Cross asset trading to the fore for FPL delegates

FPL again maxed out the capacity of London's Old Billingsgate

While changes to the OTC derivatives world grab the headlines, trading is moving to a cross asset world, largely driven by regulation and standardisation – and after a few years of pain, firms may find that they are better off as a result.

That was one theme to emerge at the annual EMEA Trading Conference organised by FIX Protocol Ltd in London this week, and it dovetailed neatly into overarching issues such as regulation, the relationship between sell- and buy-side forms and the continuing complexity of connectivity as new venues emerge and disappear ever more frequently.

While different parts of the industry are moving at different rates – and have different motivations – the efficiencies of cross asset trading will prove attractive in the longer term. “We definitely see the value of cross asset trading,” said one panellist. “Looking beyond the regulations there is an enormous amount of industrialisation [of processes] going on, and that lends itself to trading multiple asset classes, but it is not at all clear how we get beyond the regulations.”

Several sessions focussed on the development of the FIX protocol into other asset classes. Originally developed for the equities markets back in 1992, FIX has since been widely adopted in foreign exchange markets and is now moving onto fixed income and the OTC derivatives market. The latter, in particular, has hitherto used FpML – the Financial Products Mark-up Language – developed by the International Securities Dealer Association.

Delegates heard in one session how the work done on extending FIX into the bonds market has developed in parallel with work on OTC derivatives, and how FPL has been working with ISDA to embed FpML payloads inside FIX messages. “There is quite a lot of synergy between bonds and derivatives – the commonality is OTC trading,” said the presenter.

Another panellist related this back to the move to cross asset trading and responses to regulatory changes: “FIX is a good way to reduce cost and time to market … if we have to wait even two or three months for changes, it is not going to work very well.”

Part of the reason for this is that widespread FIX adoption has led to firms also aligning their processes along best practice lines, though there is a way to go. “Best practice is great for us because we might already be using it,” he said. “In practice, it might be quite a few years before we get to that Nirvana state.”

In the shorter term, the impact of imminent changes to the OTC derivatives markets is still far from clear. In particular, panellists and delegates point to the lack of clarity in international regulation: “Differences in the rules between EMIR and Dodd-Frank mean we’ll have to build different platforms to cope with differing regulatory requirements,” said one.

Looking slightly further out, a panellist said that he saw three potential ways the market could go.

“In OTC markets in the US, reporting requirements originally just covered credit derivatives, but have been broadened to include more and more instruments,” he said. “A gradual increase in the scope of instruments falling under the new requirements is the first possibility. A second possibility is standardisation of contracts – for example, having a standard coupon and standard rollover dates. The third possibility is that all products become like futures, traded on a central limit order book. Maybe we’ll transition between them. We need flexibility.”

But even this is problematic, said another. “Flexibility means that there’s too much flexibility. Can we standardise the business process, not at FIX tag level but how the messages will communicate? If there’s too much variation in that process, systems will have to change. The reality is the middle office doesn’t have much money – it’s a cost centre and it’s not a priority. We need a common agreement.”