Clarus Financial Technology

BRL Interest Rate Swaps

The CME are due to begin clearing Brazilian Real interest rate swaps by the end of August 2015.  I thought it worthwhile to uncover what we can see in the data prior to their launch.

What is a BRL Swap?

BRL swaps have a few peculiarities.  Let’s have a brief look at the characteristics:

The CME info-sheet on this product makes clear that all settlement will happen in USD, and the maximum maturity allowed will be 10 years, presumably that is where liquidity starts to become thin.

I spent a couple years in Sao Paulo one summer (see what I did there) – and I can first hand tell you that valuing CDI swaps is not terribly straightforward, particularly when you try to jam them into a legacy trading system.  One of the most difficult concepts was handling on-shore vs off-shore.  The problem as it relates to BRL CDI swaps is that BM&F Bovespa have very active contracts in CDI that can be used for building a curve and valuing swaps, that is all good.  Only problem is that these contracts represent on-shore (Brazilian) business.  Once BRL is transacted off-shore, you get into a world of tax that ends up meaning there are separate off-shore CDI rates; however there exist no true listed instruments from which to build a curve for off-shore CDI.  I have to presume CME is somehow gathering this off-shore market data information from market participants for the daily valuation.

The Data

I’ll use SDRView to look at BRL activity.  Remember this should account for US-named trading in these products.  For example, it will not account for domestic Brazil (on-shore) trading in CDI swaps.

First in terms of trade count, going back to the start of 2014, we can see trading peaked out at 143 trades in one day of November 2014, with the average standing at about 35 trades per day.  This particular chart is broken out by “subtype” – showing spot starting BRL swaps accounting for 68% of the activity.  (Apologies this is a large chart, you can click on it to enlarge).

Daily BRL IRS Trade Count. Jan 2014 – Aug 2015. Stacking by subtype.

Other notables as I ran this activity through various filters:

Let’s now look at how BRL activity stands up to other Latin American swaps.  I’ve chosen the 6 currencies for which we have seen activity since SDR inception.

Latin American Interest Rate Swaps in billions of USD equivalent per month. Jan 2014 – Aug 17, 2015.

A few things to note:

I suppose it is relevant to look at the adoption of MXN clearing since CME’s launched it in early 2014.  A quick look at stacking the MXN activity by clearing status shows us that CME has been successful in garnering nearly half of the MXN market, as of the latest August intra-month data point shows here.  I suppose they could hope for an equal performance in BRL CDI swaps:

MXN IRS activity in billions of USD equivalent since Jan 2014, stacked by Cleared / Uncleared.

Worth noting here that Mexico is due to begin mandatory clearing for dealers in April 2016, so we might expect to see some further change here, based upon the profile of the firms driving this volume.

Other Data Sets

All of our data is gathered from the Clarus View products, which normalize and enrich data from the SDR’s and SEF’s in the US.  If I take a larger perspective onto the global derivatives market and pull the most recent BIS triennial report, I can see they claim the following global MXN and BRL interest rate swap activity:

Given that the BIS numbers are from April 2013, and given the large price swings in USD/MXN and USD/BRL FX rates, we should normalize those values back to domestic currency terms using historical April 2013 FX rates:

This is helpful, as we can now say that the 5.8 billion BRL per day that we see in SDRView demonstrates that the US can see ~20% of the global OTC swaps business, given the BIS numbers as the “universe”.

Regardless it is interesting to see that the BRL market would appear about 50% larger than the MXN market on a global scale.

SEF Activity

Lastly, let’s look at which SEF’s are handling the On-SEF flow in BRL interest rate derivatives.  I have chosen to look at all Latam currencies from January 2014 to present:

SEF iRS Activity in Latam currencies, Jan 2014 – Aug 2015, in millions of USD equivalent.

This shows:

Summary

To summarize:

Lastly, one might further extrapolate that if CME can handle non-deliverable BRL, there are a host of other non-deliverable currencies – Korea, China and India come to mind – that may fit in nicely to an offshore cleared world.  We can pull the numbers on that pretty easily, but I will leave it to you to check for yourself.  If you want to dig into this yourself, log into SDRView.

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