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    ECB Paper Examines the Interest Rate Swap Market in Euro Area

    February 15, 2019

    ECB published a paper that analyzes the structure of the interest rate swap market in Euro area after the start of the mandatory clearing obligation. The analysis provides new evidence to regulators and policy makers about the structure and activity in the interest rate swap market along the dimensions of risk-absorption and the impact of regulatory reforms such as the clearing obligation and the role of Basel III capital and liquidity ratios in influencing trade activity.

    For the analysis, the authors use a novel regulatory dataset of fully identified derivatives transactions. The dataset contains 1.7 million bilateral interest rate swap transactions of banks and non-banks. The key results are as follows:

    • The euro area interest rate swap market is highly standardized and concentrated not only around the group of the G16 dealers but also around a significant group of core “intermediaries” (and major central central counterparties).
    • Banks are active in all segments of the interest rate swap euro market whereas non-banks are often specialized.
    • When using relative net exposures as a proxy for the “flow of risk” in the interest rate swap market, the authors find that risk-absorption takes place in the core as well as the periphery of the network.
    • Among the Basel III capital and liquidity ratios, the leverage ratio plays a key role in determining the interest rate swap trading activity of a bank.
    • Also, after mandatory central clearing, there is still a large dispersion in interest rate swap transaction prices, which is partly determined by bank characteristics, such as the leverage ratio.


    Related Link: Working Paper (PDF)

    Keywords: Europe, EU, Banking, Interest Rate Risk, OTC Derivatives, Basel III, Clearing Obligation, Liquidity Risk, ECB

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