In this paper, we examine the implications of the benchmark regime change in the interest rate swap market on underlying market conditions.
Occasional Paper No. 27 (PDF)[1]
We have published this Occasional Paper alongside an Insight article - The power of benchmarks: an analysis of the ice swap rate[2].
Find out more about Occasional Papers and read our disclaimer.[3]
Summary
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 us.
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.
Authors
Matteo Aquilina, Gbenga Ibikunle, Vito Mollica, and Tom Steffen.
Matteo Aquilina and Tom Steffen work in the economics department of the FCA. Gbenga Ibikunle is an Associate Professor at the University of Edinburgh and Vito Mollica is an Assistant Professor at Macquarie University.
Disclaimer
Occasional Papers contribute to the work of the FCA by providing rigorous research results and stimulating debate. While they may not necessarily represent the position of the FCA, they are one source of evidence that the FCA may use while discharging its functions and to inform its views. The FCA endeavours to ensure that research outputs are correct, through checks including independent referee reports, but the nature of such research and choice of research methods is a matter for the authors using their expert judgement. To the extent that Occasional Papers contain any errors or omissions, they should be attributed to the individual authors, rather than to the FCA.