Margins on dollar-denominated swaptions and constant maturity swaps (CMS) have collapsed in the past two years. According to one prominent dealer, three years ago, on a CMS or swaption trade with a one-volatility-point bid-ask spread, a dealer earned about a quarter of a volatility point; 18 months ago, that had halved. Today, dealers earn no volatility on many trades.
Dealers and their clients say three things have combined to crush the margins on these two volatility products: consolidation
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