OTC, Futures, Benchmarks and repo – Q3 2021
We are pleased to provide the Q3 insights report and the full chart pack from the ASX Rates ecosystem during the July to September 2021 period. The chart pack includes the roll volumes for ASX Interest Rates Derivatives – 3, 5, 10 and 20 year futures by volume, session and open interest.
Interest rate futures Q3 2021
Overall Q3 rates futures volumes were 1% lower than Q2 and 10% lower when compared with the same period last year (Q3 2020), largely driven by reduced levels of Open Interest across the curve and a general risk off environment due to ongoing lockdowns across the country.
The 3’s10’s curve finished the quarter at just over 1.00% (1.04%) after dropping as low as 0.85% in August, the lowest level since January 2021. The recent steepening was largely driven by developments in the US around the timing of future interest rate rises (possibly as early as 2022) and expected tapering of bond purchases before the end of the year. The mid part of the Cash Rate Futures curve flattened over Q3 with the market pushing out the expected timing of local interest rate rises due to deteriorating economic conditions as a result of extended lockdowns.
At the September meeting, the RBA extended its bond buying program (QE) until at least February 2022 at a rate of $4 billion per month. The Bank remains upbeat on the future economic state with the delta outbreak seen as a temporary setback that is ‘expected to delay but not derail the recovery.’ The market continues to price in rate rises well before the RBA’s projected 2024 timeline with the first hike fully priced for December 2022 (as at the end of Q3).
The Reserve Bank of New Zealand increased the Official Cash Rate by 0.25% to 0.50% at the October meeting ‘to maintain low inflation and support maximum sustainable employment’. The market is pricing another 0.25% increase in November and further increases in 2022.
The September roll market was orderly, trading in 2.4bps and 0.3bps range in the 3 and 10 year futures contracts, respectively. The range in the 10 year contract was much narrower than previous rolls suggesting the contract was trading at or close to fair value throughout the period.
3 year roll activity was 9% lower in September (856,000) vs June (943,000). 3 year Open Interest was 4.5% lower when compared with June accounting for some of the decline in volume.
- 10 year roll activity was 2.4% higher (1.7 million) vs June (1.66 million) although 10 year Open Interest was down 3.7% when compared with June.
- Order book depth in the 3 year contract was somewhat improved when compared with March and June while top of book liquidity remained commensurate with previous rolls. The 10 year contract saw greater top of book liquidity and depth when compared with June assisted by the tight trading range/fair value pricing throughout the roll.
- 59,000 5 year and 17,700 20 year contracts were rolled.
- 43,023 3 year, 15,001 5 year, 73,016 10 year and 158 20 year contracts were taken to cash settlement.
- 92,956 AU 90 Day Bank Bill Futures contracts were taken to cash settlement.
- 25,670 NZ 90 Day Bank Bill Futures contracts were taken to cash settlement.
- The April 2024 bond line rolled out of the 3 year bond basket meaning the 3 year contract is now free of any RBA Yield Target bonds.
OTC swap volumes
Global AUD OTC swap volumes recovered somewhat in Q3 2021 vs Q2 2021, however continue to be lower vs PCP due to a continuation of subdued shorter-date interest rate swap and OIS volumes, as a result of the low rate environment and yield curve control. ASX’s OTC Clearing service has recorded total notional cleared of A$1.12 trillion in Q3 2021, up 81% from A$619 billion in Q2 2021.
2021 ISDA Definitions: ASX adopted the 2021 ISDA Interest Rate Derivatives Definitions as the definitions for cleared interest rate swaps from 4 October 2021, in alignment with the globally co-ordinated go-live. ASX published a market notice which provides further detail on this change and is available here.
Continued growth in longer dated swaps: ASX has grown its activity and market share in longer dated interest rate swaps, with Weighted Average Maturity of ASX Cleared Interest Rate Swaps growing 45% to 2.45 years across the 12 month period ending September 2021 with market participants taking advantage of ASX’s lower total cost of clearing and the available cross-margining offsets (average 50% cross-margining benefit across users of ASX’s Margin Optimisation service).
Daily eligible volumes, for the purpose of calculating BBSW using transactions, have declined over the last quarter averaging $1.84 billion per day (compared to $2.14 billion for June 2021 quarter) with more than 50% of the eligible volume concentrated in the 3-month tenor. An average of 2.5 tenors per day were formed in Q3 using the transaction based layer of the methodology (compared to 2.6 tenors per day in Q2).
August 3, 2021 was the largest eligible volume day since the introduction of the transaction based methodology in 2018 with a total of $5.05 billion traded, leading to all 6 tenors formed using transactions.
Australian bond futures dataset
Historical bond futures components data is now available from ASX DataSphere. Reference key elements of ASX bond futures contracts including details of constituent basket bonds from 1989 onwards. This data provides the base reference material needed for development of systems for current and historical bond futures basket fair value analysis, and associated pricing inefficiency analysis. Frameworks for analysis of patterns between bonds and the associated futures contracts can be based on contract and bond basket details from this file, as well as systematic pricing and trading/hedging systems requiring this data. This dataset underpins the futures, bond and repo funding dynamic, and can contribute to pricing systems solving for implied repo funding rates for basket bonds, and identification of other associated pricing inefficiency opportunities.
- Quarterly contract details for all current ASX bond futures contracts back to 1989 where appropriate.
- 3, 5, 10 and 20 year bond futures contracts are included.
- Constituent basket bonds are listed by ISIN, coupon and maturity, with constituent counts to aid system use.
- Key contract dates are specified to aid programmatic use: first/last trading date and settlement/expiry dates.
- Various forms of contract codes and expiry details are included, along with contract sizes for reference.
Market repo instructions reminder
Participants are reminded that all Market Repo transactions need to be settled as Market Repo transactions in Austraclear by 22 November 2021. Further details at https://www.asxonline.com/public/notices/2020/apr/0338.20.04.html and on the Austraclear webpage under Market Repo updates.