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Following on from our dive into Category 2 debt instruments in Propellent Insights Issue 28, this week’s edition focuses on Interest Rate Swap (IRS) and how they are impacted by the Category 2 deferral rules.
As with debt instruments, there is a lesser known category of instruments that came into effect on 1st December 2025 (at the same time as the main guidelines). The instruments affected are summarised in Figure 1 below:
Figure 1: FCA Category 2 Rules
Looking at Figure 1 on the previous page, when the report is made by an FCA trading venue, the following can be inferred for IRS activity:
If a trade occurs in EUR, USD or GBP and is for an in-scope instrument type / reference rate combination, it will fall into Category 1. In practical terms, this means:
Activity in the above instrument classes must be reported regardless of whether it occurs on- or off-venue. However, if the instrument does not fall within this subset (e.g. basis or inflation swaps), they only need to be reported if the trade occurs on-venue. In this scenario, the trade would be subject to Category 2 reporting rules, meaning the venue sets the deferral time. This will be explored further, but first it is worth examining the monthly volumes shown in Chart 1.
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As expected, the vast majority of the volume falls into Category 1. Perhaps more surprising, however, is that in some cases as much as 20% of monthly (EUR equivalent) notional volume is within the Category 2 bucket.
It should be noted that, although Chart 1 appears to show the proportion of activity falling into Category 2 dropping over time, this could be due to lengthy deferrals. As a result, more data will be required before any firm conclusions can be drawn.
Chart 2 filters out all Category 1 activity and shows the split by instrument type; however, it is important to first outline the methodology used in the analysis.
In order to remove Category 1 instruments (and categorise appropriately), we took the following steps:
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It is clear that the vast majority of activity is on-venue and focuses on Overnight Index Swaps (OIS). This is expected because OIS make up the vast majority of FCA reporting with the transition away from ‘IBOR’ swaps in recent years.
The data also shows that the bulk of non-Category 1 flow is Category 2, with a small amount of off-venue activity reported (by APA’s), which in theory is not required.
As with debt instruments, there may be cases where venues use different reference data and therefore there can be some variance in their categorisation of the swap contract (i.e. they may see these as reportable, rather than non-reportable).
The final section this week focuses on deferrals and how they differ across venues. The most important consideration is that for Category 2 instruments, the venues themselves are able to set their own deferral times whereas they are set directly by the FCA for Category 1 instruments.
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From Chart 3, it is evident that there is some divergence between the venues, although it is perhaps less extreme than what we saw in debt instruments a few weeks ago.
There is also a very small amount of near real-time reporting via APA’s. However, as mentioned previously, this is likely driven by differences in reference datasets (e.g. the reporting APA’s may define these as Category 1 instruments).
The majority of activity is reported around the four-week mark, with some after three months. This is likely to fall under the FCA’s ‘End of Following Quarter’ structure, where a trade in December would be reported at the end of March, and a trade in January would be reported at the end of June.
Overall, there is still some inconsistency in the reporting timelines for Category 2 instruments, however it is not as pronounced as the debt instruments side. Reference data appears to be the main cause behind these reporting discrepancies. Additional data will be required before this assumption can be validated with greater confidence, meaning the topic may warrant further review in the coming months.
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