OSTTRA data on the IBOR transition for Equity Swaps shows a last-minute JPY sprint from JPY-LIBOR to 100% RFRs while EUR lingers on EURIBOR with just 10% of volume using EUR-EuroSTR in August 2022. Overnight rates trump self-compounding rates for all currencies, despite initial transition popularity.
Following up from our recent reviews of the impact of global IBOR reform on the Interest Rate Swap market, OSTTRA is pleased to provide an IBOR Transition Update specifically for equity swaps. In this article, we look at the effect of the transition from IBOR to risk-free rates (RFRs) on Equity Total Return Swaps. The data is a subset of those being traded in the market, namely those that are confirmed on the OSTTRA MarkitWire platform. We’ve analysed market share between legacy IBORs, and the new risk-free rates (RFRs) for EUR, GBP, USD and JPY.
What impact has benchmark index cessation had on GBP, EUR, USD and JPY Equity Swaps since July 2021?
Since November 2021, new GBP Swaps trade volume moved to Reformed SONIA and away from GBP-LIBOR, which ceased publication on 31 December 2021. Initially, this move was to the self-compounding calculated rate, but since February 2022 there’s been a growing trend among equity participants to use the overnight rate with compounding or averaging provisions instead: in February 2022, 70% of volume used the self-compounding calculated rate, but that picture was reversed within five months, with over 70% using SONIA by July 2022.
EuroSTR (a.k.a. €STR) replaced EONIA. EURIBOR is going to be published until at least 2025, but a material migration to EuroSTR is expected in the meantime. EUR-LIBOR, which hadn’t been materially traded in the swaps market for at least a decade, ceased publication on December 31, 2021.
OSTTRA data shows that for Euro trades, the self-compounding calculated rate has had very limited popularity. EuroSTR, on the other hand, has been slowly growing while Euribor declines, with EuroSTR trading volumes varying from 3% to 19% this year so far. As the clock ticks down on EURIBOR, we expect this transition to speed up in the next year.
SOFR will replace Fed Funds and USD-LIBOR. Unlike the other LIBORs, USD-LIBOR is expected to be published until June 30, 2023, although a “SOFR first” policy applied to interdealer swaps from 26th July 2021 onwards.
For Equity Swaps on US underliers and indices, the move away from USD-LIBOR began in earnest in November 2021, reflecting movements in the rates market following the move to the 2021 ISDA Interest Rate Derivatives Definitions. However, unlike rates, over two thirds (67%) of Equity Swaps where the underlier is a US stock or index are still being confirmed using Fed Funds rates, compared to 29% being confirmed using SOFR.
USD Equity Swaps on non-US underliers
OSTTRA’s MarkitWire platform also processes a number of Swaps where the underlier is a non-US stock, but the trade is priced and settled in USD. For these types of Swaps, Fed Funds has barely been used with firms favouring SOFR. Similar to the initial move of GBP Swaps to the SONIA self-compounding calculated rate, firms were initially using the self-compounding calculated version of the SOFR rate, but since the start of 2022, volumes have moved to the overnight rate with compounding or averaging provisions applied. OSTTRA data only includes volume information as the notionals are in a variety of currencies and therefore subject to exchange rate fluctuations.
Japan is taking a multiple rate approach. TIBOR, also known as DTIBOR, is expected to continue alongside TONA. Euroyen TIBOR or ZTIBOR is expected to be discontinued 2 years post LIBOR cessation.
JPY-LIBOR ceased publication on December 31, 2021, and as expected, 100% of Equity Swaps moved to TONA. As with SONIA and SOFR, equity swap volume moved from the self-compounding version of TONA to the overnight rate with compounding or averaging provisions applied, although in this case the move is more recent, with 0% of volume on the self-compounding rate in August 2022, down from 88% in April 2022.
How does OSTTRA support market players with the post-trade processing of TRS?
The OSTTRA MarkitWire Equity trade confirmation platform enables sell-side and investment management firms to electronically and legally confirm Total Return Swaps along with other Equity derivatives including Options, Variance & Volatility Swaps, Basket Swaps and Accumulators. The platform removes the need for paper confirmation and provides an STP workflow that reduces risk and operational overheads. By agreeing trade details with counterparties through bilateral affirmation or matching instead of negative affirmation, market participants can obtain legal certainty that Swap details are positively confirmed, which decreases the chance of cashflow and settlement breaks. In addition, the OSTTRA triReduce service provided the ability to compress legacy IBORs as part of its compression service.
The regulatory move from IBORs to the new benchmark RFRs has taken place quite smoothly for new USD, GBP and JPY equity swap trades, with no new trades submitted for USD-LIBOR since Feb 2022, GBP-LIBOR since Dec 2021 and JPY since Jan 2022. In some cases, the move across was quite last minute, JPY for example saw 100% of new trades in November 2021 submitted with JPY-LIBOR, which went down to 0% in December – with trades fully moving across to RFRs in just one month. EUR is moving more slowly, with 19% of volume in EUR-EuroSTR in June, up from 0% at the end of 2021.
The other notable development in the Equity Swaps market was the initial move to self-compounding rates which are now trending towards the overnight rate with compounding or averaging provisions applied. For example, trades with GBP underliers in Feb 2022 made up around 30% and 56% of the volume and notional respectively vs the self-compounding rate. By July 2022, GBP-SONIA accounted for 72% of volume and 94% of notional.
We’ll continue to monitor the transition to RFRs, in particular overnight rates along with movements in other currencies to be ready to support all events linked to the transition, including the highly anticipated transition dry runs.