April 2020 - CURVEGLOBAL NEWSLETTER

CURVE POINTS | APRIL 2020

Per ardua ad astra

Every year has its highs and lows, but the threats the global community now finds itself up against are unprecedented. The level of disruption across all walks of life is something we’ve never witnessed before. But something history has taught us is that humanity is resilient and we somehow manage to bounce back, no matter what’s thrown at us.

This resilience – in responding to the COVID-19 pandemic and to volatile markets – is being tested now and it’s remarkable to see how quickly many firms are adapting to new ways of working. Ensuring that markets remain open and continue to operate smoothly is a huge challenge for our industry, and it is essential for business continuity that participants remain able to diversify risk by connecting to multiple clearinghouses and platforms.

CurveGlobal’s purpose has, perhaps, never been as apparent as it is now. Our central role – along with CurveGlobal Markets’ responsibility to conduct orderly and fair markets, to provide continuity of service to customers and to support financial stability – has never been clearer. We should all take great pride in the fact that we have fulfilled this responsibility thus far, despite the high volatility of the last few weeks, and with the additional challenge of shifting the vast majority of our workforce to working remotely.

I wanted to offer my thanks and congratulations to the operations and IT teams here at LSEG that have ensured all the markets we support continue to operate as normal. A testament to the resilience of the infrastructure, software and hardware. Indeed, more broadly across the street, from cash to derivative markets, the resilience shown has been impressive and worthy of congratulations.

As followers of CurveGlobal know, we are a big supporter of regulatory bodies’ efforts on benchmark reform. And with the current stress and strains on the market, we have seen a significant drop in volumes on SONIA-based futures. We have also seen a marked change in the spread between SONIA and LIBOR (please see Ian’s trade concept below). This is why we have not seen any GBP LIBOR trading – and indeed, have seen issues with other benchmarks such as ICE SWAP fix.

The BoE and FCA recently issued a statement advising that the current upheaval wasn’t a good reason to delay benchmark reform. Indeed, the fact that we do have data on SONIA but only estimates for LIBOR should only increase the ardour of everyone engaged in financial markets for this required change.

While it’s clearly not business as usual (we only have to look at the markets for that), at CurveGlobal we are very much still open for business – and are here for the long-term. The ability to trade blocks has continued to be a useful tool for our users. We may not be the biggest player but we do provide vital access to additional liquidity that enables our customers to hedge their risk. And with the backing of LSEG, we are well positioned to weather the storm.

So, as we head out (or more accurately, stay in) for the Easter holidays – which will be quite unlike any other – I wish you, your loved ones and colleagues the best of health, and look forward to returning to “business as usual”.

Trade Concept

Recent moves in SONIA, Three Month Sterling LIBOR and CurveGlobal futures

By Ian Murphy

Bank of England SONIA* and Three month Sterling ICE LIBOR**

The first Bloomberg chart shows the daily levels for BoE SONIA (blue line) and Three month Sterling LIBOR (green line). The lower section of the chart shows the simple spread between the two (yellow line).

During early March, Three month Sterling LIBOR priced lower, in anticipation of central bank action with the spread chart at negative levels. As the BoE cut rates and further central bank support materialised, the enormity of the situation priced into the credit markets and the Sterling money market curve steepened. The spread level increased from a low point at minus 0.24 to current positive 0.52.

*The “SONIA” mark is used under license from the Bank of England (the benchmark administrator of SONIA), and the use of such mark does not imply or express any approval or endorsement by the Bank of England. “Bank of England” and “SONIA” are registered trademarks of the Bank of England.

**ICE Benchmark Administration Limited London Interbank Offered Rate (ICE LIBOR)
ICE BENCHMARK ADMINISTRATION LIMITED MAKES NO WARRANTY, EXPRESS OR IMPLIED, EITHER AS TO THE RESULTS TO BE OBTAINED FROM THE USE OF ICE LIBOR AND/OR THE FIGURE AT WHICH ICE LIBOR STANDS AT ANY PARTICULAR TIME ON ANY PARTICULAR DAY OR OTHERWISE. ICE BENCHMARK ADMINISTRATION LIMITED MAKES NO EXPRESS OR IMPLIED WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE FOR USE WITH RESPECT TO THIS PRODUCT.

CurveGlobal® Three month SONIA and Three month Sterling Futures

The second Bloomberg chart shows the daily settlement levels for our Jun20 Three month SONIA (blue line) and Three month Sterling (green line). The lower panel is the Cross Product Inter Commodity Spread (CP-ICS) level between the contracts, priced SONIA minus Sterling (yellow line).

As both futures contracts are forward looking by nature, they reflect the current view of market participants as to where settlement may occur.

The change in sentiment towards credit and LIBOR rates can also be seen in this chart with the selloff in Jun20 Sterling after the first BoE cut and the widening in the CP-ICS to 0.56 with the current level at 0.36.

For market participants wanting to express a view on the credit impact related to COVID-19 the CP-ICS could be used. Selling the spread would imply a belief that market anxiety will wane, whereas buying the spread would imply a belief that market anxieties will persist or grow.

From Chart 2, the current level in CP-ICS for Jun20 futures is 0.36. This is narrower than the current spread between Three month Sterling LIBOR and O/N SONIA highlighted on Chart 1 at 0.52. Although this is not a direct comparison between SONIA O/N vs CurveGlobal Three month SONIA (settles to a compounded rate over the quarter) but with SONIA O/N at 0.0729% the compounding is minimal.

CurveGlobal

Links to documents, contract specifications and videos highlighting how the ICS works, and the Finer Price Tick increments that are available in these spreads.

CurveGlobal Markets Document Library

Watch this video to see how the CP-ICS works.

The Finer Price Tick and improved implied pricing is shown in this video.

Monthly Volumes and Open Interest

Events

LIBOR Transition Webinar

CurveGlobal is partnering with LCH and Vivadum to host a LIBOR transition webinar, moderated by Andy Ross, in which we will also be discussing our offering. Arif Merali from Vivadum, Ian Murphy from Curve and David Horner from LCH will share key insights into this pressing issue from a range of perspectives, and our audience will also have the opportunity to participate during the Q&A session. We will be in touch in the coming days with further details.

Press Articles of Note (includes subscription content)

HEDGE FUND PARPLUS SAID TO BE SOURCE OF ABN’S $200M LOSS
RISK.NET

EUROPEAN TRADERS PRESS FOR LOOSER RULES TO EASE OPTIONS TRADING
FT.COM

IMPACT OF THE CORONAVIRUS ON FIRMS’ LIBOR TRANSITION PLANS
FCA.ORG.UK


LIBOR DEADLINES – THE DOMINOES START TO FALL
RISK.NET

SONIA UPDATE
CLARUSFT.COM

To find out more about CurveGlobal or to offer suggestions on improving this newsletter, contact us at +44 20 7797 1055 or info@curveglobal.com.