Quick Takes plus: The Evolution of Cross Currency Swaps
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Ali Curi: Hi everyone, and welcome to the premiere of Quick Takes plus. I'm Ali Curi and our host Chris Barnes, will take a quick dive into the topics of importance in the financial and FinTech world. 

Today's special guest is Brendan McVeigh, senior advisor to LSEG and previously head of Cross Currency at ICAP.

Let's get started. Hi Chris. Hi Brendan. 

Chris Barnes: Hi Ali. How you doing? 

Brendan McVeigh: Hi, Ali. 

Ali Curi: Hello, gentlemen. Welcome to Quick Takes plus. Chris, let's start with you. Tell us what will we be discussing today? 

Chris Barnes: Alright, Ali, we are going back to my favorite topic today. We're gonna be talking all things cross currency swaps. Now, as everyone who listens, everyone who reads the blog knows I write a lot about cross currency swaps.

The reason I do that is that I used to be a cross currency swaps trader. I must admit, I'm getting a bit tired of describing myself as an ex swaps trader, and so I thought, something that I think is of interest to a lot of our listeners and readers is the background to the cross currency swaps market.

How did it actually get started? How do you even go about starting a market like this? How do you go about trading it? And when I think about that, there's really only one name that I think of, and that is Mr. Brendan McVeigh, who has kindly agreed to join us. I knew Brendan through roughly 10 years at HSBC.

He was one of my brokers. I've also worked with him for about 10 years at LSEG. And he was really there at the coalface, at the beginning of the cross currency swaps market. So Brendan, as like a starter for 10, a warmup, tell us about those early days at ICAP. 

Brendan McVeigh: Thank you, Chris. You're making me feel very old.

Recounting my time at the beginning. We started the cross currency desk at ICAP in '97. And Dollar/Yen was already trading as a cross currency. It had a curve and it was trading mainly out of Tokyo and bits out of London. But the Deutschemark dollar, the Piper dollar, the Lira dollar, all those other currencies were trading very rarely.

And there was no market. There was no curve. Nobody knew what the prices were. Myself and a colleague were asked to start the desk and see if we could develop a market. We were given a few clients we knew were trading, WestLB, AIG, Deutsche Bank, Bankers Trust. Some banks still exist today, some banks don't.

And we started cold calling. We were cold calling the rest of The Street, telling 'em what we were doing, what we were trying to do. And could they support prices in the markets. And then we came across ABN, who in Amsterdam, who started showing us curves, plus two minus two; Deutsche Mark dollar, French Bank dollar, Swiss dollar, [Gilder] dollar, Lira dollar, Peseta dollar. 

Chris Barnes: And when you say a curve, Brendan, this is literally like a phone call and they would read out, like six months side by here, there was no screen, right?

Brendan McVeigh: Guys I were talking to were medium term traders, rates traders, or cross currency traders, and they wouldn't show anything in three months, six months, or nine months.

It was mainly one year, one year out to 30 year at the time. And all these prices were forward starting. They didn't want to show a spot price 'cause they didn't want to be picked off in the front end when the FX moved. So it was all just roughly a week forward starting just to show support. That's how the market developed.

And the market continued like that until the trading end of a forward start, where banks would come in to hedge their issuance at of particular dates, and then when we trade, we would negotiate them, "What start date do you want on that price?"

Chris Barnes: And I think back to my early days, like middle 2000s, and I remember that the market was super, super tight. Like it would move in 0.1 basis points. It would be very, very stable. It was big news if there was like a half basis point move. And so, you think back to that time and then compare that to what happened in GFC when the market just went crazy and everybody was referencing stuff for marks off the high cap screen.

How did you go about even beginning to maintain that screen as well as doing your main job of actually doing trades? 

Brendan McVeigh: It was hard. It was tricky. It was easy when it was 8-1-1 wide, 1-2 wide. Very easy to maintain a curve. But the GFC, that's the whole, different kettle of fish. The market just disappeared. Everybody was demanding dollars. The front rule, its whole history now moved down to 300 and the one year down to MI minus a hundred. I remember those moves when the one year move, I think it started, we had some liquidity around minus 40 or minus 50, and then the next bit was minus 60. Euros a hundred million. Next bit was minus 70. Euros, a hundred million, minus 18, another a hundred, minus 90, and then minus a hundred. I remember one bank was screaming, "Get me dollars, get me dollars!" Minus a hundred, move your screen. And of course, I didn't have three decimal points, places to move my screen. It never been done before.

So I had to ring up my IT department and say, can you add another decimal place to the Reuters screen because I have to publish minus a hundred. And about 20 minutes later I was able to move it. Yeah. It continued down to minus 120 or something, I can't remember exactly, but they were crazy times.

And then how did we update the two year, three year, the five year? I did it to the best of my ability. I looked at the forward curve and I tried to make it a nice, smooth forward curve. No, I didn't, I just did it to where I think it should be. And then I would touch base with a variety of banks to see if they roughly agreed with the shape of my curve.

But it was moving so quickly. Nobody knew. 

Chris Barnes: So whilst there is a screen, do you think that screen could be made into like an electronic marketplace and it would be possible to actually trade off it? I mean, it's still a voice brokered product today, right? 

Brendan McVeigh: Yeah, it could be, like an interest rate swap, could be. If you look at the FX market globally, the biggest market in the world, FX, trillions executed electronically, but you still have FX voice brokers. Swaps markets, you still have large 30 man desks of euro swaps, dollar swaps, sterling swaps. But they do have a hybrid. They do have some matching.

During the day where people might trade at mid-market particular times of the day, cross currency always lagged the interest rate swaps market and the developments there. So I think when swaps fully go electronic, cross currency will too. But cross currency is slightly different beast. You know, our desk ran the G 10 cross currency, so there were certain value added we could give to the client that a normal swaps broker couldn't because, we were working a twos, five, seven spread in Euro dollar.

Our seven year price might be lagged into a seven year starting Euro, and our five year price might be lagged into a five year Swiss Euro. And of course, two Euro subject to the FX. That was the value added that I've always brought to bring across currency where you integrated different curves. 

Chris Barnes: I think from my experience of trading both rates and cross currency, right? Different times, admittedly, but if you talk to a Euro swaps broker, there's no way that they know what is going on in dollar swaps or sterling swaps. And yet if you talk to across currency desk, if Euro dollar is going lower, it also automatically makes big bids in dollar/yen look better.

It's such an intrinsic link to our dollars. Naturally, when you speak to a cross currency broker, they seem to have much more visibility of how a trader looks at stuff of looking across multiple markets as opposed to like just a laser focus on where are 10 year spreads. It was a very, very different experience to me.

So we touched on GFC. Any other particular kind of notable events or market moves that stand out for you over the years? 

Brendan McVeigh: I think the first market moves that I met or remember thinking, "Wow, we're really connected to what's going on in the capital markets," was in the early maybe 2000, 2001 was the, when the 3G telecom licenses were being auctioned in the UK and Europe.

And I think something like a hundred billion worth of debt was raised by the likes of France Telecom, Dodge Telecom, the operators in the UK to pay for these licenses. And to do this, they went to the deep dollar bond market and loads of dollars are raised, and that was all swapped back into Euro and suddenly we saw the curve move up.

Lack of offers everybody getting out of dollars back into the Euro. And to me that was the first time, "Wow, we're very connected to the capital markets." And then of course it just tumbles along, and until the GFC and then you're connected really to the coalface of what was happening throughout the world.

And when the first break goes down to minus 300, you're going, "What's going on?" And then everybody's telling you, "The dollar Libor is not fully representing where actual banks are receiving unsecured funding." And so the whole covered interest rate parity is broken, the basis moves down. And I remember thinking, "Wow, what's all this?"

And so I went over to my depot cash desk and I said, "Can I borrow three month dollars?" And they said, "Well, who's asking?" And I, so I made up a bank, a large European bank that didn't submit to the dollar Libor, and their answer was, "Nowhere."

Chris Barnes: Wow. 

Brendan McVeigh: I was thinking, "Wow, wow." So at the height. No offer in dollars for that European bank.

So I came back to my desk and went, "Right, this may snap back at some stage." Let's see. But that was because after the GFC, that, to me, that was a dollar story. Then the next story was the Euro crisis, and it was, you know, the PIGS. The bond spreads on all the PIGS countries moving out against the Deutsche market.

Bonds, and that was every day was all about Euro. Will it survive? And then upped at them and Draggy came along and said, "Whatever it takes. We'll do whatever it takes," then that greatly helps and it move back into normal markets after a while. 

Chris Barnes: And so you've had these periods of, let's say "normal markets" and then like "eye of the storm," how would you develop trust?

Because it must be a tricky balance over, "I've got trade, I've got a trade, I've got a trade, I need to know where the screen is. I need to know what my clients are," versus a longer term appreciation of "maybe the market's moving your way, you know, wait a bit." How would you go about that? 

Brendan McVeigh: Look, I think I was very lucky 'cause I was there at the very beginning.

Anybody that spoke to us knew that we'd set the desk up. We're not estate agents. We're not looking to sell a house. They won't talk to you again for 10 years. We want to do several trades with the clients every single day. And it's in your interest to look after each client.

Particularly in more illiquid curves, if a client comes there and asks you what you know, the depth of the market and maybe everybody's a seller and there are no payers, you're not going to entice your bank to come in and pay the top. You're going to look after them. Particularly when we were trading, I was helping you on the dolly and Chris. Illiquidity in the long end. 

Chris Barnes: In dolly, I'll never forget when I had like 120 yards of yen to do in six year yen, and it was like you sat there thinking, "This could take me like six weeks to trade out of this." 

Brendan McVeigh: I mean, I always knew you had size. I never knew the exact amount, but if you had told The Street you needed to pay in size, and if you didn't handle that very delicately, then the market would completely run away from you.

You have to be very careful, and this is where I suppose the trust, the broker comes in. You have to be very careful to handle an order like that. 

Chris Barnes: Yeah, precisely. And it really, really helped. Well, I found it exceptionally helpful to have such an experienced broker to speak to as well. Because ultimately, particularly at that time, you had loads and loads of people who were suddenly looking at cross currency for like the first time.

They were like, "Oh, wow, it moves" and "Wow, it's really, really correlated to Euro dollars" and it's super correlated to the short end, et cetera. I think everyone would agree the market's different now. For listeners that don't know, I was working with Brendan at LSEG for a eight year period, Brendan, I think? Setting up a service called SWAP Agent. SWAP Agent has largely helped to standardize the interbank market to a dollar CSA, aiming mainly to get rid of cross gammas, so that trading frictions reduced. Great period. Great to stay close to the market. You are still there, Brendan, what do you see as the future of the cross currency swaps market?

Do you think that standardization is gonna continue? Has it run it, run its course? What is swap agency? 

Brendan McVeigh: Well, I think in terms of for the broker in the trading market, the standardization that the dollar CSA brings is fantastic. It just enhances liquidity and particularly for those that were running multiple CSAs against counterparts to bring all back to dollars.

As you see, it minimizes cross gamma. I think with swap page and LSEG, maybe the start handling the front and back exchange connection to CLS, things like that will also increase the liquity of the market by making it easier to trade the product. Operational efficiencies. 

Chris Barnes: Appreciate it Brendan. I know it's a Quick Takes plus. I think that's probably all we've got time for. I'd just like to say a huge thank you to Brendan for coming along. I'd love to know if we had a time machine and I came back to 1997 and I said, "Brendan, one day we'll, be recording a podcast on this," what your face would've looked like. 

Brendan McVeigh: Yeah. Well, there's so much to say, but I'm happy it's Quick Take. Thank you very much. 

Chris Barnes: Thanks, Brendan Ali, back over to you.

Ali Curi: Thank you. I believe that's a wrap. Chris Barnes, Brendan McVeigh, thank you both for sharing your insights on Quick Takes plus. Let's do it again soon. 

Chris Barnes: Look forward to Ali. Thanks very much. 

Brendan McVeigh: Thank you. 

Ali Curi: And that's our episode for today. You can follow ION Markets on X and on LinkedIn.

Thank you for joining us.