Quick Takes: Cross Currency Swaps Review 2023

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, Chris. It’s good to see you again.

Chris Barnes: Hey, Ali. How are you doing?

Ali Curi: I’m doing great. Apparently, we’re going solo again, so it’s you, me, and Quick Takes.

Chris Barnes: Solo again, as one of my UK colleagues said this week, Amir is a bit like Judith Chalmers at the moment, it seems like he’s always on holiday. It’s all right for some, isn’t it, Ali?

Ali Curi: It’s a great life if you can get it. Let’s talk about Quick Takes. What is your Quick Take for this week? Which headline from the Clarus FT blog would you like to discuss?

Chris Barnes: All right, Ali, this is a very selfish blog. I must be 100 percent honest. This is the cross currency swaps review for 2023. Now, Ali, if you can remind me, I don’t think we’ve done a podcast on cross currency swaps before. Is that right?

Ali Curi: We have not. That is correct. We have not.

Chris Barnes: Okay. Much as I’ve said on the SACCR blogs, there are not many people that write about SACCR.

Certainly nobody ever does a podcast on SACCR. Cross currency swaps really are in a similar realm to that. They are very, very niche. Not many people write about them. Whenever we write a blog on cross currency swaps on the Clarus platform, it’s always wildly popular. My only thought on that is really because it’s such a niche topic, there isn’t a lot of content out there on cross currency swaps.

And it’s just worth taking a moment now to look at why that might be. And the main reason really for cross currency swaps not to be written about in the mainstream press so much is because when people talk about what’s happening in rates, what’s happening in interest rate derivatives generally, there is an overarching theme normally of all the Federal Reserve or the ECB are going to do something. It’s normally related to central bank action or the strength of the underlying financial markets or strength of the underlying economies. Cross currency swaps really are different to that in that they’re a pure funding product.

And so as a result, you don’t get this same tie in between what happens in cross currency swap markets and what happens in the underlying markets themselves. And so it’s difficult to write, let’s say a narrative, around what is happening in the cross currency swaps market. However, when you look at the content that Clarus are producing, both for the blog and latterly for this podcast, what we’re really there to do is present a neutral lens on the data that is underlying markets.

So we’re not there trying to explain why volumes have gone up or explain why prices have moved as they have, what we’re doing is using the transparency data to say, look, this is an important market, it is pivotal, for example, for cross currency swaps for how government agencies fund themselves. They need to tap into cross border funding. And so it’s a very important market to monitor.

And so all of the blogs we write on cross currency swaps are consistently popular. For 2023, there are really three main headlines. And obviously as a podcast, I can’t go through the data in a granular manner.

I’m not about to talk you through a chart. So your three takeaways from this blog are really that 2023 saw all time record notional volumes. It was an all time record year for cross currency swaps reported to the US SDRs. That’s a really important takeaway. Traditionally, cross currency swaps are somewhat liquidity constrained.

It is a difficult market to move big size through. A lot of the trading job that is involved is warehousing massive trades for a long period of time. So it was a really positive sign for global markets that volumes were so big. However, what we’re able to do at Clarus is overlay those notionals with our analytics as well, because we’ve got the trade by trade details, including the start and end date of the swaps.

We can then calculate what’s called a DV01. That’s a maturity adjusted metric of volumes. So it gives you a maturity agnostic measure of how big the risk is that’s moved through the market. Headline number two, is that in terms of DV01, 2023 was not a record year. I think I’m right in saying that 2020 was larger.

So whilst we saw record number of trades, record size of trades, we didn’t see a record amount of risk move through the market. And that brings us on to headline number three. If you’ve got large notional trades, but they’re not that risky, that generally means that they are shorter trades. And that’s exactly what we saw in the data for 2023.

Generally speaking, a cross currency swap that was traded in 2023 was shorter than a cross currency swap that was traded in 2022. So those are my three main takeaways. I realized that it’s a niche market Ali, but do you have any specific questions on that?

Ali Curi: Yes, actually I do. You spoke about the press, and my question to you is, why don’t we see more coverage about cross currency swaps in the mainstream press?

Chris Barnes: As I said initially, it’s difficult to put a narrative around it, and trying to flesh out that narrative is really hard. Cross currency swaps are really driven by pure supply and demand dynamics. What we’re mainly looking at is cross border issuance. So it’s driven by bond issues. So for example, the government of Germany have a large development bank called KFW.

They have to raise X amount of euros each year. To do that, they might have to tap into the dollar bond market, the sterling on market, the Swiss on market, et cetera, and swap it back to euros. There are a number of these big institutional users of cross currency swaps around there. For the mainstream press to go into the depths of researching what bond issues have come out, how it’s moved, the prices, what the volumes have been like is really a layer over and above what you can expect of a financial journalist. It really takes a trading desk to put the flesh on the bones of what has happened. I will say, the US SDR data is vital here. It’s the only lens that we have into cross currency swaps because cross currency swaps are a bilateral instrument. They are not cleared. They are not reported as part of any volumes of CCPs. They remain an uncleared market. So this is the only data that we have on this market.

Ali Curi: Technically, even though we’re in February, we’re still at the beginning of the year. So what are some of your predictions that we might see in the cross currency markets for 2024, for this year?

Chris Barnes: Man, if you’d asked me that last week, I wouldn’t have had a clue. This month, I’ve just started looking at what happened in January.
Whilst the blog says that 2023 was a strong year, but maybe it wasn’t a strong year for the amount of risk. What we saw in January of 2024 already was actually a record month ever for the amount of DV01 traded in cross currency swaps. So January has just got the market off to a stellar start.

Now, the cross currency swaps market is really known for being full of cynics. Generally speaking, the traders are pessimistic. The traders are expecting a blow up at any point in time. So if you speak to any cross currency swaps trader they are bound to say that January won’t happen again. I think that’s probably fair to say, this year, as we’ve said, the market dynamics are driven by bond issuance.

There is a natural inclination in an election year to try and get all of your dollar issuance done as soon as possible. So it’s very likely that the bond issuers are front loading their issuance this year, doing it as early as possible to avoid any event risk associated with the U.S. election. So whilst we’ve had a record month, I don’t think it’s necessarily the case that we expect that to continue throughout 2024.

Ali Curi: We’ll keep an eye out and we’ll see how your predictions pan out for this year. Chris Barnes, thank you for joining us. Oh, and before we go, tell us again the title of your blog post.

Chris Barnes: Title of the blog post, very simple, Cross Currency Swaps Review 2023. It’s been a pleasure, Ali. I’ll speak to you next week.

Ali Curi: Thank you, Chris. Let’s do it again 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.