The last article in our CME-LCH Basis category is dated July 15, 2015 and while our regular Swaps Review does cover CCP Basis Swap Volumes, it is now nearly 3 months since we looked specifically at the CME-LCH Basis. So time to see what has been happening.
Daily Price History
Lets start with a time series of the CME-LCH basis for the major tenors.
Showing that the Basis:
- first started to widen in April 2015
- massively increased in early May 2015 (see my blog from then)
- drifted steadily down over June, July, August
- widened again from mid Sep 2015
- and has continued widening in Oct 2015
- the 30Y tenor in particular has widened the most
- reaching 2.4 bps last week, just shy of its high in May
- 10Y, 7Y, 5Y & 3Y have all widened with only 2Y holding steady
Dramatic moves indeed.
(Thank you to ICAP Information Services for providing this data).
Prices as of 28 Oct 2015
Lets look at a screenshot of the ICAP 19981 page from 28-Oct.
Showing the term structure of the basis.
Meaning that on a 30Y USD Swap, it is currently 2.23 basis point more expensive to pay fixed at CME over LCH.
Assuming a bid-offer of 0.25 bps, lets create a table of receive and pay fix rates for the 4 major tenors.
This shows that if we want to:
- Receive Fixed 30Y, we get 2.50030 at LCH or 2.52260 at CME
- Pay Fixed 30Y, we get 2.50280 at LCH or 2.52510 at CME.
Meaning that if we want to Pay Fixed, we should do this trade at LCH (all else being equal) and if we want to Receive Fixed, we should do this trade at CME.
And if all else was equal, then these prices signals would cause a change in supply and demand of Receive vs Pay at both CME and LCH resulting in the basis narrowing back down.
But clearly the reverse has been happening in the last six weeks, so all else is not equal and my earlier blog provides a possible explanation.
CCP Basis Swap Volumes
Has the widening basis had an impact on volumes of CME-LCH Switch trades?
In SEFView we have daily volumes of CME Cleared swaps at ICAP and Tradition which we assume are CME-LCH Basis trades, either outrights or curves or flys.
There does seem to be an impact, but perhaps the opposite of what we may expect. The recent two months show lower CCP Switch trade volumes with Oct much lower than Sep and Sep slightly lower than Jul and Aug.
CME vs LCH Cleared Swap Volumes
And what about the volume of USD IRS on CME vs Client Cleared USD IRS at LCH?
Using CCPView we can look at weekly volumes for the past eight weeks.
So while LCH continues to dominate the USD IRS Client Clearing volumes, we see a small uptick in CME share in the first three weeks of October, but last week reverting to early September with 70% share for LCH.
It will be interesting to see what the higher CME-LCH basis means for these volumes in November.
Thats all for today.