The Resurgence of Data Standardisation: why 2020 may be the year of ISO 20022
HENRI PEGERON, STEVEN CROTCH
Over the past decade, data standardisation ‘took a backseat’ relative to other regulatory driven priorities such as data transparency, reporting and accuracy. The financial services industry was focused predominantly on upgrading technology infrastructure and the associated pipelines for data, with less time spent on establishing how to standardise the format of what was coming through the pipes.
Subsequently, the industry decided to revisit the work undertaken at the turn of the millennium, before the burden of regulatory commitments. At that time, industry standards such as Financial products Markup Language (FpML), Financial Information eXchange (FIX) protocol and SWIFT were ‘melting pots’ for innovative standardisation proposals relating to product representation, lifecycle events, order flows and payments messaging. One key factor underlying these standards was the adoption of eXtensible Markup Language (XML) as a method of structuring financial terms, and to a varying extent, communicating data between parties. Even the International Organisation for Standardisation (ISO), via the ISO 15022 standard, had taken steps to try and standardise the communication of financial information with a set of principles which provided users with tools to design message types to support information flows.
It was in 2010 that ISO began to broaden its focus towards data communication by extending the 15022 principles for financial information and adopting the XML schema as a method of conveying the concepts directly. The new set of standards known as ISO 20022, would soon find itself struggling with adoption by an industry burdened by unprecedented transformation and close to operational capacity. At that time, data standards adopted by the financial services industry to drive compliance with financial reform regulation became, by default, the standard for storing and communicating data, for better or for worse…!
So, what is ISO 20022?
In non-technical terms ISO 20022 is the international standard that’s designed to simplify global business communication, providing a global dictionary of common language that everyone can understand. This ensures that that information can be exchanged and processed worldwide, clearly and consistently, making it easier to communicate financial information between people and systems. More specifically, it streamlines communication for payments, securities, funds, trade services, foreign exchange trading and credit card sectors.
Adoption of the standard lays the foundation for vastly improved, regulatory compliant global payment processing efficiency and interoperability. It provides for a new global payment landscape, reducing costs and providing access to a payments highway for all the opportunities real time information, visibility and digitisation brings to market participants.
Its benefits are numerous from an enhanced holistic customer experience, reduced risk, increased resiliency through to regulatory compliance, as well as providing the capabilities to competitively differentiate with new payment service offerings.
The nature and breadth of the ISO 20022 implementation provides a springboard for reassessing existing business models or at a minimum redesigning substandard business processes.
Whilst adoption is not mandated by regulation, organisations that deem “wait and watch” to be the most prudent strategy, risk being excluded from international payment systems. Over the next five years, the Federal Reserve and The Clearing House in the US, Eurosystem and EBA Clearing in Europe, and the Bank of England’s real-time gross settlement service will all modernise their High Value Payment Systems, almost simultaneously, underpinned by the ISO 20022 programme. SWIFT will also introduce ISO 20022 for cross-border payments—adoption will be mandatory for all users of SWIFT MT cross-border payment messages. Consequently, the programme has been referred to as probably the most impactful international payments industry undertaking since the introduction of the Single Euro Payments Area (SEPA) more than a decade ago.
Consequently, ‘The Wolfsberg Group’ which is an association of thirteen global banks which aims to develop frameworks and guidance for the management of financial crime risks, is championing the adoption for US Federal Communications Commission (FCC) and compliance purposes.
Technically speaking, ISO 20022 standards are essentially a collective set of business processes, outlined in Unified Modelling Language (UML), along with a set of XML messages. About 20 business areas are covered, with the largest adoption being driven by the initial focus on securities settlement, payment initialization and account management. These messages can be adopted wholesale via the ISO XML schema, and communicated through a large number of XML friendly delivery mechanisms such as Google Protobuf, Avro, JSON etc.
The important factor to note is that ISO 20022, whilst distributed with a set of messages, is not a messaging standard – but rather a data standard, or a set of rules to which financial data should comply. Messages need to be well formed, contain a unique message identifier, have a well-maintained version and contain a clear and directed purpose for each message. Almost any messaging standard can be modified to meet these criteria whilst still being flexible enough to allow adoption of a more specific or niche communication model.
The International Swaps & Derivatives Association, Inc. (ISDA), through their common domain model (CDM) initiative have taken a head start towards this by harnessing the Distributed Ledger Technology (commonly referred to as DLT or blockchain) and developing a set of financial smart contracts for some of the common pain points in the industry such as multi-account allocations and real-time affirmation of trades. CDM relies on other data standards, such as FpML, to define the product itself and instead focuses on how the messages/contracts should flow back and forth.
The same relationship between CDM and FpML can be said of other data standards, such as FIX involvement with clearinghouses, or SWIFT and the relationships to settlement and CLS. The financial industry is far too complex to support a single data standard for every purpose, and the same is true of the infrastructures and models which support these data standards. However, a set of theoretical guidelines to which all of these data relationships should logically follow IS possible, and this is perhaps where ISO 20022 can be made very relevant in the coming years.
Rather than focusing on how to replace or supplant methods of communication, ISO may be the key to focus the 20022 standards on ensuring that specialised data standards and communication models all interact in the same way. Guidelines on interaction are language, format, and even in most cases context agnostic. Letting FpML handle the minutia and nuances of derivatives data, and then choosing CDM as the method of communicating that data can be done under the guidelines provided by ISO (without ever using a single message from the ISO XML library).
Firms would do well to ensure then, that their own logical, physical, and communication models for financial data conforms to the rules and guidelines set out by ISO 20022 and it’s like minded contemporaries.
Communication, collaboration and coordination is key—ISO 20022 will be much more successful if the industry is aligned to move together, recognizing the mutual benefits at an industry level!
JDX is heading to Sibos next week, this year’s conference theme “thriving in a hyper-connected world” recognises the challenges and opportunities that mass digitisation and data-driven relationships present for the Sibos community. A number of sessions are focused on ISO20022. Whatever your data challenge, we’ll be on hand to discuss our capabilities.