We have assessed the data processed by OSTTRA MarkitWire to evaluate the impact of Brexit on single currency interest rate swaps (IRS)[i] trading for the three currencies subject to the Derivatives Trading Obligation (DTO) in the EU and the UK, and the CFTC’s Made Available to Trade (MAT) requirements in the US. We analysed the trading venue geographical market share for EUR, GBP and USD swaps. Our last published review was of Q1 2022 as things had stabilised, but following some interesting recent developments, we decided to share our latest insights into venue swaps trading.
By Kirston Winters
What has happened in the last year?
After the dramatic moves in late 2020 and early 2021, which saw large scale movement from the UK venues to the US SEFs[ii], the market shares of on-venue EUR swaps had stabilised.
However, with the spike in volumes in March 2022, the SEFs’ market share became higher than that of EU venues for EUR swaps for the first time. SEFs had 47% in March 2022, their highest recorded share and the EU venues had 38%, their lowest since December 2020. This continued for a few months but by June 2022 the gap had closed to a few percentage points, even inverting in July 2022. As recently as January 2022 the market shares were within 1%.
However, in February 2023 it widened to a 7-percentage point gap, and with the spike in volumes in March 2023 the SEFs’ market share was 51% – their highest recorded. The EU venues had 35% – their lowest share since December 2020.
Meanwhile, so far in 2023 the UK venues’ average is 15%, down from 16% in 2022 and 17% in 2021; a downward, albeit gradual, trend.
After the significant moves in late 2020 and early 2021, with SEFs overtaking UK MTFs/OTFs to become the biggest on-venue market for GBP swaps, Q1 2022 saw the UK venues return to top spot. This was slightly above their pre-Brexit norms, hitting a record 66% of on-venue GBP swaps in January 2022. US SEFs had fallen back a little but were still at their pre-Brexit norms.
UK venues’ share of on-venue activity remained consistently around 60% until October 2022 but was as low as 49% in December 2022 and January 2023 before recovering to 57% in February and 53% in March 2023.
The SEFs have been the main beneficiary of this dip with their share of on-venue GBP swaps peaking at 47% in December 2022 and January 2023. This is their highest share since September 2021 but still well below the levels seen in the first half of 2021, in the aftermath of Brexit.
EU venues had just a 3.5% share of on-venue GBP swaps in March 2023 and have averaged just 4% of on-venue activity for the last 9 months, half of their 2021 average. They are now back at September 2020 levels; it seems the double-digit market shares seen in December 2020 and January 2021 were a transitory spike and the overall trend is downward.
After the small but significant moves in late 2020 and early 2021, with UK MTFs/OTFs’ market share falling, EU MTFs/OTFs’ share increasing and SEFs becoming the predominant location for on-venue USD swaps, the market had remained consistent, with the SEFs regularly showing a market share between 82% and 85%.
However, so far in 2023 the SEFs’ share has averaged just under 80% of on-venue USD swaps, down from 82% in 2022 and 83% in 2021. This is more akin to the levels immediately preceding Brexit as the last six months of 2020 saw an average of 80%.
UK venues have seen highs in market share of 14% in on-venue USD swaps in September 2022 and March 2023, the highest levels since December 2020. So far in 2023 the UK venues’ average is 13%, up from 12% in 2022 and 11% in 2021; an upward, albeit gradual, trend.
EU venues saw a record high market share of 8% in on-venue USD swaps in February 2023. So far in 2023 the EU venues average just under 8%, up from 7% in 2022 and 6% in 2021; an upward, albeit gradual, trend.
How has the IBOR transition impacted swap trading location?
We have previously drilled down to look at: dealer-to-dealer swaps versus dealer-to-client swaps, DTO/MAT swaps versus non-DTO MAT swaps and cleared swaps versus uncleared swaps to see if there are specific market segments driving the moves in the broader market in a more pronounced way.
Last time, we looked at IBORs versus RFRs. In summary, for USD on-venue swaps we saw a slightly lower market share for SEFs in RFRs at 76% in March 2022 versus IBORs at 89%. Meanwhile, UK venues were at 16% for RFRs versus 5% for IBORs and EU venues at 8% for RFRs versus 6% for IBORs. It seems that for SOFR there is slightly more volume on UK and EU venues, which would make sense as there isn’t the same DTO equivalence problem driving UK-EU cross border transactions to a SEF.
We aren’t going to repeat that analysis this time. But as the DTO and MAT requirements have impacted the population of trades subject to those requirements over time due to the shift from IBORs to RFRs, we decided to check on the on-venue versus off-venue population. It may be surprising to some that the proportion of trades traded off-facility (off-venue) has remained flat or fallen in each currency over the last year and a half. This means it appears that firms’ decisions to trade on-venue are mostly out of choice rather than following a trading mandate; otherwise the proportion of on-venue trading would have, ceteris paribus, fallen.
It is also worth noting that GBP has already transitioned, with all new risk being traded in SONIA rather than LIBOR, so the “all swaps” data published above is now all SONIA; the same will be true of USD from June 2023. EUR swaps remain a mix of EURIBOR and RFRs (EuroSTR).
• EUR Swaps: In March 2023 the SEFs’ market share of on-venue EUR swaps was 51% – their highest recorded share. The EU venues had 35% – their lowest share since December 2020, as UK venues fell to 14%.
• GBP Swaps: In March 2023 the UK venues’ market share of on-venue GBP swaps at 53% remained slightly ahead of SEFs at 43%, as the EU venue share fell to below 4%.
• USD Swaps: In March 2023 the SEFs’ market share of on-venue USD swaps was 79%, with UK venues at 14% and EU venues at 7%
As I have always said, market share is one aspect of this post-Brexit story – market access is the other. Some EU and UK banks and EU and UK clients have reduced market access for transactions that are subject to an EU/UK DTO. For DTO products, clients in the UK are unable to trade on EU venues and clients in the EU are unable to trade on UK venues. This means that clients must either stay in their home market or utilise an SEF to gain broader liquidity. The swap markets may have previously been truly global, but it is now very much fragmented.
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[i]The calculations are generally, except as otherwise stated, based on (i) all new single currency interest rate swaps; Including IRS & OIS (fixed versus floating), fixed versus fixed swaps and basis swaps (floating vs floating) referencing all floating rate options (indices), supported by our MarkitWire platform.
[ii]There is a very small quantity of US MTF/OTF trades, these are immaterial and have been ignored for this analysis. There is at least one UK based SEF, to protect client confidentiality the UK SEF trades have been classified as SEF rather than being classified separately. Therefore, SEF throughout the analysis means all SEFs including the US SEFs plus a(ny) UK SEF(s).