As the derivatives industry moves towards greater automation, one seemingly simple piece of trade data can still cause problems downstream: how a trade was executed.
The industry already has mechanisms for capturing execution source, which records the method associated with a trade’s execution. FIX Protocol Tag 1031 is widely recognised as a mechanism for carrying that information, but adoption across exchanges, clearinghouses and market participants has been inconsistent and incomplete, according to the Derivatives Market Institute for Standards, or DMIST.
Execution source values can be missing, overwritten or unvalidated, rendering them unreliable for systematic use, DMIST says. This can affect brokerage and fee calculations, reconciliation and other downstream processing, leaving firms to rely on manual processes, bilateral mappings and exception handling.
For example, two otherwise identical trades could attract different brokerage charges if one is executed electronically and the other receives greater broker involvement. If the execution source information is lost as the trades move downstream, they can appear identical.
Clearing brokers may then apply the wrong fee, resulting in inaccurate client invoices and reconciliation breaks. Operations teams are then forced into manual investigations to reconstruct how the trades were originally executed, creating unnecessary cost, risk and delay.
To address this challenge, DMIST – an industry body established to encourage the adoption of standards in the market – and FIA have published the Execution Source Code Standard.
The standard, which was developed by a DMIST working group representing clients, brokers, exchanges, CCPs, technology providers and other industry participants, sets common expectations for how the data should be captured, validated, transmitted and preserved through the transaction lifecycle.
The framework is intended to be implemented consistently by all participants involved in the trade lifecycle, and it applies regardless of asset class, execution method, protocol or geographic region.
“The strength of the Execution Source Code Standard lies in its cross-functional design,” says Jason Stipe, global head of listed execution product at BNP Paribas and co-chair of the DMIST Execution Source Code working group. “Our working group has worked closely with market participants to ensure that this standard is technology-agnostic and applicable across the entire listed derivatives lifecycle.”
At the heart of the standard is a simple principle: execution source information should be captured correctly at the point of execution and remain unchanged as a trade moves through processes such as allocations, give-ups, clearing, settlement and reporting. Where FIX is used, the code can be transmitted through Tag 1031. Where API or binary connections are used, participants should use the values set out in the DMIST standard.
No single participant can preserve the data alone. Staci Parrish, vice president of global industry operations and execution at FIA, says the executing broker has a key role in ensuring the code is correct, working with the party originating the order to capture the correct execution method. Exchanges, CCPs and clearing brokers then need to support the receipt, storage and transmission of the code so it remains unchanged through downstream processing.
The issue becomes more important as the industry moves towards more automated and time-sensitive workflows. Parrish says billing, allocations, risk and clearing processes are accelerating towards near-real-time models, reducing tolerance for ambiguous or late-arriving execution source data.
“With broad adoption, the standard is designed to materially reduce brokerage discrepancies and manual exception handling by providing a consistent and reliable source of execution data across the industry,” Parrish tells MarketVoice. “Part of the implementation phase of this effort will be to benchmark current metrics and capture improvements over time.”
The main challenge will be aligning implementation across market participants that currently support execution source information with different levels of consistency and automation, says Parrish.
DMIST is now working with firms to support implementation through their existing technology roadmaps and plans. Parrish says DMIST will monitor adoption through ongoing industry engagement and by tracking support across key firms and market infrastructures.
Publication of the standard establishes a common industry baseline. Broader adoption across the trade lifecycle could help make execution source information more consistent and reliable, providing a stronger foundation for increasingly automated post-trade processes.
