Quick Takes: What’s new in AUD swaps in 2024?
===

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 are 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: All right, Ali. This week, we're going to go for "What's new in Aussie swaps in 2024." Looking back over nearly 10 years of blogs that I've published on Clarus, this will be the sixth time I've written about Aussie swaps.

And I have to say, every single time I write about this market, I always come away thinking how nuts it is. I think of all of the markets we cover, I think now Aussie dollar has the most complicated market structure you could ever imagine, basically. Whilst every other market has gone through this benchmark reform and has ended up in a situation whereby you've replaced many, many interest rate indices with one.

Aussie dollar continues to trade multiple indices, and it does it in a really complicated way. Even if you took out Benchmark Reform, you would sit here going, how have we ended up trading all of these things for Aussie? Before I go into the volumes and the blog, I just want to make it clear what Aussie actually trades.

So if you trade an overnight index swap, you trade versus AONIA. So AONIA is akin to a risk free rate; SONIA, SOFR, et cetera, simple. If you trade an interest rate swap, you trade against BBSW. So BBSW is a term rate, but if you trade an interest rate swap out to three years, you trade against three month BBSW.

And if you trade anything longer than three years, you trade against six month BBSW. So you're guaranteed in your book to have at least basis between three sixes and at least basis between AONIA and BBSW. Then you look at what trades in Aussie cross currency markets. Okay, so Europe, Euros, that has an RFR, €STR, that doesn't have an explicit mandate to get rid of EURIBOR. So threes and sixes trade in EURIBOR as well, but Euro cross currency, when it went through the RFR transition to SOFR on the dollar leg, that at least trades €STR versus SOFR, so that's a simple product.

Australia, no, no, no, no, no, different! So Australia trades three months BBSW against SOFR. Like why? It's just nuts! And then we do a lot of work in the US looking at market share for D2D CEFs. And in the US we always highlight that it's mainly swap spreads that are trade, right? In Australia, I can't quite believe I'm saying this, but in Australia, the most liquid instrument for the inter dealer rates market is actually an exchange for physical, which is an invoice spread in every other area of the world, which is a ASX future against an Australian government bond versus an interest rate swap that will trade against six month BBSW.

And then they invent things like Bobswaps. Bobswaps are OIS versus BBSW. It is so convoluted and so complicated. It's quite good for bloggers like us. Gives us lots of different things to look at in terms of volumes. But I think because of this exceptionally complex background to the market, what it does is two things.

One, it makes transition and changes even harder because people are intrinsically attached to this complexity. But it also makes just monitoring volumes in Aussie swaps, like almost a full time job. They are more volatile in terms of volumes traded, whether you look at DVO1, whether you look at notionals than any other market we have ever looked at.

And the variability is absolutely huge. I don't know whether it was entirely COVID and pandemic related, but in 2020, 2021, and most of '22, Aussie volumes just fell off a cliff. It was as if the Aussie swaps market just went to the beach and that was it and this might have a backdrop because the RBA, the central bank had started cutting rates before the pandemic anyway, and they'd never really traded such a low rate environment, I'm not sure.

But it really took until 2023 for volumes to wake up again. And we're talking about a big swaps market. I forget, but I think roughly speaking, Aussie is like the fifth or sixth largest swaps market. This is a big market and yet the volatility of volumes is really, really striking. And related to that, when we talk about our monitoring of what trades as a risk free rate and what trades as a term rate, the volatility of that is also huge.

We've had some months whereby 45 percent of total volumes have traded against the risk free rate. And then you fast forward just two months and that 45 percent has dropped below 30%. We've talked about how volatile the adoption of €STR in Europe is, but the real amount of trading against AONIA for Australian markets really seems to be tied to how in play the central bankers. Amir, I've rattled through a number of different points that didn't even get to mention the CCP picture in ASX versus Swapclear.

Do you have any specific questions? 

Amir Khwaja: Great points about the complexity of the Aussie market. I remember when you first looked at futures, obviously the bank futures are different being discount based. So again, those complexities, right? But I guess there are elements of the CAD market, has that same...at two or three years, the conventions switches. But yeah Aussie, it was interesting. So historically the market has kept these different bases, even though there was an opportunity in RFI reform to simplify the rates market, right? 

Chris Barnes: Yes, and also the RBA jumped in very, very early once the investigations into LIBOR reform started. And they jumped in and they said, we will be the administrator of both AONIA and BBSW. 

Amir Khwaja: Even Canadian is now going to CORA, Euro, nothing happening. But I guess BBSW got reformed. So it's staying around and AONIA hasn't quite taken off as much as we would like, apart from on some months it's huge, as you say 45 percent down to 30%.

So it does vary a lot. So it does seem yeah, future swaps has to be interesting. But one thing I see is that people don't talk much about the basis between the CCPs. The way we see, we hear about it in dollars and euros and yen, right? So it's not clear that it's very transparent or trades. I don't know. Are they just different participants? 

Chris Barnes: I've never seen anything on basis between swap clearing and ASX. I think historically swap cleared didn't offer clearing versus AONIA. If you look back, like five, six, seven years ago, ASX was able to build up volumes of AONIA.

ASX are also able to offer cross margining versus their futures. But I think as we've seen play out in many, many other currency markets, cross margining doesn't seem to be a particularly compelling sell. So the ASX market share when we first started looking, let's say 2018-19 was of the order of magnitude 12 or 15 percent.

I think most of the interest rate swaps were still cleared at SwapClear. Fast forward to now and that market share of ASX appears to be moving lower, I'm not sure what CCPs think of as like a significant move lower at the moment you'd say that their market share is more like 8 or 9%.

I don't know if that's a structural move, whether it's a choice of market participants to move to swap clear, it's really, really unclear. And exactly as you say, Amir, I don't think there's a traded basis market between SwapClearing and ASX. And that's something that could be helpful in the future to add a little bit of transparency as to what is driving volumes at each of the franchises.

Amir Khwaja: And the other thing I can't remember when I last looked at this, how much of share of clearing at ASX and LCH is client versus member or dealer. I suspect it might be lower, there might be much more active member volume directionally than client volume, but I'm not sure. Potentially. 

Chris Barnes: Potentially. 

Amir Khwaja: Given, I think lots of Australian, Australia has some really large entities that invest a lot abroad because the home market is, it's not as big for the pension fund industry. Australia has large supers because it's mandatory to contribute and many of the investments or different investments are outside Australia given their size.

So there's certainly a market, and that kind of brings me to also it, the Aussie swaps market sort of trades both in Aussie and London hours. It's not primarily traded only in Australian hours. So I wonder whether that informs some of the nuances of what trades differently. And the volume. 

Chris Barnes: I think you're precisely right, and probably similar drivers as we see at JSCC apply for ASX as well, in that it's very difficult to run a single currency clearinghouse, because most of the international players are captured by a clearing mandate, which is multi currency, therefore they want most of their currencies in a single netting CCP. Conscious of time, we will revisit Aussie again for sure.

So Ali, I will hand back over to you for this week. And it sounds like we've got even more to discuss on these markets. 

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

Chris Barnes: That blog was "What's New in Aussie Swaps in 2024." If you want to have a little bit more on the underlying market structure, there's another one which is called "The Latest in Aussie and Kiwi Swap Markets."

Ali Curi: Great, that works. 

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

Amir Khwaja: Thanks, Ali. 

Chris Barnes: I look forward to it, Ali. Thanks.

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.