MAC instrument volumes accounted for only about 5 percent of notional this year.
Market Agreed Coupon (MAC) interest rate derivatives have gotten off to a slow start this year. Granted, the transition to SEF trading of standardized derivatives and the onslaught of new regulations has given swappers a lot to do. Despite being stuck at about 5 percent of notional, according to Tod Skarecky of Clarus Financial Technology, MACs may see greater adoption as the market gets used to them.
MACs have some interesting properties. They have standard coupons, tenors, IMMs and CUSIPs. They are cheaper and easier to trade than standard OTC rate derivatives, which means hedgers may be willing to take on some basis risk to achieve those savings.
Bloomberg was the first SEF to trade a MAC, back in November 2013. The instruments got a boost when ISDA published a standard MAC confirmation this past April. Nonetheless, trading in these instruments (except during the quarterly rolls, when it spiked) has been lackluster.
Nonetheless, their advantages could be compelling. Mr. Skarecky points to a number of positives:
- Managing line items in a cleared world is easier because they naturally compress, a la futures.
- Additional swap line items of swaps are a Basel III no-no.
- Standardization promotes liquidity; and liquidity promotes more liquidity.
- Firms looking to take a view on 5YR risk want to have the luxury of getting in today and getting out tomorrow without any residual basis risk.
- Firms looking to hedge specific dates may determine that the cost savings and liquidity in MAC contracts outweigh the associate basis risk.
With the interest rate hedging world increasingly constrained by capital requirements, companies may well find that the simplicity of the MAC structure and its low cost are worth a little basis risk.