Quick Takes: GBP 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, 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. It's great to have you here. 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: All right, Ali, seeing as summer is officially over, I am going to do a UK-centric blog because the UK never gets a summer anyway. I'm going to cover a blog that's called "Sterling Swaps — What's New?"

But I'm going to first put a health warning to this, and this is becoming a bit of a thing now. Sterling Swaps, I published this on the 31st of July, 2024. That was about five days before markets went crazy. There was a big sell off. There's huge amount of volatility led to massive volumes in August. 

I last wrote about Sterling swaps back in June of 2023 and in that blog I highlighted that I appear to be subject to what is known in the academic press as the Matt Levine effect.

Now there is an official paper published how it seems to be that every time Matt Levine at Bloomberg takes a holiday, the markets go crazy and he has to cancel his holiday and come back. And there is some type of correlation here. And it seems to be that I have exactly the same thing with Sterling swaps.

Before the financial market meltdown of Liz Truss and Kwasi Akwartang, I had written a blog a week before, before the pandemic, I think it was, I'd written a Sterling swaps blog the week before, like it is uncanny. So every time that you see a Clarus blog on Sterling swaps, everybody should be prepped and ready now for a big, big sell off. Health warning aside, there's some really interesting data for Sterling this year.

And I think when I've tried to do these summaries of markets, in the past, our listeners have had to kind of go through the whole podcast and follow the thread. So what I'm going to try and do is, is summarize the blog in like four bullets now, and then you can listen in for the particular note worthy pieces.

So I think first things to know is that the amount of risk the DV01 traded across all sterling rates and markets, that's up 76 percent on the year, and that's a three year high. So we are seeing a lot of trading in Sterling. I think that's pretty much because of the general election. There's been a lot of repositioning associated with that.

Obviously, the Bank of England are in play from a rates perspective as well. And so there has been a lot of activity. More Sterling SONIA, OIS traded at SwapClear in Q2 this year than ever before. But I think probably the biggest story of all of this is what's been happening at ICE. And from our data, which stretches back to like 2016, I think for it, there have never been more Sterling derivatives traded at ICE.

So the Sterling SONIA futures market is now bigger than short Sterling futures ever were. And I don't think anybody really expected that. We've written a lot on the blog about how the cessation of LIBORs results in generally less trading because there's less basis. There isn't a credit spread component, et cetera, et cetera.

We've seen euro swaps markets overtake dollars as the biggest now as a result of having €STER, Euribor and basis and yet Sterling markets are flourishing. Obviously we've got an inflationary backdrop, there's the general election, as I said as well, which is motivating a lot of trading, but it's still super, super impressive to see these records.

And then my final kind of summary point is really about SEF trading. And I think what we're seeing increasingly is voluntary use of SEFs. I think that now that people are so plugged in for trading on the dollar side, and there's the benefits of having those workflows in place, we're seeing more and more use of SEFs outside of dollars as well.

If we just talk generally about the blog, I think one of the interesting aspects of Sterling trading has been the relative stability this year. I don't think that markets in sterling have been quite as volatile as dollars and euros. But despite that, we've still seen a huge amount of trading to put it in our perspective, Sterling swap markets, when we combine them with Sterling futures as well, they're the third largest currency. So you've got dollars and euros. Dollars is bigger than euros when you combine it with futures and Sterling is firmly entrenched as number three. When we talk about seeing these record volumes, it's not like I'm talking about a small currency here.

This is a really significant portion of the rates market. Coming down the blog, the biggest thing to note is really about what's happened in a futures volumes. So a stat for you here, average daily volumes for Sterling futures reached almost 600 billion Sterling in Q2 of 2024, that is an all time record.

And as I said, that now means that SONIA volumes are higher than short Sterling volumes ever were. Finally, just want to talk again about the SEFs. We've seen a gradual increase in the usage of SEFs. So 50 percent of Sterling notional was executed on SEF compared to 42 percent last year. And if you go into SEFView and look at the market share stats, what you really see is that the biggest beneficiary of that is Tradeweb.

And so this looks and feels a lot like clients voluntarily using the benefits of the workflows at Tradeweb to just do more and more of their currencies, non dollars on SEFs as well. That's broadly what I wanted to cover. Amir, have you got any specific questions on any aspects? 

Amir Khwaja: Yeah, sure, Chris. So I guess you mentioned August, generally a quiet month, people away from their desks, the low volume, which can lead to price moves, the kind of juniors on the desk, right? So do you think, have we seen higher volumes in August? Will Q3 be bigger than Q2? 

Chris Barnes: We've definitely seen in some markets record volumes in August, and I don't mean record volumes for an August. I mean, record volumes ever. That's really, really surprising because precisely as you say, desks are normally on demand.

I don't know whether it was reflective, but you know, just the sheer amount of volatility and the big moves may have meant that there was a lot more repositioning this year. I think one of the general feelings I have from a global perspective is that there's a lot of trading this year being front weighted so that a lot of the trading is done before the election in the US and that just seems to be a factor in terms of we keep on seeing record volumes.

Amir Khwaja: And I guess the other question I had, Chris, was, so we can see that the ISONIA contract is now bigger than the Sterling contract was, you know, the short Sterling. What about the long Gilt contract? Is that bigger or similar? 

Chris Barnes: I think certainly Gilt futures are more liquid now than previously. There is more activity in Gilt futures versus swaps as well.

In terms of the precise data, I've not got it in front of me, but the feeling would be that yes, Gilt futures were also seeing record volumes. 

Amir Khwaja: Great. Thanks, Chris. 

Chris Barnes: Ali, that's everything I had for this week. 

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

Chris Barnes: Title is, "Not everyone panic the world's about to blow up."

Maybe I should change it to that. It's simply "Sterling swaps — What's new?" 

Ali Curi: Short and sweet. We like that. Amir Khwaja, Chris Barnes. Thank you both for sharing your Quick Takes. Let's do it again next week. 

Amir Khwaja: Thanks, Ali. 

Ali Curi: Thanks, Ali. See you next week. 

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.