This week’s Quick Takes has Amir discussing “Most Active Names in Credit and Equity Derivatives – August 2023” and Chris telling us more about how “Brexit continues to impact EUR Swaps market share for CCPs and SEFs”.
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: Hey Ali.
Chris Barnes: Hey Ali. How you doing?
Ali Curi: I’m doing great. It’s great to have you here.
Ali Curi: We’re back for some Quick Takes. Amir, let’s start with you.
Ali Curi: What are your Quick Takes for this week? Which headline from the Clarus FT blog would you like to discuss?
Amir Khwaja: Great. Thanks, Ali. Most Active Names in Credit and Equity Derivatives, August 2023. So on a monthly or quarterly basis, I write an article on most active names.
Amir Khwaja: So that data we use is based on SEC swap data, repositories, which cover securities. Really, they cover two important markets, credit defaults swaps on single names and total return swaps on equities. And data tell us what’s trading in those markets. So the reason that’s important is that, we all know that Credit Suisse, went under on this year was taken over by UBS.
Amir Khwaja: And there are a number of factors contributing to the loss in confidence on Credit Suisse. A few losses, particularly, so Greensill, which we won’t talk about, but really Archegos, if you remember, was a large hedge fund in the US where Credit Suisse was the prime broker. In early 2021, they went under, causing a 10 billion loss of which Credit Suisse, had to take over 50 percent of $5 billion. So then a factor that contributed to the loss in confidence of Credit Suisse was Archegos and their relationship with Credit Suisse. And Archegos was taking large positions in equity markets, but using total return swaps, which are not disclosed through the normal reporting or were not banned anyway. So since then, the SEC has imposed regulations for transparency in total return swaps. And now we can see the volumes that trade in that marketplace that are off exchange, but it’s large in size. So basically, so each month or every other month, I look at the volumes in total return swaps on single stocks and single name credit default swaps.
Amir Khwaja: Because a lot of names trade in these markets, there’s thousands of issuers, looking at just trades, it’s hard to spot what’s going on. So what’s disclosed is every time a trade happens in single name CDS or in total return swaps (TRS) on equities by U.S. person, the trade is made public, but there’s trades in thousands of different names or issuers.
Amir Khwaja: So what we do is we collect that data. We have the time of the trade, we have the size, we have the price, and we create aggregate views. Now, one of our most popular views is what we call the top most active view. So it really hones on the most active 100 names that traded yesterday or this week or this month compared to the prior month.
Amir Khwaja: You can see really where trading, has changed a lot, as to which names. So in August I looked at what were the most active names in CDS higher than their prior month average. So very quickly, we can see for August in U.S. Corporates on single MCDS, U.S. Steel, was up a lot based on its prior month average, also Ford Motor Credit, American Axle. So these are names that are either, issuing debt and the market is taking a view on the credit spreads of those names in the CDS market. Where activity is higher than normal or lower than normal, there’s some activity happening in that name or a change in market view of what the credit spread should be of issuers, of their issues. So that’s important in the same way TRS is, the return swaps are used to take large positions off exchange on single stocks. And if we look again at U.S. equities, we can see much high activity in August compared to July for Johnson & Johnson, Akamai Technologies, Nikola Corporation, which is a EV type manufacturer, AMC Entertainment. So AMC, if you recall, this is one of these Reddit stocks like GameStop that were really huge and driven up by investors in retail. So again, they had a bigger month in Total Trends Top Markets. So that gives people insight, it’s lagging, but it tells you what is trading and what size and above average size in different periods, either daily, weekly, monthly. So that’s my summary. And really what we’re trying to show that this transparency in trades helps make markets more efficient. And this data is really contributes to that. And really the purpose of markets is to provide an efficient venue for buyers and sellers to trade. Better quality data on transactions that are actually happening, help make efficient markets, and now since Feb, 2022, we have daily transaction volume on all trades done by US persons in credit default swaps on single names and on total chain swaps on equities.
Chris Barnes: Amir, on your last point on transparency there, probably worth us dwelling a little bit on some of the frustrations we have with this data as well, right? So thinking back to when Credit Suisse was particularly stressed, there were banking market stresses around regional banks in the U.S. as well. So of course with my trusty blogging hat on, I turned to the SPSDR data.
Chris Barnes: And we wanted to see what the potential contagion aspects of that were. So we went looking through the data, looking for single name CDS on banking stocks that may be subject to contagion like Deutsche or Commerce, et cetera. And when I did that blog, the hope was that we could not only monitor volumes with this data, but to monitor the price data in there as well.
Chris Barnes: And yes, I think it’s just worth flagging for our listeners here that not all transparency data is equal. I think regular followers of the blog will remember back in 2012 and 2013, when DTCC first started publishing data for rates, there were data quality issues around it, and I like to think that one of the best feedback mechanisms that public transparency data can ever have is when people actually use it and we certainly saw that with SEF. You, Amir?
Amir Khwaja: In 2013, yeah. And of course your point is exactly correct. So SPSDRs have only been live since Feb 2020, so I guess a year and a half. And while the transaction data and volume is good, the price information is not always present on the records.
Amir Khwaja: So really, ideally, you want to see what credit spread and name is traded at and the size of the trade. And often, unfortunately, we see that particularly, I think I guess there’s two main repositories for credit defaults in the U.S., ICE and DTCC. I think the ICE data tends to be better. We often see, we usually see, the credit spread that the trade traded at.
Amir Khwaja: Which is, should be published by the, on the public record, by SEC regulations on the DC repository, it’s generally empty, that field is not populated. So that’s, not great because really we want to see, have spreads widened or have they collapsed in a crisis. And really in the crisis, banking spreads of certain banks exploded.
Amir Khwaja: But seeing that in real transactions is more important than seeing, hypothetical spreads that people are making, but not transacting. So that’s unfortunate, we hope that by giving that feedback in the public, that should improve. I think on the transaction volume side, trades are capped at $5 million dollar size.
Amir Khwaja: So the trade could be $5 million, $50 million, a $100 million, but we see $5 million. That’s just to keep it consistent with with trades in the U.S. Corporate bonds. But again, over time we expect that to be recalibrated to a different amount, maybe higher for sovereigns of different sectors, because you would like to see more in, a higher amount of volume disclosed without impairing liquidity.
Amir Khwaja: Because again, these are markets that trade infrequently in large size. So you don’t want to disseminate too quickly a public transaction before the market maker has hedged it or, although they don’t compare liquidity, but really, yeah, price needs great improvements. And I think Chris, as you pointed out, the more I look at the data, the more obvious it becomes that these fields need to be fixed and there’s pressure on the reporting parties, the repositories, their regulators to make sure that happens.
Chris Barnes: Yeah. I think also an observation on the TRS data for the equities. I think the use case of that data is probably a little bit different to the use case of rates, which is more on a macro perspective. When you’re looking at the data here, just looking at some of these names and the big changes month on month, clearly a lot of that is event related.
Chris Barnes: For example, if there’s an earnings report that month, the name is far more likely to reach our list of top 50. And so you almost need to get into that mindset of this is transparency data, but to make sense of the transparency data, I need to combine it with either underlying market knowledge or other sources of data as well to make it meaningful and to interpret those rules.
Amir Khwaja: So if a firm reduces quarterly earnings and the market has a different expectation, you would see higher volume on that stock. So I think quite often when I do this blog, the names that show up because I’m looking at the volume data, I look at some cause for the names. And, Google is great, you just type that name in and you can find some recent news tied into that month on that name. Either there’s been an issue or there’s been a quarterly earnings and the market responded positive or negative fashion to this quarterly earnings or some acquisition, often M&A, so you’re right.
Amir Khwaja: So this data is best tied into knowledge about news on particular issues. Really what we’re doing is highlighting stocks that have traded much more in TRS than their average over a previous week or previous day or previous month. Then you can link to other sources, to get a better picture of what’s going on.
Chris Barnes: So Amir, you mentioned that Google’s a really useful resource. I need to take this opportunity to point out that Google’s a really useful resource for coming up with good blog titles as well. I think we, I really need to move away from quarterly review, and get some more clickbait out there.
Chris Barnes: I mentioned Bard last week. I did go back to Bard this week as well. I asked Bard for, I asked it for what is a good title for a “Clarus Financial Technology Podcast Featuring Amir and Chris,” would you like to hear the top three?
Amir Khwaja: I think we would.
Chris Barnes: Yeah. In third place, it was “FinTech Deep Dive with Amir and Chris.”
Chris Barnes: Second place, we’ve got the “Clarus Fintech Show, Where Finance Meets Technology.” But my favorite from out of Bard, by a long way, is “Fintech Disruptors, Amir and Chris on the Cutting Edge.” I’m not sure we’ll run with any of those.
Amir Khwaja: Oh, Ali, what do you think, Ali, about those three titles?
Ali Curi: I’m guessing the third one, your last one, is definitely the “Cutting Edge” one.
Ali Curi: That one gets my vote.
Chris Barnes: All right. All right. Okay.
Amir Khwaja: Couple for the readers, yeah, on this list.
Ali Curi: And Amir before we continue, tell me again, what is the title of your blog post that you were just discussing? I think you mentioned it at the beginning, but tell us again.
Amir Khwaja: Sure, yeah. “Most Active Names in Credit and Equity Derivatives, August, 2023.” And as Chris says next time, but shall use Google Bard to give me a better title.
Ali Curi: Well, Chris, let’s move over to you. What are your Quick Takes for this week? Which headline from the Clarus blog? This is pre-Bard, which headline from the Clarus blog, from the Claris blog, would you like to discuss?
Chris Barnes: This week, I have chosen to write about Europe. It’s a very hot topic. In the markets at the moment, we tend to approach it from a Clarus perspective, mainly in terms of monitoring market share.
Chris Barnes: This is a fantastic use case for pretty much all of our data products. The title of the blog is Brexit continues to impact Euro swaps market share for CCPs and CEFs. It’s really written in response to an ISDA paper. That was published in conjunction with a number of other trade associations talking about the possibility that European-based market participants will have an active account requirements at a onshore CCP.
Chris Barnes: Now, I don’t want to get too much into the politics or the reasons behind that. Clarus did write a very well followed blog immediately after Brexit, which was called “Moving Euro Clearing Out of the UK,” the $77 billion dollar problem. I must admit that $77 billion dollars is such a big number. I often forget whether it’s $7 billion, $177 billion or even bigger, but that really highlights the impact that if you’ve got a CCP the real benefits to market participants of CCPs is multilateral netting and breaking that netting set from a market participants viewpoint can be very painful, can be very costly, and that can be the result of so called location policies, whereby you try and move a portion of business from a netted multilateral set into a standalone silo. We’ve been monitoring both the impacts of Brexit’s interest rate, derivative markets, and what that means for CCPs, for SEFs, what it means from a market infrastructure perspective. We tend to be particularly keen on writing these types of blog because they change from month on month.
Chris Barnes: It’s a way of monitoring market share. This also at the moment is potentially impacting policy as well. So it’s really important to have timely data, but equally, it’s quite an interesting it’s not quite, it’s really interesting from a shared data perspective, because of course, for market share, there’s numerous ways of measuring market share, whether you are looking at open interest, whether you’re looking at volume that trades, how you measure that volume, whether it’s in terms of notional whether it’s in terms of DVO1.
Chris Barnes: Clarus saw huge proponents of rates market. We should not talk about notional volumes. We should talk about DV01 because DV01 is the amount of risk that is being traded. DV01 is a measure that allows you to fairly compare volumes in a three month compared to volumes in a 30 year trade, which are fundamentally different contracts, different length contracts, but the DV01 is really a maturity agnostic measure of that risk. So when we look at CCPs, we have DV01 data available. What that allows us to do is measure the market share of CCPs in Euro swaps. Now, when I talk about Euro swaps, historically, that would all always have been FRAs and interest rates. Of course, increasingly in an RFR world, more and more of the rates market is trading versus ESTER.
Chris Barnes: So when I talk about swaps, I’m also including OIS swaps in that. What we see recently in the data is very interesting. There’s really two major CCPs with volumes. That’s a London-based LCH Sutcliffe and a Eurex in Frankfurt. The Eurex market share by our measure, which is DV01 traded per month has in the past been as high as between 9 and 10%, but August 2023 was an interesting month.
Chris Barnes: Volumes were higher than a typical August, but we did see the Eurex market share slip and Eurex market share was actually down at 3.7%. We don’t know if that is a sign of things to come, whether it will change. But I thought it was a timely reminder that these market shares do move and can move by quite significant amounts month on month.
Chris Barnes: So an interesting one to monitor and very timely from a policy perspective. The second thing that’s happening in Europe. At the moment is that ICE are in the process of closing their European based CCP for CDS that will allow ICE to move all of their cleared CDS to a single U.S.-Based CCP for market participants that obviously increases the propensity for netting and so could be potentially beneficial for market participants from that perspective for local European-based clients who maybe don’t have the same type of exposures fit for U.S., they continue to have a European domiciled option in LCHs, CDS Clear. So for the past kind of 18 months, we’ve seen the market share figures moving with ICE Clear Europe shrinking and CDS Clear growing. I thought it was interesting to see that both CCPs, so LCH, CDS Clear, and ICE have been happy with that process. I imagine as a result of ICE seeing more netting in the U.S. House and LCH increasing their market share. As at the end of August, the LCH market share now stands at about 28, 29%. Finally… just from a data perspective, I think the market share of the global Euro swaps market that trades on a SEF is a very interesting one to monitor.
Chris Barnes: We wrote about this at the very beginning of Brexit. We quickly saw a move whereby about 15% of the global Euro swaps market moved to trade on SEF. And that was due to regulations and SEFs being the only platforms that were equally identified by both the UK and Europe as fulfilling the trading obligation.
Chris Barnes: And so actually, Brexit resulted in moving a portion of the market to US-based platforms. Now recently we’ve seen a big divide in how you measure that market share of Euro of SEF market share for Euro swaps. So if you measure it by DV01, it’s been remarkably consistent over the past two, three years at 15% of the global market.
Chris Barnes: However, if you look at the amount of notional that’s trading on U.S. SEFs, that market share can actually go up as high as 30%. So again it’s this concept of, okay, all of this transparency data is out there. You need to be very mindful of the measures you’re taking. You need to be mindful of the data you’re looking at.
Chris Barnes: We continue to believe that DV01 is the right measure. If you look at SEF as a purely brokerage platform, brokerage is largely charged as a percentage of DV01 as opposed to as a percentage of notional, therefore, in terms of market share, we should be looking at DV01 measures. It’s just interesting that those two measures have diverged so much.
Amir Khwaja: So a few questions here for you. So I guess, post Brexit, the equivalent termination by European regulators for UK-based CCPs has been an issue. And we know that’s been deferred a bit, changes in Eurex market share, to moving Euro clearing onshore versus offshore for European firms, hence the active account. But I guess the one, so some movement but we still have equivalents. And I know, I think it’s now summer 2025, but is that the, the next stage? But the one effect we are definitely have seen is that volume, which used to be on MTFs UK, which were European pre Brexit.
Amir Khwaja: Now there’s a, UK-based MTF or a Amsterdam-based MTF, but volume, some volume has gone on to U.S. venues, which is a surprise, right? The break of Brexit has caused the U.S. to gain volume on, certainly trading venues. Do you have a view on whether that’s played out or whether we will see that change and whether that also affects clearing in some sense.
Chris Barnes: I don’t think where the trade is executed impacts clearing. I should also flag from the clearing perspective that since we wrote this article about the active account requirement risk of all, as I’ve also followed up with a very detailed article. And that’s the first time I’ve seen a number mentioned about what an active account might mean and risk of floated with this idea that may be 10%, maybe 15%, it feels like a political question.
Amir Khwaja: Let’s step back a bit. So it’s a question of, CCPs are financially, what’s the word, super important institutions. I forget what that term is, right? Systemically important institutions that are backstopped by the local regulator, Bank of England, ECB, et cetera. And firms in those jurisdictions need equivalents to be able to have large exposures at foreign CCPs.
Amir Khwaja: A regulator can use a carrot or a stick. They can say you cannot trade, we draw equivalents, it’ll be more expensive or carrots, right? There’s some benefits, or the market will find its own solution, right? So markets clearly would like to gravitate, as you say, to a solution where they get the most multilateral netting benefits, which are the most efficient for them from margin and capital point of view.
Amir Khwaja: And, but that, that may have adverse impacts on financial stability, right? Who backstops this important institution, right? So I guess the active account is a, how do you term that, it’s not a, it’s a softer, regulatory requirement, right? To say European firms should maintain active clearing relationships in the onshore CCP, but still allowed to use offshore CCPs, right? That’s the kind of idea, right?
Chris Barnes: The soft approach would be exactly as you say, to allow the market to decide, and the market at the moment has consistently traded anywhere between 5 and 10 percent of new volumes at Eurex. That seems to be where the market has stabilized recently. One of the motivations for writing the blog was, yes, that is dipped recently, noticing on your previous blog as well on CCP volumes and share that market share is actually lower if you just look at ESTER, it can have consequences for benchmark reform and market structure changes as well.
Amir Khwaja: But I guess, but Chris, but I would say, the market decides on, firstly based on liquidity, what clients prefer in terms of jurisdiction and law but also just based on upcoming regulatory changes that may or may not happen, right?
Amir Khwaja: So the threat to withdraw equivalence, is a deadline, right? So I guess the back of that can also influence. So clearly there’s regulatory drivers. So what I mean by softer is that the active account is softer. It’s much softer than withdrawing equivalents, right? So clearly there are some client firms that would prefer to clear in Europe or in U.S. rather than UK.
Amir Khwaja: Just based on their jurisdiction or their legal position. Debate the point as to what it means for market share. I think a point that trading on venues is different to where the trade clears. But it still affects, where firms choose to set up their venues, where they hire staff, where they have their risk, et cetera.
Chris Barnes: I just think of the swaps market naturally as a very global beast, right? I haven’t traded for a long time now, very long, long time. It was never a consideration as to where a client was or where a dealer was, right? The whole consideration was liquidity and accessing the maximum amount of liquidity so that you can serve your clients in the best way possible.
Chris Barnes: And then all of a sudden, if you’re used to working in a global financial hub like London, but you have a European client, or a European dealer, all of a sudden you can’t face that European dealer where you would normally trade. You need to actually say, oh, hold on, I need to trade that on a U.S.-based platform because that’s the only platform that has equivalence for both of our jurisdictions.
Chris Barnes: That’s a real fundamental change. And the reason, efficiency. And you have to remember that’s at the point of execution of a trade. And so that has very meaningful impacts on price moves, on clients, on your ability to service clients. And so from the perspective of a trader trying to do their job, when you impact where they can execute trades, it is very meaningful.
Amir Khwaja: The flip side is, regulators backstop the CCP in their country. And when the CCP has financial resources that are in the billions or hundreds of billions, those are large sums for many economies. And the concern more is, I guess it’s more, but in the event of default of a clearing member, what does it mean?
Amir Khwaja: And clearly we know that CCPs are you know, governed, risk managed, lots of collateral, lots of default funds, resources to backstop. So they really mutualize the exposure and do not depend on the central bank bailing them out.
Chris Barnes: Exactly. And the whole way to get a risk neutral CCP is to ensure that there are processes in place to spread that risk and to minimize the risk as much as possible.
Chris Barnes: If you then have to run directional dollar positions in one CCP, versus directional euro positions in another CCP, that is going to increase the amount of risk that each CCP is carrying.
Amir Khwaja: And to me, the question is, is that increasing cost worth paying for, I don’t know, superior financial stability in an extreme crisis?
Chris Barnes: I would argue it’s not going to create more financial stability in a crisis though, because you’ve then got two independent ways of managing outright risk, which would essentially, if they were at a bank, they wouldn’t be managed separately. They would be managed together. And so really importantly, in the event of a crisis, the most efficient way to manage the risk should really be our goal.
Amir Khwaja: Well, does it really clarify which regulator is on the hook, right? As opposed to, so in the end, the buck stopped somewhere and the buck generally stopped at the central bank of that currency, that regular CCP. So maybe an extreme crisis, it makes it very clear who’s responsible to making sure orderly markets function. Then we would say for a global market, global regulators would get together from different jurisdictions and work out a solution. But it does depend, by, which country’s taxpayer bears the costs, right? Should that extreme event happen, then there are taxpayer losses, right?
Chris Barnes: I think it’s a very emotional subject. I think it’s also political. We could go on and on, but I think at some point we need to stop. And Ali is waving at me saying, stop, enough gents.
Ali Curi: Amir and Chris, thank you so much for sharing your Quick Takes. Let’s do it again next week.
Chris Barnes: Thanks Ali.
Amir Khwaja: Thanks Ali.
Ali Curi: And that’s our episode for today. You can read more about these topics on the Claris blog, and you can follow ION Markets on X, formerly Twitter, and on LinkedIn. Until next week, thank you for joining us.
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