Barnes on Swaps Transparency under  MiFID II

Barnes on Swaps Transparency under  MiFID II

A recent blog in the TABB Forum, by Chris Barnes of Clarus Financial Technology, looks at recent developments in the realm of MiFID, and looks forward.

The UK’s Financial Conduct Authority in August of this year authorized certain Approved Publication Arrangements (APAs) for reporting under MiFID II.  The authorization of APAs is part of the MiFID system, and Britain remains part of the MiFID system Brexit vote notwithstanding.

MiFID II, the second incarnation of the Markets in Financial Instruments Directive, is scheduled to replace MiFID I, the existing system of regulation on such instruments, on January 3, 2018.

Who Gets to be an APA

One of the goals of the switchover is increased transparency for the whole financial system on the continent of Europe. As to trades executed on anything other than an equity outside of a trading venue, MiFID II recognizes that investment firms have an obligation to report their over the counter trades to an APA as close to real time as is possible, no later than 15 minutes after the occurrence of the trade.  So recognition of who gets to be an APA is an important event.

One of the APA’s is NEX Regulatory Reporting. In a press release, the head of NEX Regulatory Reporting, Collin Coleman, said recently that the FCA’s decision on its APA application “is an important milestone in building our multi-regime transaction reporting infrastructure and helps strengthen our position as the partner of choice for market participants’ global regulatory needs.”

Incidentally, NEX will be hosting a roundtable in Amsterdam on September 28, for discussion of the “scope, operational impact, and practicalities of MiFID II.”

Under the transparency rules, these new venues should publish something-or-other in January 2018. But Barnes observes that it isn’t yet at all clear what they will publish. He asks, “Will the data be anywhere near as useful (or as timely) as the data” found in the swap data repositories (SDRs) in the United States?  

As Barnes also says, Clarus regularly “interrogates” the SDR data, looking for logical groupings of trades, near and far legs, etc.

Some MiFID Particulars

MiFID’s transparency requirements turn on three points: whether a trade is liquid, whether it is deemed “Large in Scale” (LIS), and whether it has passed a Size Specific to Instrument (SSTI) threshold. These work as follows:

  • If a transaction is illiquid, then it is subject to a reporting delay to be defined by the National Competent Authority (NCA).
  • If a trade is deemed LIS  then, again, post-trade disclosure can be subject to a delay.
  • Likewise if a trade is above SSTI threshold.

In each case, the underlying rationale is the same. Such deals may require a certain level of opacity.  

Regulations provide that in regard to transactions that are executed outside of the rules of a trading venue, “the responsibility to make a transaction public should always fall on the selling investment firm unless only one of the counterparties is a systematic internaliser and it is the buying firm.”

The idea behind this rule is simply that it ensures publication happens without duplication — responsibility must be unambiguous.

Bad News and Good News

Barnes  does not believe that any very meaningful level of transparency regarding swaps comes into being in Europe in January. Indeed, he says that 75% of the risk traded in EUR swaps is going to remain dark for up to four weeks, and 80% of EUR trades will have no pre-trade transparency.

But Barnes does say that there is good news.

“Over time,” he writes, the data generated by the European Securities and Markets Authority improves, the official LIS and SSTI thresholds will fall, increasing transparency.  

Market participants will learn how to follow the public data and determine what it implies.

“This is a good thing,” Barnes writes, but “it is a shame that the transitional levels, which will be in place until April 2019, are so wide of the mark,” that is, so wide of replication of US-level transparency.

The Clarus website tells us that Barnes has 12 years of experience trading over the counter derivatives, starting with cross-currency swaps at HSBC, London. He has a masters in Natural Sciences, Cambridge. His dissertation there concerned artificial intelligence.

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