SERVICE AND TECHNICAL DESCRIPTION. Electronic Order Book for the UK Retail Bond Market

Transcription

1 SERVICE AND TECHNICAL DESCRIPTION Electronic Order Book for the UK Retail Bond Market

2 1 Contents 1. Introduction Main Characteristics Scope of Changes Readership Relevant Documentation Enquiries and Comments Service Overview Overview Access Scope Trading Services Order Types Trading Phases Price Monitoring Price Conventions Tick Size Order Size Accrued Interest Settlement Buying-in Trade Reporting Technical Description Market Structure Closing Prices Reference Data Testing Conformance Requirements Customer Development Service End to End Testing Project Implementation List of Available Securities Participation Key milestones...14 Appendix A Message Versions Copyright London Stock Exchange Page 1 of 19

3 2 Infolect TradElect X-TRM Glossary of Terms London Stock Exchange Group s market data dissemination service. London Stock Exchange Group s trading system, designed to deliver unprecedented levels of performance, reliability and scalability. London Stock Exchange Group s post-trade router Version Control Nov 2009 First version Jan 2009 Second version incorporating amendments to sections 2.3, 2.10, 2.12 and 4.2. Jan 2009 Third version incorporating amendments to section 2.2. Copyright London Stock Exchange Page 2 of 19

4 3 1. Introduction The new electronic, order-driven trading service for UK government and corporate bonds aims to offer retail investors efficient access to an onscreen secondary market in London listed debt instruments. The introduction of this new electronic order book is in response to growing demand from private investors in the UK for a cost effective and transparent mechanism for gaining access to fixed income securities. The new trading service aims to build on the success of the London Stock Exchange Group s established MOT market operated by Borsa Italiana. The DomesticMOT market, offering Italian government and corporate bonds, and the EuroMOT market, providing access to a range of Eurobonds and Asset Backed Securities (ABS), comprise the most liquid and heavily traded retail fixed income market in Europe. We now seek to offer the benefits of this market model to retail investors in the UK. The new trading service is not expected to impact existing wholesale bond or gilt trading and trade reporting arrangements and does not aim to change established practices in the institutional fixed income markets. 1.1 Main Characteristics The new trading service will be an electronic order-driven model similar to SETS, with continuous two-way pricing provided by market makers. Two new segments, for electronically tradable gilt-edged securities (UK Gilts) and electronically tradable UK fixed interest securities (UK Corporates) will be introduced on London Stock Exchange Group s TradElect trading system. The trading day will be made up of an initial opening auction phase followed by continuous trading until market close. There will be no closing auction. All order book trades in securities admitted to the new segments will settle in CREST. Where required, routing of trade information to Euroclear UK & Ireland will be carried out by London Stock Exchange Group s post-trade router, X-TRM. Copyright London Stock Exchange Page 3 of 19

5 4 1.2 Scope of Changes This document provides an overview of the new order book and outlines the key features offered by the new trading service. Also included is an initial summary of the market structure and settlement arrangements and a technical description of the functional changes required for implementation. 1.3 Readership This service and technical description is intended to provide a guide for members. It will also be useful for private client brokers, Retail Service Providers, Market Data Vendors and prospective participants who may wish to begin trading on the new trading service. 1.4 Relevant Documentation Related documents are available on the Exchange s website, including: Guide to TradElect: TradElect Parameters Document: Technical Specification Documents: Enquiries and Comments Supporting you throughout the implementation of this new service is important to us. For further information in relation to technical queries, please contact your Technical Account Manager or the Technical Information Desk on +44 (0) Alternatively, please the Client Technology Group on [email protected]. Copyright London Stock Exchange Page 4 of 19

6 5 For commercial or business queries, please contact the UK Fixed Income team on +44 (0) If you are interested in applying for access to the new trading service, please contact the Client Implementation Team on +44 (0) or Copyright London Stock Exchange Page 5 of 19

7 6 2. Service Overview 2.1 Overview London is one of the premier global venues for the primary market listing of debt securities and is the most important centre for secondary market overthe-counter (OTC) trading of international bonds. Over 10,000 debt securities are admitted to the London Stock Exchange but the majority of these securities are not electronically tradable on our systems. Instead most debt securities are available in trade reporting-only segments of TradElect. We recognise the unique nature of the wholesale bond markets and will continue to offer all existing services to meet its members trade reporting requirements. We also seek to facilitate new business and to respond to demand for a transparent, liquid bond trading service where retail investors can gain exposure to fixed income asset classes and where members can execute electronic transactions in bonds using their existing connectivity arrangements. 2.2 Access Member firms who require access to the Order book for Retail Bonds will be required to register for the new trading service and provide static data. Participants will be required to submit a relevant static data form to the Client Implementation team at [email protected]. Please note that Trader Group IDs used on this service must be either 8 or 11 characters. A list of market participants with access to the electronic bond trading segments will be made available on the London Stock Exchange website. Customer testing on our Customer Development Service (CDS) is now available. It will be the responsibility of firms seeking to access the new service to conduct the appropriate testing to ensure readiness for live implementation. Copyright London Stock Exchange Page 6 of 19

8 7 2.3 Scope The new electronic order book will initially include UK gilt-edged securities in a new UK Gilts segment UKGT and UK domestic fixed interest securities in a new UK Corporates segment UKCP. To be admitted to the electronic bond market, securities must be eligible for CREST settlement and must be supported by an electronic market maker. Straight-through-processing of order book trades will be available for those who opt-in to Direct Input in CREST for settlement. The initial implementation will not offer a central counterparty (CCP) model for clearing. 2.4 Trading Services The new trading service will offer an electronic order book trading model similar to SETS, with continuous two-way pricing provided by market makers. Market maker quotes will have maximum spread and minimum volume requirements. Minimum volume will be a multiple of the lot size set for the security. Participants will be able to enter orders to execute electronically against named market maker quotes (aggressive execution), or enter their own orders onto the order book (passive execution). 2.5 Order Types Market makers will be able to enter named, electronically executable quotes. All market participants will be able to use limit orders and market orders. Hidden, iceberg and named order types will not be supported on this service. For further information on these order types and their characteristics please refer to the Guide to TradElect. 2.6 Trading Phases The trading day will be made up of an initial opening auction phase running from 8:00 to 8:45 hours (London time) followed by continuous trading until market close at 16:30 hours. There will be no closing auction. Copyright London Stock Exchange Page 7 of 19

9 8 2.7 Price Monitoring Price movements in securities will be monitored in regard to a dynamic and static reference price. If pricing diverges by a defined percentage away from either reference price an automatic execution suspension period (AESP) will be activated for a period of 5 minutes. Price monitoring tolerances will be determined at sector level as detailed below: Segment Code Sector Code Open auction PMP % Dynamic Price Monitoring % Static Price Monitoring % UKGT UKG UKGT UKG UKCP UKC UKCP UKC UKCP UKC Price Conventions All prices entered for trades in the new UK Gilts and UK Corporates segments must be entered as a clean price, i.e., exclusive of accrued interest. 2.9 Tick Size The minimum price movement for all securities made available for trading in the new UK Gilts and UK Corporates segments will be No changes will be made to the minimum price increments available for trade reporting in gilt-edged and fixed interest securities. The granularity available for trade reports is not restricted to the tick size set for orders on TradElect. Copyright London Stock Exchange Page 8 of 19

10 Order Size A minimum tradable lot size will be set for all securities. For gilt-edged securities in segment UKGT the minimum tradable lot will be 1 nominal value. For securities in segment UKCP the minimum tradable lot size will be equal to the denomination size of the bond. Orders entered must equal the minimum tradable lot size, or be a multiple thereof Accrued Interest As order book trades will be executed on a clean basis, X-TRM will calculate accrued interest for these electronic transactions. Accrued interest will be applied based on one of the following day count conventions: ACT/ACT ACT/ACT ISMA ACT/360 ISMA 30E/360 ISMA European ACT/365. Conventions and formula for the calculation of accrued interest on each security admitted to the order book will be made available to participants via the London Stock Exchange website Settlement All settlement of order book trades will take place within CREST. Participants have two options for settlement processing on this service: Participants can opt in to Direct Input, whereby settlement of order book trades will be instructed automatically by the X-TRM post-trade router via Direct Input into CREST. Order book trade data will be fed into X-TRM which will calculate the accrued interest payable and will instruct settlement in CREST on behalf of the counterparties. Participants or their settlement provider must contact CREST to set up Direct Input for the relevant settlement accounts. Participants currently using Direct Input functionality within other London Stock Copyright London Stock Exchange Page 9 of 19

11 10 Exchange markets (eg. SETS) will still be required to contact CREST to set up Direct Input for this new trading service. Where participants have chosen not to opt-in to Direct Input, they will have to enter settlement details (including accrued interest) into CREST manually, for matching with their counterparty. For all trades counterparty details will be included in the trade report sent from TradElect immediately after the execution of a trade. The choice of settlement option implemented will have no bearing on any part of the trading process, including which counterparties can be executed against. The standard settlement timetable for securities in the UK Corporates segments will be T+3. In keeping with existing arrangements for gilt-edged securities, the settlement timetable for securities in the UK Gilts segment will be T Buying-in Buying in will be available for electronic trades executed in securities admitted to the order book. The earliest that a request for buying in can be made is intended settlement date Trade Reporting Trade reporting will be available in all gilt-edged and fixed interest securities traded on the order book. Order book trades will be trade reported automatically and will be published immediately. The wholesale reporting arrangements for non-electronically traded giltedged securities and for fixed interest securities will remain in place and no data on trade reported business will feed into the X-TRM post-trade router. However, market participants currently trade reporting in these securities should be aware that, as some securities will migrate into the new UK Corporates and UK Gilts segments, they may need to make amendments to their arrangements to reflect the change of segment. Copyright London Stock Exchange Page 10 of 19

12 11 3. Technical Description This section provides details of the technical changes being implemented on TradElect to facilitate the new electronic, order-driven trading service for UK government and corporate bonds. 3.1 Market Structure Two new trading segments will be introduced. Gilt edged-securities will be available in the UK Gilts segment (UKGT) and UK fixed interest securities will be available in the UK Corporates segment (UKCP). UKGT will be split into two sectors, whilst UKCP will be split into three sectors, to allow for variations in price monitoring thresholds and market maker obligations. A summary of the market structure is as follows: Segment Code Segment Description Sector Code Sector Name UKGT UK Order Book Gilts UKG1 UK order book Gilts 1 UKGT UK Order Book Gilts UKG2 UK order book Gilts 2 UKCP UK Order Book Corporate Bonds UKC1 UK order book Corp Bonds 1 UKCP UK Order Book Corporate Bonds UKC2 UK order book Corp Bonds 2 UKCP UK Order Book Corporate Bonds UKC3 UK order book Corp Bonds 3 The market configuration matrix (TIS105) has been updated with the new segment, sector, roles and period changes. This document is available at: Copyright London Stock Exchange Page 11 of 19

13 Closing Prices A closing price for gilt-edged and fixed interest securities admitted to the order book will be calculated and disseminated to the market. This closing price will be determined based on the mid-point of the bid-offer spread and will serve as a reference for securities in the UK Gilts and UK Corporates segments. This closing price represents only the closing price for the electronic order book and in the case of gilt-edged securities this price may vary from the Gilt-Edged Market Makers Association (GEMMA) Reference Price. 3.3 Reference Data Reference data for this service will be sent down existing Service and Performance Channels via Infolect. This has been done to reduce the overall cost and lead time of configuration for this service. Reference data will be sent down S04/P04 and S17/P17 whilst market data will be sent down Sf1, Sf2 for Service Channels and Pf1 and Pf3 for Performance Channels. Market Status indicators will be sent down S16/P16. For a list of all messages sent down these channels please refer to Appendix A. Copyright London Stock Exchange Page 12 of 19

14 13 4. Testing 4.1 Conformance Requirements No new functionality is being introduced for the changes described in this document, and therefore no mandatory testing is required. Any Independent Software Vendors (ISVs) or in-house software developments that do not currently support the trading functionality but wish to subscribe to the service must pass a full trading conformance test. 4.2 Customer Development Service The structure for the Order Book for Retail Bonds is currently available on the CDS environment to allow customers to begin testing. Customers are recommended to make use of the CDS environment to test their internal systems prior to go-live. More information on the CDS environment can be found on the London Stock Exchange s website techlib/cust+test/ 4.3 End to End Testing From mid January 2010 end to end testing from trading through to settlement via the X-TRM router will be made available. Member firms who have submitted the relevant static data form will be able to perform end to end testing until go-live. Customers who have not submitted a completed static data form prior to the start of the end to end testing phase will not be able to access the CDS environment during this time. Copyright London Stock Exchange Page 13 of 19

15 14 5. Project Implementation 5.1 List of Available Securities The securities to be migrated and the segments / sectors to which they will be moved will be communicated prior to go-live via a Service Announcement. Market participants should then use the Reference Data Service (Full & Changes) for full details of the UKGT and UKCP securities, segments, sectors, period rules, etc. 5.2 Participation Market participants that wish to sign up to this service must complete a new static data form, available at: For assistance with this process participants can contact the Client Implementation Team on +44 (0) or by at [email protected] 5.3 Key milestones Indicative dates for key milestones and documents are as follows. All documentation will be made available on the London Stock Exchange s website. Indicative Timetable November 2009 Publication of Service and Technical Description (this document) December 2009 January 2010 TradElect Customer Development Service (CDS) available, allowing customers to test trade execution in the new market segments End to end testing available 1 February 2010 Expected go-live Copyright London Stock Exchange Page 14 of 19

16 15 Appendix A Message Versions Appendix A provides a comprehensive list of all messages sent on UK Level 1, UK Level 2, market status indicator channels and UK reference data. Service Name UK Level 1 Service/Performance Channel Sa1, Sb1, Sc1, Sd1, Se1, Sf1, Sg1, Sh1, Si1, Sj1/ Pa1, Pb1, Pc1, Pd1, Pe1, Pf1, Pg1, Ph1, Pi1, Pj1 MESSAGE TYPES THAT MAY BE BROADCAST OVER THIS CHANNEL: 5AP Average Cumulative Volumes 5AB Return Measures 5AF Alphas/Betas 5DV Cumulative Number and Volume of Trades 5EM Ex Marker Status 5FM Value Traded 5IP Idle Poll 5MH Mid High/Low 5MV Market Share top 5 5OZ Trade Report 5PP Market Share Ratio and Market Capitalisation 5PR Opening Price 5SF Best Price and Volume 5SG Announcement Message 5SK Closing Price 5TH Trade High/Low 5VO VWAP from Trades 5VW VWAP from Automatic Trades 5TW Time Weighted Average Spread 5UD Uncrossing Price and volume Copyright London Stock Exchange Page 15 of 19

17 16 Service Name UK Level 2 Service/Performance Channel Sa2, Sb2, Sc2, Sd2 Se2, Sf2, Sg2, Sh2, Si2, Sj2/ Pa3, Pb3, Pc3, Pd3 Pe3, Pf3, Pg3, Ph3, Pi3, Pj3 MESSAGE TYPES THAT MAY BE BROADCAST OVER THIS CHANNEL: 5CT 5EM 5IP 5MK 5OE 5OL 5OO 5OV 5OW 5QT 5SG 5SN 5SX 5UP Tradable Instrument Control Ex-Marker Status Idle Poll Market Status Information Order Deletion/Expiry/Fully Matched Temporary Period for tradable Instrument/Currency Order Details Tradable Instrument/Currency Period Change Sector Period Change Quote Update Announcement Message Quote Close Uncrossing Completed Uncrossing Price Copyright London Stock Exchange Page 16 of 19

18 17 Service Name Service/Performance Channel UK Reference Data S04/P04 MESSAGE TYPES THAT MAY BE BROADCAST OVER THIS CHANNEL: 5EM 5ER 5IP 5IS 5MN 5MS 5OM 5SD 5SG 5SS 5TM 5TY 5VI Ex Marker Status Equity Background Data Idle Poll Instrument Trading Data Member Role in Instrument Member in Segment Period for Market Sector Segment Description Announcement Message Sector Description Tick Size Matrix for Segment / Currency Trade Type for Segment Settlement Venue for Instrument Copyright London Stock Exchange Page 17 of 19

19 18 Service Name Service/Performance Channel Market Status Indicators (Exchange) S16/P16 MESSAGE TYPES THAT MAY BE BROADCAST OVER THIS CHANNEL: 5CT 5IP 5MK 5OL 5OV 5OW 5SX Tradable Instrument Control Idle Poll Market Status Information Temporary Period for tradable Instrument/Currency Tradable Instrument/Currency Period Change Sector Period Change Uncrossing Completed Service Name Service/Performance Channel Market Reference Data S17/P17 MESSAGE TYPES THAT MAY BE BROADCAST OVER THIS CHANNEL: 5HM 5HV 5IP 5MR 5MT 5PE 5PU 5PM 5SV Period Handling for Market Mechanism Type Period Handling for Validity Type Idle Poll Member Details Market Description Period Extensions Period Rules Period Rules for Market Mechanism & Validity Type Settlement Venue Copyright London Stock Exchange Page 18 of 19

20 Copyright January 2010 London Stock Exchange plc. Registered in England and Wales No London Stock Exchange plc has used all reasonable efforts to ensure that the information contained in this publication is correct at the time of publication, but shall not be liable for decisions made in reliance on it. London Stock Exchange and the coat of arms device are registered trade marks of London Stock Exchange plc. London Stock Exchange 10 Paternoster Square London EC4M 7LS Telephone: +44 (0) Copyright London Stock Exchange Page 19 of 19