FIX Trading Community, formerly FIX Protocol Limited, is set to publish updated guidelines on swap execution facility (SEF) message standards as the 2 October deadline to begin trading on these new platforms approaches.
The first phase of the guidelines was published in 2012 to ensure SEFs would be ready to implement standardised trading protocols ahead of the Commodities Futures Trading Commission’s (CFTC) publication of its final rules in May this year.
While the first phase covered the key issues needed in order to ensure FIX could be used for trading the most common types of swaps on SEFs, the second phase guidelines will focus on issues surrounding more complex contracts and handling trade allocation failures.
FIX has worked alongside the International Derivatives and Swaps Association (ISDA), which has its own FpML protocol for swap trading, in order to correctly define types of swaps.
Sassan Danesh, co-chair of FIX Trading Community's Global Fixed Income Committee and managing partner at Etrading Software, said integrating FpML messages into FIX ensured costs would remain low by using existing standards where practical.
“With the standards we’re developing for swap trading, it made sense to work with ISDA so they could define the contracts with FpML and then we integrate that into the FIX message which handles other aspects of the SEF trade,” he explained.
The new guidelines are expected to be published in September. FIX Trading Community will then shift its focus to work on Organised Trading Facilities (OTFs), a SEF-like platform envisioned for Europe, though the timetable will be largely dictated by the pace of European regulation, which is currently around 18-months behind the US. However, it is hopeful that much of what has been learned in developing FIX for SEFs will be transferrable to the European market.
Danesh also warned that swap traders would need to undergo a significant cultural change in order to implement trade certainty when SEFs become operational in October.
With the electronic execution of swaps on SEFs just weeks away, buy- and sell-side firms face the risk of trades failing to complete as participants adapt to new clearing rules and counterparty agreements. Also, changes to front- and back-office processes to accommodate SEFs may also cause teething issues when trading formally begins.
As part of Dodd-Frank, most swaps will be traded electronically and centrally cleared. However, as trading and clearing will occur in two separate and distinct steps, during the trading phase, each party will have little knowledge of whether their counterparty has sufficient credit to subsequently clear the trade.
Danesh believes this could result in trades failing: “When a swap trade goes to clearing, there is a chance the clearing house will reject it. This means that, for the first time, firms will want to know about post-trade information during pre-trade.”
In order to guarantee trade certainty, the front- and back-office will need to engage in dialogue and communicate much more effectively than they do today, but there remain challenges in this area.
“Traditionally, front- and back-offices have operated separately. The front-office has been very focused on immediate trading needs, while the back-office takes a much more structured approach, but regulatory change is causing these two worlds to collide. To guarantee trades will complete there will need to be a feedback-loop between the two, which will require a big cultural change,” Danesh said.