Swap trades will get smaller as counterparties tackle clearing requirements and look to cut costs, according to a panel at the International Swaps and Derivatives Association conference in New York yesterday.
“The rule of thumb would be that the more things that get commoditized and electronicized, the smaller the trade sizes get,” Athanassios Diplas co-chair and global head of systemic risk management group at Deutsche Bank told the attendees.
“If you look at markets such as equity that have actually had what the futures and the swaps markets [are going through], in fact the futures market looked like the electronic market and the swaps market was the block market. But right now, all of that have been pushed in the same domain, so we will see something similar here,” Diplas said. Equity trade sizes diminished significantly after it was moved to standardized electronic platforms.
Ted MacDonald, managing director at The D.E. Shaw Group, raised the issue that transaction size will be limited by costs, because repository, clearing and swap execution facility charges would ultimately add up.
Eric Litvack, head of regulatory strategy at Société Générale, responded by saying, the cost element is only a factor while it remains the primary concern. “Once you drive the cost down, then they are opening the door to smaller and smaller trade sizes. That is what we have been seeing in the equity market, where the factor of squeezing out cost and the increasing amount of electronic intervention has lead to smaller trade sizes,” he said.