Across the spectrum: ISO 20022 perspectives
The original concept of the ISO 20022 was to create a repository of data used in financial messaging to communicate business information of any type – and to be able to add any types of data that might arise in the future.
There has been a lot of focus on the use of the standard in payments and securities messaging roles In combination with its mandated use in regulatory projects such as the Single Euro Payments Area and the TARGET2 Securities, this has obscured its current and potential use in other areas.
One of the most significant is perhaps how international regulators are looking at the use of standards as part of their efforts to supervise financial services globally. Recognising that their work will have to involve interaction and interoperability with their opposite numbers in different jurisdictions, some see international standards as a potential tool.
This was raised at the Swift Standards Forum in London this year, by Scott O’Malia, who was at the time a Commissioner at the US Commodity Trading and Futures Commission, O’Malia, who has now taken up the position of chairman at the International Securities Dealers Association, told the audience that a standards-based approach could enable “successful cross-border regulation of the derivatives markets through the use of open, transparent, and standardised swaps data” as part of a “coordinated approach to swap data reporting by international regulators in order to comprehensively regulate OTC derivatives and monitor systemic risk”.
Securities industry regulators like the CFTC are faced with the challenges of how to collect and analyse vast amounts of fast-changing, multi-faceted data to try to get a view of the risk in the market. “Lack of automation, inconsistent reporting, technical challenges, and poor validation and normalisation have crippled our utilisation of swaps data,” O’Malia said. “The technological deficit in our ability to aggregate, search, and navigate through these varied data structures have made our efforts to develop a basic level of analysis unsuccessful. These breakdowns in functionality can be traced in large part to the lack of data standards. The swap data reporting rules failed to provide for standardised data fields or reporting formats. As a result, entities are reporting trades using different message types and in varying record formats.”
While regulators are addressing the problem of aggregating the data, the capability to reduce the risk of generating errors data at its point of origin is another possible benefit of the adoption of standards, a factor that was highlighted by the Singapore Exchange in its decision to mandate the use of ISO 20022 by those brokers, custodian banks and other stakeholders that interact with it.
Lai Kok Leong, vice president of Post Trade Services at Singapore Exchange said the use of the standard for securities settlement would make the processing more standardised and consistent across different customer segments and thereby reduced risk of errors.
“Our services reach out to different segments of the financial industry, we interact directly with brokers, custodian banks who are members of SGX, but they in turn reach out to their customers, so it is vital we provide clear, standardized messaging services which cascade to different downstream customers directly or indirectly using our services and through different IT systems,” he said.
“Mandating the use of ISO 20022 will enable greater automation and straight-through processing (STP), and a consistent messaging standard will help reduce data processing risks. For high-value transactions, errors can result in significant financial losses.”
The next step for the SGX will be to deploy the standard to other business areas such as corporate actions, reference data, payments and collateral management, he said: “ISO 20022 aligns well with our future developments and is a tool to help us future-proof our messaging, providing a consistent data structure across all our services and to all our different customer segments”.”
There certainly seems to be an appetite for standardisation across the industry, according to Professor Michael Mainelli of Z/Yen, who has been looking into the area, contrasting the voluntary adoption of standards in financial services with other industries – and finding a notable difference that doesn’t reflect well on financial services.
Mainelli said that he and his co-researcher, Chiara von Gunten, were “stunned” by the positive response from the industry when conducting the research, which suggests an appetite for voluntary standards, though he comments: “Six years on we don’t seem to be responding to the crisis quite as aggressively as they might in other industries.”
Z/Yen describe a voluntary standards market as “a commercial system in which actual and potential buyers and suppliers of products and services rely on conformity assessments. Conformity assessments are carried out against standards and can consist of self-certification, second party and third party independent verification and certification. Voluntary standards markets are used widely in all industries. Voluntary standards markets bridge unregulated markets and regulated markets.”
The key thing, says the report, is that standards are voluntary, typically industry-driven, alternatives to regulation through legislation, as well as an alternative to a purely free market approach. Standards aim to increase trust in markets by seeking improved quality while reducing risks: “While regulation is imposed and typically controlled by a quota of time or resource, a standard may emerge from market choice. Standards can complement regulation while still supporting competition. Standards are part of markets. A ‘standard’ is an authoritative principle, rule, model, pattern or procedure used for guidance in assessing something, by comparison with which the quantity, excellence, correctness, or other criterion of the thing is assessed. Some definitions of ‘standard’ include the idea of a universally agreed set of guidelines for interoperability. The military emphasise usability; related concepts include benchmark, criterion, gauge, measure, comparison, touchstone or yardstick.”
Introducing a note of healthy scepticism, Fiona Hamilton, vice president EMEA at Volante Technologies cautions against thinking of standards as any kind of panacea, or as something that will inevitably lead to innovation across the board.
“I remain unconvinced that the increasing adoption of ISO 20022 will facilitate a lot of new services; by and large a payment is a payment is a payment regardless of where in the world it is executed,” she says. “However, I do think that a potential impact could be that through the reduction in the costs of interoperability, which will inevitably happen, a decrease in the traditional area of cross border correspondent banking could be the reality. Interoperability between utilities becomes much more easily achievable. reverting to the language analogy, it is certainly much easier for me to understand a dialect of my own language than conversing with someone speaking an entirely different and non-Germanic/Latin based language, as it is with both parties adopting ISO 20022-compliant messages. A small amount of transformation of “tags” may be necessary but because these tags often refer to the same underlying data types, this process becomes near trivial.”
If all ACHs globally could easily exchange payment instructions between each other, and a foreign currency payment could be sent to a domestic utility and consequently settled in that country, arguably, there would be little need for a complicated correspondent banking chain, says Hamilton. “If these same utilities are also embracing ‘immediate payments’ – being built, in some instances, using ISO 20022 – and can interoperate easily with minor transformations, then a world in which cross border payments clear in seconds, cannot be far away. Now that would be progress.”
How the role of ISO 20022 in this exchange of information between institutions, infrastructures and regulators plays out in the medium and longer term is an important question.
“ISO 20022 is a big thing for the payments industry in the UK, and the Payments Council has said it will be the default technical standard for collaborative initiatives,” says James Whittle, director of industry dynamics at the UK Payments Council and ISO 20022 Regulatory Market Group Convenor.
Whittle says that says that the standard has reached an interesting point in its development where the outcomes of the interactions between parties will be crucial to making further progress without the interests of one party or another dominating. “I fully subscribe to the view that there are benefits in collaboration, but there are fine lines between collaboration and competition” he says. “Standards are about allowing people to do what they need to do in business, so there is a need for a thoroughly understood trust model.”