For example, some contracts depend on the Ibors’ forward curve while the replacement rates, such as SOFR and the sterling overnight index average (Sonia) are backward compounding rates. 22% of GBP IRS volume by notional is spot starting. Random samples could be taken – either over different windows, or averaging or using a median quote. These account for 45% of volumes. I can also see why high level talk of a “calculation engine” puts people off. This work … How SOFR, the benchmark rate chosen to replace USD LIBOR, works and what drives its movements. GBP IRS markets are the third largest Interest Rate Derivatives market. Our SDRView product captures a reasonable portion of the market, and shows us just how saturated the market for clearing in GBP Interest Rate Derivatives now is: We can use SDRView trade-by-trade transaction reports to look at the structures commonly traded in GBP IRS. SONIA is a well-established interest rate benchmark that has been published daily since 1997. Inflation Swaps are somewhat lower, with around 60% of volumes being cleared. Let’s assume a step-rate function similar to the ICE futures model? TP ICAP will provides quotes from the electronic trading platform i-Swap. Volume-weighted calculation.
The FCA has also suggested that regulators could announce LIBORs discontinuation themselves — presumably for a date after 31 December 2021 — but with the announcement potentially coming as early as 2020. Despite the disruption caused by the COVID-19 pandemic, the UK Financial Conduct Authority is still advising all market participants to prepare for a discontinuation of LIBOR at the end of 2021. Other products show a similar story. Looking at the SDR data we find that 80% of SONIA risk currently reported is forward starting.
GBP SONIA HKD HONIX JPY TONA NZD NZIONA SEK SIOR USD FED FUNDS ZAR SAFEX O/N Dep Rate ©Edu-Risk International Limited-Risk link: Swap on -Risk Curve Off The -floating rate -collateralised ). Due to the trade-by-trade nature of the SDRView data, we can also analyse the maturities (tenors) traded.
This work is being supported by the Risk Free Rates Working Group, who have developed a new Task Force to help provide market-wide input. Now that IS different. Otherwise, the FCA may step in after a number of banks have left the process and state that the reduced size of the panel prevents LIBOR from being robust enough for use. While LIBOR is forward looking, giving the cost of borrowing for the future period starting on the day it is published, SONIA is backward looking. SONIA is a backward-looking rate. 42% of GBP Libor swaps are forward-starting; spot-starting swaps account for only 22% of volume. Some time after the end of 2021. If the entire panel drops out, LIBOR would be discontinued at that point. The paper outlines a “calculation engine” which might set some alarm bells ringing regards complexity/transparency. There is the possibility that this distribution of risk is skewed by the types of counterparties reporting GBP OIS risk to SDRs (maybe hedge fund heavy?).
SONIA risk is concentrated in the 1 year tenor. LIBOR transition continues with the announcement of ISDA’s protocol release date, updated language from the ARRC for bilateral business loans, and possible amendments to the EU Benchmarks Regulation to help ease the transition. Stay informed with our FREE newsletter, subscribe SONIA swaps are frequently forward-starting out of MPC dates and IMM dates.
91% of GBP LIBOR swaps (by notional) were traded versus the LIBOR 6m index (77% by trade count). I think simplicity and transparency is really what end users of these rates will first and foremost demand. It is notable that three of the four providers have preferred to incorporate spot-starting quotes into the fixing process. Most Libor risk is much longer dated, with the 10 year tenor the most active.
I can’t stress this enough.
Whilst reading the below, bear in mind the following risk profile of SONIA risk reported to SDRs in the past six months: This is an interesting one, with some big names attached: The presentation does not include precise details on the calculation methodology, but states that they are keen to consult with the broader market to develop a methodology. Backward starting swaps – typically associated with either portfolio maintenance or novation activity – account for 13%. SONIA is calculated as the trimmed mean, rounded to four decimal places, of interest rates paid on eligible sterling-denominated deposit transactions. Both spot- and forward-starting. Employ a point-in-time fixing (with say a two minute observation window). In particular, the FCA has set a deadline of 31 March 2021 for banks to stop signing new loans linked to LIBOR if they mature after the end of 2021.
During that time, they found that GBP IRS made up 9% of Average Daily Volumes and was hence the third largest market in interest rate derivatives, behind only USD and EUR.
The paper only describes an “end-of-day base curve” so it’s not 100% clear.
Hi Chris – a useful summary to save end users going through the presentations, which as you state lack detail in certain instances. Most SONIA risk trades in the 1 year tenor, and MPC-dated contracts are frequently traded. FTSE Russell will be the benchmark administrator. The SONIA swap market is already well-established, and since the second half of 2019, the average daily volume of new SONIA swaps traded has exceeded that for LIBOR.
As we did for other European markets, we can identify Swaps with matching maturity dates to outstanding Gilts.
At each policy meeting, the MPC meets to determine the Bank Rate during the subsequent maintenance period. I expected JPY to be much larger. Even more significant are volumes starting on the first day of a Bank of England maintenance period. Will the market really start creating CLOBs in the derivatives market to solve it or do we need a Markit-like approach? The downside of that is that it can be interpreted as complicated. If there are insufficient transactions and/or quotes, the methodology will fall-back to futures quotes, transactions and prices.
Aren’t forwards an even better input to the Step Function than futures? The exact date has not been fixed by the FCA — instead, the regulator will stop asking banks to participate in LIBOR’s calculation after 31 December 2021. Chatham Hedging Advisors, LLC (CHA) is a subsidiary of Chatham Financial Corp. and provides hedge advisory, accounting and execution services related to swap transactions in the United States. Each month, our team discusses the current state of GBP LIBOR and SONIA markets, exploring both the performance of the rates as well as the borrowing and hedging markets that surround them.