Bank-backed futures utility criticized as too ambitious

Efforts to simplify the futures trade lifecycle should be guided by pragmatism rather than grand designs of overhauling existing workflows, a top industry executive has said.

Dealers have backed the creation of a new utility to prevent a repeat of the operational bottlenecks that crippled futures trade processing during last year’s pandemic-induced market meltdown. The project is being led by FIA Tech, a for-profit subsidiary of the Futures Industry Association, which plans to simplify the futures trade lifecycle by standardizing the way market participants connect with each other and more than 70 exchanges.

Joanna Davies, head of FX and securities at Osttra, a new post-trade joint venture between CME Group and IHS Markit, said that vision “sounds like nirvana”. Instead, she urged “pragmatism in a first step to deliver quick wins.”

Davies has previously suggested one solution could be to take executing and clearing brokers out of the process and have clients communicate their allocation instructions directly to clearing houses using a common set of transaction data standards.  

Julian Bennett, head of exchange-traded derivatives business development at Osttra, agreed that standardizing the data formats used by exchanges to identify trades could deliver faster results. “Everyone has an order ID on the trade, but everyone just changes it to their own systems’ order ID,” he said. “Creating a link between everybody’s order ID would give an indelible mark that leads right the way through from trade execution to clearing. That is the key to making allocations efficient.”

Davies also played down suggestions that distributed ledger technology should be the focus to improve futures trade workflows. “I think too often, we go down the road of identifying technology and force-fitting it to the problem, as opposed to the other way around,” she said.

Bennett and Davies were speaking on a panel at the Futures Industry Association’s IDX conference on September 27.

Speaking on the same panel, Nick Solinger, president and chief executive of FIA Tech defended plans to create a utility to manage trade allocations, saying there “needs to be a place for everyone to meet to exchange information”.

“Otherwise, everyone will still have their own reconciliations and matching and do it independently,” he said. “Our vision is working together to create a trade data network that sits parallel to the clearing workflow, that facilitates this exchange of information.”

“Why isn’t [processing] seamless end to end? Why isn’t it real-time?… And why are everybody’s commodity codes different?

Samina Anwar, Cargill

The futures industry has come under intense pressure from end-users and regulators to address the root causes of the back-office breakdown in March 2020, when a big increase in volumes led to a large number of trade breaks, resulting in missed margin payments and positions left on the books of the wrong brokers.

Speaking on a separate panel at the IDX conference, Samina Anwar, derivatives operations director at US food giant Cargill, said the debacle “absolutely hit across our companies”, leaving the firm unable to reconcile its books.

“What we’re looking for is absolutely less complexity and more efficiency,” she said. “Why isn’t [processing] seamless end to end? Why isn’t it real-time? Why do we have books and records that we’ve maintained, and then every participant along the chain is maintaining their own books and records? And why are everybody’s commodity codes different?”

Jonathan Morris, global head of listed derivatives operations at Goldman Sachs, also stressed the need to improve trade processing. “We all recognize that post-March 2020 there were several things that happened that none of us would want to go through again, and there’s definitely lessons to be learned,” he said, speaking on a third panel at the same conference. “Hopefully, through some of the standards work that we are doing, we’re definitely going to be a force for change.”

Speaking on the same panel as Morris, Meher Sutaria, head of global clearing operations for Europe, the Middle East and Africa at JP Morgan, urged the industry to unite and press ahead with a solution before one is imposed on it.

“I think this is a unique opportunity for us to actually make a change because if we don’t do it with all the issues that were there last year, the regulators might force our hands to do it,” she said. “And then you can’t do it the way you might want to do it. It might be enforced on us. So, we need to make sure that we act.”