The UK’s Investment Association (IA) has proposed new standardised categories to simplify the processing of rejected FX trades in a bid to bring greater consistency to the market and improve outcomes for investors.
Under the proposals, when a request by an investment manager to trade is not executed, the execution providers – brokers, dealers and platforms – will be asked to use 13 new high-level reject code categories to organise their current use of reject codes: a shorthand identifier explaining why a trade has not been executed.
Seven of the reject codes are intended to reflect regulatory and risk categories, in the quote phase, including credit, pricing outage, regulatory restraints, risk and capital constraints. They also include static data errors – where there may be an error on the unique trader ID, as well as for “unsupported product”, although one has to wonder why a provider would be pricing in something they don’t trade. Finally in this category the IA proposes an “exceptional’ category, which it describes as “a residual category to ensure a complete set of categories exist and a reject code is always provided, and only to be used exceptionally if none of the previous six categories are appropriate.”
On trade rejects, the IA proposes messages for last look (on a market move) as well as last look – latency, where the client has tried to execute on a stale price. Other categories in this “trade phase” are “pricing/liquidity unavailable”, again where a client tries to hit a stale quote but on liquidity that is not last looked; credit, static data and “exceptional”.
The IA says the proposed high-level categories will allow information on why a trade was unsuccessful to be communicated quickly and consistently, allowing for faster processing by investment managers. The cause of the rejection can then be remedied quicker, to minimise any disadvantage to investors. It is asking all execution providers to match up their existing reject codes to the 13 new high-level reject code categories and report to their investment management clients by the end of Q1 2020, while recognising that some execution providers may wish to distinguish their level of service by continuing to provide additional tailored reject codes.
“When it comes to deciding whether, how and where to trade on the FX markets, investment managers must seek to act in the best interests of their clients,” says , Galina Dimitrova, director for investment and capital markets at the Investment Association. “Currently brokers on the FX markets have no consistent way to communicate why trades aren’t successful. Our new reject code categories help ensure the reasons for trade rejections can be analysed rapidly, so steps can be taken to put right any errors and minimise potential disadvantage to savers and investors.”
These proposals were produced through consultation with the IA’s membership, banks and the Global Financial Markets Association, trading venues and trading technology providers. The IA says that where investment managers do not deal directly with an execution provider, all parties involved in a request for a quote will need to play a role in ensuring reject codes are communicated promptly to the investment manager. This is in keeping with the Global FX Code, it says, which the IA supports.