The US Commodity Futures Trading Commission is considering a new measure to calculate the size of the interest rate swap (IRS) markets. Under the methodology proposed in a paper by CFTC Chief Economist Bruce Tuckman, the value of the IRS markets would be determined by the calculation of what the paper refers to as "Entity-Netted Notionals" (ENNs) instead of the current gross notional measure used today, which the paper argues overstates risk transfer in the markets.
ENNs would be calculated by: (1) converting the long and short notional amounts of each counterparty to five-year risk equivalents; (2) netting longs against shorts in a given currency within pairs of legal entities; and (3) summing the resulting net longs or shorts across counterparties. Under this calculation, the value of the current IRS markets would be approximately $15 trillion, which represents roughly 8% of the current $179 trillion market valuation under the current notional calculation.
In a speech introducing the paper, CFTC Chairman J. Christopher Giancarlo argued that the new measure would ensure the IRS markets are more easily compared to other markets, and, in particular, that it would bring their value closer to other fixed income markets, such as the markets for US Treasuries, corporate bonds, mortgages and municipal securities. However, he also acknowledged that ENNs are not intended to measure counterparty or operational risk and said his intention is not necessarily to use the calculation to rethink regulatory thresholds, such as the swap dealer de minimis registration threshold.
The CFTC is looking for market reaction to the ENNs proposal.
View the Office of the Chief Economist's paper.
View Chairman Giancarlo's speech.
