Risk Transfer with Interest Rate Swaps

OCE Staff Papers and Reports, Number 2020-002

32 Pages Posted: 8 Sep 2020

See all articles by Lee Baker

Lee Baker

affiliation not provided to SSRN

Richard Haynes

Government of the United States of America - Department of the Treasury

John Spencer Roberts

Commodity Futures Trading Commission (CFTC)

Rajiv Sharma

U.S. Commodity Futures Trading Commission (CFTC)

Bruce Tuckman

New York University (NYU) - Leonard N. Stern School of Business

Date Written: March 20, 2020

Abstract

This paper proposes Entity-Netted Notionals (ENNs) as a metric of interest rate risk transfer in the interest rate swap (IRS) market. Unlike the ubiquitous metric of notional amount, ENNs normalize for risk and account for the netting of longs and shorts within counter party relationships. Using regulatory data for U.S.-reporting entities, the size of the market measured by notional amount is $231 trillion, but, measured by ENNs, is only $13.9 trillion 5-year swap equivalents, which is the same order of magnitude as other large U.S. fixed income markets. This paper also quantifies the size and direction of IRS positions across and within various business sectors. Among the empirical findings are that 92% of entities using IRS are exclusively long or exclusively short. Hence, the vast majority of market participants are prototypical end users, and the extensive amount of netting in the market is attributable to the activity of relatively few, larger entities. Finally, some sector-specific empirical findings are inconsistent with widespread, prior beliefs. For example, pension funds and insurance companies are typically thought to be long IRS to hedge their long-term liabilities, and these sectors are indeed net long, but approximately 50% of individual entities in these sectors are actually net short.

Keywords: Interest Rate Swaps, Fixed Income Markets, Entity-Netted Nationals, Notional Amount

JEL Classification: G00, G10, G12, G20

Suggested Citation

Baker, Lee and Haynes, Richard and Roberts, John Spencer and Sharma, Rajiv and Tuckman, Bruce, Risk Transfer with Interest Rate Swaps (March 20, 2020). OCE Staff Papers and Reports, Number 2020-002 , Available at SSRN: https://ssrn.com/abstract=3661715 or http://dx.doi.org/10.2139/ssrn.3661715

Lee Baker

affiliation not provided to SSRN

Richard Haynes

Government of the United States of America - Department of the Treasury ( email )

1500 Pennsylvania Avenue, NW
Washington, DC 20220
United States

John Spencer Roberts

Commodity Futures Trading Commission (CFTC) ( email )

1155 21st Street NW
Washington, DC 20581
United States

Rajiv Sharma

U.S. Commodity Futures Trading Commission (CFTC) ( email )

1155 21st Street NW
Washington, DC 20581
United States

Bruce Tuckman (Contact Author)

New York University (NYU) - Leonard N. Stern School of Business ( email )

44 West 4th Street
Suite 9-160
New York, NY NY 10012
United States

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