« Epic fail: Hospitals aren’t publicizing charity programs | Main | XBRL, the New Language of Financial Reporting, Slated to be Included in the Financial Track of SemTech 2010 »

Standardisation, regulation and recovery of the financial industry

by Alexandre Kech, https://www.swiftcommunity.net/communities/49/blogDetail/20931

Since the outburst of the crisis and its resurgence these days, politics, journalists and people in general request that there be more regulation of the financial industry. Without taking a stand on whether it should or should not be the case, I am convinced that standardisation of communication and identification protocols has a major role to play in helping the financial industry regain some of its lost credibility.

Transparency
The use of communication standards such as ISO 20022 or identification standards such as ISO 9362 Business Identifier Code (BIC) or ISO 10383 Market Identifier Code (MIC) increases the transparency of data.

The adoption of these ISO standards for all financial communication would enable the transport of standardised data in compliance with standardised processes not subject to interpretation nor manipulation by the bad guys of the industry.

It would enable the creation of international or local reporting facilities usable by any regulators and allow market data to be exchanged in an efficient way among them. The current use of proprietary standards is inefficient and costly.

Martin Sexton, Director of IT at London Market Systems Ltd, once advocated in a mondovisone article regarding MiFID : “Realistically, the only way to ensure that one has achieved this [provide evidence that they have achieved 'best execution' for their clients] and met the directives requirement of market transparency is by the use of industry standards.” I cannot agree more. This is true for any need for transparency.

Cost
There is no doubt in my mind that if the whole industry was (forced?) to adopt ISO standards, the industry would save hundreds of millions of EUR or USD (same thing, nowadays, no?) in recurring maintenance costs of messaging and integration platforms and equivalence tables for static data. And you can add a few hundred millions spent on losses due to bad quality non-standard data, on staffing used for manual repair or rekeying of transactions, on implementation and testing (and maintenance) of proprietary standards to connect to “international standards disabled” market infrastructures. You just need to have worked a few years in operations or discussed with implementers to realise it.

Lillian Tham, Chief Operating Officer at Schroders was saying exactly that at a recent SWIFT event: “The only way to decrease our fixed cost infrastructure is to standardise internally and externally.” ISO 20022 is the response to this.

The issue is that those costs are spread across many years and are invisible to short term focused shareholders. They only see the cost of implementing the standards, though a fraction of the profit of most financial institutions last year (a difficult year, it was). And this cost perception issue is not an easy one to overcome these days.

Competition

Following the adoption of ISO 15022 by global custodians and ICSDs in the dawning of the 21st century, all were able to focus on what is essential; the quality and diversity of the services they offer. It has also became easier for customers to switch from one provider to another. It did remove some of the stickiness of the services some custodians were offering but if they did indeed lose clients, they also won clients. You will find nobody in the global custody business to say that their adoption of ISO standards was a mistake. If it worked for the global custodians, why wouldn’t it work for the whole financial industry, CSDs, CCPs, trading venues, etc? ISO standards will bring their full potential only if implemented by most or all of the Industry. In some cases, partial implementation can sometimes be more costly than no implementation at all.

Alistaire Milne, Senior Lecturer in Banking and Finance (Cass Business School), starts his paper on Standards and competition in post-trade securities processing by: “Standard setting in securities settlement is not just about lowering processing costs and improving cross-border interoperability, it is also a central determinant of competition in central counterparty clearing, in securities settlement, and in associated services, such as securities custody and the management of securities transactions.” I cannot agree more.

For those who would argue that ISO standards are not flexible enough to enable innovation and therefore competition based on better and new services, I would reply that it has been too long since they have looked at an ISO standards. ISO standards, nowadays, have built-in extension mechanism and other features to enable the necessary innovation and competition to take place without jeopardising the need for transparent and standardised financial communication. Most ISO identification standards such as MIC or BIC are updated on a monthly basis, some faster.


Recovery
Once you have spent some time and money on optimising processes through standardisation, you have the tool box you need for a longstanding, robust recovery and for growth.
You have tools to prevent such a crisis through an effective and fair control of the industry.
You have the tools to enable investment in markets that standards finally made accessible in a cost effective way.
You have all your need for a financial industry at the service of the economy (its historical role). You can quote me on that one.


In another life, I was in the door-to-door selling business. You know what? I kind of liked it (for a short while…) because I believed in the product I was selling. It is the same for ISO standards. The last 10 years, I have been market-to-market selling ISO 15022, ISO 20022 and others. I like it because I am convinced that the standardisation of the financial industry is the key to many of the issues to which it is confronted.

It is not for nothing that so many international or local players such as Target 2, Target 2 for Securities, Jasdec, DTCC, Euroclear, Clearstream, Strate... decided to speak ISO. Global custodians, I have already mentioned, do not need any more convincing.

It is not for nothing that most banks use ISO 9162 BIC as a way to identify themselves globally, that internet uses ISO 3166 for identifying countries, that treasurers use ISO 4217 for identifying currency codes, etc. It is because it brings value, efficiency and cost reduction.

So whenever someone proposes to you a communication or identification protocol, if it is not ISO, say you are not interested and have them call us.

June 12, 2010 in Medical Banking Blogging | Permalink

TrackBack

TrackBack URL for this entry:
http://www.typepad.com/services/trackback/6a00d83451ce7b69e20133f0e37017970b

Listed below are links to weblogs that reference Standardisation, regulation and recovery of the financial industry:

Comments

The comments to this entry are closed.