Ali Curi: [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. 

Amir Khwaja: Hi Ali, how are you doing?

Ali Curi: I'm doing great. It's great to have you here. Welcome back to Quick Takes.

Amir Khwaja: Thank you. 

Ali Curi: What is your Quick Take for this week? Which headline from the Clarus FT blog would you like to discuss? 

Amir Khwaja: Sure, so it's called "2023 CCP volumes and share in IRD." CCP's, as we all know, our central counterparties, and we have a product called CCP View where we collect volumes, daily volumes from all major CCP's.

Once a year, I do a review in January for prior year. So this is normally one of our most well read blog each year. I think our readers are keen to understand, a end of year summary of the volumes and market share by CCP major currencies in the prior year. So that's the blog I'm covering. So again, a few good themes this year.

So [00:01:00] if you look at some of the reading I did by currency, some of the major currencies, dollar, yen, sterling. So it's in the blog, I show charts of volumes in 2021, 2022, 2023, and we compare those, right? And what's, a big thing in those currencies is the fact that LIBOR has now ended in dollars, in yen, in sterling to be replaced by the risk free rate, SOFR, Sonia, TONR, that comes across, very nicely in the charts, right? LIBOR has been around in swap market for over 30 years. They're been trillions of dollars of notional link to LIBOR swaps. So they've now ended and they've now been replaced with equivalent volume in SOFA swaps, to SONIA swaps, et cetera, right?

That comes through in the volume charts. Also pretty good year in volumes, right? As central banks have been raising rates last year and have now paused, there's been a higher demand for interest swap hedging. I think, with some of the stuff we saw in Q1 with regional banks, no hedging their interest risk appropriately.

So I think there's been a [00:02:00] general increase in the volumes of swaps. So I think that's important. And then we see that in all the currencies, in dollars, in euro, in yen, sterling, et cetera. A good year for volumes for the CCPs, right? I think it's important. 

Really, I look at two things. I look at generally volume, sometimes open interest, what's outstanding at the point in time, and also market share. It's the market share is having pretty similar, I think we don't see that much change certainly in dollars and sterling where LCH Swap Clear is the dominant CCP.

I think in Euro, where Euribor has continued and €STR is a new RFR, there's now two major indices. So some change in share there, in that Euro share has gone backwards slightly to what it was in mid 2021, it's down a bit. In yen, I think both JSCC, which is the Japanese clearing house and LCH, having vying, I guess a few years ago for majority share, but for a few years now, GSEC has had larger share.

So I think it, it was two thirds 2023. This is [00:03:00] one LTH, right? So again, by showing a few simple charts, we do a summary of the volumes last year. Open interest, market share changes, and I guess well read, so I think people are keen to understand that. Any questions for me Ali, on that?

Ali Curi: Sure. Could you tell us a little bit more about the emerging markets currencies? 

Amir Khwaja: Oh, yeah, sure. Good question. As one of the major currencies, I cover EMEA, Asia, Middle East, Africa, Asia pack and LatAm in groups, right? And again, these are substantial currencies, right? In the same way as central banks have been increasing rates or changing rates in the G8 currencies, it's also been happening in the emerging market.

So the same way, it's been a banner year for volumes in 2023 for all those regions, right? So much higher volumes. So in fact, I think EMEA volumes are up 40%, right? So at, overall in 2023, we saw 17 trillion across the number of what we rank, what we categorize as EMEA currencies, of which South African Rand is the largest, followed by Swiss Franc, [00:04:00] Swedish, right?

So again, big years for those. Asia Pac, pretty similar, again, up 33 percent in volume terms, CNY is the biggest currency in that region. LatAm swaps, similar increases of about 40%, $13 trillion or $13.6 trillion gross notional last year. So again, the emerging market regions are now substantial in size in interest rate swaps that are cleared globally. And predominantly, those are mostly cleared at LCA swap clear, apart from LATAM is a majority at CME. They are some domestic CCP, so in China and India, they have substantial market share. Australia as well, Aussie Dollar, which I guess that we can categorize as a major currency, not a EM, right?

That kind of gives you a feel, right? So I'm trying to cover both the major currencies. Emerging market currencies, volumes, market share, and it's been a banner year in terms of volumes for most CCPs and those currencies compared to the prior year. 

Ali Curi: Amir, what's your view on volumes and shares? How will they be performing going forward in 2024?

Amir Khwaja: That's always a hard one to call. [00:05:00] I would say in market share, changes are very slow and over many years, so we don't expect much change in market share, but volumes do invariably change. I think, we're at a period now where most central banks are poised at rates that will at some time start to drop, which will drive volume.

But if they stay on a plateau, then I think we would probably see lower volumes this year. Hard to say, right? But if I had to really call it, I would say volumes, probably similar, because we do expect central banks in most countries to start dropping interest rates, which will invariably lead to some change in interest swap or requirements for demand, supply, etc., or rebalancing.

That takes longer, volumes may be subdued for a while, but at some point, I think that drop in rates will play out to a level state, right? Which point I would think the volumes we've seen in 2023 will start to revert back to the low volumes from prior years, right?

Pre 2021. And particularly as now [00:06:00] we have less reference indices, right? With Libor, we had Libor one month, three months, six month basis to, to settle our creditors. Now with really one major index for most currencies, or at least major currencies. So there's probably less basis, less volume around those.

So we do expect, not in 2024, possibly, but in 25, 26, to return to maybe low volumes. 

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

Amir Khwaja: Sure. So it's called "2023 CCP Volumes and Share in IRD." And it's one of the most well read blogs, most years. 

Ali Curi: Amir, thank you for sharing your Quick Takes.

Let's do it again next week.

Amir Khwaja: Great. Thank you, 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.