By: John Jannes, Executive Director of Trading Analytics at IHS Markit
As we head into 2020, US broker-dealers are preparing for new mandates on how they report transactions back to customers. The requirements – established by the Securities and Exchange Commission’s (SEC) updates to Rule 606 – aim to bring investors greater transparency and an assurance that orders are handled in line with the principles of best execution.
For background, the SEC delayed the implementation of these requirements several times, most recently in September. As of today, broker-dealers are looking towards staggered go-live dates of January 1 2020 for 606a and a simplified version of 606b3, and April 1 2020 for full 606b3 including look-through data, which leaves no time to waste in gathering data from downstream brokers, and more broadly, determining which methods of data collection will be used going forward.
To address the comprehensive implications of the updates to Rule 606, IHS Markit recently hosted an industry roundtable in New York, where we discussed best practices for meeting the SEC’s requirements.
Here are three key takeaways that broker-dealers need to think about:
- Now is the time to have conversations with your downstream brokers and venues
It’s difficult to proceed without knowing the level of data and details downstream brokers and venues will be able to provide. By engaging with your counterparties, you’ll be able to discuss the depth of required look-through data and the means of facilitating it to interested parties. In order to stay compliant with 606(b)(3), brokers can only trade with execution service providers who are willing and able to provide downstream route data. It is likely that different execution service providers will have differing approaches to delivering look-through data because there is no SEC template for look-through, and there are some pros and cons to each approach.
Our discussion at the roundtable showed that most participants are still in the early stages of internal discussion regarding look-through data, and generally have not yet started the conversation with execution service providers. Across the board, there was concern about exposing sensitive information to counterparties, which many firms plan to mitigate through the use of vendor provided technology instead of home-grown solutions.
- Start gathering the required look through data
Broker-dealers who use downstream brokers for execution services will have some challenges in acquiring and processing look-through data. There are two options for receiving data from downstream brokers: aggregated, or raw.
In practice, this will force firms to consider how implementation is going to work and weigh the various implications of potentially exposing investor identity, revealing routing logic intellectual property, and grappling with the inherent complexity of manipulating and reconciling large datasets.
- Understand the two options to obtain and process downstream execution data
There are two basic formats of receiving data: aggregated data and raw data.
Option one is to receive aggregated data from downstream brokers, either aggregated by customer, month and venue, or by order number, venue and trade date.
The positives of aggregating by customer, month and venue are that the SEC’s XML format can be used, which downstream brokers usually support for their own reporting anyway, and that it represents the highest possible level of aggregation, therefore divulging the least amount of proprietary routing logic from the perspective of the downstream broker.
The negatives are that a customer ID must be supplied, potentially exposing sensitive client information to the downstream broker, and since the it is the highest level of aggregation, it is also the most challenging to reconcile between reporting and downstream brokers.
The positives of aggregating by order number, venue and trade date are that the downstream broker’s routing logic is still somewhat protected, and at the same time the investor’s identity is also protected.
The negatives are that special logic must be created by both the downstream broker and the reporting broker, or vendor, to fully process the data, and to a certain extent reconciliation may be challenging at times – as it always is when working off of aggregated records (though less difficult than when aggregated by customer, month and venue).
Option two is to receive raw data, either provided by a broker or given through an intermediary aggregator.
The positives of receiving raw data directly from the broker are that no special logic needs to be created by the downstream broker, and very little additional logic is required by the reporting broker (or its vendor). It allows for full reconciliation and can later be used for full scale performance and venue analysis.
The negatives are that it increases data processing volume for the reporting broker and potentially exposes the downstream broker’s proprietary routing logic.
Based on these takeaways, it’s clear that the revised data requirements for Rule 606 are substantial – without delay, broker-dealers need to evaluate their capacity for managing this in-house or through an external provider. While the SEC’s delay provides some temporary relief, 2020 is just around the corner, and the New Year will be here in the blink of an eye.
Barclays announces new trade finance platform for corporate clients
Barclays Corporate Banking has today announced that it is working with CGI to implement the CGI Trade360 platform. This new platform will provide an industry leading end-to-end global trade finance solution for Barclays clients in the UK and around the world.
With the CGI Trade360 platform, Barclays will provide clients with greater connectivity and visibility into their supply chains, allowing them to optimise working capital efficiency, funding and risk mitigation. By utilising cloud based functionality for corporate banking clients, Barclays will also be able to offer a leading client user experience through easy access and real-time integration to essential information, combined with the latest trade solutions as the industry-wide shift to digitisation continues to accelerate.
This move underpins Barclays commitment to supporting the trade and working capital needs of their clients and reinforces a commitment to innovation that has been central to the bank for more than 300 years.
James Binns, Global Head of Trade & Working Capital at Barclays, said: “We are delighted to announce our move to the CGI Trade360 platform and to have started the implementation process. We have a longstanding partnership with CGI, and the CGI Trade360 platform will mean we can continue delivering the best possible trade solutions and service to our clients for many years to come.”
Neil Sadler, Senior Vice President, UK Financial Services, at CGI, said: “Having worked closely with Barclays for the last 30 years, we knew we were in an excellent position to enhance their systems. Not only do we have a history with them and understand how they work, but part of the CGI Trade360 solution includes a proof of concept phase, which is essentially seven weeks of meetings and workshops with employees across the globe to guarantee the product’s efficiency and answer all queries. We’re delighted that Barclays chose to continue working with us and look forward to supporting them over the coming years.”
What’s the current deal with commodities trading?
By Sylvain Thieullent, CEO of Horizon Software
The London Metal Exchange (LME) trading ring has been the noisy home of metals traders buying and selling for over a hundred years. It’s the world’s oldest and largest metals market and is home to the last open outcry trading floor. Recently however, the age-old trading ring, though has been closed during the pandemic and, just a few weeks ago, the LME announced that it will remain so for another six months and that it is taking steps to improve its electronic trading. This news fits in with a growing narrative in commodities about a shift to electronic trading that has been bubbling away under the surface.
Something certainly is stirring in commodities. The crisis has affected different raw materials differently: a weakening dollar and rising inflation risks bode well for some commodities with precious metals being very attractive, as seen by gold reaching all-time highs. Oil on the other hand has had a tough year and experienced record lows from the Saudi-Russia pricing war. It has been a turbulent year, and now prices look set to soar. While a recent analyst report from Goldman Sachs predicts a bullish market in commodities for the year ahead, with the firm forecasting that it’s commodities index will surge 28%, led by energy (43%) and precious metals (18%).
Increasingly, therefore, it seems that 2020 is turning out to be a watershed moment for commodities, and it’s likely that the years ahead will bring about significant transformation. And whilst this evolution might have been forced in part by coronavirus, these changes have been building up for some time. Commodities are one of the last assets to embrace electronic trading; FX was the first to take the plunge in the 90s, and since then equities and bonds have integrated technology into their infrastructure, which has steadily become more advanced.
The slow uptake in commodities can be explained by several truths: the volumes are smaller and there is less liquidity, and the instruments are generally less exotic, essentially meaning it has not been essential for them to develop such technology – at least not until now. This means that, for the most part, the technology in commodities trading is a bit outdated. But that is changing. Commodities trading is on the cusp of taking steps towards the levels of sophistication in trading as we see in other asset classes, with automated and algo trading becoming ever prominent.
Yet, as commodities trading institutions are upgrading their systems, they will be beginning to discover the extent of the job at hand. It’s no easy task to upgrade how an entire trading community operates so there’s lots to be done across these massive organisations. It requires a massive technology overhaul, and exchanges and trading firms alike must be cautious in the way they proceed, carefully establishing a holistic, step-by-step implementation strategy, preferably with an agile, V-model approach.
The workflow needs to be upgraded at every stage to ensure a smooth end-to-end trading experience. So, in replacement of the infamous ring, these players will be looking to transform key elements of their trading infrastructure, including re-engineering of matching engines and improving communications with clearing houses.
However, these changes extend beyond technology. For commodities players to make a success of the transformation in their community, exchanges need to have highly skilled technology and change the very culture of trading. All of which is currently being done against a backdrop of lockdown, which makes things much more difficult and can slow down implementation.
What is clear is that coronavirus has definitely acted as a catalyst for a reformation in commodities. It is a foreshadowing of what lies ahead for commodities trading infrastructure because, a few years down the line, commodities trading could well be very different to how it is now, and the trading ring consigned to history.
Afreximbank’s African Commodity Index declines moderately in Q3-2020
African Export-Import Bank (Afreximbank) has released the Afreximbank African Commodity Index (AACI) for Q3-2020. The AACI is a trade-weighted index designed to track the price performance of 13 different commodities of interest to Africa and the Bank on a quarterly basis. In its Q3-2020 reading, the composite index fell marginally by 1% quarter-on-quarter (q/q), mainly on account of a pull-back in the energy sub-index. In comparison, the agricultural commodities sub-index rose to become the top performer in the quarter, outstripping gains in base and precious metals.
The recurrence of adverse commodity terms of trade shocks has been the bane of African economies, and in tracking the movements in commodity prices the AACI highlights areas requiring pre-emptive measures by the Bank, its key stakeholders and policymakers in its member countries, as well as global institutions interested in the African market, to effectively mitigate risks associated with commodity price volatility.
An overview of the AACI for Q3-2020 indicates that on a quarterly basis
- The energy sub-index fell by 8% due largely to a sharp drop in oil prices as Chinese demand waned and Saudi Arabia cut its pricing;
- The agricultural commodities sub-index rose 13% due in part to suboptimal weather conditions in major producing countries. But within that index
- Sugar prices gained on expectations of firm import demand from China and fears that Thailand’s crop could shrink in 2021 following a drought;
- Cocoa futures enjoyed a pre-election premium in Ghana and Côte d’Ivoire, despite the looming risk of bumper harvests in the 2020/21 season and the decline in the price of cocoa butter;
- Cotton rose to its highest level since February 2020 due to the threat of storm Sally on the US cotton harvest, coupled with poor field conditions in the US;
- Coffee rose 10% as La Nina weather conditions in Vietnam, the world’s largest producer of Robusta coffee, raised the possibility of a shortage in exports.
- Base metals sub-index rose 9% due to several factors including ongoing supply concerns for copper in Chile and Peru and strong demand in China, especially as the State Grid boosted spending to improve the power network;
- Precious metals sub-index, the best performer year-to-date, rose 7% in the quarter as the demand for haven bullion continued in the face of persistent economic challenges triggered by COVID-19 and heightening geopolitical tensions. In addition, Gold enjoyed record inflows into gold-backed exchange traded funds (ETFs) which offset major weaknesses in jewellery demand.
Regarding the outlook for commodity prices, the AACI highlights the generally conservative market sentiment with consensus forecasts predicting prices to stay within a tight range in the near term with the exception of Crude oil, Coffee, Crude Palm Oil, Cobalt and Sugar.
Dr Hippolyte Fofack, Chief Economist at Afreximbank, said:
“Commodity prices in Q3-2020 have largely been impacted by COVID-19. The pandemic has exposed global demand shifts that have seen the oil industry incur backlogs and agricultural commodity prices dwindle in the first half of the year. The outlook for 2021 is positive however conservative the markets still are. We hope to see an increase in global demand within Q1 and Q2 – 2021 buoyed by the relaxation of most COVID-19 disruptions and restrictions.’’
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