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Acuiti study finds preparations in listed instruments lagging as derivatives industry enters final six months before the switch to SONIA
London – 30 June 2021: Derivatives market participants are least prepared for the transition in futures and options as the GBP markets enters the final six months before the cessation of LIBOR, a study by Acuiti has found.
The study, which was commissioned by CurveGlobal Markets and based on a survey of 114 senior executives from across the GBP derivatives market, found that 52% of respondents were ready for the transition in listed derivatives, the lowest reading for all instruments.
“It had been assumed that listed instruments would be one of the simplest areas to transition to SONIA. However, both liquidity in SONIA futures and options and the levels of preparedness identified in our study, point to a very busy six months for the industry,” says Will Mitting, managing director and founder of Acuiti.
Almost three quarters of respondents reported that more than half of their daily swaps volume traded currently references SONIA, and around a third of respondents said that more than half of their total swaps exposure now references the new rate.
For listed futures, however, it is a different story. Just 15% of respondents said that over half of their daily volume of listed trading is in SONIA-referenced instruments, with a similar percentage saying the same for open interest. Over 50% of respondents still have less than 10% of their listed open interest referencing SONIA.
Since 17 June, the FCA is “encouraging” market participants to trade in listed SONIA referenced contracts over their LIBOR equivalents, the so-called “SONIA First” initiative, which has proved successful in shifting liquidity in OTC instruments.
“The June 17 SONIA First day was a significant step to accelerate the growth of liquidity in SONIA-based listed instruments,” adds Will Mitting. “However, the day itself was overshadowed by the US Federal Reserve announcement of a more rapid increase in rates, which led to a surge in trading in the more liquid LIBOR contracts.
“Building liquidity in futures and options is always a challenge but our study also found that less than half of respondents were currently planning to transition in the market ahead of the forced conversion in December.
“This is likely to change as liquidity grows in listed instruments as banks shift house business following the guidance of the FCA. However, should a significant proportion of the market wait until the end of the year there is real operational risk of disruption during the final days of GBP LIBOR.”
As the derivatives industry approaches the six-month mark before the cessation of LIBOR, the Acuiti survey also found increasing concern among respondents about the impact of the transition on their business.
In October 2020, 13% of respondents told Acuiti that the transition would be “highly disruptive” to their business. This has increased to 22% in the most recent survey, despite respondents’ concerns about the impact on the overall market having lessened.
However, fears over the disruptive impact of the cessation of LIBOR are highly concentrated. Banks and proprietary trading firms are significantly more likely than asset managers or corporates to view the end of GBP LIBOR as being highly disruptive to their business.
Other findings in the report were:
- A third of respondents are currently planning to wait for exchange/CCP conversion for listed products
- There is currently strong demand for a general Term SONIA rate against regulators’ wishes
- Almost half of respondents would consider shifting their futures execution venue
- A large majority expect a more complex market structure following transition
To download the full report, click here.
For more information, contact Will Mitting
Tel.: +44 (0) 203 998 9190
Acuiti is a management intelligence platform designed to provide Senior Industry Professionals in the Derivatives Industry with high-value insight into industry-wide performance and business operations. At Acuiti, we believe in quality, not quantity. We provide a platform through which our exclusive network of Senior Industry Executives can share and source information on day-to-day operational challenges, providing them and their management teams with increased transparency and in-depth analysis to make more informed decisions and benchmark company performance. Financial Institutions benefiting from our services include Banks, Non-bank FCMs, Brokers, Proprietary Trading Firms, Hedge Funds and Asset Managers.