Part One: ICE’s Caramaschi reflects on a turbulent first year

Part One: ICE’s Caramaschi reflects on a turbulent first year

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Few have had a first year in a job like the year Caterina Caramaschi has had as Intercontinental Exchange’s head of interest rates and equities.

Caramaschi, who became the US group’s global head of equities in late 2020, was promoted in early October last year to run ICE’s rates book in addition to her duties in charge of equities.

The timing is significant because the UK economy was in early October still reeling from Liz Truss’s ill-fated mini-budget on September 23 which drove sterling to an all-time low against the dollar and caused a sell-off in gilts.

As the home of the UK interest rate derivatives market through its SONIA franchise, ICE (and therefore Caramaschi) found themselves in early October at the centre of fast-moving financial crisis.

She told Global Investor: “My expanded role into the rates business came at a very challenging time, we had not long finished the GBP Libor to SONIA transition and the rate cycle had begun after over a decade of very low rates.

“At the time, both SONIA and Gilts were struggling because we had heightened global rates volatility and the mini budget which didn’t help SONIA liquidity.”

London-based ICE Futures Europe’s three month SONIA futures had a record month in September as firms sought to mitigate the effect of the mini-budget but trading volumes collapsed after that through October, November and December - the first three months of Caramaschi’s tenure in her new role.

She said: “One of the first things the team and I did when I started was put in place measures to underpin liquidity in the SONIA future and we are now seeing future’s liquidity improve substantially as a result of those measures and some calm returning into the UK market following the appointment of a new chancellor and the unwinding of the mini budget.”

The longer end of the curve was also hurt by the mini-budget with open interest in the UK ten year interest rate future dropping to 350,000 lots in January.

Caramaschi said these were undoubtedly “tough times” but: “Client engagement was key and all the feedback we got was important. Most said time is a great healer and we need confidence to come back to the UK markets before open interest will improve. This has been proved right as we are now back above 520,000 lots of open interest and growing. The ten year gilt futures market is definitely fixing itself with the help of our clients.”

Similarly, ICE SONIA trading volumes recovered in the early part of this year, as memories of the mini-budget faded, and hit in March this year a monthly record for volumes, topping 10 million lots in a single month for the first time.

Caramaschi added: “What we see is in times of stress and, when capital becomes more expensive, is clients reallocating capital to the best opportunities. US rates and Euro rates are the largest, followed by sterling rates and, in 2022 and also early 2023, clients re-allocated their capital to trade euro rates, via our Euribor contracts and US rates, where they saw more opportunity to deploy their risk.”

While the UK rates book wobbled late last year, Caramaschi is right that the ICE three month Euribor futures contract had a stand-out year in 2022, trading more than 20 million lots every month in the second half of the year.

“Our Euribor futures and options had a strong 2022 with over 365 million lots traded, up 66% on 2021. 2023 is also proving to be another good year for our Euribor futures and options, especially in the futures where average daily volume (ADV) is up 10% year-to-date. We think Euribor is here to stay, and we want to continue to work with our clients to build liquidity.”

ICE’s strong Euribor franchise faces a challenge later this year when Deutsche Boerse’s Eurex relaunches its rival Euribor future backed by a revenue-sharing agreement aimed at investment banks, market-makers and other trading firms but Caramaschi declined to comment on this initiative.  

She did, however, suggest there has been a shift in emphasis in recent months as inflationary pressure has eased in Europe which bodes well for SONIA.

She said: “We are now potentially seeing the end to the US and Euro rates cycle. US markets are pricing in one more rate hike, in Europe another two, whereas in the UK markets were pricing another five rate hikes until recently, after the June inflation numbers that all changed and markets are pricing in another three, this could change again.

“Due to this uncertainty in UK rates, vs EU and US rates, we are seeing a lot more interest coming back into SONIA futures and options.”

SONIA futures and options broke their second record this year, after 1.37 million contracts were traded on May 24, ICE said.

Caramaschi continued: “This is the benefit of ICE as an exchange. ICE has positioned its rates business as a multi-currency offering through Euribor, SARON, SOFR and SONIA, noting that the post zero interest rate policy years would likely see the return of monetary policy divergence.”

Continued on August 15

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