Fixed income trading focus : Trading platforms : Gherardo Lenti Capoduri

July 16, 2017

TRADING PLATFORMS ARE CHANGING MARKET STRUCTURE.

Gherardo Lenti Capoduri, Head of Market Hub at Banca IMI explains the promise of electronic trading platforms in the new regulatory world order.

While the industry has been grappling with the fallout of the financial crisis, there has been a plethora of trading platforms looking to capture greater market share with a “one-stop shop” execution model. Although their aims are similar in terms of adding to the liquidity proposition across the trading spectrum, they each have their own brand of innovative technology and trading protocols.

Despite the ensuing fragmentation, these platforms play an important role as part of the ongoing electronification trend of markets as well as being a key component in helping financial services firms meet the incoming MiFID II transparency requirements. For example, it will be more difficult to do voice block trading without impacting the market price. This is likely to accelerate the number of smaller tickets and lead to greater automation as these orders are passed through a trading platform.

This disruptive market structure landscape is not easy for sellside firms who historically have been on the other side of a trade for their core clients. However, the stricter regulatory environment, especially the more stringent Basel III requirements, has elevated inventory management costs and created a re-think of the traditional “client-sales-trader” business model. The sellside, for instance, is reshaping its role towards a more risk-averse agency model that supports the traditional model and provides an array of compliant services as well as a more efficient source of liquidity.

Buyside firms, for their part, are also contemplating their modus operandi particularly against the current bullish market trends and new private capital inflows. As they may no longer be able to count on their sellside colleagues to provide as much liquidity as in the past, they are increasing their overall trading flow as well as becoming multi-asset trading advisors in order to find liquidity and design strategies for their portfolio managers.

Trading platforms are also viable solutions for the never-ending search for liquidity. Key features for the platform to attract liquidity are:

• Stable critical mass of trading flow: it is crucial for a trading platform to be used by as many financial institutions as it can onboard to create critical liquidity flows and an efficient network of counterparties;

• Universal trading model: in order to meet the various needs of sophisticated and technological market participants (e.g. client-to-multi-dealer request for quote, chat, all-to-all, anonymous auction) and the possible combination of B2B2C, D2C and inter-dealer broker approach;

• The participants on the platform should be as varied as possible (liquidity may come from everywhere: asset managers, mutual/hedge funds, investment banks and others);

• “Plug-and-play” solutions for a wide range of client execution management systems (EMS). It should also offer a greater degree of automation and lower latency;

• Data mining and big data: storing and analysis of data with the possibility of building automatic reporting for business solutions and transaction cost analysis (TCA);

• Supporting the financial intermediary’s compliance with regulation: data reporting, evidence of best execution, and bond liquidity among others;

• Opens the door to a wide range of financial instruments.

The next step

There are several different initiatives being developed that will further facilitate the process such as information/data aggregation tools which will help dealers set the deal on the axed instruments, in particular on more illiquid bonds. In addition, all-to-all trading protocols, as well as central limit order books, have been gaining traction. These are particularly popular in Italian markets, which are home to the traditional trading model for regulated markets and MTFs, as well as SOR systems acting as liquidity aggregators in a fragmented markets environment. It enables participants to find latent liquidity in a deeper pool of liquidity.

The trend that we are witnessing in Italy is that trading venues are adding RFQ protocols to their traditional CLOB model, while in other parts of Europe, where the RFQ model has been central for many years, new electronic platforms are building protocols based on an all-to-all model.

The introduction of different waivers across European countries may also affect the choice of future trading solutions. From a trading platform point of view, the European landscape may not have a level playing field and this will create some opportunities.

Conclusion

In this regulatory-laden environment, market participants will have to work twice as hard to comply but trading platforms have started to provide concrete solutions to ease the burden and address market participants’ specific needs. However, these solutions are still quite fragmented and there is no ‘one-stop-shop’ platform yet.

In the foreseeable future, we might witness a merging of ideas and technologies across platforms, which could provide an answer to the fixed income markets’ liquidity pursuit.

©BestExecution 2017

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Viewpoint | MiFID II & data | Joe Turso

Ian Rycott

July 16, 2017

SEEKING HARMONY.

Joe Turso, Vice President of Product Management for the SmartStream Reference Data Utility spoke to Best Execution about the data challenges posed by MiFID II.

What do you perceive as the greatest challenge associated with MIFID II?

As a reference data utility (RDU) we are very focused on the harmonisation of data. We have seen several significant differences in the classifications of data that cause challenges in meeting pre- and post-trade reporting.

Can you give us some examples?

The European Securities and Market Authority (ESMA) has adopted three-tier taxonomy to drive transparency-reporting requirements: asset class, asset sub-class and sub-class. Although the first two levels are similar to many existing industry taxonomies, the third level is more granular, specific and challenging. It was originally anticipated that existing classifications schemes such as the Classification of Financial Instrument (CFI) Code could be used to derive the ESMA classifications, but it has become apparent that such mapping exercises lead to major gaps.

For example, securities where we find differences between ESMA and CFI include:

• Interest Rate Derivatives – IR Futures, IR Options, Swaptions;

• Equity Derivatives – Swaps, Portfolio Swaps;

• Commodity Derivatives – Energy Future, Options, Swaps;

• Credit Derivatives – Single Name CDS, CDS Index Options;

• Financial Contracts for Differences (CFDs) – Commodity CFDs.

RDU has adopted a methodology to derive the ESMA classifications based on both sourced and manually entered data. Data provided in the ESMA RTS 23 Financial Instruments Reference Data System (FIRDS) feed will be the primary source as this includes many of the necessary fields including the CFI Code. However, there are data points not covered in this feed, which we will source directly from the trading venues.

The ability to reconcile data across CFI codes, ESMA and trading venues is an example of harmonisation of data.

A key element of MiFID II is the concept of Trading On a Trading Venue (TOTV). Is there clarity on how TOTV should be supported?

ESMA has recently provided new guidance on this concept of TOTV, which requires using RTS 23 fields to reconcile an OTC security to a security trading on a listed venue. Implementation of this approach though has some significant challenges, such as the recommended fields are CFI codes and free form text fields. The RDU, as well as other industry participants, has commented to ESMA that using these fields for reconcilement can dramatically reduce the number of securities that match and this can lead to under-reporting. We expect ESMA to provide further guidance and refine their TOTV methodology.

We are six months away from this regulation being implemented and it appears there are still open requirements. How are you and your clients managing change?

We had been very committed to providing clients with a working service and a test environment by June. Our clients understand that ESMA requirements are still evolving and there is still no test data. In the meantime, we have been working with our clients to develop a set of “test” data that can be used to exercise the functionality of our service. We have also built our services based on assumptions, which we constantly refine as we receive more clarity from regulators. A good example is TOTV, where we have defined a logic set to calculate “Best Fit” ISINs (International Securities Identification Number)

I think clients are fine with this incremental approach because it builds confidence in our solution and helps progress their internal build.

What role do you see the utility model playing in MIFID II?

As I mentioned before I believe that there is a need for a utility function to harmonise and integrate data across sources. It also supports pre and post trading reporting, which requires a combination of sources including ESMA, the Association of National Numbering Agencies (ANNA), Global Legal Entity Identifier Foundation (GLEIF) and trading venues. The same challenges related to classifications between ESMA and CFI code also exist between ESMA and ANNA regarding OTC transactions.

ANNA has created the Derivative Service Bureau (DSB), which has been designed to provide ISINs for OTC securities. The fundamental problem is that ESMA classifications don’t align with ANNA, which is based on the International Swaps and Derivatives Association (ISDA). This makes it difficult to enrich an OTC product with ESMA liquidity and threshold values. A utility can play a role in the alignment of CFI code, ESMA and ANNA as these regulatory agencies try to align their data standards. We have invested significantly to build rules to manage these discrepancies and to provide clients with a working service they can test.

You mentioned before the need to harmonise data across with trading venues as well. Can you please explain that requirement?

The requirement relates to derivatives. Essentially, ESMA will be providing its FIRDs data on a T+1 basis. In calculating TOTV it is important to have a complete universe of products to be able to reconcile against OTC products to determine pre and post trade reporting on a T+0 basis. As a result, we are sourcing data directly from trading venues to ensure that clients have a complete universe of listed derivative securities to match against their OTC securities.

Aside from the issues of timeliness, we are concerned about the data quality associated with derivatives, including those listed on exchanges. Historically, the industry has struggled with complete and accurate data for derivatives given the complexity and lack of standards for this asset class. Therefore, we have gone directly to trading venues to ensure our clients have a comprehensive set of cleansed derivatives to support their MIFID II reporting requirements.

What do believe the current state of readiness is within the industry?

We anticipate that open requirement issues will be addressed by the regulators over the next few months. However, our concern is the lack of test data and plans for a co-ordinated industry test. We think the industry could benefit from co-ordinating testing across systematic internalisers (SIs), approved publication arrangements (APAs), approved reporting mechanisms (ARMs,) ESMA and market data suppliers. This approach would help build confidence in the process. Irrespective of testing, the wild card is still whether the industry as a whole can manage the volume and performance required to maintain liquidity in MIFID-regulated markets once the new reporting rules go into effect.

©BestExecution 2017

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Viewpoint : Trading technologies : Rishi Nangalia

Ian Rycott

July 16, 2017

FACING EVOLUTIONARY CHALLENGES.

Rishi Nangalia, Global Head of Exchange Traded Instruments (ETI) Trading at Thomson Reuters, talks to Best Execution about the need for a modular approach into today’s evolving trading technologies eco-system and the ongoing effort to provide leading Execution Management System (EMS) capabilities from REDI, integrated in its flagship desktop, Thomson Reuters Eikon.

There has been a lot of talk about fund managers moving to multi-asset and cross-asset trading, how do you see this being implemented and developing?

The distinction between multi-asset and cross-asset class trading is an important one. A single system, supporting many asset classes, does not mean that those asset classes can be cross traded. Multi-asset class trading systems, supporting exchange-traded products, have existed for a very long time. In our system equities, options, futures co-exist in one system; the pieces that are separate are FX and fixed income, which have always had different systems and market microstructures.

The convergence has begun especially with the growing move towards electronic trading. It is not the exchange-traded business going multi-asset that is driving this new wave of convergence, it is the fact that participants want to trade exchange-traded products, FX, and OTC products, using the same workflow and the same ‘infrastructure’. It doesn’t mean the same trader will be trading all the asset classes. It simply means that the buyside want to consolidate their systems and finally, as fixed income can, to some degree, go electronic, they want it to be on similar systems, using similar vendors, if possible. It is cheaper and more efficient for them to support fewer systems and eventually build cross asset functionality; things that already exist in REDI for exchange traded instruments.

You need good multi-asset trading before you can go cross-asset, and some of the processes only exist where the asset classes have the same trading style and can rely on the same infrastructure. Cross-asset trading is now starting to develop and while systems like ours achieve this synthetically, users are now wanting cross-asset trading in an automated fashion.

What are the drivers pushing for a combined OMS/EMS and how do you see this developing?

There has been a lot of discussion about the convergence of OMS and EMS for a long time, but no real examples exist today. A couple of companies that own EMSs and OMSs have delivered them as a single vendor but there is not a single company that has delivered a truly combined OMS/EMS to date.

Our approach is to let the client decide and drive this convergence through efficient deployment and seamless workflows. We have an open platform approach; and we have integrated with most vendors and are now building on that with the platform strategy. The idea is to deploy vendors’ software, and let the client choose to have a single experience, but it doesn’t mean it is one product. The client can choose a modern OMS or EMS and expect the same data sources and for systems to interact with each other in a seamless manner. We are trying to solve the problem a little more exponentially, rather than trying to create some new “do-everything” product.

The underlying driver is the desire for a single vendor, a single support structure and a single deployment and data model, but if participants can solve these practical problems, they would realise there is very little reason to have a single product that does it all. We know that monolithic products, that claim to do it all, have many issues and so we are moving away from a world of monolithic products to a world of modular products that the client puts together.

What has been the greatest challenge in developing these systems?

Different asset classes have different market structures and clients have very different needs, depending on client-type, and regional differences. Furthermore, our industry has a poor track record of collaboration. No single platform can do it all and no single company can be very good at every asset class, globally, for the entire lifecycle. You could be creating the lowest common denominator product and miss best-of-breed specialisation. For example, while OMSs can capture the terms and conditions of every complex asset class, they still need to trade each asset very differently and there is not one system that can handle the different execution styles.

An eco-system can be created by using modules and partners that provide different pieces, where clients can put together a unique solution as client needs evolve.

What functionality is the buyside looking for today?

The buyside industry is under pressure to generate returns over and above the standard benchmarks with fewer people and more regulation, all of which is driving the demand for greater electronification and cost efficiencies.

Data and analytics are becoming more in demand, across asset classes, particularly in Europe with the imminent introduction of MiFID II. It is not only in TCA, buyside participants now want a common repository of what they have traded, how they traded and how well they traded. They are looking for performance statistics, real time monitoring, and pre-trade, during-trade and post-trade analytics, end-to-end, across asset classes – if you can’t measure it, you can’t improve it. Our focus is on building real-time performance monitoring as well as comparing historical and current performance. The value of this kind of analysis, across the asset classes, is growing.

What developments and additional challenges lie ahead in this space?

The biggest challenge for the buyside is paying for innovation and technical development. Although some of the very large firms have built their own technology, typically the buyside relies upon vendors and the sellside, and for them to adopt multi-asset or MiFID II requirements or to improve their workflow, they need someone else to drive the development. If the buyside is not willing to pay for it explicitly, they are at the mercy of the vendors who will do it at their own speed. And to add, their business models are under pressure with the move from active to passive management.

The added complication is many vendors don’t get paid by the buyside alone, but rely on commercial models that get paid through various other arrangements. There is a very interesting challenge brewing around who funds this evolution, with the vendors looking to grow, the buyside looking to cut costs, the sellside paying for it but not wanting to, and then MiFID II presents new rules around inducements and payments, and that further adds to this complexity of commercials. This is going to be one of the biggest issue going forward for innovation and development in our space.

©BestExecution 2017

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Viewpoint : Trading technologies : Andrew Pheifer

Ian Rycott

July 16, 2017

THE FUTURE IS INTEGRATED.

By Andrew Pheifer, Director, Product Management, Eze Software

“If there were a fluid way to work and hand off trade information to various departments smoothly and seamlessly, financial operations would flourish.” That is the vision that’s driven Eze Software since the advent of RealTick EMS in 1985, and Eze OMS a decade later. Today that dream is much closer to reality – but the buyside ecosystem has changed as well. Gone are the debates of whether an order management or execution management system would be best to handle key investment workflows. Rather, buyside desktops have adopted both OMS and EMS, and the goal is harmonising interaction across all of the various parts of the investment process.

A recent Greenwich Associates survey¹ of buyside traders found that at the top of the wish-list for OMS improvements was easier integration with other tools. This was also at the top of the list for EMS users, who want to maintain their focus on liquidity analysis and identify opportunities – after all, few traders want to swivel between systems to collect and cross-check data. This is hardly surprising. Given the pace of the current trading and compliance environments, there is relentless pressure on investment managers to streamline their processes. For instance, MiFID II best execution requirements mean that buyside firms should be taking “all sufficient steps” to monitor the market for potential issues that may affect execution quality, so that they can act on information quickly and demonstrate how and why they make execution decisions. Handling compliance and trading processes with distinct approaches or altered workflows across multiple systems is not appealing in this scenario.

On a traditional trader’s desktop, the OMS typically houses compliance and allocations tools, and there’s at least one EMS for trade execution. Having to manually navigate between the two environments can cause inefficiencies and delays to traders, while compliance officers have worried that their firms are trading blind. What the buyside wants is an integrated platform that does everything a classic order management system (OMS) can do, plus everything today’s increasingly sophisticated EMS systems can do.

In the last decade, there have been multiple imperfect approaches to integration; while these approaches have provided some value, none has achieved the value possible through a bonafide integration between best-in-class systems. Here are some of the most prevalent attempts we’ve seen in the marketplace:

FIX-only integration: This is the longest-running setup (see Fig 1). The user creates an order in the OMS, runs pre-trade compliance checks and does allocations processing, then stages an order via FIX to the EMS, then executes the order through the EMS. The problem with this type of setup is having two applications open on the desktop to complete one trade – and constantly having to swivel between the two. If the user has to change the order, he’s swivelling back from the EMS to the OMS, rerunning all of the compliance checks, doing a cancel/correct out to the EMS and executing from there. Such a workflow is neither efficient nor cost-effective: there are multiple potential parties involved in the process, introducing potential for latency and mistakes.

OEMS products: These products fall into one of two camps. Some are traditional EMS products that feature layered OMS-lite compliance functionalities such as firm-wide restricted lists or fat-finger rules, but miss the more robust features, such as fund-specific exposure rules or global ownership disclosure checks. On the flip side, there are traditional OMS products with EMS-lite capabilities. These have rich compliance features and some EMS functionalities such as level 2 data and a watch list, but more robust functionalities like enhanced list trading, pairs trading, or conditional orders aren’t available. Neither of these scenarios has thus far been able to bring together best-of-breed functionalities in a truly integrated fashion.

One-Off Custom Solutions: These are specific integration scenarios where clients say, “I’d like to integrate System A with System B, I want to do it in the cheapest possible way and in the fastest time possible.” These systems could be proprietary, or off-the-shelf. These scenarios by definition are one-off attempts to stitch together two systems, so they don’t easily adapt to changing needs or market conditions, and they ultimately become difficult to maintain over time.

A better way

It’s clear the time has come for a truly versatile, integrated solution. Here’s what an elite EMS/OMS solution should feature:

• Robust functionality. A trading desk seeking a single platform for order management and execution needs is looking for robust features such as advanced compliance and modelling capabilities of the OMS, and versatility, reach and execution capabilities of the EMS. ‘Lite’ add-ons won’t cut it.

• Streamlined order creation. The entire process from trade entry through execution should occur in one application with no swivel. This means pre-trade and intra-day compliance and position checking should occur without the user having to leave the EMS.

• Allocation scheme and strategy selection should also be accomplished without the user having to leave the EMS.

• Data that’s fully synchronised throughout the trade lifecycle without the user’s intervention.

• Ability to support multiple strategies as the firm grows. That might mean partnering with multiple data providers and third-party specialist systems to provide extensive support for a wide range of markets, asset classes and strategies.

• Hands-on support and responsive development. Owning the source code, co-ordinating release cycles and development, and trouble-shooting and monitoring across a single support team are key conditions that can make or break delivery of a truly integrated solution.

As Analyst Spencer Mindlin of Aite Group said in a recent white paper², “OMS/EMS integration will likely become the benchmark, not the exception, as heads of trading desks realise they are losing their trading edge and as compliance departments realise existing and older solutions expose the firm to unnecessary risk.” But only those technology providers willing to invest in what it takes to build a truly integrated platform will deliver. n

1. www.greenwich.com/fixed-income-fx-cmds/buyside-goes-outside-omsems-platforms

2. www2.ezesoft.com/whitepaper/EMS_OMS

©BestExecution 2017

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Market Opinion : Derivatives trading : Regulatory divergence/convergence : Jannah Patchay

Ian Rycott

July 16, 2017

WHO SEES THE BIG PICTURE?

By Jannah Patchay, Director, Agora Global Consultants.

We live in interesting times indeed. Between Brexit, the recent UK election, and the ongoing political events unfolding in the US, it’s often hard to keep track of what or who is coming or going. This confusion extends well beyond the realm of political rhetoric and into the world of OTC derivatives markets, particularly with respect to the ongoing global regulatory reform process.

On one level, market participants are scratching their heads over the big picture questions: will the US remain committed to the G20 reform agenda? Will the UK crash out of the EU and Single Market in two years’ time, leaving the City alone and adrift in the Atlantic, short of trading partners on either side? Will the City be transformed into a sort of Cayman Islands of the North Sea, if you will – a thriving regulatory low-touch Mecca attracting opaque business structures and money of indeterminate origin from all corners of the Earth?

At another level, financial firms must make immediate plans based on the current reality. Chief amongst these for many firms is compliance with MiFID II; even a full exit of the Single Market would come too late for the MiFID compliance deadline of 3rd January 2018. And in any case, given the UK’s continued membership of the G20, plus the FCA’s extensive involvement in definition of MiFID II to date, and quite irrespective of the UK’s presumed intention to obtain a determination of third country equivalence for its financial markets regulatory regime, it is unlikely that a full retreat from the (increasingly complex and not altogether logical) EU financial markets regulation will be on the table anytime soon.

Against the backdrop of this pandemonium, events unfolding in the US Commodity Futures Trading Commission (CFTC) are, relatively speaking, stately, measured and well-planned. Since taking office in January, the new president has committed to ushering in a new era of light regulation focussed on free enterprise and economic growth. The Dodd-Frank Act, a potent symbol of political over-reach for many, has been targeted for repeal. Fortunately for the CFTC in particular, and the continuation of stable global derivative markets in general, the acting CFTC chairman, J. Christopher Giancarlo, has a plan. Giancarlo has for some time been the dissenting CFTC commissioner, a voice of some moderation in an agency much given to extension of its regulatory oversight and reach over the past decade. And in a rare display of transparency and accountability, his plan is available for all to ponder. In 2015, Giancarlo authored a white paper entitled ‘Pro-Reform Reconsideration of the CFTC Swaps Trading Rules: Return to Dodd-Frank’. In it, he clearly set out those aspects of the CFTC’s Dodd-Frank implementation that he believes to be flawed, with compelling arguments to back these opinions, and proposed alternatives. In many of Giancarlo’s speeches since taking on the mantle of Acting Chairman in January (a position that is widely expected to be made permanent), he has subsequently reiterated his plan – to implement the alternative path set out in his white paper.

In the EU, political pressure has been increasing over the past eighteen months to implement the Derivative Trading Obligation (DTO) as soon as possible. Market participants had generally expected that this provision of MiFID II, which limits trading of certain cleared instruments, where these are deemed sufficiently liquid and available, to EU-authorised trading venues or their third country equivalents only. This is not unreasonable, given that the G20 commitments originally envisaged that all members should have trading obligations in place, alongside other transparency and execution reforms, by the end of 2012. After all, other jurisdictions already have their own (albeit often limited or incomplete) versions of the trading obligation in place, including the CFTC. Trading of eligible cleared mandated swaps that are ‘made available to trade’ has been mandated on SEFs since October 2013.

However, there is a well-known regulatory conflict potentially arising, due to the cross-border nature of derivatives trading, where a single transaction might be subject to both the MATT and DTO determinations and therefore be executable on neither without leading at least one counterparty to be in breach of their local regulatory obligations. Again, other jurisdictions such as Singapore, Hong Kong and Australia have found mechanisms for managing these conflicts in a sensible and co-operative manner. Furthermore, the CFTC and the European Commission have ostensibly been in discussions on the subject of regulatory equivalence since 2013 (although the EU does not help itself by having an extremely rigid and inflexible set of criteria for making equivalence determinations, including a demand for complete reciprocity and jurisdictional deferral that sits at odds with many other regimes and has already contributed much pain to the equivalence process for CCPs).

In light of this, two of Giancarlo’s planned focus areas may be of particular significance to European market participants in the run-up to the DTO implementation. Firstly, Giancarlo believes that the CFTC over-stepped its remit when defining the detailed SEF rules, among them, the controversial ‘all-to-all’ rule as well as some of the more detailed and prescriptive rules on the trading models to be adopted by SEFs. The requirement for all SEFs to operate an order book, for requests for quote (RFQs) to be sent to a minimum of three dealers, and for trades agreed off-SEF to be exposed to other SEF participants for fifteen seconds before execution are all singled out and criticised for their seeming lack of serving any useful or beneficial purpose, either regulatory or commercial. Since 2013, SEF rules have effectively fragmented liquidity between US and non-US pools – an outcome that Giancarlo observes to be unwanted, and certainly one not conducive to global market resilience. To this end, he proposes a simplified set of SEF rules and obligations, minimising interference with standard, well-functioning market structures. Removal of these prescriptive requirements may help pave the way to an equivalence determination, as in the EU, MiFID II is more concerned with organisational requirements, governance and transparency than it is with the minutiae of trading protocols.

Secondly, Giancarlo is a strong advocate of cross-border comity and of regulatory convergence at the level of principles and outcomes as opposed to implementation details. As such, he has expressed enthusiasm for increased US participation in standards-setting bodies such as IOSCO, and in global efforts to agree on solutions to cross-border regulatory challenges. This open attitude and willingness to recognise other regulatory regimes sits at odds not only with current US political sentiment, but also with Giancarlo’s predecessors who were all most keen on retention of CFTC jurisdiction wherever possible, so it will be interesting to see how this plays out in practice. Given the EU’s inflexibility on regulatory equivalence, however, having another party coming to the negotiating table with a more collaborative outlook may make all the difference to ultimate success of the DTO, over the next 6-12 months.

©BestExecution 2017

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Fixed income trading focus | Beyond MiFID II | Sassan Danesh

Ian Rycott

July 16, 2017

TRADING, POST MiFID.

Sassan Danesh, Co-Chair, OTC Products Committee, FIX Trading Community outlines what he sees are the priorities for buyside global heads of trading in a post-MiFID II landscape.

With preparation for MiFID II now well and truly underway, this article looks at three trends that will likely pre-occupy buyside trading desks in 2018 once MiFID II implementation is out of the way:

• The continued growth in market data costs;

• Efficiencies in bilateral OTC trading;

• Electronification of the primary markets.

Addressing the market data cost challenge in fixed income

The continuing electronification of fixed income has resulted in the availability of a diverse set of market data for the buyside, which has improved price discovery and provided the basis for rudimentary forms of transaction cost analysis within fixed income. However, alongside these benefits is the ever-growing cost of connecting and consuming this data from a heterogeneous set of sources of varying quality and formats.

The anticipated explosion of additional market data, as a result of MiFID II’s pre and post-trade transparency regimes, will exacerbate this challenge, making the cost of consuming the market data a significant challenge for the buyside.

In order to assist market participants with this cost challenge, the FIX Trading Community has already published best practices for the dissemination of fixed income market data via trading venues, thereby allowing for streamlined and standardised publication and consumption of trading venue market data. Furthermore, work is now very advanced to extend the FIX Protocol for the standardised dissemination of MiFID II post-trade transparency data from Approved Publication Arrangements (APAs). This work will assist in constraining the additional growth in costs resulting from the need to consume the new APA market data.

However, one area that has not been standardised to date is the supply of market data direct from market makers to the buyside. A direct sellside to buyside standard offers a step-change reduction in the cost structure of the industry by simplifying and streamlining the market data ecosystem. To achieve such savings requires the standardisation of the diverse publication formats used by individual market makers. It also requires the vendors that are part of the market data ecosystem to adopt the standard, which in turn may require a change to their business models to focus pricing on value-added services and away from the provision of proprietary formats and connectivity. Such a change has the potential to spur additional innovation across the entire industry value-chain resulting in increased benefits to the buyside.

Efficiencies in bilateral OTC trading

The rise of electronic trading in fixed income has resulted in significant benefits to market participants, in the form of straight-through-processing (STP) and speed of execution. However, these benefits have been gained mostly in odd-lot trading on trading venues. Block trading is still predominantly occurring over the counter (OTC) via bilateral discussions with individual market-makers via voice or IM chat. This is perhaps not surprising, given the illiquid nature of many of the products, which increases the need for additional pre-trade information leading up to the execution.

This leaves a challenge for the buyside to streamline and automate bilateral OTC trading, especially given the additional burdens that non-electronic flows will face post-MiFID II with respect to stringent record keeping obligations across the entire trade lifecycle.

The FIX Trading Community is at the forefront of the electronification efforts within fixed income, having already published best practices for electronic trading via trading venues which has resulted in streamlined connectivity to trading venues. These best practices also cover the electronic trading of block-sizes on venues.

However, existing standards leave out the substantial volume of OTC trading that takes place bilaterally. There is large scope for electronification of such trading, to streamline the cases where the buyside choose to trade bilaterally rather than through an MTF or OTF. An agreed standard for OTC trading has the potential to bring all the efficiencies of STP to OTC trading across the entire lifecycle of the trade.

Fortunately, some of the pieces required to implement a standardised and streamlined electronic OTC workflow are already in place. In particular, the provision of pre-trade IOIs in a uniform manner already exists as a FIX standard. Therefore, the key remaining requirement is to establish a standardised approach for the electronic exchange of messages required for the trading phase of the OTC workflow.

By maintaining the OTC nature of existing workflows but migrating the interaction onto electronic channels, such an approach has the potential for a radical reduction of industry costs through increased operational efficiencies in OTC trading.

Electronification of primary markets

MiFID II is resulting in wholesale change in secondary market trading, but the regulation has mostly bypassed the primary markets which have not faced significant change to their existing manual processes. However, the increased size of the primary markets relative to secondary markets in recent years, together with the relatively manual processes that exist in this space today, provide opportunities for the buyside to streamline their primary workflows through increased electronification.

FIX Trading Community members have been at the forefront of establishing standards in this space, albeit with an initial focus on equities issuance. Indeed, one or two vendors have already started to work with these standards to implement electronic workflows in fixed income that allow the buyside to interact with existing systems used within the Debt Capital Markets businesses of the investment banking community. This early work is gathering momentum within the end-user community as it demonstrates the real benefit that such electronification can bring to the buyside.

With the progress towards the implementation of electronic workflows in the primary markets now well established, it only remains to be seen how quickly other vendors and end-users will participate in establishing a broader ecosystem of stakeholders to drive innovation and diversity in this space.

Conclusion

The three areas described in this article will likely be of interest to the community once the current focus on MiFID II concludes in early 2018. The common theme across the three areas is the role of standards to drive additional efficiencies in fixed income, once regulatory implementation for MiFID II is complete.

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For Asia Firms, Becoming “MiFID II Friendly” Starts With Getting An LEI

GlobalTrading

July 11, 2017

By Gary Stone, Market Structure and Regulatory Policy Strategist, Bloomberg

MiFID II is much more than just responding to the EU’s new inducement rules.

The Markets in Financial Instruments Directive (MiFID) II does not place direct obligations on buy-side or sell-side firms operating in Apac. However, because it touches nearly every aspect of their EU customers’ investment workflow, MiFID II will indirectly affect Apac firms in ways traders, operations and compliance managers may not realize.

Apac firms that do not understand MiFID II and its new standards of transparency may place themselves at a competitive disadvantage. In addition, firms that do not help their EU customers with MiFID II may risk losing their business.

In many cases, the first step for Apac firms to become “MiFID II friendly” involves obtaining an LEI, or Legal Entity Identification number. The LEI is a unique 20-character, alpha-numeric ID based on the global ISO 17442 standard developed by the International Organization for Standardization. Each unique ID is associated with a single legal entity. Similar to the way people have a passport or national insurance ID in the EU, firms are identified by the legal entity identifier.

The LEI became the EU’s standard customer/counterparty identifier under the European Markets Infrastructure Regulation derivatives reform. The LEI concept has subsequently become hardwired into EU legislation, including MiFID II and the Market Abuse Regulation. The code is how EU firms are required to identify their EU and non-EU relationships in their regulatory reports.

The European Securities and Markets Authority’s guidance on LEIs is clear: EU firms’ counterparties are required to have an LEI before they can start transacting with each other. As a result, the LEI has become part of the EU’s new Know Your Customer and on-boarding process.

If you’re an Apac sell-side firm that executes EU customer orders in Apac financial assets, or a buy-side firm that invests in EU financial instruments or has EU investors, then there are three things that you can do to improve your competitive position by helping your EU relationships become MiFID II compliant:

Obtain an LEI through an accredited issuer.
Ask your EU counterparties, “How is MiFID II changing your business?”
Implement answers to the question, “Besides getting an LEI, what else do you need me to do so you can comply with MiFID II?”

For the last year or more, EU firms have been extremely focused on MiFID II compliance related to their relationships within the EU. Most of the discussions about the extraterritorial effect of the directive have focused on research compliance and management. MiFID II places more than a dozen other new obligations on EU investment firms related to order management, best execution, trade surveillance and reporting, just to name a few.

With the 3 January 2018 implementation date rapidly approaching, Apac firms should strike up a conversation with their EU relationships about how they can be more MiFID II friendly now.

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Alternative Routes For Block Trades

GlobalTrading

July 11, 2017

By Vaibhav Sagar, Senior Technology Consultant, Open Systems Technology

A tech consultant reviews Eastpring Investment’s Sanjay Awasthi’s recent article about block trades.

The article by Sanjay Awasthi identifies the importance of block trade routing and examines various circumstances where it is conducted. It is particularly successful in making the following points:

Block trades, if executed correctly, provide optimal execution prices for liquid and not-so-liquid securities that are either widely- or narrowly-held by institutional investors.

A given block deal quantity could be greater than multiple days of average daily turnover volume (ADTV) of widely/narrowly held securities, hence the need to broker a deal via block trade.
The whole process of exploring undiscovered or hidden liquidity by checking the trading blotter of your clients, sending out indications of interest (IOIs) and also hidden orders (using ICERBERG strategy) is a very well designed way of implementing the liquidity search operation for block trades.
Human agency is still necessary for some trade execution, especially using the skills of sell-side traders to fill difficult buy-side orders.
There is a strong obligation to prevent information leakage and resist any market manipulation.

In general, the article does a good job at defining the scope of block trades, describing the technicalities and processes as well as emphasising the confidentiality aspects of executing block trades.

However the article could have been more comprehensive had it discussed the following topics:

When a broker can locate both the buyer and seller of a block, how is the execution price decided?
What role does the broker play if it only has the seller’s order: does the broker assume the role of deal maker and take the risk on its own books while it looks out for a buyer?
An examination of other liquidity options, such as dark pools and unlit venues provided by exchanges, would have provided a fuller understanding of the routes for executing block trades.

We’d love to hear your feedback on this article. Please click here

News : Buy-side advised to prepare for “restrictive” dark trading rules under MiFID II

Ian Rycott

June 27, 2017

Buy-side advised to prepare for “restrictive” dark trading rules under MiFID II

Plato Partnership’s launch piece of research authored by Melbourne Professor of Finance, Carole Comerton-Forde, addresses the future of dark trading – any trading mechanism that does not have pre-trade order transparency.

With dark trading having increased from 3% to 8.75% between 2011 and 2017 (Rosenblatt Securities), thanks in part to the growth in high frequency trading, block and dark trading, MiFID II regulations on dark trading will have a significant impact on traders’ aims to source liquidity whilst managing costs and minimising information leakage.

Buyside firms utilise the flexibility of block and dark trading, however concerns regarding the propensity for dark trading which impacts price discovery and liquidity are widespread.

New regulations aim to enhance pre-trade transparency and force trade onto Registered Markets, Multilateral Trading Facilities and Systematic Internalisers. MiFID II limits reference price trades to midpoint, introduces double volume caps on the reference price and negotiated trade waivers at 4% of volume in a stock in a single pool and 8% of the volume in a stock across all dark pools, as well as altering the minimum size thresholds for Large-in-Scale (LIS) trades.

According to the report, “the dark trading rules that form part of MiFID II are the most restrictive compared to the US, Canada and Australia”. Certain changes, such as the narrower scope for the reference price waiver, pose fewer problems, however the report suggests that the impact of double volume caps, which can lead to the closure of dark pools for up to 6 months, will have a “dramatic and likely adverse effect on market quality”.

Responses to the most concerning change of the double caps are already in place, indicated in reports¹ expressing an intended increase in the use of LIS waiver post-MiFID II. Consequently, there has been a growth in the number of initiatives, including LIS venues, new or modified order types facilitating LIS trades on exchanges, and high frequency and intraday auctions. However, concerns over market fragmentation are being raised.

The report makes four main recommendations:

· Buyside should assess 2017 trading levels to analyse the likelihood of possible 2018 trading suspensions;

· Collaboration between buyside and sellside to adjust operating practices in the case of dark trading suspension;

· Evaluation of the merits of new trading venues;

· Innovation in new technology to exploit new data to the buy-side’s advantage.

The advice to buy-side firms on the whole is to start “changing their behaviour now to ensure a smooth transition to the post-MiFID II world”.

1. https://www.liquidnet.com/campaigns/mifid2

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TRADING PLATFORMS ARE CHANGING MARKET STRUCTURE.

Gherardo Lenti Capoduri, Head of Market Hub at Banca IMI explains the promise of electronic trading platforms in the new regulatory world order.

SEEKING HARMONY.

FACING EVOLUTIONARY CHALLENGES.

THE FUTURE IS INTEGRATED.

By Andrew Pheifer, Director, Product Management, Eze Software

WHO SEES THE BIG PICTURE?

By Jannah Patchay, Director, Agora Global Consultants.

TRADING, POST MiFID.

Sassan Danesh, Co-Chair, OTC Products Committee, FIX Trading Community outlines what he sees are the priorities for buyside global heads of trading in a post-MiFID II landscape.

Buy-side advised to prepare for “restrictive” dark trading rules under MiFID II

Plato Partnership’s launch piece of research authored by Melbourne Professor of Finance, Carole Comerton-Forde, addresses the future of dark trading – any trading mechanism that does not have pre-trade order transparency.

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