We often get excited by new transparency initiatives (perhaps us more than most); however, the UK Bond Consolidated Tape has generated a good deal of chatter within the industry. With the launch date set for Monday 22nd June, we decided to look a bit more into the scope.
The reporting venues are defined* as follows:
There are unlikely to be any surprises there, so we move on to the covered asset classes which are determined* by CFI Code:
Whilst the tape is referred to as the UK Bond CT, we can see that a more accurate description might be the UK Debt Instruments CT as many ‘bond like’ instruments are also included (these are commonly referred to and treated like bonds by traders and other market participants).
Having reviewed the scope, we next look at the breakdown (in terms of notional volume) and see the implications.
Chart 1 shows that although the vast majority of activity in debt instruments traded within the UK will be captured and reported via the UK CT, around 8% of volume will not be.
This 8% predominantly consists of Money Market Instruments, Asset Backed Securities and Structured Products.
Having reviewed the scope, we next look at the breakdown and see the implications.
When we look into the data, it becomes clear why this apparent disparity exists.
Money Market Instruments do not make up a material proportion of the out of scope transactions, which is logical as short dated paper often trades in very large institutional size (i.e. transactions occur less often, but the notional volume per trade is likely to be high).
The material portions are Asset Backed Securities (ABS) and Structured Products. The former is more institutional, but as we saw in Chart 1, along with Mortgage Backed Securities (MBS), this made up a reasonable amount of the out of scope volume.
Structured Products are often created with retail investors in mind and so although the transaction count is high, the volume is low (as retail trades in much smaller sizes than large institutions).
Having seen that out of scope volumes make up around 8% of the total, we break thisdown further to see the absolute volume per out of scope instrument type.
We can see that the vast majority of (expected) off-tape activity is in the money marketspace (which is interesting in itself as money market transactions are not mandatory to report under FCA guidelines*).
A lot of short dated paper trades alongside longer dated bond (or ‘bond like’ instruments) and is seemingly reported via the same channels under the CFI Code ‘DY’. We can only presume that venues report the short paper trades either to go above and beyond minimum requirements or potentially because they have different reference data that classifies these instruments as Bonds/MTNs instead.
Finally, we turn to ABS and MBS, these combined make up over EUR 1 trillion of notional volume and from an institutional perspective are probably the most meaningful asset class to be out of scope. Whilst money markets are sizeable in volume, the market is also very transparent, unlike asset backed instruments which tend to trade sporadically by appointment.
Overall, we can see that the vast majority of activity within the UK Debt Instruments space is captured; however, it is important for many to ensure they also keep an eye on off-tape activity as there is a chance an important transaction could be missed.
