Bank of America Merrill Lynch has selected FTEN, a provider of risk management tools owned by Nasdaq OMX, to bolster surveillance of its European cash equities clearing business.
BAML has implemented FTEN’s RiskXposure (RX) tool, which offers a post-trade risk management infrastructure that combines data on client positions and executed trades.
RX first aggregates data from disparate sources including central counterparties and multiple European trading venues. Given the variety of symbols and layouts of data from the different sources, the system then normalises and integrates the data in close to real-time.
RX then presents the data to the broker or general clearing member for analysis, which can subsequently be used to trigger an alert or allow the firm to take action.
According to Gary LaFever, chief corporate development officer of FTEN, the real-time awareness and control of order flow afforded by RX will enable sell-side firms to comply with guidelines on automated trading systems unveiled by the European Securities and Markets Authority (ESMA) in May.
The ESMA guidelines provide a framework for electronic and automated trading in Europe, including the use algorithms by investment firms and the provision of direct and sponsored access. This means brokers need real-time, cross-market monitoring of all order flow and the ability to control trades sent to individual trading platforms.
“Time is now a critical element of trading risk,” said LeFever. “If a general clearing member (GCM) wants to shut down a trading firm today, then need to get a view of a client’s positions from the clearing house and trading venues, a process that can potentially take hours.”
He added that central counterparties only offer information on trades that have been accepted, which does not include open order exposure, while trading venues only have information on the trades conducted on their platforms.
“RX allows information to be collected across all these systems and brought back to the GCM,” added LeFever.
BAML will use RX for awareness of order flow, complementing its existing risk management capabilities. Firms also have the option of adding kill switch capabilities into their overall risk management infrastructure for specific end-clients. LaFever said a kill switch at the broker level would offer better oversight on a client’s trading activity compared to the trading venue level, which he said does not give the full picture of a client’s trading in a fragmented market.