An Analysis of OTC Interest Rate Derivatives Transactions: Implications for Public Reporting

Abstract

This paper examines the over-the-counter (OTC) interest rate derivatives (IRD) market in order to inform the design of post-trade price reporting. Our analysis uses a novel transaction-level data set to examine trading activity, the composition of market participants, levels of product standardization, and market-making behavior. We find that trading activity in the IRD market is dispersed across a broad array of product types, currency denominations, and maturities, leading to more than 10,500 observed unique product combinations. While a select group of standard instruments trade with relative frequency and may provide timely and pertinent price information for market participants, many other IRD instruments trade infrequently and with diverse contract terms, limiting the impact on price formation from the reporting of those transactions. Nonetheless, we find evidence of dealers hedging rapidly after large interest rate swap trades, suggesting that, for this product, a price-reporting regime could be designed in a manner that does not disrupt market-making activity.