An increasing number of exchanges and clearinghouses are adopting FIXML, an XML version of the FIX Protocol, for communicating post-trade data. Now it is time for clearing firms and vendors to weigh in. If the clearing members want to encourage the adoption of a global standard for post-trade messages to eliminate managing multiple interfaces, then 2010 is an important year. Eurex, NASDAQ OMX, MEFF and LCH.Clearnet are asking for user input on the initiatives they have underway.
FIXML is being implemented in various stages at exchanges in the U.S. and Europe. Major U.S. clearinghouses have implemented FIXML for all post-trade data and are offering additional functionality via FIXML. Certain European clearinghouses are testing the water by offering specific post-trade data via FIXML alongside their proprietary interfaces. If clearing member response is positive, they will make additional messages available via FIXML.
The widespread adoption of a post-trade standard interface will have significant benefits for clearing members. Managing proprietary interfaces with more than 60 exchanges that trade futures and options is time consuming and costly. The events of the last two years have driven more attention to costs and controls, says Conor Sherrard, Executive Director and Business Manager for Europe, Middle Eastern and African futures and options for J.P. Morgan. “The technology exists to deliver even greater straight through processing and cost reduction but without the adoption of an international protocol, firms are faced with having to maintain multiple systems to replicate essentially the same functions across the range of exchanges and clearinghouses they access,” he explains.
Legacy interfaces can sometimes limit the functionality available to clearing members. “By adopting this initiative we would lay the foundation to achieve critical improvements around risk management, more accurate trade commissioning and even greater automation across operations in areas such as close-outs,” says Sherrard.
FIXML provides a flexible method of formatting and describing data so that it can be recognized by other systems. Data values can get as large as needed because there are fewer limits imposed by the format of the message. The number of data fields contained within a transaction record is limited only by the message definition. Contract and account information may be added as necessary without size or format restrictions. For numeric values containing decimal points, XML allows flexible decimal place positioning, eliminating price alignment inconsistencies. On the exchange side, new products can be brought to market faster and more efficiently. The standard supports complex and non-vanilla products more easily and offers fewer barriers to entry for new exchanges.
The emergence of FIXML as a global standard began in 2000, when the Futures Industry Association launched an initiative to create a standard interface for clearing organizations to communicate with their members. The Chicago clearinghouses recognized that their ability to offer new products and new post-trade functionality was limited by their reliance on TREX, the messaging standard developed in the early 1990s for Chicago Mercantile Exchange and Chicago Board of Trade to communicate with members. CME, CBOT, Options Clearing Corporation, New York Mercantile Exchange, and New York Board of Trade participated in a working group that considered several formats before settling on FIX, which was widely used on the front-end.
The clearinghouses did not want to be limited by a fixed number of characters in the message so they agreed that XML (eXtensible Markup Language) should be the basis for the post-trade format. They approached the FIX Protocol Organization about creating an XML version of the FIX Protocol.
While firms agree that a common interface globally would be more cost efficient, it was the threat of regulatory intervention that prompted the U.S. and European exchanges to work together on a common standard for the listed derivatives industry. In 2003, the Giovannini Group, a quasi-governmental body established by the European Union to identify the principal barriers to cross-border clearing settlement, directed European exchanges to agree a common messaging protocol for European exchanges. U.S. exchanges had already begun adopting FIXML as a standard and the futures industry wanted to avoid one standard for the U.S., another for Europe and perhaps a third for Asia. FIA approached the European exchanges about agreeing a global standard.
The FIA and the U.K. based Futures and Options Association established a cross-border post-trade working group (PTWG) in 2006 which included CME, Eurex, New York Mercantile Exchange, New York Board of Trade, LCH.Clearnet, MEFF, OCC, and OM. Recent additions to the group include Intercontinental Exchange, and NYSE Liffe.
Building a Post-Trade Standard
The PTWG broke the post-trade process into four parts: trade reporting, allocation reporting, position reporting and collateral and margin reporting. Because FIX is a global standard for execution and SWIFT is the global standard for banking and settlement, execution and banking and settlement are not covered in the FIXML initiative.
First, the PTWG had to identify and agree on the business processes for each of these areas. Different clearinghouses have different approaches to the various aspects of post-trade processing, which needed to be accommodated when developing the FIXML messages. Once the business process analysis was complete, the group developed workflow documents which detail all methods used by participating clearinghouses to achieve a particular process. Once the workflow was defined, the PTWG then created messages to support them. The PTWG is in the process of completing gap analyses to determine what new messages need to be added to the FIXML standard to accommodate the process. Once a gap analysis is complete, it is submitted to the FIX Protocol Organization for review and adoption.
The trade reporting specification covers trade submission, matching, claiming, posting and splitting.
Trade capture messages are based on existing FIX messages because FIX contains many of the necessary attributes for trade submission and matching. The PTWG modified the trade messages and message flows to support all the business processes and workflows needed by the participating central counterparties. The PTWG enhanced trade capture report messages to support trade splitting and proposed new messages to support trade posting including posting instruction, posting report, trade match report and trade match report acknowledgement.
The position reporting specification covers position management which consists of a series of processes that begin with the posting of a trade to a position, applying start-of-day and end-of-day adjustments, corporate actions when applicable, final netting, exercise and assignment, marking to market, and start-of-day position rolls. New FIXML messages for position variation and premium calculations provide the information needed to produce daily pays and collects for the settlement process. Messages for position quantities provide the raw material necessary to calculate margin requirements and determine if additional collateral is necessary for risk management purposes.
Allocation specifications include messages for allocations, give-ups, and average pricing. The workflow document describes and diagrams workflows for single and multitrade give-ups, give-ups taken up by multiple firms, update requests, reversals, cancels and average pricing. The PTWG also has completed message flows for the exchange of collateral between the clearing member and the central counterparty and is currently working on a gap analysis. It does not cover actual transfer of collateral. Workflows include:
- Collateral request/notification — sent from the CCP to the clearing member to notify an excess or deficit in collateral.
- Collateral lodgment/deposit — sent from the clearing member to the CCP notifying collateral has been lodged into their account at the respective Depository or Bank.
- Collateral withdrawal — sent from the clearing member to the CCP requesting a withdrawal of collateral, to be confirmed and initiated by the CCP.
- Collateral transfer — sent from the clearing member to the CCP requesting the transfer of collateral from one collateral account to another.
- Collateral detail report — inventory of all collateral held and the collateral value.
- Margin requirement summary — a summary report of the total liability of the clearing member to be covered with collateral.
- Cash and accounting summary.
The PTWG has completed margin reporting specifications which cover real-time, intraday and end-of-day margin reporting. Messages that support transactions to communicate margin requirements include margin requirement inquiry and inquiry acknowledgement and margin requirement report on both a summary and detailed level.
Current Exchange Initiatives
The vast majority of the post-trade activity at CME is conducted in FIXML. Due to its acquisition of Nymex and new product development, CME continues to expand its usage. All Nymex post-trade information is now delivered via FIXML. Clearport, which used a version of FIXML, has a completely new API that is 100% FIXML as of Nov. 21.
FIXML has helped CME make the leap from futures to over-the-counter products. CME is using FIXML to provide additional functionality needed for clearing credit default swaps such as describing and identifying which accounts are eligible to trade.
“We haven’t had to re-engineer or rebuild like we would have had to with TREX,” says Matt Simpson, Associate Director, business systems architecture for CME. He explained that XML has reusable components. Once an instrument or party component is defined, it becomes a common element across many different kinds of messages— reference data, trade, position or allocation messages. “As we define a set of CDS elements, users see elements that are familiar to them and fit into their system the way they have built it and there is very little change or disruption,” says Simpson.
CME also has built a FIXML interface for CDS trading platforms that dealers use to transact CDS to connect to CME clearing via FIXML. “As we talk to more and more CDS dealers, we see that some would prefer FpML, but surprisingly there hasn’t been really much resistance to FIXML for CDS,” says Simpson. CME also plans to use FIXML for OTC FX and forward-like futures products that are currently being developed.
Options Clearing Corporation
OCC began implementing FIXML for post-trade messages in 2003 and now uses FIXML exclusively. The latest FIXML initiative affects the way the options industry reports large options positions. When new reporting requirements become effective on January 19, firms will be able to submit Large Options Positions Reports in a batch mode in FIXML format. LOPR is similar to the CFTC Large Trader Report.
OCC also is expanding current post-trade functionality to include collateral messages for distributing valued and government security haircuts. The valued security changes have already been implemented, with changes for government securities following in the second quarter. In December the OCC began offering a basic exercise acknowledgement. When the firm submits a position maintenance request for exercises, OCC sends an acknowledgement of receipt. This is the first time OCC has used FIXML for acknowledgements. Another FIXML project in 2010 will allow OCC to deliver position data to firms in real-time on demand.
ICE Clear U.S. has used FIXML to replace the proprietary interface it inherited from the New York Board of Trade. ICE plans to extend this protocol to ICE Clear Europe and ICE Canada.
“We are committed to taking FIXML to all clearinghouses we own,” says Richard Baker, Clearing Product Development Director for Intercontinental Exchange. “We want to use the same technology for multiple clearinghouses.”
Currently, ICE Clear U.S. supports FIXML messages for end-of-day trade match-off reporting, allocating (give-ups), transfers, challenging and updating trade records, and option
exercises and assignments. Members were required to conform to the FIXML standard effective Sept. 30. Allocation (give-up) messaging is now being tested by vendors and is
expected to be live at the end of the first quarter 2010. The specifications for PCS (position change submission) have been submitted to the vendors, but are not yet in production.
ICE Clear Europe, which launched in fall 2008, is still using legacy technology from its prior clearing arrangement with LCH.Clearnet, which did not use FIXML for message delivery. ICE Clear Europe plans to move to FIXML in third or fourth quarter 2010. Testing for the end-of-day trade match-off reporting has already begun. Trade and allocation management and PCS will begin testing with vendors at the end of the second or third quarter. Plans to implement FIXML for ICE Canada have not been announced.
The “Enhanced Risk Solution,” due in first quarter 2010 as part of Eurex release 12, will include real-time risk information for clearing members. Currently, margin requirement information is delivered at 10-minute intervals. The new Eurex interface will use FIXML messages to alert clearing members whenever an event occurs that triggers a recalculation of margin. FIXML messages will be available only through the AMQP (Advanced Message Queuing Protocol), the new protocol Eurex is adopting to transport messages between the exchanges and clearing members. In order to take advantage of the new messaging, members need to implement AMQP as well as have a FIXML processor. The launch of the Enhanced Risk Solution, which includes the FIXML messages, is tentatively scheduled for March. Eurex is offering the real-time margin information in both its proprietary format and FIXML to test the clearing members’ appetite for FIXML. Further implementation of FIXML will be driven by member demand.
NASDAQ OMX plans to introduce an optional FIXML interface when it launches Genium Clearing, its next generation platform for post-trade clearing, settlement and risk management. Connectivity to the platform will be available through both its proprietary interface and FIXML. “For new customers we expect to see a strong demand for FIX and FIXML,” says Mats Andersson, Chief Technology Officer for NASDAQ OMX. “To facilitate a smooth migration for our existing customers we are keeping our proprietary API in Genium, therefore we initially don’t expect a strong demand from their side.” Implementation will depend on requests from new and existing customers. He expects the FIXML portion of the project to begin in 2010. “FIXML support is an important addition to our roadmap while the delivery date is not yet set,” says Andersson. In addition to its Nordic
operations, NASDAQ OMX serves clearinghouses in Asia-Pacific.
MEFF currently uses FIX on both the executing and clearing side to pass messages between the exchange and clearing members. The clearing FIX API contains session, connectivity, news and contract data messages and offers post-trade functionalities including position monitoring and management, trade reporting, trade management,
exercise instructions, static data related to clearing, and post trade reference and filter management. While MEFF is currently not offering a FIXML interface, it is considering including it in a future release. MEFF is looking for member input to determine how much of a priority it should give FIXML development, according to Garry O’Reilly who is project manager for MEFF’s information technology department.
Representatives from LCH.Clearnet Paris and London have been participating in the working group from the beginning, however, no plans for implementation have been announced at this time. “We are definitely convinced that FIXML will be a major added value for the industry and we will continue to support this initiative and do the job to make sure this new standard is able to support our business model,” says Franck Giraud, Senior Manager infrastructure and service design. LCH.Clearnet will be working with members to determine when implementation will occur.
Source: Futures Industry Association