From the improbable upside-down plane scene in ‘Flight’ to musing over the state of the Markets in Financial Instruments Directive (MiFID) in the future of ‘Bladerunner 2049’, this year’s FIX Trading Community event in Boston kicked off with references to the cinematic. But it was the keynote speaker’s analogy borrowed from ‘Back to the Future’—and, specifically, mention of the flux capacitor—that tied a wide range of topics including MiFID II and pre-trade transparency, zero-touch post-trade processing and virtual currencies, all together.
Every session at the event, hosted by State Street, was marked by disbelief about the twists and turns of innovation in recent years, whether it be in preparations for the gyrations of MiFID II, real-time pricing for investment-grade fixed income, or the explosion of initial coin offerings (ICOs). “Five years ago, you wouldn’t have believed…” was a common refrain. So the core question put to panelists was therefore a kind of puzzle, and frequently one that spawned friendly debate: given all that has come before, how can communication and standardization help to catalyze or further unlock market innovation for a wider array of participants? In short, how should the FIX standard fuel the FinTech and RegTech DeLorean?
MiFID II: How to Cope
Fittingly, the first discussion focused on a battle against time itself. When the first phase of MiFID II finally goes live shortly after New Year, the world’s financial institutions—whether based in Europe or not— will have a new regulatory behemoth to cope with, covering transparency, execution, and data costs among other priorities. It also promises potentially compressed timelines for the additional 2018 phases, short-term trading chaos as a result of systematic internalizer reclassifications, and little tolerance for excuses once ESMA brings a review. Even for those firms with narrower exposure to MiFID II, panelists agreed that the weighty new rules will likely align with future rulemaking in the US and elsewhere, marking an onerous new era for technology, operations and compliance globally.
The most common advice was surprisingly simple: be prepared to demonstrate how your MiFID II interpretations, frameworks, calculations and disclosures were thought through, designed and ultimately implemented. As one speaker put it, the ongoing problem with MiFID II will not be technological so much as semantic. Despite the 2018 deadline, a significant amount of definitional uncertainty remains around key concepts and provisions. Firms demonstrating dexterity around those issues will not only have an easier time navigating the new environment internally, but may be able to use the messaging standard’s flexibility and critical mass to influence outcomes on a practical, operational basis.
If MiFID II has been a preoccupation for the past few years for FIX, another area—streamlining and linking up post-trade processes for the institutional buy side—has been a priority for even longer. One panelist called this second discussion area a drive towards “zero touch”: from execution all the way through to settlement and custody, the asset manager shouldn’t have to intervene at all. The challenge, fellow panelists agreed, is that across different asset classes, organizations and post-trade ecosystem mechanisms, communication of positional data in a digestible, automatable format remains very hard to achieve. But the stalwart implementation progress of a handful of major asset managers has pushed the project forward, ultimately augmenting the protocol to achieve even greater interoperability. “What we’re working with in FIX is a regulator’s dream,” said one participant, calling it a “[lighter] version of the Consolidated Audit Trail (CAT).”
That work continues now with further modifying the FIX tags for payments automation, and in particular the reporting of updated interest statements and loans’ manufactured income. Naturally, the discussion also brought up blockchain considerations. With them came contrasting views on whether distributed ledgers would ultimately gain widespread prominence. Where the panel agreed, however, is that effective data governance would have as much role to play in more straight-through processing as any nascent technology. Even if blockchain promises a greater role in the future, that was no reason to curtail the pursuit of FIX-based solutions in the short term. In fact, it was argued that foundational work with FIX could help pave the way there.
Fixed Income: Towards Pricing Transparency, But Also Centralization?
On the opposite end of execution, at pre-trade, was a third and equally colorful topic: where and how to deploy FIX to achieve greater surety of pricing in fixed income. Treasuries and credit, in particular, have seen an array of trading platforms and aggregators crop up in recent years, both in terms of style, participant pool, and—for treasuries—finally a push into real-time, actionable blocks rather than indications of interest (IOIs). But for the builders of those platforms, a tricky situation remains: how to design with a wide range of client connectivity needs in mind, without compromising the philosophy (or market behind it) of the platform itself. Panelists meanwhile also noted that compressed margins and services unbundling in the space are forcing more clients to optimize how they trade and reduce the cost of execution. Fixed income is being squeezed.
Pockets of liquidity and gaps in other places remain, and much of this “prickly” topic, as one panelist described it, comes back to insufficient and unreliable market data. Two ideas were seriously considered that, while not mutually exclusive, did expose a contrast in methods. On one hand, the pursuit of further electronification—including anonymous counterparties and central limit order book (CLOB) trading—would ensure a steady drive towards greater liquidity further out the yield curve. This was a primary lesson of the 2008 credit crisis, it was argued, though recent ‘flash’ events have shown it is no panacea. On the other hand, development of a centralized data hub for these markets was offered as the best way to limit information asymmetry for both trading desks and buy-side clients, given that trading book activity, especially in credit, has slowed down to a trickle. But could that be done neutrally, and without a cost to innovation? The question was left open—with an invitation for more opinions.
Helping Virtual Currencies and ICOs Mature
Finally, the day finished at the markets’ truest frontier: the renaissance of Bitcoin and other virtual currencies, and the incipient rise of initial coin offerings, or ICOs. New financial products based on the price of BTC are coming to fruition; funds are no longer simply dipping their toes; and coin wallets are appearing right next to retail investors’ traditional portfolio holdings. ICOs, meanwhile, have expanded to fund ventures more varied and geographically dispersed than anyone could have imagined—growth, one panelist said, that may not be sustainable in the long term, but should still give way to a healthy, narrower band of justifiable offerings in the future.
As these and smart contract-based alternatives like Ethereum have come to the fore, panelists from exchanges and institutional investors alike noted that more regulatory scrutiny is no longer optional. Indeed, for many in the space would be welcomed news. Doing so would not only bolster the types of crypto activities major banks and managers can do, but provide needed legal clarity and guidance on custody and security. And those underpinnings would provide the breadcrumbs for FIX. As more users of the protocol take up these new instruments, institutional communication around them can be designed to fit.
In many ways it was an appropriate way to conclude a briefing that would truly run the gamut—from the inevitable and stubbornly familiar to completely newfangled; from deliberate, stepwise processes automation to big, open-ended debates.https://www.fixtrading.org/?p=48445&preview=true