• How much of the USD Rates market is now traded versus Fed Funds (“EFFR“)?
• We run through the data and find that it really depends on how you measure it!
• Clarus, and most market participants, find that DV01 is the most accurate measure for Rates products.

This is a follow-up to an RFR Adoption blog that I wrote in November:

In that blog, I noted that Fed Funds seemed to be settling at around 10% of the USD market (excluding LIBOR, which continued to print in relatively large size every month in 2022).

However, last week I noticed the following Linkedin post that piqued my interest:

I thought I should present our Clarus data on Fed Funds and SOFR to see if we can shed any light on the data.

OTC Notional Data

Let’s start simple. How have the notional amounts of Fed Funds and SOFR swaps evolved recently?

Showing;

• Notional Amounts of OIS cleared each month for the past four years.
• These are OTC notionals only – i.e. they exclude futures.
• As a note, SOFR has been around and we have been blogging about it since July 2018. Whilst it is a somewhat weird thought that I will have been blogging about SOFR for FIVE YEARS before LIBOR actually ceases, it also means we should now have traders in the market who may have only ever traded RFRs….!
• We can see that on a notional basis, the Fed Funds market was extremely active in Q1 2022, with volumes exceeding SOFR each month.
• As the year progressed, it looks like there was relatively less short-end trading and SOFR took over again.
• However, for the entire year, the notional amount of Fed Funds cleared was indeed higher than SOFR: $83.6Trn in Fed Funds plays $77.8Trn in SOFR for the entire year.
• Just to note that this data comes from the CCPs themselves, so these notionals are the full size, there are no complications around block trade sizes etc. Full sizes are disclosed. (Which also allows me to remind our readers that Block and Cap Thresholds will change this year in the SDR data).

This is perfectly in line with the previously mentioned Linkedin post, but does seem to fly against our analysis for the RFR Adoption Indicator (new data due soon by the way!). What gives?

OTC DV01 Data

As regular readers are no-doubt aware, we create the ISDA-Clarus RFR Adoption Indicator using DV01 data. We derive this from Clarus analytics, combined with a maturity split into standardised tenors from the CCPs themselves.

Whilst we mainly concentrate on these DV01 metrics, in reality a lot of analysis turns out to be interchangeable whether we are talking trends in notional amounts or trends in DV01 amounts. However, for OTC-cleared OIS in 2022, the trends were completely different on a notional and on a DV01 basis.

First, the chart:

Showing;

• DV01 Amounts of USD OIS cleared each month for the past four years.
• This chart looks very different to the previous one!
• SOFR has dominated the amount of risk traded as an OIS product ever since August 2021.
• The amount of DV01 traded versus Fed Funds is very volatile.
• Interesting to note that March 2022 stands out as the largest amount of SOFR risk ever transacted in OTC products.
• We have noted previously that the most amount of SOFR DV01 transacted across the market – i.e. including futures – was in September 2022. Something is going on there with IMM roll months, as more futures trading has transitioned away from Eurodollars and into 3 month SOFR IMM contracts.
• This OTC chart makes the adoption of SOFR look very strong indeed. And is very much in line with the end of year LCH press-release, which noted:

2022 was also a significant year for SwapClear ahead of the USD Libor conversion to SOFR in Q2 2023 – with more than 80% of all new USD swap risk cleared by SwapClear now SOFR-based.

Record clearing volumes at LCH with growth across services and regions; expansion of offering for the uncleared derivatives market

Overall Market

Finally, from CCPView, it is worth noting just how much OIS risk across both Futures and OTC products, is now traded. This is measured by DV01:

With some (a lot of?) USD LIBOR risk still lift to transition , those numbers are likely to climb higher throughout 2023.

In Summary

• The data behind LIBOR transition is important but can be complex.
• We aim to provide as much transparency as possible without boring people with too much detail!
• Yes, a lot of notional traded in Fed Funds in 2022 in OTC markets.
• This does not mean that transition from LIBOR is happening to Fed Funds.
• SOFR dominates the amount of risk traded in USD markets.
• This is consistent with what market participants and our readers tell us. It is also important that the data backs it up!

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