Volatility in the bond and interest rate derivative market has seldom been higher, spooking investors and causing liquidity to dry up. Gennadiy Goldberg, a strategist at TD Securities, describes the situation as a “volatility vortex.” “Right now it is all about market volatility,” said Goldberg in a recent interview with the FT, “You have investors staying away because of the volatility — and investors staying away increases volatility.”

Recent events such as increasing inflation across the globe, the repricing of interest rates by most of the Central Banks, and the historic sell-offs of UK sovereign debt have contributed to the turbulence in the bond and interest rate derivative markets. Rules put in place following the 2008 Financial Crisis demanding that sufficient collateral is in place to reduce the risk of trades, may be making the situation worse. As Satyajit Das, an author and former banker puts it: “Higher collateral requirements also are one factor in the declining use of derivatives for genuine risk management, increasing overall systemic vulnerabilities.”

Source: Bloomberg

With liquidity drying up, market participants can find themselves having to accommodate much larger PnL swings than usual. During such times, even putting axes out into the market carries a risk as doing so can scare liquidity away. At a minimum, the axes will likely only trade when they are the wrong price. Normally, volatility means more opportunities for bond and interest rate derivatives dealers to profit, but this is obviously not the case when dealers are chasing liquidity away. At the very moment that dealers need liquidity the most, it’s removed.

At Wematch, we may have the solution. Our Risk Netting Service enables dealers to reduce the “saw-teeth” (alternating longs and shorts) in their portfolios by 30% or more in just 10 minutes, on an unmoving curve, and without projecting their risk to the market.  The service automates Euro IRS and basis swap trades, transforming unwanted dealer positions into fresh mid-market exit liquidity. 

Through a simple user interface, traders simply input their DV01 exposure per Tenor to be reduced, trading constraints (e.g., PnL, Curve, and Fly Constraints), and mid-market prices for each Tenor. 

From there, the Wematch Risk Netting Service runs its optimisation algorithm which generates matching trades in bulk respecting the constraints and contingencies of all the traders.

Results reports are sent and the trades are then automatically released and booked. 

If you would like to access unprecedented liquidity to overcome the challenges of today’s volatile market, we would love to show you our solution. 

To learn more, Contact us.