Quick Takes - Cross currency swaps review 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, 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: Hey Ali, how you doing? 

Mark Bell: Hi Ali.

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

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

Chris Barnes: Okay, Ali, this week back to probably my favorite subject. I'm going to cover the cross currency swaps market in 2024. Before we do that, though, let's take a pause. Let's take a pause and reflect. Pause is over. This was my 500th blog for Clarus, 500 blogs! I have essentially blogged every single week for 10 years. I wrote my 10th anniversary blog last year. I admit the maths doesn't quite stack up. If I've been blogging for over 10 years, I should have done over 520 by now. But, you know, for the allowances of holidays and illness, COVID, et cetera, I've done 500 blogs.

Two things about that. One, I can't believe that people still read them. Like, haven't you got sick of me by now? You know, it's incredible to think that from my small brain, there can be new things to write about 10 years after starting this blog. And the second one is that it is a real kind of skill that develops over time.

The process that I go through of writing a blog in 2025 is just fundamentally different to what I did in 2015. I think the sources of data help. I think the experience helps and also getting to know our readers and our clients better and knowing what resonates with the audience also really helps. I'm looking forward to writing many, many more blogs, obviously, but my favorite topic continues to be the cross currency swaps market. And seeing as this was my 500th blog, I thought in terms of the podcast, I would just highlight how different writing a blog is to when I was trading and writing a market commentary.

When I was trading the cross currency swaps market every week, I would write a summary of what had happened that past week. That summary, I never really had to look at charts. I never had to look at my blotter. Like every trade for the past five days, you could really kind of vividly remember and track and you would know roughly whether the market had gone up or down following a specific trade.

Because I was so involved in the markets, if somebody had sat me down on the 5th of January and said, "Can you write a review of the past year of cross currency swaps trading?" I would have laughed at them. I'd have been like, "Hell no, that is impossible." I have no idea where cable was on the 10th of January last year.

I can just about remember my last week of trading activity, but once you've moved on, once you've processed it, you know, trading is fundamentally a forward looking job. And so you're always thinking about the next trade and how to manage your current risk, not how you could have done better on your previous risk.

And so I do think that is one of the big, big differences with writing a blog is that we have all this data, you know? And so, no, I'm not trading cross currency swaps every day. Yes, I still stay close to the market, but when I sit down to write these blogs, I'm looking at the data and I'm going, "Oh, isn't it interesting how cable has moved? Isn't it interesting how Euro dollar has moved," et cetera. 

And it's that kind of natural interest in the markets that brings the blogs to the forefront. In terms of findings on this particular blog, I just highlight ed this. I think is my fifth annual review of cross currency swaps activity. Every single blog I've written, I've been able to say it was a record every year for cross currency swaps.

Seems that the number of cross currency swaps traded just goes up and up every year. It's about a 10 percent annualized growth rate every year since at least 2018 now. I wasn't blogging on cross currency swaps in '18, but we've seen that growth through. 2024, particularly good year, 12 percent more trades traded than ever before.

It was the first time that reported to US SDRs, there was over 7 trillion in notional. That was 21 percent higher than last year, but is somewhat inflated by the change in block rules and seeing higher notionals reported for November and December. And we see particular different dynamics between different currencies.

And so if there's one chart, I think that's particularly interesting on the blog that I haven't presented before, it's about halfway down and it's called the average maturity blog. And what that really does is distills the differences between the currency pairs. I look at Aussie dollar, look at Euro dollar cable and dollar yen.

That single chart really shows how dollar yen trades on shorter dates. Cable is the longest maturity market that is reported to SDRs. Average maturities are between like 10 and 12 years, whereas yen is more like five years. Eurodollar sits somewhere in between. And what we've seen over the years is that particularly for Eurodollar and cable in the past three years, cross currency swaps are getting shorter.

You're seeing a reduction in the average maturity of swaps, something of the order of magnitude of reducing from, let's say 10 years to eight years. So you're still in that kind of middle part of the curve. But it does feel like, particularly for Eurodollar and Cable, trades are getting shorter. That obviously leads to more notional being reported.

That's why we've talked about trade number at the top of this podcast. Final thing, I think that it's really important to take away from that blog is SEF trading. We saw throughout 2024 a reduction month on month on month of the number of trades being reported on SEF. When we started the year and consistent with let's say the second half of 2023 about 79 percent of volumes were reported as on SEF.

By the time we left 2024 in December, only 65% were trading on SEF, roughly a 15 percent reduction. I have no idea why that is. I do think it's a bad thing. Normally when trades are traded off SEF, it results in a loss of transparency. And so I think it's a really important thing to monitor from a market infrastructure perspective going into 2025.

Mark, that's a whistle stop tour of my, have I mentioned, 500th blog on the Clarus website. Mark, if you could just tell us how many blogs you've written and then I will answer some of your questions. 

Mark Bell: I think I'm a factor of 10 smaller than you, Chris, in terms of, or maybe even a factor of a hundred smaller than you in terms of blogs, but I think I'm going to get started.

I think that 10 years ago, if you'd guessed what your 500th blog would have been, you would have guessed it would have been cross currency swaps. I'm sure. 

Chris Barnes: Exactly right. 

Mark Bell: The interest was there and the interest is still there. And I can remind listeners that probably our evergreen blog in terms of readers is the blog, "The mechanics of cross currency swaps," which we get, still get hundreds of views every week in terms of that data.

I want to take you back Chris, to your trading, because my question is really a trading related question around cross currency swaps. So you know, one of the dimensions that you didn't look at was the segmentation of spot starting swaps versus forward starting swaps. A lot of the end users enter into the forward starting swap market.

So maybe a five year, five year swap. How do you hedge that? Is that hedged as a, with a 10 year and a five year swap? That's the first part of the question. The second part of the question is, do those hedges actually push up the volumes in terms of the spot numbers? Those are the two things I'm interested in hearing from you.

Chris Barnes: Simple, really. I think all cross currency swaps traders wish that they had the luxury of choosing how to hedge a five year, five year if there was ample liquidity. Yes, it's perfectly hedgeable using a spot starting 10 year, a spot starting five year. The reality is that what you're really looking at is your outright risk.

And so you would choose one of the maturities that would most suit your book and you would hedge the five year, five year in either five year or 10 year. It would be on the whole too expensive from a bid offer perspective to try and hedge that any more accurately. Of course, what it means is that your book is then axed and so you're able to better serve your clients.

And precisely as you said, less than 10 percent of client facing business is spot starting. Most of it is custom dates. The forward forwards that you talk about are mainly from hedge funds. I do think when you look at the different currencies, you're seeing more hedge fund activity in cross currency swaps than ever before.

And I think that's certainly driving the data as well. I think that's all we've got time for today. As everybody knows, I could talk about cross currency swaps for another three hours. I'm going to stop myself and look forward to coming back on the podcast next week. 

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

Chris Barnes: That was the "Cross currency swaps review 2024." I may have mentioned that was my 500th blog. 

Ali Curi: And congratulations on your 500th blog. Well done.

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

Chris Barnes: Ali. I'm looking forward to it. And one day it'll be the 500th podcast.

Ali Curi: Sounds good to me. 

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.