Clarus Financial Technology

CCP Basis and Volume in Major Currencies

Almost a year has passed since we last looked in detail at CCP Basis, which just goes to show how normal and accepted this has become in the market. Since the shock emergence of the CME-LCH Basis Spread in June 2014, we have seen regular trading of CME-LCH Switch trades to manage the CCP Basis risk and the emergence of an LCH-JSCC Basis in JPY Swaps and an LCH-Eurex one in EUR IRS.

In this article I will look at recent data for the major swap currencies, USD, EUR, JPY and AUD.

Background

For instruments that are economically the same, (if I am paying Libor 3M every quarter, I expect to receive the same stream of fixed cash-flows) it is non-intuitive that the fixed rate (price) should be different depending on which CCP clears the trade.

We have covered the reasons for the price difference in a number of blogs (see here and here). In summary these boil down to an asymmetry between payers and receivers at a CCP, requiring dealers to hedge at a different CCP and paying two lots of gross margin; the cost of which they need to recover in the price.

USD Swaps and CME-LCH

Lets start with the largest currency and the one we have the most transparency for.

First USD Swap outstanding notional YTD at CME and LCH.

Outstanding Notional USD IRS in million

So massive amounts of USD Swaps are cleared at each of these CCPs.

Next lets look at the YTD CME-LCH Basis price history.

USD LCH-CME Basis Swaps

And next the volume of Switch trades that we see to manage this CCP Basis risk.

(These are trades where parties agree to simultaneously receive fixed at one CCP and pay fixed at the other).

 

CME-LCH Switch Weekly Volumes DV01 millions

So certainly active trading each week in significant size to manage risk or take advantage of the CCP Basis.

Thats it for USD.

EUR Swaps at LCH, Eurex and CME

Next EUR Swap outstanding notional YTD at CME, Eurex and LCH.

Outstanding notional EUR IRS in millions

Compared to USD, which was 75% to 25%, we have a much higher concentration in EUR outstanding notional.

What does this mean for the existence of a CCP Basis in EUR?

Lets look at the YTD LCH-Eurex Basis price history.

EUR LCH-EUX Basis Swaps

The EUR LCH-CME Basis by contrast is static having been at  -0.3bps, -0.4bps and -0.85bps for 5Y, 10Y, 30Y for most of the year, only recently 30Y narrowing to -0.3bps.

Next it would be good to see the volume of CCP Switch trades and MiFiD II transparency certainly promised such data, but those of you that follow our MiFID blogs will know that it is a challenge to even answer simple questions like how much EUR IRS 10Y trades on a given day, let alone more nuanced ones like how many EUR IRS 10Y LCH vs Eurex Switch trades.

I remain in hope that in the near future we will be able to answer such questions.

JPY Swaps at LCH, JSCC and CME

Next JPY Swap outstanding notional YTD at CME, JSCC, LCH.

Outstanding Notional in JPY IRS in Yen millions

So not too dissimilar to the split we saw in USD, but this time LCH the smaller party.

I was going to look next at the LCH-JSCC Basis price history, however unfortunately I have run out of time to do so before deadline to complete this article.

So you will have to trust me when I say that it is volatile in a similar manner to USD and refer to earlier blogs where I cover this, see LCH-JSCC Basis: An Update.

As for CCP Switch trades, unfortunately the transparency in the Japanese market from Trade Repositories or ETPs does not provide such granular insight.

Now the question I want to end with is: does it follow that whenever there is significant volume at more than one CCP, there is always a basis (price difference) between the same product cleared at each CCP?

AUD Swaps at ASX and LCH

Lets turn to AUD Swaps outstanding notional YTD at ASX, CME and LCH.

Outstanding Notional in AUD IRS in AUD millions

Not too dissimilar to the split we saw in USD.

Final Thoughts

So we should expect an LCH-ASX Basis in AUD Swaps.

However there does not appear to be one. Why?

I can only assume because some of the requisite conditions for a CCP Basis are not present.

The liquidity pool at ASX, while smaller, must have evenly matched supply and demand from payers and receivers and the maturities cleared shorter in tenor, so dealers do not have to turn to LCH to balance their positions.

So while dealers have become wary of a CCP Basis emerging, it need not exist.

And if it does emerge, the market will trade it to manage risk.

It will be interesting to keep an eye on Swap markets in 2018 and 2019.

As regulations and political events unfold.

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