Integration between pre and post-trade is essential to support clearing certainty however, this is easier said than done. Sassan Danesh, FPL Co-Chair, Global Fixed Income Committee, and Managing Partner, Etrading Software explains the challenges of improving integration between the front and middle offices and tells DerivSource how FIX is considering ways to help firms address the communication problem.
Today pre and post-trade operational processes are increasingly merging to support new trading and clearing procedures required under new financial regulation, including Dodd-Frank and EMIR. The merging of pre and post-trade processes is especially crucial to support the clearing certainty requirement.
New requirements to execute certain OTC derivatives via swap execution facilities (SEFs), coupled with mandated clearing via a central counterparty (CCP) means there is now a two-stage process to the execution of some derivatives. A derivatives trade cannot merely be executed and then expected to clear via a CCP automatically – this has to be certain. Thus the question for firms is ‘how do we make sure that there is clearing certainty when clearing is a post-trade procedure but this information is needed now at a pre-trade level too?
Clearing certainty requires close integration and interaction between post-trade systems and pre-trade systems but the challenge is that these two operational areas are very much siloed. For instance, the market has historically used different messaging standards in the derivatives space; FIX for the front office and FpML for post-trade. Culturally, the front office is also very different from the post-trade area too. The business remit of the front office is focused on executing the trade quickly whereas the middle and back office are concerned with checking for errors and ensuring trades are executed, cleared and settled efficiently. One of the big questions that market participants far and wide are grappling with right now is ‘how to achieve clearing certainty given the cultural and logistical challenges of merging these two areas?’
Some firms are figuring out a strategy to merge both business areas. For example, I know one SEF who is using FIX as the transport protocol and then relying on FpML as the payload that contains the definition of the product they want to check to see if there is enough margin information there. In that scenario, there is some level of integration and interoperability already implemented right now as part of clearing certainty procedures. Of course, that level of integration could go much further to ensure that there is a very efficient mechanism for the marketplace as a whole to be able to interoperate because the bigger challenge here is that there needs to be improved interaction between all the places: the executing broker, the SEF in the middle and then the FCM on the other side.
Of course, hubs that act as that facilitator to make sure the messages are appropriately passed through can provide a valuable service here, but the other option is to establish a market standard to allow a more point-to-point, a mesh-like infrastructure to be created. We are discussing this latter idea of a market standard now but will not yet form a working group until there is full industry consensus. For hubs, which are easier to get off the ground, there are several vendors in this space already who are coming up with more proprietary solutions, which address that need today.
Looking ahead, at FIX we are in discussions with our members to assess if focusing on support for clearing certainty is a sufficient priority for the organisation given the existence of the hubs, and to make it a worthwhile standard given everything that is going on within the wider industry. The members we have spoken to so far are keen to explore this but we’re not at a point where we know if this will be a priority for FIX in 2014. However, the market has a long way ahead to ensure clearing certainty is easily obtainable and completed in an efficient manner. And in any scenario, both pre and post-trade processes need to work in concert to facilitate this.
