Quick Takes - JPY swap clearing — Why do dealers prefer JSCC?
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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. 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: Well, Ali, I'm not sure the question should be, "What is the headline?" I think the question should be, "Can I do better than Biden? And can I still remember the title of the blog by the end of the podcast?"

So I will be talking about yen swap clearing. Admittedly, we did do a yen podcast in April. That was a very, very high level overview of yen swap markets. What it did was two things. That first blog gave me that high-level overview, but it also sparked my interest to really dig further. And the reason I wanted to discuss this particular blog, which is about why dealers prefer JSCC for yen swap clearing, is that I think it acts as a really good platform to exhibit the benefits of transparency and what is possible now.

So, as I stand here now, I recently celebrated the 10th anniversary of my first blog on the ClarusFT website. So I've now been blogging for 10 years, right? I blogged before transparency was even a thing really. And when I think back to what I expected the benefits of transparency to be 10 years ago, I was kind of hopeful that we as neutral market participants as guys in a room watching the tape, would be able to get more of a feel and more of a sense of the market, more akin to how a trader feels about the market. Because I don't think necessarily that traders really appreciate just by the sheer fact that they are in the market constantly, they are transacting all of the time, they build up this deep, deep base of knowledge whereby they know what clients are doing, they know what dealers are doing, they know which portion of the market is active.

They know which clients are paying in particular tenors, et cetera. They have all of this color. And I think when transparency first started with this trade by trade reporting of swaps, there was maybe a naive expectation that we would be able to watch the tape. We'd be able to watch the swaps come in and we'd be able to get kind of some type of similar feel for the markets.

And I think 10 years ago, there was a bit of a backlash against the transparency, because I don't think I just speak for myself here, but I think everybody who was watching that data, they were a bit disappointed by what they could actually glean from it. Yes, they saw the volumes and prices. It wasn't the same as being able to go into a trader's head and pull out the color. However, this most recent blog, okay, I did a high level overview. But what I also found is that if you dig that bit deeper, and unfortunately we don't have the time because of deadlines every single week to do this real in-depth process.

But if you dig a little bit deeper, CCPs and the market in general does make so much more transparency available now, not only about trade by trade levels, but you can also go in depth about the market structure. And so what I was able to find for this blog is that when you look at the volumes at JSCC, most of the volumes at JSCC are dealer-to-dealer.

And when you go and look at the volumes at SwapClear, most of those volumes at LCH SwapClear for yen swaps are client. And so there is this structural difference between dealers and clients. Then you peel back the onion even further and you find that, yes, the CCP basis has been very, very active and very volatile this year in terms of the long end of the CCP basis between JSCC and LCH moving negative for the first time.

And so this is a really strong example, a really strong platform to say, look, we've got all of this transparency in our markets now. And we can finally say, look, here is a price that's moved. The JSCC LCH basis has moved. We can put all of the pieces of transparency together. And we can exhibit why it's moved.

We've recently seen the 50th client on board to JSCC. It feels like the more clients that come on board to JSCC, the more likely it is that LCH JSCC basis moves closer to zero. And in this case of 2024, moves through zero into negative territory. So maybe it speaks more to me. I've enjoyed this like journalistic type of process and research, but I do think it's real strong evidence that we've been able to move into a new wave of transparency whereby we can use data to really show this data has moved the prices.

And I think that's a powerful. thing to say. All right, so that's an overview of the blog. I didn't want to go through paragraph by paragraph exactly what is in the blog. I wanted to give a bit more color on the process and the ideas behind it. Amir, do you have any specific questions about either the content or the process?

Amir Khwaja: Yeah, sure, Chris. We often hear the term extracting signal from noise, right? Sources of data that help you get a better understanding of what's going on. So I think, yeah, this is a great example of looking at the data and getting understanding of something that wasn't obvious when you first looked at the data.

Chris Barnes: Yeah, agreed. I will say there is more work, more research that goes into this type of piece where you're really extracting color than from a high level overview. So I guess if we were still to look at through a critical lens of the transparency that's there, it's difficult to get here in a single step, right? It's taken a couple of steps of research to be able to get this level of color. 

Amir Khwaja: Yeah. Thanks, Chris. And I guess the other thing which stands out to me is that without looking at it, I would have just given other CCPs and we know CME clients dominate CME versus dealers LCH. Here it's the opposite finding, which is interesting.

So it's probably the only one like that where the electivity is not on swap clear. It's on a different CCP in a currency, which is interesting. And that comes out from the data that's put, that we have.

Chris Barnes: Yeah, and even having gone into the level of detail we have in the further research, it's still not a hundred percent clear to me why dealers are JSEC.

I can obviously see why clients are swap clear, but that last piece of the puzzle doesn't necessarily scream out, this is why from the evidence. So you need the data to be able to state that. 

Amir Khwaja: So I guess you can't point to a particular regulation that imposes that. It's happened over time for a number of contributory reasons and has become de facto.

Chris Barnes: Agreed. 

Amir Khwaja: Great. Thanks, Chris. 

No problem. Ali, now the big, big test. I've been blogging for 10 years. Can I still remember the title of the blog at the end of this podcast? Is it a yes or is it a no? 

Ali Curi: I think your memory is as sharp as ever, Chris. Can you please share with us again the title of your blog post?

Chris Barnes: It's "Yen Swap Clearing — Why do dealers prefer JSCC?" 

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. See you next week. 

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.