On the 5th of June, the FIA and the Derivatives Market Institute for Standards (DMIST), jointly announced the publication of the Average Pricing Standard. This second standard published by DMIST supports the 30/30/30 standard. Which focused on improving the timeliness of Trade Give-ups and Allocations and was released in June 2023.
DMIST introduced it to tackle the lack of standardised average price functionality across CCPs that was preventing processing trades on Trade Date. It’s a global call for CCPs to adopt certain standard average pricing functionality. Aiming to drive consistency and improve the current allocation and timing issues associated with average price order workflows.
The industry has long struggled with the challenges posed by inconsistent average pricing functionality across CCPs. It has also long been a thorn in the side of many market participants. It’s hoped that this new standard will revolutionise the way average pricing is handled and bring much-needed consistency to the industry.
The standard will apply to all CCPs globally. It calls for those currently offering average pricing to review their functionality and adapt to the minimum functionality standards set out in their table. For those who do not provide on-CCP average pricing, it will provide a roadmap to develop a globally recognised average pricing service.
At the core of the standard is a 16-point Functionality Table seen as a universal blueprint for CCPs globally to align their average pricing services. The documentation covers everything from general standards encompassing decimal precision and GUI information availability, to intricate details such as average price grouping criteria and cash residual calculations.
The General Standards section calls for average pricing functionality to be made available for all products and CCP systems to support a minimum decimal precision of seven and a maximum of ten. It also details what information should be available to members in the CCP GUI.
Whilst the standard aims to drive consistency and efficiency across the industry, there’s a concern that it may be inadvertently favouring larger organisations. This, in turn, could present multiple challenges for smaller market participants. For example, for an organisation to adhere to the 16-point Functionality Table, it will require significant investment in its technology, infrastructure and personnel.
A lot of these smaller organisations still rely on legacy systems and manual processes that are likely to be incompatible with the standardised average pricing functionality. Upgrading or replacing these systems to comply with the standard will be costly and disruptive and could potentially outweigh any perceived benefits.
Implementing the standard will also require technical expertise, dedicated project teams and ongoing maintenance and support. Larger firms will simply be better equipped to handle these undertakings whilst others may struggle to allocate what’s required without compromising any existing projects or operations. Failure to meet these requirements or comply with the new standards may cause the competitive landscape to widen and firms of a smaller statute may struggle to compete with their larger peers.
It’s not all doom and gloom though for smaller organisations as the Average Pricing Standard does provide a plan for CCPs that currently do not offer on-CCP average pricing, which would be of benefit in the long run. The industry, regulators and DMIST do need to recognise and be wary of these disparities. They need to consider ways in which they could support smaller organisations during the adoption phases.
Potential solutions could include dedicated support programs, phased implementation timelines or financial incentives. These initiatives could help smaller firms transition to the new standard without compromising their competitiveness or financial stability. The aim should be to ensure that the benefits of the Average Pricing Standard are realised across the entire market and not just for those at the top of the pyramid. This should foster a level playing field and drive innovation at all levels.
It does seem like the latest standards favour larger organisations over smaller ones, but we feel that is merely not seeing the forest for the trees. Larger organisations will always have bigger budgets and be able to respond quicker to new laws, legislations and standards. This standard though is not unattainable for smaller firms with the technology and platforms currently available within the market. There are transitional plans to help those behind the 8 ball and as the Star Trek character Spock famously said, “logic clearly dictates that the needs of the many outweigh the needs of the few”.
HelloZero, and other platforms like it, have been built to help organisations of all sizes by offering a range of solutions that are available individually or collectively. We have been able to help our customers address specific gaps, and where needed, implement solutions alongside existing platforms. Our solution can automate the ingestion process for organisations of any size, and we were in fact able to cut down the manual work for one of our customers by up to 40%.
We are experts within this space, and we were involved in the decision-making process being DMIST ambassadors. This allowed us to participate in the subject matter working groups that vetted, analysed and refined the proposed standards. This standard is another step in the right direction and will help standardisation across the industry.
Get in touch and we’d be happy to discuss how we can help you.
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