The Year Ahead In Derivatives Trading
Along with all other markets, derivatives trading was significantly affected by the pandemic and the subsequent lockdown measures adopted to address it. As financial markets entered uncharted territory, we saw volumes spike, margin calls rise and some regulation implementation dates delayed. However, the end date for LIBOR transition has on the whole stayed fixed at December 2021 (although USD LIBOR will continue at a staggered rate until June 2023), and we continue to plan and work towards a world without new LIBOR risk from January 2022 onwards. The LIBOR transition, therefore, remains an important paradigm change for the markets, with many aspects still to resolve to ensure an effective shift.
During our recent virtual event, ‘The Year Ahead In Derivatives Trading’, esteemed guests and panellists discussed the latest from the FCA on the Sterling LIBOR transition, the views of the Alternative Reference Rates Committee (ARRC) on the progress towards SOFR, and the changing interest rate swap (IRS) landscape across both the U.S. and European markets, the shift to alternative risk-free-rates (RFRs), and the most recent market structure updates.
Highlights from the event include:
- Progress made by the FCA on the launch of the ‘SONIA-First’ initiatives that provide a clear roadmap to support the development of deep and liquid derivative markets and in facilitating a smooth and orderly transition - including encouraging signs from the recent non-linear market transition
- Insight from ARRC, the body leading the charge on the dollar markets transition away from USD LIBOR, along with the latest developments on fallbacks and key guidance principles to be used to help tackle this challenge in the months to come
- Topics ranging from hedging with RFR based swaps, to liquidity and trading of the sterling swap and swaptions markets
A commonality across all sessions was the guidance for firms not to wait until the last minute to switch over to the new RFRs. Not only could firms potentially face a lack of liquidity in LIBOR instruments at a later stage, but it is crucial that firms ensure there is enough time to set up their systems on a functional basis, as the set-up can involve more complexity than some originally expect.
Tradeweb’s Work on Alternative Reference Rates
At Tradeweb, we’ve been both supportive and actively involved in the transition from LIBOR to alternative reference rates. Robust liquidity exists across all the new indices from SOFR to SONIA to €STR, with bid/offers improving as end user activity increases. We already have 21 market makers providing liquidity in SONIA swaps, including streaming quotes for instruments with tenors ranging from one week to 50 years. Similar to SONIA swaps, our SOFR and €STR offerings are live, with 19 and 25 dealers supporting the products, respectively.
Last year, more than 400 portfolios combining SONIA with GBP LIBOR swaps were actively transitioned on our interest rate derivatives platform. In Q1 2021, SONIA-linked trading activity was up 55% over Q4 2020 on Tradeweb, with close to 200 clients actively trading the new global RFR indices.
We have been evolving our swaps offering in line with the milestones set by the regulators. Throughout this journey we have listened to our clients, and tried to solve their problems and evolve their workflows. Our shared journey is, and has always been, idea-led and collaborative.
Seamless Trading Solutions
The end of LIBOR has been a topic that has had much preparation, which has been necessitated due to the transformative effect it will have on interest rate markets. At Tradeweb, our mission is to help clients comply with regulatory change, as well as challenges, and continue to offer them the most seamless trading solutions.
Latest on Sterling LIBOR Transition - Summary of Conversation with the FCA
Changing Landscape of Interest Rate Swaps - U.K (BMO GAM) versus U.S. Views (Vanguard) of LIBOR Transition