It’s been a helter-skelter start to the New Year for everyone, I’m sure. At CurveGlobal, we’ve got lots of exciting news to share with you in the months ahead, but we’ll try to spread it out. At the top of the list is the pending launch of the CurveGlobal® Three-Month SONIA® futures contract which will be admitted to trading on LSEDM and cleared at LCH (see press release). It’s a priority for us because it’s a priority for you.
We believe that the launch of the CurveGlobal® Three Month SONIA® futures contract will help inject liquidity at this vital early stage of the new benchmark’s life. Given the nature of our industry, a strong start in SONIA will help ensure that there is a lesser chance of unsteadiness when LIBOR is decommissioned as the standard in 2021. After all, it’s a little scary to think that 2021 is just 34 months away! We’re told by our customers that the ability to trade the spread between LIBOR (short sterling) and OIS (SONIA) is key for users managing this transition. So we will be launching a native spread that fills both legs at the same time (designed to eliminate execution legging risk) to facilitate liquidity. Finally, we’re reducing the “tick size” on short sterling to half a tick (0.005 with a value of £6.25). The ability to offer better prices to those crossing the spread on LSEDM’s central limit order book is of key importance in allowing users to get better execution. This also complements the use of block trades to create finer price granularity as discussed in the January newsletter.
To this end, we'd like to invite you to what we see as a very useful and important seminar on the mechanics of the LIBOR replacement. We're holding this event jointly with LCH at The Four Seasons, 10 Trinity Square on 8 March. I'd strongly encourage you to attend, given the potential for increased rates margining benefits that exists by trading CurveGlobal products on LSEDM and which are cleared with LCH.
To see the agenda for this seminar please see the article below. If you are interested and would like to attend please RSVP to email@example.com.
This month, in our Q&A on LIBOR replacement we are delighted to have the thoughts of one of the industry’s experts, Phil Whitehurst from LCH.
CurveGlobal has had a great start to the year with yet more new clients joining and onboarding.
- Up nearly 200% from a year ago
- Up 15% already year to date
I’m sure SONIA will be on everyone’s lips at FIA BOCA, now less than a month away. Richard, Catherine and I will be there, of course, so we look forward to meeting you, hopefully in some much-needed sunshine.
A New Rates Benchmark for Sterling
Q&A with Phil Whitehurst, Head of Capital, Collateral & Liquidity for SwapClear at LCH
Q1. What factors make it important for users to change benchmark?
PW: It’s really important that the benchmarks the markets rely on have solid foundations. My focus is on the swaps market, which has historically been big users of benchmarks such as LIBOR, which aims to capture pricing in unsecured inter-bank deposit markets. The biggest challenges come when the underlying market has limited activity and each piece of activity is highly sensitive to the counterparties involved. Both these challenges apply here, which makes benchmarking a structurally difficult job. With the advent of the EU Benchmark Regulations (BMRs), benchmarks have to pass sterner tests. Users will need to change benchmark if those currently being used don’t meet the required standards.
Q2. How quickly do you think users will change benchmark rates (and will this differ by currency)?
PW: There will be limited switching in the next 12 months, but it is likely to accelerate from 2019 onwards. In relation to OTC derivatives I expect there will be a much lower reliance on current benchmarks within 3-4 years.
Q3. Do you think central bank-backed rates will be the only rates offered or do you expect a proliferation of alternatives to emerge?
PW: Central bank-backed rates have certain advantages. For example, the central bank can collect the widest set of data relating to the underlying market, and use it to produce the most robust benchmarks. However, we've already seen that there is room for private sector benchmarks such as in Switzerland. So, I think there is scope for co-existence, with private sector benchmarks complementing those produced by central banks. As a practical matter, I think it's best to focus efforts into a single benchmark during the transition phase, and that's reflected in the plans of each regional working groups, such as ARRC and £RFRWG etc.
Q4. The SARON migration occurred without a future - are futures required or needed to help with this migration?
PW: The requirement for a future largely depends on the demands of users trading the product. Where there's been a previous reliance on a futures contract to aid price discovery at the short end of the curve, such as in GBP and USD, it's very likely that the transition will feature one, and the CurveGlobal® Three-Month SONIA® future will be very welcome on that front. But there may also be scope for highly standardised OTC products.
Q5. Corporate clients often say they require a “term benchmark” - how will they get this in the future?
PW: This is still a source of contention. I think there's good evidence that term rates are important to the markets. The fact that an Overnight LIBOR is published in all five LIBOR currencies but that no one uses it is an example. But there are also arguments against. Ultimately, I think competition can help shape the outcome on this. As to how they get this, my sense is that term OIS rates could play a part. They don't suffer some of the more serious shortcomings of unsecured deposit benchmarks, but that's not to say there aren't challenges.
To find out more about the role futures can play in the transition to a new benchmark Rates structure, contact us at firstname.lastname@example.org
Benchmark Reform Seminar
The Transition to Alternative Reference Rates
Among the topics to be discussed:
- How do the EU BMRs address the frailties the regulators are concerned about?
- What are the connections between fallback, transition and conversion in legacy contracts?
- How do we break the areas of deadlock that have been identified?
- How can we foster adoption of the new alternatives to build robust new markets?
- What do we want the rates markets of the future to look like?
8th March 2018, Four Seasons, Ten Trinity Square, London EC3N 4AJ
1:30 - 6:00 PM, followed by networking drinks
To secure your place, please register by emailing email@example.com
Potential Portfolio Margining at LCH
By: Ian Murphy
For this month’s Trade Concept, we look at the possible Portfolio Margining opportunities available for CurveGlobal Futures positions cleared at LCH.
LCH Listed Rates Service
Futures Trades are cleared within the Listed Rates Service at LCH
Possible Portfolio Margining of open positions is available for the whole portfolio of positions
Long Gilts vs. Short Sterling or Long Gilts vs. Bunds are typical examples of Futures Pairs Trades
CurveGlobal® Three-Month SONIA® futures will be added to this list
For more information on LCH Services
Examples provided for illustrative non-reliance purposes only, potential benefits indicated are approximate and may not be realised.
Team Spotlight 60 Seconds with...
Catherine Eckhouse, Business Development and Marketing Manager, The Americas, CurveGlobal
1. What are you listening to/reading these days?
I am currently reading When Breath Becomes Air by Paul Kalanithi and A Gentleman In Moscow by Amor Towles
Listening to: this is a tough one for me as I listen to almost anything except for Country and Western music. And it depends on whether it is for a dinner party, or when I am out for a run. I regularly move songs in and out of my playlists, but the constants are always going to be almost any song with California as a shout out to my home state such as: California Dreamin’, California Love, California Girls and/or California Gurls; a few treasures by the Grateful Dead: China Cat Sunflower, Looks Like Rain and Eyes of the World; all the Cafe Del Mar, Superclub, Hed Kandi and Ministry of Sound compilations; Melanie Gardot, Diana Krall, Miles Davis and the Dave Brubeck Quartet for my Jazz fix and mixed into all of the aforementioned, tons of pop music to keep it interesting.
2. What is the one thing you can’t live without?
My heated floors; a great pair of running shoes; knitting needles and really luxurious yarn. I appreciate that I have named more than one thing, but I challenge you to find the one thing you can’t live without.
3. If you could invite any four dinner guests past or present who would you choose?
My two grandfathers (my father’s father who died before my parents married, and my mother’s father whom I really miss), Charlotte or Emily Bronte and Paul Weller.
4. You can do any job for just one day, what would it be?
Being a backup singer or musician for a great band.
5. Ten years ago, where did you think you would be now?
10 years ago, we were about to move back from London and always thought that 10 years on we would be back in London. From a job perspective, and because I like what I do, I imagined that what I would be doing is something very similar to what I am doing.
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To find out more about CurveGlobal or to offer suggestions on improving this newsletter, contact us at +44 20 7797 1055 or firstname.lastname@example.org.