Corporate actions in the world’s securities markets continues to be an operation that incurs substantial cost and risk throughout the process, both in internal settlement and between market players, with data integration and transformation remaining a serious problem throughout the data chain from start to finish.
The Securities Industry arrived at its present process, due to ongoing market developments and from historical practices and relationships. Compounding the whole industry problem is an over-reliance on bespoke legacy systems, on both buy and sell-side, which makes the need for integration of data between different systems of paramount importance.
In recent years the cost and risk layers in the market have grown, as financial products and trading/investing strategies have become more and more complex, especially as portfolios have become more global. Processing corporate actions reflect this complexity, causing more obstacles to efficient settlement.
Currently, the issues in the corporate actions data chain begin with the Issuer, as originator of the data. Companies announce and distribute the corporate actions event information in free format, either within the confines of a substantial hard copy document or by fax or via email, where the data relevant to the Securities Market for accounting, settlement and trading has to be found and manually extracted by the receiver.
The data is then circulated by a myriad of different suppliers in a mixture of ISO15022, bespoke and unstructured, unformatted messages. Thus it’s not surprising that with this process, things can go wrong at an early stage.
The inconsistency in the quality of the data has created a need for data cleansing for firms who buy and redistribute corporate actions data. These are key firms in the industry that provide at a cost, corporate actions data in a standardized electronic format that firms should be able to rely upon.
However, to ensure completeness and correctness of information, many large Custodians and Investment Banks buy the same data from multiple sources and then cleanse it to ensure they have a complete record, a “Golden Copy” as it is known. This creates another layer of cost on top of an already expensive operation. Then once the data has been organized and cleansed the information is then sent in a bespoke structure to the investor or agent.
Accuracy of data and timely notification of all individuals and agents necessary to the settlement of the event is vital. Delay or inaccurate or misinformation can expose firms to operational risk and potentially huge losses.
This current process is a major cause of the high cost of data and contributes greatly to operational risk but is by no means the only problem. By the time the data reaches the end Investor, the Securities Industry has assimilated; collated, cleansed, massaged and resold it many times over. It has passed through many different systems, with manual intervention at various stages. And like ‘Chinese Whispers’ the end result is not what was expected, this can lead to transaction failures, increased cost, increased risk, inefficiency and regulatory breaks.
A Cause For Hope
The Issuer has in the past been outside of any market led solution. However, this is changing in the
Outside of the
It is ISO20022 that is a vitally important ingredient into the
Historically Speaking
The market solution to the lack of integrated corporate data, with the objective of reducing cost and risk has to date, been to, give prominence to, industry wide, global implementation of message standards. After nearly two decades the electronic connection between the Retail and the Wholesale Market via SWIFT has still not achieved the desired result. It’s very doubtful, due to the cost, that the introduction of standard messages via SWIFT will ever be totally successful. However, by divorcing a closed network like SWIFT from the overall industry solution there is a much better opportunity for the international securities industry to move universally forward by implementing an open network communication structure that allows competing commercial network suppliers to be chosen, rather than inflicted.
ISO15022 messages can already be carried over any chosen network and are not, as many believe, the sole ownership of SWIFT. However, ISO15022 does not have the flexible construction that allows the retail investors/agents to interplay with their wholesale market suppliers without significant capital outlay on systems. This has been the single reason why retail financial services firms have not used ISO15022 or indeed any messaging standard.
ISO20022 is an industry messaging standard implemented uniquely for firm’s individual needs and by allowing each firm to develop and evolve its preferred messaging capability, the need for industry standardization is diminished thus facilitating the wider interests of the industry to be better served.
ISO20022 provides the opportunity for the securities industry to connect wholesale and retail markets through their existing network suppliers or the Internet without the need for developing expensive communication architecture. So ISO20022 is a more cost effective connection for the Retail Market as it is network neutral. But why are the benefits of ISO20022 still mystifying the market and curtailing widespread take up?
Is ISO20022 In A Rut?
Partly, this is because of the existing market structure and the protectionism it has created. It would appear obvious that by allowing the retail investor and their agents to read electronic messages without having the outlay costs of developing SWIFT connectivity, firms of all shapes and sizes should be engaging in an ISO20022 project with extreme haste. This is not the case today!
ISO20022 has the misfortune to have huge potential in many different guises, which is the curse of its flexibility. Simply put, standards have tended to turn off the brains of many business users within financial markets for years and have been left to the devises of technologists to understand and implement a solution. It’s doubtful for example, that if SWIFT had not had instigated an ISO7775 message redundancy plan several years ago the uptake of ISO15022 would not be great and it would still be being implemented today. Thus message standards tend not to change by choice but need a focus to motivate budget for development. ISO20022 is therefore struggling to gain focus as there is no timescale for implementation and it has not gained enough understanding within business circles of its potential to solve problems, increase business and improve efficiency, whilst reducing costs and risks.
Migration
The securities industry is split between retail and wholesale markets that are split between those using message standards and those that are not and split between those that have messaging technology and those that have not. The securities industry needs interoperability as it has to cope with multiple standards and different business processes throughout the corporate actions lifecycle and in ISO20022 there is a very good starter to achieving industry wide ‘straight through processing’.
For Corporate Actions processing there is a dire need to electronically communicate both horizontally across the industry and vertically through the data chain. Such demands require industry uniformity but without a need for industry wide standard implementation. It is for this reason that ISO20022 offers each type of financial services firm an individual approach to implementing a business solution that fits into a broader industry need.
ISO20022 is supported by key industry structure organizations like FIX Protocol (FpL), Omgeo and ISDA and is growing across all supporting market infrastructure players with the DTCC, Euroclear and Clearstream all moving towards ISO20022. This alone is enabling the benefits of ISO20022 to be felt within financial services firms operations from securities to treasury, FX and beyond.
Firms should be undertaking a forensic analysis of their existing systems communication capability within their architecture to acquire a deep understanding of ISO20022 and identify the business benefits they can gain. To gain the most rewards, it’s important that they should be prepared to ditch processes or change them to accommodate ISO20022 if necessary, rather than try and work it into existing practices or processes.
It may be that the most cost benefit of implementing ISO20022 will be in virgin message standard sites where there is most to gain and almost nothing to lose, assuming the development is seen as an investment. In these cases the obvious savings will be the elimination of paperwork and archaic communication methods like fax, which create operational risk black holes and increase the burden for physical storage and retrieval for regulatory purposes.
It is also essential that firms interested in an ISO20022 project set a realistic ROI timeframe. Initial investment may not look at all appealing but taken over five or more years would look significantly attractive. There is also the important requirement for firms to keep pace with their customers and the market to secure regulatory endorsement.
If the firm is open to change and implement ISO20022, they can expect the following benefits: streamlining of operations, improved communication, increased efficiency, and operational cost and risk reductions. Existing users of standard messaging can anticipate lower cost of systems/messaging maintenance by reusing component message information and increased potential to grow the business through adaptable communication within their own architecture.
And finally
Financial Services firms can wait to implement ISO20022 but will miss the opportunity to introduce a long standing messaging solution that has wide benefits for business and systems support. Costs and risks are always quoted when new developments are called for and in ISO20022 it is no different. However, the wider industry interests are also at stake and a market is only as good as its weakest link. ISO20022 has an empowerment quality that needs a close examination to release it. SWIFT is an important structure organization for the finance industry but it is by no means the only choice or the driving force for ISO20022. That is down to financial services firms and hopefully they will see it.