both Futures Commission Merchants (FCMs) and central counterparty clearinghouses (CCPs);
• SEF volumes and revenues in 2014.

Among the key action items we conclude that:

• Dealers need to continue competing for swaps clearing market share. Not only is clearing set to become a healthy revenue stream in its own right but we see an implicit decision by the buy side to send swaps execution flow to their clearing broker;
• In the face of shrinking ticket sizes and lower volumes, dealer revenues will come under pressure with the introduction of SEFs. Each bank will need to decide on how it chooses to implement market share strategies, whether it be via relationships and the phone, via SEFs and algorithmic pricing, or some hybrid of the two;
• The disintermediation effect of Dodd-Frank notwithstanding, dealer relationships with the buy side will continue to be key. The trick will be in knowing where the relationship really lies, across the array of potential business lines and myriad of individuals, and understanding why a buy side firm wants to engage.

US Swaps 2013: The Future Is Emerging

In early autumn 2013, we conducted fifty interviews with buy-side firms who are all actively clearing swaps, an increase of 61% from the previous year’s inaugural survey, with an aggregate Assets under Management (AuM) of $18.1Trn, $7.6Trn (42%) of which is allocated to fixed income. On October 2, Day One of SEF trading, we also conducted an online survey to gauge SEF activity and solicited responses from 41 firms with an aggregate $13.6 trillion in AuM.

Many of the findings included in this report are the result of TABB proprietary models built by triangulating the data gleaned from our conversations and online surveys with the buy side, as well as publicly available data from SEFs, CCPs, Swaps Data Repositories (SDRs) and self-regulatory organizations (SROs). We have also relied on tens of conversations with industry participants including dealers, interdealer brokers, SEFs, CCPs and SDRs. Our sample set of buy side interviews comprises of asset managers, hedge funds, banks, and insurance companies dealing in interest rate swaps and/or CDSs. The vast majority of participants were either large or medium-sized firms, but we classify size differently according to participant type.