The Derivatives Working Group of ISITC, a securities industry standards group, is helping to spotlight a problem that has gotten lost in the shuffle of a pandemic and sudden recession. Essentially, how do users of the SWIFT financial messaging network process negative trading prices on commodity futures?
“The effort was spurred by recent market event disruptions caused by the COVID-19 pandemic, headlined by the West Texas Intermediate (WTI) oil benchmark, which traded and settled in negative territory for the first time ever,” according to the working group.
“After the events of April 20, the Settlements and Derivatives working groups quickly organized around a market practice update as an interim solution,” says Brian Manning, co-chair of ISITC Derivatives Working Group, in a prepared statement.
“Our membership’s diverse set of skills and subject matter expertise gave us a broader lens to help address this issue. As efforts continue for a long-term solution, ISITC continues to champion the SWIFT messaging standards,” Manning says.
In the meantime, the working group has just made available a market practice document, the “Listed Derivative Market Practice Guide.” The group hopes the focus on the nitty-gritty details (complete with diagrams) will help users of the SWIFT financial messaging network to process the negative trading prices on commodity futures.
“Commodity futures are traditionally transmitted from buy side to custodians via MT54x messages according to SWIFT settlement instructions. Field 90B within the message indicates the traded price but SWIFT standards do not allow for communication of a negative value in this field,” according to the working group.
“Due to the global nature of SWIFT communications, the change management process can be lengthy and tightly controlled,” the working group adds. “The market practice document outlines an interim solution that firms can use when special processing is needed to avoid posting a negative traded price trade as a positive.”
In particular, the document “provides guidelines for the use of ISO 15022 MT541 and MT543 messages in the communication of settlement for Listed Futures, Listed Options, and OTC (over-the-counter) options in the US Markets,” according to the document.
“The document addresses messaging guidelines and requirements for simple OTC Equity and Index option transactions only. More ‘exotic’ types of OTC Options consisting of, but not limited to Swaptions, Barriers, and Cap/Floors will be addressed in the OTC Derivative Market Practice,” according to the document.
The full ISITC guide can be found here: https://go.aws/2XPiWXr
The International Securities Association for Institutional Trade Communication (ISITC) states that it “brings together investment managers, broker dealers, custodians, utilities and technology vendors to develop and promote standards and best practices that increase operational efficiencies across the securities industry, enabling member companies to provide essential and enhanced products and services.” The group was founded in 1991.