The Markets ConversatION Podcast

Quick Takes: Can the UK get transparency right?

February 9, 2024 | Duration: 11 minutes

Speakers: Amir Khwaja and Chris Barnes


In this episode, Chris goes solo to highlight the UK rules for pre- and post-trade transparency that were largely inherited from MIFID II post-Brexit.

He will explain to those who are not familiar with MIFID II transparency why it doesn’t work and why after 15 years after the G20 “commitment” to reform OTC derivative markets, we still have no transparency in Europe. Also, he shares his thoughts on why the US continues to set the gold standard for capital markets.


Ali Curi: Hi everyone, and welcome to ION Markets Quick Takes. I’m Ali Curi, and every week, along with my guests, Amir Khwaja and Chris Barnes, we take a quick dive into the headlines on the Clarus blog. Let’s get started. Hi Chris.

Chris Barnes: Hey Ali, how you doing?

Ali Curi: I’m doing great. Chris, it’s great to have you back on Quick Takes.
You were out last week.

Chris Barnes: That’s right. I’m happy to be here. I think Amir will be away for a couple of weeks, so a couple solo, and then we’ll be back into the team effort.

Ali Curi: Well, I think you and I can tackle Quick Takes for this week. Let’s get started. What’s your Quick Take for this week? Which headline from the Clarus FT blog would you like to discuss?

Chris Barnes: This week, I thought I’d talk about whether the UK can get transparency right. This is the first blog I wrote in 2024. I must admit coming back from the Christmas break, it was quite an undertaking as I sat there on day one and realized I had to read 172 pages of FCA consultation to be able to write my first blog of the year.

And I think it’s worth just taking a moment on the podcast for people who maybe haven’t read the blog for the past seven, eight years to understand a little bit about why we do actually blog on these regulations. Certainly for me, I thought it would be worthwhile taking a moment for listeners of the podcast who maybe haven’t read all of the blogs over the past seven or eight years to actually talk about how the regulations are made.

Because I think there is a bit of a divide between regulators and market participants, whereby there is a natural instinct for traders and salespeople just to go, “What, there’s more regulation, it’s coming, it’s changed again.”

And certainly for me, before I started writing these blogs, I wasn’t necessarily aware of the exact process in the background that leads to us having these regulations. So I think it’s really, really important for listeners to understand that there isn’t just a team of regulators that sit in an ivory tower and go, “This is what should happen.” There is a whole process involved and central to that process is a series of consultations.

Whilst you’re on the cold face of trading and sales, it might feel like, “Oh, we’ve just been hit with more regulation.” That couldn’t actually be further from the truth for any regulations to actually come in, there is a whole raft of consultations behind those whereby the regulators, whether it’s in private with their biggest market participants or in the public realm, are constantly engaging with the market to find out people’s opinions on their proposed regulations. Normally, this process works. So when new regulations come in, they work. I think unfortunately, an example of where the regulations and that consultation process didn’t play out really how anybody wanted it, whether it was the regulators or the market, was an example of transparency under MIFID 2 in Europe.

Anybody that’s heard me speak, anybody that’s read any of my blogs on data will know it continues to be a real shame. Basically, the whole raft of transparency regulations were introduced in Europe to make OTC derivatives more transparent. To try and achieve for the derivatives market in Europe, what the U.S. has done so that we as market participants could sit there and see what is actually trading.

For a number of reasons that data is not accessible. What data is accessible tends to be delayed by at least four weeks. It’s very difficult to interpret the data, and also from a identifier perspective, it’s very difficult to actually work out what has traded. So the UK following Brexit inherited all of these MIFID 2 transparency rules. And the regulators in the UK are now putting in the process to change those transparency rules so that the data will actually be usable.

So it’s a really, really important process. What it means from our perspective in terms of looking at the main things is one, getting rid of that crazy deferral period. Nobody wants to be looking at data, which every four weeks is going to change. So fundamentally the UK are looking at removing most of those deferrals.

There is a lot of sensitivity over transparency, over all the deferrals that are in place for very large trades suitable. I think everybody will agree that the deferral regime in the U.S. which is basically, everything is reported within 15 minutes apart from the largest trades and the largest trades are reported up to a certain size with a 15 minute delay. That has worked in the U.S., so naturally one of the deferral regimes for large trades that the UK has put forward is very, very similar to the existing U.S. system. Another one is looking at whether we can actually put more of the volume into the public sphere, but with a longer delay. I don’t honestly know what side of the coin market participants will come out on as a result of this consultation. I think, largely speaking when you look at the people who will respond and how the industry has dealt with changing regulations over the years, simplicity and consistency are normally the hallmarks of good regulation. Therefore, it’s more than likely that the outcome of this consultation is that market participants get behind the existing U.S. regime and say, let’s just go with that.

So that’s one of the aspects. One of the other things that was a bit of a surprise to me, and I mentioned at the very end of the blog, is actually the scope of transparency. Which instruments are you actually going to have to report in real time? At the moment, it’s very, very wide, it covers everything, but there are elements of what is classed as a liquid market and what is classed as not.

And so what the UK has done is taken a pragmatic step and said, look, we are making changes, the easiest change to make in terms of scope is to say everything that’s subject to a clearing mandate should be reported within 15 minutes. That is kind of the least risky first step that we can take. And I think it’s important to understand the process in that context in that this is an ongoing consultation process. So the regulations will come in, we will see good data. We will see usable data. We will see understandable data for cleared products. And then it’s a natural next step to look at extending that to more products. Final thing I should mention, shame that Amir’s not here because it’s about his favorite subject, ISIMs.

So whilst we at Clarus really don’t like ISIMs, they will continue to be reported, but there will be new fields which allow us to both interpret what an ISIM actually is, as well as the new unique product identifiers. And importantly, the UK will introduce some new fields such as which CCP has cleared the trade, which adds to the meaningfulness of the data. So in Amir’s absence, Ali, I was going to ask you after that brief run through and you having read the blog as well, if you had any specific questions on the content.

Ali Curi: Yes, Chris. Actually, you touched a little bit about the proposed UK rules, and I was wondering how different will these proposed UK rules be to those that are already live in, say, Europe or the US?

Chris Barnes: Very good question. I think compared to Europe, they are very similar, but we’re talking about changes to the details so that the data will be more meaningful and it will probably only impact those of the most liquid markets because the intended scope is for clear trades only. Compared to the U.S., I just continue to hold up the U.S. as like the gold standard. They really have the best process, the best rules, they were implemented quickly, they’ve been live for a long time, they’ve really helped markets perform well in times of crisis. And this is a step for the UK into the same direction as the U.S. Unfortunately, the U.S. will continue to be the only place where we can see information on uncleared products that will probably mean that the FCA and Bank of England have to publish very regular reports and research telling us stuff about uncleared markets as a result, but it’s definitely a step in the right direction.

Ali Curi: And also, as a follow up, you talked about the latest consultation paper as well, and there’s always different versions and revisions coming out. Regarding the latest one that they put out, is there anything that you felt the regulators left out?

Chris Barnes: Yeah, so specifically, I’m talking about FCA consultation paper, CP 2332, not a very catchy title, but what this consultation paper really focuses on is the quality of the data is what is being reported usable from a data perspective.

Are the right fields being reported? Is it being reported in a timely manner? I have to be honest, from a Clarus perspective, a lot of our data products are fundamentally formed from free data. So we don’t have a lot of say in terms of our data products about what goes in. What we do with our data products is then take that and standardize it and make it as usable as possible.

So we’re adding as much value as possible to free data. Unfortunately, the way that the rules are written because of the largely inherited framework from MIFID2, Clarus are not actually able to take this data. So whilst this consultation focuses on the quality of the data, we will still face substantial hurdles in being able to actually consume the data.

It is very, very difficult to get an agreement in place under reasonable commercial terms with an APA or any of the publishing arrangements that would allow Clarus to access this for free and actually use it. We very much hope that there’ll be extra consultation papers that would allow us to explore using the data.

We talk about it in a completely unencumbered manner.

And that was it, Ali. Look forward to following up this process. I think responses for the consultation are due in early March. One thing I will say is whenever regulators speak to consultations, they say to us, “Thank you for including hard data. We get so many responses which are all just opinion driven.”

So if you’re looking to respond to this consultation, please, please, please include data in your responses.

Ali Curi: Well, thank you, Chris. Thank you for your insight. And please share with us again the title of your blog post.

Chris Barnes: This was a blog I published on the 10th of January called, “Can the UK get transparency right?”

Ali Curi: Well, we will find out. Thank you. That works. Chris Barnes, thank you for sharing your Quick Take. Let’s do it again next week.

Chris Barnes: I look forward to it, Ali. Thank you very much.

Ali Curi: And that’s our episode for today. You can read more about these topics on the Clarus blog, and you can follow ION Markets on X, formerly Twitter, and on LinkedIn.
Thank you for joining us.