Starting in November, Eurex will require the input of FIA-developed codes on order messages to identify the execution method used at the point of origin. The move marks another milestone in the industry's efforts to reduce brokerage discrepancies, one of the largest causes of operational friction in the reconciliation of exchange-traded derivatives.
Eurex, the largest derivatives exchange in Europe by volume, will be the second major exchange to mandate the use of FIA's execution source codes after CME Group said it would require a tag on order messages beginning in November last year.
The standard set of execution source codes – also known as Rate Identifiers – was developed by FIA and its subsidiary FIA Tech to identify widely used methods for executing trades. These methods range from fully automated algorithmic trading to human-to-human interaction over the telephone.
Adding standardized codes to order messages allows information about the execution method to be carried forward through clearing and post-trade processing – something that is particularly important when clients use one firm for execution and another for clearing – to help ensure that brokerage is correctly calculated and paid.
"When a trade is executed by one broker and given up to another for clearing, the execution method is not passed on and the clearing broker has no visibility in how the trade was executed. This increases the workload on operational staff and creates disputes over brokerage fees," said Mark Davis, senior vice president and head of strategy for FIA Tech. "Implementing these codes on an industry-wide basis will improve operational efficiency and support greater automation in post-trade processes."
This is particularly pertinent at a time when a proliferation of execution services, platforms and providers means there are increasingly more scenarios where different brokerage rates apply for different types of execution.
FIA and FIA Tech first attempted to tackle this challenge with brokerage settlement back in 2010, but the original execution code schema was not as well-documented the first time around. In 2018, in response to renewed interest in addressing this issue, FIA Tech introduced new technical guidelines that were created in partnership with major exchanges and brokers. These guidelines were released in December 2018 along with a white paper describing how the codes should be used.
Eurex is one of several exchanges that has supported FIA's execution code schema in both order entry and clearing house messages, but usage was not mandatory. From November 2020, with the release of version 9.0 of its trading platform Eurex T7, the entry of the execution source code will become a requirement.
“Market efficiency and the fostering of STP processing is a core priority for both Eurex and Eurex Clearing’s IT strategies,” said Manfred Matusza, member of the Eurex Clearing Executive Board. “In this context, we welcome FIA initiatives such as the introduction of the execution source code and will continue to support such offerings in the future."
The execution source code is incorporated in Eurex T7 via the Enhanced Trading Interface, the Eurex FIX Gateway and the Eurex GUI as "Tag 1031". Executing brokers will be able to insert one of six different category codes developed by FIA and FIA Tech into Tag 1031. That tag will allow the execution source to be tracked across the lifecycle of the trade.
In an announcement, Eurex said that with the introduction of T7 Release 9.0, the execution source code will be mandatory in the case of agent business execution, which it calls Trading Capacity "A". If no value is entered to an order, the order will not be rejected but a default value for the execution source code will be added automatically instead.
FIA Tech has been working with Eurex on their adoption of Tag 1031 over the last few months.
"We are very pleased Eurex took the decision to make population of this field mandatory," Davis said. "In one-on-one conversations and working groups I have been involved in, it is clear the industry is behind making population of this FIX tag with the FIA standard codes mandatory. In an environment where traders are looking to their executing brokers for more options in how to get orders to market, which in turn drives execution method price differentiation, the use of this tag becomes a necessity for efficient brokerage settlement."
Support
Other market operators, including Intercontinental Exchange and Borsa Italiana, are also supporting the FIA initiative. ICE has added the codes to its system but has not yet made usage mandatory. Borsa Italiana, meanwhile, introduced the new functionality when it moved to version 14 of its SOLA trading system in February. Although use of the code is not mandatory, Borsa Italiana cautioned that orders with invalid values would be rejected, and orders with blank values would be defaulted to the code for "high-touch" execution through a broker.
Having the largest derivatives exchanges supporting the effort and adopting FIA's source codes are big steps forward for industry standardization and efficiency and in solving a common pain point in trade processing.
"Eurex announcing the mandatory use of Tag 1031 is another step in the right direction to tackle the brokerage settlement problem that our industry has faced for years," said Nick Sharp, head of futures electronic trading EMEA at Barclays. "Universal use of this tag will improve STP brokerage settlement, making market operations teams more efficient and better equipped to deal with higher volumes. The key to this initiative’s success is ensuring the broker and vendor community utilize the tag effectively in their execution and clearing platforms. We encourage more exchanges to follow suit with mandatory adoption of Tag 1031 at point of execution."
