The Covid-19 pandemic has forced the majority of traders to work from home or back-up sites, but it hasn’t stopped them trading in record volumes. Extreme volatility though March was matched by a surge of activity as traders repositioned portfolios for dramatic rate cuts and a deteriorating economic backdrop.
Credit derivatives stand out. March volumes were almost twice the month average, with indexes dominating as traders rushed to protect against a wave of defaults and downgrades since lockdowns brought much corporate activity to a halt.
US credit default swap index and CDS single-name volumes rose 89% in March 2020 from a year earlier, reaching $2.6 trillion. In the three-month period from February to April 2020, we saw $4.7 trillion of cleared notional of which $4.3 trillion was index and $367 billion single name. Similarly euro CDS index and single name activity jumped 92% from its record month in September 2019 to hit €1.67 trillion ($1.8 trillion) in March 2020.
Non-deliverable foreign exchange forwards also had a record month with over $1 trillion of gross notional at LCH ForexClear, the first time the trillion threshold has been crossed; the previous high was $870 billion in September 2019.
In interest rate swaps, US dollar volumes in March also hit a record high at $8.8 trillion, 2% above the previous high in June 2019, while euro and yen volumes were shy of the highs in January and June 2019 respectively.
When it comes to market share, incumbents prevailed through the most turbulent period, though some challengers were able to eke out gains. Clearing for credit derivatives continues to be dominated by Ice in both US and Europe, while LCH gained 3% share, comparing February to April 2020 with the corresponding three-month period in 2019.
Market share in US dollar swaps saw LCH gaining over CME, but only if we look at overall volumes. When comparing client clearing notional only, CME gained over its larger rival. In euro, LCH continues to dominate, while Eurex continues to gradually increase, now 4% compared with 2% a year earlier. Meanwhile, in yen swaps, JSCC increased its share by 3.7% to hit 54.7% versus 45.3% at LCH.
Market share in FX clearing is dominated by LCH with 97.6% and FX options are starting to increase but are still small compared with their market size and certainly compared with non-deliverable forwards volumes.
Cleared US dollar swaps
Let’s start with the largest product; cleared US dollar interest rate swaps and selecting only vanilla fixed float types, (so excluding overnight index, basis, zero coupon and variable notional) and using single-sided gross notional volumes.
Figure 1 shows:
- March 2020 with volume of $8.8 trillion is a record month, $700 billion higher than March 2019 and $200 billion higher than the previous highest month –June 2019.
- LCH with 87.9% market share in the most recent three months, up from 84% share in the corresponding 2019 period.
- CME with 12.1% down from 16% for the 2019 period.
- LCH with $17.5 trillion in the most recent three months, up $1 trillion from the 2019 period.
- CME with $2.4 trillion down from $3.1 trillion.
- A cumulative $19.9 trillion in the three recent months of 2020 compared with $19.65 trillion in the corresponding months of 2019.
Even with the extreme market volatility in March, we see massive volumes of US dollar Libor swaps being traded as firms repositioned their exposures. Overall, LCH gained over CME compared with a year earlier.
However it does depend on how one looks at the data. If we were to take just LCH client cleared volumes in US dollar swaps and compare with CME, on the assumption that CME volume is all client, then we see that CME share of client volume actually increased from 16.2% in January and February to 20.8% in March and 22% in April. In this period the CME-LCH basis spread also collapsed to near or below zero for tenors under 10 year.
Cleared euro swaps
Next the second largest product; cleared euro interest rate swaps and just vanilla fixed float product types.
Figure 2 shows:
- March 2020 with volume of €5 trillion was a high month, but just below the €5.1 trillion in March 2019 and well below the record month of January 2019 with €5.6 trillion.
- LCH with 96.3% market share in the most recent three months, down from 97.7% share in the corresponding 2019 period.
- Eurex with 3.7% share, up from 2.3% for the 2019 period.
- LCH with €12.3 trillion in the most recent three months, down €0.7 trillion or 5% from the 2019 period.
- Eurex with €470 billion in the most recent three months, up from €310 billion, an increase of €160 billion or 53%.
- A cumulative €12.75 trillion in the three recent months of 2020 compared to €13.3 trillion in the corresponding months of 2019.
Euro volumes are holding up well through the market volatility and just a fraction down compared with 2019. LCH is maintaining its dominant market share, with Eurex only managing to increase by 1.4% to 3.7%. In April, Eurex share was 4.1%, in January it was 4.7%, so a definite upward trend, but some way to go to get to 10% to be in a similar ballpark to CME’s share in US dollars.
Cleared yen swaps
Figure 3 shows:
- March 2020 with volume of ¥150 trillion ($1.4 trillion) is a high month, well above the ¥129 trillion in March 2019 but some way short of the ¥173 trillion in Jun 2019.
- JSCC with 54.7% market share in the most recent three months, up from 51% share in the corresponding 2019 period.
- LCH with 45.3% down from 49% for the 2019 period.
- JSCC with ¥196 trillion in the most recent three months, down ¥2 trillion from the 2019 period.
- LCH with ¥162 trillion down ¥28 trillion or 15% from a year earlier.
- A cumulative ¥358 trillion in the three recent months of 2020 compared with ¥387 trillion in the corresponding months of 2019.
Cleared yen swap volumes market share moving in JSCC’s favour, a gain of 3.7% to make it 54.7% versus 45.3% percent at LCH.
Cleared US dollar credit default swaps
Let’s now switch focus to credit derivatives and the volume of credit indexes and single names in US dollars.
Figure 4 shows:
- March 2020 with volumes of $2.6 trillion is by far a record month, almost double the previous record of $1.3 trillion in March 2019, an increase of 89%.
- February 2020 and April 2020 are also substantially higher than a year earlier.
- The cumulative volume of $4.7 trillion in the three recent months is 87% higher than the $2.5 trillion in the corresponding 2019 period.
- Index volume was $4.3 trillion in these three months compared with $367 billion of single name, a ratio of 92% to 8%.
- Ice Clear Credit dominates with 97% share,
Credit derivative volumes are spectacularly up in the recent three months, showing that market participants traded nearly double the average volume as they repositioned portfolios during the Covid-19 crisis.
Cleared euro credit default swaps
Next, the volume of credit indexes and single names in euro.
Figure 5 shows:
- March 2020 with volume of €1.67 trillion is by far a record month, almost double the previous record of €0.87 trillion in September 2019.
- February 2020 and April 2020 also substantially higher than a year earlier.
- The cumulative volume of €2.9 trillion in the three recent months is 95% higher than the €1.5 trillion in the corresponding 2019 period.
- Index volume was €2.8 trillion in these three months compared with €103 billion of single name, a ratio of 96% to 4%.
- Ice Clear Credit with 56.1%, Ice Clear Europe 29.8% and LCH CDSClear with 14.1% market share in these three months of 2020, which compares with 55.2%, 33.6 and 11.1% in the equivalent 2019 period.
Euro credit derivative volumes showing the same massive increase observed in US dollars and LCH CDSClear gaining 3% share from 2019, mostly from Ice Clear Europe.
Cleared non-deliverable forwards
Finally cleared non-deliverable forwards and FX options.
Figure 6 shows:
- March 2020 with volume of $1.1 trillion is a record month and the first month above $1 trillion notional. The previous high was September 2019 with $870 billion.
- A cumulative $2.65 trillion in the three recent months of 2020 compared with $2.1 trillion in the corresponding months of 2019, an increase of $580 billion or 27%.
- The vast majority of this volume is non-deliverable forwards, while $69 billion of FX options also traded, up from $32 billion in the same period of 2019.
- LCH with 97.6% market share in the most recent three months, up from 96.8% share in the corresponding 2019 period.
Cleared non-deliverable forwards also show significantly increased volumes, not as much as credit derivatives, but more than interest rate derivatives as emerging market currencies fell significantly versus a stronger dollar.
Amir Khwaja is chief executive of Clarus Financial Technology.