The Anatomy of the Euro Area Interest Rate Swap Market

70 Pages Posted: 19 Feb 2019

See all articles by Silvia Dalla Fontana

Silvia Dalla Fontana

Swiss Finance Institute; USI Lugano

Marco Holz auf der Heide

European Central Bank (ECB)

Loriana Pelizzon

Goethe University Frankfurt - Faculty of Economics and Business Administration

Martin Scheicher

European Central Bank (ECB)

Multiple version iconThere are 2 versions of this paper

Date Written: February 15, 2019

Abstract

Using a novel regulatory dataset of fully identified derivatives transactions, this paper provides the first comprehensive analysis of the structure of the euro area interest rate swap (IRS) market after the start of the mandatory clearing obligation. Our dataset contains 1.7 million bilateral IRS transactions of banks and non-banks.

Our key results are as follows:

1) The euro area IRS market is highly standardised and concentrated around the group of the G16 Dealers but also around a significant group of core “intermediaries”(and major CCPs).

2) Banks are active in all segments of the IRS euro market, whereas non-banks are often specialised.

3) When using relative net exposures as a proxy for the “flow of risk”in the IRS market, we find that risk absorption takes place in the core as well as the periphery of the network.

4) Among the Basel III capital and liquidity ratios, the leverage ratio plays a key role in determining a bank’s IRS trading activity.

5) Also, after mandatory central clearing, there is still a large dispersion in IRS transaction prices, which is partly determined by bank characteristics, such as the leverage ratio.

Keywords: OTC derivatives, network analysis, interest rate risk, banking, risk management, hedging

JEL Classification: G21, E43, E44

Suggested Citation

Dalla Fontana, Silvia and Holz auf der Heide, Marco and Pelizzon, Loriana and Scheicher, Martin, The Anatomy of the Euro Area Interest Rate Swap Market (February 15, 2019). ECB Working Paper No. 2242 (2019); ISBN 978-92-899-3504-3 , Available at SSRN: https://ssrn.com/abstract=3336462 or http://dx.doi.org/10.2139/ssrn.3336462

Silvia Dalla Fontana (Contact Author)

Swiss Finance Institute ( email )

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland

USI Lugano ( email )

Via Giuseppe Buffi 13
Lugano, TN Ticino 6900
Switzerland

Marco Holz auf der Heide

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Loriana Pelizzon

Goethe University Frankfurt - Faculty of Economics and Business Administration ( email )

Theodor-W.-Adorno-Platz 3
Frankfurt am Main, D-60323
Germany

Martin Scheicher

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany
+49 69 1344 (Phone)
+49 69 1344 7949 (Fax)

HOME PAGE: http://www.ecb.europa.eu

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