A Call for Participation: Non-USD NDF Fixing Conventions Using FIX
Aim: The lack of standardization of fixing conventions for non-USD NDFs has plagued voice trading for many years, adding operational risk that leads to market risk and potential losses. Therefore, the FIX Trading Community’s FICC (Fixed Income Currencies Commodities) Committee aims for the following goals:
- Standardize communication of the fixing source and time between market makers, clients, and platforms.
- Support all possible fixes for NDF currencies – primarily APAC and LATAM.
- Not dictate which fixing conventions should be used.
There are well established conventions for the fixing times of NDF currencies against the dollar – mostly following the Central Bank official fixing times. For example, the following is an extract of the CME rulebook for the settlement of KRW/USD futures:
Final Settlement Price is equal to the reciprocal of the spot exchange rate of Republic of Korea won per U.S. dollar as reported on the termination of trading day by the Seoul Money Brokerage Service Limited (SMBS) as “KRW KFTC 18” or “KRW02”, which appears on the Reuters KFTC18 Page to the right of the caption “USD Today.” The reciprocal will be rounded to seven decimal places. The reported KFTC18 rate represents spot market activity for value on the second succeeding Korean Business Day. This spot exchange rate is published at about 4:00 p.m. Seoul Time on the rate calculation date. This rate is used widely by the interbank foreign exchange market to cash settle non-deliverable forward contracts for Korean won versus U.S. dollars.
However, taking another example of a JPY/KRW NDF, ideally there would be a benchmark rate at 4pm Japan/South Korea time, but this does not exist outside of the hourly WM/Refinitiv and Bloomberg fixes. Typical benchmarks for JPY include: 09:55 Japan time MUFG rate, 15:00 Japan time Tokyo cut for options and 16:00 UK time WM/Refinitiv rate. Clients submitting price requests and orders for JPY/KRW will have to negotiate outside the FIX Protocol about which combination of fixing times should be used for the USD/KRW and USD/JPY legs of the trade. Operational errors by either the client or the bank can result in market risk; for example, client expects 09:55 fix and receives 16:00 UK fix, so the fix rate will have moved in the ~16 hours between the two fixes.
A second operational issue is that while an agreed fixing convention may have been arranged outside of the FIX Protocol on a bilateral basis, there may be occasions where a supported but non-standard fixing convention is required. Due to there being no way of communicating this using the FIX Protocol standard, typically these trades are then executed by the calling up of salespeople, which can also increase operational risk, when compared to having STP from the client OMS/EMS.
Proposal: This proposal is limited to enabling the communication of fixing conventions desired by the client to the liquidity provider to ensure that both parties have:
- The ability to price the trade accurately.
- STP and can confirm the trade with the correct fixing information.
- A clear audit trail of the full life cycle.
- The ability to reject requests for unsupported fixing conventions, to avoid trades that cannot settle.
Core to a proposed enhancement would be to add FIX fields with a defined enumeration of valid values for:
- Leg fixing time e.g. 16:00 GMT
- Leg fixing source e.g. WM/Refinitiv, Reuters, etc.
- Leg fixing page e.g. KRWFIX=KTFC, etc.
To achieve this, the initial expectation is that the following FIX components will need adding to:
- Requests: Quote request and market data request
- Data: Quotes and market data
- Orders: New order single
- Trades: Execution report
Also, minor enhancements to the FIX Protocol (in addition to the above) are needed to fully support non-USD NDFs.
Call for Participation: The FIX Trading Community’s FICC Committee invites banks, clients and platforms to join a cross-industry discussion focused on non-USD NDF fixing conventions, and analysis of relevant workflows, subsequent Gap Analysis, and eventual extension/service pack within the FIX Protocol standard.
To participate in the FIX FICC Committee’s non-USD NDF fixing convention discussions please contact barbara.law@fixtrading.org asap.