The Futures Industry Association today released a set of recommendations for increasing the usefulness of drop copy systems in exchange-traded markets. Drop copy systems, which provide a way to monitor trading activity in near real-time, are currently offered by many trading venues and have become a critical component in the risk management processes of brokers, trading firms and end-users. The purpose of the FIA recommendations is to promote the wider adoption and increased standardization of drop copy functionality. The FIA paper also recommends extending drop copy functionality to all types of trading venues and incorporating additional features to meet regulatory reporting requirements and other needs.
“FIA has long recognized the importance of promoting best practices in risk management,” said FIA President and Chief Executive Officer Walt Lukken. “Drop copy is a very effective tool for managing the risks of electronic trading. We believe that these recommendations will make drop copy even more effective and contribute to ongoing efforts to enhance the stability and reliability of electronic markets.”
The drop copy recommendations were drafted by a working group of principal trading firms, brokers and exchanges. The initiative began after representatives from the FIA Principal Traders Group met with officials at the Securities and Exchange Commission in the fall of 2012 and discussed the value of drop copy functionality in limiting error trades and minimizing the impact of software malfunctions.
“FIA PTG strongly supports the recommendations in this paper and encourages all market participants to implement the recommendations to the greatest extent possible,” said FIA PTG Chairman Don Wilson. “By providing an independent source of order message information, drop copy helps FIA PTG member firms monitor their trading activity in real-time and quickly identify any errors or discrepancies. Our participation in this initiative underscores our commitment to improving the stability and integrity of exchange-traded markets.”
Drop copy is a report that summarizes a participant’s execution activity on a trading venue and is generated in as close to real-time as possible. Drop copy feeds are different from cleared trade feeds in that they may contain additional information to aid a participant’s risk management, such as order state changes, modifications, rejections and cancellations. In addition, they are generated at the point of execution rather than when the trade has been cleared.
Drop copies can be used in several ways to manage the risks of electronic trading. For example, a company can compare the information provided by an exchange in a drop copy with trade notifications from its own trading infrastructure and quickly identify any discrepancies. In addition, brokers that provide clients with sponsored access to trading venues can use drop copies to monitor the trading activity of those clients.
The drop copy recommendations are the latest in a series of risk management recommendations issued by FIA. Other recent initiatives include Order Handling Recommendations for Executing Brokers, issued in March 2012, and Market Access Risk Management Recommendations, issued in April 2010. FIA PTG also has issued several sets of risk management recommendations, including Risk Controls for Trading Firms in November 2010 and a joint report with FIA European Principal Traders Association on Software Development and Change Management Recommendations in March 2012.