By Daniella Baker
Working with the Trading Community to Create a More Financially Stable Environment
2011 has presented many challenges for the global economy, with multiple markets experiencing increased volatility and investor confidence in sharp need of an injection of faith. Achieving increased transparency and sustained long-term financial stability has become the Holy Grail for politicians and regulators globally. It may seem an unlikely fit for those unfamiliar with the scope of activities pursued by FPL, but market participants working closely with the organisation, will understand the growing relevance of FPL’s work in helping to achieve these goals.
FPL is an industry-driven organisation, it is independent and neutral, and all initiatives are ultimately focused on supporting the evolving business needs of the trading community, to enable firms to optimise efficiencies and reduce costs. As the markets seek to further mitigate risk and support regulatory reforms, aimed at effectively addressing the needs of the real economy and protecting the end investor, FPL has worked hard to help its members understand the implications on their businesses and how they can seek to achieve these goals. In doing so, the organisation has also ensured the wider needs of the trading community continue to be effectively addressed, meeting the requirements of emerging trading trends and ensuring new geographies benefit from educational opportunities. Here are some highlights explaining how FPL has worked towards these goals in 2011 and an insight into some of the initiatives FPL will be seeking to deliver as we move into the New Year.
Supporting the Development of Regulation
FPL works closely with regulators around the world to encourage the use of non-proprietary, free and open industry standards that enable all sectors of the financial community to benefit from the resultant consistency and transparency that facilitates ease of surveillance. The standards promoted are those that achieve mass adoption by the trading community, enabling firms to more easily meet new requirements by leveraging their existing investments across additional business areas and generating significant cost and resource savings. As an organisation, over recent months, we have started to see results from these efforts, as regulators have begun submitting documents to the market requesting participants use open standards that offer these elements to meet emerging requirements.
This approach is consistent with the recommendation in the 2010 released Investment Roadmap, which FPL produced in collaboration with other leading standard bodies to provide the industry with clear guidance as to which standards should be used to support business processes throughout the trade life cycle. The transparency and consistency offered by using standards in this manner, is becoming essential in furthering regulation while restoring investor confidence.
FPL has provided representation at a number of regulatory related initiatives throughout 2011. A few examples include the annual IOSCO conference in South Africa, a meeting of the FSB (Financial Stability Board) in Basel and attending a Regulatory Data Workshop coordinated by the Office of Financial Research (OFR) in DC as a chance for data experts within the federal financial regulators to share common concerns, best practices and promising ideas.
Throughout 2011, FPL’s regulatory efforts in Europe have focused on the Markets in Financial Instruments Directive (MiFID) review. This has included contributing to discussions and responding to consultations focused on the development of a European Consolidated Tape and encouraging the adoption of FIX for this initiative. As FPL’s membership represents the cross section of firms that will be using the consolidated trading data, FPL has played an active role in the group providing advice on how the new standards could be applied to deliver the greatest industry wide benefit.
The MiFID review also raised important concerns around posttrade transparency and in response to this the Market Model Typology (MMT) initiative was launched by the Federation of European Securities Exchanges (FESE), with strong support from a number of leading data vendors. The MMT initiative aims to reduce the level of complexity of equity market data, which will generate processing cost savings, and significantly improve market transparency. The initiative will seek to achieve these goals by standardising trade flags across trading venues in Europe, including lit, off book, dark and OTC trading. The standardisation of post- rade data will prove to be a pre-requisite for effective data consolidation.
Additionally, FPL member firms in Europe continue to be invited to participate in the MiFID Forum, which is supported by a range of industry standard bodies and associations. The forum provides an opportunity for open discussion and debate amongst senior market practitioners on the regulatory issues affecting the financial markets.
As an independent and neutral stakeholder, FPL continues to respond to regulatory consultations. To ensure that these responses are submitted in a manner that reflects the broad interests of its membership, in December 2011 FPL invited members from the region to join the EMEA Regulatory Subcommittee. The organisation looks forward to working with group representatives in 2012 to further this effort.
From a U.S. perspective, the Securities and Exchange Commission (SEC) has been very active in its efforts to regulate the U.S. financial markets as it seeks to reduce risk, increase market transparency and ultimately restore investor confidence. Increasingly, rule filings have focused on the role of technology as both the source and solution to current market issues. To assist the ma
rket in comprehending and addressing the implementation issues raised by SEC and Financial Industry Regulatory Authority (FINRA) filings, FPL has worked alongside the Financial Information Forum (FIF), to address recent transparency initiatives.
rket in comprehending and addressing the implementation issues raised by SEC and Financial Industry Regulatory Authority (FINRA) filings, FPL has worked alongside the Financial Information Forum (FIF), to address recent transparency initiatives.
This group is working with the U.S. regulators to encourage the adoption of FIX for new regulations as they are being developed. By being involved at this stage and encouraging the promotion of FIX business practices, this has proven to enable market participants to implement FIX more efficiently and reduce errors, thus generating significant industry wide savings. Trade reporting is key to measuring firm compliance and expanded use of FIX for equities and fixed income assists in controlling development costs. During 2011 this has also included encouraging FIX use for the reporting of the SEC proposed Large Trader Identification rule, which will enable the SEC to more easily review trading activity from buy- and sell-side firms.
FPL has been providing expertise and recommendations to both the Commodity Futures Trading Commission (CFTC) and the Department of Treasury Office of Financial Research in the areas of reporting, identifiers, and financial instrument classification. For example, FPL has been working with the members of the Futures Industry Association to enhance FIX trade reporting messages to meet CFTC Large Trader Reporting requirements.
From an Asian perspective, FPL continues to reach out to regulators across this diverse region, in order to highlight the benefits that standardisation and the many advantages that using FIX presents.
Meeting the Challenges of Risk Management
As market volatility continuesto threaten the achievement of financial stability, the use of effective risk controls in automated trading has become essential in protecting not only the parties involved in the trade, but also the wider integrity of the market from flawed electronic orders. Keen to raise awareness of the risk issues presented by electronic trading, and how the adoption of common practices could help mitigate against these, in early 2011 FPL developed an initial set of guidelines which recommended risk management best practices in equities electronic trading for institutional market participants.
Determined to ensure that the proposed guidelines comprehensively meet business needs, FPL has sought wide industry feedback. A number of market participants from across the globe took part in this review and their value was recently recognised by the European Securities and Markets Authority (ESMA), who in October published a consultation paper referencing the guidelines. FPL is currently incorporating the feedback received and the guidelines are also being extended to support the trading of futures and options ready for their release in the New Year.
Additional to this, the FPL Americas Buy-Side Working Group has also commenced an initiative focused on risk mitigation. The group is looking at the potential to increase the use of test symbology for all electronically traded asset types to encourage more secure, reliable and compliant business processes. We look forward to hearing more about this initiative as it progresses.
Working with the Buy-side to Increase Transparency and Mitigate Risk
To ensure that the needs of the end investor are protected, increasing market-wide transparency and mitigating risk throughout the entire trading life-cycle is very important. Due to the buy-side’s close proximity to the end investor, FPL is keen to fully understand and effectively support the business challenges facing this industry sector.
Over recent years, a central component of this effort has been the formation of regional buy-side focused working groups. Recognising that in an increasingly global trading environment many buy-side challenges, whilst having mild regional variances, are experienced worldwide and FPL is keen to ensure that the knowledge achieved and initiatives developed regionally are able to benefit members globally.
A prime example of how this is being achieved is the best practices around Execution Venue Reporting that FPL published earlier this year. The proposed practices were developed to enable buy-side industry participants to achieve increased transparency and a more consistent response from their broker-dealers on the reporting of the execution venue on each fill. Over recent months, FPL has worked closely with buy-side representatives as they have approached their brokers to encourage adoption of these practices. This initiative, originally developed by the FPL Americas Buy-side Working Group, is now being reviewed by other FPL buy-side focused groups globally so they can understand how the best practices can be applied to achieve increased transparency in their local markets.
An additional area currently under the spotlight by the FPL Americas Buy-Side Working Group is post-trade allocations and the current risks prevalent within this space. The group is exploring the use of FIX messages bilaterally with their counterparties for equity allocations. FIX has offered functionality within this area since 2005 and the group is looking at how it could increase adoption. The work has focused on developing best practices that are acceptable to both the buy- and sell-side community utilising FIX to support the equity post-trade allocation processes. We look forward to hearing more on this initiative in the coming months.
In support of FPL’s efforts to more effectively meet buy-side needs, in 2011 the organisation welcomed the UK based Investment Management Association (IMA) and the Bundesverband Investment und Asset Management (BVI), which represents the investment industry in Germany, to the FPL membership. We look forward to their participation in the many active FPL committees and working gr
oups in the coming year.
oups in the coming year.
Encouraging the Consistent Use of Standards across the Asset Classes and by the Exchanges Community
As the US Dodd–Frank regulatory reforms seek to achieve greater market transparency, by requiring most types of OTC derivatives to be cleared through clearing houses and traded on swaps execution facilities (SEFs), a surge in new market venues is expected in the US. Similar reforms are also expected to emerge from the upcoming MiFID II regulations in Europe. As these new markets develop, FPL member firms have expressed a desire to encourage the increased use of FIX, and other standards, by both existing and emerging trading venues. Adoption of open standards would enable industry participants to connect to these SEF market venues in an efficient and cost effective manner. To achieve this goal, members from the Global Fixed Income Committee are currently reviewing the functionality FIX offers to ensure it can effectively support the required processes for trading of credit default swaps (CDS) and interest rate swaps (IRS). The group is producing guidelines that build upon methods currently employed today with the aim to release these best practices documentation and enhancements to the FIX Protocol ready for industry adoption in Q1 2012.
To enable FIX to comprehensively meet the business needs of the foreign exchange trading community, in 2011, FPL turned its attention to foreign exchange options. Keen to improve FIX support for both the exchange traded and OTC foreign exchange options markets, the work is initially focusing on vanilla options and simple strategies (including non-deliverable currencies) and then moving onto exotics and more complex strategies. Over recent months, the Global Foreign Exchange Committee has been reviewing business requirements and examining the protocol to understand how it can be enhanced to more effectively support these trades, with the aim of releasing new functionality in Q1 2012.
To provide enhanced FIX support for the listed derivatives trading community, in 2011, the Global Derivatives Committee incorporated enhancements to the protocol to better support post-trade clearing activities. Further enhancements were also made to the protocol to support evolving exchange requirements in the areas of order handling and quoting models.
A major area of new functionality was added to the FIX Protocol to support the communication of parties reference data, including setting risk limits and entitlements between parties. New messages have been developed to not only communicate this information but to also define and update this information.
Encouraging the standardised adoption of FIX by the exchanges community, has been a key area of focus for the Global Exchanges and Markets Committee over recent years due to the large number of market participants required to connect to them and the significant cost savings that can be achieved by being able to do so in a standardised manner. In 2011, these efforts continued with FPL offering significant support to a number of exchanges, including many based in Asia to encourage standardised implementations.
Developing a More Transparent Approach for Latency Measurement
In today’s latency sensitive environment it is not surprising that achieving and promoting strong latency results is common practice for many firms, however FPL member firms have questioned to what degree are latency measurements comparable when there are no standard approaches to measuring latency. For example, there are many points in the transaction of a trade where latency could be measured and no common measurement points are identified. Additionally, latency is often quoted as a single number and with exchanges processing many thousands of orders each day, this number can often reflect only the trades that achieved the strongest results, which may be just a small proportion of those overall.
A further challenge is the actual process of measurement across disparate locations. To measure latency in different locations, a common timing device is needed at either end of the communications link and currently only proprietary communication protocols are available to market participants.
To provide a more transparent latency measurement approach, under the umbrella of the Global Technical Committee, the FIX Inter- Party Latency Working Group has been busy developing the industry’s first free, open and non-proprietary standard, to consistently measure the latency of a trade as it travels through systems at exchanges, trading venues and investment banks. Additional to this, the group is also preparing a set of industry guidelines to encourage common latency reporting to enable like-for-like comparisons to be achieved. Both of these deliverables will be available to market participants early in 2012.
Supporting Local Trading Needs
As an organisation, FPL has witnessed strong growth within the relatively challenging climate presented by recent years, with a 40% increase in members since the start of 2010. This growth is an indication of the return on investment and significant value membership offers to the trading community.
Over this period of expansion the geographical diversity of members has increased along with the desire from member firms to lead localised initiatives that support local trading needs. This has led to the organic growth of a number of new subcommittees. Since the start of the year, the organisation has formed new groups in Germany and in the Nordics, and supplemented the FPL India and Middle East North Africa groups formed in 2010 and multiple others already collaborating to address both the business and technical challenges facing their markets.
These are just some of the many ways in which FPL is working to support the ever expandin
g needs of the trading community. As an industry-driven organisation we encourage all members to play an active role in the future of FPL and get involved in initiatives that are shaping the future of the trading environment. In 2012, we plan to continue our efforts and ensure that FPL not only meets but exceeds our members’ expectations addressing business challenges so as a whole the industry can trade even more effectively and efficiently.
g needs of the trading community. As an industry-driven organisation we encourage all members to play an active role in the future of FPL and get involved in initiatives that are shaping the future of the trading environment. In 2012, we plan to continue our efforts and ensure that FPL not only meets but exceeds our members’ expectations addressing business challenges so as a whole the industry can trade even more effectively and efficiently.
For more information about how your firm could get involved with FPL please visit: www.fixprotocol.org or contact fpl@fixprotocol.org.
