COVID-19 has derailed many plans. One such plan was for interbank GBP swaps trading to move from LIBOR to SONIA on March 2nd.
With the market volatility around that date, it just didn’t happen. We covered the subsequent changes in GBP activity here, here and here.
The COVID-19 situation isn’t any better right now, but markets are at least less volatile.
Therefore, the FCA and the Bank of England are again encouraging “market participants in further switch to SONIA in interest rate swap markets“:
Sterling traders seem to have chosen a Tuesday this time, just to make sure no-one has any strange Monday morning foibles about trading SONIA?
We’ll keep our customary eye on the SDR tape to see what is happening throughout this week.
The Monday morning activity has been strongly concentrated in LIBOR products so far.
There have been 50 GBP LIBOR trades already today:
In the SONIA corner, we have seen only 11 trades:
- 11 SONIA trades vs 50 in LIBOR.
- £823m SONIA notional vs £2.7bn LIBOR.
- £75k DV01 SONIA vs £1.57m LIBOR.
- SONIA longest maturity 2050 vs 2070 LIBOR.
Check back regularly this week to see how SONIA activity is picking up.
Monday October 26th Recap
On the last day of LIBOR being the standard, GBP markets saw the following activity in LIBOR markets:
- 185 LIBOR trades
- £12bn in notional
- ~£6m in DV01
- 5x 50Y trades.
Whilst SONIA saw the following activity yesterday:
- 44 Trades
- £15.4bn in notional
- £1m DV01
- 5 x 30Y trades.
So we had a result with the amount of notional traded in SONIA being greater than LIBOR, but still far from the standard for risk transfer. The DV01 transacted in SONIA markets was just one sixth that of LIBOR markets.
Today’s activity (Tuesday October 27th) will have to see a real step-change for the “market standard” instrument to shift to SONIA.
All eyes peeled. No GBP reported to SDRs so far (07:40am London time).
Tuesday October 27th 09:00am London Time
An inauspicious start for the transition to a SONIA standard on the face of it. We’ve had 36 LIBOR trades versus just two SONIA trades.
However, amongst those 36 LIBOR trades, there are very few that are spot starting. There was evidently a compression package that went through of IMM starting 5Y LIBOR trades that is somewhat skewing the picture.
If we consider interbank markets to only trade spot starting (probably a fair assumption), we see a somewhat more balanced picture of activity in the SDR.
- 3 LIBOR spot starting trades. 5Y, 10Y and 20Y
- No SONIA trades.
I think we can only consider a switch to have happened to a SONIA standard if we see more 10Y spot starting SONIA traded than 10Y spot starting LIBOR.
Long way to go yet.
12:05pm London Time
There is life in these GBP markets! Retaining our spot-starting filter for the LIBOR activity, we have seen:
- 21 spot starting LIBOR trades
- £903m in notional
- £925k DV01
In SONIA markets, we have now seen 23 spot starting trades! However, 21 of those were traded as a package so I’m not sure I would count these as market standard trades.
We have had two spot starting ten year SONIA trades however. Unfortunately, we’ve had 5 such trades versus LIBOR as well. So I still don’t really see a concerted effort by the market to adopt a new standard.
18:30 London Time
Well, the end of day picture certainly looks rosier than when we took the snapshot at the half-way point.
GBP LIBOR Activity
Looking at only the spot-starting activity:
- 67 spot-starting GBP LIBOR trades were reported today.
- £2bn in notional.
- £2.4m in DV01
These figures drastically increase when we look at all activity in GBP LIBOR markets:
- 296 GBP LIBOR trades.
- £9.5bn in notional.
- £7.1m in DV01.
GBP SONIA Activity
Again, looking at just spot-starting swaps:
- 54 spot starting SONIA swaps.
- £1.1bn in notional.
- £1.1m in DV01.
Roughly speaking, we can say that twice as much risk and notional traded in GBP LIBOR standardised instruments today compared to SONIA standardised instruments.
If we now look at all SONIA swaps traded (i.e. not just the spot-starting interbank market):
- 96 SONIA trades in total.
- £25.5bn notional.
- £1.95m in DV01.
Clearly the uptick in activity between spot-starting instruments was far greater in LIBOR instruments than in SONIA today. Maybe that means it is clients who are struggling with this transition?
Unfortunately, if clients persist in asking dealers for SONIA prices, then dealers will have to effectively hedge twice if they price a LIBOR IRS (first into SONIA, then manage the LIBOR-SONIA basis).
As we said yesterday, we will continue to monitor GBP markets to see if there is a concerted shift into SONIA. It feels like only baby steps have been taken so far.
Wednesday October 28th 10:00am London time
Really interesting to see what is happening this morning in the standardised instruments.
GBP LIBOR has seen just 3 spot starting swaps, totaling £91k DV01.
On the other hand, SONIA has seen 9 spot starting swaps, totaling £380k DV01.
That is a huge difference. Enticingly, the activity in SONIA has been in 5Y, 7Y and 10Y, suggesting there might indeed be a shift underway:
Watch this space….