One Size Fits All? Update on TESI Effort To Ensure Clients Trading Provision Is Standardized

During an exclusive interview last week with industry-driven FIX Trading Community, Forex Magnates spoke to key executives including Sassan Danesh who holds the roles of Co-Chair, FIX Trading Community Global Fixed Income Committee (GFIC), and Managing Partner at Etrading Software, about major initiatives underway, including the Trading Enablement Standardization Initiative (TESI), that is aimed at helping industry members overcome administrative inefficiencies.

Mr. Danesh shared his insights with regarding to some of the common challenges and opportunities that is facing market participants with regards to implementing and adopting an endeavor such as TESI, which could result in increased administrative, operational and market-related efficiencies as the provision of trading enablement is aimed to become standardized.

The first goal of the member-led initiative was to help transition OTC products to the listed space on the new Swap segment via SEFs, while recent CFTC guidance has caught market participants by surprise as the regulator pushes to have products handled in a more listed manner.

According to Mr. Danesh, TESI is expected to be ratified by members of the FIX trading community some time in Q1 2014, around the same time that discussions may go underway with regulators in an attempt to provide collaborated industry feedback -- the latter of which is something that the FIX community has done on several occasions, as explained by Courtney McGuinn, Operations Director at FIX Trading Community, during the interview with Forex Magnates.

Ms. McGuinn, who holds a senior position within the FIX Trading Community and has been involved for many years with the guiding its efforts, emphasized the educational nature of the community as collaborative and open. She explained how the community has many initiatives under works, and TESI is just one of them that was developed from a group of participating FIX community member firms, with the intention to standardize the process of ‘trading enablement’.

Specifically, if we look at the administrative tasks and processes involved to enable and provide clients to trade via multi-dealer and even single-dealer platforms, these methods are as varied as the technology upon which they are integrated with - across brokerages. Many dealers and clearing firms are manually entering post-trade data and pre-trade data (with regards to trading enablement) and TESI seeks to change that for the best, among other reasons and areas aimed at improvement.

Forex Magnates' Interview

Sassan Danesh (SD), responded to questions posed during an exclusive interview last week, by Forex Magnates (FM):

FM: What will be the biggest benefits for firms that adopt TESI standards and in particular in Foreign Exchange?

SD: "The TESI standard allows sell-side dealers to integrate their own client customer relationship management and permissioning systems directly with each ECN’s Trading Platform Trading Platform In the FX space, a currency trading platform is a software provided by brokers to their respective client base, garnering access as traders in the broader market. Most commonly, this reflects an online interface or mobile app, complete with tools for order processing.Every broker needs one or more trading platforms to accommodate the needs of different clients. Being the backbone of the company’s offering, a trading platform provides clients with quotes, a selection of instruments to trade, real In the FX space, a currency trading platform is a software provided by brokers to their respective client base, garnering access as traders in the broader market. Most commonly, this reflects an online interface or mobile app, complete with tools for order processing.Every broker needs one or more trading platforms to accommodate the needs of different clients. Being the backbone of the company’s offering, a trading platform provides clients with quotes, a selection of instruments to trade, real Read this Term. This will strip out the manual work of enablement such as account mapping where some clients can have accounts running into the thousands. The current process is often laborious and error prone and we expect the automation and integration provided by the TESI standard to reduce operational risk and increase the efficiency and timeliness of the enablement process. The net result is improved customer service by the dealers who adopt the standard.”

SD: “Additionally, TESI will ensure that clients are treated the same way across whichever ECN they use to access the dealer’s Liquidity Liquidity The term liquidity refers to the process, speed, and ease of which a given asset or security can be converted into cash. Notably, liquidity surmises a retention in market price, with the most liquid assets representing cash.The most liquid asset of all is cash itself.· In economics, liquidity is defined by how efficiently and quickly an asset can be converted into usable cash without materially affecting its market price. · Nothing is more liquid than cash, while other assets represent The term liquidity refers to the process, speed, and ease of which a given asset or security can be converted into cash. Notably, liquidity surmises a retention in market price, with the most liquid assets representing cash.The most liquid asset of all is cash itself.· In economics, liquidity is defined by how efficiently and quickly an asset can be converted into usable cash without materially affecting its market price. · Nothing is more liquid than cash, while other assets represent Read this Term because the ultimate source for the client enablement configuration is the dealer’s customer relationship management system."

FM: How can a firm implement or prepare to implement this standardized approach to trading enablement?

SD:"Firms should look at their current manual enablement processes and map these to the TESI technical standard workflows. This will allow them to identify which FIX workflows and message are applicable for their business. To realise the real benefit requires installation of a FIX engine (there are many free and commercial offerings in this space) and its configuration to send and receive the TESI FIX messages from the FX execution venues and integrating these into the organisation’s existing CRM and permissioning systems."

SD: "FIX provides a stable, popular open standard mechanism to exchange the entire entitlements of a trading organization. The standard targets most organization types: sell-side liquidity providers, sell-side brokers, execution venues, vendors and can easily be implemented by buy-side firms too."

FM: Are there similar challenges with EMIR/ESMA regulations and the adaptation of TESI with regards to FIX overall?

SD: "Regulations such as EMIR are going to impact dealers’ client on-boarding functions, such as Know Your Customer (KYC) and client classification. TESI allows the communication of this information between dealers and ECNs using a robust industry standard communication protocol. As new regulatory requirements on client data are mandated, the TESI standard together with the extensibility of FIX provides an easy win for the industry to incorporate the new requirements into the existing open protocol."

Background on Message Standards and Protocols

The most widely used protocol or programming language for messaging used to communicate orders and order specific information electronically is the Financial Information Exchange (FIX) protocol, and the underlying 'lubricant' in financial market’s efficiency as far as electronic trading is concerned. That is, as a significant amount of all electronic trading is communicated via the FIX protocol, regardless of medium or order management system or execution management systems between trading parties or venues. There are a number of other major protocols as can be seen in the excerpt from

graphic below, from the FIX Community:

Forex Magnates recently wrote about the FIX Trading Community, which has been re-branded from FIX Protocol Ltd, which publishes guidelines and owns and operates the protocol as a non-profit organization with over 160 global members consisting of some of the largest banks and brokerages in foreign exchange, as well as specializing in many other asset classes and financial market segments.

While there are many messaging protocols used across the industry for electronic trade-related communications, these also are a key component of high-frequency trading and algorithmic trading, where high-performance computers process part of the FIX message tag, before the entire tag has even been fully read by the machines. Hence, the structure of the FIX tags are critical as the most important information is kept in the beginning and read first, while the rest of the tag may have post-trade related information with regards to routing, clearing, allocating,etc...

What is Trading Enablement?

When a customer's account is approved, activated, enabled, turned-on, switched-live, or any other term that would describe its trading as having been 'enabled', there are several processes included in these administrative tasks that cover compliance, financial risk and configuring parameters in brokers' platforms and back-office enterprise systems -- and which all together vary considerably from firm-to-firm, throughout which the entire administrative journey customers go through before becoming enabled for trading.

What TESI aims to do is standardize the technical method and processes that firms follow when enabling trading for customers, this includes the degree of provisions or permissioning that is given to a trader or fund or advisor, which in turn could be enabled across other providers through either a central system (multi-dealer), or shared electronically as needed by the originating needs of the client (who might want to trade in multiple venues and clear in several destinations), as well as the needs of the broker.

The challenges with these are several. Firstly, when a provision is made to enable a particular client to trade, the definition of the language and terminology used in each particular case may have a very different meaning for the different providers, or such symantec terms and phrases may not even exist, and vice versa. So the same term could have different meanings across the trade-life cycle from provider to provider both on the clearing and execution spectrums -- adding to the existing complexity behind provisioning trading enablement.

Standardizing Provisional Permissioning, Easier than it Sounds

The issue here, is that often in the process of provisioning a client on the sell-side with the buy-side, or vice versa, including the clearing & settlement process, information can get lost in translation, or at best prolonged due to the un-heterogeneous format of the provisioning data.

TESI looks to change that. By standardizing this process, the administrative side can become more transparent and more efficient and lead to less operational risk and clearing/settlement errors throughout the trade life-cycle.

These aspects of provisional permissioning becoming more standardized are becoming imperative in segments like the new Swap Execution Facilities (SEFs) in the US, which require according to the latest CFTC clarification, that each participant must be able to send a Request for Quote (RFQ)to any other SEF participant - even without knowing information about that customer (such as KYC,etc...)- as the SEF must allow this information to be available even if the buy-side doesn't use it, as explained by Mr. Danesh during our interview.

If a buy-side goes to trade on a particular SEF, the SEF must allow any buy-side to choose any other particpant to connect to any another SEF participants -which could be either a buy-side or sell-side participant. Just like on an exchange where any order could match with any other order across trading venues within the exchange.

Recent CFTC Guidance Pushes Towards Listed and Away from OTC

Recent CFTC guidance has become increasingly complex prompting certain industry-driven firms to take such matters to court, as covered yesterday. The recent clarification from the CFTC in the last few weeks aimed towards a more "listed-style" rather than an OTC counterparty method with regards to trading enablement.

In a scenario like this, a provisioned client could elect to have its info enabled for other providers to see, thus enabling trade at multiple venues with ease, rather than having to go through a painstaking process of integration with each provider.

Thus, the TESI solution can serve the greater good of all parties by enabling greater efficiency both administratively and operationally in the market, and transparency and convenience for participants while complying with related regulatory mandates.

Aim is to Ratify TESI During Q1 2014

The TESI initiatives are supported by about 10 members at the moment, with more expected as the standard is ratified by the community in the coming months.

Just as the FIX community has supported the messaging protocol, including certification standards, documents, white-papers and all the known and unknown efforts by countless participants, the implementation of TESI can follow a systematic approach creating an ease of implementation.

Mr. Danesh explained that he is aiming for the TESI to be ratified by the community members sometime in the first quarter of 2014, around which time collaborated discussions with the regulators would follow for feedback. The FIX Community, having education as a main driver for its efforts, has provided industry feedback on several occasions as the issues of electronic access are focalized through its protocol which continues to evolve, and currently at version 5.0 with many institutions still using versions 4.0 through 4.4 as the versions evolve with the markets needs.

While already more than 10 firms are on board with the TESI standard, more work is clearly needed before it is widely adopted, and therefore it will be interesting to see the adaptation rate across participants.