Benchmark Regulation and Market Quality

52 Pages Posted: 29 Jul 2017

See all articles by Matteo Aquilina

Matteo Aquilina

Financial Conduct Authority

Gbenga Ibikunle

University of Edinburgh; European Capital Markets Cooperative Research Centre

Vito Mollica

Macquarie Graduate School of Management; Capital Markets CRC Limited (CMCRC); Macquarie University, Macquarie Business School

Tom Steffen

University of Geneva

Date Written: July 26, 2017

Abstract

Benchmarks are fundamental elements of financial markets’ infrastructure. In this paper, we analyse the effects of the change from the panel-based benchmark assessment under the ISDAFIX regime to the market-based assessment under the ICE Swap Rate regime and the simultaneous start of regulatory supervision by the FCA. We find that the transition in March 2015 has a neutral to positive effect on the representativeness of the benchmark. Studying proprietary order book data of electronically-traded USD interest rate swaps, we also find that liquidity in the underlying market improves following the benchmark regime change. Our results are robust to a multitude of controls and show that the enhancement in liquidity for swaps with a regulated benchmark assessment is over and above the improvement in those swaps without assessment. As such, the effects of the regulation, as measured in this study, are positive. Overall direct savings measured in this study are in the region of $4m–$7m, but they only account for one tenor and a single trading platform. The overall benefits are likely to be substantially larger.

Suggested Citation

Aquilina, Matteo and Ibikunle, Gbenga and Mollica, Vito and Steffen, Tom, Benchmark Regulation and Market Quality (July 26, 2017). FCA Occasional Paper No. 27. Available at SSRN: https://ssrn.com/abstract=3009209

Matteo Aquilina (Contact Author)

Financial Conduct Authority ( email )

25 The North Colonnade
Canary Wharf
London, E14 5HS
United Kingdom

Gbenga Ibikunle

University of Edinburgh ( email )

Old College
South Bridge
Edinburgh, Scotland EH8 9JY
United Kingdom

European Capital Markets Cooperative Research Centre ( email )

Viale Pidaro 42
Pescara, 65121
Italy

Vito Mollica

Macquarie Graduate School of Management ( email )

Capital Markets CRC Limited (CMCRC) ( email )

Level 3, 55 Harrington Street
Sydney, 2000
Australia

Macquarie University, Macquarie Business School ( email )

New South Wales 2109
Australia

Tom Steffen

University of Geneva ( email )

Geneva
Switzerland

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