A FIX to the Post-Trade World
President, Jordan & Jordan
At the FIX Trading Community event in Chicago on July 25, 2019 hosted by Itiviti at The Library at 190 South LaSalle, a panel of five professionals from a large asset management firm, a large bank and technology providers were surrounded by 50,000 volumes of law books, flanked by soaring Palladian windows that frame dramatic views of Lake Michigan and the majestic status of Ceres. How could a panel on Post-Trade stand-up in that environment? Well, the panel did not disappoint.
FIX Protocol has a strong history of 25 years of continuous expansion from equities trading to fixed income, FX, derivatives and as discussed on the panel, swaps. It has evolved from front office to post-trade allocations, confirmations and settlement and as discussed on the panel and announced in a press release one day earlier, the payment sector.
For the past several years, the FIX Trading Community, through the Post-Trade Innovation Subgroup, has been working together to address the often fragmented, costly and inefficient sector that is the post-trade space. At large banks, there are large teams of people manually matching and confirming expected payments between parties. These payments are what we call periodic payments; for example, a coupon on a swap, interest on cash collateral or a dividend. As described by one panelist, the new FIX messaging types is a "simple, flat way of bringing entities together through a common language and allows for a continuation of service."
What that means is firms can send and receive details on a specific payment, which is completed before there is any physical cash movement or remittance instruction given. With the new FIX message types, firms can confirm payments far quicker and efficiently, and in a messaging language that is consistent with other parts of their trade processing. For a large bank, the current platforms are expensive. It is an effective way of using standards and technology in the ongoing need to reduce costs in the trade process.
It will also add a new level of efficiency. Take for example, a swaps trade executed as a block, that has 100 parts that are allocated to different accounts. Those trades literally are entered manually in the trade booking systems by hundreds of employees entering the data. Banks moved some of those operations to less expensive locales in recent years to save money, but it is still a time consuming, manual process. With the new FIX message types, the bank can go directly through a vendor, or even directly to a client, where the allocations are confirmed automatically. For a bank processing thousands of trades a day, the new message types help the bank filter only those trades that do not match, also known as exception processing. That saves on time, staff and is far more accurate.
Another use case for the new FIX messaging types is applicable to payment breaks. If both parties are using the FIX messaging, the payment is confirmed and very likely will not be broken later. The other use case is on the interest on cash collaterals, where the new messaging will reduce the number of payments as many parties are rolling over positions. For periodic swap payments, interest on collateral and principal interest on bonds, payments are currently all manual processes handled by a bank's payment group. FIX can address that.
In short, the new FIX messaging types are taking straight-through-processing further down the trade lifecycle and trying to replace antiquated, fragmented methods that still use confirmation tools such as e-mails and voice. One panelist said the estimated cost for these manual processes for operational resources among the top 500 investment managers and global investment banks could be as high as $1 billion per year. The FIX messaging types helps standardize templates and formats that streamlines those processes dramatically. There is also a huge operational and financial risk reduction which can only help with the ongoing onslaught of regulatory pressures that firms are subject to.
Market participants are excited about the prospects for the new FIX messaging types. With trades today happening in milliseconds, market participants believe that the post-trade space is now poised to shorten the cycle. One panelist provided the example of a client that executed 25,000 trades a day that were settled in about two hours using available systems. With the new FIX technology, they did it in just seven minutes.
"And the client is happy because they can go home early," he said.
The new technology has already started to roll into testing phases with a number of banks, asset managers and technology firms. Phase I is expected to begin a rollout for active market participants in Q3 and will work as a gross payment-for-payment tool. But the new FIX message types are just the first step to a more efficient process and they can expand the uses further into providing more payment types and offering netting.
The expectation is that more broker dealers and asset managers will also want to utilize the FIX post-trade solution for their middle and back office environment. It is more accurate, less expensive and therefore supports the two major current focus areas of cost and regulation. Another clear benefit is that when the middle and back office can handle more volume it allows the business to grow. What is wrong with that picture!
While many firms will incrementally improve their post-trade process, others will assess how FIX can assist in other areas. One example is how the FIX message types will fit in with the growing integration of distributed ledger technology, and blockchain. While blockchain is often seen as an evolutionary development for certain aspects of markets and processes, FIX message types may serve a valuable function as simple on- and off-ramps for DLT solutions. FIX Trading Community is working on FIX standards for the crypto-assets space.
The Financial Times had an excellent Big Read Technology article last week on how the US, EU and China are competing to set industry standards. FIX is working with ISO on current and future standards. However, as the article noted, establishing facts on the ground through market share is likely a more effective method of dominating standards. The panel nicely summarized that FIX is the language of the full trading life cycle across asset classes.
It was the best library learning experience for me since college.