BornTec In Action: Exchange Compliance – Proactively Manage a Persistent Problem

Life for those responsible for compliance functions at futures brokerage firms is never easy. Doing more than less is imperative as headcount is reduced while, at the same time, trading volumes increase and new products are added. In addition, exchanges and regulators have stringent requirements for reporting and recordkeeping, requirements that have become more strict of late with initiatives such as the recent CFTC enforcement initiative, sometimes referred to as HEAT, and increasing fines and penalties from exchanges.

Fortunately, BornTec has the experience and insight necessary to create processes and reports that comply with requirements and provide support staff with time-saving tools that make the most of scarce resources by providing an enterprise solution to meet their needs. A good case in point is exchange compliance. 

What is Exchange Compliance?

In the course of day-to-day business, order routing compliance is required by exchanges to process, record, and report on a number of different types of information, and significant monetary penalties are often doled out if these tasks are not handled correctly. Important categories include FIX tags for trader/operator ID and location, block trades, and algo trading. Some of the specifics include:

  • CME Operator ID (Tag 50)
    • Operator IDs, also known as Tag 50 IDs, are FIX tags that identify trading participants that access and submit messages to or from CME Globex and are used to identify authorized individuals (individuals, terminal / algorithm operators – Automated Trading System (ATS) teams (head trader, ATS team members). Tag 50s are audited by exchanges and misuse or mislabeling of Tag 50 IDs often results in fines.
  • Block Trades
    • The rules and requirements pertaining to block trades are very complicated. Block trades are only permitted in specified products and are subject to minimum transaction size minimums, which vary according to the product, the type of transaction (e.g. outright, spread, or option) and the time of execution. At a major exchange like CME Group the number of combinations for these parameters runs into the thousands. Many exchange compliance fines arise from mishandling or misreporting of block trade transactions within a specified time period and these fines can run into the tens of thousands of dollars.
  • Manual Order Indicator (Tag 1028)
    • Both CME Group and ICE Futures U.S. require that FIX Tag 1028 be validly populated for all orders. Tag 1028 differentiates between manual and automated order entry with a manual order being one that is submitted by an individual “button pusher” (e.g., mouse, keyboard, touchscreen), whose terms are not modified by an algorithm after submission, and are submitted to the exchange without delay. Clearing firms are required as well to ensure that their client’s orders are correctly labeled and are responsible if they are not.
  • CME Tag 142
    • CME Group requires each order be tagged with the originating location in tag 142. This sender location ID is populated with the ISO code for the physical location of the individual or team head trader identified by the Operator ID in the message.
  • MiFID II Short Codes and Algo Codes
    • MiFID II, a European regulatory regime, requires that specific short codes be used as well as codes for algo (non-”button pusher”) orders. Short codes of the natural persons who are primarily responsible for both the execution and investment decision (if applicable) must be available for submission in the MiFID fields and registered with the trading venues.

BornTec Exchange Compliance In Action

With a multitude of requirements and very real monetary consequences for non-compliance, exchange compliance can be a daunting task. Fortunately, the professional team at BornTec has decades of experience in the trading industry and are experts in data, automation, and finding creative solutions to hard problems. In most cases, enabling any exchange compliance function is automated to the point of simplicity by BornTec, making it possible to perform the needed actions by simply checking a box. 

BornTec automates the handling of exchange compliance, fulfilling the required duties without the need for any intervention or maintenance on the part of compliance staff. The BornTec process for handling exchange compliance is a four step, recurring cycle:

  1. 1) Alert configuration: Determine the specific requirements that your business must adhere to and configure the relevant monitors.
  2. 2) Data discovery: Identify the precise information to be monitored and enable automated data discovery, imports and/or manual configuration from disparate sources and systems. 
  3. 3) Event alerting: With real-time monitoring, alerts are created with context for detailed insights and delivered in an intuitive and easy to configure dashboard.
  4. 4) Resolution: To speed processing and reduce noise, alerts are designed to provide pinpoint accuracy to rapidly identify issues and enable the ability to quickly correct configurations.

As rules and requirements change and evolve, so too are the parameters adjusted using the same four-step process. 

Managing Exchange Compliance with BornTec

At a time when enforcement activity by the regulators is on the increase and exchanges are increasingly strict in the application of their rules, it pays to choose a partner that understands your business and can proactively help you manage your responsibilities. With preparation, there is no need to scramble or put additional hands to work when an exchange query is received because all of the information that you need will have already been collected and available in one place. BornTec can help manage your requirements, bringing both peace of mind and a lower likelihood of fines from regulators or exchange.

To find out how BornTec can help manage your exchange compliance obligations, as well as other critical middle and back office tasks, contact us today for a call or demo. 

Further Information

  1. CME Group Market Regulation Home Page
  2. CME Group User Help System: Registering and Managing Operator IDs (Tag 50)
  3. CME Group Client Systems Wiki: Point of Order Origination (including Tags 142 and 1028)
  4. CME Group Block Trades
  5. ICE Futures U.S. Regulation Home Page
  6. ICE Futures Europe Regulation Home Page
  7. ICE Futures U.S. Tag 1028 FAQ 
  8. ICE Futures U.S. Block Trade FAQ
  9. Eurex Rules & Regulations
  10. Eurex MiFID II/MiFIR order flagging requirements: Short code solution enhancement

 Read our take on CFTC HEAT on the BornTec LinkedIn page.

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BornTec in Action: Audit Trail Compliance – Managing Complex Reporting Functions

Pop quiz: When it comes to functions performed in a trading or clearing operations, audit trail compliance:

  1. A) Makes little or no contribution to a business’s revenue line
  2. B) Is mandated by regulators like the CFTC
  3. C) Appears simple on the surface but is actually naggingly complex
  4. D) All of the above

Unfortunately, the answer is D.

However, the good news is that audit trail compliance, a component of CrossCheckTM from BornTec, can make this unpleasant task easy and, in the process, deliver both regulatory cover, greater operational efficiency and enhanced business insights. 

Challenges with Audit Trail Compliance (ATC)

The unification of trade flow data is a persistent and often difficult component of managing compliance responsibilities. Tracking and reporting on all trading activity is a seemingly simple exercise but it winds up being very complex in a real world setting. In the derivatives world, compliance is mandated by the CFTC but enforced by the individual exchanges, e.g. CME Group or ICE. 

Some of the challenges with ATC are:

  • Lack of uniformity in both information provided and reporting required by and among exchanges
  • Multiple ISV sources, e.g. TT, Fidessa, or CQG, that deliver what amounts to unstructured data due to a lack of consistent formatting 
  • Unique and non-standardized direct market access (DMA) feeds
  • Changes to source files and formats that lead to incorrect or incomplete data capture 
  • Difficulty in tracking and accounting for missing or incorrect files in real time
  • Requests for audit trail information may come a year or more after the fact: the CFTC requires that records be retained for 5 years
  • Fines from exchanges for non-compliance with rules and regulations

Given the complex and diverse data challenges involved, it pays to fully understand the issues to be faced. In order to fully manage audit trail requirements, a number of steps must be incorporated:

  1. Data retrieval: There are a large number of data sources so it makes sense to utilize automated data retrieval via SFTP or other standardized format wherever possible.
  2. File validation: Begin with a check to ensure that the file received is valid and proceed to confirm that the correct structure of rows and fields is in place.
  3. Data normalization: the format of data varies between sources so it needs to be parsed and recorded so that it fits within required data parameters in a common schema.
  4. Completeness checks: Data must contain all required information but is often deficient. Consuming and comparing to drop copy data is a check to fulfill this requirement.
  5. Query and export: data must be accessible in order to have value so a final step is to build out functionality that allows for easy querying and export of audit trail records. This information can then be combined with other trade data to deliver unique insights into market activity.

Audit Trail Compliance in CrossCheckTM from BornTec

ATC may be an unpleasant but necessary task in trade processing but it can be efficiently handled with the right tools. The ATC solution in CrossCheckTM has a number of winning attributes.

  • Completeness verification: Missing files, empty files or incomplete data are common problems that are routinely flagged and managed.
  • Full data validation: Vendor code changes can be common and lead to data corruption or inconsistency with respect to exchange requirements. Our ATC module allows you to stay on top of these changes.
  • Rapid Data Retrieval: Data that is stored on a file server is inaccessible to most personnel; searches take days-weeks. Our solution puts data and reports right at your fingertips. 
  • Format Auto Detections: Vendors often change the format of their files, making data searches and audit trail reconstructions difficult. We can readily flag discrepancies and our team stays on top of issues that are common to the industry. 

On its surface, ATC is one of those “no win” functions in a clearing operation that has nothing but downside: it is a non-revenue producing task but can lead to regulatory fines if it is handled incorrectly. In reality, a complete audit trail picture can be combined with other data to enhance risk management and trading analytics, increasing insight for the enterprise. ATC from BornTec delivers on all counts.

BornTec is a Chicago-based technology solutions firm that provides tools to support surveillance, risk, compliance, and regulatory reporting functions in financial markets. Contact us for a demo of our data resilience solutions.

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The World of Data Automation

Automation is a powerful tool in any industry, as it can save time, reduce errors and allow  employees to focus on more relevant tasks. The use of data automation can streamline and aggregate multiple types of data, allowing for meaningful outputs.

Automating the collection, processing and reporting of data is known as Data Automation. It is used to generate reports and alter or analyze data – in some instances automating decision making processes. Data automation goes hand in hand with business intelligence (BI) which helps organizations make better decisions by providing them with accurate and insightful information at the right time.

Data automation can help you reduce time spent on repetitive tasks, decrease errors, and increase productivity.

  • Improved resource allocation. Reducing the time employees spend on repetitive tasks, such as entering data from a spreadsheet into an ERP system.
  • Mitigating risk through error reduction. Data is often entered incorrectly when manual processes are involved in the collection of information. The more complex a process is, the more likely it is that errors will occur. Automation helps eliminate these errors as it reduces human error by simplifying processes and eliminating any room for mistakes in their execution. Automation also enables organizations to use fewer resources while achieving greater results.
  • Improved reporting capabilities. Automated generation of consistent, complex reports alleviates the reliance on human capital to produce reports.
  • Increase the quality of results. Automated software is able to analyze patterns and trends in much greater depth than humans can do alone (while being more cost-effective).

Investing in data automation tools for your business through BornTec

CrossCheck by BornTec is a powerful tool that allows firms to manage transactional data efficiently, enabling easy data acquisition, event monitoring, and data analytics. 

Our SaaS platform enables easy distribution across risk, compliance, front and back office, and the C suite; giving your entire organization visibility into the same data in the format they need. 

Through data normalization, enrichment, and automation we can seamlessly transform data for easy visibility, automate reporting, and provide insightful analytics.

Relevance in today’s market.

The value of automating business processes is stronger than ever in today’s market. Staff turnover creates risk of knowledge gaps related to manual processes, breaks in workflow, and reduced outputs. Process automation helps mitigate these risks and alleviates resource constraints. By automating these processes, there is an alleviation of these resource constraints. Combined with better accuracy, increased operational efficiency, and real time visibility of data, automation makes more sense than ever for most firms.

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