Quick Takes - CAD swaps – what’s new?
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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. Welcome back to Quick Takes.

Chris, let's start with you. What's your Quick Take for this week? Which headline from the ClarusFT blog would you like to discuss? 

Chris Barnes: It's a very simple headline. It's "CAD swaps — what's new?" It's not that simple a blog. Today I'm a little bit worried. It's going to be a little bit of a rambling monologue on CAD and Canada and what's happened.

So I'm going to try and keep it to the point. But I've noticed when I've started writing these blogs, which cover a whole market, if I'd done this eight or nine years ago, it would have been a short and succinct blog because there wasn't that much data. But now as we have more and more data and we understand more and more about the data behind it, the blogs get longer and longer.

And so for the purposes of a short podcast, it makes it really hard to not do a minute of rambling introduction exactly as I've just done. Moving to the point, I think, number one piece of news for CAD. Is that CDOR, the term rate has now disappeared. It's ceased publication. So a hundred percent of volumes in CAD are now versus CORRA.

It's a bit of a shame because the CAD swaps market was one of these funny markets, a little bit like how I've spoken about Aussie and it has this bizarre market structure of trading bills against three months and bills against six months and BOB swaps and AONIA OIS is only short dated. CAD swaps in CDOR space were really funky because they traded against three month CDOR.

But the fixed leg was six months. And so they compounded up the three month payments to pay semi annually as well in CDOR. You know, it's one of these things that it's really, really niche. No other market does it. It was introduced for credit reasons before any of the swaps were collateralized. But it never changed.

CORRA swaps are obviously different. They are simpler, but you know, it's lost a little bit of nuance as a result. Because of that structure, also three sixes in CAD never really traded. So there was never really a big single currency basis market for CAD. Three's ones traded, in the short end as a result of bank funding, but three sixes term, there was always a very small market.

So I think the expectation going into CDOR cessation was always that the CAD market would manage this pretty well. I think we've seen that from the volumes. If I had to give the Canadians a score, I'd probably give them like a nine and a half out of 10. They transitioned to CORRA to an extent of 90 percent with two or three months left, which is not what we've seen in most of the other markets.

Most of the other markets have had this cliff edge. And so we've seen the CCPs convert CAD trades to CORRA that creates some really nice charts where we can point using colors that says, look, this is the exact events that has caused the outstanding notional of interest rate swaps to drop and all be replaced by CORRA swaps.

We see the same for futures as well. I wanted to talk a little bit about the overall CAD market size. It's obviously going through a cessation. It's been a really healthy market for a number of years with DV01s trading almost up at 800 million dollars of gross DV01. Per month, that's a sizable market. I think when we rank it, that means it's the sixth largest markets of all of the cleared derivatives.

It's really, really meaningful. And that's on the swap side. What our data allows us to do is also start looking at the relative size of swaps versus futures. For CAD futures, you're talking about short term interest rates. So now versus CORRA and also government bond futures. And one thing I noticed when I was going through the data is that we've seen a really significant growth in the volume of Canadian bond futures trading over the past five years.

Volumes have more than doubled. And so the bond futures in Canada are becoming now a really significant market. When I saw that it started me thinking and thinking, okay, so if these exchange traded products are becoming entrenched in Canada and more and more popular and traded more, what does that mean for SEF trading?

In many ways, I think of SEFs as like an exchange light for swaps. And when you go in and look at our data, we see that 85 percent of CAD swaps are reported as executed on SEF. That's up from 50 percent over the past five years. And we've seen really significant volume growth as well. When we look at where that volume growth is coming from, I think it's fair to say that it's not really happening in the dealer space, but where it is happening is on the dealer-to-client SEFs specifically trade web really have seen huge growth. Bloomberg also have seen a growth. And I think this speaks of generally how SEFs are expanding. They're expanding really on the workflow side.

If you're captured by a trading mandate that says you have to execute dollar swaps or euro swaps on a SEF, then you scramble to meet the regulations first. But by extension, once you're plugged into that SEF and you're doing dollars and euros, if the liquidity is there, you may as well extend and start doing CAD and sterling and yen, et cetera, just for the electronification benefits.

We have spoken on this podcast in the past about "inshittification" and how some of these regulations can just make markets worse and more complex. I think this is an example that is not "inshittification" and is showing how actually end users of swaps are saying this is really beneficial and we are voluntarily choosing to trade on SEF.

I'll finish there. Amir, any questions?

Amir Khwaja: Yeah, sure, Chris. So it's interesting, the volume increase on SEFs. So I do wonder how much you think that's related to the fact that we've gone from a nuanced market with compounding, et cetera, and non standard compared to global markets to a very standard product.

So that could make it easier for new firms to trade and for SEFs to gain share, right? 

Chris Barnes: It could, it might also be related to more and more list trading and compression and moving of packages generally, which I think would also speak to the fact that CORRA, as you say, is more standardized. So it's easier to find a truly risk neutral package for CORRA.

And so people are potentially trading, a portfolio of a hundred CAD swaps now. Whereas even three years ago, that would be unthinkable. That would explain why we're not seeing a big increase on the D2D SEFs. It's more of a processing and simplifying of portfolios. 

Amir Khwaja: And I guess the other question I simply have is, it is very impressive, the success, the rapid adoption of CORRA over CDOR compared to any other RFR chain from SOFR to SONIA, right?

It's been phenomenallywell done towards the end. So I guess you think maybe it's a small, more domestic market or lessons have been learned, from other transitions? 

Chris Barnes: I think the lesson is very clear. It was really difficult to be the first market and there are huge benefits in being a close follower.

And obviously all of the Canadian market participants are active in dollars. So they already had experience in transitioning away from LIBOR to SOFR. And so they've been able to directly leverage the same people, the same teams for the transition from CDOR to CORRA. I would also say, of course, dollars was the most complex because it had such a big non linear options market, which is far more complex to move.

I think for markets like CAD and Aussie, which naturally have much, much smaller option markets, it's been a simpler process. 

Amir Khwaja: Great. Thanks, Chris. 

Chris Barnes: Ali, back to you. 

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

Chris Barnes: The title, "CAD swaps — what's new?" 

Ali Curi: Great. Short and sweet. That works.

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

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

Amir Khwaja: 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.