Order Routing
Routing Orders from CME Group to BM&FBOVESPA (from CME Globex to GTS)
To be able to trade BM&FBOVESPA contracts by means of the routing facility, the CME Globex user/investor should:
- Be registered in Brazil as a nonresident investor, under the terms of the Brazilian Monetary Council (CMN) Resolution 2689 or 2687;
- Enter into an intermediation agreement with a BM&FBOVESPA brokerage house (an institution that holds a Trading Right); and
- Be duly registered and authorized as a BM&FBOVESPA customer.
After performing the usual procedures, participants will be registered as customers in the BM&FBOVESPA Participant Registration System by the BM&FBOVESPA brokerage house with which these participants have previously entered into an intermediation agreement. The brokerage house should also register on the same system the information necessary to identify investors when BM&FBOVESPA receives their trade orders that have been routed from CME Group. Such information will be included in the orders (FIX message) and will be used to convert the identification of CME Group end customers into their identification as BM&FBOVESPA customers, since the order submitted to CME Globex will not contain the investor's identification at BM&FBOVESPA.
Given the fact that the trading of BM&FBOVESPA contracts through the order routing system will be restricted to nonresident investors, BM&FBOVESPA will control their access by means of the data entered into the BM&FBOVESPA Participant Registration System.
Identification Mapping for the Globex – GTS Order Routing Participant
Any order that is sent to GTS is a FIX (Financial Information eXchange) Protocol message which contains the information that makes up the order, such as Exchange identification for the participant, instrument, quantity, price, etc. The order routed from Globex to GTS is also a FIX message which also contains information which allows for the identification of the entity/client that is responsible for the order to the CME Group.
The Globex GTS order routing participant identification mapping consists of the conversion of the customer ID at the CME Group (part of the information that is included in the Globex message) into the customer ID at the BM&FBOVESPA Derivatives Clearinghouse (part of the information that must be included in the GTS message).
By using the information contained in the message routed from Globex, the routing system checks whether the client is registered in the participant ID mapping module before inserting the order into the GTS order book. If that is the case, the system converts said information into the participant ID data at the BM&FBOVESPA Derivatives Clearinghouse, and the order follows the regular routing flow. If that is not the case, the order is rejected.
Participant ID Data
The CME Group participant ID data used for mapping purposes are described below:
- Globex Code – Unique ID number assigned by and registered at the CME Group for a participant who has received access to Globex from the relevant clearing firm. In the FIX messaging system used by Globex this code corresponds to tag 49 (first six bytes only). In the BM&FBOVESPA participant registration system it is called the “GlobexExecNum@CME” (Globex Execution Number at CME).
- Account at CF – Investor ID number of the CME Group end-customer which is defined by the investor’s clearing firm. In the FIX messaging system used by Globex this code corresponds to tag 1. In the BM&FBOVESPA participant registration system it is called the “AccountNum@CF” (Account Number at Clearing Firm).
- Trader – ID number of the trader who actually inserts the order into Globex. In the FIX messaging system used by Globex this code corresponds to tag 50. In the BM&FBOVESPA participant registration system it is called the “SenderSub@TF” (Sender Sub at Trading Firm).
The participant ID data at the BM&FBOVESPA Derivatives Clearinghouse that are used for mapping purposes are:
- BM&FBOVESPA Broker – Unique brokerage house ID number, as assigned by BM&FBOVESPA; and
- Account at Broker – Unique account ID number at the Derivatives Clearinghouse, as assigned by the brokerage house. This code may refer to a customer account, a master account, a PLD assignment link, or a give-up link.
Risk Management in Order Routing
All routed orders will be submitted to risk exposure controls through pre-trade credit checks prior to becoming offers on the GTS trading system. BM&FBOVESPA will provide brokerage houses with two options, namely the adoption of BM&FBOVESPA's credit limit facility or some other such facility of their preference. The figure below represents routing when the BM&FBOVESPA risk management tool is used, while the following figure shows routing in the event that the BM&FBOVESPA brokerage house chooses to employ a non-BM&FBOVESPA risk management tool.
The top half of the figure represents the CME Group participants' environment, while the bottom half shows the BM&FBOVESPA participants' environment.
The operational trade flow in the BM&FBOVESPA market via order routing is initiated through investors that are originally CME Globex users (represented in the top left hand of the figure as end customers), who send their orders to CME Globex via a CME Group trading firm or via a direct market access provider. Once the CME Group system recognizes an order for the BM&FBOVESPA market, it sends it to BM&F-represented in the figure by the arrow connecting the CME Group order router to the CME Group gateway, which is located at BM&FBOVESPA.
After its insertion into the BM&FBOVESPA environment, the order is submitted to the participant's registration verification. If the participant fails to be recognized by the BM&FBOVESPA Participant Registration System, the order is rejected; otherwise, the participant's CME Group identification is converted into a BM&FBOVESPA identification, whereby the BM&FBOVESPA brokerage house and the BM&FBOVESPA Clearing Member are both defined. The order is then submitted to credit limit assessment, and if it does not violate the established limit it is sent on to the GTS or otherwise rejected. Once sent to the GTS, the order enters the BM&FBOVESPA order book, and the BM&FBOVESPA brokerage house receives the relevant notification (via drop copy), after which it may cancel the order. If the order is executed, the corresponding trade is registered and then the usual procedure flow at the Derivatives Clearinghouse takes place (i.e. specification procedures, give-ups, intraday risk management, collateral allocation, settlement, etc.)
The above figure shows a similar flow as compared to the one in the previous figure, except for the verification of credit limits, which takes place in the brokerage house environment and not in the BM&FBOVESPA environment. Following identification conversion, the order is routed to the brokerage house, where risk verification takes place. If it does not violate the limits, the order is then sent from the brokerage house to the GTS and inserted in the order book, thus following the usual procedure flow from then on.
The following table exemplifies the mapping of CME Group participants into BM&FBOVESPA participants. The "Route to Broker" field indicates whether credit limit verification will occur at BM&FBOVESPA or at the brokerage house. The "Automatic Specification" field indicates whether the trades will or will not be automatically specified to the corresponding account (AccountNum@Broker). In any case, for the purpose of verification of credit limits, any executed trade will impact the position in the indicated account.
Risk Management - Credit Limits
The risk management model proposed by BM&FBOVESPA for order routing consists of a pre-trade credit check. All orders routed to BM&FBOVESPA will be submitted to an exposure control prior to becoming GTS-based orders. Due to the need for high computational efficiency, the limits and adequacy rules should be simple.
The BM&FBOVESPA brokerage houses will be responsible for assigning adequate credit limits to their customers. Any order routed to BM&FBOVESPA will be rejected (not forwarded to the trading engine) whenever its insertion into the order book represents a violation of the limit(s) defined by the brokerage house for the customer or holder of the master account, as applicable.
The BM&FBOVESPA brokerage house will have at its disposal two alternatives, namely (i) the use of a credit limit facility offered by BM&FBOVESPA; and (ii) the use of another facility, at its own discretion, whose implementation will not involve BM&FBOVESPA. Under alternative (ii), risk management will be conducted within the brokerage house environment. BM&FBOVESPA will define the upper limits for every limit the brokerage house assigns to customers as well as the minimum risk management requirements to be met by the brokerage house.
The risk control facility offered by BM&FBOVESPA will enable the brokerage house to assign to each customer three different types of credit limits:
- Limits to the number of contracts ordered, defined by instrument;
- Limits to the number of bought contracts and to the number of sold contracts, by instrument and trading session; and
- Limits to the number of bought contracts and to the number of sold contracts, by contract and trading session.