Banks invest in futures utility to guard against tech snafus

FCMs, including Goldman and JP, stump up $44 million to fund FIA Tech push to standardise trade processing

Ten of the world’s largest clearing banks have agreed to fund the growth of an industry utility tasked with helping standardise post-trade workflows – seen as vital in preventing a repeat of the operational bottlenecks that crippled futures trade processing during last year’s Covid-19 market meltdown.

FIA Tech, a for-profit subsidiary of industry trade body the Futures Industry Association, has received $44 million in funding from a group of futures commission merchants (FCMs), including Goldman Sachs, Morgan Stanley and JP Morgan, and a mandate to smooth kinks in the piping that connects brokers and clients to one another and the more than 70 exchanges in the listed derivatives markets.

“Market infrastructure in exchange-traded derivatives needs modernisation,” Nick Solinger, FIA Tech chief executive, tells Risk.net. “When volumes surged last year, a lot of the strategies that individual firms had were lacking. Because of the interconnectedness of the industry, scale processing solutions are needed to more seamlessly connect players to exchange information, to collaborate and to manage risk.”

In a statement, FIA Tech said it would use the capital to build utilities and central services – in practice, simplifying the futures trade lifecycle, from allocations to give-ups, by standardising the way futures market participants connect with each other. Solinger adds that central counterparties (CCPs) are also prepared to deploy resources and investment to collaborate on standards.

FIA Tech – which already has more than 8,000 participants connected to its platform – is seen by some as the natural lynchpin for standardising trade flows and order routing. Futures trade data from exchange clearing systems already flows through FIA Tech’s Atlantis settlement platform, which manages payments to executing brokers related to futures give-up and block trading activity.

In March 2020, amid coronavirus-induced volatility, a huge increase in volumes saw a large number of trades fail, resulting in missed margin payments and positions left on the books of the wrong brokers. Some FCMs feared a systemic incident during the back-office breakdown.

There’s a lot of information that’s lost. And there’s been no attempt in an industry-wide way to connect all the vendors in the space and provide a framework for exchange of information in a better way

Nick Solinger, FIA Tech

Several firms pointed the finger at outmoded practices at rival brokers for exacerbating the situation, or inefficiencies at exchanges – but all agreed that greater standardisation of the way different order types are routed between clients, FCMs and exchanges would have helped.

Under one mooted solution, rather than clients sending separate allocation instructions to their original executing broker and their clearing broker, a single venue or hub could exist at which each party sees the instruction at the same time.

Before that can happen, the first big challenge is facilitating the exchange of golden sources of reference data. One problem FIA Tech identified during the Covid volume surges was the same products and trades being identified with different codes. FIA will launch a golden source of pre-trade lifecycle reference data later this year to bring a standardised taxonomy for products and collateral.

One of the biggest factors blamed by FCMs for holding up trade processing in recent years is the growing ubiquity of average price allocation methodologies by asset managers. In practice, this means traders at executing brokers must work futures orders in pieces over a whole trading session before allocating average prices across hundreds or thousands of sub-funds. Only once the average price of a trade is known – usually at the end of the trading session – can orders be allocated equally across the funds that the client manages.

Nick Solinger, FIA Tech

The later FCMs receive these orders, the smaller the window they have in which to share them with the CCP – and problems frequently occur at the point when allocation information is shared between clients and FCMs, or when sending give-ups from broker to broker, Solinger says.

“There’s a lot of information that’s lost. And there’s been no attempt in an industry-wide way to connect all the vendors in the space and provide a framework for exchange of information in a better way,” he adds.

Solinger also says buy-siders are working with FIA Tech on this: “There already has been a lot of movement on the behaviour front of clients. They’re very conscious that there can be knock-on effects from the way that they process post-trade in the market. We’ve seen a lot of appetite for clients to work with their clearers to ensure that they are [supporting] straight-through processing.”

“Isolated” technology glitches at CCPs and clearing firms blamed for exacerbating trade processing bottlenecks have also been “tactically addressed”, he says.

Differing views have been expressed on whether distributed ledger technology should play a role in improving futures workflows. Solinger says FIA Tech is open to the “significant benefits” of bringing DLT and other new technologies to bear into the space, but such solutions could “have a long lead time to market”.

“We’re evaluating those carefully,” he says. “But we certainly see it as potentially a strong contributor to automating the way data is distributed around the market.”

The 10 investors in FIA Tech are ABN Amro Clearing, Bank of America, Barclays, Citi, Credit Suisse, Goldman Sachs, JP Morgan, Morgan Stanley, UBS and Wells Fargo. FIA will retain an ownership stake in FIA Tech, and will continue to serve on its board. Former FIA chair and JP Morgan managing director Richard Berliand joins as an independent director.

Part of the $44 million has been earmarked for the development of existing products. FIA Tech services include digitally managing give-up agreements, meeting regulatory compliance requirements, reconciling and settling brokerage fees and providing reference data products. FIA Tech says it will also expand the scope of its trade processing, reconciliation and reference data in equity options and other asset classes.

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• Topics
• ABN Amro
• Bank of America
• Barclays
• Buy side
• CCP
• Citi
• Clearing
• Credit Suisse
• Distributed ledger technology (DLT)
• Exchanges
• Futures
• Futures commission merchant (FCM)
• Futures Industry Association (FIA)
• Goldman Sachs
• JP Morgan
• Listed products
• Margin
• Morgan Stanley
• Trade processing
• UBS
• Wells Fargo
• Risk management
• Covid