MAC swaps: not yet needed by dealers
MAC swaps are touted by some as a major contribution to swap market liquidity but how is the project progressing? Tod Skarecky of ClarusFT takes a look in his latest ClarusFT blog post. My sense is banks focus is elsewhere for now.
From Tod's post the key points I picked up are:
- Outside the quarterly rolls' volume blip as positions are rolled over, MAC averages in the 2%-3% of notional and 3%-4% of trades in USD fixed-float swaps
- Volume in other currencies is negligible
- ERIS standards (MAC lookalikes but swapfutures) are tiny by comparison even to MAC swaps
At the TABB conference last week (see my post for highlights), one panel member opined that nearly all the MAC volume was being traded by a small number of buy side firms which get convenience benefits from keeping to a small number of positions which they increase and decrease notional on as needed rather than having to look at swap risk in the conventional fashion using bucketed PV01s.
When might we see signfiicant MAC dealer-to-dealer volume? Hard to say.
1. MAC becomes a more liquid hedge than spot-starting – clearly we are not there yet.
2. Broader client interest – clearly this is more of a special arrangement for certain large clients at this point.
3. Leverage ratio benefits – given the focus on Basel III leverage ratio, perhaps banks can book a string of MAC swaps on the same end date and coupon as a single swap – reducing notional and improving the leverage ratio. Can anyone confirm this is the case?
Compression is banks focus
I don't know if 3 is a benefit. Even if it is, I suspect banks are focused on the leverage ratio impact of the enormous (from notional point of view anyway) portfolios of open trades at CCPs and with bilateral counterparties. Given portfolios have a half life of 5-7 years it would take many years for these to be partly replaced by MAC swaps. Not hard then to rationalize the major focus on trade compression via TriOptima and CCPs at this point. Perhaps when compression volumes reach a steady state once the large, low-hanging fruit has been picked, MAC may become a priority in banks' capital optimization initiatives.
How can you hedge MAC swaps without a D2D market?
Given the small size of the MAC market my guess is banks are hedging MAC swaps using conventional bucketed PV01 portfolio macro hedging approach using spot-starting IRS rather than separately hedging them in the MAC swaps market.