This winter’s regional FIX Trading Community briefing, hosted by Morgan Stanley in New York, brought out veteran technology experts and raised fresh questions as the industry stares down twin-barreled trade reporting mandates on both sides of the Atlantic—with MiFID II’s imminent January 3, 2018 go-live date, and deepening drama behind a missed November 15milepost for the US Consolidated Audit Trail, or CAT.
Much of the FIX agenda in 2017 has faced next-generation questions—from retrofitting the standard for cybersecurity and crypto-currencies, to facilitating better pre-trade price transparency and deeper post-trade automation. But a new wave of old-fashioned trade reporting remains front and center.
That level of attention is owed to the breadth of technical requirements and predicted globalization of MiFID II; it has also played out over the circuitous history and proposal process of the CAT. Taken together, though, they represent a mutual, aggressive aspiration among regulators. As one panelist put it, “the pendulum has swung completely in the other direction” regarding trade data — whether to address the perception that traditionally-bundled research and execution fees have run amok in Europe, or improve from the aftermath of the flash crash of 2015, which exposed regulators’ limited capability to connect the dots across contemporary equities venues in the US. In short: expansive collection of trade execution data is now viewed, almost philosophically, as the only option.
But can it work down at the nuts-and-bolts level? Some in the audience colorfully debated whether this new ethos has become too prescriptive and cumbersome in implementation—or if instead it was inevitable, given what has come before. Either way, the session broadly agreed that the swing has become a little wild—and the session’s panel focused on how to creatively and collaboratively stay ahead of the challenges that are no longer in the offing, so much as at the doorstep.
To start with, many in the industry wait with bated breath for the January MiFID II deadline. Along with short-term chaos, panelists predicted profound shifts in market structure and client preferences; new winners and losers as a result of unbundling; and a raft of data management concerns. For many European investment managers, MiFID II-driven best execution will be “like learning a new language,” one speaker said, while healthy skepticism remains as to whether buy-side order and execution management systems (OMS and EMSs) will be capable of ingesting, storing and effectively managing the deluge of trade data coming back from their broker-dealers. “The elephant in the room”, it was argued, is a pure technology problem.
“What MiFID II asks for in terms of best ex analysis is a kind of Holy Grail,” the panelist explained, “whereas we as an industry can only work with what data is available. In the US, there is growing demand for greater study of order routing data, well beyond execution, whereas in Europe, transaction cost analysis (TCA) is still fairly nascent and at medium-sized and smaller firms, they’re only asking for rolled-up, minimum information from the broker at end-of-day. They simply don’t have the capacity to meet this yet.”
Meanwhile, industry adoption of the CAT took a surprising turn in November, when initial reporting entities—exchange operators—requested a last-minute exemption that was denied by the US Securities and Exchange Commission. The exchanges cited data security concerns as the main reason for the request. But panelists also pointed to questions that cropped up about the Thesys-built reporting processor platform and mapping to its proprietary JSON messaging file format—an area that now has brokers’ close attention, and one about which FIX has already sought clarification.
While a brief delay may yet prove constructive, the larger worry, speakers said, stems from rising costs and unclear timing. A prolonged transition from legacy reporting constructs—specifically OATS [the Order Audit Trail System], electronic blue sheets and large-trader filings—to the CAT means a more expensive and complex internal systems migration that was already tough, given its lower minimum thresholds for required reporting dealers, and its coverage of equity options. For many firms this could potentially augur an incomplete phase-out, or “dual supporting, dual reporting,” as one panelist put it. The danger is that data accuracy and rapidity of reporting to the CAT will suffer as a result, and for the industry, it can lead to a vicious cycle and, ultimately, a breakdown of the project.
“The SEC wants to switch over to the CAT and view reporting error rates on an industry level,” he continued. “So the problem becomes: if one or two firms remain well above that error rate, that throws the whole process off. The cost even beyond CAT-related development—of simply maintaining [OATS]—is a major burden.”
Data Capture, Tech Transference
So, how to cope? First, multiple panelists said savvy planning— especially at the data infrastructure level—can pay major dividends. By prioritizing data traceability and building out data governance, best practices and controls into a ground-up solution for MiFID II, new tools and infrastructural strength are already in place and readily transferrable to the CAT, they said. Part of this, one panelist admitted, was taking a page from the regulators’ book: capture as much data as you can at as many trade lifecycle points as possible. Favor too much over too little. “With that already done, you can worry more about the interpretation of the rules surrounding a legal entity or trade within a certain jurisdiction, and about how to satisfy that requirement,” said the executive. “It’s still challenging, but easier.”
The same discipline goes for solving the messaging impasse around CAT. As one attendee admitted, “even the FIX membership is currently split” as to the best path forward for migrating from OATS. For some, that can mean favoring a “path of least resistance” today, while still trying to leave the question open about the future. Versatility, therefore, should be favored, it was argued— with one panelist pointing out that FIX and JSON need not be mutually exclusive, if handlers are properly implemented. Bringing that idea from the front office back to CAT teams in ops and compliance would be critical, it was agreed.
So, too, should it be remembered that “once you get past the current [November 15] scheduling issue they’re dealing with, Thesys has actually been open and excited about some of these ideas,” the attendee argued. “If you look at the development of JSON, early on they had added fields and deleted OATS fields that made comparison impossible—given that half of the comparable data had been eliminated. This was pointed out; they reconsidered.”
The FIX Trading Community has had positive dialogue with Thesys CAT over the past month and there is discussion with regards to a FIX to CAT mapping exercise once the latest version of the technical specification is distributed to the industry. Such an exercise is very much in line with how FIX has collaborated with other regulators across the globe. Because of the broad footprint of FIX and its flexibility to respond to divergent data and linkage requirements, leveraging FIX will result in great savings both in dollars and implementation time for the industry overall so more to come on this front.
Readiness is All
As often, winning the day will require a measure of flexibility and cooperation in 2018. With so much definitional and operational uncertainty still in play, however, and an expectation that both MiFID II and the CAT have several years of growing pains to go, the session concluded that technical acumen will prove strongly influential—if not dispositive—in guiding the decisions that lay ahead.