Quick Takes: RFR Trading Is Now Back on Track
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[00:00:00] 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. 

Hey Ali. 

Hey Ali. How you doing? 

Doing great. It's wonderful to have you here.

Welcome back to Quick Takes. Chris, let's start with you. What are your Quick Takes for this week? Which headline from the Clarus FT blog would you like to discuss? 

This week, I'm going to be talking about RFR Trading. RFR Trading is a subject that we have published a lot of blogs on. We do a monthly blog whereby we look back at the previous month trading in RFRs.

And we look at what is traded in interest rate derivatives versus a risk free rate, and what is traded versus the old legacy term rates. And so each month we are monitoring the percentage of risk that's traded as a risk free rate, [00:01:00] and we compare that to the total size of the market. Each month Clarus provide that data to ISDA, and ISDA publish the ISDA Clarus RFR Adoption Indicator.

Now that's across a number of different currencies and it generally monitors the amount of trading that is done versus a risk free rate. As I said, I've done a lot of blogs on this subject. I must admit when I first committed to blogging on these once a month, I was a little bit dubious. I really thought that this was going to be a straightforward pathway.

I just thought that month on month on month, we'd see more trading versus RFRs, more trading versus RFRs, solely because there was such a strong regulatory tailwind behind it. And I thought that the, industry would be mindful of that, would be mindful of all of the set in stone deadlines there were, and they would get their act together way, way, way before any term rate actually ceased.

For the purposes of the blog, it's been a really interesting series because I couldn't [00:02:00] have been further from. The truth really, this has been far from a straightforward journey. As we saw dollar LIBOR cessation earlier this year, I just assumed maybe somewhat naively, but post-dollar LIBOR cessation, I just thought everything would trade versus SOFR.

And we haven't. And so the data particularly this year has been particularly interesting because we've seen things like CCPs physically convert old LIBOR trades into SOFR. We've seen the Eurodollar future, which used to be the biggest futures contract in the world that's physically converted to SOFR.

So I just thought I'd have boring blogs to write that would just be, "this is an all time high, this is an all time high, this is an all time high," how would you write 500 or 600 words about that? And what's actually happened is ever since the LIBOR conversion exercises in May, well, the conversion exercises happened in April, our measures for [00:03:00] May, June, and July have been, let's say, less than stellar. We haven't had a new all time high to really get excited about for a while. And it really leaves us scratching our heads. It's amazing that we can be so close to the data, we can write about these things so often, and yet there's still a whole market dynamic out there, which is forcing the data in a way that we are unable to predict. But August was a different month, August traditionally is a very, very quiet month in terms of trading activity, the so called summer lull. We didn't see that this year. Volumes in August were actually pretty healthy. And from a RFR adoption perspective, it was a really interesting month because the adoption of RFRs jumped in August 2023 by more than during any other month we've ever looked at. So it increased by 5 1/2 % compared to the previous month.

I [00:04:00] don't want to name all of the figures, cause this is a podcast, right? And people will turn off if I'm talking about 66. 1 % versus 61%, et cetera. So we're just trying to flesh out the highlights. So overall RFR adoption increased by more than we've ever seen in a single month. Dollar SOFR adoption increased hugely, increased to over 76 percent. Dollars is a bit of a unique animal now in that we don't have really a meaningful term rate, LIBOR's gone, but we do have two overnight rates SOFR and Fed Funds and we've seen a huge variability in the amount of risk that trades in the market versus Fed Funds each month.

So when we say that 76 percent of the dollar market is trading versus SOFR, it does not mean that quarter of the market is trading versus term rates. They are trading against another overnight rate. It happens to not be a [00:05:00] risk free rate. Second thing to note is that in the Euro market, we still have a so called legacy rate, a term rate, EURIBOR and we don't have a date for when EURIBOR will cease, but we do have an RFR, ESTER. And we see an amazingly volatile adoption of ESTER. It varies hugely from month to month to month. August, 2023, an all time high in Euro ESTER, so 35 percent of the market traded. Versus Esther, by extension, if you see the two largest markets, dollars and euros having highs of adoption, then the overall index is obviously going to be very strong as well.

Great, Chris. Yeah, that's interesting. SOFR or dollar risk free rates, all time high, I think up to Sterling has been done and 100%. Can you talk about some of the smaller currencies like CAD and Aussie as to how they're progressing in terms of adoption? 

CAD's the real live one. There has [00:06:00] been a cessation date announced for CDOR.

CDOR's the old legacy, right? So we see more and more trading versus CORA now. There are a number of CORA First initiatives being rolled out, whether that's dealer-to-dealer linear, whether that's dealer-to-dealer non-linear, whether that's dealer to client. I've written a series of blogs on CORA and CORA First.

I must admit, at this stage of the transition, I continue to be amazed by people who attend conferences and can still name different dates for different currencies and different timelines. It's difficult to pick out even when Sterling LIBOR And Yen LIBOR ceased, nowadays, you know. It's when you're over these, events, it's as if you instantly forget about it and it's on to the next one and on to the next one.

Good point. And you mentioned the first initiative. So in the same way we had SOFR First, SONIA First, these are, deadlines imposed by regulators to encourage the dealer market to move and then clients to move, right? Or to make the market [00:07:00] standard that reference rate that work well. 

And if we're being really honest about it, it's kind of a tacit recognition that markets are not moving organically or naturally to these RFRs. It needs to have a regulatory dead stop. It needs a push. We know from great experience that Trading is a very sticky business, right? It tends to stay on the same platforms. It tends to happen across the same products. It's very hard to move. 

Hard to move. It's hard to move liquidity. So I guess, so Aussie is really a multi-rate jurisdiction. So BBSW has been reformed. But I'm also interested in Euribor has been given extension to some date in the future. But clearly there are probably not enough transactions in Euribor that the market should go to Euro STR at some point, but it's being deferred, right? So it's probably the next big one to watch.

Aussie and Euros both stand out as the two strange ones now. As you've said, I haven't heard of any plans for BBSW to [00:08:00] disappear. I think in Europe, it's a bit of a different story. We do see a lot more trading in ESTER than in AONIA, but I would say the market forces that change those dynamics month-on-month are very similar.

If the central banks are active, you see a lot of short end trading and therefore you see a lot of adoption of the RFRs. 

Thanks, Chris. Interesting. 

No worries. It's nice to have this as one of the series to blog about, but it is very kind of data heavy, right? So it really, really focuses on all of our data products, as opposed to our software.

Final question for you. So any thoughts on ChatGPT or BARD giving us a better title than "RFR Trading is Now Back on Track, August, 2023?" 

I'm so tempted every month to say," BARD, why isn't SOFR trading more?" You know, it feels like the next step for these platforms is to be able to give them our data, right?

And say," What is the pattern I'm [00:09:00] missing here?" 

Good point, predict from data. 

So that was everything I wanted to cover. The blog itself is called "RFR Trading is Now Back on Track." As I said, it's a monthly series, so expect to hear a podcast again covering September trading very shortly. Over to you, Ali.

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

Great, thank you. 

Thank you both for joining us. 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, formerly Twitter, and on LinkedIn. Until next week, thank you for joining us.