No Lingua Franca for Financial Instrument Reference Data

The choice of and the investment in trading solutions for both the buy side and sell side of the derivatives industry is an important determinant in the degree to which competition exists in brokerage and other trading related services. Well managed instrument symbology enables sell side firms to offer trading, risk management, clearing and settlement services to the buy side, irrespective of the product choice that a buy side client has made. The innovation in commercial services for symbol mapping has enabled sell side firms to gain competitive advantage to win new business that may have otherwise been inaccessible to them, to reduce internal costs and to comply with vendor data licensing conditions. For buy side firms, the choice of sell side services has increased as a direct result of consistent symbology mapping of otherwise unique vendor identifiers.

Symbol management of financial instruments is not a new subject yet it has never been more exposed in the press and media as pivotal to regulatory compliance, reducing systemic risk and lowering costs in trade processing. Many firms still carry out vendor instrument mapping internally, potentially breaching vendor data licensing restrictions unwillingly, but out of necessity. This has been driven by the lack of truly global identifiers that would be acceptable in commercial, regulatory and operational terms.

Sell side services that require translation of incoming client positions need to validate the price executed through the client trading platform, either using the buy side’s original trading product symbols or by using an alternative sell side source(s) or both. Carrying incorrect symbology can lead to trade mismatches and mispricing of open positions with inherent asset risk, compliance risk, settlement exposure and reputational impact. Where a sell side firm does not carry a vendor’s instrument symbols, the buy side faces reduced competitive offerings to only those sell side providers who can support that buy side’s choice of vendor product.

In cases where official industry identifiers are not available many firms generate their own internal version of a constructed symbol in order to complete the trade order process leading to unique instances of what should be common symbology. Without regular database auditing against subsequent official identifier allocations, firms become increasingly burdened by manual intervention to resolve incorrect contract mappings in risk management or compliance reporting functions in other parts of the firm.

Problems can also arise in the timeliness of available symbols for new contract listings as vendors and other industry bodies can take different approaches as to when new symbols are allocated. Forward dated contracts may carry a pre-allocated symbol or the symbol may be dynamically allocated once the contract is openly tradable or has been traded for the first time, although industry investment means that is now easier to allocate and publish new symbols more effectively.

There are scores of unique symbologies in operation within the traded market ecosystem ranging from open access vendor sources to fully licensable identifiers with protected IP, where commercial imperatives constrain direct collaboration to mutualise the problem, leaving only independent service providers to provide industry solutions due to their ability to hold multiple vendor relationships on behalf of the user community. An independent database carrying multiple distinct symbologies collaboratively sourced from market data and independent software vendors, regulatory and other industry bodies, offers a whole universe of tradable contracts against which these participants’ symbols are cross-referenced. These enriched data feeds allow the import of portfolio transactions from client originated platforms to be instantly mapped into clearing and settlement systems, all referencing the correct exchange traded instrument. Open positions can then be dynamically tracked for clients by utilising the same or alternative vendor equivalent traded series symbology to retrieve real-time prices from market data sources and client reports enriched with additional attribute information.

These datasets provide effective solutions to mutual clients’ needs and significantly improve trade flow efficiency through the middle and back office by enabling the clean order match of a traded series product to the correct listed instrument and fundamentally underpin a superior position management environment.

The existence of robust symbology maintenance to allow trade data to be passed between mixed vendor products is an essential component in the complex and component based architecture of modern trading operations. In this respect, industrial grade symbol mapping is a game changer that has the ability to alter competition dynamics in both the sell side and buy side in both the derivatives and cash markets.

For the buy side the selection of trading products is no longer limited to those products that sell side brokers could readily support due to cross-referencing gaps in unique vendor instrument symbols. Limited choice in broker services has been replaced by increased service offerings from more brokers that can translate incoming identifiers from buy side firms. This opens up the prospect of increased broker service choice for the buy side, new accessible business for the sell side and for trading product providers, the real prospect of switch sales from incumbents.

New client on-boarding times can be reduced and thereafter, persistent quality of service for clients is underpinned by effective operational processes based on robust instrument mapping across all vendor and proprietary components used. In addition the application of cross-vendor symbology mapping improves middle office risk management and for the back office increases efficiency in straight through processing in clearing and settlement.

The commercial availability of an instrument cross-reference database of key vendor participants can bring significant benefits to the industry including the increase in both choice and competition in services offered to the buy side community and the added capability for sell side firms to improve the quality of service to their clients through an unrestricted choice of vendor platform.

Brokerage service firms can offer seamless implementation of new clients, with invested operations of differing configured technologies for market data and order execution. This capability can provide a competitive advantage in winning new business, more often than not in a switch sale, with minimum disruption and high quality of service.

With risk management and regulatory compliance reportingat the top of many senior managers’ agendas, good symbology can also reduce risk and help avoid large fines from lodging of incorrect transaction records.

The uneven playing field caused by unique symbology can be solved with a robust symbol mapping service to provide a more open environment, where future product choice can be made on best functional merit as the focus of competition and not restrictive symbology. An industrial strength symbol mapping service:

• Allows product choices for end-users to be open and not restricted by legacy

• Enables product switching to be justified and more easily implemented

• Adds competitive edge to the sell side who can win new business by operating a vendor neutral environment

• Compels vendors to win business on product merit in a more competitive environment

• Delivers sell side improvements to operational efficiency and reduces processing costs

• Raises quality of service offerings and wider choice for the buy side

• Allows ready price retrieval from alternative market data vendors increasing competition

• Assists the industry to achieve lower exception reporting and improved risk management.

Embedded trading solutions and invested operations technology mean that developments toward a common standard are more likely, under free market forces, to be incremental than those mandated by unilateral industry change, although there is now a more concerted effort being made by a number of industry bodies. That’s all well and good, but critical symbol mapping has been around a long time, is present today and is needed for an effective traded market for the foreseeable future, no option.

Contact us to discuss your symbology mapping strategy and how we can help you.