Quick Takes: USD rates 2024 review
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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, Chris Barnes and Mark Bell, we take a quick dive into the headlines on the Clarus blog. 

Let's get started. Hi, Chris. Hi, Mark. 

Chris Barnes: Hi, Ali. How are you doing? 

Mark Bell: Hi, Ali.

Ali Curi: Hello, gentlemen. Welcome back to Quick Takes.

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: Today, I'm going to cover my blog, the "Dollar Rates 2024 Review." We're into 2025 now, but I think it always makes sense to take stock, have a look at exactly what happened last year, whether there are any particular conclusions that we can pull into 2025.

And to remind ourselves that there are particular things that we should really be keeping an eye out for this year. I'll start with a really big number. A really big number I'd never even come across before I saw SwapClear issue it as part of a press release about two years ago, and that is one quadrillion dollars, a quadrillion!

I actually had to look up what a quadrillion is. It's a thousand trillion. So exactly as a thousand billion is now known as a trillion. We are now in the realms of talking about quadrillions and so across all long data dollar rates products, so covering swaps, largely cleared LCH SwapClear, covering bond futures largely traded at CME. And covering cash, US treasuries trading itself, we saw over a quadrillion dollars of notional equivalent trade. Just to stress like how big rates markets are, A) that's just an enormous number, but B) I'm not even including SOFR futures in this, right? So like one of the most liquid instruments I don't even include in this rates review because I'm trying to look for equivalents that trade as well and there isn't really another competitor to SOFR futures.

So yeah, massive, massive numbers. What it means, of course, is that it's super interesting as to where these things trade. I think, you know, a second order impact of all of these numbers we're talking about is how much money are trading venues making, how much money are clearing venues making as well. And I think that's why it's an interesting exercise to talk about the volumes and eventually look at how those volumes read through to how these stocks are performing as well.

From a SEF perspective, ICAP are leading the way in terms of spreadovers and curve trading. There's some really interesting stats on the blog here in terms of the dealer-to-dealer market. Just how much of the market trades versus spreadovers and how important that market is versus other products. And then thirdly, looking at cleared volumes, LCH SwapClear across interest rate swaps and overnight interest rate swaps as well. It's got a 98 percent market share. 

That is a phenomenal franchise and it just keeps on spitting out huge, huge numbers. I mentioned that they've issued a press release where it was introduced to me that a quadrillion is an actual thing. That is the SwapClear volumes across all currencies, this blog looks only at dollars.

Finally, I would stress there's far too many kind of percentages and volume shares to really go through on a podcast. So again, I encourage you to read the blog itself, but in terms of what we can do with our data, I find this a really powerful demonstration of just how transparent our derivatives markets are.

Like before we had a product like CCP view, it was just so difficult to get a risk adjusted view of even dollar rates, which are the largest and deepest market out there. As traders, we had an intuitive feel as to whether it was easier to execute large amounts of risk in bond futures or in cash bonds or in swaps themselves.

It's really, really rewarding now to have a really mature data product that brings in the volumes across different asset classes effectively and lets you have a really holistic view of dollar rates. What that all allows us to do, tying it together, is also start to look at the average maturities that trade across these three different things.

I think there's some interesting market structure elements to pull out there. For example, CME, it looks like more and more trading is moving towards their so called ultra contracts. Those ultra contracts have a duration that is far closer to the benchmark. Because they have a much tighter basket of the cheapest to deliver bonds.

And what that is resulting in is we're seeing a extension of the average maturity of products traded in bond futures at CME. On the swap side, we're seeing the opposite whereby swaps generally are getting a little bit shorter. I would say on the swap side, that's probably as a result of two things. One is that FRAs have gone post LIBOR.

And so any of those single period swaps, which are replicating a money market future are now included as part of that dollar swaps volume. And so those large notionals and lots of risk transfer, potentially even convexity trades versus futures. Those are showing up in the data and showing as the dollar swaps market getting a little bit shorter.

Of course, also, I would just stress that we've had a very active short end of the curve for at least 12 months now. And so I think it is a fair reflection that there is a lot of activity in short dates. Mark, I think it's a great demonstration of our different products. Are there any particular kind of trends or pieces of data I've failed to pick up on it?

Mark Bell: I think firstly, one quadrillion is obviously a very, very large number. And I remember my first few weeks in Clarus looking at the cleared Eurodollar futures and thinking how close that number was back then. And we've spoken in the week earlier about how some senior people in finance don't really understand what we do with our data. And yet quadrillion is such a large number.

But I was trying to quantify it and I looked at about 145 million households in the U. S. with a mean value of $419K for a house. The total value of the housing stock in the U.S. is about $60 trillion. So what's that close to one 17th of this number that you're talking about, one quadrillion in dollar swaps. So that number is enormous. 

But my question really is around the market itself. This is the first year that we've had no LIBOR transactions in the reports that we've done. Well, 2024 is the first year that we've had no LIBOR transactions. So given that there's no LIBOR transactions, firstly, has it made the market more accessible?

Single curve pricing, for example, is the market now more accessible because there's no LIBOR transactions? There's just SOFR. And is that reflected by someone like RTX? You've noted in your blog, take two percent of the swaps volume and are a new player, and will there be opportunity for new players to participate in this market?

Chris Barnes: Really tempted to answer with a single word which is just "yes." I have been such a proponent of RFRs from day one. I was a proponent of OIS versus OIS in cross currency space, like decades ago now. I think exactly that it makes it such a simpler market. It reduces your second order risks. I don't think it necessarily leads to larger volumes trading.

I think as we've seen the difference between Euro swaps and dollar swap markets. The Euro swap market is larger now, but entirely as a result of having two indices to trade. I would just highlight Mark that you missed one thing really, and that's that we still have Fed funds in dollars. I like to think of myself as a relatively educated observer of these markets.

I still sit here and scratch my head as to why Fed funds still exist. Let's move everything to SOFR. Let's simplify. It's positive. It leads to a very transparent market. I think the markets are in very healthy state. And I think the numbers alone show that the regulations that have been put in place, as you've highlighted, have allowed new players to come into this market, and that should be good for all market participants. 

Mark Bell: So maybe I'll answer your question. Yes, I do think it is an absolutely fantastic show of how our data can be used by CCP view data, SEF view data, and the SDR data in terms of the transparency that the dollar swap market certainly has now because of the data that the market is forced to publish.

Chris Barnes: Thanks, Mark. I think on that note, let's hand it back to Ali. 

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

Chris Barnes: I wish I'd called it just "One Quadrillion Dollars" now, but the actual title is, "Dollar Rates 2024 Review." 

Ali Curi: Chris Barnes, Mark Bell, thank you both for sharing your Quick Takes. Let's do it again next week. 

Chris Barnes: Looking forward to it, Ali. Thanks a lot. 

Mark Bell: Thanks, Ali. 

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.