FPL Allocations Breakfast Briefing: Towards a new STP Model Sponsored by: 25 January 2005

FIX Allocation & Confirmations Jim Kaye Goldman Sachs

FIX – A Quick Background What is it?What is it? Industry-owned messaging protocolIndustry-owned messaging protocol 10 years old10 years old De facto industry standard for front office communicationsDe facto industry standard for front office communications Used by hundreds of market participantsUsed by hundreds of market participants How does it work?How does it work? Defined messages using tag-value pairsDefined messages using tag-value pairs Can be transmitted over any IP network (including the internet)Can be transmitted over any IP network (including the internet) Uses a ‘session’ to handle authentication, message delivery and recoveryUses a ‘session’ to handle authentication, message delivery and recovery ‘Pessimistic’ protocol (acknowledgements required)‘Pessimistic’ protocol (acknowledgements required)

Investment Manager Broker Dealer Settlement Generate one or more orders Fill/part fill some/all of the orders Communicate allocation splits Generate trade confirmations Communicate ‘ready to book’ Affirm/reject allocations Affirm/reject trade confirmations Settlement SSIs Pre-defined booking rules Fee/expense calculations Give-ups, step-outs, soft dollars New order single Execution reports Allocation Allocation ack Confirmation Confirmation ack An Overview of FIX Allocations & Confirmations

Why Use FIX? Fits the process flow –Logical extension to FIX order routing flows –Allocations often a front office function –Consistency of data from front to middle office –Real time status availability through ‘ack’ messages –Supports complex booking requirements arising from, e.g. self-directed trading Ease of implementation –Opportunity to leverage existing technology investment –Open protocol – network/vendor independence –Wide choice of technology suppliers Data structures and standards –Flexible data structures for a changing environment –Simple mapping to ISO 15022/SWIFT delivery messages –Timestamps and audit trails

Implementation – Things To Think About Counterparty readiness –Can my trading counterparties support this? –If so, how? Business process –Which products? –Which part(s) of the trade lifecycle? –Bilateral or central matching –SSIs…? Technology –Existing infrastructure –Networks –FIX engines etc.

FIX engine Case Study 1 – Fax to FIX Orders/ executions Buy side order management system FIX network FIX engine Buy side middle office system Sell side order management system Sell side middle office system Fax machine Allocations Re-keyed… Issues: Not machine readable Prone to error No acknowledgements Issues: Not machine readable Prone to error No acknowledgements 

FIX engine Case Study 1 – Fax to FIX (ctd) Orders/ executions Buy side order management system FIX network FIX engine Buy side middle office system Sell side order management system Sell side middle office system Allocations Issues: Machine readable Can be processed automatically Real time acknowledgements Issues: Machine readable Can be processed automatically Real time acknowledgements FIX engine

Case Study 1 - Implementation Counterparty readiness –Many sell side firms support this model –In place for a number of major buy side firms Business process –Currently in use for equities/PT –Generally used in conjunction with Global OASYS Technology –Many off-the-shelf OMS providers support this model –Some middle office system providers also support this –Most FIX networks support this –Zero messaging cost; low/zero implementation cost (apart from testing time)

BUSINESS ENTITY IDENTIFICATION - REFERENCE DATA AND FIX 4.4 Simon Leighton-Porter VSAF.NET

FIX and Reference Data FIX and reference data seems like an odd combinationFIX and reference data seems like an odd combination Why the emphasis on reference data when discussing a communications protocol?Why the emphasis on reference data when discussing a communications protocol? Without standardisation and accuracy of reference data, any processing architecture is merely so much junkWithout standardisation and accuracy of reference data, any processing architecture is merely so much junk

TAKING A BROADER VIEW SO, WHAT ARE OUR AIMS IN DOING THIS STUFF?SO, WHAT ARE OUR AIMS IN DOING THIS STUFF? REDUCE COSTREDUCE COST REDUCE RISKREDUCE RISK Client take-on Sales and trading Trade-date processing Settlement FIX BUSINESS ENTITY IDENTIFIERS

SQUARING THE CIRCLE COMPONENTS OF A SUCCESSFUL, FIX-BASED POST-EXECUTION MESSAGING ARCHITECTURECOMPONENTS OF A SUCCESSFUL, FIX-BASED POST-EXECUTION MESSAGING ARCHITECTURE –Hardware and applications –Connectivity –Interoperability and flexibility within a framework of well-defined standards –Matching –Business Process Management (BPM) –CONTENT - turn all the talk about data standardisation into reality by providing an identifier that supports the entire business process and is flexible enough to be used in any processing model So, what does one of those look like?So, what does one of those look like?

IBEI Defined International Business Entity Identifier: ISO 16372International Business Entity Identifier: ISO “IBEI is a global scheme for uniquely identifying business entities playing a role in the lifecycle of, and events related to, a financial instrument” “A business entity is an entity that is either regulated or on which due diligence is necessary under any jurisdiction” ISO TC68 SC4 WG8 Feb 2004

IBEI Model Central utilityCentral utility Concept of sponsorshipConcept of sponsorship Core information will be free or available at very low costCore information will be free or available at very low cost Data quality maintained byData quality maintained by –Multi-source information –“Triggers” –Twilighting –Sponsor updates –Information from IBEI entities and IBEI users NO LICENCE FEESNO LICENCE FEES Value-added information will be available at additional costValue-added information will be available at additional cost –Cross-references to other commercial data sources Scope for future developmentsScope for future developments –Settlement instructions –Payment instructions –Compliance-related information

Role of the Sponsor Centralised, using sponsorsCentralised, using sponsors Registration Authority Applicant Sponsor IBEI REQUESTIBEI ALLOCATION

IBIE Repository Data Content

IBEI VALUE-ADDS REDUCE COSTREDUCE COST REDUCE RISKREDUCE RISK SUPPORTS USE OF FIX POST-EXECUTIONSUPPORTS USE OF FIX POST-EXECUTION Client take-on Sales and trading Trade-date processing Settlement FIX BUSINESS ENTITY IDENTIFIERS

IBEI SUPPORTS SSI FRESH REDUCED COST AND RISK OF CLIENT TAKE-ON (Common to all processing models)REDUCED COST AND RISK OF CLIENT TAKE-ON (Common to all processing models) AGREED RANGE OF IDENTIFIERS FOR ENTITIESAGREED RANGE OF IDENTIFIERS FOR ENTITIES IBEI CAN BE USED TO IDENTIFY LEGAL ENTITY, ALLOCATED ACCOUNT ETCIBEI CAN BE USED TO IDENTIFY LEGAL ENTITY, ALLOCATED ACCOUNT ETC POTENTIAL USE AS SSI FRESH DATABASE TO SUPPORT MODEL 1POTENTIAL USE AS SSI FRESH DATABASE TO SUPPORT MODEL 1

BuysideSellside Global Custodian Local agent(I)CSD Local agent Allocation enriched with SSIs and, ideally, net money Confirmation (1 per account) enriched with SSIs x2 and net money Affirmation MATCH MATCH? SSI Database SSI updates

SSIs Alvin Mullan UBS Investment Bank

Introduction SSI data within the FIX Allocation & Confirmation message flowSSI data within the FIX Allocation & Confirmation message flow Electronic Capture of Standing Settlement Instructions (SSI)Electronic Capture of Standing Settlement Instructions (SSI) Scottish Statutory Instrument (SSI) 2002 No. 39 The Sheep and Goats Identification (Scotland) Amendment Regulations 2002Scottish Statutory Instrument (SSI) 2002 No. 39 The Sheep and Goats Identification (Scotland) Amendment Regulations 2002

Model 1 – Buyside involved in SSIs Buyside Sellside Global Custodian Local agent(I)CSD Local agent Allocation + SSIs (inc PSET) & net money (ideally) Confirmation (1 per account) + SSIs x2 and net money Affirmation MATCH MATCH? SSI updates Notes: Needs FIX 4.4 for Allocation And FIX 4.4 or SWIFT MT515 for Confirmation Notes: Needs FIX 4.4 for Allocation And FIX 4.4 or SWIFT MT515 for Confirmation

FIX 4.4 SSIs in the Allocation message

FIX 4.4 SSIs in the Confirmation message

SSI baggage in FIX

Model 2 – Buyside opt out Buyside Sellside Global Custodian Local agent(I)CSD Local agent Allocation + Custodian & net money (ideally) Confirmation (1 per account) + SSIs x2 and net money Affirmation – needed? MATCH SSI updates Notes: Can use FIX 4.2 for Allocation And SWIFT MT515 for Confirmation Or FIX 4.4 for both Notes: Can use FIX 4.2 for Allocation And SWIFT MT515 for Confirmation Or FIX 4.4 for both

Model 3 – Centralised SSI Buyside Sellside Global Custodian Local agent(I)CSD Local agent SSI updates

SSIs - building solutions STPLiteSTPLite SSI FreshSSI Fresh Solutions Providers – many “harolds”Solutions Providers – many “harolds” Generally accept:Generally accept: –custodian holds and maintains SSI data –data automatically issued to “local” or “central” database –adhoc query and response –real time access to custodian on a trade by trade basis NOT necessary

SSI - data Query dataQuery data –Number –Country or Place Fund Manager ID –Custody Account of Settlement –Side (Buy/Sell) –Product, Security Identifier and Type –Effective date/time Response or Pushed dataResponse or Pushed data –Cross-references to query (forming the “key” fields) –SSI Detail: PSETPSET Agent and Agent Account at place of settlementAgent and Agent Account at place of settlement CustodianCustodian

SSIs – need for data standard Delivery mechanism may varyDelivery mechanism may vary –FIX/FIXML –SWIFT –File Need to ensure we have an SSI data standard – clones like “Dolly”Need to ensure we have an SSI data standard – clones like “Dolly” SSIs for cash settlementSSIs for cash settlement Nothing to do with sheep and goat identification and Scottish Statutory Instrument regulationsNothing to do with sheep and goat identification and Scottish Statutory Instrument regulations

Any Questions?

FPL would like to thank the sponsors of this event: 25 January 2005