Gerard Bermingham is S.V.P. of Business Strategy at Information Mosaic.
“What if they gave a war and nobody came?” While there seems to be as many variations of that line as there are claims of origination, this version has been attributed to the German poet and playwright, Bertolt Brecht. So, when it comes to financial messaging, what if they gave a standard and no one adopted it?
This could very well apply to the ISO 20022 standard. Since the design and rollout of the first ISO 20022 payment message in 2005, the ISO organization, SWIFT, regional Central Securities Depositories, exchanges, financial firms, solution providers, and others have invested resources in the development, planning, testing, and implementation of the ISO 20022 design. In attempting to correct the shortcomings and address particular ambiguities of the prior version (ISO 15022), a business modelling approach was applied. Utilizing the widely preferred syntax for e-communication, the eXtensible Mark-up Language (XML), schemas were developed to reflect the actual logical flow and requirements of financial transactions. The scope of the standard would address practically all areas of finance: payments; trade services; card processing; foreign exchange; and securities. Initial commitments for adoption were widespread, both in terms of functional area as well as regional take-up. In Europe, the Single Euro Payments Area (SEPA), an initiative to harmonize payments for euro-denominated retail credit transfers and direct debits, stated their intention to deploy the ISO 20022 standard. Also in Europe, the Target2-Securities (T2S) initiative, with its goal of normalizing securities settlement, indicated its plans to use ISO 20022. The Japan Securities Depository Center, Inc. (JASDEC) is working closely with SWIFT to implement the ISO 20022 standard for corporate actions processing as well as other areas. The South African Development Community (SADC) is currently working on applying the new standard to its payment messages. In the US, the Depository Trust & Clearing Corporation (DTCC) has been working with SWIFT, custodian banks, and solution providers, to develop ISO 20022 for corporate actions market practice.
The success of each of these initiatives vary. For example, while the DTCC has completed the testing phase and now has some of its key participants in production with ISO 20022, the ISO 20022 volumes at JASDEC are minimal, at best. The drivers and incentives for adoption have been clearly identified and articulated, and even include internal, as well as external uses. The implementation of ISO 20022 can be used for business and processing validation against other and non-SWIFT message formats. However, as evidenced by the inconsistent take-up of the standard, it is a matter of capability versus adoption. The benefits of the initiative are clear, but the hard work comes in the development and implementation. In addition, as in any implementation, there is the challenge of migrating to a new system while maintaining the old one for the day-to-day work prior to cutover. In Europe, for example, based on the SWIFT change requests of various regional Securities Market Practice Groups (SMPG), there seems to be an effort to perfect the ISO 15022 as opposed to planning for migration to ISO 20022. The effort to continue to develop and work with ISO 15022, including the support of some cumbersome work-arounds, takes vital resources away from implementing effective ISO 20022 messaging in those markets.
Another approach to help in hastening the take-up of ISO 20022 would be to target emerging markets in which SWIFT adoption has either been slow or non-existent, or markets which are in need of automation. Not being burdened by parallel processing or the challenges of migration, these areas may be quicker to benefit from the discernable advantages of the new format. By concentrating on those markets first and then working towards established ones, perhaps even leveraging ISO 20022 work that has already been done in those regions, global adoption may come sooner.
As I stated earlier, SWIFT and its partners has done a commendable job in championing the benefits of ISO 20022. However, it has promoted these benefits to its traditional membership base, namely, banks. In addition, the DTCC has successfully launched their ISO 20022 corporate actions initiative but the take-up has been by its own traditional participants: broker dealers and banks. There are other constituency types in the trade processing chain that either do not see the benefits or feel that the effort of migration is greater than those benefits. Asset managers and end-investors, who would gain efficiencies from increased data quality and accuracy by being able to directly process ISO 20022-based messages from their custodians, are somewhat indifferent to the initiative. This could be due to the fact that they do not have a representative body, dedicated solely to its constituency, directly involved in the discussion of ISO 20022. As a result, a sense of apathy to the new standard has emerged from that end of the chain. In addition, given the current adoption rate, solution and data providers would have to continue to support at least two distinct industry standards for the foreseeable future.
It is up to standard organizations to force industry participants to drop the older version and make ISO 20022 adoption mandatory. So, be forewarned. In fact, the second line of Brecht’s poem is, “Why, then, the war would come to you!” And the poet even goes on to say, “He who does not take part/In the battle will share in the defeat.”
About the author: Gerard joined Information Mosaic in 2003, with responsibility for the business requirements, development, and enhancements of Information Mosaic’s corporate actions application, IMActions™. Gerard is currently SVP of Business Strategy, responsible for building an awareness of customer and industry needs, increasing market profile, promoting Information Mosaic as a thought leader within Security Services and Operations, and working with Product Leadership on global product strategy. Gerard is a requested industry speaker, a frequent contributor of articles on global finance, and is often quoted in the financial press.