Thirteen of the world’s largest broker-dealers have joined an industry-wide push to agree technical standards for the trading of interest rate and credit default swaps in a move they hope will increase liquidity and cut IT costs for trading in the over-the-counter derivatives.
The group of 13 banks, which includes Barclays, Deutsche Bank, Goldman Sachs and JPMorgan, has formed the Fixed Income Connectivity Working Group to define open technology standards as the market prepares for a deepening push into electronic trading in fixed income.
The G20 group of leading economies has pushed for more over-the-counter derivatives trading to be conducted on electronic trading platforms as part of tighter safeguards of the global financial system. Sweeping financial regulations such as the Dodd-Frank Act in the US and the impending review of Mifid in Europe are set to create approved electronic venues for fixed income trading – called “swap execution facilities” in the US and “organised trading facilities” in Europe.
Up to 40 venues, including Bloomberg, Tradeweb and interdealer brokers such as Icap and BGC Partners, are expected to convert to these platforms to meet the new rules. However, each of those venues historically has had its own proprietary protocol, or software language, and each investment bank has to create a custom-built platform to connect to each venue.
While there have been some swap market initiatives to define technical industry standards for post-trade services, there has been no equivalent industry initiative for technical standards covering pre-trading.
The industry push has received support from many of the fixed income trading venues likely to become SEFs and OTFs, including MarketAxess, Tullett Prebon and GFI Group, because best practices are an integral part of the new technical standards, rather than an addition to them.
Global regulators and authorities are laying down standards covering trading of over-the-counter derivatives but have not mandated specific rules covering agreed computer language. However, the US Commodity Futures Trading Commission, the US Securities Exchange Commission and the International Swaps and Derivatives Association are understood to be following the developments.
The work has been carried out by Etrading Software, a UK-based financial technology consultancy, and is based on the Fix protocol that is used for carrying data and trading messages around the world’s equity markets. The open Fix protocol that is being agreed could also be used to define technical standards for trading in other asset classes, including fixed income cash markets, commodities and currencies.
The new working group is aiming for ratification of the protocol for fixed income by the end of the year. The other broker-dealers in the group are: BofA Merrill Lynch, Commerzbank, Credit Suisse, HSBC, Morgan Stanley, Royal Bank of Canada, Royal Bank of Scotland, Société Générale and UBS.