The recently rebranded independent body for trade messaging standards, FIX Trading Community published a set of recommended guidelines last week, for the efficient electronic communication of client entitlement information between broker-dealers and the emerging Swap Execution Facilities (SEFs) which are set to launch shortly, at a time when a number of institutional firms in North America are being granted temporary SEF status by the Commodity Futures Trading Commission.
The guidelines set in place are intended to explain how the currently manual business process that will be required to transfer details about client relationships and their associated permissions can be carried out in an electronic, automated and standardized manner, presenting the potential to reduce operational risk and generate considerable efficiency gains and cost savings.
At the beginning of this year, then-named FIX Protocol Ltd had begun to branch into the post-trade arena by issuing a set of standardized guidelines for post-trade procedures.
Standard Guidelines for SEFs
The subsequent rebranding to FIX Trading Community materialized as a result of the organization’s need to diversify and expand into different areas of issuing standards for messaging, as well as the organization’s involvement in post-trade messaging guidelines and presence on Senate advisory panels in relation to the Dodd-Frank Act.
As regulatory efforts such as the US Dodd-Frank Act and the EU’s MiFID II seek to increase market stability, the structure of the OTC derivatives and OTC fixed income markets is undergoing significant change, with a more electronic and fragmented environment emerging. The last quarter of 2013 will witness the launch of the first SEFs in the US market, many of which are undergoing the approval process by the CFTC at the moment.
FIX Trading Community considers that SEFs will also be approved in Europe, as the rules relating to MiFID II are further clarified, whereby OTC trading will continue to migrate to Multilateral Trading Platforms (MTFs), while Organized Trading Facilities (OTFs) are expected to surface. Opinions have varied on this during the course of the year, exemplified by discussions among senior industry participants involved in this procedure at a panel in London to which Forex Magnates was party.
The subject of SEFs was raised, and the timescales that are likely to be fully implemented in each region. Jacqueline Liau, FX Prime & Global Head,Product and Service at HSBC addressed the panel and stated that, “When it comes to FX products we still have to work out realistically how to get a clearing system for FX options, and when it comes to NDFs we need to find out when we will need clearing mandates for clearing the NDFs. This may be 2014 in the US and a bit later in Europe. Hong Kong and Singapore have put it back, I expect it to be probably effective in those regions at the end of 2014. On this basis, we are unlikely to see much SEF activity in FX for some time.”
The events so far have reflected this line of thinking, with the US regulatory authorities having approved a series of temporary SEFs which will undergo monitoring of their procedures before being granted permanent SEF status, but Europe and Asia have yet to approve SEFs in their jurisdictions.
James Kemp, Managing Director of the Global FX Division at the Global Financial Markets Association (GFMA) had a question to ask on this matter. The question he posed to the panel was, “What is surprising about the rulings surrounding SEFs is that there are only 2 regimes looking at execution requirements, which are the US and Europe under the Dodd-Frank Act and MiFID rulings. How is this going to relate to trading globally in these products?”
This raised a series of opinions across the panel, the conclusion of which was that the majority of jurisdictions have made a link between clearing requirement and execution mandate. With FIX Trading Community’s implementation of standardized procedures from an impartial perspective, the framework is further clarified.
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In relation to the guidelines set forth by FIX Trading Community, the trading platforms used by broker-dealers to trade on these emerging venues will need to understand important client information such as:
– Which clients are able to trade with which counterparties
– The types of trades they can conduct
– How their trades should be cleared
The new guidelines published by FIX Trading Community explain how this information, along with other details pertinent to the client relationship, can be communicated between the broker-dealers and the SEFs in an automated manner using the FIX messaging language. The guidelines set out how a standardized approach to communication can bring increased efficiency, speed and reliability to the process.
FIX is a commonly-used methodology within trading institutions. It is used by thousands of firms every day to complete millions of transactions, enabling the industry to minimize the cost of trading, maximize operational efficiencies and achieve increased transparency.
These guidelines have been built upon previously released best-practice recommendations developed to enable market participants to use FIX to trade swaps and cash bonds on existing and emerging trading venues. These guidelines are now being rapidly adopted by market participants, with almost all new SEFs planning to offer access using FIX.
The Global Fixed Income Subcommittee’s next steps will see the development of recommended practices for automating the communication of client entitlement information to support the trading of cash bonds.
Making a statement on behalf of the organization, Sassan Danesh, Co-Chair FIX Trading Community Global Fixed Income Subcommittee and Managing Partner at Etrading Software said, “Communicating client enablement information is currently a very labor-intensive process, and as each trading relationship will need to be validated on day 1 of the new SEFs going live, the impact of standardized electronic procedures could be huge – significantly speeding up the enablement process and considerably reducing the potential for errors.”
Commenting on the guidelines, Andrew Miller, Executive Director, e-Trading Client Services, J.P. Morgan stated publicly that,“Traditionally, enablement of clients to trade electronically entails significant manual effort, with the ensuing consequences for the cost, speed and accuracy of client setups. These guidelines will provide client entitlement in a consistent manner across SEFs and will support stronger client service, control and agility. Without such an approach, we would need to provide these details in a multitude of different ways.”
Matthew Arnold, Managing Director of Goldman Sachs’ Securities Division further stated, “The release of these guidelines offer significant potential for derivative market participants. Providing client entitlement information in a consistent manner across all of the SEFs we plan to trade on offers efficiency savings and better control. This initiative will help remove unnecessary complexity from the client enablement process.”
Additionally, “The new FIX guidelines will help the industry standardize client enablement on electronic derivatives platforms,” added Justin Peterson, Managing Director at Tradeweb. “Tradeweb worked closely with FIX Trading Community to develop this initiative, and we believe market participants will benefit from the increased speed and capacity it will bring for enabling SEFs in the US, but also electronic platforms in Europe and Asia.”