Will GBP LIBOR stop trading on 2nd March 2020?

• The market convention for GBP Swaps is expected to move to SONIA from Monday March 2nd 2020.
• This structural change follows an announcement from UK regulators.
• The data shows that already 88% of total notional in GBP swaps is versus SONIA.
• Maturities longer than 2 years have still not transitioned to SONIA trading.

Probably* as a result of reading last week’s blog, the FCA and Bank of England issued the following:

The full text is available here, stating that market convention for GBP Swaps trading should be SONIA from Monday March 2nd 2020.

Mark the date in your calendars!

*Our readers will notice that our SONIA blog was actually published after the announcement!

A Structural Change

I’m really surprised how little coverage this announcement from the UK regulators has received. To put it in context, I thought I should go through a typical day of trading in the GBP markets, similar to my “GBP Swaps for Dummies” from 2017.

Looking at the data might put into context just what the authorities are trying to achieve in the next ~six weeks.

SONIA’s Monday Morning

First, let’s look at what has traded so far this morning, as reported to US SDRs:

Showing;

• 26 trades so far.
• £34bn in notional.
• £811k DV01 of risk transacted.
• Maturities ranging from 1 month all the way out to 40 years.

Looking at the risk that has traded;

Showing;

• There is activity in a number of maturities.
• No 5y or 10y trades.
• It is great to see long-dated activity in the 20Y through to 40Y buckets.
• Most of the risk was traded in the shortest maturity (1 month). This represented ~25% of the total risk.

Looking at the SONIA “tape” of trades in the SDR, we can see that activity has been dispersed throughout the morning – these trades weren’t down to a sudden burst of activity. Again, this is a good sign for the transition:

A LIBOR Morning

Let’s perform the same analysis for LIBOR trading. Keep in mind that traders have had this guidance from the regulators for over 10 days now. Are they avoiding LIBOR?

This is a summary of LIBOR trades:

Showing;

• 64 trades.
• Nearly £6bn in notional.
• A total DV01 of £1.6m.
• Maturities ranging from 1Y out to 30Y.

Comparing to SONIA, we can say:

• Notional amount of SONIA transacted so far has been nearly 6 times greater than in LIBOR.
• Amount of SONIA risk transacted has been half that in LIBOR.

We can see more from the maturity profile of risk traded:

Showing;

• A very different maturity profile to SONIA risk.
• Most risk has been traded in the 2Y bucket.
• This is closely followed by the 10Y.
• 5Y and 30Y also see significant amounts of risk.

The LIBOR picture is one of activity spread along a number of different tenors. It does not show the same concentration of risk in the shortest tenor as we see in SONIA.

Again, the LIBOR “tape” shows frequent trades throughout the morning:

Note that two trades are marked with an asterix (*) – the total size is over the block trade reporting threshold. We also saw large block trades in SONIA in a number of maturities, so it seems to have been a busy morning for GBP swaps traders.

Electronic Trading

Interestingly, our data shows that most SONIA volumes are executed off-SEF:

89% of SONIA volumes (reported to the SDRs) have been transacted off-SEF in 2020. The market needs to look at this infrastructure to make sure that the convention successfully transitions to SONIA from 2nd March 2020.

SONIA Extension

Measured in notional-terms, it looks like we are in a very strong position to follow the regulators advice in five Monday’s time. Remember that the analysis so far has been based on the US Person’s market, via SDR data.

Using CCPView, we can see that the global cleared market has equally traded significantly more SONIA than LIBOR in 2020:

Showing;

• Daily volumes cleared at LCH SwapClear in GBP SONIA (blue) and GBP LIBOR (red) last week.
• 88% of notional last week was in SONIA.
• Expressed another way, 7.4 times as much SONIA cleared last week than versus LIBOR.

This is all great news on a notional basis. However, we highlighted last week that much of this activity is down to trading related to the BoE decision this week. It is therefore very short-dated in nature. The SONIA and LIBOR activity longer than 2 years at LCH SwapClear supports this:

Showing;

• LIBOR activity (in blue this time) continues to dominate in tenors longer than 2 years.
• LIBOR traded 3.9 times the amount of notional compared to SONIA for these longer tenors. This means 79.5% of notional was versus LIBOR.

2nd March 2020

We don’t do “LIVE” blogs very often. Looking back, we have live-blogged on Brexit, the US election and MIFID II. A whole swap market transitioning to a different index on a single day also seems like good enough reason to me.

So join us on Monday 2nd March 2020 for a live blog as we will follow the data and see how complete the market transition will be to SONIA.

In Summary

• GBP Swaps are expected to trade versus SONIA as the market convention from 2nd March 2020.
• We now see 88% of notional being transacted versus SONIA.
• However, most of the swaps longer than 2 years are still transacted versus LIBOR.
• This means that less than half the total risk transacted is versus SONIA.
• We also find that 89% of SONIA volume is transacted off-SE.
• There is therefore still work for the market to do in the next ~six weeks to ensure a smooth transition.
• We will publish a live blog on Monday 2nd March 2020 to assess how successful the transition has been.