Ali Curi: [00:00:00] 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 Amir. 

Hi Chris. 

Amir Khwaja: Hi Ali. 

Chris Barnes: Hey Ali. How you doing? 

Ali Curi: I'm doing great. Welcome back to Quick Takes.

Chris, let's start with you. What's your Quick Take for this week? Which headline from the ClarusFT blog would you like to discuss? 

Chris Barnes: All right, Ali, today I'm going to try a click baity title. The blog is called "All You Need to Know to Avoid the Trade Execution Requirement?" And as soon as I wrote that title, I got scared.

I was like, "Oh no, what have I done? Am I at risk of destroying the reputation of Clarus? Am I putting something out there where compliance are going to come to me and say, 'Why have you written that?'"

So I published the blog and then as a sanity check, I went to AI [00:01:00] and I went to Google's Gemini. And I typed into Gemini, "How does Clarus Financial Technology recommend to avoid the trade execution requirement in their latest blog?"

And there was a bit of a pause, it was processing, it was reading, but it's obviously like real time now because I think I only waited an hour until it was published. Anyway, the answer came back and Gemini states, "Clarus Financial Technology would never recommend avoiding trade execution requirements in any of their blogs."

"They are a reputable firm specializing in the nuts and bolts of financial regulation, including trade execution. Their focus would be on ensuring clients comply with regulations and navigating the complexities of the system." I mean, I breathed a big sigh of relief, I must admit. So, I'm happy to say still here, I'm still employed and I can still [00:02:00] talk about "All You Need to Know to Avoid the Trade Execution Requirement in Swaps."

Now, sadly, what writing the blog taught me is that even though, like, we look at this data all day, we talk about the regulations, we respond to the consultations, et cetera. There are still a number of facets of both the regulations and the data that we don't fully understand. And the blog's about like a very, very specific use case, but one that I would think of doing if I was a potential client of Clarus data.

I would go and look for demonstrably erroneous data, now that's a horrible phrase. I mean, I would go and look for bad data, right? I would say to Clarus data there should never be a trade that has to be traded on a SEF that's traded off-SEF. And I would go and look for them. And then I would say to Clarus, I'm not buying your data because there are these swaps and it's obviously wrong. But we also have [00:03:00] to be cognizant of the fact that you do have outliers and edge cases.

And one of the common edge cases that we are asked about like once a year is why are all of these trades that are MATered? So MAT means that you have to trade a swap on a SEF. Why are there all of these trades that match all of the MAT requirements, but are actually traded off-SEF? We've always talked about it in the past in terms of a materiality.

There are something like 60,000 dollar swaps reported every month. And the number of off-SEF MAT swaps you're talking about is normally less than 500. So you're looking at a very, very small portion of the market anyway, but it's still a good test of the data. And so I decided to try and put a definitive answer out there as to what these swaps are.

So I'll let you read the blog, but I go through the regulations. I pull out two clauses, which state that if [00:04:00] you have a MAT swap, you might actually be able to trade it off-SEF. As a summary of those two clauses, I would say one is if you're an end user. And the other is if you're at a massive bank, you have lots of different legal entities who are ultimately owned by the same group.

You can actually trade your inter entity positions off-SEF as well. Broadly speaking, that is the message I wanted to get across. I think there are still interesting elements to do with the data in that, for example, all of these trades in 2024 have been reported as cleared. Now, if you're an end user and you're exercising your right to not clear the trade, then you would also think that you would trade it off-SEF uncleared.

So there are intricacies. And so the point of the blog, I really wanted to try and get across is that even though you can work with the data for many, many years, even though the benefits of transparency are [00:05:00] clear, there will always continue to be these kind of interactions between regulations and data that are difficult to understand and just take a bit of brainpower to process.

So I wanted to try and get a definitive answer out there. Amir, I'm pretty sure that you've read the blog. I know it can appear kind of quite heavy going at first. Are there any specific questions or something that wasn't clear about it? 

Amir Khwaja: I find it very interesting, so then, there's this mandate or obligation that you have to trade MAT products on a SEF.

It's good to see that only 1%, just tiny under 1%, not on SEF. But again, I agree with you, it was surprising that those are not all uncleared and possibly you can touch upon the inter affiliate trades. Maybe that's what they are, right? 

Chris Barnes: My conclusion in the blog is that the inter affiliate trades, the reason they're cleared is probably something to do with margin optimization at CCPs. 

Amir Khwaja: Yes. Interesting. I think, you [00:06:00] know, then what strikes me is, what about the old Chestnut about there's never been a new, okay, apart from SOFR, there hasn't really been any, SEF has not done a new MAT for any other products, right? Even though lots of products trade on SEF that are not required to trade on SEF that are not mapped just for convenience purposes.

Any thoughts on, is it necessary to see an expansion or is the quality of data good enough? 

Chris Barnes: I'm a bit surprised you've asked me this because when I published it I received an email asking almost exactly the same question and I'm pretty sure that you weren't on that email actually. This is obviously a common thing and another way of posing the question is why are we even bothering with MAT?

The biggest SEFs are actually the dealer to client SEFs that don't do any MAT trades anyway. Clients are mainly trading out of forward dates. MAT only covers spot starting. For the vast majority of the time that clients are trading, they are not subject to the trade execution [00:07:00] regulations at all. So really MAT has impacted the inter dealer market, and that feels like it doesn't give those guys the same workflow benefits as clients have benefited from.

There probably isn't as much voluntary use of SEFs in the inter dealer market as there is in the client market. And so kind of the overarching question that comes back is what is the point of MAT swaps? The specific email that I had said clearing mandate obviously reduces systemic risk. That is clear, it's taking counterparty credit risk out of the system. What is actually achieved by forcing trades onto SEFs? Now, I would turn around as a big supporter of SEFs and say you want to really move the market as quickly as you can into, electronic execution and STP wherever it's possible. And as long as SEFs act as a valid kind of [00:08:00] guiding light and facilitator for that, then it definitely reduces operational risk, reduces a systemic risk of workflows, for example.

And I think the voluntary use of SEFs by clients shows that SEFs do have a very, very meaningful place in the market. 

Amir Khwaja: Agreed. Yes, Chris. 

Chris Barnes: Yeah. Ali, back over to you. 

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

Chris Barnes: The AI friendly title, which is, "All you need to know to avoid the trade execution requirement?"

Ali Curi: Great. That works. Amir Khwaja, Chris Barnes. Thank you both for sharing your Quick Takes. Let's do it again next week. 

Amir Khwaja: Thanks, Ali. 

Chris Barnes: Thanks, Ali. Speak to you next week. 

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 and on LinkedIn.

Thank you for joining us.