March 2016 Swaps Review: Compression Trades Tell the Story

By Amir Khwaja, Clarus Financial Technology

Originally published on TABB Forum

Swaps compression activity was exceptional in March, helping drive a jump in on-SEF trades and propelling Tradeweb ahead of Bloomberg in the race for SEF market share.

Let’s take a look at Interest Rate Swap volumes in March 2016.

First the highlights:

• On-SEF USD IRS volume in March 2016 was > $1.25 trillion.
• For price forming trades, DV01 was 10% lower than Feb. 2016.
• Butterfly trade volumes were up and Outright volumes were down.
• USD SEF Compression volumes were exceptional, at > $240 billion.
• On-SEF vs. Off-SEF for price forming trades was 64% to 36% in March.
• USD Swap Rates were up, reversing the Jan. and Feb. downwards trend.
• SEF Market Share shows Tradeweb first, taking over from Bloomberg.
• Tradeweb gain are due to its larger share in Compression and Roll activity.
• CME-LCH Switch volumes were the lowest since Oct 2015.
• Global Cleared Volumes show LCH SwapClear increasing its share of USD Swaps.
• And LCH SwapClear significantly increasing AUD OIS Swap volumes.

Onto the charts, data and details.

USD IRS On-SEF

Let’s start by looking at gross-notional volume of On-SEF USD IRS Fixed vs. Float and only trades that are price-forming – so Outrights, SpreadOvers, Curve and Butterflys:

aa resized 600 

Showing:

• March 2016 gross notional is > $1.25 trillion.
• (Recall, capped trade rules mean this is understated, as the full size of block trades is not disclosed.
• A little lower than February 2016, by 2%.
• Compared to March 2015, gross notional is down 4%.

And splitting by package type and showing DV01 (adjusted for curves and flys):

bb resized 600

Showing:

• In DV01 terms, March 2016 was 10% lower than February 2016.
• Overall > $500 million of DV01 was traded in the month.
• (Recall, capped trade rules mean this is understated.)
• Butterfly DV01 was higher in March 2016 than any of the other months shown.
• Outright DV01 was lower in March 2016 than any of the other months shown.

And gross notional of non-price forming trades – Compression and Rolls:

cc resized 600

Showing:

• Exceptionally high Compression activity of > $240 
• Higher than the > $220 billion in Feb. 2016.
• Far higher than January 2016 and the corresponding months in 2015.
• And higher than the > $204 billion in March 2015.
• IMM Roll activity is significant, as we would expect in an IMM month.
• With > $63 billion in March 2016, compared to > $51 billion in March 2015.
• Evidencing larger positions in IMM or MAC Swaps being rolled.

USD IRS Off-SEF

Comparing On-SEF vs. Off-SEF for price-forming trades as percentages:

dd resized 600

• Showing that On-SEF vs. Off-SEF for March 2016 was 64% to 36%, the highest On-SEF percentage in the months shown and noticeably higher than the 57% to 43% ratio in March 2015.

USD IRS Prices

Let’s now take a look at what happened to USD Swap prices in the month:

e resized 600

Showing that:

• Rates were up with the curve steepening.
• Reversing the downward moves we saw in January and February.
• Short rates up 1bps, medium up 6 bps, and long rates up 8 to 9 bps.
• Reflecting the general improvement in global markets.
• EUR, GBP, JPY Swaps.

Let’s also take a look at On-SEF volumes of IRS in the other three major currencies:

f resized 600

• Showing similar volumes in March to those in February.
• The overall gross notional in these three currencies of > $237 billion in March is just 19% of the USD volume of $1.25 trillion.

And then looking at SEF Compression activity:

g resized 600

• Showing that compression in EUR at > $38 billion was significantly higher in March than other months shown.

SEF Market Share

Let’s now turn to SEF Market Share in IRS including Vanilla, Basis and OIS Swaps.

We will start by looking at DV01 (in USD millions) by month for USD, EUR, and GBP and by each SEF, including SEF Compression trades, and use a chart to compare the relative share in March 2016 with the prior two months.

h resized 600

Showing that:

• Overall, March volume is higher than February.
• Which the prior SDR charts show is down to Compression and Roll volume.
• Tradeweb has the highest volume in March, overtaking Bloomberg.
• Due to its larger share of Compression and Roll activity.
• Bloomberg is second with similar volume to Feb.
• ICAP-IGDL is slightly down from prior months.
• Tradition is slightly higher than Feb and significantly higher than Jan.
• Tullet is up from Feb.
• BGC is down from Feb and similar to Jan.
• Dealerweb is similar to Feb.
• TrueEx down from Feb and similar to Jan.

CME-LCH Basis Spreads and Volumes

We can also isolate CME Cleared Swap volume at the major D2D SEFs (on the assumption that this is all CME-LCH Switch trade activity). Let’s look at this for the past 3 months:

i resized 600

Showing:

• Overall volume in March was $35 billion gross notional.
• Significantly down from the > $50 billion in prior months.
• And the lowest month since Oct 2015.
• Tradition mostly held on to its volume.
• IGDL was significantly down.

CME-LCH Basis Spreads remain at similar levels to the end of Feb., with 30Y at 2.65 bps. The lack of volatility in the month either was the cause or effect of the lower CCP Switch volumes.

Global Cleared Volumes

Now let’s look at Global Cleared Swap Volumes for EUR, GBP, JPY & USD Swaps:

j resized 600

Showing:

• Overall Global Cleared Volumes similar in March to Feb.
• LCH SwapClear volume at $18.3 trillion is similar to the prior month.
• CME at $2.66 trillion looks higher than prior month (more on this below).
• JSCC at $607 billion is down from Feb but above Jan.
• Eurex is up a bit, but at $14.5b in the month. still tiny compared to the rest.

Let’s drill-down to the daily numbers in March for CME:

k resized 600

Showing that:

• 23 March has $1.25 trillion!
• Clearly this cannot be new trade volume.
• And as we have observed in the past, this is TriOptima compression showing up as volume.
• We can verify this, as the Outstanding Notional does not jump by $1.25 trillion over this period.
• As an estimate, let’s assume that $1.2 trillion of the $1.25 trillion is compression.
• Manually adjusting the CME March volume of $2.66 trillion results in a new figure of $1.46 trillion.
• Which is similar to CME’s Jan 2016 volume.

A comparison of USD Swap volume at LCH SwapClear and CME gives 84% to 16% for all volume in March.

Client Clearing volume for USD Swaps shows LCH SwapClear at 77% and CME at 23%, which is higher than the 69% to 31% in Jan. and Feb.

And before we end, let’s look at the volumes of AUD, HKD, SGD Swaps (including Vanilla, OIS, Basis, Zero Coupon):

l resized 600

Showing:

• LCH SwapClear has the largest volume.
• And is significantly up, increasing 47% from Feb. (which was up 75% from Jan.).
• Driven largely by increasing AUD OIS volumes.
• ASX figures for March are not yet available to us.
• ASX volumes for Feb. were up 64% from Jan., so also on the up.
• CME and SGX just register on the chart.
• HKEX not visible.

That’s it for today. A lot of charts – 12 to be precise. Thanks for staying to the end.