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Swaps market structure changes create fragility 

September 28, 2015

Helen Bartholomew, IFR Asia

New regulations pushing execution in the US$630trn over-the-counter derivatives market onto electronic platforms may be contributing to a more fragile trading environment and exacerbating shocks, market participants have warned.

“We’re seeing a fragility of markets that hasn’t existed before and we can see that in the rise of flash crashes and big market moves,” Dexter Senft, managing director for fixed income e-markets at Morgan Stanley, told Isda’s European conference in London this week.

New rules under Dodd Frank require all US standardised OTC derivatives to be traded over regulated swap execution facilities. Similar rules to be launched under MiFID II in 2017 will push Europe’s swap market further down the electronic route, where trades will be subject to greater pre- and post-trade transparency.

“The nature of swap markets is as they become more transparent, they tend to have less depth. We’ve seen fantastic ability for markets to execute small size, but large orders can’t be executed all at once,” said Senft. “Quants have long term careers once again figuring out how to get their trades done in small parts.”

Read more: IFR Asia

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