Quick Takes:  Transparency — Where do we go from here?
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Ali Curi: Hi everyone, and welcome to ION Markets Quick Takes. I'm Ali Curi, and every week along with my guests, Chris Barnes and Mark Bell, we take a quick dive into the headlines on the Clarus blog. Let's get started. 

Hi Chris. Hi Mark. 

Chris Barnes: Hey Ali. How you doing?

Mark Bell: Hey Ali.

Ali Curi: Hello, gentlemen. Welcome back to Quick Takes.

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

Chris Barnes: Alright, Ali, today, this is gonna be Transparency 101. Ladies and gentlemen, boys and girls, sit down and get a pen and paper ready. I'm gonna talk to you about all the things I've learned about US transparency in OTC markets in pretty much the past 10 years.

And this is a really kind of interesting experience for me in terms of relaying this. 'Cause this is all this kind of information or learnings that you pick up along the way, and it's not intentional. It's really just experience of dealing with this data results in a vast pool of accumulated knowledge that you're not even necessarily aware that you have.

And yet, if I sit down today with a graduate who has never traded, with a graduate who has never been involved in the derivatives market, who of course has never even heard of Dodd-Frank now, with a blank sheet of paper and I explain how trade level transparency actually works. It's actually fairly intricate and is a difficult one to know where to start.

I'm gonna start at the highest possible level, and I'm gonna work my way down from there. If we talk about the most transparent markets, they are cleared markets, so a rate swap that is submitted to a CCP for clearing, which covers something like 90 to 95% of volumes in any way as a result of clearing mandates and the uncleared margin rules. Those are the most transparent markets. 

And thanks to one of our data products, CCPView, we have a hundred percent coverage of the global markets of cleared rates. So we know the volumes that trade and that data is available daily. Now, what I find really interesting is where you start to peel back the onion because that data is reported at rather a high level.

It's reported either at a currency and product level or at a currency product antenna level. But those tenor splits are pretty broad, like two year, five year, 10 year, 30 year, and 50 year. If you want greater transparency, you can also go to other sources of data that cover the same markets, but they report at a either instrument level or trade level.

So we've got CCPView at the top. We then have a layer down whereby you get a smaller portion of the market, and this is rates products traded on a SEF, but you get more data about it. So SEFs report volume data that is not capped. They report their full volumes every single day at an instrument level. So we know whether it was a five-year swap versus LIBOR or a five-year swap versus SOFR.

We know if it's an €STR swap or a EURIBOR swap. That granularity of data is greater. Now, that means that for cleared on SEF, we have a really nicely transparent market. But we could go even better. Because while SEFs report some data to do with prices. So, open, high, low, and close prices, they don't actually report the precise price of every single trade that goes through a SEF.

That doesn't mean that that price isn't reported. It means that it's not reported by the SEF. That's SEF data. Now, if we go down another layer of transparency, we have SDR trade level reporting. That gives you all of the primary economic terms of a trade, including the price, so you can watch it like a ticker. It has a time stamp for when the trade happened. Notional amount of price. That's like the gold standard of transparency. That's the most amount of transparency that you can ever see publicly for a trade. But again, that doesn't cover the whole market. What I thought would be an interesting exercise for the Clarus blog is just to try and flesh out these different sources of transparency and work out how much of that global cleared market that is represented by CCPView is actually covered by trade level transparency.

And I think the headlines are really interesting. So I'll let readers read the blog in terms of the methodology. But the headlines, "Sixty percent of the global dollar market is subject to trade level reporting." That is both on SEF and off SEF. That's total volumes, 60%. If you look at some benchmark tenors, like 10 years, 87% of 10 year risk is subject to trade level reporting. That is a great benchmark of transparency and it got me thinking, this is an OTC market. This is not exchange traded, it's not a future. How is it compared to some of the other products out there? So I did a bit of research and NASDAQ published a paper about four years ago looking at the US equities market. In that, it stated up to 40 to 50% of volumes are traded in so-called "dark pools."

Now, I'm not saying that our rates markets are as transparent as US equity markets, but what I am saying is that if you benchmark the data in CCPView versus trade level reporting, trade level reporting covers a huge amount of the market that is somewhat comparable to the volume of trades that are reported in equity markets in real time as well.

Mark, that's me trying to convey like 10 years of accumulated knowledge in six minutes. I'm sure there are questions. Any specifics that jump out for you? 

Mark Bell: So I think you've sort of approached the last 10 years as an ex trader. So what additional information would traders have in terms of being able to participate in the market?

I come from the software vendor background, but we've had a slightly different way of looking at the data or benefit from the data. And I'll start by a little story. I can remember probably 15 years ago living in Southeast Asia and visiting a bank of a local or a regional bank in Southeast Asia or Taiwan.

Being asked if the software, that the company that I was working for at the time, was able to do the latest double reverse knockout with an accumulator and a switch. Six months later, I would visit them again and I would get yet another complexly named product that I would be asked about. And if I would go back to the original product, no one could remember that one.

What I realized was that as I visited these banks in that region, so all of the global banks were visiting these banks in the region and trying to pitch them a variety of different products that probably are better known for blowing up during the GFC, or in the case earlier than that, the story around was trades, guns, and money. The book about the blow up of the Indonesian entity that had a very complex product that they were trying to book. 

Anyway, so I think firstly the great thing for us as software vendors is this data transparency actually tells us what's going on in the market, rather than us having to believe a bank or a broker as to what is required in a software solution that they're going to look at.

So you think about it, connectivity. If a broker comes to you and says to you, I'm making the best market in dollar CNY swap, dot, dollar CNY NDFs. You can check it, you can make a decision in terms of whether you're going to invest in, in connectivity to that broker because of the market that they say they might have.

It provides a transparency to the market in terms of what, in terms of what's going on. Which is very useful from a vendor perspective because you can actually have a better understanding of where you need to make your bets. But you started off with a comment, "This is the transparency in the US markets."

My question really is Europe and then the rest of the world. What can be done to ensure that there is transparency in those markets? And that's a big question. 

Chris Barnes: It's a fair question. So when we talk about the 40% of risk that is not subject to trade level reporting, it's really important to state that, that risk is traded away from a US person, basically. So it's not subject to US rules. That's not to say that in other jurisdictions, these trades are not reported. For example, they are reported in Europe, but 95% of that data is delayed by four weeks is capped, is not commercially accessible, is not collated across multiple different venues.

It's very, very difficult to use. So whilst the data may be there, if a regulator really needed to go and dig for it, it's not there for public transparency purposes. Equally, Asia doesn't have any trade level reporting apart from Japan, which is like a SEF-like world. Aside from holding the US up as like the gold standard and say everywhere should be like the US, the most critical point to take away from this is that the proportion of markets that trade subject to this trade level reporting has never decreased, and if anything has been increasing over time as this transparency is increasingly valued. 

Mark Bell: My second question really is, has this allowed for greater participation in the OTC markets? With the ability to report, has these brokerage businesses that target retail customers, are they getting more access to products, et cetera?

Chris Barnes: OTC still isn't a retail product. We have seen new entrants into the swap market as a result of transparency and clearing, namely Citadel. But I would say it's more about, it's changed the way that people trade. People now expect streaming prices. Streaming prices, of course, can be benchmarked against the last traded price, the next one, and followed through with where RFQ and streams are missed.

So there's a lot more analytics, which is possible as a result of this transparency. 

Mark Bell: Thanks very much. 

Chris Barnes: Alright, mark, I think we've gotta leave it there for today. Ali, over to you. 

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

Chris Barnes: That is "Transparency — Where do we go from here?" 

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

Chris Barnes: Thanks, Ali. Looking forward to it. 

Mark Bell: Thanks Ali. 

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.