Boosting the Resilience of Post-Trade with a Collaborative FIX

Early adopters of back office efficiency gain an edge, but the industry needs wholesale change through standardisation.

When financial services shifted to remote working while also dealing with increased market volumes in response to the global impact of Covid-19, it put the spotlight on operational efficiency and the need for increased automation and standards. Outdated, manual processes based on creaking infrastructure are simply not sufficient when employees are working in isolation away from offices; and in post-trade, unnecessarily complex, siloed operations further complicate matters when working to maintain seamless operations during a crisis.

In the lead-up to the pandemic, Accenture reported that an average of 70% of banks’ IT budgets are still being spent on maintaining legacy environments. To be resilient when faced with disruptive events, the industry needs to move aggressively, rather than making incremental tweaks. Prioritizing resilience and driving efficiencies requires aggressive simplification of the post-trade industry. The adoption of technical and operational global standards is an accelerating trend whose time has come.

The Financial Information eXchange (FIX) protocol is an industry-led partnership with a business-driven approach to solving granular challenges in STP by developing new messaging standards. In the 2010s, FIX took on an ever-increasing role in front-office executions as electronification of trading came to all asset classes. There are also opportunities to extend FIX usage into the middle- and back-office. FIX has already seen positive post-trade adoption on both the buy side and sell side with FIX allocations and confirmations for equities and fixed income, and now there is increasing interest in the exchange-traded derivatives, foreign exchange and repos markets. More generally, the industry is showing more interest in moving FIX beyond the middle-office into the settlement and payments process, a necessary step toward 100% digital, automated straight-through-processing (STP).

In February and March this year, trading volumes in all asset classes spiked in response to uncertainty around Covid-19, leading to a scramble for liquidity. If sell-side businesses are able to manage inventory, assess risk, price for risk and at the same time assess the likelihood of trade failure in real time, they will be able to supply liquidity to their clients more frequently, and at a lower cost, than their peers. This will place considerable operational demands upon siloed technology stacks and fragmented data sources. FIX standards can play a supporting role in this through improving liquidity management, STP and operational control through reducing errors.

The weak spot is connectivity. Much of the financial industry remains dependent on humans as interfaces between systems, with emails, phone calls and faxes still providing much of our connective tissue. It is time to move rapidly to an operating environment where FIX and ISO 20022 underpin structured data flow, and open application programming interfaces (API’s) connect non-structured data. This rapid adoption is entirely possible using a cloud-based software-as-a-service model, which allows new technology to be layered over existing processes, in a modular approach, and then built up to construct a new, flexible IT framework that fully supports STP. By overcoming the operational barriers to change, major financial organisations can bridge the gaps in their widespread operations at lower cost than on-premise systems would have allowed.

As those early adopters begin to embrace messaging standards and deploy STP systems across their back offices, their commercial partners will gain efficiencies by following suit. The trickle-down effect will reach market infrastructure players and smaller firms, creating an increasingly automated, resilient ecosystem. Eventually the market will come together in embracing a more efficient, standardized way of working, but the early adopters will have a chance to simultaneously boost their operational resilience while scaling up their business. With the post-trade industry increasingly collaborating around FIX standards, early adopters will be viewed as leaders in the space, but given the interconnectedness of financial services, it is vital that all market participants prioritize operational resiliency. Broadening the use of standards is a good next step toward transforming post trade and safeguarding our industry.

May 6, 2020

mack gill