The Bond Market Association has released a code of practice for extending T+1 settlement disciplines to the trading of corporate and municipal bonds.
The BMA report, issued in a draft form, notes that current plans to achieve STP in the US fixed income segment, call for inter-dealer as well as customer trades to be "locked-in" upon submission to the Depository Trust and Clearing Corporation for clearing and settlement.
"In many firms, this will require a significant change in the workflow as it applies to the life cycle of a trade," the report states. "Notices of execution, allocations and settlement instructions must be distributed on a more timely basis. Information that was typically provided by a back office process will now need to take place before a trade is submitted for settlement."
In addition, to facilitate STP, other tasks such as new account setup or the addition of a security to the master file, considered to be traditionally a back-office function, may need to be pushed forward in the trade process and performed when the initial order is filled. Risk management, compliance and surveillance systems, updated with current information and accessible in real-time, may become a more integral part of the front office trading process, states the BMA document.
The Association recently entered an agreement with FIX Protocol Limited to develop a common set of protocols for front office messaging in fixed income securities trades.
The BMA notes, however, that in those cases where transactions are performed electronically, the post-trade processing systems have not been integrated with the electronic trade flow, and opportunities for straight-through processing have been lost.
"Many firms are simply unaware or have not focused on realising the efficiencies offered by electronic trading," states the report. "Output from one system is frequently re-keyed into another for reasons that include data or format inconsistencies. Furthermore, a lack of standards in the electronic exchange of trading information has added complexity to the landscape, as each 'feed' requires custom programming."
In the post-trade arena, the BMA report embraces a number of initiatives, including the DTCC's real-time trade matching system for government and mortgage backed securities clearing, the SIA's Institutional Transaction Processing Committee blueprint, and the trade matching utilities, GSTP and Omgeo.
Omgeo is already hooked in to the DTCC - a co-owner of the utility with Thomson Financial. GSTP, which is working on developing a DTCC interface, also recently struck a deal with Bloomberg to provide fixed income traders with direct screen access to its transaction flow manager software.