http://www.iss-mag.com/forward-thinkers/fpl-meeting-the-demands-of-regulation
Daniella Baker, Global Marketing and Communications Manager, FIX Protocol Ltd
Over recent years, the European financial markets have witnessed an unprecedented level of new regulation coming down the pipeline. Whereas previously the region’s trading community was predominantly focused on implementing the initial iteration of MiFID, these same firms today need to understand the implications of multiple emerging regulations, impacting various areas of the trade lifecycle and many different asset classes.
With new regulation being developed at both a supranational level such as MiFID II and EMIR, and at the national level with country specific requirements such as implementation of the Financial Transaction Tax (FTT) in advance of FTT zone legislation, there is much to contend with. Throw into the mix increased globalisation and regulatory developments elsewhere, the emergence of new regulatory bodies such as the Prudential Regulation Authority – the UK’s new financial regulator, a lack of clarity in terms of what we can expect from certain regulations and the tightening of purse strings (necessitated by the financial crisis) and firms are often finding that they need to manage growing regulatory pressures with increasingly limited resources. As such, it is unsurprising that meeting regulatory requirements is frequently cited as one of the top concerns facing firms across the industry.
FIX Protocol Ltd (FPL) is an industry-driven standards body dedicated to addressing the business and regulatory challenges impacting the trading community through standardisation. The organisation provides a forum that brings together representatives from different industry sectors, with different viewpoints on issues of common concern. It then encourages participants to work together, free from commercial interest, to develop solutions that prove beneficial for the wider community.
FPL is responsible for developing and promoting the FIX messaging standard that has become embedded in the fabric of our industry, supporting the infrastructure used by thousands of firms every day to complete millions of transactions. Therefore, being able to leverage this existing investment to meet new regulatory requirements offers market participants the potential to absorb these changes into their business in a cost- and time-efficient manner. Some examples of FIX usage by regulators include use by ASIC for Short Sale Reporting, IIROC for Transaction Reporting, FINRA for TRACE Reporting, and the CFTC for Large Trader Reporting. Encouraging an increased understanding of how FIX, and other mass adopted, non-proprietary, free and open standards, could be used to address emerging needs is central to FPL’s work.
Fixed income
One of the areas in which market participants are calling for increased use of FIX to meet regulatory developments, is in relation to the many changes taking place in the fixed income world. Regulatory efforts to increase capital requirements and enhance transparency, in this traditionally voice traded asset class, have led to the development of an increasingly fragmented marketplace. As broker dealers started to reduce their inventory, institutional traders found that they needed to look to the broader market to source liquidity and for price discovery. This accelerated the need for an increasingly automated and venue-driven trading environment.
In mid-2011, as a proliferation of new trading venues was expected, FPL was approached by representatives from the broker dealer community keen to work with the organisation to encourage both existing and new venues to offer FIX connectivity. Using FIX presented the possibility of being able to connect to these platforms in a cost effective manner and achieve greater transaction efficiencies than might otherwise be possible.
Working closely with this group, in 2012 FPL produced recommended guidelines for how FIX could be used by emerging Swap Execution Facilities (SEFs) to trade interest rate swaps (IRS) and credit default swaps (CDS). These guidelines are now being used to support FIX implementations by a number of SEFs and are expected to also be adopted by OTFs once details around these are finalised within MiFID II. This was recently followed with best practice recommendations published in February 2013 and further enhancements to the protocol, created to support the trading of cash bonds using FIX. Further phases of this work, some of which are already underway, include additional support for cash bond trading and related functions such as the exchange of trading limits and entitlement information.
OTC derivatives reporting
The OTC derivatives space is currently also undergoing significant change, many of these developments are impacting FPL’s member firms, a considerable number of which currently trade OTC derivatives using FIX and are keen to leverage their investment and use FIX for reporting purposes also. FIX supports OTC derivatives trading through to allocations and clearing, however the organisation is currently in the process of including additional functionality to support recent regulatory developments.
Achieving consolidation in a disparate world
One of the major impacts of MiFID was the creation of a more fragmented market structure and whilst this achieved increased competition, key challenges presently facing the industry relate to how we actually bring information regarding market activity back together again. A prime example of this is the need to be able to manage and consolidate trading data across multiple trading venues. This consolidated view would enable the generation of common trade-measurement benchmarks and similar metrics.
In mid-2011, FPL formed a group to explore how standards could be applied to help address this challenge and in November 2012, released recommended guidelines for the consolidation of trade reports and market data for European equity markets. These recommendations make it much easier to identify where a trade was issued and in which currency, where the trade was executed and the time of execution, in addition to providing further information.
The LEI
As FPL seeks to support the needs of a global membership base, it is involved in encouraging consistency and the promotion of standards in the development of regulation in multiple markets. One initiative that transcends interest across many jurisdictions is the Legal Entity Identifier (LEI), which is likely to impact many FPL member firms as they are required to integrate the LEI into their business processes.
In addition to ensuring that FIX is able to support the LEI, FPL also participates in various LEI working groups that have been formed by the Financial Stability Board (FSB). These groups are responsible for exploring how the LEI should be implemented and how it could work in practice. FPL is keen to encourage the development of a federated and open standards-based approach to the creation and publication of the identifiers themselves, as it feels this would best address industry needs.
Where next
These are just some of the many ways in which FPL is seeking to support the trading community as it aims to meet the demands of continued waves of regulation facing our industry. There are many further initiatives planned for 2013 some of which build on those already mentioned and others explore different areas, all presenting many opportunities for market participants to get involved. A prime example of this emerged just last week as FPL announced the formation of a new pre-trade working group, part of this group’s remit will be to explore regulatory impact in this space. As regulatory audits of trade advertised volume has recently been on the rise and it is felt that additional FIX values may be able to assist in helping the brokerage community to accurately categorise their advertisements and avoid further penalties.
There are many ways that increased standardisation could benefit our markets and FPL is keen to ensure these advantages can be realised. For more information please visit www.fixprotocol.org
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