Major Banks Complete Swap Trading Standard

FICWG, which comprises leading investment banks such as Barclays, Commerzbank, JPMorgan, Goldman Sachs, BNP Paribas and others, has been in discussion with the venues expected to register as Swap Execution Facilities (SEFs) in the US, and Organized Trading Facilities (OTFs) in Europe since last year. The group aims to promote global best practices for trading instruments such as credit default swaps and interest rate swaps using open standards from the Financial Information Exchange (FIX) protocol, in line with incoming changes in how swaps are transacted under the Markets in Financial Instruments Directive (Mifid II) and the Dodd-Frank Act.

"In fixed income, historically, [FIX] hasn't been that prevalent," says Sassan Danesh, managing partner at ETrading Software, which has been designated by FICWG to provide technical support for the project. "It's been found more on the buy side, but the sell sides are connecting the big broker-dealers to the execution venues, such as Bloomberg and so on. These have always been proprietary protocols. From a bank perspective, it's a pain in the neck, because every time they connect to a new execution venue, they're starting from scratch."

Cutting Costs
Given the requirement for standardized derivatives contracts to be traded on exchange-like platforms, and cleared centrally, as mandated by regulators such as the US Commodity Futures Trading Commission (CFTC), the level of connections required to SEFs and other similar utilities have produced a broad range of industry support for common procedures at the trading level.

"One of the good things about this initiative is that it's been industry-led from the beginning, and thus the core focus has been very pragmatic," Danesh explains. "We've used their existing application programming interfaces (APIs) and protocols as part of coming up with a super-set, if you like, a common approach that will take into account what people have today, and what would be easy to migrate to. Of course, what's easy to migrate to these days in the trading space is FIX of some sort. FIX is so malleable, that what we wanted to do was to establish what we call best-practice guidelines for implementing FIX in different workflows. We went through some 80 workflows, and we identified the ways in which it would work both for them and for the venues."

Attention to Detail
Creating a standard between so many participants, however, requires a great amount of detail. Danesh says that the process has been rapid to date, but the particular quirks and mechanisms have needed to be balanced with creating something that facilitates easy implementation.

There's been a lot of industry support for it. But there's been a lot to do─to give you a feel, the documentation comes to 500 pages, split between four volumes. There's a lot of detail in there, and that's deliberate.

"We've made very fast progress, and in that sense, it's been great," he says. "There's been a lot of industry support for it. But there's been a lot to do─to give you a feel, the documentation comes to 500 pages, split between four volumes. There's a lot of detail in there, and that's deliberate. We thought about a lot of practical implications, and included a lot of examples. So, if you want to implement a request-for-quote (RFQ), here's an illustration of an RFQ implementation, and each step of it is defined, to make life easy for people who are actually going to do it."

Part of the process has been to examine how trading currently works between venues and participants. In the above RFQ example, for instance, a buy-side will enter an RFQ through a multi-dealer platform to four or five different brokers, pitting them in competition with one another. The venue, for its part, will let each dealer know how many others they are competing against. Building in functionality such as this has been part of the granular detail that FICWG has been aiming to achieve.

Other areas have included building in support for the Legal Entity Identifier (LEI), to aid with determining where a swap will need to clear once it has traded.

FICWG has finished defining the standard, and the group is moving towards refining its capabilities, as well as updating it due to regulatory developments.

The Bottom Line

• FICWG aims to lower the cost of ownership for technology within fixed income. Typically, connection to a bond platform or similar has cost vastly more than a similar connection in the equities space, for instance.
• The standard has been industry-led from the start, and has heavily involved the organizations expected to register as SEFs in the US, such as Bloomberg, Tradeweb, MarketAxess and others.
• The use of the FIX protocol allows companies to purchase a single FIX engine and tweak it for different connections. Before, entirely new, proprietary protocols and APIs had to be built from scratch for connection to each execution venue.
• While this standard provides support in some areas for the post-trade process, such as the identification of appropriate clearing locations for swaps, it is focused on the trading side.