Euro, Swiss swaps trading jump on rate hike chatter

Highest weekly volumes since at least 2020 as ECB and SNB gear up for policy change

Trading in euro and Swiss franc interest rate swaps referencing overnight rates reached record highs last week, as the European Central Bank (ECB) prepares to raise its benchmark rate for the first time in more than a decade.

Swaps referencing mainly the euro short-term rate (€STR) totalled €1.2 trillion ($1.25 trillion) notional for the week ending June 12, according to figures from the Depository Trust & Clearing Corporation’s (DTCC) swap data repository.



Swiss franc swaps referencing the Swiss average rate overnight reached Sfr41 billion ($41 billion) notional in the same week, their highest weekly total since at least the start of 2020.



The moves come as traders grapple with the upcoming rate increases from the ECB, which last hiked rates in 2011, and speculations that the Swiss National Bank (SNB) could soon follow suit.

On Thursday (June 9), the ECB’s governing council announced plans to raise its key interest rate by 25 basis points when it meets in July, and again at its September meeting, potentially by a larger amount. The benchmark rate is currently set at -50bp.

The day saw the highest daily volume of euro overnight index swap (OIS) trades since at least 2020, with €391 billion notional hitting the market.

Traders also piled into euro rates volatility trades, pushing swaption volumes to their highest weekly total since at least 2020. Notional volumes totalled €133 billion for the week, split relatively evenly among pay fix, receive fix and straddle swaps.



What is it?

The DTCC swap data repository includes trades involving US-regulated counterparties, while excluding trades not involving US-regulated firms.

In some cases, trade notional amounts are capped, further underreporting the size of total trading. Still, the repository offers one of the best publicly available insights into the derivatives market and is referenced by traders and in industry reports.

For this analysis, trades were considered OIS or swaptions if submitted to the SDR with the respective designation. Only same-currency trades are included.

Trades are date-stamped in Coordinated Universal Time, equivalent to Greenwich Mean Time, and the data has been adjusted to reflect trade corrections and cancellations.

Why it matters

The ECB last raised the deposit facility rate from 50bp to 75bp in July 2011. Since then, it has either kept rates level or gradually nudged them lower. Rising eurozone inflation has helped force the central bank to change direction.

While most economists expect the SNB to keep rates level when it meets today (June 16), continuing a 15-year run without a rate hike, speculations are mounting on a change of direction in the near future. Last month, one of the bank’s governing board members, Andrea Maechler, said the SNB would not hesitate to tighten its policy if high inflation persisted.

Traders in both markets have been operating without their respective Libor rates since the start of the year, which may explain the concentrated use of Swiss franc OIS swaps. Euro traders continue to trade swaps referencing the interbank rate Euribor, but for overnight rates they are left with €STR since Eonia’s phaseout.

Euro swaptions continue to use Euribor, and last week’s volume increase did not feature any €STR-based swaps.

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