EMEA Trading Conference 2013 28 th February London

EMEA Trading Conference 2013 28 th February London

Using FIX for OTC Derivatives

Using FIX for OTC Derivatives Sassan Danesh, Co-Chair FPL Global Fixed Income Committee, Managing Partner, etrading Software Ltd. Fiona Hamilton, Vice President EMEA Operations, Volante Technologies Jivraj Kainth, Head of EMEA FICC Liquidity Tech, Goldman Sachs & Co. Andrew Parry, Co-Chair FPL Global Derivatives Subcommittee, Chair ISDA Equity Derivative Working Group, Director, Derivatives Business Technology, Bank of America Merrill Lynch Justin Peterson, Head of Technology Institutional Fixed Income, Tradeweb

Table of Contents FIX in the Derivatives Market FIX Enhancements for Trading OTC Derivatives Best Practices for Fixed Income Trading - CDS & IRS Structure of Swaps Best Practices Documentation Principles Behind the Best Practices FpML Payload for IRS & CDS Trading FIX Enhancements for Regulatory Reporting CFTC Parts 43 & 45 - Swap Data Reporting Enhancements (GTC & FIA) FIX Extension Packs for OTC Derivatives Pre-trade Credit Limit Check Enhancements Additional Extension Packs 4

FIX in the Derivatives Market Origins Equities trading since FIX inception in 1992 FX as a traded asset class since FIX 4.2 Listed Derivatives as of FIX 4.2 Fixed Income bonds as of FIX 4.4, released in 2003 Expansion Regulatory mandates for the migration of OTC derivatives onto electronic platforms has made FIX the market standard for swap market connectivity Global Fixed Income Subcommittee created best practices recommendation for swaps trading in 2012 5

FIX Enhancements for OTC Derivatives Best Practices for Fixed Income Trading - CDS & IRS In 2011, FPL engaged with a consortium of large sell-side banks (FICWG) with the aim of promoting the increased use of FIX for trading fixed income products Objectives Adoption of open standards for the trading of fixed income products Scope All Fixed Income OTC markets Phased Approach 2010 Feasibility study 2011 FPL Best Practices for CDS & IRS (Phase 1) 2012 FPL Best Practices for Cash Bonds (Phase 1) FPL Best Practices for Cash Bonds (Phase 2) FPL Best Practices for CDS & IRS (Phase 2) 6

FIX Enhancements for OTC Derivatives Structure of Swaps Best Practices Documentation FPL-FICWG 2011/2012 CDS & IRS Best Practices (Phase 1) Introduction (Vol.1) Overview FIX Backward Compatibility Glossary Common Workflows (Vol.2) Infrastructure Messages Instrument Identifiers Reference Data Price Subscription Quote Contribution Quote-Driven Workflows (Vol.3) Quote Request Quotes/Order Based Trading Central Order Book (Vol.4) New Order, Amend, Cancel Execution Best Practices (Phase 2) Introduction (Vol.1) Overview FIX Backward Compatibility Glossary Common Workflows (Vol.2) Infrastructure Messages Instrument Identifiers Market Conventions Reference Data Price Subscription Quote Contribution Quote-Driven Workflows (Vol.3) Inquiry Timeline Quote Request Tradeable Quote (No Last Look) Tradeable Quote (Last Look) Indicative Quote Multi-Dealer Voice Trading Central Order Book (Vol.4) New Order, Amend, Cancel Execution Quote Contribution to CLOB Voice Trading 7

FIX Enhancements for OTC Derivatives Principles Behind the Best Practices Identify Business Workflows Identifiy FIX Messages Identify FIX Fields Such as Market Data Trading Negotiation For each scenario, identify the business workflow then recommend the set of FIX messages and fields to use for that workflow The committee submitted relevant Gap Analysis documents to the FPL Global Technical Committee, these were all approved and have been incorporated into the FIX 5.0 SP2 specification 8

FIX Enhancements to Support OTC Derivatives FpML Payload for IRS & CDS This body of work describes how an FpML payload can be used to carry a non-standard product definition during the pre-trade workflow. Products Covered Single name Bond Indices itraxx Outcome CDS - Europe Indices - Asia Indices CDX (US) - Investment Grade - High volatility investment grade - High yield (all ratings) IRS IRS that consist of exactly two legs: - Fixed Rate leg - Floating Rate leg For single CCY swaps, the fixed rate notional amount is always the same as the Floating rate notional There are no fees (neither initial nor final fees) Fixed vs. Float single CCY (G8) Traditional Fixed vs. Float cross CCY (G8) OIS (G8) Multi-leg instruments such as switch and butterfly IRS & CDS schema definitions approved by FPL and ISDA and officially released in early 2013 Documents available to download at the following link: http://www.fpml.org/spec/fpml-5-5-1-wd-1/ 9

FIX Enhancements for Regulatory Reporting CFTC Parts 43 & 45 Swap Data Reporting Enhancements (GTC & FIA) Part 45 requires reporting of all swap transactions to Swap Data Repositories (SDRs) whether cleared or uncleared Part 43 defines the rules for SDRs to disseminate real-time information on swap transactions to the public In April 2012 an industry working group sponsored jointly by FPL and the FIA was launched to identify the enhancements needed in the FIX Protocol to support fully the 17 CFR Part 43 and 45 rules. The outcomes were: Four phase gap analysis - Phase 1: Primarily focused on CDS & IRS - Phase 2: Primarily focused on Commodity Swaps - Phase 3: Primarily focused on Foreign Exchange - Phase 4: Primarily focused on Equity Swaps White paper about the Unique Swap Identifier (USI) TradeIDGrp 10

FIX Enhancements for Regulatory Reporting Part 43 and 45 Reporting FIX Message Flow Swap Execution Facilities Swap Dealers & Major Swap Participants Confirmation/ Affirmation Platforms Derivatives Clearing Organizations Swap Data Repositories Real-Time Part 43 (public) TradeCapture Report SDR Portal Public Primary Economic Terms Part 45 (regulators) TradeCapture Report Confirmation Part 45 (regulators) TradeCapture Report SDR Portal CFTC Valuation (trade time & ongoing) TradeCapture Report 11

FIX Extension Packs for OTC Derivatives Pre-Trade Credit Limit Check Enhancements A FIX gap analysis produced with FIA s support It was determined that the Parties Reference Data set of messages would be enhanced to support the requirements for pre-trade credit checks Additionally the following new messages have been proposed: PartyRiskLimitsReportAck(35=TBD) - used to ack or nack the PartyRiskLimitsReport(35=CM) message PartyRiskLimitCheckRequest(35=TBD) - used by the Ping Model to request credit limit approval PartyRiskLimitCheckRequestAck(35=TBD) - used to ack or nack the PartyRiskLimitCheckRequest message 12

FIX Extension Packs for OTC Derivatives EP140, EP147 & EP153: CFTC Large Trader Reporting Extensions (GTC & FIA) Extension of PositionReport(35=AP) message to support large trader reporting rules for physical commodity swaps and swaptions EP155: Customer Cross Margin Reporting Extension Derivatives Clearing Organisations (DCOs) will be required to set minimum performance bond levels (initial margin) as the sum of requirements calculated for each individual customer account EP156: Legal Entity Identifier (LEI) Extension (GTC) A new PartyIDSource(447) value to specify the new Legal Entity Identifier EP157: Legally Segregated Operationally Commingled (LSOC) Extension This extension pack provides the ability for Futures Commission Merchants (FCMs) to report to clearing organizations the information required to meet LSOC reporting obligations. The AccountSummaryReport message has been enhanced for this purpose. 13

Panel Discussion Moderator Sassan Danesh, Co-Chair FPL Global Fixed Income Committee, Managing Partner, Etrading Software Ltd. Panel Members Fiona Hamilton, Vice President EMEA Operations, Volante Technologies Jivraj Kainth, Head of EMEA FICC Liquidity Tech, Goldman Sachs Andrew Parry, Co-Chair FPL Global Derivatives Committee, Chair ISDA Equity Derivative Working Group, Director, Derivatives Business Technology, Bank of America Merrill Lynch Justin Peterson, Managing Director, Tradeweb 14