Four-fifths of euro swaps will not be subject to pre-trade transparency under new reporting requirements despite the European Union’s aim of improving price and volume data.

Chris Barnes at derivatives analytics provider Clarus Financial Technology said in a blog: “80% of euro trades will have no pre-trade transparency and 75% of risk traded in euro swaps will remain dark for up to four weeks.”

MIFID II Transparency will leave us in the dark https://t.co/0BtqMn9RlU pic.twitter.com/LUdZn3qwfC

— Clarus (@clarusft) August 30, 2017

MiFID II, the regulations coming into force in the European Union at the beginning of next year, requires all investment firms to report their over-the-counter trades. Transparency requirements depend on whether instruments are deemed to liquid; large in scale (LIS) or above a size specific to instrument (SSTI) in order to to avoid information leakage and front-running of potential market-moving trades.

If instruments are illiquid then transaction data can be subject to a publication delay of between  two days and four weeks, depending on the national regulator. Large in scale trades are exempt from many pre-trade transparency requirements and post-trade disclosure can also be delayed, again dependent on the national regulator. Trades above the size specific to instrument limit have reduced pre-trade transparency requirement for responses to a request-for-quote and again, post-trade disclosures can be delayed.

Barnes said: “In a nutshell, these limits have been calibrated such that there will be no pre-trade transparency for euro trades above €20m in size. There will also be sizeable delays in post-trade transparency for trades above ~€100m (depending on maturity).”

He analysed swap trades in US swap data repositories  during 2016 under the SSTI and LIS limits set by the European Securities and Markets Authority. The US has required certain derivatives to be traded on swap execution facilities and be centrally cleared since 2013.

Barnes found that 80% of of all euro swaps will not be subject to pre-trade transparency and 75% of risk traded in euro swaps will remain dark for up to four weeks. He added: “Pre-trade transparency will only give us price data for three points on our interest rate swap curve. This is not enough to calibrate any meaningful pricing data.”

Barnes recommended that Esma should recalibrate the LIS and SSTI thresholds, along with the liquid designations, using the freely available from US swap data repositories.

Clarus has also recommended that the data being used by Esma to derive the trading obligation of euro swaps should be combined with information from US swap data repositories to give the most complete picture of liquidity available to a market participant.

“If you are located in Frankfurt, you can just as easily access prices provided from a dealer located in London, New York, Singapore or Japan,” said Clarus. “Analysis for a trading obligation should therefore be conducted on a similarly global data set. It should not be constrained by where the trades are reported.”

The latter recommendation was made in response to Esma’s consultation on the trading obligation for derivatives under MiFID II. Responses to the consultation said the European Union should harmonize differences in scope and timing of the implementation of the obligation to trade derivatives on a venue or there will be an unequal playing field between jurisdictions and firms.

Marcus Schüler, head of regulatory affairs and market structure at Tradeweb Europe, said in a response: “Distinct market silos could emerge with trading being conducted primarily between entities within a specific region rather than on a global scale. Such fragmentation would harm market participants and end investors in the form of reduced liquidity, less competitive pricing and higher execution risks and costs, reducing their ability to manage financial and economic risks.”