By Sassan Danesh, Co-Chair Global Fixed Income Committee, FIX Trading Community, Managing Partner, Etrading Software
During the past few years, the fixed income markets have moved increasingly towards greater electronic trading, facilitated by the growing acceptance of FIX as the global standard for trading fixed income products.
Working with the industry, the Global Fixed Income Committee (GFIC) extended the FIX Specification and established sets of Best Practices documentation for the use of FIX for the trading of fixed income products that are now being successfully adopted by the global fixed income community.
Looking to the future, work has begun to maximise cross-asset trading efficiencies as well as to automate the administrative messages associated with client enablement on OTC markets.
Further ahead, the challenges of MiFID II are also on the horizon, which will no doubt lead to additional enhancements to support the market’s needs.
Proprietary Past
Fixed income products have traditionally been traded bi-laterally over the phone between counterparties with little by way of electronic trading. Execution venues offering electronic trading for fixed income products have typically done so via a proprietary API.
Furthermore, independent software vendors (ISVs) providing connectivity solutions to the sell-side faced large challenges due to the bespoke connectivity and workflows in fixed income, which reduced competition and stifled innovation compared to other asset classes.
Ripe for Change
The regulatory changes over the past couple of years have been the catalyst behind the fixed income market moving towards a more exchange-like, standardised model as Dodd-Frank in the US and MiFID II in Europe mandate the migration of OTC swaps, Interest Rate Swaps (IRS) & Credit Default Swaps (CDS), onto regulated electronic trading platforms known as Swap Execution Facilities (SEFs) and Organised Trading Facilities (OTFs) respectively. Furthermore, Basel 3 and other capital adequacy requirements have led to the reduced use of sell-side balance sheets to support their fixed income trading businesses, which has reduced bond inventories and led to fragmentation of liquidity and increased costs.
With the industry increasingly focused on cost-reduction, finding ways to unify the trading landscape across asset classes is something that has been welcomed with open arms.
While the initial drive towards standardisation focused on swaps trading, in more recent times there has been a push to standardise electronic trading for cash bond products, such as US Treasuries, European Government Bonds, Gilts, European Credit, Supras, Agencies, US Corporates etc. The adoption of open standards across multiple asset classes is what allows industry participants to leverage and re-use IT infrastructure and realise the cost saving benefits that standardisation brings.
In 2011, a group of leading sell-side banks approached the FIX Trading Community to establish a working group under the governance of GFIC. This working group, comprised of sell-side banks, trading venues and software vendors, was tasked with adapting FIX to the new SEF requirements by creating a set of ‘Best Practices’ for the swaps market.
The technical subcommittee analysed the business workflows specific to the swaps market and discussed how the protocol could be best implemented by venues running either an RFQ (request for quote) or CLOB (central limit order book) trading model. The resulting document was released by GFIC in March 2012. Since then, the majority of soon-to-be SEFs have agreed to migrate their trading protocol to FIX and implement their trading workflows in a ‘Best Practices’ manner.
In 2012, this same group of banks asked for an equivalent set of ‘Best Practices’ for cash bonds. The result was extension to the FIX specification to support North American credit trading (to support two-step negotiation for spread trading) as well as US Treasury trading in the wholesale markets (to support auctions and workups). All other markets were found to be supported by FIX already and simply needed to be documented in a cash bonds ‘Best Practices’ documentation. The specification and Best Practices were released in February 2013.
The Future
This year, GFIC has been working to extend the coverage of the cash bonds ‘Best Practices’ to the following areas:
- Enhanced post-trade workflows (e.g. modification of allocation instructions)
- Support for multi-leg strategies such as bond v/s future
- Tiered price contribution
- Extending swap guidelines
Additionally, the group has launched an initiative to automate the process of enabling clients onto fixed income OTC electronic trading platforms. This is currently highly proprietary to each individual OTC market. It is often ad-hoc and manual, leading to unnecessarily high enablement costs and error rates. With the entitlement workflow likely to grow significantly with an increase in the number of electronic trading venues, these factors suggest the time is right to provide an automated and standardised approach to client enablement.
The TESI (Trading Enablement Standardisation Initiative) was launched this February, with the remit of defining an open industry standard for the permissioning of buy-side traders to trade with sell-side banks on OTC electronic venues. Once complete, these guidelines will explain how trading relationships can be established on an automated basis, thereby reducing operational risk and increasing the efficiency of trading enablement on SEFs as well as bond electronic trading venues.