DECEMBER 2020 - CURVEGLOBAL NEWSLETTER

30 Nov 2020

Hello,

I’m a natural optimist at heart. The response from pharma and scientific communities to COVID-19 makes me humble and while we’ve obviously seen missteps in the dealing of the pandemic, the fact that we as human beings have identified the virus, created a vaccine, tested it and are in the position to roll it out within a year is frankly incredible.

I was also super excited by the Apple M1 chip release – it reportedly does 11 trillion operations per second! It was not long ago when we needed liquid helium (c. 270°C) cooled processors the size of a room to perform calculations at that speed, and not that far back when we needed liquid nitrogen (c. 90°C) cooled processors. Now, it seems, we can do it on our laptops! This growth in computer power is opening up a completely new opportunity for financial markets, AI, and our interactions with technology. We are in the middle of a revolution. Optimism works!

I’ve also got BUCKETS of positivity about the progress we’re making together at CurveGlobal Markets. Our open interest is up 50%, and we’ve had record volume days of nearly 200K lots (representing over 35%* of the Short sterling STIRS).

These are the obvious measures of success, but, internally we analyse much more, including passive fill rates, order book size, depth and most importantly width. What’s driving CurveGlobal Markets volumes is an increase in these “hidden” facts. These are the facts that matter, the facts that drive market engagement.

I want to thank the growing number of clients of CurveGlobal Markets for all this good news. It turns out that if you cut the cost of trading by having zero fees, deliver a strong market with masses of liquidity and volume, and have banks and non-bank FCMs connected along with the main ISVs, you can build a really interesting – and competitive – ecosystem.

Take a look at the number and quality of smart order routers available to split orders. We’ve got a number of brokers working orders in CurveGlobal Markets, both directly onto the Exchange and in the block market. Also, remember that you can do a block at the middle of the market if you’re axed.

It’s not easy achieving growth and promoting a new exchange when operating sales and purchasing forces remotely. The traction we have achieved “despite COVID” is a testament to the value of the Exchange (and the CurveGlobal team).

Lastly – it wouldn’t be a newsletter introduction without me banging on about LIBOR transition. CurveGlobal recently participated in LSEG’s Transitioning away from LIBOR week, which consisted of daily panels discussing the effects of the transition on the different areas of the Group. You can watch replays of each session here. Our session discussed futures trading risks and opportunities in a post-LIBOR world.

My challenge is to persuade you that, when it comes to migration from LIBOR to SONIA, you don’t need to keep the same exchange and clearing house, but can switch and use a leading clearing house with a comprehensive SONIA swaps offering. An exchange that’s cheaper for you and adds competition in the long run to markets. A genuine win-win.

I wish you all a healthy Christmas and holiday season. Stay well – I’ve just so much optimism for 2021!

Best,
Andy
aross@curveglobal.com

*Notionally adjusted (CurveGlobal Markets has different sized contracts to other exchanges for some markets, so to compare like with like we adjust).

LIBOR Transition Readiness Whitepaper

Ahead of the anticipated LIBOR end-date, CurveGlobal commissioned a report on the transition from the legacy benchmark (and other IBORs) to alternative risk-free reference rates (RFRs). In this report, Acuiti analysed the issues that might disrupt the impending transition, including:

Current levels of preparedness and the barriers to transition
Building liquidity in OTC and listed markets referencing RFRs
Term rates and credit spread adjustments for the RFRs
Fallback methodologies and challenges

You can download the full report here.

Trade Concept

The End of Sterling LIBOR

By Ian Murphy

How the OTC market and CurveGlobal Futures are pricing basis spreads either side of December 2021

This month we look at how the basis spreads are reflected in pricing in the OTC markets and CurveGlobal Futures.

As we fast approach the expiry of December IMM-based positions, there will only be four trading quarterlies left until the potential end of Sterling LIBOR.

FRA/OIS IMM dated basis spreads

The first Bloomberg chart below shows the IMM dated FRA/OIS spreads, 4th IMM to 7th IMM. The chart highlights the pre- and post-December 2021 market expectations influenced by ISDA fallback considerations.

We need to remember these IMM date periods are continuous, so data rolls inwards each quarter, with the next roll on 16th December. This is different to futures, where we look at individual dates, e.g. Dec21 or Mar22.

Chart 1

CurveGlobal ICS spreads

The listed version of the FRA/OIS spreads we looked at previously are the inter commodity spreads (ICS) for the same contract month. These are priced Buy 1 lot CurveGlobal® Three Month SONIA and Sell 1 lot CurveGlobal® Three Month Sterling Futures.

The ICS is listed separately and offers no legging risk for the fills in the underlying SONIA and Sterling Futures.

Chart 2 shows the Bloomberg view of four of these ICS spreads, reflecting market pricing pre and post potential LIBOR cessation. The futures ICS show very similar levels and have experienced similar price action as FRA/OIS.

For Sep21 and Dec21, the ICS levels are trading a few price ticks above zero. The significantly higher levels for ICS Mar22 and Jun22 are where the ISDA adjustment is priced by the market.

Chart 2

CurveGlobal Futures trading and hedging opportunities

CurveGlobal Futures and ICS offer trading participants the opportunity to:

Position separately in LIBOR or SONIA-based contracts
Move futures contracts used for hedging LIBOR to SONIA by trading the ICS
Have a different view to the current pricing of the market by trading the ICS

October Initiatives – Zero Fees

No CurveGlobal Markets Exchange fees for trading from 1 October 2020 until 30 September 2021
No LCH clearing fees from 1 October 2020 until 31 March 2021
No fee surcharges for wholesale orders, blocks and basis or delayed block publication
No market data costs

CurveGlobal Links and Contract Specifications Sterling Products

The “SONIA” mark is used under licence 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.

Links to documents, contract specifications and videos highlighting how the ICS works:

CurveGlobal Markets document library

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

Monthly Volumes and Open Interest

LIBOR Transition Week Webinars (available on demand)

Last month, CurveGlobal collaborated with London Stock Exchange Group (LSEG) on a LIBOR transition week to discuss LIBOR thematic topics across LSEG. Our session explored how ready the market was for the end of LIBOR and the trading opportunities available at CurveGlobal Markets, as well as the challenges of competition.

You can view each webinar session by following the links below:

The end of LIBOR – the timelines, the challenges and what comes next

New benchmarks and the future shape of swaps markets

Futures trading risks and opportunities in a post-LIBOR world

'From LIBOR to SONIA – the role of term rates'

LIBOR – from an issuance perspective