Quick Takes: What You Need to Know About INR Swaps

Ali Curi: Hi everyone, and welcome to 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: Doing great. Chris, why don’t we start with you?

What’s your Quick Takes for this week? Which headline from the Clarus FT blog would you like to discuss?

Chris Barnes: All right, Ali. Today I’ll be following up on a whole series of blogs we do called, “What you need to know about.” We try and write these periodically because they work really well as so called “evergreen content” for us.

Very popular for the Google searches. And what it does for Amir and I, in terms of writing these is gives us a reason, an excuse to educate ourselves about typically an area of the market that we don’t actually know a lot about. So the specific blog is all about INR swaps, Indian rupee. I have never traded INR swaps, never had much reason to look at them before writing the blog.

But for example, in 2022 and 2023, we know that a feature of the clearing landscape has really been increased volumes in currencies outside of the so called G6, it seems to be that clearing is getting more and more popular particularly for smaller currencies. And so as we get more and more data, there is a lot more for us to be able to write about and a lot more for us to be able to educate our readers about.

As a broad brush intro to what the swaps landscape looks like for INR, broadly speaking, it’s split between onshore markets and an offshore market. Immediately, this is interesting for us at Clarus, there aren’t that many cleared markets whereby you have real competition between different CCPs.

We obviously blog a lot about Europe and what’s potentially happening with the onshoring of rates trading there. We used to write a lot about the dollar swaps market ever since CCP basis, most dollar swaps are cleared at LCH. It’s not that much of an interesting topic to blog on. So for INR, it was nice to see that there is real competition here.

About two thirds of the volumes are cleared at swap clear, in London. The other third is cleared at an onshore CCP called CCIL or Cecil. Am I allowed to call them Cecil? I’m not sure, but it’s the clearing corporation of India, which is an onshore CCP. The products that are cleared are different. I wrote a similar blog for CMY swaps as well.

It is important to note that whilst we talk about competition between. The CCPs, the products are different. So for example, in the case of INR swaps, the swaps cleared on shore are actually settled in rupee. Whilst the swaps that are cleared offshore swap clear are actually settled in dollars. So we are talking about different products, but it’s still relevant from a market structure perspective from a competitive landscape to monitor how much is trading onshore, how much is offshore, whether those trends are changing over time. I think as my main takeaway from the blog, it really is that cleared volumes have increased year on year 2021, better than 2020, et cetera.

2023 is already a record year for cleared swaps in Rupee. And it looks like from the SDR data that more and more of the market is being cleared. I think just pulling some numbers from the blog, I think something like 85 percent of the volumes reported were cleared in the latest month. The other thing that we can look at in terms of our data is SEF trading.

When we look at it very surprising at how few SEFs are actually active in the Rupee market. It looks like basically you’ve got one SEF that’s looking for dealer-to-client flows, that’s TradeWeb, and one SEF that’s looking at dealer-to-dealer flows, which is BGC. Again, it really highlights how these niche markets have different values for different areas throughout different businesses, that is a very different dynamic to the one we see elsewhere in, in SEF-land. I’ll leave it there for now and ask Amir if he’s got any specific questions. It really is designed as an introductory blog. I think that even people who have traded the markets for a while, they’ll still find data that is interesting in there. And I think as the size of our data sets continue to increase, that is very much a feature of markets like this.

Amir Khwaja: Great. Thanks, Chris.

This theme of what you need to know about, certain swap market, we’ve done BRL, Mexican, CNY, INR swaps, and it’s proved a very popular topic.

I think for us, it was great. So new markets for swap traders I’ll tell the major currencies that might be familiar with Scandi currencies. I think there’s less similarities, so certainly from our experience on these sort of markets, but

they’re given the economies are very large now they have developed capital markets, they’re now large swap markets as well, right?

Chris Barnes: Yeah. And I think a real feature of that is that we’re getting more transparency into these so called smaller markets as a result of the moving to clearing. So whilst any particular currency or jurisdiction might not have its own clearing mandate, what the clearing mandates in other currencies do is somewhat act as an economic mandate to clear further currencies, because there are portfolio offset benefits. If you’re a large swap dealer at swap clear, it’s typically irrelevant for your margin if you start adding another currency, because that currency will be much smaller than your exposures in euros, dollars, sterling, yen, which are really driving your margin.

And so it makes sense to have as diversified a portfolio as possible. That’s good generally for increased transparency across a number of different currencies.

Amir Khwaja: A good point. Yes, so we’re seeing a mandate in dollars or euros or sterling has also in some way made the economic case better for smaller currency with no mandates.

And there’s more clearing and transparency in EM currencies, et cetera, which makes us markets open up to international audience, which provides more volume, more transparency.

Chris Barnes: If I tried to write this blog back in 2016-17, there just wouldn’t have been enough data for the rupee market for an outsider to be able to research, collect and write something meaningful.

You really would have had to be an active market participant to be able to produce the type of blog that we can do now. The reason that we can do this blog now is that more and more activity in the swaps market is moving to cleared.

Amir Khwaja: Yeah, I think that makes a lot of sense. So a firm looking to enter the INR swap market can find volumes, find trades, find information about where to clear them, how much trade, etc.

Yeah, and I think that helps the win. I think for the market, it’s an awful lot of participants.

Chris Barnes: It does. The downside for us, for the blog, is when people then write a mail to you going, “You obviously know a lot about the Rupee swaps market.” And I have turned around some clients and be really honest, go, look,

“I’ve never traded this, but it is amazing how given transparency and data it’s possible to now write 700 words and sound relatively knowledgeable about something that you’ve researched for a number of hours, really.”

Amir Khwaja: So we have some insight and it’s a great starting point for people to get into the weeds of that market and talk to local participants who probably know more. Great, Chris. Thank you.

Chris Barnes: Exactly right. Ali, that was what you need to know about INR swaps.

Ali Curi: Thank you, Chris. That was the title of your blog post, correct?

Chris Barnes: Correct. That’s right. “What you need to know about INR swaps.”

Ali Curi: That works. Chris Barnes, Amir Kwaja, thank you both for sharing your quick takes. Let’s do it again next week.

Amir Khwaja: Thanks, Ali.

Chris Barnes: Looking forward to it. Thanks, Ali.

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.

Until next week, thank you for joining us.