The Application of FIX in Allocations Rationalising Automated Transaction Processing From Inception to Settlement 22 nd /23 rd March 2004

The Application of FIX in Allocations 2 Agenda  FIX allocations and confirmations  How does it work and what does it give us?  What about data?  Implementing FIX allocations and confirmations  How to do it…  …and what to watch out for  Where is FIX going?

FIX Allocation and Confirmation Messaging How it works and what it can do

The Application of FIX in Allocations 4 FIX – A Quick Background  What is it?  Industry-owned messaging protocol  10 years old  Industry standard for front office communications  Used by hundreds of market participants  How does it work?  Defined messages using tag-value pairs  Can be transmitted over any IP network (including the internet)  Uses a ‘session’ to handle authentication, message delivery and recovery  ‘Pessimistic’ protocol (acknowledgements required)

The Application of FIX in Allocations 5 Conceptual Order Processing Flow SettlementSettlement Both parties exchange settlement instructions Provides booking instruction Provides allocation details Sends trade confirmations Affirms confirmations Submits order Accepts order ‘Done’ notification Executes order Buy Side Sell Side Custodians/Depositories

The Application of FIX in Allocations 6 With FIX Messages… SettlementSettlement Both parties exchange settlement instructions Provides booking instruction Provides allocation details Sends trade confirmations Affirms confirmations Submits order Accepts order ‘Done’ notification Executes order Buy Side Sell Side Custodians/Depositories New order single/list Execution report – ‘new’ Execution report – ‘filled’ or ‘done for day’ Allocation (with Allocation ACKs for affirmation) Confirmation Confirmation ACK Not supported by FIX

The Application of FIX in Allocations 7 FIX Allocation Message Highlights  Message Flows  Acknowledgement messages to confirm receipt, rejection or acceptance  Cancellation and replacement messages  Message Details  Allows buy side to transmit ‘ready to book’ notification  Ability to specify booking unit in various ways  Support for soft dollars, directed brokerage etc.  Actual allocation details can be sent in same message or separately  Can be uncalculated or fully figured (i.e. with net monies)  Can contain various levels of SSI detail (based on ISO15022 data definitions)

The Application of FIX in Allocations 8 FIX Confirmation Message Highlights  Message Flows  Acknowledgement messages to confirm receipt, affirmation or rejection  Cancellation and replacement messages  Copy confirmations supported  Confirmation requests  Message Details  Flexible structure for differing local/regulatory requirements  Can contain buy and sell side SSIs (based on ISO15022 data definitions)  Common identifiers back to allocation messages

The Application of FIX in Allocations 9 Why use FIX post-trade?  In general  Wide choice of technology suppliers  Minimal incremental cost to just having FIX order routing  Acknowledgement-driven message flows (no ‘fire and forget’)  Allocations  Allocations can be ‘bolted on’ to a FIX order management infrastructure  Fills the booking instruction black hole  Supports buy-side specification of settlement instructions  Confirmations  Data structures designed to simplify mapping onto SWIFT delivery messages

The Application of FIX in Allocations 10 Sell Side Buy Side FIX Process Flow Nirvana Trading decision  I need to buy m units of security ABC for funds X, Y and Z Execution Booking  I want to book these three orders out as two booking units (one per broker) Allocation  I will now communicate my allocations to the brokers  Receives, acknowledges and executes orders  Sends a ‘done’ notification  Receives booking inst and books order(s)  Receives and processes allocations Confirmation  Receive and match confirmations; send trades for settlement  Generate trade confirmations; send for settlement when affirmed New orders Exec reports, ending in ‘done’ or ‘filled’ Allocation Allocation acks Confirmations Confirm acks  I am happy with the execution of these orders and do not wish to execute any further volume  I am going to place three orders for ABC with two different brokers

The Application of FIX in Allocations 11 And the point is…?  FIX is a vendor neutral mechanism for handling all trade date electronic messaging.  FIX supports order booking and can do so as part of an order management infrastructure.  FIX allows settlement-critical data attributes to be exchanged and/or matched early in the trade management process.

The Application of FIX in Allocations 12 Data  Block matching  Same ids as used in front office  Match on block definition and/or order details  Commission matching  SSIs  Can be sent with the allocations  Can send derivation parameters with the allocations  Standardised identifiers  BIC for counterparties  LEI for accounts…?

Implementing FIX Allocations and Confirmations How to do it and what can go wrong

The Application of FIX in Allocations 14 Things to Consider… ProcessTechnologyCounterparties  What are they doing?  How are they doing it?  Which products?  Which part(s) of the trade lifecycle?  Bilateral or central matching?  SSIs…?  Legacy infrastructure  Networks  FIX engines etc.

The Application of FIX in Allocations 15 Counterparty Readiness Buy side Sell side System Suppliers FIX allocations FIX confirmations Industry Utilities  Supported by a few firms for equities  Supported by around a dozen firms for equities  Supported by a number of OMS suppliers for equities  Some also looking at fixed income  Most FIX networks and hubs now support allocations  Some matching utilities plan to support FIX allocations in 2004  Fixed income expected in 2004  Firm plans for implementation for equities in 2004 by a few firms  Firm plans for implementation for equities in 2004 by a small number of firms  Some OMS providers planning to implement in 2004  Equities and fixed income  Most FIX networks now support confirmations  Fixed income expected in 2004

The Application of FIX in Allocations 16 Process Flows  Allocation messages can contain some or all of the following:  Explicit booking unit breakdown (orders and/or executions)  Allocation account details (‘splits’)  Net monies, fees and expenses  Buy-side and/or sell-side settlement instructions  Where does matching occur?  Sell-side or buy-side matching  Use of a CTM  What about SSIs?  ‘SSI Fresh’ model or variants thereof  Enrichment ‘in flight’ by CTM  ‘As is’ model

The Application of FIX in Allocations 17 Implementation Guides to the Rescue… FIX 4.0/4.2 Implementation Guide for Allocations FIX 4.4 Implementation Guide for Allocations, Confirmations and Settlement Instructions  ‘Fax to FIX’ model for allocations  No net monies, fees or expenses on allocations  Full definition of most basic model  As above, plus…  Support for buy-side SSIs on allocations  Confirmations (including buy and sell-side SSIs)

The Application of FIX in Allocations 18 Technology FIX engines Stand-alone  Separate software  Generally up to date with support for all FIX versions and messages  Needs to be integrated with existing infrastructure Built-in  Built in to OMS/middle office system  Generally only supports certain FIX versions and messages  No need for integration work Networks  Generally support all FIX versions and messages  Requires separate connection to and testing with all counterparties Point to pointHub and spokes  Generally only supports certain FIX versions and messages  Only requires one connection for all counterparties  Most FIX testing is against the hub  Additional ‘business level’ testing required for each counterparty

The Application of FIX in Allocations 19 What Can Go Wrong… Counterparties not ready  Ensure infrastructure can handle both ‘ready’ and ‘non ready’ counterparties  May involve using existing (manual?) processes for some flows  Some types of trades may need to be processed manually anyway Technology failures  Resilience of infrastructure and networks  Defined support model and escalation procedures  Infrastructure (and resources) must handle manual processing Mitigating actions Too many exceptions  Use agreed standards for all static data  Agree ‘bilateral’ parameters (rounding rules, tolerances etc.)  Agree messaging standards and processes up front

The Application of FIX in Allocations 20 FIX 4.4 FIX 4.3 FIX 4.2 A Few Words on FIX Versions Equities  IOI/trade advertisements  Orders and executions  ‘Fax to FIX’ allocations  Pre-trade allocation (single account)  Settlement instructions (standalone)  Pre-trade allocation (multiple accounts)  Ready to book messages  Confirmations  Settlement instructions (on allocations) Supported processes FuturesFixed income FIX 4.1 FIX 4.0 Recommend using separate sessions for post-trade and pre-trade/trade messages

Where is FIX Going? Megalomania over IP…?

The Application of FIX in Allocations 22 The agenda…  World domination  Global front office messaging standards  Buy-in from industry worldwide  There is no escape  Protocol integration with SWIFT  Seamless integration from deal to depository  Eliminate all mutants  Implementation guidelines and standards  Certification  Data standards

Questions? Jim Kaye Goldman Sachs International