1. Market Standards and Initiatives - FIX CP176, ISO 20022, MiFID, Giovannini and FAST Kevin Houstoun, Global Transaction Messaging, HSBC Co-Chair, FPL Global Technical Committee

2. 10 th March 2006 Agenda FIX, MiFID CP176, Giovaninni ISO20022 FAST

3. MiFID Markets In Financial Instruments Directive

4. 10 th March 2006 A bluffer’s guide to MiFID Long 44 pages 73 articles (> twice the number of the original ISD) The directive itself lays down ‘principles’ Draft ‘enabling measures’ created at level 2 of the Lamfalussy process Major impact – buy-side is affected too Process Data Messaging protocols Expensive

5. 10 th March 2006 MiFID – high-level overview Markets in Financial Instruments Directive Covers Best execution Order handling and internalisation of order flow Transparency (pre- and post-trade) and disclosure Record keeping and internal systems Client/counterparty identification and classification Client assets Outsourcing Exchanges and multi-lateral trading facilities (MTFs) National regulators

6. 10 th March 2006 MiFID and standards Standard formats for publication and quote dissemination Monitoring and proving best execution…and that’s not just the price Trade reporting Transaction reporting Data consolidation How to do trading cost analysis using multi-source data? Two key areas where standards can help 1.Data standards 2.Message standards

7. 10 th March 2006 MiFID – reference data and messaging In-scope - articles Client order handling – 22(2,3) Transactions with eligible counterparties – 24 (2) Transaction Reporting – 25(3,4,5) Pre-trade Transparency for Investment Firms – 27 Post-trade Disclosure for Investment Firms – 28 Pre-trade transparency for MTFs (29) Post-trade transparency for MTFs (30) Pre-trade transparency for RMs (44) Post-trade transparency for RMs (45) Out-of-scope Application of MiFID rules to internal processes Information and conduct of business – 19(3,4,5,8) Other articles related to regulated markets – 36-42

8. 10 th March 2006 Impact on message standards Agreement on a single unified protocol ‘unlikely’ before April 2007 QUOTE ORDER TRADE REPORT ETC TRANS REPORT Article 22 Article 24 Article 27 Article 21 Article 44 Article 28 Article 30 Article 45 Article 25 Article 29 ESC/23/2005 QuotesTrade Confirm Orders Trade ReportTrans Report

9. CP-176 Bundled Brokerage and Soft Commission Arrangements

10. 10 th March 2006 CP 176 - Background Paul Myners drew attention to the opaque nature of the arrangements under which fund managers make direct charges to the funds they manage, by way of commission, to purchase goods and services in addition to execution. He said that the lack of transparency in the relationship between brokers and fund managers made it very difficult for the customers to judge whether their interests were being well served by the fund manager. The FSA agreed with the Government to review the use of soft commission and bundled brokerage arrangements, which created conflicts of interest between the fund managers' own interests and those of his clients – the pension funds and all pooled investment vehicles which they manage.

11. 10 th March 2006 CP 176 - Recommendations FSA proposals to achieve two outcomes that fund managers have stronger incentives to make efficient decisions about trade execution and the purchase of ancillary services, such as investment research; that fund managers should be fully accountable to their clients for those decisions, and the consequent expenditure of their clients’ funds, Three changes are necessary: the range of goods and services that fund managers can buy with their clients’ funds should be limited to “execution” and “research”; fund management clients should be given clear information about the respective costs of execution and research, and the total amount spent by the manager on their behalf; fund managers should be encouraged to seek, and brokers to provide, payment and pricing mechanisms that enable individual services to be purchased separately.

12. Giovannini Group The Giovannini Group is a group of financial- market participants, under the chairmanship of Alberto Giovannini (chairman - Unifortune Asset Management SGR), which advises the European Commission on financial market issues.

13. 10 th March 2006 Giovannini Process Barrier 1 “National differences in the information technology and interfaces used by clearing and settlement providers should be eliminated via an EU wide protocol. SWIFT should ensure the definition of this protocol through the Securities Market Practice Group. Once defined, the protocol should be immediately adopted by the ESCB in respect of its operations. This barrier should be removed within two years from the initiation of this project.” SWIFT formulate recommendation IAG asked to review FPL asked to join IAG IAG amended recommendation

14. 10 th March 2006 Terminology: Protocol scope Exchange VMU / ETCP Trade Date Space 1 Pre-trade / Trade Space 3 Clearing & Settlement Order Trade Institutional (buy) Side Street (sell) Side Space 2 Post Trade / Pre-Settlement Trade Date + X GC CCP SA IMIB/D (I)CSD SC B/D Space 4 Space 4 - Custody Services Non Trade Related Activity 1 2 3 SA Area of mandatory Protocol usage IMI: Investment Manager B/D: Broker Dealer VMU: Virtual Matching Utility ETCP: Electronic Trade Confirm provider GC: Global Cust SC: Sub-Cust SA: Settlement Agent (Clearer) CCP: Clearing House/Central Counterparty ICSD: (Int‘l) Central Securities Depository Cash Clearing systems/ Central Banks

15. 10 th March 2006 Terminology: Protocol framework The original 9 element framework should be simplified into 6 elements over 2 layers

16. 10 th March 2006 Data Layer: Element 1 – Data Standards It is mandatory for all Infrastructures and Participants active in EU Clearing, Settlement & Asset Servicing of Cash Equities, Fixed Income and Listed Funds to support the use of ISO15022/ 20022 standards/syntaxes for all cross-border participants, and domestic participants where appropriate For Exchange Traded Derivatives, relevant expert bodies must consult on the feasibility and, if appropriate, recommend a plan to achieve compliance with the Protocol It is recommended that all EU Infrastructures and Participants implement support for all ISO data standards relevant to ISO15022/20022, e.g. ISO 6166 for ISIN, ISO 9362 for BIC etc. Where relevant to other EU initiatives e.g. MiFID, support for these standards should be implemented to avoid the development of non- compliant solutions that inhibit end-to-end straight through processing

17. 10 th March 2006 Data Layer: Element 3 – Data Service A gap analysis of ISO Standards must be completed by SWIFT Standards for all EU States (plus other countries as necessary) to identify missing functionality. Standards must then be extended to include that functionality The gap analysis should prioritise discrete processes for all countries rather than all processes for a specific country. Element 2 is addressed in the transfer layer

18. 10 th March 2006 Giovannini compliant Transfer Layer: Standards: ISO15022/20022 structured messages & file formats Use Internet Protocol (IP) Offer message & file transfer services plus GUI interfaces Security: Authentication/data integrity, via PKI Non-repudiation Time stamping PKI: ISO21188 if relevant & Market best practice minimum key strength Service: Be at least available during TARGET opening hours Satisfy business & regulatory requirements for performance, resilience & network management Message/file audit log, guaranteed delivery & delivery once and only once

19. 10 th March 2006 FPL Response to Giovannini Recommendation Summary of FPL’s response to the Giovannini Protocol Recommendation in February 2006: FPL believes the Giovannini recommendation represents an important initiative to guide, inform and encourage standardisation of settlement processing FPL believes in the same four principles identified by the Giovannini Group of leverage, inclusivity, neutrality and openness In response to the specific question of whether the updated recommendation is an acceptable solution, FPL answered yes provided that: the scope is settlement processing the distinction between ISO15022 and ISO20022 is clarified the depiction of standards within diagram 1 is clarified Consistent with Giovannini’s principle of leverage, FPL believes that extending the most widely adopted standard in a space to universal coverage in that space is the best first step towards achieving the industry’s goals of simplicity, automation and ROI Thus, for the recommendation’s primary focus on cash equities and fixed income, FPL sees the FIX Protocol being used from pre-trade up to and including post-trade/pre-settlement, and the ISO15022-based MT54x series (and relevant downstream) messages being used to service settlement http://fixprotocol.org/pages/2296/Giovannini_20060203.htm

20. FAST Fix Adapted for STreaming

21. 10 th March 2006 The market data catalyst Market Drivers Best executions Direct market access New Products New Participants Innovative Trading Strategies Market Structure Changes Regulatory (Reg NMS, MiFID) Dynamic pools of liquidity Innovation in Technology Electronic Trading Algorithmic Models Reliance on Market Data for Decision Making Ubiquitous Trading Technology Market Data

22. 10 th March 2006 Peak message rates outpacing effective solutions Business demands are outstripping communications services and cost- effective bandwidth solutions More products, more listings, More price levels, more depth/data Increased demands for low latency Proprietary solutions are increasingly costly to maintain The industry is ripe for a radical shift

23. 10 th March 2006 Mission To define standard services for the reliable transport of FIX market data messages using implicit tagging and support for multicast and point to point topologies Market Data Optimization Working Group Charter Approach Consider additional optimization techniques that may further enhance market data delivery such as compression Garner participation and representation from all industry segments in order to develop a true standards-based solution Create a common, flexible, straightforward solution that will reduce integration costs Make allowance for non-market data related information to take advantage of the same optimizations

24. 10 th March 2006 FAST Protocol Factors that Influenced the Design Efficiency Compression Ratio Resource Consumption (CPU, memory) Ease of Use (Conceptual, Implementation, Operation) Costs Implementation Validation Deployment Operation Maintenance

25. 10 th March 2006 FAST Protocol Characteristics Basic Feature Set Optimized for message streams Content aware (requires knowledge about message structure) Byte-oriented binary representation Variable-length fields Each message contains one or more fields A presence map enables efficient use of default values Several ways of deriving default values Empirically validated Very fast processing (encoding / decoding) High compression ratios on tested exchange feeds Simple implementation Extensible

26. 10 th March 2006 FAST Protocol Proof of Concept

27. 10 th March 2006 FAST Protocol Proof of Concept Phase1B Summarized FIX Results Exchange Feed FIX Messag e Size FIX FAST Message Size FAST Protocol Avg Compression Rate FAST Protocol Peak Compression Rate FAST Protocol Messages per second ARCA ArcaBook 121.910.591.3%94.1%667,000 OPRA177.020.888.2%90.8%434,000 CME Globex 241.429.088.0%88.9%333,000 LSE157.754.465.5%81.5%149,000

28. 10 th March 2006 FAST Protocol Performance – Native Format ARCAOPRA CMENorEx

29. 10 th March 2006 Conclusion – What did the POC Prove? FAST is a viable solution for solving market data bandwidth problems FAST has the ability to reduce data latencies from sender to receiver FAST makes an industry standard for market data an achievable goal FIX message formats can be used as the basis of this standard format

30. 10 th March 2006 FAST Protocol Summary FAST SM is available today FAST Field Encoding Specification FAST Transfer Encoding Specification FAST SM is being implemented by leading market centers Archipelago Chicago Mercantile Exchange International Securities Exchange Exchange technology group – tba LSE running a pilot to evaluate FAST SM is evolving to meet greater needs in the industry FAST Session Control Protocol FAST Template Management

31. 10 th March 2006 Resources Specification www.fixprotocol.org/fastwww.fixprotocol.org/fast FAST Protocol Specification C, C# and Java FAST Reference Code FAST Users Guides FAST Presentations FAST Proof of Concept Test Results FAST Proof of Concept Test Data Discussion group http://www.fixprotocol.org/discuss/46http://www.fixprotocol.org/discuss/46 Working group http://www.fixprotocol.org/working_groups/mdoptwg http://www.fixprotocol.org/working_groups/mdoptwg FIX in general www.fixprotocol.orgwww.fixprotocol.org

32. 10 th March 2006 Summary FIX, MiFID CP176, Giovaninni ISO20022 FAST

33. 10 th March 2006 QUESTIONS?