Y2010 Problem: Firms May Not Be Prepared for New Options Symbols
July 20, 2009
In seven months, securities traders may not recognize their options any longer.
That's when ticker symbols for listed options will expand from as few as three characters to as many as 21 numbers and letters.
Doesn't sound like a big deal. Just more information in each symbol. Yet some industry experts are sounding an alarm over the potential lack of preparedness by fund managers and small to mid-tier broker dealers.
Firms which can't accommodate the new 21-character code will not be able to trade options electronically or price them. They might even create erroneous trades.
"For a fund manager or brokerage doing only a handful of transactions such a scenario might not be financially troubling,'' said Michael Hartig, a managing principal at New York financial services consultancy Capco, during a July 15th webinar. "However, for firms handling several hundred or thousands of orders a day, the results could easily be cost prohibitive representing millions of dollars worth of potentially lost revenues."
The 21-character symbols being spearheaded by the Options Clearing Corp. (OCC)--the clearinghouse for U.S. listed options--will be introduced in February 2010. The current three- to five- character codes will be completely eliminated in May.
Switching over to a new symbology will be no easy task. Options exchanges, financial firms, data vendors, service bureaus, and clearing firms must change their security master databases, pricing databases, options analytics systems, trade processing and clearing systems, and compliance systems to store and process the 21 characters. Pershing, the financial services outsourcing arm of Bank of New York Mellon in Jersey City, N.J., estimated that nearly 40 different applications will be affected.
Market data vendors, software providers and financial services firms say they will have to create proprietary codes to identify the contracts for client reporting and processing purposes. Many companies' internal applications feed off of security master files, which were designed to accommodate only 9- or 12-digit alphanumeric codes.
The Options Price Reporting Authority (OPRA), which tracks options prices, said it will switch to a condensed version, comprising 17 characters. Firms using OPRA feeds to support their trading, analytics and pricing applications will still need to convert those symbols to both the OCC code and separate proprietary identification codes.
"The multiple OCC and OPRA standards, in conjunction with the new formats from market and reference data vendors, increase the complexity for all of the impacted market participants and reinforces the need for development of comprehensive test scripts and rigorous end-to-end testing by all financial firms trading or processing options," said Hartig.
To help firms prepare, the OCC has planned four tests between the clearinghouse, options exchanges and member firms in October, November, December and January. The OCC has indicated it will help its members get up to speed with their preparedness and certify when they are ready. All of the options exchanges have also said they will test separately with their members.
That still leaves fund managers and introducing brokers to fend for themselves when testing with executing brokers, clearing firms and service bureaus. "We don't think that buy-side firms are up to speed on the changes," said Dave O'Marra, principal consultant with Capco, who also spoke at the webinar.
Dayle Scher, research director with research firm TowerGroup, said fund managers can't put off getting their systems ready to accept the longer codes. "The buy side must resist being tempted to wait and see what the impact of symbology changes will be on them," she warned. "They should have already begun assessing the possible risks to their systems," added Scher.
Of the maximum 21 characters in the new code, the first six characters will represent an option contract's symbol; two characters each for the maturity day, month and year; one for the call or put indicator; five for the strike dollar; and three for the strike price. Today, listed options are named using as many as five characters. Of those five, three characters indicate the root symbol for the option and two characters identify the expiration month, whether it's a put or a call and the strike price for the option.
While in effect for over 30 years, the current identification codes don't provide sufficient information on underlying securities and cannot accommodate newer types of options such as long-term equity anticipation options (Leaps) and flexible exchange (Flex) options. according to the OCC, which has spearheaded the so-called Options Symbology Initiative (OSI) since 2005.
Because exchanges needed to design some kind of approach to symbols for new types of options, broker-dealers, market data vendors and other service providers had to continually tinker with their operating systems and sometimes rely on manually processing of transactions.
The OCC believes the new nomenclature will eliminate much of the proprietary symbology used by exchanges for new kinds of options as well as the ad-hoc symbols adopted by third-party service providers to compensate for inadequate identification. As a result, the 21-character approach is expected to reduce errors in trading and post-trade processing. In the case of corporate actions, the new methodology will mean a substantial reduction in exceptions being processed manually. One operations executive at a New York-based brokerage firm said processing errors cost his firm $100,000 annually.
The pricetag for changing to the new options symbology will be high. The Financial Information Forum, a New York-based trade group specializing in technology issues, estimates that the industry will collectively spend $400 million to prepare. Of that amount, more than half will be spent by executing brokers and clearing firms which will have the most work to do.
"We will begin testing with our customers shortly," said Joseph Dattolo, managing director of the trading services group at Pershing. He estimated that only 20 percent of its introducing broker and independent registered investment advisor customers will be affected by the options symbology change because the remainder rely on Pershing to complete all of their processing work.
Clients who depend on third party front-end systems to send orders to Pershing won't have any trouble because those order management and execution management providers have made the necessary changes, he said. However, firms downloading files from Pershing at the end of each business day confirming their trades will need to be able to register the new format into their applications.
BNP Paribas has already begun testing its files with the new options symbols with its service bureau and will also be testing with clients and internal systems, according to Timothy Donohue, director of the bank's prime brokerage unit and its clearing unit for listed derivatives. "Firms which are not prepared to accept the new options symbols can always trade through another executing broker or use a third party clearing firm which is prepared," he said.
But O'Marra countered that firms can't rely on even the most qualified external help to get them through the options symbology change. "They still need to verify their interfaces with every application whether licensed, proprietary or outsourced," he said.
Three operations executives at New York-based fund management firms contacted by Securities Industry News last week declined to comment on how they would prepare for the new options symbology but their lack of awareness of whether or not they would be affected was glaring.
"I don't know if we're doing anything about it," said one operations executive, who declined to be identified "I'll ask my IT guy." Yet another operations executive, who also requested anonymity said: "I send orders through my FIX engine so there shouldn't be a problem."
FIX experts also cautioned that such a complacent attitude is misguided. "The FIX protocol doesn't need to be changed to accommodate the new options symbology, but a particular implementation of FIX may need to be changed to include the expiration day of the month," said Jim Northey, regional committee-co-chair for FPL Americas and co-founder of the LaSalle Technology Group.
None of the brokerages contacted by Securities Industry News were willing to disclose their contingency plans in the event their fund manager or introducing brokerage clients were not prepared. Such a stance reflects the steadfast decision by the OCC and the options exchanges to stick to the February timetable even in the face of mounting opposition.
Last December, the clearinghouse and exchanges denied the request of some of the largest U.S. brokerages, which presumably can afford the chantges, to extend the schedule for the new options symbology by another year. In letters sent to the OCC in December, TD Ameritrade, Charles Schwab Corp., JP Morgan Chase, UBS Financial and Bank of New York Mellon did not explicitly say they were ill-prepared but they did say they didn't want to allocate valuable resources during an economic crisis to meet the deadline.
"We're confident the industry will be prepared for the change," said Dave Harrison, vice president at OCC. He declined, however, to comment on what the clearinghouse and exchanges would do if the testing shows gaps in firms' readiness to change. Harrison also would not specify what criteria the OCC and exchanges would use to measure the successfulness of the industry-wide testing.
The clearinghouse and options exchanges will likely disclose those measures before September to ensure that brokerages are not lax in their preparedness.
