Decades of delayed trade allocation issues in exchange traded futures markets can only be resolved by the industry working together, according to industry experts at the FIA IDX conference in London this week.
Speaking at the ‘working together for post-trade evolution’ panel discussion on Monday, Joanna Davies, Managing Director at OSTTRA, said: “In many respects, we already know about the operational challenges we face, as they have been around for what seems like an eternity. The COVID-induced volatility last March put the issue of delayed trade allocations into sharp focus as we saw certain clearing brokers at risk. The stark reality is that if we as an industry can’t get together to do something about it, regulators may force the point on their own and implement a proposed solution that is not ideal.”
On an average day in exchange traded futures, 4% of global trading volume is given up more than a day late. During the height of the global sell-off in Q1 2020, the figure spiked to 7% (Source: FIA). “The pandemic fuelled volatility reinforced just how problematic the give-up process is, and the impact on operational resources when things go wrong,” added Nick Solinger, President & CEO at FIA Tech, who joined Davies on the panel.
One of the biggest challenges around trade allocations outlined by the panel was around order IDs. While all market participants have an order ID on a trade, there is currently no link between everyone’s order ID from trade execution right the way through to allocation and clearing. According to Davies, getting the right data in the right place is the key to making allocations more efficient.
“The information needed to ensure a stronger allocation process is available, the trouble is that the industry have not been attaching allocation instructions to orders at the point of trade. Some may say a behavioural change amongst the buy-side is needed, but it is actually a process change that is required. There needs to be a desire to enrich trade notifications to reduce congestion at the end of the trading day. The buy-side should be allowed to trade as they wish. It is not about asking them to change, instead we should enrich allocations with information already in existence to try and solve this particular issue.”
“That collaborative work has only just started, and will require all industry stakeholders to put talent, energy and resources behind standardisation efforts. This won’t always be easy, but it’s necessary to seize future opportunities as well as to ensure that futures markets are not forced to deal with unwanted attention from regulators,” concluded Davies.