Hi, I am trying to find out how much do broker dealers make on OTC interest rate swaps annually. My approaches are as follows: (1) Get the Interest rate swaps OTC notionals traded in $bn from bis.org. Multiply this with the average spread on interest rate contracts that broker dealers make. Problem: I am not able to get average spreads on interest rate swaps. (2) Look at 10Ks of JPMC, UBS, CS, GS etc to find out how much they make on interest rate derivatives trading (assuming ~70% of that is OTC interest rate derivatives, need to verify this number as well). Problem: how much a dealer is making on interest rate derivatives on OTC specifically is hard to get. --------------------------- wondering if anyone can offer suggestions as to how to better my approach / new data sources / new approaches. pls help me!!!
I think your approach is good. It is pretty difficult to gauge the spread that brokers/dealers make but a good way may be to do a valuation per Bloomberg of a standard swap, then get quotes on the same instrument by a few large banks and see what the difference is in the fixed rate between the bank and the Bloomberg rate. This can be done by calculating the break even rate given a certain notional schedule. You can also do it in Excel with Solver. Another thing you may try to do is determine the bid ask on the Libor/Swap curve and see if that tells you what they are buying and selling at. Just a thought. I deal with IR swaps daily and have seen on average about $20k the banks make per trade. There is also a small credit component as well since swaps are traded off of the exchange.
i’m trading irs, so here are some insights: take into account the tiering of customers. on CSA customers market makers show (only valid for liquid markets like USD, EUR) bid/offer spreads up to 10y with only 0.5- 1bp. so assuming equal flows on bid and offer its simple to compute p&l (in reality thats not the case as you have to hedge for example with futures, so be a bit more conservative). when it comes to non-csa counterparts margins are extremely different (from no margins at all for cross selling purposes to 20 or more bp for project customers where the desk is not in competition with other banks). so what you need is a pretty good idea of the (average) structure of a brokers customers. if you can break that down give every customer a weight, an average margin and an average bpv (depending on nominal and maturity) per deal. but be cautious with whatever you come up with because it can be only a rough estimate and everything is before other costs (all that mid- and backoffice things). what i said is only true for vanilla irs stuff, if your pupose is to include ccs and vega-products - good luck!
Wow, thanks so much Monte Carlo and IRS - Trader!!, that gave me good data points to start with 
In the meanwhile I did the following and would love your thoughts on this: For approach 1: from BIS, I got Notional amounts outstanding for IR contracts to be 449,793$bn in 2009. If i assume a spread of 0.01%, average amount of money that banks make on IR Contracts should be >449,793X0.01%= $45bn. For Approach 2: I looked up bank trading data from OCC, and found out that US banks roughly made $14.5Bn on IR contracts in 2009. I also extrapolated US’s share of derivatives trading which came out to be 33% of world, this 14.5Bn of US IRC revenues leads to roughly 14.5/33%= $43bn for worldwide revenues on IR contracts. Looking at above two approaches (45 v/s 43 bn) I am inclined to believe that actual average spreads are in the range of 1bps only for overall IR Contracts at macro level (ofcourse, this is only a ballpark figure and I understand there are huge variations when it comes to specific contracts). What are your thoughts on this?? Monte Carlo - you said banks make on an average 20K per trade, what do estimate the trade size to be? (assuming $100 mn avg trade size, spread comes to ~ 0.02%=2bps) Secondly, based on our CFA text (:P) and also from what I read from miscl. sources, dealers often use IR contracts to hedge FX risk… should I also include FX contracts in my analysis? (I am trying to size OTC derivatives market, FX and IR as such makes around 81% of all OTC traded.)
@approach 1: i would say you misspecified this one. what you need is the incremental amount (delta 08 09). basically there are other disadvantages of this computation because it doesn’t correct for some changes in the market. for instance: counterparty risk has much more attention with the financial crisis. what dealers did since 08 or even before was unwinding a massive amount of swaps which were redundant because they were only held for hedging purposes (big players players reduced their outstanding amount of irs by hundreds of billion (each dealer not total) dollars) --> search for “Trioptima” on google for more details. these unwinds have changed outstanding amount but of course not the amount of new deals and margins (unwinds a market mid). @approach 2: can’t say anything about data quality and your sources but this approach sounds much more reasonable because it takes into account only new deals. @ 20k per deal: whats the rationale for that number? this has to be proven…in my opinion customer, notional and maturity drive margins. if you come up with resonable proxys and end up with 20k, go for it, but be cautious and prove your position. @ FX for sure it drives IRS market: whenever you have in- and outflows of fixed amounts of FX you bare interest rate risk (the longer for today the more) in the respective currency. so what you do is hedge it via IRS. so your approach would also include fx-swaps and ccs
Avg bid/offer on liquid buckets like 2s, 5s,7s and 10s Swaps is within 1 bp these days ( for standard vanilla OTC IR Swap). So take the net notional x .5bps ( aggresive estimate). Now they dont just make this money. Swap dv01 expsoure is hedged and aka also funded by buying/selling Treasury’s. Hence its not that easy to take outstading notional. Most of the Swaps deals are also collaterlized ( fully funded - refer LCH’s website) Secondly there is a distinction b/w brokers ( like cvg) vs. dealers (like goldman,barcap). Brokers make money on more non standrad products’ when called by trader’s. Dealers make wider spread when market making non-standard or less liquid products ( like averaging swaps or CMT Swap etc) when called by their Sales guy.