Quick Takes - We have new block sizes
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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 are you doing?

Mark Bell: Hey, Ali. 

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

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

Chris Barnes: Headline's very simple this week, Ali, it's, "We Have New Block Sizes." But that should come with a massive health warning, which is "Be really careful what you wish for, particularly around Christmas," I would say. 

Today I'll generally be speaking about content across two blogs, both of them on block sizes, and both of them really talking about the impacts of what happens when the data that we now rely on changes. And so I will try and cover what those changes are, but also what it means in terms of trying to look at the data.

In a nutshell, when trades are reported to a US data repository, they're only reported up to a certain size, and you do have two different, let's say regulations, one associated with block trading and one associated with capped thresholds. For the purposes of our podcast and for the purposes of a blog, I interchangeably talk about blocks and capped thresholds.

I think in terms of interpreting the data, as opposed to interpreting trading behavior, what we're really talking about are the capped thresholds. That's a bit of a mouthful. So I tend to refer to them as "blocks." I want to put that out there because the financial industry is full of pedants. We do work in a detail-oriented environment.

And I don't want to annoy anyone up front by them thinking I am continually wrong. Yes, I get things wrong all the time. I am a human being. I am not AI, yet. And so I use the terms "block" and "cap thresholds" interchangeably. Since 2012, these "cap thresholds," "block thresholds" have not changed. They've never changed.

They were calibrated on, let's say some data that no one else ever saw apart from the CFTC, they were calibrated such that 50 percent of total notional, 50, five zero, half of total notional would be on average above the reporting threshold. So in terms of total notional that you see, when you run any queries on SDRView, a Clarus product, you'll only be seeing actually 50 percent of the traded notional.

Number one, I don't think that's widely understood. Number two, just describing it is a bit counter intuitive. That does not mean that 50 percent of swaps are above the capped threshold, right? When we run the analysis, let's say 90 or 95 percent of trades are under the capped thresholds. What it means is that 5 percent of trades are so big, account for so much of the volume, that 5 percent of trades by trade number can actually account for half of the notional.

You need to appreciate that dynamic first. When thinking about what the potential changes in block sizes mean. And when I talk about changes in block sizes, this is probably a bit of a, a mea culpa moment. I've been really excited about this. This is a change. This means that the data is going to change. This is transparency in action. This means that we're going to see more notional as a result of recalibrated block sizes. So the recalibration of the block sizes. It's a responsibility of the CFTC. I want to say they started this process like four years ago. I seem to have been blogging about it forever going, "They're coming, they're coming, they're coming."

And then just as they're about to be implemented, there's been a no action relief and they've been delayed. The reason for these two blogs is that they weren't delayed anymore and they went live on October the 4th. And what that means is from October the 4th, no longer is 50 percent of the notional masked, but only 25 percent of the notional.

So in theory, we have more transparency. Layman's terms, you would think that means that block sizes have gone up. We see more notional, we see less trades reported above that threshold, we have more transparency. Do we have more data? I guess so, because less trades, in theory, should be over that threshold.

And so it feels like it should add to transparency. I was really excited, I thought, great! But then, when you try and look at the data, man, it's really hard to make sense of the data. And that's because these are the first properly calibrated thresholds. Previously, they were the same, whether you were trading a dollar swap, a euro swap, a yen swap, a sterling swap, even now we have individual block thresholds for every currency.

Those block thresholds vary by tenor. Those block thresholds have been calibrated against real data. Therefore, it's not like a constant DVO1 at each tenor. So you've got different notionals. You've got different DVO1s across all the different currencies. And they just went live on October the 4th. So what you see when you go into the data, which is the second blog I wrote, which has a really cringy title, which is some play on words on new kids on the block, which I really apologize for, but it scored really well on that headline. Clickbait, yes, you should use this headline.

When you look at the data, of course you see notional amounts going up on October the 4th and, you know, muggins here, whose job it is to blog about the data and whose job it is to make sense of the data, then has to look at it and go, ah, yes, well, we could have predicted this because X, and we could have modeled it that it would go up by Y and as I stand here now, I've looked at this data for two months and you can't really write a model that explains it because you're dealing with data in so many different dimensions.

You're dealing with changeable trading amounts. You're dealing with different behavior in the market, as well as the fact that the parameters for the data have changed. It has undoubtedly made it more difficult to look at trends in the data now. There's a broad brush if you want a number to take away. On average, block sizes have increased for dollar swaps by 64%.

So it's a really significant change. They're much, much larger now, but you have to remember for markets, I think off the top of my head, like sterling and yen, the block sizes have gone down. And so you could potentially see more block trades in those markets if they're accurately calibrated. And so when you're looking at SDR as a whole, you now have to take into account all these different dynamics per currency.

And traditionally, I've used our tools in SDR to look at these long term trends in data over how much risk is trading. And I'm sorry to say, but that's become more difficult as a result of the changes. They are still positive changes. We still have more transparency. We can still make more sense on any given trading day going forward of the trading behavior and of the risk traded.

But it makes my job a bit more difficult. On the plus side, Clarus still have different tools like CCPView and SEFView, which are not impacted by this change in regulation, at all. On that point, I'll move over to Mark. Any specific questions, Mark? 

Mark Bell: Yes, Chris. So I think firstly, this is the post-LIBOR transition calibration of the block sizes.

So I might be accused of some gross generalization here, but just looking at the currencies that have compressed into a single index, so sterling and yen, there's been a decrease in the block size. While even though that there's a smaller percentage of the market, being above the block, but currencies with a basis market, so euro and dollars still have had their block sizes increased.

Are basis trades being incorrectly accounted for in the calibration? 

Chris Barnes: Really hard to say, I'd say for dollars, no, because basis trades trade as a single swap. Therefore, it's really easy to pull them out. For euros, it is difficult to specifically say this is a basis trade if you don't do any of the data augmentation that Clarus do.

So if you just take a vanilla data set. Euro basis trades trade as two swaps and so three sixes in EURIBOR trades as a fixed rate against EURIBOR on the three month index, a different fixed rate against the six month index. So that could theoretically inflate your sizes, but in that case for euros, for example, that would make the block size bigger.

If you think that basis trades included for, let's say sterling, right? Sterling, they're definitely excluded because it trades as a single swap. I think what really has happened is let's not anchor ourselves on the old sizes. The old sizes were calibrated on a data set that nobody outside the CFTC saw.

They were calibrated on old data. They were calibrated on data before we had trade repositories as well. They were the same across all of the currencies, which doesn't sit right. And so I think the better way of looking at this is that it is a fundamentally very positive step forward to get calibrated block thresholds on real data rather than relying on what has been in place for 10 years, which were not calibrated on the same quality of data as we have now.

Mark Bell: Thank you, Chris. A second question, maybe then just in terms of the design of the block thresholds. I think that initially they were there to sort of prevent front running or hedging. So increase the transparency. But is the increase in the thresholds a comment by the regulators that on the available liquidity rather than a concern with the lack of transparency?

Chris Barnes: No, I think by the regulators, it's a tacit recognition that transparency is working. We're in a positive regime. The changes we've made to the swaps market have been really well received by end users. And so therefore it makes sense to recalibrate on the real data. On transparency data that people trust so that these recalibrations can happen periodically now, as opposed to just relying on those old thresholds, which were, I consider not as accurate as these new ones. I don't think it speaks to trading behavior, I think it speaks far more to the benefits of the transparency regime. 

And on that point, I think we're out of time, Mark. So I will pass over to Ali. Thank you for the questions. 

Mark Bell: It's a pleasure. 

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

Chris Barnes: The title of the blog post is "We Have New Block Sizes."

I've decided I shouldn't have used that title. I should have said "New Block Sizes Make It Really Difficult to Make Any Sense of the Data Now." 

Ali Curi: Okay, great. 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.