FIX has grown rapidly from the historic base of cash equity product, and pre-trade and trade business process support, to a point where it now supports a broad range of product types; Fixed Income, Foreign Exchange, Equities and Derivatives. This organic growth has been driven by the business benefits of FIX, and a dynamic user and vendor community. JP Morgan’s Andrew Parry explores the technical aspects that will take FIX to the next level, in particular in relation to global derivatives.
The success of FIX, to date, is supported by a simple premise. It is useful, provides valued business outcomes, and has an active user, vendor, and consultancy community, rather than trying to be the most beautiful possible technical solution.
To expand FIX further we need to continue the lines of work opened up in FIX 5.0 so that we can continue to provide valued business outcomes with what is, by now, a far larger model in terms of data and function support than when FIX began.
These lines of work such as correctness, machine readable business rules and process rules – discussed below – should improve the core of the FIX model, and increase the ease of use, both for software tool makers, and our end users.
Companies such as Google and Apple provide a good example of this approach. The end user of Google maps does not have to understand the technology behind it, whereas application developers are provided with a Google Maps API. We should approach the FIX model in the same spirit.
An analysis: Service Packs FIX 5.0 onwards supports a service pack model, which supports the addition of minor changes within a matter of months'. This approach has particular value for the derivatives industry, which has a high rate of business driven change, and increasing regulatory requirements.
By adopting the service pack model, we promote standardised additions, instead of customised user extensions, which are commonly required in the absence of a timely way to make contributions. We will go on to look at how the service pack model has been used to a wide range of features to support derivatives in FIX 5.0 onwards.
Building Blocks The service pack approach has been used to provide business correct building blocks, which can be re used. Taking an example from FIX 5.0-SP2( Service Pack 2), which has provided timely support for the business requirements and regulator demands of credit derivative contract specification standardisation and central clearing in America and Europe.
EP83 – Enhancements for Credit Default Swaps Clearing. “The following new fields were added to the Instrument Block … AttachmentPoint (1457), DetachmentPoint ( 1458 )”.
These fields are in support of CDS index tranches, which give investors the opportunity to take on exposures to specific segments of the CDS index default loss distribution. For example the “0% to 3% tranche” with attachment (0% ) and detachment (3%) is the lowest tranche, known as the equity tranche, and absorbs the first 3% of the losses on the index due to defaults.
Correctness The percentage data type used for AttachmentPoint and ExhaustionPoint should only allow values between 0% and 100% (inclusive) to be business correct. The attachment and exhaustion points are always between 0% and 100% of the notional amount. This is data type correctness.
Where a tranche is being modelled, both AttachmentPoint and ExhaustionPoint should be used, otherwise the tranche is unbounded. This is model structure correctness.
AttachmentPoint should always be less than ExhaustionPoint, otherwise the Tranche would have zero or negative width. This is business rule correctness.
Where we have standardised tranches, such as “0% to 3%” we should have a way of tying back to a reference data source to confirm that this is indeed one of the standard tranches. This is reference data correctness.