As the financial industry continues to evolve, the demand for faster more efficient communications and data has never been greater. The importance of fluid, efficient communication to improve internal efficiencies and improve products cannot be overstated.
Swift, the global financial message infrastructure, has, for many years, provided financial intermediaries a secure channel to communicate. Whilst it undoubtably delivers huge benefits to financial services, market nuances, differences in formats, field interpretations, etc. can cause significant challenges. This article looks at some of those challenges and options available to help solve them.
In recent years, two Swift standards have emerged and now co-exist in securities markets: ISO 15022 and ISO 20022.
The Swift standard of ISO 15022 has been widely adopted and relied upon for many years. Intermediaries and SaaS platform providers have invested hundreds of millions of dollars developing systems to read and transmit information using the ISO 15022 format in attempts to reduce operating cost and risk, whilst improving the speed of communication. While that investment has helped bring scale and speed to many aspects of securities markets, ISO 15022 has some limitations, especially when dealing with the more complex aspects of post trade asset servicing.
Almost 17 years ago, in 2007, Swift adopted ISO 20022 to further improve data transmission between financial intermediaries. However, this was not widely used outside of cash processing until 2015, when the ECB mandated the use of ISO 20022 in its Target 2 Securities (T2S) European Central Bank Money (CeBM) settlement platform. Whilst this was a positive step for ISO 20022 adoption rates, in effect, it only impacted a relatively small number of financial intermediaries who connected directly to T2S, with the majority of financial intermediaries deciding to remain on ISO 15022, rather than incur the implementation and maintenance costs of ISO 20022.
While both ISO 15022 and ISO 20022 have their advantages and disadvantages, the latter has emerged as the more robust and future-ready solution, with adoption increasing across financial intermediaries. In this article, we review these two standards and discuss the considerations for financial institutions on when and how to make the shift.
Why has the industry not made the change to a message type introduced back in 2007?
In short, this is down to the cost. As mentioned, the industry and its participants have spent hundreds of millions of dollars developing their systems, to efficiently process transactions communicated by ISO 15022. With the backdrop of the financial crisis in 2008, the resulting tsunami of regulatory change and reducing margins, intermediaries could not make the business case for change to ISO 20022, and unless usage is widespread, the cost will not bring tangible benefits for years to come.
One area in asset servicing that has recently seen an increased focus and adoption of ISO 20022 is proxy voting. The structured format of the ISO 20022 message schemas has removed the dependency on long free format textual narratives inherent to ISO 15022 messages, and which has created the industry considerable processing pain over the years. However, adoption of ISO 20022 is still inconsistent, with some parties forcing compulsory ISO 20022 message usage on their clients, while others remain on ISO 15022
What is the challenge now?
The added dimension here is with interconnected financial institutions, such as that seen in the securities chain of custody. We are seeing larger custodians and Central Securities Depositories (CSDs) mandating that they will only support the use of ISO 20022 messaging going forward. This represents a real problem for their clients or downstream service providers in the custody chain, be they sub-custodians, global custodians, wealth managers or brokers, who have traditionally built their technology stack on ISO 15022. The alternative solution of the use of banking portals for operations staff to input information may appeal to clients with low volumes of financial messaging, but clearly this is not sustainable for those with greater volumes and demanding clients. This is far from ideal for intermediaries that have also been challenged with other market pressures and changes, such as new regulation, which have for several years now consumed budgets normally made available to product advances for their clients and their organisation.
Given the advantages and industry initiative tail winds, it is not surprising that many financial institutions are now considering adopting ISO 20022. However, implementing this standard can be challenging, especially for organisations faced with competing demands for highly coveted IT resources. Financial institutions generally have two options, buy or upgrade to a solution that supports the use of ISO 20022, or build an in-house solution using internal IT resources. Although, for both of these options, the financial institution must also decide if it needs to support both ISO 20022 and legacy ISO 15022 message formats to maintain Straight Through Processing (STP) levels of efficiency and client needs, while managing the risk. This decision is made even harder given the lack of harmonisation on adoption from intermediaries and across the different products i.e., cash, securities settlement, corporate actions, and Proxy Voting.
In addition to the risk and build cost, companies need to consider the on-going cost of maintenance of two swift standards and the rate that these may increase for ISO 20022 in the coming years as the standard is more widely adopted across markets, functions, and intermediaries.
In recent years, the buy option has evolved beyond vendor IT software applications (SaaS) to include managed service solutions, such as those offered by Proxymity for proxy voting and shareholder disclosures.
Proxymity, an industry infrastructure built with investment from 8 of the top 10 global custodians, has introduced ISO 20022 and ISO 15022 messaging interoperability, as well as developing a suite of proprietary APIs. Customers of Proxymity are unaffected by the co-existence of both ISO 15022 and ISO 20022 messaging as the platform automatically transforms data appropriately.
This type of product provides another option for financial institutions that cannot justify large change programs or expensive software updates to internal systems or existing vendor applications. The added benefit of such products is that they can be tailored to the needs of each financial institution, from simple transformation of ISO 15022 message formats to ISO 20022 as required, to fully managed services.
The journey to full ISO 20022 adoption has only just begun, and the option of using a managed service such as Proxymity can provide institutions critical time to invest in other initiatives, whilst the industry further develops the use of 20022 messaging.
However, over the next few years, all market infrastructures will gradually force clients to make the decision on how to adopt ISO 20022.
For banks considering the migration, buying a solution may be the most cost-effective and efficient solution, allowing them to quickly implement ISO 20022 for those parts of the value chain using the message types, and without diverting internal resources from other important projects. In the long term, adopting a standardised messaging format like ISO 20022 is essential for banks looking to remain competitive in a rapidly evolving financial industry.
While both ISO 15022 and ISO 20022 have their advantages and disadvantages, the adoption of ISO 20022 messaging is and will remain inconsistent across markets, functions, and financial institutions for years to come. This together, with the continual maintenance cost for an adapting standard over a newly adopted message, these factors could present significant costs for companies needing to use or interoperate with different swift standards.
A simple solution could be to utilise market solutions such as Proxymity and to provide a cost-effective solution that would also result in a better governance product for you or your clients, this option could also provide an intuitive solution for intermediaries to review and observe the changes in the industry and then make the step at the right time for their organisation.