Lynn Strongin Dodds looks at the latest set of recommendations from the Derivatives Market Institute for Standards on the automation of position transfers in ETDs and how it can improve industry practices
The Derivatives Market Institute for Standards (DMIST), an independent body established by FIA in July 2022, published its Standard Regarding Position Transfers targeting the automation of position transfers in exchange-traded derivatives (ETDs) markets. This proposed standard is the third and final standard of three put forth by the group.
The independent body seeks to address the movement of open positions between accounts within the same clearing firm or across different firms. These transfers are seen as critical for risk management, margin optimisation, portfolio balancing, and adapting to changes in ownership due to mergers and acquisitions.
One of the main issues is that the position transfer process is almost completely manual and needs modernising. DMIST believes a standard would not only increase operational efficiency and resiliency but also reduce operational and regulatory risk by minimising the human touch points. Equally as important it would simplify communication between clearing members and their clients.
Samina Anwar, Director of Derivatives Operations at Cargill and Chair of the DMIST Sponsor Board, summed it up by saying in the press release, “Position transfers are vital for clients to manage risk and optimise margins effectively. Many clients face inefficiencies and delays due to varying processes across clearing brokers. A standardised template for requesting position transfers will streamline workflows, enhance accuracy, and significantly reduce errors in both requesting and booking transfers.”
The consultation covers several recommendations including the establishment of a template clients can use to submit a position transfer request to its clearing member(s). It also advises developing standard templates for clearing members to more easily upload position transfer data to central counterparties as well as for CCPs to adopt for receiving data from clearing members.
DMIST is also asking for feedback on the timing for simple and complex position transfers. It suggests that simple position transfers requested five hours ahead of the market clearing close be concluded the same day.
The more complex ones, on the other hand, which require exchange approval should be completed 48 hours ahead of the nearest market clearing close. Moreover, the standard proposes that the client send the request form simultaneously to both the originating and receiving clearing members.
The FIA Operations Americas Division, with input from FIA’s European and Asian Operations Committees, submitted a proposal to the DMIST Sponsor Board in May 2024 to standardize Position Transfers. The Sponsor Board approved the proposal and formed a DMIST Working Group, which reviewed and enriched the proposal.
DMIST has 35 members including executing and clearing brokers, exchanges and clearinghouses, clients and service providers. Around 200 representatives from these firms contribute to the identification, development and implementation of standards.
The positions paper and standard is the third and last in a series. The first standard focus on improving timeliness of trade give-ups and allocations as published in June 2023. This standard set out the goal is to improve the delivery and processing of allocation instructions by establishing the so called 30/30/30-minute timeframes. Clients, executing brokers and clearing brokers are obliged to submit and process allocation instructions within 30 minutes of the trade being confirmed or instructions received. A set of metrics was also defined to allow participants to measure progress.
The second paper and standard focused on average pricing was published last June. This standard called for CCPs globally to adopt certain minimum standard average pricing functionality because the lack of standardisation was one of the hurdles preventing transactions being processed on trade date. It outlined a 16-point functionality table covering general standards, average price grouping, and cash residuals. Average pricing is being used extensively in ETD markets as electronic trading allows firms to break large trades into many smaller orders to minimise market impact.
For the position transfers standard, the consultation process is currently underway with industry stakeholders until 21 March. The aim is to put the finishing touches on by the end of the Q2 2025.
