June 15, 2011

Major sell side firms see the potential for the FIX protocol to become the electronic trading standard for emerging swap execution facilities in the OTC derivatives market, according to Courtney Doyle McGuinn, FPL Operations Director, who spoke with Wall street & Technology at the SIFMA event in New York yesterday.

Today FPL announced that a consortium of 12 leading investment banks have agreed to work with existing and emerging fixed income venues and independent software vendors (ISVs) to promote increased adoption of the FIX protocol and open standards such as FpML across the life-cycle of fixed income products, FIX Protocol Limited is non-profit group that maintains and promotes the FIX standard.

FIX Protocol is the language used by firms across the world to facilitate electronic trading in front-office equities. Its usage has been steadily expanding across the foreign exchange, derivatives and fixed-income markets. However, the usage of FIX in fixed income markets is still lagging even though the tags for fixed income have been available in FIX since the 2002/2003 time frame, partly because assets managers call up their brokers to execute a trade.

However, momentum for adopting FIX for fixed-income is building as a result of the Dodd-Frank financial reforms which is seeking greater market transparency by requiring most types of OTC derivatives to clear through central counterparty facilities and trade on swaps execution facilities or SEFs. A surge in new market trading venues is expected within the U.S. and similar reforms are expected from upcoming MiFID II regulations in Europe.

As a result of these regulatory initiatives, there is more of a push by FPL and its members to persuade new and existing venues to increase adoption of FIX to increase efficiencies and produce cost savings for market participants, states today’s release.

With the new regulations pushing electronic trading in the more opaque instruments, some existing fixed income venues that are already using FIX are expanding into credit derivatives.

Commenting on the fixed-income initiative, Ric Elvir, Co-Chair of the FPL Global Fixed Income Committee, UBS stated, “FPL is supported by leading financial services companies from the buy- and sell-side, as well as the exchange, ECN and vendor communities. By engaging FPL, the consortium will benefit from the expertise, knowledge and extensive experience of the organisation’s industry-wide membership.”

Standards came up on a SIFMA panel today discussing the impact of SEFs, clearing and and OTC derivatives on technology. Moderator Larry Tabb, CEO of Tabb Group, asked what the standards are going to be and how the industry would reconcile the dominance of FIX in securities vs. FpML in derivatives.

Rick McVey, CEO of electronic credit marketplace MarketAxess, which plans to launch a SEF, said that the dealers are working on a FIX standard for fixed income. McVey said the adoption of FIX 5.0 is throughout the industry and migration is occurring today. However, the protocol may have to be tweaked because asset managers come in through a variety of systems, such as Bloomberg’s AIM, Charles River, and BlackRock’s Aladdin, noted McVey. On the same SEF panel, George Harrington, global head of fixed income Trading at Bloomberg, added, “Our protocols are FIX-based with FpML encapsulation,” said McVey at today’s conference.