FIX Booking of OTC instruments.
ID’S RFQ-hub, a leading provider of multi-dealer trading platform on Listed & Over the Counter (OTC) derivatives announced recently the release of a new interface layer for Order Management Systems (OMS). David Sagnier, CEO of RFQ-hub explains how this layer provides investment managers the “missing link” in the straight-through-processing (STP) chain for OTC-negotiated derivatives.
Based on FIX standards, this connectivity closes the trade life-cycle by providing leading OMS users a complete pre-to-post trade electronic system for these error-prone products.
From the trade request entered by the fund manager to compliance checks, negotiation & trading with broker-dealer institutions, the requests are handled electronically without double entry or re-keying. This process leverages the extensive network of liquidity providers available on RFQ-hub to provide a state-of-the-art “best execution” platform.
The challenges faced for OTC instruments are multiple: not all OTC requests are traded and having to enter the instrument details pre-trade for the OMS would mean that a lot of these instruments would eventually be unnecessary. In addition, some of the economics of these instruments are only known post trade, which requires creating a security shell. RFQ-hub combined with any OMS offers the flexibility to refine the security at various steps and handles multiple trading derivatives workflows off the shelf. It results in far shorter processing time to trade fund managers’ strategies, which is critical for derivatives.
“In order to enhance returns and manage portfolio risk, we frequently trade OTC options. This process was very labour intensive for us, but RFQ-hub has helped streamline the whole workflow. We are now using this link for all our OTC-negotiated options”.
Scott Rogers, Head of European Equity Trading, Fidelity Worldwide Investment
Instead of using email, IB chat or the phone to obtain competing quotes and trade vanilla and complex derivatives, buy-side traders can use RFQ-hub connected to their OMS using FIX to send a quote request to multiple liquidity providers at once.
To do so, two complementary workflows are supported: a standard FIX order flow or a notice of execution (see diagram):
• For the first, the requests are initiated by the traders from their order blotter by selecting RFQ-hub as a target broker for their OTC orders, just like listed orders.
• For the second, they are created by the portfolio managers themselves on RFQ-hub’s Portfolio Manager UI and follow the usual compliance/ central dealing desk / brokers workflow, to end up with an automatic electronic booking. The allocation of these requests is seamlessly handled between the two systems.
These high touch requests are then handled by the investment banks electronically using a similar RFQ-hub FIX connection, or using their RFQ-hub front-end. It enables their quotes to be received, compared and traded on RFQ-hub in a timely manner.
There are no leftovers as we provide all the necessary tools for transitioning market participants. Sales of the largest equity derivatives liquidity providers have access to an internally packaged RFQ-hub front-end and a wide range of tools to automate the quoting process, whilst fully interfaced market makers can provide auto-quote on these OTC instruments using FIX.
Transactions are then sent to the different downstream systems on both sides to enable automatic booking and reporting, achieving all the benefits of electronic trading in terms of speed of execution, proof of best execution, operational risk reduction and straight-through processing.
The trade details are automatically sent to the OMS: winning broker, underlying details, quantity & price and competitive quotes. These positions are then easily accessible to initiate an unwind or a roll, while allowing electronic position closing using common identifiers to both systems.
Competing quotes and trades are captured for audit purposes, compliance and brokers’ reviews, providing quantitative and valuable business intelligence on the counterparty trading activity.
“There are various ways to interface an OMS with RFQ-hub on OTC derivatives: you could use flat files or our API, but FIX is the standard protocol of choice if you wish to leverage your existing FIX architecture. The flexibility of their Order Management System enabled us to go the extra mile for Fidelity Investments and automate all different aspects of the flow.” Idriss Farhat, Project Manager, RFQ-hub.
After giving birth to the FIX protocol in the nineties to handle their equity trading flow with Salomon Brothers, Fidelity Investments continues to be at the edge of innovation by pushing the last pieces of manual processing to the electronic world.
OTC derivatives trading can be streamlined thanks to new technologies such as the RFQ-hub hosted platform. It allows asset managers to comply with the requirements for confirmations by electronic means under EMIR; best execution under MIFID and satisfy T+1 reporting requirements of the regulations.
About ID’S RFQ-hub
ID’S is the company that develops and commercialises the RFQ-hub software. It is a privately owned broker neutral company with offices in Europe, Asia and the Americas.
The application offers streamlined Request-For-Quote and order workflows in cash equities, OTC and listed derivatives (vanilla and structured products) on global underlyings, swaps, futures, options, program trades, convertible bonds and ETFs. With 28 investment banks and market makers, RFQ-hub provides the ability for global institutional asset managers, mutual funds, pension, hedge funds and wealth managers to harness any available liquidity across the widest spectrum of instruments via requests for quotes, interests and targeted care orders.
Multiple workflows – from simple buyside trader-to-broker setups, to workflows involving portfolio managers, middle office or compliance – are available. Combined with the different order/RFQ creation choices – Excel bulk import, FIX, drag & drop – RFQ-hub provides a variety of alternatives to cater for all types of investment managers.