The majority of industry participants are disappointed and frustrated that an agreement has not been reached on an alternative standard to the Options Price Reporting Authority (Opra) code, according to a recent study by the Financial Information Forum (FIF). Mary Lou Von Kaenel, managing director, management consulting at New York-based consultancy Jordan & Jordan, which chairs the FIF group, explains that the industry will spend an estimated US$250 million in preparation for the introduction of new options symbology, regardless of whether a standard has been reached or not.
“Time is running out for firms who were hoping for industry consensus on a standard before beginning full implementation. Those firms must now pursue their separate plans, and will need to resolve issues related to lack of standardisation as each situation presents itself in dealing with vendors, utilities and other market participants,” says Von Kaenel.
Industry participants have as yet, been unable to come to an agreed standard as an alternative to the current five character Opra codes, which could then be disseminated by Opra and the Options Clearing Corporation (OCC), the clearing house that since 2005 has led the Options Symbology Initiative (OSI). There is no agreement about how the new 21 character options symbology key, due to be introduced in 2010, will be implemented across the industry, according to the respondents to the FIF survey.
Respondents to the survey included 46 of the FIF’s members, representing 26 broker-dealers, 12 service bureaus, seven market data vendors and one options market, says Von Kaenel. FIF has engaged its members in active discussion to exchange ideas and share plans for implementation, she adds. Initial discussions led the group to explore opportunities to establish a standard, and to conduct a survey to better understand how a broader range of firms is approaching the implementation effort.
The group’s involvement in the OSI has not been limited to discussions and research, says Von Kaenel. “FIF has also acted as a clearing house to provide information and OSI status to its members. FIF has compiled and posted to its web portal a list of milestones with links to relevant documents and specifications. FIF plans to maintain ongoing dialogue with its members to support their OSI implementation efforts and preparation for industry testing,” she explains.
General industry discontent with a lack of standardisation was prevalent in the survey and respondents also indicated they are aware of the high cost of implementation. “The other interesting, although not surprising, finding of the survey is the estimated cost to the industry of US$250 million, which does not include buy side or custodian implementation costs,” she adds. “In this market environment, with no new revenue that can be attributed to the expense, cost has become a significant challenge for some firms.”
Broker-dealers have two key areas of cost and concern, says Von Kaenel: changes to the dealers’ internal applications, which are far reaching and therefore very costly; and changes that touch their customers, which are of great concern to dealers. As well as coping with the additional characters in the new codes, institutions will also have to deal with fractional pricing with an explicit series key and decimal strike prices.
She explains the most costly aspects of the changes: “Looking at it from the customer perspective, FIF members focused on customer confirmations and account statements generated by the back office. At the front end, there are more complex elements to consider, such as ease of order entry or avoiding input errors.”
For instance, there are firms that currently enable clients to enter orders and request quotes using a touch tone phone. These firms must remediate their interactive voice response (IVR) systems, she explains. Many firms also allow their customers web access to functionality that will be impacted by elimination of the five digit Opra code.
Costs associated with various customer interfaces involve far more than programming, as firms must initiate marketing programs and customer training to retain their current user base. “The survey estimate of US$250 million is limited to programming expenses and doesn’t consider marketing costs, customer service or the help desk resources that will be required with the transition,” she adds.
Currently, most firms are only able to store nine or 12 digit identification codes and in order to comply with OSI, they will have to create proprietary identifiers for listed contracts for purposes including client reporting and processing. The FIF survey asked respondents to evaluate the various approaches to creating the nine character dummy codes, including the offerings from Standard & Poor’s Cusip Service Bureau, Symbol Management Clearing, Interactive Data and an open source code, Mark 1 Algorithm.
According to the survey, 39% of respondents would use codes created by Cusip Service Bureau, 7% would use Interactive Data’s solution and 2% would use Symbol Management Clearing. None of the respondents selected Mark 1 Algorithm, but 17% indicated they would use their current internal identifiers, 7% were uncertain and 24% declined to comment. This is indicative of the lack of standardisation across the industry with regards to tacking the OSI, says the FIF.
Moreover, not everybody is up to speed with what has to be done. “Most of the large firms are familiar with the OSI initiative and have scoped the work effort, but many more firms are somewhat unaware of the changes planned for the options industry and will depend on their vendors to guide them,” says Von Kaenel. Dealers who participate in the options markets and the vendors who support them with market data, trade order management systems, market making applications and back office processing, must be fully prepared to transition to this new methodology by 2010, she warns.
“At Jordan & Jordan we deal with a broad base of firms whose OSI related change requirements range anywhere from a few minor ‘tweaks’ to a major effort affecting over one hundred applications and hundreds of screens,” she adds.
Von Kaenel recommends that institutions create a roadmap for OSI implementation at the firm level in order to tackle the challenge in a coherent manner. She recommends that a firm should focus on minimising the impact of symbology changes on end-users, particularly customers and traders, as well as preserving the integrity of data and systems.
“To determine the impact on internal workflow and systems at a firm, we look at the effects of symbology changes on front office market data, order entry, trade management and execution processing systems; risk management, position tracking, compliance and reporting systems; back office trade matching and clearing systems, books and records; historical data stores and ongoing adjustments for corporate actions,” she explains of Jordan & Jordan’s approach.
Firms cannot afford to rest on their laurels as the first major milestone of the OSI comes in September 2009, with the commencement of industry testing. “To be prepared for testing, firms must have completed their internal programming changes (perhaps by end of 2nd quarter 2009) to allow for several months of internal testing to insure there is no unintended impact of changes on adjacent systems,” she warns.
Some firms will be ‘early adopters’, ready to go into full production to avoid maintenance of two sets of code for an extended period, reckons Von Kael. However, firms that are not ready for industry testing and do not see it as an opportunity to cycle the complete process, introduce a significant amount of systemic risk into the overall implementation effort, she adds.
The major milestone in the short term, will be gaining the attention of management and obtaining the resources necessary to pursue a major initiative such as this, which may be problematic, concludes Von Kael. “Given current market conditions, executive management undoubtedly has other priorities.”
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