OSTTRA has assessed the Q2 2021 data processed by our MarkitWire platform 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.

For additional background on the drivers for these shifts see our initial flash analysis in mid-January (available here), and our January review (available here), Q1 2021 review (available here) and our joint report with Deloitte (available here) entitled “European capital markets: The regulatory considerations for banks as they move beyond Brexit”.

To recap the drivers, the transitional period ended on 31 December with no relief for European Union (EU) firms on the DTO from the European Commission (EC) and only limited adjustments from the United Kingdom (UK). Despite largely identical rules, no equivalence was granted between jurisdictions. This left many firms with conflicting and incompatible DTOs in the EU and the UK and no apparent option other than to trade the relevant derivatives on a US Swap Execution Facility (SEF), or in Singapore. US firms remained subject to the MAT requirements.

Current position:

• EU firms must meet the EU DTO by trading certain OTC Interest Rate Swaps (IRS) on an EU MTF/OTF or an ‘equivalent’ venue, currently limited to US SEFs and Singapore based venues
• UK firms must meet the UK DTO by trading certain IRS on an UK MTF/OTF or an ‘equivalent’ venue, currently limited to US SEFs and Singapore based venues (with some limited relief when UK banks face EU clients who cannot access a SEF)
• US firms must meet the MAT requirements by trading certain IRS on a US SEF or an exempt foreign swap trading venue, currently; UK MTFs/OTFs, EU MTFs/OTFs and Singapore based venues.

This means that EU, UK and US firms can access global on-venue liquidity except; UK firms cannot access EU venues (except in some special cases where temporary relief is available) and EU firms cannot access UK venues. This has created some specific challenges:

• An EU firm can only trade certain IRS subject to both the EU and UK DTOs with a UK firm on a venue that allows both firms to comply with their local DTOs, which means an EU bank cannot face a UK client on an EU nor UK venue
• A UK branch of an EU firm is subject to both the UK and the EU DTO.

How did Q2 2021 compare?

EUR: All Swaps

After the dramatic moves in late 2020 and early 2021, we have seen additional movement from the UK to the US venues in Q2 2021 with UK MFTs/OFTs falling from 10% in March to 9% in April, and 8% in May and June 2021 and SEFs increasing from 19% in March to 22% in April and May and 24% in June 2021, while EU venues have remained largely flat at around 26%.

Q1 versus Q2: The SEFs’ Q2 share was 23% up from 18% the UK venues’ share was 8% down from 11% and the EU share was flat at 26%.

GBP Swaps

After the significant moves in late 2020 and early 2021 with SEFs overtaking UK MTFs/OTFs to become the biggest on-venue market. Q2 has been stable with the only noticeable trend a small decrease in EU venue market share from 5% in March and April to 4% in June 2021 but this still remains much higher than the 1% in mid-2020, but now half the 8% we saw in December 2020. SEFs have remained consistent with their March level throughout Q2 2021. The UK MTFs/OFTs saw a jump in June to 22% the highest level in 2021 thus far, but this could be a one-month anomaly at this stage. We will check back on this in our Q3 review.

Q1 versus Q2: The SEFs’ Q2 share was 29% up from 25% the UK venues’ share was flat at 20% and the EU share was down at 4% from 5%.

USD Swaps

After the small but significant moves in late 2020 and early 2021 with UK MTFs/OTFs market share falling from 10% to 5%, EU MTFs/OTFs share trebling from 1% to 3% in Jan 2021 and SEFs moving from 40% to 47% the USD swaps market has been remarkably consistent ever since with UK MTFs/OTFs consistently around 6%, EU MTFs/OTFs consistently around 3% and SEFs printing between 46-48% each month throughout Q1 and Q2.

Q1 versus Q2: The SEFs’ Q2 share was flat at 47% the UK venues’ share was flat at 6% and the EU share was flat at 3%.

Given the stability of USD and GBP swaps, we will only drill into more detail on EUR swaps this time…

On-venue EUR Swaps

With the off-facility trades removed the on-venue split shows the same trends albeit to a slightly greater degree.

EUR Dealer-to-Dealer Swaps

There was a sudden drop in D2D EUR swaps on UK MTFs/OTFs from 14% in January, February and March to 9% in April, May and June 2021. This is matched by a shift on SEFs from 15% in January, February and March to 20% in April, 19% in May and 21% in June implying a further shift in EUR D2D swaps.

EUR Dealer-to-Client Swaps

There had been a sudden jump in D2C EUR swaps on SEFs in March 2021 from 10% in February to 19% in March, this was followed by 15% in April, 16% in May and 17% in June so the SEF share of client trades appear to have stabilised at a higher level than seen historically. The EU venues’ share has remained consistent at around 16%. The UK venues’ share rebounded from 6% in March to 11% in April before posting 7% in May and 8% in June 2021.

It is noteworthy that the SEFs’ share of the EUR D2C swap market is now higher than the EU venues’ share.

EUR Swaps subject to a trading obligation (DTO/MAT[ii])

There was a sudden drop in EUR swaps subject to DTO/MAT on UK MTFs/OTFs from 15.5% in Q1 to 10.5% in Q2. This is matched by a shift on SEFs from 18% in Q1 to 25% in Q2 showing a material further shift in EUR swaps subject to DTO/MAT. The EU venues’ share has remained consistent averaging 38% in both Q1 and Q2.

EUR Swaps not subject to a trading obligation (DTO/MAT)

There hasn’t been a material shift in non-DTO/MAT EUR swaps. The only item of note is that UK venue’s share rose to 8% in April before falling to 6% in May and June and SEFs’ share increased from 19% in March and April to 21% in May and 22% in June. However, when you look at Q1 versus Q2 UK and EU venues are flat with the SEFs 2.5% increase from 18.5% to 21% almost entirely coming from a reduction in off-facility.

EUR Cleared[ii] Swaps

Well over 90% of EUR swaps are cleared. There was a sudden drop in Cleared EUR swaps on UK MTFs/OTFs from 12% in Q1 to 10% in April, 9% in May and 8% in June 2021. Meanwhile SEFs’ share increased from 19% in Q1 to 23% in April and May, and 26% in June implying a further shift in EUR cleared swaps. The EU venues’ share has remained fairly consistent. The rest of the SEFs’ increase came from a reduction in off-facility.

Conclusion

EUR Swaps: There was a further drift from UK venues to US venues in EUR swaps, while EU venue share remained flat. This could be due to clients being concerned about the longevity of the FCA relief making the changes needed to use a SEF.

GBP Swaps: There was a small decline in EU venues’ share of GBP swaps which is now half its December 2020 level, while UK venues are seeing a small increase posting their highest monthly share in 2021 in June.

USD Swaps: The USD swaps market appears to have plateaued with UK MTFs/OTFs consistently around 6%, EU MTFs/OTFs consistently around 3% and SEFs printing between 46-48% each month throughout Q1 and Q2.

EUR Swap Breakdown

D2D EUR Swaps: Q2 saw the UK venues’ share fall a further 5% from 14% to 9% while the SEFs’ share increased from 15% to 20% while the EU venues’ share has remained fairly consistent.

D2C EUR Swaps: The SEFs’ market share in Q2 was higher than the EU venues’ share for the first time.

EUR DTO/MAT Swaps: Q2 saw the UK venues’ share fall 5% from 15.5% in Q1 to 10.5% in Q2, while the SEFs’ share increased from 18% in Q1 to 25% in Q2 while the EU venues’ share has remained fairly consistent averaging 38% in both Q1 and Q2. Thus, the data shows a material further shift in EUR swaps subject to DTO/MAT from UK venues to SEFs.

EUR Non-DTO/MAT Swaps: Q2 saw the SEFs’ share increase 2.5% from 18.5% in Q1 to 21% in Q2, which almost entirely came from a reduction in off-facility swaps.

EUR Cleared Swaps: Q2 saw the SEFs’ share increase 5% from 19% in Q1 to 21% in Q2, which came equally from a reduction in UK venues’ share and off-facility swaps.

As mentioned previously, market share is one aspect of this story, market access is the other…

Some EU and UK banks and EU and UK clients have reduced market access

EU banks which do not have UK subsidiaries can no longer access 10% (Q2 average) of the EUR DTO IRS market that occurs on UK MTFs / OTFs.

UK banks which do not have EU subsidiaries can no longer access 38% (Q2 average) of the EUR DTO IRS market that occurs on EU MTFs / OTFs, except where trading with, or on behalf of, EU clients subject to the EU DTO which do not have access to a SEF.

Clients in the UK and EU have reduced choice about where to execute trades as, where the transactions are subject to an EU/UK DTO, clients in the UK are unable to trade on EU venues and clients in the EU are unable to trade on UK venues for DTO products.

Increased market fragmentation does not appear to have had a direct impact on liquidity

OTC derivative markets are global in nature and very agile. Trading liquidity in OTC IRS tends to concentrate on a currency-by-currency basis; liquidity begets liquidity. However, the combination of a relatively hard Brexit for financial services, the lack of EU – UK equivalence (or a progressive, detailed financial services agreement), combined with the equivalence available from both the EU and the UK to use US SEFs, has had the effect of driving some former UK venue volume to SEFs and a number of EU venues, primarily in Amsterdam and to a lesser extent in Paris.

These shifts in market share have created a more geographically fragmented market in EUR and GBP IRS and a more geographically concentrated market in USD IRS on SEFs. OSTTRA has not performed a liquidity analysis. However, anecdotally the geographical fragmentation does not appear to have had a direct impact on liquidity.

January 2021 saw generally reduced EUR swap activity, both in terms of volumes and notional traded compared to January 2020. This could be explained by low volatility, caused by a low and stable interest rate environment. However, volumes rebounded in February and to an even greater extent in March. This rebound was primarily driven by inflation fears in the US. Volume in April was sharply down with May and June improving but still below January 2021 levels.

There has been little or no change in where OTC IRS are cleared

Based on our June 2021 data, over 93% of EUR and GBP IRS and 96% of USD IRS are cleared. Where OTC IRS clear and where they trade are independent decisions. Looking at the first half of 2021, UK CCPs clear over 99.5% of the GBP IRS market, over 96% of the USD IRS market, and 91% of the EUR IRS market. There has been no material change in this position for the GBP IRS market, while for the EUR and USD IRS markets, comparing H1 2021 with Q3 2020, there has been only minor variation and nothing to suggest any significant trends are emerging yet. This is something we will look into further in another piece shortly.

[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] The full set of EU, UK DTO and US MAT rules are complex. As a proxy for subject to a trading obligation we have used product IRS (fixed float), tenor (DTO/MAT), spot starting (i.e., excluded non-spot but also excluded IMM which is DTO/MAT), roll frequency (3m or 6m) and floating rate option (index DTO/MAT).

[iii] For the avoidance of doubt these are not just swaps cleared in the EU, they are swaps cleared at any of the OTC IRS clearing houses globally.

Endnotes

1. There is a small quantity of US MTF/OTF trades, these are immaterial and have been ignored for this analysis.
2. 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).

OSTTRA has assessed the data processed by our MarkitWire platform to evaluate the post-Brexit landscape 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 (available). We analysed the trading venue geographical market share for EUR, GBP, and USD swaps. Our last review was of Q2 2021, we didn’t publish the Q3 and Q4 2021 reviews as there hadn’t been any significant change, until now…

How did Q1 2022 compare?

EUR Swaps

After the dramatic moves in late 2020 and early 2021 which saw movement from the UK venues to the US SEFs^[ii] the market shares had stabilised. However, with the spike in volumes in March 2022 the SEFs’ market share is now higher than that of EU venues for EUR swaps. SEFs had a market share of 26% in March 2022, their highest recorded share and the EU venues had 21%, their lowest share since December 2020. UK venues have remained largely flat at their post Brexit norm of just under 10%.

When you look at on venue volume only SEFs had 47%, in March 2022, again a record high, while EU venues had 38%, again a post Brexit low, and UK venues remained largely flat at their post Brexit norm of approximately 15% of on venue volume

GBP Swaps

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. The last few months have seen UK venues return to top spot, and actually slightly above their pre-Brexit norms. US SEFs have fallen back a little and are now at or slightly higher than their pre-Brexit norms.

UK venues had a third of GBP swap volume in March 2022, their highest recorded share. The SEFs had 23%, their highest share since September 2021 but well below the levels seen in the first half of 2021, in the aftermath of Brexit. EU venues had just 2% share in March 2022, half of their 2021 average, they are now back at September 2020 levels,

When you look at on venue volume only, UK venues had 57%, in March 2022, while SEFs had 39%, and EU venues had 4% of on venue volume, a post Brexit low.

USD Swaps

After the small but significant moves in late 2020 and early 2021 with UK MTFs/OTFs market share falling from 10% to 5%, EU MTFs/OTFs share trebling from 1% to 3% in Jan 2021 and SEFs moving from 40% to 47% the USD swaps market has been remarkably consistent ever since.

However, in the last 6 months the SEF’s share has averaged 50% up from a 47% average in the prior 6months which has been driven by trades moving on venue as the UK and EU venue shares have remained stable at 6% and 4% respectively.

When you look at on venue volume only, SEFs had 82%, in March 2022, while UK venues had 11%, and EU venues had 7% of on venue volume.

A random thought?

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. Well, recently I was approached by a European regulator focused on the benchmark transition asking when we would be publishing our next update on IBOR versus RFR volumes, (it will be published tomorrow!), and asked whether there is any difference in the trading location data^[iii] between existing IBORs and the new RFRs. Well…

Firstly, GBP has already transitioned with all new risk being traded in SONIA rather than LIBOR, so the “all swaps” data published above is all SONIA, so I focused in on the USD and EUR markets.

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%. With UK venues at 16% for RFRs versus 5% for IBORs. With EU venues at 8% for RFRs versus 6% for IBORs. So, 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.

For EUR on venue swaps we saw SEFs had an almost identical market share in RFRs and IBORs in March 2022. Whereas EU venues had a slightly lower share in RFRs, 32% in RFRs versus 39% in IBORs, while UK venues had the reverse 22% versus 14%. However, in December 2021, EU venues were higher in RFRs, 44% in RFRs versus 43% in IBORs.

So, while it was an interesting thought there is not a huge difference in the trading location of the new RFRs versus the old IBORs. So that doesn’t appear to be driving the broader trends.

Summary

• EUR Swaps: SEFs overtake EU venues to become the primary trading location for EUR swaps with 26% of all EUR swaps and 47% of on-venue EUR swaps now executed on a SEF.
• GBP Swaps: UK venues re-take SEFs to become the primary trading location for GBP swaps, with a larger share than pre-Brexit, with a third of all GBP swaps and 57% of on venue GBP swaps now executed on a UK venue.
• USD Swaps: SEFs now account for 50% of all USD swaps with UK and EU venues accounting for 6% and 4% respectively. SEFs consistently account for over 80% of on-venue USD swaps.

Final thoughts

As I have previously said, market share is one aspect of this post-Brexit OTC derivatives trading location 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. Clients in the UK are unable to trade on EU venues and clients in the EU are unable to trade on UK venues for DTO products, meaning that clients must either stay in their home market or utilise a SEF to gain broader liquidity. The swap markets used to be truly global.

^[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).
^[iii] These calculations, due to the nature of separating RFRs and IBORs, were based on (i) all new single currency fixed versus floating interest rate swaps only, including IRS & OIS, supported by our MarkitWire platform. Fed-Funds OIS and EONIA OIS are treated as RFRs, alongside EuroSTR and SOFR, all other floating rate options are treated as IBORs except credit sensitive rates such as BSBY which were ignore for this analysis.

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.

What has happened in the last year?

EUR Swaps

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.

GBP Swaps

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.

USD Swaps

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).

Summary

• 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%

Final thoughts

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.

^[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).