TIME FOR ACTION.
Tim Healy, Global Marketing and Communications Director, FIX Trading Community
“When a thing has been said and said well, have no scruple. Take it and copy it” – Anatole France, French novelist (1844-1924).
Someone that I have worked with for only a short time but has been actively involved in the industry for many years made a comment about us as an organisation recently. “FIX Trading Community is not an industry trade association, nor a lobbying body for its members. What FIX does do is create, document and advocate standards and best practices to improve market quality and operational efficiency.”
The FIX Trading Community has been proactively engaged in regulatory response for some time now across the globe. The focus on regulatory change has increased immensely over the past 4 years in response to global regulators’ concerns post the financial crisis. FIX does not take a stance on regulation in terms of the pros and the cons on specifics. What it does do is look at how the use of standards can address the challenges brought by new regulation and make sure that they are available to all market participants to use. It does this through a number of working groups and committees focusing on workflows and asset classes and aspects of electronic trading with the aim to provide best practices and guidelines for the industry.
Which brings us to the topic of FIX and MiFID and what it is that the Community is actually working on. I have listened to many of the calls that have occurred over the past 12 months and it has been obvious that there has been a degree of subjectivity on many of the topics that have been discussed. This may well have been down to a lack of clarity in the regulator’s text but also an interpretation of specific detail and definitions. Part of the work that FIX has done, and needed to be done, has been to clarify terminology so that there is an industry consensus as to what specific terms, phrases and words actually mean. That may seem a slightly pointless exercise, but what is a “voided transaction” exactly? Investment Firm A may have a different view than Investment Firm B. Without that clarification and subsequent agreement across the different definitions, moving forward would prove problematic.
The next stage for the Community has been to begin the process of drafting best practices and guidelines. To do this, the working groups have been collating use cases, initially in equities but with a view to expand this to other asset classes. Looking at the work the Best Execution Working Group has performed, it has proved absolutely vital to go through different scenarios to see what reports (RTS 27/28) will be required by the regulators.
Not only what reports, but the level of detail required, the frequency of producing these reports and the tables that must be completed, are being identified and documented by the working group. The granularity and difficulty becomes apparent when looking at Request for Quote Mechanisms, Dark Pools, Voice Trading and Auctions and what is required for each of these different “execution venues”.
I’ve heard a number of people say in the past that MiFID II is essentially requiring investment firms to hold the correct data for their businesses and make that accessible to the regulators in a timely fashion. It is an understandable comment and does serve to highlight a number of the initiatives being worked on. Additionally, the past 18 months has proved that it is essential for FIX to engage with industry associations. A Venn diagram of the investment process would show that FIX and its members are firmly at the heart of things with members of FIX also being affiliated to trade associations.
In other words, what FIX and its members are looking at, so are trade associations and their members. What this has meant is that industry collaboration has increased to the point that joint industry working groups have been formed. The Order Data and Record Keeping Working Group has recently been reinvigorated as it has merged its efforts with Association for Financial Markets in Europe (AFME). Duplication of effort is never a good thing and working together to provide a framework of guidelines for the marketplace makes perfect sense.
Once again, it is a case of reviewing different scenarios – investment firms to venues and vice versa, submitting firm to receiving firm and, again, vice versa. What is needed, how will it be relayed? I hesitate to mention the often-used phrase “big data” but the sheer volume of data is vast when one considers a typical day’s trading.
The first thing to ascertain is what actually triggers “order record-keeping” as defined by ESMA? Incoming client order (not RFQ); provision of firm quote (whether as a response to RFQ or Market Making); internal principal trade (e.g. Hedge or liquidity management) seem to be the consensus view. Work has already been done by a number of the venues to capture the information they are required to, such as identity of the client, LEIs, passport numbers, ID numbers of individuals, identity of trader, etc. So not only is the quantity of data required extensive, there is also a degree of sensitivity around this data and the potential for FIX messages to increase in size significantly, potentially increasing latency.
To address this, the working group is exploring using short codes to represent the data required and then collect a mapping file at the end of the day from the remitting firm. As mentioned, it will also be vital to ensure the security of any personal information. By encrypting the information and storing it securely, the aim is to provide the regulators with workflows that meet their approval. This has received broad approval from the venues that have been involved in the initiative, but there is still more work to be done.
I’ve focused a little on just two of the MiFID Working Groups to try and emphasise the subjectivity, the complexity and the quantity of data but also to highlight the collaborative attitude, which does seem to be perpetuating the market more and more. Work is being done on Reference Data, Microstructure, Transparency, Trade and Transaction Reporting, Clock Synchronisation and Commission Unbundling.
The aim, as I mentioned at the top of the article, is to create efficient processes that will help the market. MiFID II will create significant overheads for investment firms. Those same investment firms, as part of the FIX Trading Community, are working hard as a co-ordinated effort to keep those costs low by creating guidelines and best practices for all to use. Is your investment firm involved in shaping the future of trading?