[Related: "Electronic Corporate Bond Trading’s Time Is Now"]
In mid-2011, when representatives from the broker-dealer community in the fixed income space approached the non-profit FPL organization, this trend was starting to unfold and a multitude of new trading venues were predicted to emerge. This group was keen to encourage both existing and new venues to offer FIX connectivity so they too could benefit from greater transaction efficiencies and the lower-cost connectivity enjoyed by the equities and, increasingly, the FX and derivative markets as well.
As an independent and neutral industry-driven organization with a membership base that spans the trading spectrum, FPL invited members to form a group to explore this issue, which quickly benefited from the participation of key stakeholders, including trading venues, the broker-dealers that wished to connect to them and the buy side. Through the work of 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. The urgency to prioritize these products was dictated by the imminent regulatory need for SEFs to be operational. Once complete, the group then turned its attention to the cash bond markets.
Creating guidelines that can be easily adopted is a key success factor, and FPL wanted to ensure that the community was able to minimize the cost implications of transitioning to FIX. Many of the bond electronic marketplaces also offered derivatives trading and were looking at the recommended swap guidelines; therefore, FPL ensured wherever possible that the bond guidelines were consistent with those published for swaps, so the venues could benefit from the cross-asset synergies. It was also important that the guidelines supported the geographical differences that needed to be accommodated by variances in US and European products, as the trading venues are often global. As FPL is also global with a strong presence in both of these markets, it was able to attract participation in the group from experts with a strong knowledge of each market.
A key objective of the guidelines was to meet the needs of the real business processes already in play at the various venues. To achieve this goal, FPL actually addressed more than 80 current workflows separately, providing recommendations for how FIX could be used to support each practice (where necessary, this also led to the development of additional FIX functionality). Taking this approach, all dominant market models could be accommodated, and news of venues now adopting these guidelines is expected in coming months.
All of this will significantly change fixed income trading, and it won’t stop here. Now that the FPL group has produced guidelines for all core workflows, it has started to look at some of the less common trades and how they too could benefit from standardization. For example, although the swap guidelines provided recommendations for how a generic multi-leg instrument could be traded using FIX, it is now looking at different permutations of cross-asset trades within fixed income.
Additionally, FPL has just launched a new initiative that has come about due to the trading element of fixed income becoming more electronic and market participants now expressing a desire to automate additional elements of the trading process. A prime example of this is the administration that currently takes place to grant permission for a trading relationship to occur. As each trading relationship will need to be validated on Day 1 of the new SEFs going live, this is an initiative that could present significant efficiency savings for these markets.
FPL welcomes the participation of new member firms, as their fresh perspectives and ideas can prove invaluable. If your firm is interested in getting involved in FPL’s work in this space, please contact fpl@fixprotocol.org for more information. The evolving fixed income trading environment will also be one of the key areas of discussion at FPL’s EMEA Trading Conferenceon Thursday, Feb. 28.
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1 Comment to "Fixed Income: Playing by the New Rules":
John Harris
26 February 2013
As a long-time volunteer for FIX Protocol Limited who made significant contributions to its ability to support fixed income trading, I assure you that the most important phrase in this article is this: "In mid-2011, when representatives from the broker-dealer community in the fixed income space approached the non-profit FPL organization." That was the moment when FPL lost whatever innocence it had and sacrificed its integrity as an international standards body. These so-called representatives of the broker-dealer community had formed a cabal - I use that term in its literal sense, in that the membership was largely secret - hired a consultant, drafted the so-called "best practices" of which Ms. Baker speaks outside of normal FPL channels, and presented them as a fait accompli to FPL's membership. The known members of the group were also members of the Too Big To Fail club, and had strong financial interests in shaping the development of swap execution facilities to their liking, and preventing the emergence of all-to-all trading models whether in interest-rate and credit derivatives or traditional fixed income. The known members were all at the same time publicly known as active subjects of anti-trust investigations on two continents for their activities in the credit derivatives market. I objected strenuously and publicly at the time, asked in an open forum simple questions about the membership of this group and the process being followed that to this day remain unanswered, and eventually left the FIX community in protest.
Observe that this group and complicit FPL leadership, in defiance of good sense or reason, purported to develop "best practices" and industry standards for SEFs that had yet to be created, much less launched. How anyone could know what are the "best practices," or which among the various practices should be adopted as industry standards, from activities which had yet to be practiced at all, in businesses which had yet to be created, remains a mystery to this day.
I still use the FIX protocol in my business, but what this incident proves is that the industry either needs new guardians for its existing standards or else a new standards body altogether.