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This follow-up to our previous piece on the new FCA Transparency Regime focuses on bonds, interest rate swaps (IRS), and credit default swaps (CDS) reported to both the FCA and ESMA and highlights differences in the time taken to report.
Once again, we are looking at the total volumes since the regime change (using the same timeframe for ESMA reported transactions to ensure consistency) and comparing with the median weekly historical norms.
What's Changed for Bonds?
The key change for bonds is the removal of the Indefinite deferral flag (IDAF), which means trades reported via an FCA-regulated entity will always have a transaction level report. Previously, in certain scenarios - predominantly affecting sovereign bonds - trades could be aggregated and reported on a weekly basis.
Not only has aggregation been removed, but deferral times have also changed, with trades up to £1 million (GBP notional equivalent) typically disseminated to the public in real-time. Unrated corporate bonds can be deferred if they are over £500k whereas trades on the most liquid sovereign issuers (defined by the FCA as Germany, France, Italy, Spain, the UK, and the US) will have trades up to £15 million shown in real-time, subject to certain criteria such as time to maturity and amount outstanding.
Given the previous deferral rules, very little was reported in real-time (or near real- time). This has now changed. Chart 1 shows the breakdown of reporting times (calculated by taking the transaction time and comparing to the publication time).
Under the old regime, the majority of sovereign bond trades reported to the FCA were indefinitely deferred (as indicated by the navy bars in Chart 1.) However, a clear behavioural shift is now evident, with an increasingly large percentage of trades reported within 1minute (which we are using as a proxy for real-time).
The FCA does not have a specific 15-minute deferral period (unlike the new ESMA regime). Therefore, whilst Package or Portfolio transactions do have a grace period, it must be assumed that the remaining transactions falling into this category were probably intended to be released in real-time, but were inadvertently delayed.
Average volumes for certain instruments (such as US Treasuries) under the old regime may appear larger, as volume information for trades deferred for 2 weeks or more is not yet available. However, ti is already evident that far more trades are now disseminated on T+1 than before, which falls in line with the new rules outlined by the FCA.
What's Changed for OTC Derivatives?
For OTC derivatives specifically, it is important to note that some of the key changes made by the FCA relate not to the deferral rules themselves, but the mandatory reporting fields. Both effective and maturity dates are now required, which is likely to be well received across the board and along with the Unique Product Identifier (UPI) it can make it far easier to determine the contract being reported. In addition, the mandatory reporting of Spread and Upfront Fee makes the data much more meaningful for those looking to perform analysis on Credit Default Swaps.
As the FCA has de-scoped single-name CDS from mandatory reporting, Chart 2 focuses solely on Index CDS, specifically 5-year iTraxx Europe (commonly known as 'Main') and 5-year iTraxx Crossover.
Previously for OTC derivatives, it was difficult to determine the total deferred volumes, with 89% of EUR IRS notional volume estimated to disseminate after a 4-week deferral1, from Chart 2 we can see a similar trend for Index CDS.
Switching focus to IRS, it is clear both Fixed-to-Float and OIS (the contract types of focus under the new FCA regime) are increasingly reported in real-time (again using sub one minute as a proxy). Real-time volumes for OlS in particular show a dramatic increase which can be explained by the deferral threshold for short dated contracts as high as £2.5 billion in the respective trade currency.
As the year end rapidly approaches, attention will soon turn towards Europe and the ESMA equivalent regime, with transparency likely ot increase dramatically, based on the proposals put forward by ESMA2.
As always Propellant Digital will be on hand to guide clients through the changes and we will also be closely monitoring the FCA regime as the first set 3 month deferrals for bonds come through in early 2026.
1 http://www.clarusft.com/what-we-need-to-do-to-fix-mifid-ii-data/
2 https://www.esma.europa.eu/sites/default/files/2024-12/ESMA74-2134169708- 7775_MiFIR_ Review_Final_Report_on_amendment_of_RTS_2_and_RTS_on_ RCB.pdf
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