COVID-19 disruption dried up swaps markets, research shows
01 July 2020 London
Image: Andrei Kuzmik/Shutterstock.com
Almost all UK swaps market participants saw a “massive decline” in interest rate swaps (IRS) liquidity due to COVID-19 in late February and early March, according to new market research.
An investigation into the impact of the pandemic on global swaps markets found that 96 percent of market participants suffered from a swaps drought in Q1.
But, the report notes, 60 percent also saw an immediate improvement to liquidity after central banks stepped in.
The study was led by Greenwich Associates, a global provider of data, analytics and insights to the financial services industry, in conjunction with the International Swaps and Derivatives Association (ISDA).
The researchers interviewed 172 buy- and sell-side swaps market participants in the UK, the EU, North America, Japan, Asia, Latin America, Africa and emerging markets to examine the impact of government intervention and explore the potential for future changes to the market structure.
The subsequent report ‘The impact of COVID-19 and government intervention on swaps market liquidity’, examines the factors contributing to market illiquidity and how that illiquidity impacted various parts of the swaps market in different parts of the world.
In the report, Kevin McPartland, head of research for market structure and technology at Greenwich Associates, explains that intervention by central banks was “hugely effective in calming markets”, but notes that “the appropriateness and adequacy of the specific interventions put in place are still being debated”.
“Those that were interviewed appreciated that the banks are safer than before 2008,” explains McPartland, “but market participants remained concerned that banks were restrained from stepping into the markets to restore calm as they might have 15 years ago”.
“When we asked about the impact of financial regulatory reforms put in place over the past 10 years,” McPartland adds that “most acknowledged that the reforms had, in fact, improved the strength and resiliency of the banking system”.
However, according to the survey, buy-side respondents in particular, also noted that these reforms reduced the capacity of banks to provide liquidity.
An investigation into the impact of the pandemic on global swaps markets found that 96 percent of market participants suffered from a swaps drought in Q1.
But, the report notes, 60 percent also saw an immediate improvement to liquidity after central banks stepped in.
The study was led by Greenwich Associates, a global provider of data, analytics and insights to the financial services industry, in conjunction with the International Swaps and Derivatives Association (ISDA).
The researchers interviewed 172 buy- and sell-side swaps market participants in the UK, the EU, North America, Japan, Asia, Latin America, Africa and emerging markets to examine the impact of government intervention and explore the potential for future changes to the market structure.
The subsequent report ‘The impact of COVID-19 and government intervention on swaps market liquidity’, examines the factors contributing to market illiquidity and how that illiquidity impacted various parts of the swaps market in different parts of the world.
In the report, Kevin McPartland, head of research for market structure and technology at Greenwich Associates, explains that intervention by central banks was “hugely effective in calming markets”, but notes that “the appropriateness and adequacy of the specific interventions put in place are still being debated”.
“Those that were interviewed appreciated that the banks are safer than before 2008,” explains McPartland, “but market participants remained concerned that banks were restrained from stepping into the markets to restore calm as they might have 15 years ago”.
“When we asked about the impact of financial regulatory reforms put in place over the past 10 years,” McPartland adds that “most acknowledged that the reforms had, in fact, improved the strength and resiliency of the banking system”.
However, according to the survey, buy-side respondents in particular, also noted that these reforms reduced the capacity of banks to provide liquidity.
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