CCP Basis - Large LCH-EUREX basis - not unexpected

On Thursday and Friday, Marc was presenting a workshop on “multi-curve and collateral framework and IBOR transition”.

Among the slides presented was this one:

This is a back-of-envelop computation of IM funding cost (Margin Value Adjustment - MLA) to take advantage of the CCP basis. This computation leads to a 1.5 bps annualized at each CCP, i.e. 3.0 bps total. The slide was presented with a graph of the recent LCH-EUREX basis in EUR done a couple of days before and showing the peak at 4 bps for the 10 year.

The same day that the slide was presented, the following article was published in Risk:

Eurex-LCH basis hits new highs amid rates vol

This shows that the basis, which looks like an arbitrage, is very difficult to monetize, that 4 bps may not be a strong anomaly but just a feature of the market and that constraints on the market by regulators may have unintended, but not unexpected consequences.

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SOFR First, the next (but not yet final) step!

The USD interest rate derivative market has reached the next "SOFR First"!

We need to qualify that statement. There are many ways to measure what "SOFR First" means. The first "SOFR First" initiative date from July 2021 and consisting of the regulators saying "please use SOFR". Then there were plenty of informal SOFR First

• the first day/week where there were more notional on SOFR OTC transactions  than LIBOR transactions,
• when SOFR transactions represented more than 50% of the IR OTC derivative market, 
• the last date/week when notional on LIBOR transactions was higher than SOFR transactions
• the first day/week where there were more notional on SOFR ETD/futures transactions than LIBOR transactions,
• etc.

Now it seems we have reached the next "SOFR First" moment (see Figure 1):

the outstanding notional on SOFR-linked derivatives at LCH is higher than the outstanding notional on LIBOR-linked derivatives

Note that we have not reached yet the moment when the outstanding notional on SOFR-linked derivatives at LCH is more than 50% outstanding notional on LIBOR-linked derivatives. We have not reached yet the moment when SOFR is more than 50% of derivative every week. For the moment, EFFR is still above SOFR on a regular basis (see Figure 2).

That moment will come, but it is not clear yet if it will come before the LIBOR transactions are mandatory converted to SOFR.

Figure 1: Outstanding amounts by benchmarks at LCH

Figure 2: Weekly share by product types at LCH

Figure 3: Weekly SOFR volume at LCH and as reported by ISDA (US regulatory figures based).