Fixed Income Focus | Sassan Danesh
Key challenges The process of creating the recommended FIX guidelines involved successfully overcoming a series of issues:
Collaboration Given the prevalence of proprietary connectivity protocols in fixed income, many trading venues were not used to the idea of collaborating with their competitors to establish a global standard for the benefit of the community. FPL is structured as an independent and neutral industry-driven organisation, bringing together market participants to address the business challenges impacting the trading community through the use of standards. These factors were critical in reassuring stakeholders that a suitable forum existed for discussing the technical challenges and arriving at a set of guidelines that would deliver industry-wide benefit, independent of any given venue or broker.
Scope
The fixed income markets comprise a multitude of individual product types, from government bonds to high yield instruments and also include derivatives such as IRS and CDS. Trading is global in nature, with regional differences. The FIX guidelines were able to address this large scope due to FPL’s global presence and diverse membership, which includes buy and sell-side firms, trading venues, vendors, regulators
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and industry associations. This broad membership base of firms from across the world enabled the guidelines to benefit from the participation of experts with a strong knowledge of each of these markets.
Relevance
Given that trading venues already had existing proprietary connectivity implementations, a key objective of the initiative was to ensure that the FIX guidelines would capture the existing established market practices. To achieve this goal, FPL listed over 80 different business workflows currently used in the industry and provided recommendations for each workflow individually, showing how FIX could support that specific practice (where necessary this also led to the development of additional FIX functionality). Taking this approach ensured that all dominant market models were accommodated in the FIX guidelines.
Adoption
One of the success factors for the initiative was ensuring that the FIX guidelines could be adopted easily and to minimise the cost implications of transitioning to FIX. Many of the bond electronic market places also offered derivatives trading. Therefore, FPL ensured that wherever possible the bond guidelines were consistent with those published the previous year for swaps, so the venues could benefit from the resulting
cross-asset synergies. The guidelines also benefited from the use of FIX in the listed derivatives space, which allowed market participants to leverage their existing investments in FIX infrastructure from these other asset classes. As a result, many venues have started to adopt these guidelines and more are expected to announce their support in coming months.
Benefits
This work is now yielding large benefits to the industry, by helping to meet the implementation challenges of new regulations. To name a few: The Dodd-Frank Act in the USA will result in the establishment of new SEFs; this is likely to generate a high demand for new fixed income connectivity. Already, many brokers and multiple SEFs have announced that they will be adopting the new FIX guidelines, successfully overcoming the original implementation and connectively challenges feared. Basel III is resulting in
brokers holding less bond inventories, which in turn is causing increased fragmentation in the industry. The result is a proliferation of new electronic bond markets attempting to usurp the traditional role of the broker. These new venues require new connectivity from industry participants to ensure efficient price discovery and sourcing of liquidity across the market – a requirement that is best met through electronic
Best Execution | Spring 2013
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