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Libor to Sonia – If not now, when?

Libor to Sonia – If not now, when?

By Andy Ross, chief executive, CurveGlobal Markets

At the end of this year, Libor will cease to exist. It is no longer about getting ready – it’s about being ready. If we think of Libor as an ‘approaching storm’, the potential for disruption is great. If you heard a large storm coming, would you wait until you were in the centre of it to take precautions? It’s no different for futures market participants and their derivatives portfolios with the end of Libor already clearly on the horizon.

While it may make sense to hold on to your current positions tied with the old benchmark at the moment – whether they’re yielding a profit or to minimise losses – you run serious risks to your business model by not transitioning to new risk-free reference rates (RFRs). The markets that underpin Libor are no longer liquid, which has led to the reliance on so-called ‘expert judgement’ rather than actual transactions. Past the end date, it’s hard to predict what Libor settings will be chosen by the Ice Benchmark Administration for maturing contracts, adding risk and the potential to lose out on your current positions.

Sonia transition, while not existential, is certainly very important to CurveGlobal. Our mission is to persuade people that trading Sonia on CurveGlobal Markets is a better choice than just rolling over existing positions on Ice (or indeed CME). But it’s not just about Libor going – it’s the catalyst to reimagine the market better. And where better than London Stock Exchange and LCH for trading and clearing Sonia-based products? You can trade for free (no execution or clearing charges), trade at a better price – we’ve had the same price with more than half of the liquidity for more than 75% of the time in the whites, and more than 65% in the reds, and we’ve had the unique best price for 10% of the time in the whites and around 20% of the time in the reds1 – and trade intercommodity spreads (ICS) at one-tenth of a tick. 

What really matters though is the unique opportunity to put futures liquidity and swaps liquidity together. In low-volatility environments, the differences in price with flat curves, through convexity and discounting, are not huge. I’ve been in capital markets long enough to remember when this wasn’t the case. Do you really want another expensive basis to hedge in the future? CurveGlobal Markets is unique in offering the ability to clear and portfolio margin Sonia futures alongside Sonia swaps.

When we first launched our Three-month Sonia Futures, we also reduced the tick increments of our Three-month Sterling Futures, aligning them to launch our ICS. What’s great about the ICS is that you are able to lock both contracts down simultaneously and trade them as an aggregated package, allowing you to gain exposure to or hedge against divergences in prices, while eliminating lagging risk when trading the spread. Not only this, the ICS is exchange-traded, further supporting transparency and the transition to the new sterling benchmark.

If we take a look at Sonia, we’re seeing more and more contracts being traded each month. Clarus Financial Technology reported an 87% increase in Sonia swaps in 2020 compared with 2019.

Having a more liquid market is crucial to facilitating market migration, giving participants a greater choice for trading in and out of positions. However, as highlighted in CurveGlobal Markets’ recent Acuiti report, International Swaps and Derivatives Association-Clarus figures still show that the total RFR market share lags significantly behind Libor.

CurveGlobal Markets is making the transition to the Sonia benchmark as smooth and seamless as possible. This is not ‘your risk to manage’, but rather the risk you’re taking using our infrastructure. We have a responsibility to help provide clarity, leadership and support for the transition process.

We have issued a market notice explaining how we’re going to migrate positions on Libor should it become unavailable or unrepresentative: certainty, support and clarity. It’s not surprising that, in a world with so much uncertainty, listening to our customers’ concerns means they can benefit from better pricing, and growing volumes and liquidity.

While many of us tend to leave things to the last minute, Libor transition is not something to procrastinate over. CurveGlobal Markets is offering 12 months of fee-free trading and no charge for market data, and six months of zero clearing fees when clearing through LCH.2 My question is: If now is not the time, then when is?

It’s easy to keep your positions in Ice or CME, perhaps, but it’s hardly more difficult to roll this risk into CurveGlobal Markets and benefit from the clarity, fees and margining. By doing this, you can create a more diverse market where you have competition and control of costs and prices. Unique opportunities don’t come along every day. Plenty of curveballs were thrown last year – let’s start this one with a Curve that’s making things better.

Contact CurveGlobal Markets to find out how we can help you.



1. Big xyt independent analysis, Q4 2020

2. No trading fees until October1, 2021 and no clearing fees until April 1, 2021

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