A Fixed-Income Protocol Takes Center Stage

The Audience:

What About Interoperability?

Even if Trade Web winds up working with FIX for fixed income, it will need to address compatibility with whatever post-trade standard emerges to handle clearance and settlement. The BMA does not envision there being one standard. As outlined in its RFP, the BMA's protocol effort will handle the various steps in the trade cycle from IOIs, request for quotes, notice of executions through allocations from buyers and sellers to investor's sub-accounts. At that point, the fixed-income protocol will hand off to another protocol that takes the trade to clearance and settlement and statement of reconciliation. One of the requirements for T+1 and straight-through processing is that the protocol be compatible with XML-and the ISO 15022 data dictionary. SWIFT is the keeper of the ISO 15022 data dictionary, but ISO 15022 is not compatible with XML yet. "One of the desirable characteristics of this protocol is to be compatible with what's already in ISO 15022," says Senft.

According to a comment letter submitted by Robert Davies, securities markets director for SWIFT, in response to the BMA's initiative, "discussions have been initiated between FIX and SWIFT, paving the way forward to a convergence of the FIX protocol and the ISO 15022 standards maintained by SWIFT."

Dwight Arthur, a managing director of the Depository Trust & Clearing Corporation, submitted a comment letter that urges the BMA protocol initiative to leverage the existing standards work based on ISO 15022 that is already taking place on the post-trade side for government securities, European sovereign debt, emerging markets debt, mortgage backed securities as well as corporate and municipal bonds. The letter voices support for the ISO 15022 XML Working Group (WG10) initiative, "which seeks to create a basis in XML for interoperability and convergence among the various financial services protocols."

From a pragmatic standpoint, where does this lead in the STP world?

"I don't think I want to use half my stuff SWIFT and half my stuff FIX and half my stuff XML," says a bond e-commerce executive who would like to see XML emerge as a common standard.

One theory suggests that TradeWeb will take the FIX for Fixed Income protocol and combine it with XML. "I believe at least TradeWeb will benchmark our efforts, and limit the increase in message size," says Doscas, who notes that's the biggest hurdle for XML right now.

"If they start with FIX and kind of massage it a little, maybe add some additional text coding to it to make it more flexible that's something that would help," he says. There have already been informal discussions between the FIXML Working Group and the Fixed Income Working Group about this, and they are already heading in this general direction. The idea of integrating FIX and XML is currently underway within FPML under the FIXML Working Group.Of course message size and network impact are hurdles which will need consideration. The FIXML working group offers another opportunity for the two organizations to work together. Finally, the next release of FIX, FIX 4.3 will include extensions for FIXML Syntax and Design Rules." says Doscas. "People will definitely use FIXML over time. It fits perfectly with the T+1 initiative which also embraces XML," says Hagay Shefi, CEO of GoldTier Technologies, an STP technology provider.

As the fixed-income protocol initiative evolves, those who are familiar with the work of FIWG agree that the BMA can help expedite the process but they hope that one fixed-income protocol emerges.

"If the FIX for fixed-income people continue on," and TradeWeb creates a different flavor of FIX, "then we're stuck supporting two protocols. That makes it difficult for me," says Bob Moitoso, vice president of business development sales and trading group, Thomson Financial. Though Thomson will build whatever translation engines are necessary to support two fixed-income protocols, "We all would have liked to have one protocol, that makes sense to me," says Moitoso.

But given the unique requirements of fixed-income securities, Shefi doubts that one standard will emerge for fixed income. "I do not believe in the mother of all standards. I don't believe that one size can fit all. I don't believe you can create a unified protocol that can cater to everything from equities to fixed income to derivatives," he says. Noting that each asset class has its own properties, and each geography and market trades differently, he says, "It's hard for me to see how FIX as it stands now, or even with some modifications can really accommodate all the unique requirements that fixed-income markets need."

Not withstanding all these opinions, the BMA's voluntary fixed-income protocol initiative is proceeding. Whatever protocol faction or convergence scenario the standard ends up representing, Senft and Levy emphasize that the process of the build-out will be very open. "We want to be as inclusive as possible," says Senft. "When the day comes when we say 'version 1.0 of the fixed-income protocol is ready,' we want buy-in from everyone," he says.

RFP Attracted Bidders and Commentators

A request for proposal from the Bond Market Association for its Voluntary Protocols Initiative received 11 responses from various market participants. Jordan and Jordan; a Wall Street management consultant, Random Walk Computing; both a developer and consultant, TradeWeb; an electronic bond trading system, and Xbond Corp.; a Charlotte, NC.-based developer of a fixed-income order trading system known as X-OS-all submitted proposals volunteering to develop the fixed-income protocol. Bloomberg, Javelin Technologies and MoneyLine Network submitted commentaries that are regarded as "friend of the court" or amicus responses, volunteering to support and advise the BMA on the project. Two clearance and settlement organizations: the Depository Trust and Clearing Corp. and SWIFT, submitted commentaries encouraging the BMA to seek interoperability and convergence with existing standards such as FIX, XML and ISO 15022 data dictionary that are emerging in the post-trade processing and settlement side.

After careful deliberation, the BMA's Online Bond Steering Committee(OBSC) chose two strategic contractors: TradeWeb as the builder and Jordan and Jordan to serve as the project manager.

There were four reasons why TradeWeb won the high-profile assignment, according to Bradford S. Levy, vice president, FICC/electronic commerce group at Goldman, Sachs & Co. who is vice chair of the OBSC's protocols/standards subcomittee. First, "it demonstrated knowledge of what a protocol is and what it means to the industry, both as a business matter and a technical matter." Second, "they have a track record for actually delivering an electronic trading platform and building working technology, as opposed to being a pure start up first developing a business." Third, "TradeWeb was the standout in the group as far as demonstrating expertise in pure electronic trading, which is what this protocol is really going to be designed to do," says Levy. Fourth, "there's brand recognition in the TradeWeb name-just as there is in FIX-so having TradeWeb as a brand name is important to getting a protocol accepted by the industry," he says. "All things considered, TradeWeb quickly rose to the top when we went through the check box scenario," he says.

Another feather in TradeWeb's cap was the fact that dealers and customers use its system to trade US Treasuries, US agencies, Euro sovereign debt, TBA mortgages and soon commercial paper, covering every instrument outlined in the BMA's RFP except municipals and corporates. "We believe that TradeWeb has the technology expertise for protocols with regard to fixed income generally, whatever market that applies to," says Joseph Sack, vice president of the BMA and staff advisor to the OBSC.