Hi all,

While on a LIBOR replacement panel at IDX last week, I was struck by a remark from Edwin Schooling Latter, head of markets policy at the UK’s FCA: “Transition does need to happen and you do need to have done, before 2021, whatever is necessary to move away from LIBOR.” Wow! This is not new news, but it’s pretty clear.  

The second thing that has stayed with me this week was from a market participant who, in a discussion about Swiss LIBOR replacement, said that IBA waterfall work to strengthen CHF LIBOR will lead to higher volatility in all cases. This could lead to lower rates in Swiss francs, and Swiss LIBOR could be almost entirely based on “Expert Judgement”. Double wow!      

For me, the big risk issue around the benchmark shifts is what technical changes will occur in the futures markets? Will the changes to the LIBOR rate change the fundamental nature of the use of hedging in the market? Will underlying market dynamics be different? Will some people use other products? If I had a risk position or trading strategy using positions along the curve, I’d be looking at whether the technical factors around the transition could impact the market away from historical trading patterns.

So we took a look at the data. It shows a switch to new benchmarks has already started – looking at the OI change in futures and SONIA-based discounting swaps at LCH.

If you’re not trading CurveGlobal SONIA – are you missing out? 

All the best,
Andy Ross
aross@curveglobalmarkets.com

The ICS Difference

At CurveGlobal, we’re here to help the market trade more efficiently – we’re not here to tell anyone what, where or how to trade. That’s why we’ve added the CurveGlobal® Three month SONIA product to our list of products executed on LSEDM and then cleared at LCH. 
 
The new ICE Futures Europe contract differs slightly in structure from the existing CurveGlobal contract, but the biggest point to note is the existence of the inter commodity spread (“ICS”) functionality on CurveGlobal. This allows people to trade both the LIBOR and SONIA leg at the same time, with a single spread quote and no legging risk, such that you trade a native futures spread on the exchange but are filled in the SONIA and Three month Sterling underlying (see description on this below).  
 
At CurveGlobal, in the first month of trading 57% of our SONIA volume has come from the ICS orders, adding a different but meaningful innovation to the market. This also means we can lean on the current excellent liquidity in CurveGlobal® Three month Sterling futures (at ½ a tick increment) and imply into the SONIA future. When you look at the pricing on the ICS this is the same as the IMM FRA vs. OIS swap – you can see the generic pricing in Bloomberg under “BPFOSC2”.  

What’s interesting for us is the pricing of the swap quote (as of 13th June 2018) is half a tick wider than the ICS quote (13.39/14.39 in the IMM2 dated swap vs. 13.5/14 on the CurveGlobal SEP18 ICS).

Here’s a quick look at this first month’s data profile for volumes and OI:

On 14th June 2018, the CurveGlobal® Three month SONIA contract had a record volume day of 4,784 lots, which took the total traded since launch to 31,039 (at time of publication).

Trade Concept 

CurveGlobal® Three month SONIA Future – front contract goes into accrual

By: Ian Murphy

The CurveGlobal® Three month SONIA Futures contract started trading on 30th April.

• Volume: 13,806 lots executed during the first month to 31st May
• Open Interest is seen in the first 12 quarterly contracts, JUN18 out to MAR21

Table 1 shows the first month’s volume and the split between the different types of execution strategy.

• ICS made up 58% of the flows 
• The ICS is the listed derivatives version of the OTC FRA/OIS spread
• Volumes seen in spread, butterfly and condor strategies help create the shape of the interest rate curve for our new SONIA future

Table 1

Table 2 highlights the contract listing from the morning of Thursday 21st June. 

CurveGlobal® Three month Sterling

On Wednesday 20th June:

• The front JUN18 contract will cease trading at 11am and its EDSP will be published

On Thursday 21st June:

• The SEP18 contract is the front “white” quarterly contract 
• The JUN24 contract is listed and completes the last contract of the “purple” pack
• In total 24 quarterly and two serial contracts are listed

CurveGlobal® Three month SONIA

On Wednesday 20th June: 

• The front JUN18 contract enters its accrual period

On Thursday 21st June:

• SONIA fixing for Wednesday 20th June is published
• This is the first SONIA fixing for the accrual period
• The last SONIA fixing will be Tuesday 18th September (published T+1)
• The JUN18 contract is the accrual contract and follows colour convention as the “aqua” contract
• The SEP18 contract is the front “white” quarterly contract
• The JUN24 contract is listed and completes the “purple” pack
• SONIA will have a total of 25 quarterly contracts available to trade
• The ICS is available for 24 quarters from SEP18 through to JUN24

Table 2

CurveGlobal Product Contract Specification
Contract Specifications and Bilateral Trade Rules

Monthly Volumes and Open Interest

Team Spotlight 60 Seconds with...

James Brinsden, Programme Manager at CurveGlobal

1. What are you listening to/reading these days?

I’ve just started reading a book called Thinking in Bets by Annie Duke – Andy gave it to me the other day. I was always taught, back in my old army days, that ‘the only bad decision is no decision’, and that ‘hope is not a course of action’.

This book sets out how we often have to make important decisions, based on whatever information we have at the time we make the decision, but that the outcome is not always a favourable one.

The book attests that a poor outcome doesn’t mean that a poor decision was made. For me, this book reinforces my view that: you make decisions; you learn from them; you move on – you don’t regret decisions you made in the past. I think this is a great way to live your life. It frees your mind, enabling you to be happier and more successful in whatever you do.

I have a very varied musical taste. My 18-year-old daughter often laughs at me when she catches me singing along to Taylor Swift or Hailee Steinfeld in the kitchen while cooking. I have to admit to also liking a bit of Heavy Metal. My current favourites are the Danish heavy metal band, Volbeat and American heavy metal band, Disturbed.

2. What is the one thing you can’t live without?

Other than my family it would have to be work. Whatever work it is. I couldn’t ever retire. I have to be doing something all the time. Being engaged in producing something in collaboration with others, makes me happiest. I’m not a big one for hobbies!

3. If you could invite any four dinner guests past or present who would you choose?

My four closest friends. I don’t care much for rich and famous people, as interesting as they might be. I’d much rather have a blast with those I care about the most. 

4. You can do any job for just one day, what would it be?

A mountain rescue team member. I would love to have the chance to save someone’s life. That must be one of the most rewarding experiences ever.

5. Ten years ago, where did you think you would be now?

Working, trying to pay the mortgage and school fees.

Press Articles of Note

JAY POWELL MAKES HIS MARK AS FED RAISES RATES
FT.COM

ITALIAN DEBT STRIFE REVEALS PITFALLS OF EUROPE’S MARKET STRUCTURE
FT.COM

INVESTMENT BANKING: STRONGER FRANCHISES EMERGE 10 YEARS AFTER CRISIS
FT.COM

EONIA DEATH WILL HIT VALUATIONS AND OIS MARKET – EXPERT
RISK.NET

SOME BANKS OPEN TO COMMITTING TO LIBOR POST-2021
RISK.NET

Come Visit us Here

GFII // 12th ANNUAL DERIVATIVES SUMMIT
12th ANNUAL DERIVATIVES SUMMIT
28-29 June // Pennyhill Park Hotel // Bagshot, Surrey

FIA // 34th ANNUAL FUTURES & OPTIONS EXPO
FIA EXPO CHICAGO
16-18 October // Hilton Hotel // Chicago

FI // FIXED INCOME LEADERS SUMMIT
FIXED INCOME LEADERS SUMMIT
6-8 November // Beurs van Berlage // Amsterdam

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