What's your market?

Traders get asked this question all the time. There is a certain pride in being able to make a market in something hard to price, to demonstrate a deep understanding of value and valuation.

But the probelm overshadowing any market making activity is that once a trade is done, it needs to be marked. And the real bid offer spread on any trade is a dynamic, breathing and living animal, waiting to rip the pnl away from the books if given a chance.

On top of that volatility of bid offer spread, we need to overlay a heavy blanket of regulatory requirements. A myriad of regulators and regulations require stringent adherence to a complex set of rules, especially those relating to prudential valuation practices, conjured up in the long shadow of the global financial crisis.

Thus now, for example, the Bank of International Settlements has published an entire book on guidance for valuation teams (https://www.bis.org/basel_framework/chapter/CAP/50.htm).

One important part to note is that bid offer is one of the key mentioned factors to be taken into account:

"These factors may include, but are not limited to, the amount of time it would take to hedge out the position/risks within the position, the average volatility of bid/offer spreads, the availability of independent market quotes (number and identity of market-makers), the average and volatility of trading volumes (including trading volumes during periods of market stress), market concentrations, the ageing of positions, the extent to which valuation relies on marking-to-model, and the impact of other model risks not included in CAP50.11"

Volatility of bid/offer spreads, volatility of trading volumes. These two factors alone can cause heartburn and worried faces at each month and quarter end. How do you even measure the volatility of bid offer spreads for something which trades once or twice a quarter? And what is the right way to compute bid offer spreads, given for example, exotic derivatives may not always be booked at the same time as execution date.

Here at PriceVault, we have spent most of our time studying and solving exactly these problems. Our clients use our bespoke data across IRS, Swaptions and other asset classes for bid/offer spreads, volume, and the volatility of each over time. We publish an index of liquidity, and an index of bid offer spreads which is helpful to identify regime changes for pruval and for risk measurements.

How do you measure bid/offer volatility for your pruval? Get in touch and we can grab a coffee to discuss!

USD OIS Bid Offer

Exciting year for bid/offer spreads in USD OIS swaps space. As we can see in the graph for 2/5/10/30y swaps, the year started off relatively calmly, but big spikes in March due to Silicon Valley bank and Credit Suisse in the same month. B/O spreads spiked up from around 1bp in the beginning of the year to above 4bps at the peak on strong volumes. Since end of April we saw spreads normalise again but have gradually crept higher during June - an interesting dynamic given VIX has not moved much - worth to keep an eye on this as we have seen before that bid/offer spreads may be faster to react to sentiment than VIX might. (see blog post here https://blog.pricevault.io/bid-offer-spreads-react-faster-than-vix)

Euribor Bid Offer

Euribor swaps bid offer saw relatively less volatility compared to the USD OIS space although the same theme is present, with a spike up around March/April followed by a calm May and subsequent gradual trend in bid offer spreads widening during June.

Get in touch with us or leave a comment if this analysis might be useful for other instruments or currencies, we have data for many other types of derivatives and currencies!

We found that there is no comprehensive guide to SDR data, so we have put together the below to summarise and highlight what SDR data is and why it is so useful.

What is SDR
Swap data repositories (SDRs) were new entities created by the Dodd-Frank Act, in order to provide a central facility for swap data reporting and recordkeeping. Under Dodd-Frank Act, all swaps, whether cleared or uncleared, are required to be reported to registered SDRs. 

SDRs are required to register with the CFTC and comply with rules promulgated by the CFTC, including real-time public reporting of swap transaction and pricing data.

Actually it is not straightforward to become an SDR – applicants are required to submit formal applications, and the Commission will review each application within an 180 day time frame. There quite a few instances of applicants ultimately withdrawing their applications.

What Asset Classes are covered?

Since April 2013, interest rate, credit, equity, FX and commodities swaps executed on or pursuant to the rules of designated contract market, as well as swaps executed “off-facility” have been required to be reported to SDRs. A designated contract market is an exchange that may list for trading futures or options contracts.

Who needs to report trades to SDRs?

Swap dealers and major swap participants are responsible for reporting all of their swap transactions to an SDR, regardless of whether the transaction is cleared or uncleared. The information that must be reported to an SDR includes details such as the parties to the swap, the terms of the swap, the notional amount, the price, and the date and time of execution. The reporting requirements are intended to improve transparency in the OTC derivatives market and to help regulators monitor and manage systemic risk.

What are the reporting requirements?

According to the CFTC's factsheet, the details about swaps that are required to be reported to registered swap data repositories include:

Counterparty information: The names and addresses of the counterparties to the swap.

Transaction information: The date and time of execution, the price or rate of the swap, and the notional amount.

Product information: The type of swap and the underlying asset, such as an interest rate, currency, or commodity.

Valuation data: The mark-to-market or mark-to-model value of the swap.

Other details: Additional information about the swap, such as its termination date, payment frequency, and settlement terms.

Please feel free to reach out to info@pricevault.io to find out more about how SDR data can help your valuations and trading!

Hi!

Things are feeling very very calm. All the pricevault indexes and data signals are pointing to a very liquid market. Bid offer spreads are very well contained and volumes are steady:

Seeing some 7y 5y trades print in the last few days as well, didn't see many of these trade before. Worth keeping an eye to see if more market makers require valuations in this space.

Top Trades by Vega:

Hello,

Welcome to our user guide on SDR data functions on PriceVault. There is an immense amount of real trades data being reported which can provide valuable insights for both traders and IPV teams alike.

Check out our user demo below and see how to get access to valuable data with insights into bid offer spreads and trade liquidity.

Register for trial access to our functions at https://staging.pricevault.io/register

Contact us at info@pricevault.io anytime for further information.

One of our most requested data sets are those relating to bid/offer using real traded prices.

We thought it would be interesting to plot our PV Bid Offer Index (PVBOI) against the VIX index.

As expected the two indices show a similar pattern over time, demonstrating how volatility and bid offer spreads move in tandem.

What we didn't quite expect to see is how PVBOI actually seems to react faster than VIX - both during the SVB and CS turmoil periods and also in periods of better stability and calm. 

Let us know if you would like a copy of the data or to access our indices for your own research.

Many of our clients are using our data to adjust month-end valuations and to verify trader marks for illiquids.

Bid offer spreads stable this week, 5s and 10s USD OIS swaps trading well within 1bp bid offer on generally higher volumes.

Average daily volume in 10y usd ois stable around USD7-10bn/day, average traded price around 3.2%

liquidity ratio improving to 12, consistent with stable bid offer index on higher volumes:

USD Swaptions data for the past ten days as per below:

Top Trades by Vega. I have to say the gamma trades looks suspiciously like the same trade printed or reported - we will dig into this and come back with conclusions soon.

Going into month-end always helpful to check what trades are on the radar.

Bid offer spreads have been stable for the past two weeks as well so things seem to have settled down since the SVB and CS blow-ups. 

Top Trades by Vega:

This is the first of our user guides to creating a new data series on PriceVault.

Check it out and see how to get access to derivatives valuation in 5 minutes instead of weeks and months!

Register for trial access to our functions at https://staging.pricevault.io/register

Contact us at info@pricevault.io anytime for further information.

Just past April month-end now, and things are a little bit back to normal - vols back down a bit, liquidity ratio is better and bid/offer spreads calmed down again.

Seems that trade size by risk is still smaller than end of March and short dated payer/gamma plays are showing up again. 

Check out our new bid/offer index PVBOI and liquidity index PVLIT, here we show how 10y OIS swaps bid offer spreads have come all the way back down using our custom in house B/O index algorithm. Clients are using this to check month end marks and bid/offer reserves as well as part of a dashboard for traded risk.