Quick Takes: RFR adoption Q2 2024
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Ali Curi: Hi everyone and welcome to ION Markets Quick Takes. I'm Ali Curi and every week along with my guests Amir Khwaja and Chris Barnes, we take a quick dive into the headlines on the Clarus blog. 

Let's get started. 

Hi Amir. Hi Chris. 

Amir Khwaja: Hi Ali. 

Chris Barnes: Hey Ali, how you doing? 

Ali Curi: I'm doing great. Chris, let's start with you.

What's your Quick Take for this week, which headline from the Clarus FT blog, would you like to discuss? 

Chris Barnes: All right, Ali, this week, I'm going to talk about a topic we spoke about a hell of a lot in 2023 and have not touched on anywhere near as much this year, and that is RFR adoption. So for people who are familiar with the blog and familiar with the podcast, Clarus for many years produced an RFR adoption indicator for ISDA.

This was a widely used industry monitor tool, which looked at the amount of risk being traded, mainly in the LIBOR currencies, but also looking at Aussie and Euro and later Singh (SGD) and CAD as well. And looking at how the trading moved from term rates, the old IBORs to risk free rates. I'm pretty sure that everybody in 2024 has forgotten about that now. 

Dollar LIBOR ceased over a year ago now, and exactly as markets tend to, as soon as the event risk is over, everyone forgets about it. This is a risky podcast, perhaps nobody is interested in this anymore, but I do think just from a pure kind of market participant interest, the data continues to hold value.

So I've kind of committed to writing a quarterly update to look at RFRs. It continues to be interesting for dollars because we've got fed funds and SOFR trading. It continues to be interesting in euros because euros continues to be a multi rates environment with EURIBOR and €STR trading and other currencies like Aussie are committed to term rates and risk free rates as well.

And recently this year, we've seen a cessation events in CAD as well. There continues to be events in this space, which makes the data interesting. The headlines are fairly static, I would say. So I try and give our readers a soundbite. The soundbite here would be 60, 80, 30. Those are the headlines for risk free rate trading.

What do I mean by those three numbers? I mean, roughly speaking, 60 percent of global trading now takes place against risk free rates, 80 percent of trading in the US dollar takes place against SOFR and 30 percent of trading in the Euro market takes place against €STR. Looking at those figures, 60 percent for the global market is round about there or thereabouts an all time high.

Dollars are the biggest component of this index. And so it's not a surprise to see that as the global trading is at a high, that means that the dollar SOFR adoption rate is also at an all time high. Just a note on that, I've said here dollars is the biggest component of this index. That is because we look at trading across both OTC and futures.

So dollar futures are much bigger in terms of rates trading than euro futures. If you look at just the OTC portion of this data, the Euro swaps market is now bigger than the dollar swaps market in terms of DVO1 trading. And that's largely because Euro trades as EURIBOR and €STR, therefore, you've got gross DVO1 recorded in those basis trades.

There's more risk management required for Euros to hedge that basis between EURIBOR and RFR. Therefore, there is at the moment more gross DV01 reported in euros than dollars for the swaps market. In the summary, I look at CAD as well. I think it's worth saying, as we spoke on the podcast a couple of weeks ago, Canadian market participants really deserve a gold star, I would say, in terms of their efforts towards making the cessation of CDOR as seamless as possible.

We've seen a lot of these markets transition. It is very, very unusual to see upwards of 75 or 80 percent of trading move away from the term rate a month before the cessation event. In Canada, that was not the case. I think we hit 97 percent of traded risk was against CORRA, the new RFR a month before cessation.

It was already at 60 percent in June 2023. So the cessation efforts in Canada really are worth calling out. I think as I said on our Canada podcast, I think that market participants have learned from the pain they went through of LIBOR cessation. And in terms of other currencies looking to, deprecate term rates, it seems like a well trodden path now that is easier to be a follower rather than a leader.

The only other thing that I wanted to highlight on the blog was Aussie. Aussie continues to be very, very volatile in terms of how much risk trades against AONIA. Q2 2024 was 37-40%, last year it was a little bit higher at 42 to 45%. It feels much more akin to how much trading is happening at the short end, how much trading is happening related to changes in monetary policy rather than a market structure, there is a move away from term rates to RFRs. Of course, that makes it complicated potentially for managing a cross currency position, for example, whereby you've got a term rate in Aussie and an RFR in dollars. But again, plugging a previous podcast on Australian markets, the market structure of Aussie really is messy.

It's not really a surprise to see the market persevering with term rates. On that note, I'll hand over to Amir and see if he's got any questions on a topic that has been very well trodden on this podcast already. 

Amir Khwaja: Thanks, Chris. So I like your 60, 80, 30. That's great. I think it's very helpful. So I think the question I had was a bit different.

So I know this is a weighted index, so dollars dominate. Do you, or have you, do you plan to, have you looked at some of the other currencies that haven't converted yet, like Mexican, Swedish, Norwegian. And do we, do we think they're going to follow what happened in dollar and sterling? Are they going to follow Euro and Aussie example?

Chris Barnes: For 2024, we've actually been able to create this index in a much simpler way. So previously all of the indices were built from the ground up. So I was selecting every single product type to feed in. What I do now is use the API to call a gross DV01 a single number per currency, which looks at DV01 traded just across everything.

And then I call a single API call to say how much DV01 is traded against RFRs. So it's much, much simpler now. So I didn't do any other currencies in 2023 because it didn't seem like a fair comparison and would have been a lot of work for a single blog. What it means now with this new data infrastructure behind it is that is very, very simple for us to do.

As long as the currency is flagged as an RFR currency for us, then I can run this index for literally any currency. 

Amir Khwaja: Thanks, Chris. What I'm sort of interested in is that, is Sweden, Norway, Mexico, whoever else says not reformed yet, going to follow the European example and have two multi rate, or are they going to go for one and pros and cons?

Chris Barnes: Yeah. I mean, the one that jumps to mind is Scandinavia, right? Because they're all still on term rates. There are FRS available. It would be a decent dashboard that would be similar to our €STR dashboard to see if Swedish goes first and then Noki, and then eventually Danish. 

Amir Khwaja: Great. Thanks Chris. 

Chris Barnes: All right, Ali, I think that's all we've got time for on RFRs today.

Ali Curi: Great. Thank you Chris, please share with us again the title of your blog post. 

Chris Barnes: That was "RFR adoption Q2 2024."

Ali Curi: Great. That works.

Amir Khwaja, Chris Barnes, thank you both for sharing your Quick Takes. Let's do it again next week. 

Amir Khwaja: Thanks, Ali. 

Chris Barnes: Thanks, Ali. Speak to you next week. 

Ali Curi: And that's our episode for today.

You can read more about these topics on the Clarus blog and you can follow ION Markets on X and on LinkedIn. Thank you for joining us.