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Following our initial flash analysis in mid-January (available
here) we have received a great deal of interest for a more
detailed breakdown of the activity in the global OTC interest rate
derivative markets post Brexit.
First, to recap why there was so much interest, the transitional
period ended on 31 December with no relief for European Union (EU)
firms on the derivatives trading obligation (DTO) from the European
Commission (EC) and only limited adjustments from the United
Kingdom (UK). Despite largely identical rules, no equivalence was
granted between jurisdictions. This left many firms with
conflicting and incompatible DTOs in the EU and the UK and no
apparent option other than to trade the relevant derivatives on a
US Swap Execution Facility (SEF), or in Singapore. US firms
remained subject to the CFTC's Made Available to Trade (MAT)
requirements.
Current position:
EU firms must meet the EU DTO by trading certain OTC Interest
Rate Swaps (IRS) on an EU MTF/OTF or an 'equivalent' venue,
currently limited to US SEFs and Singapore based venues,
UK firms must meet the UK DTO by trading certain IRS on an UK
MTF/OTF or an 'equivalent' venue, currently limited to US SEFs and
Singapore based venues (with some limited relief)
US firms must meet the MAT requirements by trading certain IRS
on a US SEF or an exempt foreign swap trading venue, currently; UK
MTFs/OTFs, EU MTFs/OTFs and Singapore based venues.
This means that EU, UK and US firms can access global on-venue
liquidity but, UK firms cannot access EU venues (except in some
special cases where temporary relief is available) and EU firms
cannot access UK venues. This has created some specific
challenges:
An EU firm can only trade certain IRS subject to both the EU
and UK DTOs with a UK firm on a venue that allows both firms to
comply with their local DTOs.
A UK branch of an EU firm is subject to both the UK and the EU
DTO.
IHS Markit has assessed the January 2021 data processed by IHS
Markit's MarkitWire platform to assess the impact of Brexit on
single currency interest rate swaps (IRS) trading
for the three currencies subject to the DTO in the EU and the UK
and the MAT requirements in the US, analysing market share in EUR,
GBP, and USD swaps: all, on venue, dealer-to-dealer, dealer-client,
a proxy for DTO/MAT, cleared as well as total volumes and notional
traded. In this analysis we distinguish between UK and EU
venues.
How did January 2021 compare to the prior 6
months?
EUR swaps
EUR: All Swaps
The EU MTF/OTF share has grown from less than 10% in July 2020
to a quarter as of January 2021
The UK MTF/OTF share has fallen from just under 40% in July
2020 to just over 10% as of January 2021
The SEF share has grown from less than 10% in July 2020 to
approximately 20% as of January 2021
Off facility has remained fairly consistent.
On-venue EUR swaps
The EU MTF/OTF share has grown from just over 10% in July 2020
to approximately 45% as of January 2021
The UK MTF/OTF share has fallen from just over 70% in July 2020
to approximately 20% as of January 2021
The SEF share has grown from approximately 15% in July 2020 to
approximately 35% as of January 2021
EUR Dealer to Dealer Swaps
The EU MTF/OTF share has grown from approximately 5% in July
2020 to just over 30% as of January 2021
The UK MTF/OTF share has fallen from approximately 50% in July
2020 to approximately 15% as of January 2021
The SEF share has grown from approximately 5% in July 2020 to
approximately 15% as of January 2021
Off facility has remained fairly consistent.
EUR Dealer to Client Swaps
The EU MTF/OTF share has grown from approximately 10% in July
2020 to approximately 15% as of January 2021
The UK MTF/OTF share has fallen from approximately 15% in July
2020 to approximately 7% as of January 2021
The SEF share has fallen from approximately 14% in July 2020 to
approximately 11% as of January 2021
Off facility has grown from approximately 60% in July 2020 to
approximately two thirds as of January 2021
EUR Swaps subject to a trading obligation
(DTO/MAT[1])
The EU MTF/OTF share has grown from just over 6% in July 2020
to approximately 38% as of January 2021
The UK MTF/OTF share has fallen from approximately 57% in July
2020 to approximately 16% as of January 2021
The SEF share has grown from just over 5% in July 2020 to
approximately 17.5% as of January 2021
The EU MTF/OTF share has grown from approximately 7% in July
2020 to just over 25% as of January 2021
The UK MTF/OTF share has fallen from just over 40% in July 2020
to approximately 12% as of January 2021
The SEF share has grown from approximately 11% in July 2020 to
just over 20% as of January 2021
Off facility has remained fairly consistent.
GBP swaps
The EU MTF/OTF share has grown from approximately 1.5% in July
2020 to approximately 6% as of January 2021
The UK MTF/OTF share has fallen from approximately 25% in July
2020 to just over 20% as of January 2021
The SEF share has grown from less than 20% in July 2020 to
approximately 23% as of January 2021
Off facility has remained fairly consistent.
On-venue GBP swaps
The EU MTF/OTF share has grown from approximately 3% in July
2020 to approximately 13% as of January 2021
The UK MTF/OTF share has fallen from approximately 55% in July
2020 to approximately 42% as of January 2021
The SEF share has grown from approximately 40% in July 2020 to
approximately 45% as of January 2021
GBP Dealer to Dealer Swaps
The EU MTF/OTF share has grown from approximately 2% in July
2020 to approximately 10% as of January 2021
The UK MTF/OTF share has fallen from approximately 40% in July
2020 to just over 25% as of January 2021
The SEF share has grown from approximately 10% in July 2020 to
just under 25% as of January 2021
Off facility has remained fairly consistent.
GBP Dealer to Client Swaps
The EU MTF/OTF share has grown from approximately 1% in July
2020 to approximately 2% as of January 2021
The UK MTF/OTF share has grown slightly from approximately 14%
in July 2020 to approximately 15% as of January 2021
The SEF share has fallen from approximately 20% in July 2020 to
approximately 13% as of January 2021
Off facility has remained fairly consistent.
GBP Swaps subject to a trading obligation
(DTO/MAT[3])
The EU MTF/OTF share has grown from approximately 3.5% in July
2020 to approximately 4.5% as of January 2021
The UK MTF/OTF share has fallen from approximately 55% in July
2020 to just under 30% as of January 2021
The SEF share has grown from approximately 16% in July 2020 to
just under 40% as of January 2021
Off facility has increased from approximately 25% in July 2020
to approximately 30% as of January 2021
What stands out in the raw data is that the number of trades has
fallen sharply across all categories excluding SEF which had a
small increase. This could be due to firms trading more non-MAT
products, some firms sitting out or more likely due to firms
switching from GBP-LIBOR trading (which is subject to DTO/MAT) to
SONIA (which is not) as part of the IBOR reform efforts. This
doesn't mean that the SONIA swaps aren't traded on a venue, they
typically are, it is just that they aren't technically subject to
DTO/MAT. A discussion for another day perhaps…
The EU MTF/OTF share has grown from approximately .5% in July
2020 to approximately 2.5% as of January 2021
The UK MTF/OTF share has fallen from 10% in July 2020 to just
over 6% as of January 2021
The SEF share has grown from just over 40% in July 2020 to
approximately 50% as of January 2021
Off facility has declined from approximately 47% to
approximately 40%.
These shifts in market share have created a more geographically
fragmented market in EUR and GBP and more geographically
concentrated market in USD on SEFs. What is unclear is whether this
fragmentation has impacted liquidity.
How have swap volumes and notional traded held up during
the transition?
Swaps markets are seasonal so comparing volumes between
different months is misleading. For example, January is typically a
month with robust trading activity, whereas December can be heavily
impacted by the holiday period. To compare 'like-for-like' we
looked at January each year from 2016 through to 2021.
All EUR Swaps
EUR IRS trading is down in January 2021
EUR volumes are down some approximately 15% YoY[7] and approximately
10% versus the prior 5 years' average[8]
EUR notional traded is down approximately 26% YoY and
approximately 30% versus the prior 5 years' average
It is possible that this could be explained by a combination of
some smaller firms being unprepared for the transition, some firms
sitting on the fence, and there could be a general lack of demand
for OTC interest rate swap hedging due to the current low and
stable interest rate environment. Ultimately this will become
clearer as we move through the first quarter and have more data on
activity as the market evolves.
All GBP Swaps
GBP IRS market is less clear
GBP volumes are showing a sharp decline of 38% YoY and fell 3%
versus the prior 5-year average but it is in line with 2019 and
higher than January 2016-2018.
GBP notional traded is down 43% YoY but grew 68% versus the
prior 5 years' average
The apparent YoY decline could be seen to have been driven by
an outlier month in January 2020
It is possible that this could be explained by a combination of
some smaller firms being unprepared for the transition, some firms
sitting on the fence, and there could be a general lack of demand
for OTC interest rate swap hedging due to the current low and
stable interest rate environment. Ultimately this will become
clearer as we move through the first quarter and have more data on
activity as the market evolves. However, the GBP numbers also seem
impacted by particularly robust trading last January both in terms
of volume and notional traded, which may have been related to UK
formally leaving the EU at the end of 31 January 2020.
All USD Swaps
USD IRS market is relatively flat
USD swap volumes fell 3% YoY but grew 5% versus the prior
5-year average.
USD swap notional traded fell 13% YoY and fell 10% versus the
prior 5-year average.
The USD data shows a much more measured YoY reduction in volumes
and notional traded at just 3% this could be driven by different
interest rate expectations but could also be because the USD IRS
market has not been disrupted.
EUR, GBP and USD are by far the biggest swap markets making up
~60% of the global market[9]. However, for comparison we looked at rest
of the world (ROW) as a single bucket to try to measure general
non-DTO/MAT currencies volumes in general.
All Other Currency Swaps
ROW swap volumes fell 15% YoY but grew 4% versus the prior
5-year average.
Conclusion
OTC derivative markets are global in nature and very agile.
Trading liquidity in OTC interest rate derivatives tends to
concentrate on a currency by currency basis, liquidity begets
liquidity. However, the combination of a relatively hard Brexit for
financial services, the lack of EU - UK equivalence (or a
progressive detailed financial services agreement) combined with
the equivalence available from both the EU and the UK to use US
SEFs has had the effect of driving some former UK venue volume to
SEFs and a number of EU venues, primarily in Amsterdam and to a
lesser extent in Paris. There is also generally reduced activity
both in terms of volumes and notional traded in January 2021
compared to 2020. This could be explained by low volatility, caused
by a low and stable interest rate environment. However, the impact
varies by currency and there are nuances by market segment.
Ultimately this should become clearer as we move through the first
quarter and have more data on the activity as the market
evolves.
Notes:
The calculations are generally, except as otherwise stated
based on (i) all new single currency interest rate swaps; Including
IRS & OIS (fixed versus floating), fixed versus fixed swaps and
basis swaps (floating vs floating) referencing all floating rate
options (indices), supported by IHS Markit's MarkitWire
platform
Swaps markets are seasonal so comparing volumes between
different months is misleading. For example, January is typically a
month with robust trading activity, whereas December can be heavily
impacted by the holiday period. To compare 'like-for-like' we
looked at January each year from 2016 through to 2021
There is a small quantity of US MTF/OTF trades, these are
immaterial and have been ignored for this analysis.
There is at least one UK based SEF, to protect client
confidentiality the UK SEF trades have been classified as SEF
rather than being classified separately. Therefore, SEF throughout
the analysis means all SEFs including the US SEFs plus a(ny)UK
SEF(s)
[1] The
full set of EU, UK DTO and US MAT rules are complex. As a proxy for
subject to a trading obligation we have used Product IRS (fixed
float), Tenor DTO/MAT, Spot starting (i.e. excluded non-spot but
also excluded IMM which is DTO/MAT), Roll frequency 3m or 6m and
Floating Rate Option (index) DTO/MAT.
[2] For
the avoidance of doubt these are not just swaps cleared in the EU,
they are swaps cleared at any of the OTC IRS clearing houses
globally.
[7] YoY
comparison is January 2021 versus January 2020
[8]
Comparison versus the prior 5-year average is January 2021 versus
the average of January 2016, 2017, 2018, 2019, 2020
[9]
This calculation is based on (i) all new single currency interest
rate swaps; Including IRS & OIS (fixed versus floating), fixed
versus fixed swaps and basis swaps (floating vs floating)
referencing all floating rate options (indices), supported by IHS
Markit's MarkitWire platform…
Posted 10 February 2021 by Kirston Winters, Managing Director − MarkitSERV, IHS Markit
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