The research paper on The Changing Shape of the Interest Rate Derivative Markets in 2016 by Ehlers and Eren is an interesting read. It clearly evidences the Interest Rate Derivative market has massively grown since the global financial crisis of 2007, more can be found here [LINK].
If anyone believes that new regulation such as Dodd Frank Wall Street Reform Act would dampen appeal for trading derivatives, think again. Central Counterparty Clearing Regulation that was introduced after the global financial crisis should have pushed the majority of vanilla derivative trading onto exchanges but Over The Counter products are not only still in fashion, interest for them has grown. It should be noted that both OTC and Exchange Traded traffic has increased moderately since 2007.
One growing concern is the number of non-financial institutions trading these instruments has also lifted substantially. This takes in Central Counterparty Clearing houses of course and that increases concentration risk but also hedge funds and other dealers may be present in the mix that are not regulated under the Bank for International Settlements.
Many of the non-financial entities in the IRD market will be running risk management systems that fall outside new regulatory guidelines, and few of these 'new institutions' will be capitalised in the same manner in which banks have now become accustomed. Finally, to add to the list of concerns, a large number of these institutions will not be operating integrated Counterparty Risk management systems.
In effect Basel III has potentially improved the completeness of trading book risk and control for banks but once again, regulations seemed to have pushed trading activity into a unique place of high risk that falls outside regulatory oversight.
One development to keep an eye on or which needs to be rationalised and explained, is the growth in US dollar denominated positions. Daily turnover in USD instrument has nearly doubled in a matter of three years with most volumes being traded originating from the swaps corner. Equivalently so, turnover in Euro traded positions has also pretty much halved which doesn't come as any surprise.
There has been a concerning drop of 12% in trading activity that originates from the UK, taking it from 50% global turnover to 39%. Many of those observing this will speculate the change is an outcome of Brexit, but such thinking is likely to be fallacious as the UK is the centre for Euro trading, one has to question; will it remain so?