A Preliminary Look at Dealer-to-Customer Markets on October 15, 2014 THE EVOLVING STRUCTURE OF THE U.S. TREASURY MARKET October 20-21, 2015

for internal use only

Treasury Market Structure  Two important components of the Treasury market were not covered in the public report  Dealer-to-Customer (DtC) market  Interest rate swaps and swaptions  Limited information available on DtC market activity  Request for Quote (RFQ) data (TradeWeb, Bloomberg)  Sample Voice data (Ad-hoc survey of select large dealers)  Swaps/swaptions trades reported to swap data repositories (SDRs)  Participant level transaction & position data reported to CFTC Treasury Market DtC

Inter-Dealer

• RFQ • Voice Sample

• eSpeed • BrokerTec • DealerWeb

Futures • CME

Swaps • SDRs

2

Evidence from Survey of Large Dealers Average Trading Volume by Platform for Large Dealers  Ad-hoc survey of select large dealers estimated to represent about half of DtC volume

 DtC represents a significant share of volume for large dealers  Significant variation in volume shares over time and across dealers  Voice trading volume significantly greater than RFQ on most days

 DtC volume rose by ~50% on 10/15 while IDB volume rose by 210%  Voice trading as a share of DtC volume declined slightly on 10/15 Platform Volume Share on October 15 (Survey Respondents)

Platform Share of Volume on Control Days (Survey Respondents)

IDB

IDB

RFQ

RFQ

Voice

Source: Ad-hoc survey of select large dealers Note: Pie chart represents an average and is not representative of any one dealer

Voice

Source: Ad-hoc survey of select large dealers Note: Pie chart represents an average and is not representative of any one dealer

3

Approximate Intraday DtC Trading Volumes on 10/15  DtC trading volumes were modest relative to IDB volumes and reasonably balanced during the event window  No evidence of single large trade or sequence of large trades leading up to or during event window  Intra-day pattern represents an estimate as voice data limited to survey respondents % of daily volume

On-the-Run DtC Volumes Buy

4%

Sell

% of daily volume 5%

3%

4%

2%

3%

1%

2%

Off-the-Run DtC Volumes Buy Sell

1%

0%

0%

-1%

-1%

-2%

-2%

-3% 8:00

9:00

10:00 11:00 12:00 13:00 14:00 15:00

Source: Cash RFQ Platforms, Ad-hoc survey of select large dealers Note: 5-minute intraday buckets, 8:00 – 15:00 ET; Event window grey shaded

-3% 8:00

9:00

10:00 11:00 12:00 13:00 14:00 15:00

Source: Cash RFQ Platforms, Ad-hoc survey of select large dealers Note: 5-minute intraday buckets, 8:00 – 15:00 ET; Event window grey shaded

4

RFQ Trading Statistics  RFQ data analyzed from TradeWeb and Bloomberg represents the vast majority of US Treasury RFQ volume  10/15 not an outlier in terms of RFQ volume RFQ Platforms Volume Statistics On-the-run # of Trades 3,120 Control Days Avg Daily Trade Volume ($ millions) 21,951 (April 2-17) Average Trade Size ($ millions) 7.0 # of Trades 5,059 15-Oct Trade Volume 30,736 Average Trade Size 6.1

Off-the-run 4,192 25,403 6.1 5,770 37,420 6.5

Daily RFQ Treasury Volume

10/16/2014

10/15/2014

6/5/2014

4/17/2014

4/16/2014

4/15/2014

4/14/2014

4/10/2014

4/9/2014

4/8/2014

4/7/2014

4/4/2014

4/3/2014

4/2/2014

on-the-run

10/14/2014

Source: Cash RFQ Platforms

4/1/2014

6/20/2013

6/19/2013

seasoned

4/11/2014

$ billions 80 70 60 50 40 30 20 10 0

5

RFQ Platform Volume by Firm Type  Significant dealer concentration of RFQ volume  Diversity of client flows greater on 10/15 Dealer Volume Share Top 10 Dealers Other Dealers

Control Days 10/15/2014 76.2% 73.9% 23.8% 26.1%

Customer RFQ Volume Share

Source: Cash RFQ Platforms Note: Other includes Corporates, Pension Funds, Sovereign Wealth Funds, Private Equity, Foreign Governments, and Other

Other

State/Municipal Fund

Insurance

10/15/2014

HFT/Prop

Central Bank

Other

Hedge Fund

Bank/Dealer

Asset Manager

Control Days

Non-Bank Broker/Dealer

40% 35% 30% 25% 20% 15% 10% 5% 0%

6

RFQ Platform Trade Pricing $ per 100 par

On-the- Run 10-Year RFQ Pricing

105

IDB

RFQ

104 103 102 101 8:00

9:00

10:00

11:00

12:00

13:00

14:00

15:00

Source: Cash RFQ and IDB Platforms Note: IDB quote mid point; RFQ transaction prices

10-Year RFQ-IDB Spread

ticks (64ths) 20

RFQ/IDB Spread

15

$ per 100 par 105

10-Year Price

104

10 5

103

0

102

-5 101

-10

-15 8:00

100 9:00

9:40

10:10

11:20

Source: Cash RFQ and IDB Platforms Note: 80% confidence interval, based on rolling 20 trades; time axis spaced in activity time

13:05

14:45 7

RFQ Platform Quoting Behavior # of RFQs

# of Requests

1200

45% 40% 1000 35% % of Requests Not 800 30% Responded To 25% 600 20% 400 15% 10% 200 5% 0 0% 8:00 9:00 10:00 11:00 12:00 13:00 14:00 15:00 Source: Cash RFQ Platforms

20%

Dealer Quoting Behavior

Non-Responsiveness # of RFQs

1200

10% 5% 0% Source: Cash RFQ Platforms

30%

1000

25%

800

20%

600

15%

400

10%

200

5%

0

0% 8:00

9:30

11:00

12:30

14:00

Source: Cash RFQ Platforms

% of Requests Without Response

15%

# of Requests % of Quotes 3+ ticks from best quote

14% 12% 10% 8% 6% 4% 2% 0%

% of Quotes 3+ ticks from best

Source: Cash RFQ Platforms

8

Summary of Preliminary DtC Analysis  DtC market is a significant share of the overall Treasury market  Dominated by the largest dealers  Voice remains an important mode of trading in DtC segment  No outsized trading volume observed during the event window on 10/15

 RFQ pricing generally remained tight through the period of peak volatility  Temporary widening in RFQ market mirrors widening of dealer quotes in IDB & Futures noted in the Joint Staff Report

 Some evidence of dealer pullback in RFQ market during event window  Increase in non-competitive quoting

 Increased non-response rate  Overall, preliminary evidence supports that the DtC market tracked IDB & Futures markets on 10/15 and that the event was not driven by DtC flows 9

A Preliminary Look at Dealer-to-Customer Markets on October 15, 2014

Oct 15, 2014 - Swaps/swaptions trades reported to swap data repositories (SDRs). ▫ Participant level .... Summary of Preliminary DtC Analysis. ▫ DtC market is ...

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