February 2, 2012 

David A. Stawick 

Secretary 

SWAPS & DERIVATIVES MARKET ASSOCIATION 

Commodity Futures Trading Commission 

Three Lafayette Centre 

1155 21st Street, NW 

Washington, DC 20581 

Re : RIN 3038-ADOS: Real-Time Public Reporting of Swap Transaction Data (17 CFR Part 43) 

In Consideration of Appropriate Block Trading Thresholds with Regard to Swaps Execution and 

Trade Reporting 

Dear Mr. Stawick: 

The Swaps & Derivatives Market Association ("SOMA") appreciates the opportunity to provide 

comments to the Commodity Futures Trading Commission (the "CFTC") on the CFTC's Notice of 

Proposed Rulemaking regarding Real-Time Public Reporting of Swap Transaction Data (17 CFR Part 43). 

The SOMA is a non-profit financial trade group formed in 2010 to support the goals of the Dodd Frank 

Act. It believes that systemic risk of OTC derivatives can be mitigated through their regulation, the 

creation of central clearing, and by ensuring open and transparent access to ensure greater competition, 

lower transaction costs and greater liquidity. The SOMA is comprised of many US and internationally 

based broker-dealers, investment banks, futures commission merchants and asset managers 

participating in all segments of the exchange-traded and over-the-counter derivatives and securities 

markets. 

Introduction 

It is well established that there exists certain considerations for block trades in most liquid markets. 

Congress was quick to recognize that such rules would also exist for swap trades as it drafted the Dodd 

Frank Act (the "DFA"). With the DFA, however, the clear intent of Congress was that, while block trade 

rules for different contracts and markets might be different, "the guiding principle in setting appropriate 

block-trade levels should be that the vast majority of swap transactions should be exposed to the public 

market through exchange [or SEF] trading ... (emphasis added). 1 To be sure, Congress intended that 

1 55922 (Congressional Record, July 15, 2010). 

1 
most trades are non-block and thus must trade on transparent SEFs or DCMs if true transparency and 

market integrity is to be achieved. 

Block trades are positive to the marketplace because they promote trading in large increments that in 

turn promotes liquidity. To encourage trading in large size increments, it is typical to protect liquidity 

providers from external forces that might otherwise abuse the information of a large trade and its 

immediate impact on prices and market equilibrium. As such, market makers are typically granted a 

time delay before they must report the block trade to the open market. In this time period, the trader 

may either trade hedge its block trade position or trade out of it altogether. 

But a tension exists between the market maker's right to protect itself and the market's right to know 

trades as they occur. Too little time in the delay interval and the trader fails to set its hedge and is 

harmed. Too much time, however, and the trader is now in possession of market 'moving' or price 

sensitive information that can be used to harm the market. Thus, the role of the rule maker is to set the 

optimal balance between protecting the dealer and protecting the market from any possible abuse. 

Block rules typically are defined by three determinants: 1} the time delay before the trader must report; 

2) what trade information is reported; and 3) the trade size threshold that determines a block trade. On 

January 2012, the CFTC addressed the first and second items. It set the time delay for swaps to 30 

minutes for the first year, and 15 minutes for each year thereafter. The CFTC also set the block 

reporting size to "250MM+" for all trades equal to and greater than 250 million. This paper therefore 

focuses solely third determinant-what is the optimal block trade size threshold for an interest rate 

swap? 

Moreover, what is a correct and practical method for threshold determinations such that market 

liquidity is not harmed and the vast majority of swaps trade on SEFs or DCMs consistent with 

Congressional intent? 

To answer these questions, the SOMA proposes a multi-pronged approach where three tests are 

considered to determine and measure optimal block trade thresholds: 1) a market 'depth' test; 2} a 

market 'breadth' test and 3) a multiples of average trade size test. Discussed in greater detail below, 

this paper not only proposes actual block sizes that should be adopted by the CFTC, but suggests that 

such a practical approach may continue to be used with increasing accuracy over time by regulators as 

SEFs become their real time data providers of pre trade price information. 

What is a Block Threshold? 

To consider our approach, it is first necessary to define the block threshold. The CFTC defines swap 

block trades to be "large-sized transactions that would cause a significant price impact if required to be 

executed on the DCM's centralized market." In other words, a block trade is a trade whose size is so 

large that it cannot immediately be absorbed by all the current bids or offers in the marketplace during 

a given time period. 

Market Depth Test: Set Threshold Equal to Market Depth 

To consider appropriate block trade thresholds, it is necessary to consider the liquidity in the market 

place at any point in time for a given swap. 

Theoretically, it is true that if a market were perfectly liquid, no block trade exception would be needed 

because there would always be a bid for every seller and an offer for every buyer at the current market 

price. Thus, the available liquidity in the market at any time during the trading day would instantly 

2 
absorb any trade at any size. In reality of course, this is not the case. There is not infinite liquidity at a 

given price but there is some; and thus one must consider how much liquidity is actually available or 

how much 'depth' exists at the current price. 

We argue that rule makers should set the block threshold at least equal to the Market Depth. 

Market Depth ("MD") is defined as the sum of Available Liquidity ("AL") at the time of trade. For the 

seller, available liquidity is the sum of all bids at the current price for a given swap. For the buyer, it is 

the sum of all offers at the current price for a given swap. 

Market Depth= 2 AL 

Figure 1 (below) considers Market Depth, which is equal to Available Liquidity for the largest and most 

liquid US interest rate swap market: dollar denominated, 3 month Libor indexed swaps. The first 

column is the swap maturity. The second column shows the 'Screen Size' or the standard size increment 

in which the swap price is customarily quoted by market practitioners. The third column displays 

Observed Liquidity ("OL"). 

To arrive at Observed Liquidity, we sampled six dealers' live actionable prices for each of the following: 2 

year, 3 year, 5 year, 7 year, 10 year and 30 year. Daily, we sampled dealer's bid size and offer size at the 

current or near current price. For the near current price we included order size that was within a 

quarter basis point difference of the highest bid or lowest offer. Likewise, we ignored order size when it 

was associated with bids lower than or offers higher than the acceptable tight range. We then took the 

average of each observation for a given swap over the given time series to arrive at Observed Liquidity 

for the particular swap ("OL"). 2 3 

Swap Screen Observed Available Block 

Maturity Size{MM} Liquidity Liquidity "AL" Thresold 

2yr 200 1A92 1A92 1A92 

3yr 150 1,132 1,132 1,132 

5yr 100 792 792 792 

7yr 75 546 546 546 

10yr so 408 408 408 

30yr 25 176 176 176 

Figure 1. Market Depth Test 

For the two year dollar Libor swap, the observed liquidity from six dealers is $1.492 billion in notional 

size. From considering Observed Liquidity, we may conclude that the market may instantly absorb at 

least the purchase or sale $1.492 Billion in notional two year swaps before liquidity is directly impacted. 

2 See Exhibit A for collated data taken from each dealer over the time interval. 3 Since dealers typically quoted the same size for both the bid and the offer for a particular swap, the Observed 

Liquidity only captures one side-either all bids or all offers. This properly accounts for observed liquidity available 

to either the swap seller or swap buyer. 

3 
Likewise, for the 10 year swap, the market could absorb at least the purchase or sale $408 million in 

notional, before liquidity is directly impacted. 

But our Observed Liquidity only considers six dealers. What about the liquidity that the other 24 dealers 

may provide? 

Clearly this broader dealer community does actually provide considerable liquidity to the swaps market 

place in addition the six dealers we observed. But, because only a small number of dealers offer live 

screens, it is presently difficult to quantify the liquid contributions of the non-electronic market makers. 

It is hoped that by encouraging more transparency through SEF trading, more prices will become 

available in the future. But for now we have set Available Liquidity equal to Observed Liquidity. Thus in 

an effort to be quite conservative, we assume that the marketplace for the purposes of this study is only 

comprised of the six dealers polled. 4 

Thus, based on our first test--Market Depth test--we suggest that block thresholds for dollar 

denominated, Libor indexed swaps be the following: 2 year ($1,492 MM), three year ($1,132 MM), five 

year ($792 MM), seven year ($546MM), ten year ($408 MM) and thirty year ($176MM). 

Market Depth Test & Time Considerations 

The Market Depth test is conservative also because it ignores additional available liquidity within the 

delayed reporting window set by the CFTC. The CFTC has recently mandated that such a time period 

shall be 30 minutes for the first year and then 15 minutes thereafter. 

As previously discussed, a block trade is a trade whose size is so large that it cannot immediately be 

absorbed by all the current bids or offers in the marketplace during a given time period. If the market 

maker has 30 minutes in which to hedge its position or trade out of the position completely-what is the 

likelihood that new bids and offers appear in the market within that time frame? 

The Market Depth test only captures the Available Liquidity that is immediately available to be swept by 

the block market maker. It does not capture the subsequent prices that would enter the market in the 

30 minute hedging window that follows. Because it is highly likely that several new bids and offers 

would enter the market place within the 30 minute window post immediate liquidity being swept by a 

block trade, the Market Depth test and its resultant block trade thresholds suggested here should be 

viewed as the conservative low end of where thresholds should be set by the rule maker. 

Market Breadth Test 

The second test that should be considered to determine optimal Block size trade thresholds is the 

Market Breadth test. This test recognizes that swaps are traded, hedged and risk managed on a 

portfolio basis by market makers. 

Simply put, a given swap (a 'focus swap') may be routinely hedged by another swap of like maturity or 

by a basket of swaps of different maturities. As such, because the market maker may hedge a block 

trade with swaps of different maturities, it is necessary to consider the total available liquidity of those 

additional hedging swaps most likely used when setting optimal block size thresholds. 

4 It is important to note that Available Liquidity (AL) also does not consider the impact of new liquidity providers. 

Several non-traditional liquidity providers, such as electronic or 'algorithmic' market makers have already indicated 

their intention to enter the swaps marketplace. 

4 
Market Breadth= L AL focus swap, adjacent swaps 

Market Breadth is defined as the total sum of available liquidity of the focus swap in addition to the 

available liquidity of the adjacent swap point to its right and to its left on the swap curve. 

Swap PV01 PV01 Depth Breadth 'ftllarket Depth* Market Depth* Market Breadth * 

Maturity per Million Block{MD} PV01 PV01 Threshold Adj{300K} diff Threshold 

2yr $ 179 $266,322 $ 300,000 $ 600,000 1,492 1,681 189 3,361 

3yr $ 279 $315,602 $ 300,000 $ 900,000 1,132 1,076 (56) 3,228 

Syr $ 489 $387,050 $ 300,000 $ 900,000 792 614 (178) 1,842 

7yr $ 659 $359,541 $ 300,000 $ 900,000 546 456 (90) 1,367 

10yr $ 875 $357,122 $300,000 $ 900,000 408 343 (65) 1,028 

30yr $ 1,611 $283,536 $ 300,000 $ 600,000 176 186 10 372 

* Notional expressed in millions 

Figure 2. Market Breadth Test 

In Figure 2, we consider the Market Breadth test. There are certain steps that we must take to properly 

determine the correct block thresholds for swaps across the curve based on the Market Breadth test. 

First, to consider liquidity expressed in notional sizes on an equivalent basis, we consider their Available 

Liquidity expressed on a risk adjusted basis or on a PV01 basis. Thus, we divide the Market Depth 

Thresholds in column six (determined by the Market Depth test) by the PV01 per million in column two. 

Column three lists the resultant PV01 for Market Depth Blocks which range from a value $266,322 to a 

value of $387,050 per basis point. For convenience purposes, we assume them all equal and set to 

equivalent to $300,000 per basis point. As evidenced in column eight, this is an acceptable assumption 

because it ratchets the suggested Block Threshold nationals downward in most cases as listed in the 

column entitled "Market Depth Threshold Adjusted". For example, the five year swap block threshold 

notional is now $614 million, down from $792 million as originally determined by the Market Depth test. 

Next, to properly consider the Available Liquidity across adjacent swap points, we first add the Depth 

PV01 of the focus swap to Depth PV01 of the points adjacent to it to arrive at Breadth PV01, listed in 

column five . 

For example, to determine two year swap Breadth PV01, we add the two year swap Depth PV01 

equivalent ($300,000) and the three year swap Depth PV01 equivalent ($300,000) to equal $600,000 per 

basis point. Likewise, to determine the five year point Breadth PV01, we add the five year swap Depth 

PV01 equivalent ($300,000) to the three year swap Depth PV01 equivalent ($300,000) and the seven 

year swap Depth PV01 equivalent ($300,000) to equal Breadth PV01 of $900,000 per basis point. For 

the five year swap, this resultant PV01 properly accounts for the fact that a five year swap can be 

hedged with a combination of three year and seven year swaps. 

To determine the suggested Market Breadth Threshold nationals for each maturity, we divide the 

Breadth PV01 by the simple PV01 per million for the relevant swap. For example, to determine the 

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block threshold for the five year swap we divide the Breadth PV01 ($900,000) by the PV01 per million 

($489) to get $1.842 Billion. Thus, the $1.842 Billion is the suggested block threshold based on Market 

Depth and Market Breadth. 

The resultant Market Breadth Threshold nationals (column nine) properly consider Available Liquidity 

not only in the focus swap that needs to be hedged, but also considers the Available Liquidity in the 

swaps around it. It is these adjacent swaps that swaps traders typically use as hedging vehicles if 

liquidity in the focus swap ever becomes suboptimal. 

Thus, according to this conservative Market Breadth test, we suggest that block thresholds for dollar 

denominated, Libor indexed swaps be the following: two year ($3,361 MM), three year ($3,228 MM), 

five year ($1,842 MM), seven year ($1,367 MM), ten year ($1,028 MM) and thirty year ($372MM). 

Market Breadth Test Considerations 

This Market Breadth test builds upon Observed and Available Liquidity considered in the Market Depth 

Test. The Market Breadth test properly considers not only the liquidity in a particular swap, but also 

sees all swaps of a given class as economically equivalent. 

The test recognizes that swaps are traded, hedged and risk managed on a portfolio basis by market 

makers. It recognizes that because a given swap may be routinely hedged by another swap of like 

maturity or by a basket of swaps of different maturities, rule makers should consider the liquidity of 

those swaps in making the Block Threshold determination. 

The Market Breadth test is conservative because it only considers additional liquidity of swaps adjacent 

to the focus swap for hedging. It is of course possible to use non adjacent swaps for hedging purposes 

to avail of their liquidity if desired or necessary. For example, you could hedge a five year swap with a 

two year and ten year swap. For our test however, we decided against including this method because if 

the swap curve 'pivots' or moves in a non-parallel manner the hedge result would be suboptimal. 

It is important to note, that the Market Breadth Test also ignores hedging or availing of liquidity using 

hedging tools such as US Treasuries or Euro Dollar Futures. Using Eurodollar futures, which are highly 

liquid, can prove to be quite an efficient hedge especially in the shorter swap maturities. But again, to 

be conservative, we decided against including them in the Market Breadth test. 

Average Trade Size and Multiples Test. 

A straightforward method to cross check the suggested block thresholds of the Market Depth and 

Breadth test is to consider them relative to a 'multiples of the average' trade size of a swap of a given 

maturity. 

Simply put, trades of an average trade size should be required to trade on SEFs, if rule makers wish that 

all average trades and those of smaller than average trade size should trade on transparent trade 

venues such that the transparency and liquidity goals of the DFA are met. To set them lower than the 

average, would logically mean that only very few swaps trades (those below the average size) would 

ever take occur on a SEF or DCM. 

As a result, rule makers should chose a block trade threshold that is at least equal or indeed some fair 

multiple of average trade size. 

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Such a 'multiples of average trade size' approach is consistent with Congressional intent. As previously 

noted, Congress desired that the 'vast majority' of swaps should trade on SEFs or DCMs in considering 

Block trade thresholds for the DFA. Congress did not say only those trades 'of less than average size.' 

Thus, rule makers cannot set Block Trade Thresholds less than or equal to the average trade size. Rule 

makers are required to set such a threshold at some fair multiple of average trade size. 

Appropriately, the CFTC considers such a multiples of average test as part of its two pronged block 

threshold approach. It suggests that the Block Threshold should be the higher of 1) five times the higher 

of the mean, median or mode of trade size; or 2} the 95 percentile distribution test. But is a multiple of 

five times the mean, median or mode --the correct and fair multiple? 

Swap Screen Average MrkDepth MrkBreadth Average as Multip./es of; 

Moturit} Size(MM) Trade Size* Block Block Screen M. Depth M.Breadth 

2yr 200 344 1,492 3,361 0.6 4.3 9.8 

3yr 150 221 1,132 3,228 0.7 5.1 14.6 

5yr 100 126 792 1,842 0.8 6.3 14.6 

7yr 75 113 546 1,367 0.7 4.8 12.1 

10yr 50 85 408 1,028 0.6 4.8 12.1 

30yr 25 52 176 372 0.5 3.4 7.2 

* LCH Data from 1/25/12 (www.swapsclear.com) Average 0.6 4 .8 11.7 

Figure 3. Mutiples of Average Trade Size 

In Figure 3, we consider the Average Trade Size relative to the Block Thresholds determined by the 

Market Depth Test and the Market Breadth Test. In column three, we display the average swap trade 

size. In column four and five we display the suggested Block Thresholds as determined by our Market 

Depth and Market Breadth Tests respectively. 

First, observing average trade size by itself or a one times (1 x) multiple, we see following trades sizes: 

$344 million (two year), $221 million (three year), $126 million (five year), $113 million (seven year), $85 

million (ten year) and $52 million {30 year). As discussed above, rule makers should not set required 

Block Thresholds equal or below these minimum trade sizes. 

Second, to consider the fair multiple of average trade size, we consider Market Depth and Market 

Breadth relative to average trade size. We consider the Market Depth and Market Breadth Thresholds 

from our earlier tests as multiples of Average Trade Size in columns eight and nine respectively. 

Considering average trade size relative to Market Depth, we observe that Block Thresholds suggested by 

our Market Depth test are on average a 4.8 multiple of the average trade size with a minimum of 3.4 

multiple {30 year) and a maximum multiple of 6.3 (five year). 

Considering average trade size relative to Market Breadth, we observe that Block Thresholds suggested 

by our Market Breadth test are on average a 11.7 multiple of the average trade size with a minimum of 

7.2 multiple (30 year) and maximum multiple of 14.6 (three year and five year). 

7 
Assuming the CFTC fives times multiple test to be a multiple of the average trade size, we see that the 

CFTC five times multiple is sufficiently approximate to the 4.8 average multiple from the Market Depth 

test. 

Moreover, because the Market Depth test captures only Available Liquidity, that is the total bids or 

offers available at the current price at any point in time taken from only six dealers, and because the 

Market Depth test ignores returning bids and offers in the hedging interval of 30 minutes, and because 

the CFTC Sx multiple is close to the Market Depth 4.8 multiple, we properly conclude the Sx is a fair 

multiple where the market can easily absorb the block trade within the given interval with no significant 

loss of liquidity in the market place. It is here at Sx Average Trade Size, or 1x Market Depth Threshold, 

where the CFTC should begin to set its required Block Thresholds for interest rate swaps. 

In fact we conclude that the CFTC could set required Block Thresholds for interest rate swaps at, or 

equal to, the suggested Market Breadth Thresholds and their multiples (11.8 on average) of average 

trade size, if available liquidity of adjacent swap instruments are to be considered in the process. 

Considering Other Market Proposals: ISDA, SIFMA Study 

In an attempt to guide rule makers, other market organizations considered various techniques. In 

January 2011, ISDA and SIFMA published a study entitled "Block trade reporting for the over the counter 

derivatives markets." In such a study, the author considered various markets and cautioned rule makers 

not to set block size thresholds too high because too high a threshold would result in a loss of liquidity. 

The author considered 'good' and 'bad' examples of where market liquidity was impacted as a function 

of large trade size. ISDA cited the TRACE credit reporting system as a 'good' example where liquidity 

was not negatively impacted by block trade sizes. He also cited negative examples-that of the London 

Stock Exchange's 11Big Bang" in 1986 and certain select interest rate futures markets. 

Although thoughtful in certain respects, we found the ISDA study to be somewhat limited in many 

others with regard to method and conclusion. 

ISDA TRACE Example 

The TRACE trade reporting systems is not a good basis for comparison. TRACE is not a trade execution 

venue, but is a post trade reporting system, more similar to an SDR than to a SEF of DCM. 

TRACE is not a block trade reporting system. TRACE does not consider available pre trade liquiditymarket depth or market breadth--for corporate debt instruments, not does it set block trade sizes for 

any particular instrument. Nor was it ever designed as such. According to FINRA, it is a post trade 

reporting system designed 1) to bring basic post trade transparency to the US corporate bond market 

and 2) to capture post trade data so that regulators can ((take a proactive role in supervising the 

corporate debt market."

5 

ISDA does correctly note that TRACE has different reporting requirements for trades of $5 million 

notional or more. However, trade size of five million is not a 'block' corporate bond trade in the 

institutional markets. 

5 See http ://www. finra .org/1 nd us try /Com pliance/Ma rketTranspa rency /TRACE/FAQj 

8 
It is well established in the corporate bond market that $5 million notional is actually a 'round lot' or 

standard minimum size increment in which institutional market practitioners trade with each other. Any 

increment less than $5 million is considered by the market to be a small trade or 'odd lot' typically not 

traded by institutional customers and usually traded by the 'odd lot' desk at a bond dealer. 

To assert that $5 million is a block trade not only ignores accepted market convention/ but also 

misjudges the definition of a block trade. As discussed early, the CFTC considers block trades which are 

those trades that cause 'significant price impact' or whose size is so large that it cannot immediately be 

absorbed by all the current bids or offers in the marketplace during a given time period. Simply put, for 

investment grade corporates, trades of $5 million in size do not meet this definition because they are 

readily absorbed by current liquidity in the marketplace. 

ISDA Futures Markets Examples 

ISDA also considers block trading rules and liquidity in certain futures markets to help guide rule makers 

in their block trade threshold determinations for the swap markets. To determine appropriate block 

trade thresholds, ISDA recommends that you consider the market's ability to absorb or 'offset' a block 

trade based on current market trade volumes. Simply put, by looking at trade volume data relative to 

the mandated block threshold--how quickly can the market absorb (or offset) the block trade? 

To determine how quickly the market can absorb a block trade, ISDA's considers how many block trades 

could trade during the mandated trade delay or given interval. To arrive at this, the ISDA approach is in 

two steps. First, determine the volume per block trade interval by taking total daily volume divided by 

the number of actual intervals during the trading day. Second, determine the absorption rate--how 

many block trades will the market absorb during the given time delay or interval. 

Step 1: Volume Per Interval (VPI) =Total Volume daily/# of Reporting Intervals 

Step 2: Absorption Rate= Volume Per Interval /Block Threshold 

According to ISDA, the result will show that too low an absorption rate and the block threshold is set too 

high, liquidity is harmed (thus the block trade threshold needs to be set lower). Too high an absorption 

rate and the market can readily absorb the block size, market liquidity is not hampered, and thus the 

block trade threshold is appropriate. 

To illustrate this approach, ISDA considers certain interest rate and commodities futures markets. We 

focus on their interest rate futures analysis. 

Futures Block YTD2010 * Reporting Vol Per Absorption 

Contract Threshold (BT) Avg Daily Vol Intervals Interval {VPI} Rate {VPI/BT} 

Fed Funds 2,000 52,009 78 667 0.33 

Eurodollars 4,000 1,941,931 78 24,897 6.22 

Treasury 5 yr 5,000 509,712 78 6,535 1.31 

Treasury 10 yr 5,000 1,159,612 78 14,867 2.97 

Treasury 30 yr 3,000 326,481 78 4,186 1.40 

Trading data for November 21, 2010 CME Group. 

Figure 4. Absorption Rates for Interest Rate Products 

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In Figure 4, we consider some of the ISDA results for fed fund futures, five year treasury futures, and 

thirty year treasury bond futures. For these interest rate futures, ISDA claims an absorption rate of zero 

(actually .33) for Fed Funds, and an absorption rate of 1 (actually 1.31) for Five Year Treasury Futures 

and an absorption rate of 1 (actually 1.40) for Thirty Year Treasury Bond Futures. 

That these markets can barely absorb one block trade per five minute trade delay interval, if at all, ISDA 

asserts "Block trades in interest rates products cannot typically be offset during the reporting delay 

despite significant activity in these contracts." 6 Thus, according to the ISDA method, block trade rules 

are far too high for these futures markets. Indeed, such a conclusion ties back to the broader theme of 

the overall study-that rule makers should be cautioned not to set block thresholds too high or a loss of 

liquidity in the market will result. 

But to declare that the five year treasury and thirty year treasury bond futures markets suffer from low 

liquidity is to ignore a well-known fact-these two futures markets are two of the most liquid markets in 

the world. There is ample liquidity in these markets and has been for some time. Indeed with the 

introduction of electronic execution, volumes have only increased. 

In fact, these markets are as liquid as two other interest rate futures markets the ISDA study fails to 

consider: Eurodollars and the 10 year treasury futures. It is well established that the Eurodollar future 

is the most economically equivalent to the interest rate swap. Market practitioners routinely trade 

between the two and hedge one with the other. 

To consider block trade rules for interest rate swaps, one should certainly look to the Eurodollar futures 

market. In Figure 4 above, we do just that. We notice that using the ISDA absorption method, 

Eurodollars can absorb a healthy 6.22 Block Trades of 4,000 contracts each five minute interval. Clearly, 

this result shows a vibrant and liquid market when considered by ISDA standards. 

The same is true for the 10 year treasury future, which the ISDA study also neglects to include. We 

notice that using the ISDA absorption method, 10 year treasury future can absorb a healthy 2.97 Block 

Trades of 5,000 contracts each five minute interval. 

With such high rates of absorption observed for Eurodollar and 10 year note futures, why did the ISDA 

study chose to ignore these markets? 

Aside from neglecting to consider other key interest rate futures markets-more akin to the interest 

rate swap market--the ISDA absorption method is itself somewhat limited. The ISDA absorption test 

wrongly assumes that trade volumes per time interval are a constant. This is quite an assumption. 

Trade volumes are not constant but vary significantly through the course of a normal trading day. 

US 5 YR note (CBT) Mar12 

Volume at 5 minute Intervals for 2/1/2012 

6 Page 10. "Block trade reporting for over-the-counter derivatives markets" {ISDA-SIFMA, January 18, 2011). 

10 
The above table shows that interval analysis for the five year note future for 2/1/12. It clearly shows 

that volumes varied as widely as 20 contracts (minimum) and 12,819 contracts (maximum) for all five 

minute intervals during the trading day with a mean of 2,282 contracts. 

More importantly, the ISDA absorption method neglects to consider liquidity and market absorption 

expressed by Market Depth directly and the Market Breadth more broadly. The ability to absorb a block 

trade should be measured not by rates of trading alone, but should also consider the availability of 

orders in the market place-- bids and offers--at the current price or near current price. 

The question is not---what just traded, but are there enough bids to absorb the block trader's large sell 

order and, likewise, are there enough offers to absorb the block trader's large buy order. The Market 

Depth test directly addresses and quantifies this with a specific block threshold. Market Breadth then 

considers market depth-bid and offer-- availability in swaps adjacent to and most likely to be used as a 

hedge by the swap trader or market practitioner. 

ISDA Analysis of the CFTC Block Trade Test 

Finally, ISDA considers the CFTC Block Threshold test by applying it to the 5-10 interest rate swap market 

with data from Tri-optima. It determines that the Multiples of Average Trade test would give a 

suggested block size of $375 million and the 95% Percentile Distribution test would give a suggested 

block size $250 million for 5-10 year interest rate swaps. 

That this would require 98% of the market to report trades, as ISDA asserts, remains to be seen. We 

were unable obtain such data to run the same analysis. 

That said, although percentile requirements in the nineties may seem high for the interest rate swap 

market, they are not inconsistent with other liquid markets. 

Observed Percent of 

Market Block Trades 

Interest Rate 

Futures {CME) 1% 

Crude Oil 

Futures {NYMEX) <4% 

U.S. Equity 

Index {CME) <1% 

Cash Equity 

(NYSE) 13% 

Trading data for 1/27/201 2-2/2/2012, CME Group. 

Nasdaqtrader, MonthlyMarketSummary December 2011 

Figure 5 Percentage of Trades that are Block 

In Figure 5, we consider the percentage of block trades in other transparent marketplaces. We observe 

that for interest rate futures they are equal to 1% of daily trade volumes, while they are less than 4% for 

crude oil futures and less than 1% for equity index futures. We notice that for less generic and more 

11 
diverse cash equities market place at the NYSE, the percentage of trades the execute as block increases 

to 13%. 

Therefore, the range in these marketplaces lies between the 99th and 87th percentiles for trades which 

are block, with generic and focused products like interest rate futures and equity indices tending to the 

higher of the block percentile range or 99th percentile and the less generic, less homogenous products 

tending to the lower 87th percentiles. 

Blackrock, in its comment letter, stated that the 95th percentile may be too high for interest rate swaps 

and instead suggested the 75th percentile. Unfortunately, they gave no justification for it. 

We would argue something different. Given that most markets observed fall between the between the 

87th and the 99th percentile range for block trades, regulators should be mindful to set the final OTC 

Derivative Block Threshold not only firmly within 87-99 range, but rule makers should place it firmly in 

the nineties, if such a setting is to properly account for interest rate swap liquidity relevant to other 

traded products. 

Conclusion 

Rule makers should be mindful not to set block trading sizes too high such that liquidity or transparency 

is negatively impacted. But trade size must be seen relative to its own market place. The interest rate 

swap market is one of the largest markets in the world-it is estimated to be at least $300 Trillion today 

or a staggering twenty dollars of swap for every dollar of US GDP. Average trade sizes can range in the 

tens or hundreds of millions of dollars. Consequently, it should not be considered unusual to set block 

trade thresholds in the hundreds of millions or even billions. 

The SDMA study proposes a threefold test that includes 1) Market Depth 2) Market Breadth and 3) the 

multiples of average test for optimal block threshold determinations. 

First, unlike the ISDA method, the SDMA Market Depth test considers orders-bids and offers-or 

available liquidity in the market for a given swap at a given time. It avoids considering trades and trade 

size alone. In an effort to be conservative, we consider available liquidity only from a limited number of 

dealers and ignore recurring bids and offers they may occur within the given interval once the current 

depth is swept by the block trade. 

Second, with the Market Breadth test, we consider available liquidity in hedging swaps adjacent to the 

'focus' swap that traders routinely use as hedging vehicles. Again to be conservative, we ignore swaps 

non adjacent to the focus swap. Again to be conservative, we also ignore available liquidity from other 

hedging tools such as Eurodollar or Treasury futures. 

Further, we argue that block thresholds should be seen on a risk equivalent basis consistent with market 

practice. In our Market Depth test, we observe from sampling available liquidity of six dealers that this 

risk should be $300,000 per basis point. It is interesting to note that Blackrock suggested that the 

optimal block trading size should be $300,000 per basis point in its comments letter.

7 

Finally we examine trade count and trade size by comparing Market Depth and Breadth relative to a 

multiples of average trade test. By doing this we found that a 5x multiple is consistent with Market 

7 Page 8. Real-Time Reporting of Swap Transaction Data; RIN 3038-ADOB. (Biackrock, 2/7 /2011) 

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Depth at the low end of our test. Indeed, we observe that an llx multiple is possible as an acceptable 

multiple of average trades test when Market and Market Breadth was considered together. 

The SDMA believes that setting the right block thresholds is critical to encouraging that the 'vast' 

majority of swaps trade on regulated SEFs consistent with Congressional intent and the goals of 

transparency and greater liquidity are met under the Dodd Frank Act. 

Respectfully Submitted, 

James Cawley 

Swaps & Derivatives Market Association 

(646) 588-2011 

cc: The Hon. Gary Gensler, Commission Chairman 

The Hon. Bart Chilton, Commissioner 

The Hon. Mark Wetjen, Commissioner 

The Hon. Scott D. O'Malia, Commissioner 

The Hon. Jill E. Sommers, Commissioner 

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