This week’s Quick Takes has Amir discussing “What’s New in CCP Disclosures – 2Q23?” and Chris telling us more about “JPY TONA Futures: A Rising Star in the RFR Market.”
Quick Takes: What’s New in CCP Disclosures – 2Q23? and JPY TONA Futures
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’ll take a quick dive into the headlines on the Claris blog. Let’s get started.
Ali Curi: Hi Amir, hi Chris.
Amir Khwaja: Hi Ali.
Chris Barnes: Hi Ali. How are you doing?
Ali Curi: I’m doing great. It’s great to have you here.
Ali Curi: Welcome to Quick Takes.
Chris Barnes: Thank you very much.
Ali Curi: Amir, let’s start with you. What are your quick takes for this week? Which headline from the Claris blog would you like to discuss?
Amir Khwaja: I wrote a blog on CPMI-IOSCO disclosures, so these are quarterly disclosures made by all clearinghouses that give an insight into their margins, their default resources, credit risk, collateral, liquidity, and this data we’ve collected since 2015, so we have over seven years worth of quarterly data.
Amir Khwaja: Over 200 fields allows us to compare what is changing over time in these sorts of metrics in margin, default resources, credit risk payment obligations between CCPs, we can compare them and across time, right? So it really helps clearing members, regulators understand the risk policies, the risk governance, the kind of important metrics for clearing houses, which are, very important financial institutions.
Ali Curi: And what is the title of your blog?
Amir Khwaja: Yeah. So it’s called “What’s New in CCP Disclosures, Second Quarter 2023.” So each quarter I write a blog where I cover kind of the new numbers, what’s changed since the prior quarter or prior period.
Ali Curi: I see. All right. Sounds good. Have at it.
Amir Khwaja: Great, yeah. So I think quite typically I start with looking at initial margin, which is a very important metric at clearing houses and CCPs.
Amir Khwaja: As we all know, CCPs are there to mutualize risk across clearing members. To do that, they first have to collect risk appropriate or margin appropriate to the amount of risk contributed by each clearing member. And that’s called initial margin. So it really depends on how much risk a member has at their clearing house and also how volatile the market is on that risk type.
Amir Khwaja: So these are pretty large numbers. They’re just, very briefly, we collect the four largest interest rate swap CCPs, and they have a combined aggregate initial margin of $317 billion dollars at the end of second quarter 2023. We’ve collected nine futures and options CCPs. They have $450 billion initial margin and three credit drifted CCPs that have $70 billion initial margin.
Amir Khwaja: So you can see across those are the substantial financial numbers, right? $450, $317, $70. So that’s, $ 800 billion, right, of resources held by those clearinghouses to mutualize or to cover the exposures of their members.
Chris Barnes: Having read your blog and obviously initial margin numbers very, very big, right?
Chris Barnes: I thought one of the things that jumped out when you look at the initial margin for interest rate swaps is you’ve obviously got swap clear and CME and Eurex and JSCC. I was really interested to note that the initial margin for Eurex is as, high as it is, I think Eurex in the disclosures is at about $50 billion.
Amir Khwaja: That’s correct.
Chris Barnes: And we’ve done some recent work on market share where Eurex, in terms of a turnover perspective, sits at anywhere between 6 and 9 percent of the Euro market alone. And yeah, it appears to carry quite a high amount of initial margin. That’s probably also the case when you compare it to JSCC which is, on the face of it, somewhat similar in that it’s a local clearinghouse that just clears Yen.
Amir Khwaja: Yeah, good point, Chris. Yes, I would say, so there are a number of factors that contribute to the size of initial margin, right? So first is, how directional or balanced the risk is at the clearinghouse. So if we’re looking just, if we’re comparing gross notional, which is just a gross measure, we don’t know how much net risk is there.
Amir Khwaja: So with initial margin, we’re looking at net, sort of net risk. So again, so there can be differences in size of position and how balanced they are. So the more directional, the higher the initial margin. So one factor is the actual swaps and position of the clearinghouse. The other factor is really the initial margin model, how it’s calibrated.
Amir Khwaja: Different TCPs have a different methodology. Some would have a higher initial margin. Some may have a lower relative initial margin and a higher default resources. It’s that calibration. And quite typically IM is calibrated due to historical data. There can be different stress periods involved, right, so depending on, it’s a choice of calibration or resources, BM, IM, default sources to be adequate, right? So there’s a choice that CCPs make there. And I guess the third thing is just the volatility of the underlying markets, right? GSEC and Yen, so clearly, we know Yen interest rates, not very volatile, have been very low for years. So pretty flat for years, so you would collect less margin to cover any potential loss in Yen than Euros, or dollars. So I’d say those are three sort of reasons.
Chris Barnes: And does and does anything else jump out outside of the interest rate swaps for you, either on CDS index, or…
Amir Khwaja: Yeah. So the other thing we jumped out is because there’s so many fields that are changing, we have in our, we have a way to, based on tolerance, check which numbers have moved the most out of, past few quarters out of tolerance, right? So that allows you to easily highlight things that have changed a lot.
Chris Barnes: Is this our color coded view we have.
Amir Khwaja: Yes.
Chris Barnes: It’s shaded like red and orange in the actual app.
Amir Khwaja: Yeah, correct. Yeah. So basically, so in the Clarus CCP View app, we have a way to highlight metrics that have changed out of 10 percent tolerance in the last few years very quickly, because so many numbers you want to know what’s changed and what should I focus on.
Amir Khwaja: So the ones I would quickly highlight very briefly is Eurex. Again, clearing again, have increased their default resources committed from members from $9 billion Euros to $16 billion Euros, right? So again, quite a large change in what members need to contribute to mutualized losses for the members.
Amir Khwaja: That’s kind of an important member. That’s quite big.
Chris Barnes: And I’m guessing we haven’t seen that type of change before? That’s why it’s flagged.
Amir Khwaja: Yeah. So that’s quite a large change. Yeah. So I think it’s largest we’ve seen in the historical record. So obviously they’ve looked at their tail loss credit stress testing and decided that’s a more appropriate number.
Amir Khwaja: The other one to pick up is NASDAQ clearing, right? So NASDAQ clearing, both in financial markets and in commodities had very large maximum IM calls on a single day in the period, right? So on the commodity side, there was a, on a single day, there was a $4.9 billion aggregate IM call from members under commodities, similarly, large number of financial markets, right?
Amir Khwaja: So again, that means on a single day, across all their members, they had to ask for that amount, right? So again, quite large numbers.
Chris Barnes: Yeah. And that’s the so that’s purely driven by underlying market volatility as opposed to any changes at the CCP or anything.
Amir Khwaja: Yes. Correct.
Chris Barnes: Yeah.
Amir Khwaja: Correct. So I think, and there’s various, stress testing measures.
Amir Khwaja: So as well as real actual events in the disclosures, you have estimated events. So to show people are doing a very prudent risk management, right? For example, CEM and their estimated stress losses, so they would estimate what could happen if two of their largest members defaulted, would they be covered, right?
Amir Khwaja: And there was one exception in the quarter there, right? Which hasn’t happened since Q4 2018, right? But again, those are estimated stress testing losses, best real losses right? And all these kind of metrics ensure that clearing houses are adequately risk governing the exposures of their members, right? Both for single members and across the board.
Chris Barnes: One thing, one thing I find with the disclosures is just the sheer number of them. And I must admit that when I read your blog, Amir, I was reading it going, how has he come up with this list? Has he gone through every single disclosure, looking at it? And now I see that it’s…
Amir Khwaja: Tools help, yes.
Chris Barnes: There’s a color coded grid.
Amir Khwaja: Otherwise you could spend, days looking at it, right?
Chris Barnes: Days.
Amir Khwaja: Or hours.
Chris Barnes: And just get lost in it, right?
Amir Khwaja: Yes, exactly. So for that reason, and again, we have a really broad spectrum. So it covers, South America with kind of B3 Brazil, which is the biggest clearinghouse in South America.
Amir Khwaja: Asia Pack in India, we have CCIL in India. So again, it’s a pretty broad spectrum of 44 different clearinghouses. Each clearinghouse has, can have many clearing services, for FOREX or interest rates for fixed income, so there are a lot of clearing services and lots of numbers being published.
Amir Khwaja: It’s important, for a member that’s a member of that clearinghouse to understand, the risk governance of the clearinghouse. So quite typically, clearing members are interested in this data. As the regulators that actually regulate the clearinghouses to make sure they’re adequately risk managed and competitors and other cleared members to, just for comparison, you can compare between clearinghouses and over time what’s changing because we don’t see, as we’ve had a clearing mandated and becoming larger and larger, there are more financial resources tied up in clearinghouses, and large amounts of money moved back and forwards every single day. So each day, billions of dollars are moving back and forward between members and clearing houses. That’s a very important sort of market infrastructure plumbing has to operate. And this sort of transparency really helps give confidence.
Chris Barnes: Yeah, sure. I think, I thought it was interesting this week, I’m not sure if you saw, but the Financial Times quoted some Clarus data for a piece they’ve written on Europe. And there was a comment on the FT website, which said measuring the exposure of Euro in interest rate swaps in terms of gross notional is a completely irrelevant measure, and it was really nice from a Clarus perspective to be able to respond to the comments, and go this piece of Clarus data shows that initial margin over everything and this amount lifts European CCPs, and this lifts at third country. It’s certainly a piece of data whilst the disclosures are are backward looking, right? They’re delayed now by, three months or six months.
Amir Khwaja: Two months.
Chris Barnes: Delayed by two months.
Chris Barnes: It’s still very relevant for what is happening in markets at the moment.
Amir Khwaja: Every quarter with a two month lag, we collect 200 numbers for every clearing service in every clearinghouse. And we can look at trends over time and comparison between clearinghouses that really give price transparency that they’re adequately risk managed, to members, to clients, to regulators. I think that’s important data.
Amir Khwaja: So I think Ali, so that’s what I covered. And this is a blog I do on a quarterly basis, to share what’s changed with the data we collect.
Ali Curi: Great. Thank you for sharing. Chris, over to you. What are your Quick Takes for this week?
Ali Curi: Which headline from the Clarus blog would you like to discuss?
Chris Barnes: Thank you, Ali. So this week I’ll be talking about one of the most popular subjects on the Clarus blog, which is risk free rates.
Chris Barnes: The type of blog that we normally have particular success with is a market share blog. And recently we’ve seen the advent over in Japan of new futures being launched.
Chris Barnes: These new futures are a direct consequence of the transition away from LIBOR. Japan, before LIBOR disappeared, always had a multiple rate market. So we had LIBOR, we had TAIBOR, and we had TONAR. TONAR was recognized as the risk free rate. When LIBOR ceased publication, there was certainly a feeling in the market that we might get a portion of the market that would transition to table who were interested in term rates. When we first started looking at the data post LIBOR cessation, we certainly saw between 5,6, 7 percent of the market each month trading versus TIBOR, but recently we’ve actually had an announcement that TIBOR will also cease.
Chris Barnes: So Japan is moving to a single rate market. So everything will trade versus TONAR. Now, back many years ago, when I used to trade the Yen market, TIBOR futures were always quite confusing for me because there were at least four exchanges who listed different forms of TIBOR or LIBOR futures.
Chris Barnes: And there was always a competition amongst them. So it’s very interesting to see both, how large the TIBOR market used to be, how small it is now. I think I wrote in the blog that after either the March or June ME roll of this year, we have virtually zero open interest in TAIBOR futures now.
Chris Barnes: And what that means for TONAR futures going forward, we’ve seen competing contracts launched by both JPX and TFX. Contract specs themselves are identical, three months contracts out of the ME roll. And so it really is like a direct head on competition between those two. I think we’ve seen that story play out previously in SONIA Markets.
Chris Barnes: Admittedly, we still had Short Sterling listed as the LIBOR contract. At the time, as that competitive landscape evolved, we’ve pretty much seen all of the SONIA volume stay at ICE. It’s going to be really interesting from a market’s perspective to monitor how the market share evolves in Yen as well.
Amir Khwaja: Chris, I want to ask you about that. So at the moment, in your blog, you had a JPX at 75 percent and TFX at 25 percent. The same economic contract. So, do you think all liquidity will go to one and are there examples of futures contracts that are listed that are economically equivalent where it’s not 100 percent at one exchange in a currency?
Chris Barnes: It’s difficult to know where it will end up. There is definitely a tendency for a single pool of liquidity to develop in one contract. I think as we sit here now and look at it, right? We’re in very early stages for this. We’re actually in such early stages that I should highlight to listeners that this does happen, but it happens rarely, thankfully. On the first version of the blog published there was actually a mistake on the data, and this is another reason why a) we’re very thankful for all of our readers who read but also, our readers who reach out to us and say, thank you for flagging it, but hold on, there was a mistake.
Amir Khwaja: Which we corrected once we alerted.
Chris Barnes: Exactly.
Amir Khwaja: There’s been a huge decline in the volume of short term industry Yen futures of the last five, six years. And even now the tone of contracts are pretty low.
Chris Barnes: That’s right.
Amir Khwaja: Compared to other currencies, so we’ve seen in the US so far has pretty much taken over from your dollar in terms of volume.
Amir Khwaja: So it’s very quickly comparable size.
Chris Barnes: Yeah. In the US it’s quite amazing. I find the Euro dollar future at one point the world’s biggest futures contract, it’s absolutely massive. And yet SOFR futures have really come in and slotted in and are now just as big as euro dollars used to be.
Amir Khwaja: And SONIA futures, again, I think are pretty sizable.
Chris Barnes: Are sizable. I don’t think they’ve quite reached the same size as short sterling. So it’s difficult to unpick the impacts of the rates environment, the impact of less hedging risk associated with swaps fixings. So I think looking at Japan as kind of a standalone market. We’ll shed a little bit of light on just how successful the software contract has been, but also looking forward, TIBOR gone now, basically.
Chris Barnes: There’s a there’s a consultation on the cessation of it. It does raise an actual question. How long has EURIBOR in Europe got left? And what does that mean for ESTR Futures? I wrote a very similar blog to, to this on ESTR Futures over the summer. We’ve seen the likes of CME, Eurex and ICE launch ESTR Futures, but they’re still very small, clearly in their infancy compared to EURIBOR.
Chris Barnes: And so I think looking at what happens in Japan and the TONAR Futures can also be instructive over what we might expect to see for ESTR.
Amir Khwaja: Because I think in Japan now we have two exchanges are listing contracts. So the market is able to trade these as liquidity bills, we’ll see how large they become.
Amir Khwaja: So members have a tool they can use for, for hedging or speculation on rates. And I think as clearly as Japan changes some of this quantitative easing policy, we’re starting to see sounds about their targets. And their interest rates. So there may be much more demand for that contract.
Chris Barnes: Agreed. Agreed. And I think fundamentally whether TONAR contracts can attract the same size as TIBOR reached as well, or whether, because we’re in a fundamentally simpler world, with a single index now, whether the natural end state for these contracts is smaller than TIBOR reached.
Ali Curi: Just for reference, what is the title of this blog post?
Chris Barnes: This is “Yen Tonar Futures, a Rising Star in the RFR Market.” Now, I have to admit that I didn’t write the title. Amir and I have been practicing with our Chat GPT and Google have recently made Bard available as well. And so I wrote in Bard. I said, “Bard, what would Chris Barnes at Clarus write about Yen TONAR Futures?”
Chris Barnes: First things first, I should say that Bard didn’t make the mistakes that we made in it, but it also failed to create anything new, right? It sounded very kind of chatty. It sounded like something I would write, but the content was not something that, that we would credibly publish. There was no data.
Chris Barnes: There was nothing new. There were no contract details. It felt like a Clarus person speaking and saying nothing, basically. But what it was really helpful for was a title and also a blog structure, because, it forms it with four sections. And so a lot of the points of writing a blog is to get people to read it.
Chris Barnes: A lot of the traffic onto the blog can naturally come from a Google search. And so I figured if Bard is creating this structure and likes this headline, we should try it for a blog, and that is one of the really rewarding things of publishing a blog frequently is that it gives us a platform to try these new tools, and see if it works.
Amir Khwaja: Interesting, Chris. Yes. I must try that on my next one. Yeah. Title and structure, we can certainly improve the titles from my “What’s New This Quarter” type title.
Chris Barnes: Ali, there is also internal competition between Amir and I over a number of views per like month and week and year as well. So you know.
Amir Khwaja: Chris and I are now tied neck and neck with each having written 443 blogs in the last nine, 10 years? What is it? Yeah, I don’t know. Since 2013.
Chris Barnes: Yeah. So 10 years.
Amir Khwaja: 443, 443 each. We have to just keep on the same, can’t let Chris come beyond me. Not for long.
Ali Curi: The upside, there’s a lot of content for our listeners to go explore.
Ali Curi: And on that note, Amir and Chris. Thank you for sharing your quick takes. Let’s do it again next week.
Chris Barnes: Thanks, Ali.
Amir Khwaja: Thank you.
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 LinkedIn. Until next week, thanks for joining us.
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