Quick Takes: INR Swaps — What’s new?
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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: Hey, Ali. 

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

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

Chris Barnes: This is going to be a big podcast. This is going to be a popular one. We're talking about the 16th largest swaps market in the world. Number 16. Imagine that. Now I imagine there's some of our listeners that didn't even know there were 16 swaps markets in the world.

But of all the currencies we monitor, the Indian Rupee, INR swaps are the 16th largest. Just to put some kind of context and numbers on that, right?, in terms of just how big the global swaps market is. The 16th largest swap market still cleared over $3 trillion dollars in 2024. Like the sheer size of these markets will still never cease us to baffle me.

And so, you know, this is part of my series I've written all year about what's new in specific markets. I find them a really rewarding way of both looking through our data and educating myself about swaps markets that I haven't actually traded. INR is, I think, a particularly interesting one. It's one of the seven currencies where clearing is not actually a monopoly.

So those seven currencies are Aussie, Brazil, CNY, Euros, INR that we're talking about today, Yen, and MEX. All of the clearing landscapes for those currencies are characterized as being, let's say "competitive." When I say competitive, I mean, more than 5 percent of cleared volumes happen away from the main CCP.

We obviously have some of those markets with particular regulatory and jurisdictional concerns. Euro, for example, is looking at introducing a so called "Location Policy." For INR, I would say that the difference between, or your choice of CCP is a little bit different because it really depends what type of products you want to trade.

Do you want to trade INR onshore, therefore settle it in rupees themselves? In which case you're clearing at CCIL or are you an offshore market participant? That means that you're trading a different product, essentially a non deliverable swap, in which case all of the cash flows are still calculated in INR, but you actually settle it in dollars. It's net settle in dollars. 

That onshore/offshore dynamic is particularly interesting. How much is trading and where you don't necessarily have the same market participants in the onshore market as you do in the offshore. Therefore, from a market infrastructure perspective, it's really interesting to monitor the changes in terms of how much is onshore, how much is offshore.

Roughly speaking, 2024 saw LCH swap clear. So the offshore market with 73 percent of global cleared volumes leaving, what's that, 27%? I hope my maths is right, at CCIL. I think it's really important to note that volumes keep on going higher. I know that's a common theme on our podcast, it's a common theme for cleared markets, but I do think it's really, really important still to call it out.

The rate of growth in INR swaps is really impressive at like 12 to 18 percent year on year for the past three years. It's really ripping higher. Importantly, when we look at the U. S. market, clearing of INR swaps is really popular. 90 percent of INR swaps recently that have been reported to U. S. SDRs have been cleared.

That's really much, much higher than as recently as 2022 when only half of the swaps were cleared. So there's a big, big appetite. There's a big appreciation for clearing in rupee swaps. All of those swaps are overnight index swaps. There isn't really a significant market for term indices. And then finally, I just note that in the SDR data, one of the fields that you don't see populated very often, if you're used to looking at dollar swaps and Euro swaps is the settlement currency.

But of course, for an onshore or an offshore product, it's a really significant field, which allows you to then look through the data and work out whether a particular swap has been traded onshore or offshore. When we look at the data, it's really notable that a steady 80 percent of the SDR swaps reported in INR are traded offshore.

And that has been remarkably stable over the period of 2024. In SEF trading, I was a little bit surprised. We really only see three active SEFs, TradeWeb, again, which I mention in all of these 'What's New" blogs, have a significant market share. They are the dealer-to-customer SEF of choice for rupee trading.

And then in the D2D market, I was surprised to only see two SEFs reporting volumes. So BGC have a 70% market share and Tollitz are next at 30%. I do wonder if that means that there's some local brokers who are not SEF registered, but I was surprised that that wasn't a more competitive landscape from the data.

Mark, I know that you enjoy these "What's New" series of blogs. Anything, particular on rupees that you want to quiz me on? 

Mark Bell: Thanks, Chris. As many would agree, the Indian market is going to be one of the more interesting markets over the next 10 years. CCL, the local clearinghouse, has an interesting history.

I believe that it started out clearing FX forwards before IRSs. Looking at the website earlier today, they do a really good job on data transparency to encourage participation. They show highs, lows, lost trade price, liquidity for each tenor. Some of the largest CCPs could take some notes. But it's this competition between LCH and CCL that I'm interested in, in asking you about.

My question's got two parts really. For LCH, their share seems to be, have longer dated tenors. Does CCIL increase the tenors on their, of their trades past 10 years to take on more flow? And on the other side, at LCH, unlike for Japan and China, there appear to be no local Indian banks that are members.

Should LCH be out there courting Indian members, banks such as HDFC or ICICI? 

Chris Barnes: Interesting points, Mark, and I think the first one in terms of should CCIL be extending tenors. is a particularly pertinent one for the markets today because when you look at the development of new markets and new indices, there really seems to be this like chicken and egg situation whereby market participants want a product to be cleared first before trading it, and CCPs want to see evidence of volumes before offering it for clearing. Software swaps, obviously didn't get off the ground until they were offered for clearing by CME and LCH.

It seems to be that the market prefers the CCPs to kind of push the boundaries now and an increase availability of products. And so it's probably more the onus is on CCIL to follow a swap clear rather than waiting for more liquidity to develop in these tenors. On the flip side, I'd say from a market participants perspective, do you join a clearing house or not?

I think a lot of that really has to do with resources cost. The simplest way to start trading a product will always be to join as a client clearing first, whereby you have an FCM that stands between you and the clearing house. That'll always be the quickest way. Are you going to join a clearing house just to trade the 16th largest swaps market in the world?

I'm not sure you've got overheads in terms of default management, in terms of default fund contributions, et cetera. My gut feeling is that the INR market would have to get a lot larger really before it becomes particularly interesting to become a member of a large global CCP in order to just clear rupee swaps.

Mark Bell: Thanks, Chris. 

Chris Barnes: Ali, I think on that note, I will hand back over to you. 

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

Chris Barnes: That was the 16th largest swaps market in the world. That is not the title of the blog post, although maybe I'll use it next year. Instead, it's "INR Swaps — What's new?"

Ali Curi: Great, that works. Chris Barnes, Mark Bell, thank you both for sharing your Quick Takes. Let's do it again next week. 

Chris Barnes: Look forward to it. See you next week. 

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.