STP in the Bond Market? Not Yet, But Electronic Initiatives Are Gearing Up
The BMA hopes to have a better idea about which version of FIX firms are currently using after it tallies the results of a recent survey conducted by FIX Protocol Ltd., which polled an array of fixed-income FIX participants.
""I think a lot of them are still going to be on 4.0 ... . But, certainly, from (the BMA's) perspective, on the buy side, 4.4 is where you want to be. It's the first release that has the nine (electronically-traded bond) products. So our next phase, as a committee, is to embark on the marketing of what we've accomplished in order to get people to sign up for the new version,"" says Senft.
During the three-plus years the BMA has been working on FIX, one of the largest obstacles it had to overcome was building a protocol that could handle the complexity of bonds. FIX, Senft notes, was originally developed for stocks - but whereas a stock is a stock, there are many different types of bonds. And none of them are traded in the exact same manner.
""There are completely different methods of price discovery and messages that have to be sent back and forth, depending on whether you are talking about a treasury security ... or a corporate bond ... or a mortgage-backed TBA,"" he says.
Recognizing the intricacies of bonds, the BMA has assigned each bond instrument covered by FIX 4.4 to a business-focus group, specializing in the trading of a specific product. For example, the BMA has one focus group dedicated to municipal bonds and another dedicated to treasuries. Each group, Senft says, must ask itself a series of key questions, including: ""How is a particular instrument priced and how are indications transmitted back and forth?"" This ""business-level expertise,"" he says, has helped the BMA figure out what elements make a product different. ""We had nine products and nine business-focus groups. The output of the discussions of (those) business professionals is embodied in something we called the Plain English Language document,"" says Senft.
That document describes, in non-technical terms, how each particular product is traded. After that document is published, Senft says, the product then gets sent along to a FIX-technology committee, which asks specific questions, such as ""How many new fields do I need, and how many new message types do I need?""
That process - which measures FIX's current capabilities versus the changes that are needed to adapt FIX to meet the requirements of a specific product- was dubbed a GAP analysis by the BMA. Senft, who asserts that every product covered by FIX 4.4 will undergo a thorough GAP analysis, declines to provide any specifics about what it will cost to install the BMA's latest version of FIX.
But CSFB's Murray says that both FIX 4.4 and the messaging hub should ultimately yield ""significant cost savings"" for fixed-income firms. The initiatives, he adds, should also allow firms to increase their control of risk.
Paul Scheufele, managing director of fixed income at CSFB and chairman of the BMA's online bond steering committee - which oversees the STP and standards/protocol committees - agrees with Murray.
The potential economic incentives of STP, is trying to develop a netting process that will enable both sell side and buy side firms to clear more transactions as profits, and is considering building a middle-office utility that would serve as the central reservoir for all industry exceptions. However, those initiatives don't rank as high in priority as the association's two most ambitious projects: the development of a standard-messaging hub and the release of an advanced fixed-income version of the FIX-messaging protocol.
Messaging Hub: Simplifying the Route to VMUs and ATSes
One of the ways the BMA is trying to automate the trading cycle for bond dealers is via the development of a standard messaging hub. Today, in order to send trade messages to every firm it transacts with, a dealer must build interfaces to multiple fixed-income alternative-trading systems (ATSes) and virtual-matching utilities (VMUs).
For the purposes of communicating with their clients, ATSes - like TradeWeb - and VMUs - such as Omgeo and the Global Straight Through Processing Association - have each built their own application-programming interfaces.
But the BMA, led by its STP steering committee, wants to develop a standard hub, through which trade messages can be sent to every ATS and VMU.
Peter J. Murray, chairman of the STP steering committee and the managing director of the Americas operations at Credit Suisse First Boston, says that such a hub should yield valuable cost savings to bond dealers.
""The VMUs are all building their own separate technology and functionality. So, from the dealer side, we now have to communicate with each one of these platforms,"" he explains.
""Then you have the ATSes that are out there, that are building the same functionality as the VMUs in a lot of cases. And today we have to build an interface with each different ATS that comes along. (Moreover), there are three or four firms in Europe that are looking at building a VMU, and we'd have to interface with each one of those ... . But this messaging hub would allow (dealers) to communicate to one place, and then that messaging hub would send the trade messages out to the appropriate VMU or ATS.""
Though the messaging-hub initiative is still in its early stages, the BMA has formed a subcommittee that is focused exclusively on this project. That subcommittee, says Murray, will ""probably"" send out a request-for-proposal ""to various different vendors,"" in an effort to find someone to develop the technology for the hub.
After the BMA selects a vendor to oversee the development of the messaging hub, it must decide exactly when the platform will go live. Right now, Murray says, the BMA is targeting the third or fourth quarter of 2003 for the launch of the hub - but that could change if any matching or execution vendors decide to postpone their rollouts.
In addition to not having a specific date for the launch of the hub, the source of the funding remains unclear. Though it's possible that capital will come solely from bond dealers, the BMA may also seek funding from other segments of the fixed-income community.
Joseph Sack, a BMA executive vice president, says the messaging-hub effort is part of a larger shift in the bond industry. Up until recently, he says, fixed-income firms were focused on T+1, a project that calls for firms to achieve next day settlement of trades. But since the T+1 deadline in the United States has been pushed back to 2005, the bond community, says Sack, has put T+1 on the backburner, and refocused its energy on STP. ""We definitely want to achieve automated allocations, and we want to achieve matching of block trades on almost an immediate basis,"" he says.
FIX 4.4 For Bonds on Horizon, But Will Anyone Adopt It?
The development of a standard-communications protocol - that will enable buy-side and sell-side fixed-income firms to talk to each other - is another critical element of the BMA's quest for STP. ""Right now, everybody has their own standard formats of how they communicate with each other, and one of the things that we firmly believe is that we need to build a standard-communication module and protocol,"" says Dexter Senft, a managing director at Lehman Brothers and the co-chairman of the BMA's protocol/standards committee.
To achieve that goal, the BMA is planning to release FIX 4.4 - an advanced version of the FIX-communications protocol that covers nine different bond instruments - in the first quarter of 2003. FIX 4.4, says Senft, will offer ""complete support for fixed-income transactions,"" from indications of interest all the way up to allocations. It will also cover virtually all of the bonds traded online, including U.S. treasuries, corporates, municipals, mortgage-backed TBAs, commercial paper, repos and European corporates and governments.
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