Raising the bar with adoption of new messaging standards:

the SWIFT case for ISO 20022

Consistency in communication connectivity oils the cogs of the investment management industry. Adoption of the ISO 20022 messaging standard offers a key example of providing standardised messaging to ensure consistency as an essential prerequisite for efficient risk management, cost effectiveness and business growth.

by Arun Aggarwal, Sofie Bertin and Hervé Valentin

Central to the communica­tions model of many of the leading players in the investment management industry are standards to ensure the smooth and consistent flow of financial data. While the industry’s various infrastructures benefit from improved productivity and operational efficiencies associated with standardisation, all participants extend­ing to the end-client gain from the resulting reduction in risk and lower costs for domestic and cross-border transactions.

Standards are a core element of the business activities of SWIFT, the con­duit through which the financial sector conducts its business operations with the speed, certainty and confidence it requires. Providing a range of stand­ards-related products, tools and services to support the investment management industry, SWIFT collaborates in efforts to ensure the interoperability of stand­ards, so that the community at large can also benefit from potential cost savings, eliminate inefficiencies and smoothly expand into previously untapped markets.

Specifically designed to help industry developers implement standards easily, while reducing implementation costs, SWIFT has developed a coherent and cohesive set of electronic standards re­sources. This range of products helps customers to implement standards effi­ciently and easily. Standards are developed in response to user community business and regulatory requirements. They are available for the community to trans­port across whatever system is chosen.

A SINGLE STANDARD AS GOAL

Currently there are numerous messag­ing standards and standardisation initiatives addressing financial informa­tion flows. SWIFT is working towards a rationalisation of standards and to facilitate interoperability and consistency between standards developed by differ­ent standards bodies.'

In a drive to offer a better, cheaper and faster way of developing and imple­menting message standards, SWIFT has been heavily involved in the estab­lishment and implementation of the so-called ISO 20022 standardised messag­ing infrastructure. SWIFT uses the ISO 20022 modelling methodology in its standards development and promotes its adoption globally. Further evidence of SWIFT’s commitment to standardi­sation is in its role as a registration authority, where it acts as the guardian of ISO 20022’s integrity.

ISO 20022 is instrumental for financial institutions that want to streamline their communication infrastructure and associated costs by opting for a single, common language – or lingua franca – for all financial communications, what­ever the business domain, the commu­nication network and the counterparty (other financial institutions, clients, suppliers and market infrastructures).

It is targeted at these standards initia­tives that are generally driven by com­munities of users looking for more cost-effective communications to support specific financial business processes with a particular view to facilitate inter­operability with other existing protocols.

ISO 20022:
HISTORICAL CONTEXT

The financial world is built on highly reliable, fast, auditable and seamlessly processable intra- and inter-company communications of instructions to ena­ble business transactions. Money moves financial assets. Historically these movements (or messages) evolved into standard formats based on national or regional boundaries, market participant initiatives, or standards mandated by specific industry utilities like SWIFT. These message standards developed around silos of automation based on market practice or geographical loca­tions, and the message standards were not compatible.

In order to address this compatibility challenge, the International Organiza­tion for Standardization (ISO), the world’s largest developer and publisher of international standards, developed the International Standard ISO 20022 – Universal financial industry message scheme (since abbreviated to ISO 20022). Initially developed to adhere to the ISO 7775 standard and to support the functionality used by SWIFT for their telex messages from around 1977, it grew out of the ISO 150022 standard of the 1990s and hence into a type of second edition also known as SWIFTML, which covered just securities. In 2004 the scope was expanded to include a broader remit of all financial services.

The need for an ISO 20022 standard arose in the early 2000s with the wide­spread growth of Internet Protocol (IP) networking, the emergence of eXtensi­ble Mark-up Language (XML) as the de facto open technical standard for elec­tronic communications, and the appear­ance of a multitude of uncoordinated XML-based standardisation initiatives, each having their own ‘XML dialect’. On top of offering a common way of us­ing XML, the new standard shields in­vestments from future syntax changes by proposing a common business mod­elling methodology (using Universal Modelling Language or UML) to cap­ture, analyse and syntax-independently describe the business processes of po­tential users and their information needs.

ISO 20022:
A WORKING DEFINITION

ISO 20022 is the international standard that defines the ISO platform for the development of financial message standards. Its business modelling approach allows users and developers to represent financial business processes and under­lying transactions in a formal but syntax-independent notation. These business transaction models are the ‘real’ busi­ness standards. They can be converted into physical messages in the desired syntax. At the time ISO 20022 was developed, XML was already the preferred syntax for electronic communication.

The ISO 20022 standard provides the financial industry with a common plat­form for the development of messages in a standardised XML syntax, using:

• a modelling methodology (based on UML) to capture in a syntax-inde­pendent way financial business areas, business transactions and associated message flows;

• a set of XML design rules to convert the messages described in UML into XML schemas.

ISO 20022 is a standard for standards – a methodology for the creation of con­sistent message standards using data to describe data and interactions. This flex­ible framework allows communities of users and message development organisations to define message sets according to an internationally agreed approach and to migrate to the use of common XML-based syntax. It is essen­tially the roadmap to establishing a con­sistent lingua franca in glo­bal financial markets.

In developing business standards to support transactions in the finan­cial markets for pay­ments, securities, treasury and trade services, tradi­tional MT messages are complemented by the new ISO 20022 XML-based (MX) messages, which enable the transfer of richer data for more com­plex business transac­tions. For transport across SWIFTNet, messages are either wrapped inside a SWIFTNet FileAct envelope, or packaged in one of the growing range of so­lutions that SWIFT provides.

MX messages are increasingly used in the securities industry, with adoption extending beyond Europe to Asia and the USA. MX messages offer more clarity and have wider application than earlier protocols, so their use enables invest­ment managers to improve straight-through-processing (STP) rates. Conse­quently they can drive down costs, reduce operational risk and readily ac­commodate increased volumes as their businesses grow.

SWIFT BOOSTS MX USUAGE

In the specific case of SWIFT, MX messages usage is steadily increasing for mutual and pension fund flows automa­tion, while new MX messages to sup­port corporate actions and securities settlement are set to go live in 2010. The range of MX messages of direct interest to the investment management commu­nity, notably for securities settlement and corporate actions, will broaden dra­matically over the next year and beyond.

Reflecting this development, SWIFT has linked up with SimCorp in an agreement to use SimCorp Dimension as an integrated and scalable solution to accept, process and transmit SWIFT ISO 20022 MX messages. The proof of concept involved bringing together SWIFT’s Alliance Integrator, the con­figurable SWIFT-specific integration platform, and SimCorp in a combined solution, which will be complemented in future by one based solely around SimCorp Dimension. As a long-stand­ing member of SWIFT's partner pro­gramme, SimCorp is geared up to posi­tion itself as a leading software provider in terms of MX adoption.

The investment management industry’s ability to measure the progress of auto­mation and standardisation in cross-border fund order processing has re­ceived a significant boost as a result of a regular annual survey jointly carried out by SWIFT and the European Fund and Asset Management Association (EFAMA), the representative associa­tion of the European investment man­agement industry. According to the survey findings for 2008, key success factors include adoption of the new ISO 20022-based single template for fund orders, implementation of EFAMA’s best-practice recommendations for fund processing, as well as use of focused and large-scale standardisation campaigns by fund managers, transfer agents (TAs) and platforms.

An ongoing priority is to force the pace of adoption and to reach the levels of standardisation that have been attained for other securities. According to the latest survey covering 2009, the per­centage of automated orders based on the ISO messaging standard increased to 45% in volume terms. This is an increase of 4.3 percentage points compared to 2008. EFAMA’s Fund Processing Standardisation Group has issued recommendations to guide in­dustry best practice, serving as a leading advocate of ISO 20022 as the single European standard for fund messaging and as the basis for electronic communication in processing investment funds.

EFAMA has proposed that ISO 20022 should be advanced as promptly as pos­sible as a basis for interoperability and that proprietary message standards be­tween client- and fund-side institutions should be avoided. In line with this objective and to encourage a prompt and efficient transition from manual processing to ISO stand­ard automation, SWIFT has announced a set of milestones to guide migra­tion to ISO 20022 fund messaging over the SWIFT network, culmi­nating in full adoption by late 2012.

A STANDARD TO SUPPORT GROWTH

In one corporate example of migration to ISO 20022, leading Spanish fund manager and distributor AC Gestión opted for ISO 20022 to support the business growth of its guided architecture platform. It was able to reuse the SWIFT infrastructure of sister company Ahorro Corporacion Financiera, meaning it could minimise IT infrastructure costs and achieve a faster time to market.

AC Gestión sees a very powerful bene­fit in the automation of status messages, which confirm that the content of an order is approved and will be executed. Most TAs generate status messages within minutes of order receipt, mean­ing they are received well before cut-off time, supporting timely identification and resolution of any problems.

In another example, UK-based invest­ment management company Legal & General Investment Management (LGIM) was one of the early adopters of ISO 20022 messages within the pensions industry, setting a precedent for how fund management firms can maximise efficiency while reducing costs and risks by automating fund processing operations. Despite the 2008-09 financial crisis and the general downturn in market conditions, LGIM’s business has continued to grow, with the number of transactions growing by over 25% in 2009 alone. It was able to absorb this growth without any headcount increase and projections indicate that it will continue to do this.

For LGIM, automated processes in­volve a significant number of rule checks. This means that manual inter­vention is only required for exceptions, which represent a very small proportion of the orders processed. LGIM has been able to use economies of scale for the support of its SWIFT infrastruc­ture as this is used across the entire business, i.e. for custody and settle­ment. The main drivers of the LGIM ISO 20022 business case have been: risk reduction by continuing to drive er­ror rates down; service by enabling STP to enhance the service proposition to counterparties; and scalability by bene­fitting in terms of cost containment while enjoying substantial business growth.

MAPPING OUT ISO 20022
ADOPTION

It has long been recognised that the simple existence of an ISO standard does not ensure that it will be utilised by industry participants in a consistent, coherent and cohesive way. Adopting a harmonised single template for ISO 20022 messaging is key to ensuring ef­ficient use of this message standard across the industry.

Mandated change is initiated by regula­tion, through migration by network providers such as SWIFT from the old MT to the new MX standards, or by demands of the business to support new transaction flows only available in ISO 20022. While it will increase costs in the short term, ISO 20022 also offers opportunity for competitive advantage.

Business transactions based on the ISO 20022 standard increase the reach of companies to more clients in more loca­tions with less concern for national boundaries and local legacy standards. This also allows more companies to reach into new markets with lower bar­riers to entry.

To understand the effects of mandated change, a current example of applica­tion is found in the payment standards used by the Single Euro Payment Area (SEPA) initiative. Here it is clear that there will be a transition period of co-existence of at least two years and pos­sibly longer during which existing sys­tems will be required to support both legacy and new standards.

Most investment management compa­nies have already drawn the conclusion that adoption of ISO 20022 has reached the point of no return.

All industry players realise they need a cohesive plan for how they will support both legacy standards and new stand­ards during the transition period. One option is to simply trust that their ven­dor suppliers have the answers. If this is the case, companies should be sure to ask them for a roadmap.

Alternatively, and more advisedly, companies should have an architectural roadmap that capitalises on reusing ISO 20022 messaging and integration services.

They should look to use standards-based integration technologies that support the legacy and the new XML-based merg­ing standards, as well as solutions that provide platform-neutral deployment technologies to use with existing com­puting infrastructure. Adoption of ISO 20022 is not a big-bang approach, but more a market-driven migration to a common language.

Arun Aggarwal is Managing Director, UK, Ireland & Nordics at SWIFT. He joined from Tata Consultancy Service Limited where he held the position of Head of Global Consulting Practice, EMEA. Before his tenure at Tata Consultancy, Arun was a Managing Director at LCH Clearnet Group Ltd. Arun began his career at Price Waterhouse in 1979. Arun earned a BSc (Hons) Mathematics from the Imperial College London, is a qualified Chartered Accountant (FCA) and an Honorary Member of the Association of Corporate Treasurers.

Sophie Bertin is Global Head of Asset Servicing and Custodians within SWIFT. Prior to joining SWIFT, Sophie worked for The Bank of New York, where she held different management roles. Before The Bank of New York, she worked for six years at McKinsey, where she specialised in the Financial Institutions Group and the Corporate Finance & Strategy Practice. Sophie holds an MBA from INSEAD and graduated from the Ecole Supérieure de Commerce de Paris, with a major in Corporate Finance.

Hervé Valentin is Senior Business Development Manager in the Marketing division of SWIFT. Before joining SWIFT in 2001, he worked for JP Morgan and Euroclear Bank managing the network of custodians banks and CSDs. Hervé holds a Master degree in Management Engineering (Ingénieur Commercial) from Université Catholique de Louvain in 1995, and holds Certificates from International Capital Market Association and Solvay Business School in Belgium.