What You Need to Know about BRL Swaps

• BRL Swaps are the second largest LATAM interest rate swap market, behind MXN.
• June 2023 saw the largest volumes traded in the past five years in BRL swaps.
• 99% of cleared volumes are at CME, but BRL clearing rates have been variable in recent years.
• There has been more and more BRL OIS reported recently despite only a single SEF listing BRL OIS products.

But first…

Before we plough into BRL swaps, did you know that the EUR Swaps market is now larger than USD? From CCPView:

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• For the first time since I was trading (i.e. a LONG time ago!), EUR swaps have traded more notional in a year than USD swaps.
• It is close – $170Trn plays $163Trn up until the middle of August 2023, so it may change before the end of the year.
• But the trend looks to be fairly consistent – the relevant size of the EUR swaps market has been increasing relative to USD for the past 5-6 years.

It doesn’t take a rocket scientist to work out what has caused this:

• EUR markets continue to trade EURIBOR and €STR.
• As a result, they still trade 3s6s basis, BOR vs OIS basis, FRAs (remember them?!), as well as IRS, OIS and Inflation.
• USD markets now trade OIS across both SOFR and Fed Funds, SOFR vs Fed Funds basis, Inflation….and nothing else (in linear products).
• The product split in 2023 shows this nicely:

I thought our readers would find that an interesting addition to their Summer reading.

Back to the topic in hand: BRL swaps!

Where do BRL Swaps Rank on the Global picture?

CCPView allows us to compare the relative size of BRL swap markets to other currencies. Taking out the “G6” – USD, EUR, GBP, AUD, CAD and JPY – we see the below:

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• Volumes in Cleared Interest Rate Derivatives from CCPView.
• The chart excludes the top six currencies by volumes (USD, EUR, GBP, JPY, AUD and CAD). These six currencies represented over 95% of total cleared volumes (back in 2019, see Four Trends in Swaps Data).
• There are A LOT of currencies here! I make 21 currencies, or 27 including the largest 6.
• For the currencies shown, the 2023 “ranking” by volume is as follows:
  • MXN 11.2%
  • CNY 11%
  • NZD 10.4%
  • ZAR 10.2%
  • CHF 6.4%
  • SEK 5.9%
  • CZK 5.9%
  • BRL 5.4%
  • CLP 5%

BRL ranks as the 8th largest “other” currency this year. BRL is the second largest among LATAM currencies (second to MXN – check out our MXN blog here).

Let’s educate ourselves regarding the BRL Swaps market.

99% of Cleared Volumes are at CME

As with other LATAM currencies, virtually all clearing of BRL OTC swaps occurs at CME:

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• CME have almost all volumes in Cleared BRL IRS.
• LCH SwapClear also offer cleared BRL, but their volumes are small in comparison.
• Whilst cross margining versus other currencies at LCH may be beneficial, it looks like CME benefit from first mover advantage. Recall back in 2015 and the hotly anticipated (by this blog) CME launch of BRL clearing.

Clearing in BRL Markets

In any blog about LATAM swaps, we cannot fail to mention the enthusiasm that the market has for clearing their OTC swaps! US SDRs are thought to be highly representative of the overall LATAM market, and the long-term split in SDRView between Cleared and Uncleared markets is very interesting;

A few things jump out here:

• June 2023 saw close to all time record volumes in BRL swaps, recording the highest volumes in the past 5 years (these are in USD equivalent).
• In terms of the percentage of the market that is uncleared (in green above) it is really variable.
• Back in 2017-2019, clearing accounted for 80-90% of volumes reported to SDRs.
• But 2021-22 saw this drop to under 50%. Why?
• We are back up to 76% in 2023.

This is very odd – is it a problem with the data? Are BRL swaps now being sent to Clearing as a post-trade process? An interesting one.

All BRL Swaps are versus CDI, but not all BRL swaps are reported equally

As Tod explained way back when;

So BRL swaps could be reported as zero-coupons, as interest rate swaps (with daily compounding) or as an OIS. In the CCP data, LCH SwapClear report volumes as Interest Rate Swaps whilst CME report them as Zero Coupons.

(And by the way, the CDI is not a risk free rate as it is based on interbank deposits, therefore has a credit element. I believe that the RFR in BRL is the “Selic” rate as outlined by B3 here.)

In the SDR data, we have seen a change in the past few years in terms of the product mix:

Would you look at that!

• Cleared OIS swaps have been reported since December 2022.
• We still don’t see these reported from the CCPs directly, although of course the “‘zero coupons” could describe either an IRS or OIS!
• The “Uncleared OIS” in orange began to be reported back in December 2020.
• It is these “Uncleared OIS” that seem to be the cause of the variable clearing rate for BRL in the SDR data.
• Obviously Cleared IRS (Fixed-Float) still exist in the data.
• I wonder if CME now allow market participants to send BRL swaps as either IRS or OIS zero coupons? Let us know in the comments below if you have any particular insights….

SEF Trading

Finally, we look at how much is traded on-SEF in BRL Swaps. From SDRView;

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• 83% of BRL notional was traded off-SEF in both 2022 and 2023.
• OIS traded off-SEF have grown to 47% of the whole market in 2023.
• Off-SEF OIS seem to be replacing off-SEF IRS (sorry for all the acronyms!).
• Both IRS and OIS can now be traded on a SEF – see below.

Looking at SEFView, we see the following market share for SEFs:

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• There is only a small amount of D2C activity, and all of this is on Tradeweb.
• The big IDB platforms dominate proceedings, with GFI number one.
• GFI had a 38% market share in 2021, which is down a small amount to 32-33% in the past two years.
• The other IDBs are competing for second spot, with BGC almost in first this year at 31% market share – massively up on their 5% showing in 2021!
• Much of this BGC increase seems to be at the expense of TP, who have declined from 41% in 2021 to 18% this year. Has a team of brokers moved from TP to BGC I wonder?

Not shown on the chart, but TP are the only SEF reporting volumes in BRL OIS products, as well as IRS. Interesting data.

In Summary

• BRL swap data is very interesting!
• CME enjoy a 99% market share in Cleared volumes for BRL swaps.
• There has been a recent increase in Clearing rate back up to 76%. One to keep an eye on.
• BRL OIS appear to be becoming an ever larger portion of the market.
• GFI and BGC are in competition to be the number one SEF in 2023 for BRL swaps.