The Futures Industry Association (FIA) has set out recommendations devised to help manage the risk related to direct market access to exchange networks.
In January, the FIA responded to the growing prevalence of direct access by asked a working group containing representatives from exchanges, clearing firms and trading companies to establish best practices.
In its report, the group makes a series of recommendations, covering execution risk tools, post trade checks, co-location policies, certification testing and error trade policy.
On execution risk tools, the report says that to reduce the inevitable errors that occur with manual data entry, exchanges should work towards providing a standard communication protocol that would allow firms to automate setting and updating risk parameters for individual trading entities.
This would also give clearing firm risk managers the ability to more efficiently disable a client from multiple exchanges simultaneously. An API based on an agreed standard protocol such as FIX would be the preferred method for entering and updating limits, the group concludes.
On post trade checks, exchanges should make drop copies available to clearing firms, allowing them to get their current set of trades and positions from a secondary channel independent of the primary trading system.
The post-clearing drop copy feed should contain all messages including acknowledgements, fills, amendments and cancellations, says the group. Exchanges need to work toward an industry standard of delivering - preferably via FIX API - cleared information in a maximum of three minutes after a trade is executed.
The FIA also concludes that steps should be taken to ensure that access to co-location is available to every firm that is interested and that terms remain transparent to all market participants.
Meanwhile, all trading firms that wish to write directly to the order entry or market data interfaces of an exchange should be required to pass an initial set of conformance tests that highlight basic functionality of the trading system.
The group highlights concerns over market disruptions caused by trading errors from direct access participants. To combat this, it calls for exchanges to adopt a "preferred adjust-only policy" to all parties to an error trade, meaning all trades inside of a product-specific "no-adjust" range are ineligible for adjustment.
In addition, contingent or stop orders executed as a result of an error trade should be eligible for compensation from the party that made the error. An exchange's authority to cancel orders under extreme circumstances should not be invoked merely because an order is a contingent order.
Finally, the exchange should establish a minimal reporting time of less than five minutes for firms to notify the exchange that an error has occurred.
The working group includes representatives from Bank of America Merrill Lynch, Barclays Capital, CME Group, Credit Suisse, DRW Trading, Eurex, Geneva Trading, IntercontinentalExchange, JP Morgan Futires, Newedge, Nico Trading, Nyse Liffe and XR Trading.
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