By David Tolman, Chair of Buy-Side Post-Trade Solutions WG, Professional Services, Greenline Financial Technologies, Inc.
About two years ago the FIX Trading Community Americas Buy-side working group identified post-trade processing for equities as a high priority. The initial motivation of the buy-side working group was to reduce the single points of failure in the typical current post-trade processes. As the tolerance level for post-trade inefficiencies is minimised, the industry is witnessing a determined drive to adopt free, open and non-proprietary standards as the platform on which firms can manage their operational risk and cost base. The strain on the industry’s post-trade infrastructure is expected to permeate further with increasing regulation, shorter settlement cycles and the recognition that there is no competitive edge in this space. Investment managers and broker dealers are focused on using mutually agreed standards to deliver higher efficiencies and lower costs.
In response the FIX Post-Trade Initiative for equities was started. Though initiated by the buy-side working group, the effort was quickly expanded to include the major sell-sides and related vendors. This has been a very significant industry-wide cooperative effort and has resulted in a documented set of “Guidelines” for equity post-trade processing via FIX. These guidelines are in the process of being implemented by major sell-sides, buy-sides and vendors across the industry. The guidelines conform to the FIX Trading Community FIX standard messages, but provide detailed best-practices for the use of the FIX messages and fields in the post-trade workflows. By following the guidelines parties need only implement once in order to perform post-trade processing with other counter-parties as well as being able to take advantage of value-added intermediaries as desired.
The trading workflow has the following basic steps:
1. Placement: Order placement by the buy-side (investment manager) and fulfillment by the sell-side (broker/dealer).
2. Allocation:
a. Allocation-Block match: The set of trades (the block) to be allocated is agreed upon between the buy-side (investment manager) and sell-side (broker/dealer).
b. Allocation: The investment manager allocates the block among one or more accounts and communicates this to the broker/dealer, along with the client settlement instructions. The result is the individual transactions.
3. Confirmation/Affirmation: The sell-side prepares and sends to the buy-side “confirmations” that document the final details of each transaction (e.g. instrument, side, parties). The buy-side then “affirms” the transaction back to the sell-side as well as transmitting the information, along with broker settlement instructions, to the client custodian. This is the legal contract.
4. Clearing: The affirmed transactions are communicated to the appropriate central clearing party (CCP) for clearing and settlement initiation.
5. Settlement: The counter-parties then settle the transaction by exchanging money and securities.
6. Reconciliation: The client or their custodian will reconcile the transaction data that they receive from the investment manager against the information that they receive from the broker/dealer.
The FIX post-trade guidelines focus on the Allocation and Confirmation/Affirmation steps. These are architected into two distinct stages so that there is the flexibility for the Confirm/Affirm stage to utilise different channels of communication for the Allocation and Confirmation/affirmation stages (which in the US would be a US qualified vendor). In addition the guidelines specify best-practices in these areas, to steps that facilitate downstream reconciliation.
Currently, the most common equity post-trade workflow utilises intermediary-vendor facilities that provide communication between counter-parties and matching. Because these facilities were designed and implemented when orders were still being placed through a variety of mechanisms (i.e. not primarily via FIX) they utilise different proprietary protocols and must provide complex matching and mismatch-resolution algorithms. Considerable manual intervention is required to resolve the frequent matching (block, confirmation, fees) and reconciliation issues. Now that FIX is firmly in place for order processing the post-trade workflow mechanisms can be redesigned to leverage FIX, in particular:
- The identifiers from the FIX placement and fulfillment messages can be used for exact block matching – potentially ambiguous economic matching is no longer required. The FIX identifiers in the Allocation Instructions can be used for Confirmation matching.
- The infrastructure and expertise built up to support the order processing can be directly utilised in FIX-based post-trade processing. Communication links and different protocols can be reduced, saving time and cost.
Also during the process of developing the “guidelines” several significant additional “opportunities” for improvement were identified:
- There is no defined process to insure exact reconciliation at the custodian so there are frequent issues.
- Settlement instruction management is complicated and requires significant buy-side processing and attention.
- Market specific fees are difficult to identify because they are aggregated and aggregation criteria are not always clear.
In order to facilitate value-add intermediaries the guidelines also include the interface architecture so that intermediaries can develop new services and buy-sides and sell-sides can take advantage of them without high costs of entry/switching.
The timing is right for this initiative, as is shown by the ongoing implementation across the industry, because FIX is now the primary mechanism for electronic order placement and this can be leveraged for significant improvements in post-trade processing. This has been a very significant cross-industry effort, building on many years of post-trade processing experience, and it has the potential for substantial industry-wide risk reduction along with cost savings, improved processing time and accuracy, as well as access to alternatives.
