Major execution venues active in electronic bond trading are committing to adopting open standardised protocols, said Sassan Danesh, managing partner, Etrading Software, and co-chair of message standards body FIX Protocol Limited (FPL) global fixed income committee.
The new standards – designed to support best practice in the electronic trading of fixed-income products – were formally published by FPL in February 2013. Their widespread adoption, announced on 1 May, represents a key step towards the achievement of common standards for electronic trading not just in bonds, but across asset classes.
Cross-asset standardisation would align market practice with trading reality, and thus enhance efficiency. Danesh said: “Real-world trading involves buying a future and selling a bond, say, or doing a spread trade between a five-year swap and a two-year swap. It doesn’t fit into convenient silos.” With Basel III in prospect, and against a background of regulatory efforts to move OTC derivatives trading onto electronic platforms, standardisation is an ongoing project on a wide scale. “We are working with the standards bodies to ensure that there is effectively a common standard across asset classes around which the industry as a whole can coalesce,” he added.
Work on the new standards for electronic bond trading began with the June 2011 formation of the Fixed Income Connectivity Working Group (FICWG), largely consisting sell-side banks, advised from inception by Etrading Software and Expand Consulting. A decisive factor in the FICWG’s achievement to date has been its collaborative approach and commitment to open standards. “Banks and venues have made a strategic decision not to compete at the trading-protocol level. Anybody can adopt these standards; they’re run and created by the FIX standards body itself,” explained Danesh.
Bond-trading venues that have committed to their adoption include BGC Partners, BondDesk, Bonds.com, ICE/Creditex, Dealerweb, Deutsche Börse Group, GovEx, GFI, London Stock Exchange, MarketAxess, MTS, SIX Swiss Exchange, Thomson Reuters, Tradeweb and Tullett Prebon. FICWG member banks include BofA Merrill Lynch, Barclays, BNP Paribas, Commerzbank, Goldman Sachs, HSBC, J.P. Morgan, Lloyds Bank, Morgan Stanley, Nomura, Royal Bank of Scotland and UBS.
For bond-market participants, such near-industry-wide adoption represents an opportunity to achieve increased transparency, via enhanced integration between market participants, coupled with the cost-efficiencies associated with open-standard connectivity and trading. Danesh said, “All of a sudden, people have started to wake up to the fact that in fixed income, electronic trading costs have been about five times those in equities.”
There is also potentially a business development gain. Pierre Moret, head of fixed income front office IT at Lloyds Bank Commercial Banking, said, “The adoption of standardised protocols for the trading of fixed income instruments will improve significantly the integration of our technology and thereby help reduce the cost of implementation for our credit and rates businesses.”
With adoption now largely achieved, the FICWG aims to enhance FIX bond-market standards over time, to facilitate market evolution. Progress has also been made towards the introduction of cross-asset standards. Danesh said, “We’re very close to that already. The specifications are being ratified and the next step is to ensure that the whole community adopts them.”