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) Alert configuration: Determine the specific requirements that your business must adhere to and configure the relevant monitors.
- 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) 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) 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.
- CME Group Market Regulation Home Page
- CME Group User Help System: Registering and Managing Operator IDs (Tag 50)
- CME Group Client Systems Wiki: Point of Order Origination (including Tags 142 and 1028)
- CME Group Block Trades
- ICE Futures U.S. Regulation Home Page
- ICE Futures Europe Regulation Home Page
- ICE Futures U.S. Tag 1028 FAQ
- ICE Futures U.S. Block Trade FAQ
- Eurex Rules & Regulations
- Eurex MiFID II/MiFIR order flagging requirements: Short code solution enhancement
Read our take on CFTC HEAT on the BornTec LinkedIn page.