Bringing down barriers in securities markets – ISO 20022 the way forward

Different languages. Different market practices. Different financial communication channels. Different monetary systems. Different regulatory requirements. Little or no automation of financial transaction processing.

These are just some of the horrors of yesteryears that provided us invaluable lessons on the need to progress and drive the introduction of internationally recognised financial standards.

Singapore, like other global financial hubs, has come a long way from the days of telexes and some may even remember the joy when computer-processable versions of telexes were introduced to financial markets in the 1970’s in the form of MT messages.

Over the past four decades, we have been able to benefit from progressive enhancements to financial messaging standards, evolving from proprietary MTs for payments, treasury and trade transactions; to ISO 7775 for securities messages; to ISO 15022 also for securities and the most recent and much talked about ISO 20022 standards, which is increasingly gaining traction in becoming the global lingua franca for the whole of financial messaging.

What is and why ISO 20022?

Without being too technical, the ISO 20022 standard is a (XML based) publically available open and free standard, a single standardised approach for the definition of financial data, their role in transactions, and the design of financial message standards to transport those data. It has a broad user community and covers end-to-end of financial transactions of various segments namely securities, payments, treasury, trade, cards, and even funds.

What is most attractive about the standard is that it is more flexible than its predecessors with features such as extended character sets and longer fields, thus is able to cater to local business needs.

Further, there is a wide variety of tools and services available in today’s software market to help manage its implementation. Even with the ample room of customisation that the standard permits, its well-structured design and logical message definitions ensure consistency and comparability across the globe.

In parallel with its introduction in 2004, we have been encouraged by the positive reactions and global market trend towards ISO 20022 adoption, which was initially spearheaded by the larger and more developed economies.

For instance, in the APAC region, Japan and Singapore were one of the first few countries to jump on the ISO 20022 wagon. It is observed that adoption initiatives in these markets are usually driven by their domestic or regional market infrastructure (MI) as part of a long term roadmap to be aligned with the latest state of the art technology and align with market best practices.

Often, it coincides with technology refresh cycles of MIs and pressures from market participants to facilitate improved back-office functions and more value-added services. In other cases, there has been indication of “peer pressure” or influence by other market infrastructures in the ecosystem.

Even oversight pressure by financial regulators, particularly in regionalisation efforts, have been mandated to further encourage ISO 20022 adoption and further progress initiative’s objectives.

Market participants are also keen to benefit from the noted benefits of using ISO 20022 and are incentivised to bring down trade barriers and improve the ease of doing business via higher levels of automation and STP. Hence, the obvious and constant demand for consistent, comparable, standardised and clear communicable financial messaging standards to facilitate both domestic and cross-border transactions.

ISO 20022 adoption trends and scenarios

There is no “one size fits all” approach to market adoption of ISO 20022. In the past decade, sampling from the many ISO 20022 initiatives across the globe, we observe 3 common adoption scenarios.

Firstly, being the complete replacement approach, whereby the ISO 20022 plans are enabled to supersede existing proprietary or predeceasing ISO standards. Typically, this approach is adopted at the onset of potential launch of new or updated services and functionalities.

For instance, as part of national initiatives to develop its domestic payments and settlement system, Brunei has opted for ISO 20022 in part of its newly created RTGS, to comply with international standards and best practices as well as, to better equip itself to support ASEAN integration initiatives.

Secondly and most common is the approach to allow temporary parallel existence between ISO 20022 and the incumbent standard. Typically, this is an immediate step for a gradual migration towards richer full implementation of ISO 20022 at a later stage.

This is the approach taken by the Japan Securities Depository (JASDEC), one of the pioneering central securities depositories (CSD) adopting ISO 20022. Participants are allowed 5 years since its go-live date of January 2014 to migrate their messaging standards from existing message formats to ISO 20022.

Another permutation to parallel existence is whereby ISO 20022 is introduced in a specific domain or part of the MI business; for example, corporate actions notifications, with a longer term view of possible migration of their entire business.

This was the approach taken by the Australian Stock Exchange (ASX) starting off with their Corporate Information Straight Through Processing (STP) initiative which went live on ISO 20022 last year. Singapore Stock Exchange’s (SGX) also adopted a similar approach with its SGXNews Corporate Events Data Service (CeDS) in being ISO 20022 capable ahead of its other functions.

The last scenario is where participants are given an option to choose which standards to adopt. This adoption approach may be implemented in parallel existence with or without a longercterm goal to eliminate or migrate away from one of the standards available in the market.

However, such an approach requires careful consideration and planning by both MI and participants to manage the cost of maintaining multiple standards in a single environment.

What can we look forward to?

As we draw near the second half of 2015, we are still encouraged by the steady pace of ISO 20022 adoptions that we expect to continue over the coming years.

For instance, in the US, the Depository Trust & Clearing Corporation (DTCC) is in the third phase of its Corporate Actions Transformation Project, migrating more than 6,500 clients to its web platform implemented earlier this year, to be able to submit instructions using ISO 20022.

In Europe, we can also look forward to the first few waves of CSDs coming on board on to the Target-2-Securities centralised settlement platform.

Closer to home, the Asia Pacific region gears itself up for ISO 20022 front-runner domestic projects such as, the SGX Next Generation Post-Trade Platform project scheduled to go-live with its Settlement Application Programming Interfaces (API) on ISO 20022, in September this year.

Other examples in the medium term pipeline: Brunei will also be adopting ISO 20022 for its CSD project, and most recently in the limelight the Indonesian Central Securities Depository (KSEI) has indicated that it will be adopting ISO 20022 as part of its strategic plans to develop its C-BEST NextGen2 post trade system over the next couple of years.

Regionally, the ASEAN + 3 countries have also rallied together to encourage the adoption of ISO 20022 to progress bond market development initiatives in the region.

ISO 20022 and standards have come a long way from its humble beginnings. Heartened by the intensity of ISO 20022 adoptions projects, the question lingers, could we possibly be looking at signs of the next ISO 20022 champions emerging from Asia Pacific or even the ASEAN bloc?