The Impact 0f ISO20022 on Corporate Actions
Approximately 65 million messages for corporate actions were delivered over the SWIFT network in 2007 - a 21% increase on the previous year. These will all have been in ISO15022 format. This figure significantly increases if we add to it the data vendor messages in ISO15022 format that are sent outside of the SWIFT network.
36 million messages related to MT564 announcements and notifications. Only 1.5 million messages were MT565 instruction messages pointing to the fact that the market stills seems some way off full corporate action lifecycle automation. Most concerning is that the MT568 “narrative” message saw a turnover of 9 million during the period – an 11% increase on the previous year.
Onto this background the market will shortly deliver ISO20022 messaging for corporate actions. The basis of ISO20022 is primarily to provide a format away from the SWIFT traditional tag data schema and deliver messages in XML.
In order to assess the impact of this a number of elements require evaluation:
§ What is the current state of messaging within the corporate actions marketplace now?
§ What initiatives are in play within the market place?
§ What business and technical factors need to be considered as part of the impact of moving towards ISO20022?
§ What has been and will be the impact of the current economic conditions?
ISO20022 is in our general world of messaging now, through the use of funds messaging that have only been provided in ISO20022 format, and through proxy voting messages, within the realms of corporate actions that again has been developed specifically within ISO20022 only.
Whilst take-up on these two messaging types has been slow there is now some greater traction in the market. The point to remember here on both of these projects is that the development of the message formats related to net new implementation and not a re-engineering of an existing process.
A number of the hurdles that will need to be cleared as part of the full corporate actions implementation of ISO20022 have not yet been encountered.
So what is the current state of messaging within the corporate actions marketplace at the moment? The answer to this is very much based on the business type and the interactions with interested parties within the process.
Corporate actions are all about messaging, and the data content of those messages. There are numerous interested parties involved with the message flows; issuers, data vendors, custodians, CSDs, the buy-side and sell-side communities and system vendors. All have their own messaging needs both inbound and outbound. All are at different stages within the automation process.
The problems encountered by all these parties are many and need to be examined at two levels; business issues and technical issues. In some cases the issues are shared across the levels but all link into the processing chain and highlight cases that impinge on automated processing, either in the existing ISO15022 format or the proposed ISO20022 format.
Most of the business problems are familiar to us;
§ Ensuring that all the information we require to process the corporate action is to hand.
§ Comparison of the data provided by the various interested parties highlights discrepancies.
§ Interpretation of the data provided is correct and there is no ambiguity.
In automated messaging terms this manifests itself in a number of ways;
§ No consistent messaging format utilised by all the market participants.
§ No consistent data structure used by all the market participants.
§ No consistent data content used by all the market participants.
§ Too much narrative / unstructured data within the automation cycle.
All of these issues are seen as barriers to a reasonable level of automation in the corporate actions market place now. Although 71% of all firms who took part in the recent survey conducted by CityIQ and SWIFT admitted to some form of automation it was clear that extensive lifecycle automation is still not commonplace within the industry.
So, what initiatives are there to move the automation process forward? ISO20022 has been with us for some time. This is in effect the shell and placeholder for the market changes that will facilitate the progression of the business community to adoption of the standard.
Specifically we have seen the emergence of direct drivers to move the market on. These have come from Euroclear through their programme of ISO20022 definition with the issuers and the single platform project, and also from the SEC and DTCC in the
Both are integral to advancement of automation within the marketplace. However, although the usual overviews from the projects are noting the interoperability of the standards and taxonomy based on the single ISO20022 structure the market sees the usual risks surfacing; consistency, adoption and split standards based on geography.
So what of the SWIFT ISO20022 project itself? This is a reverse engineering process from the existing ISO15022 message formats and structures. There are a number of positive and not quite so positive considerations with this approach.
The working party direction has been to take the existing message structures and convert these into the ISO20022 structure. This at least simplifies for the main message types the amount of work required to create the same reference data details and qualifiers.
However, the message range has been expanded. Whereas currently under ISO15022 there are only 5 message types that cover all operations this is being expanded to 13 under ISO20022. Part of this expansion should be looked on positively. In ISO15022 a number of messages, such as MT567 and MT568, catered for a number of functions. Under ISO20022 the majority of the important message functions have been broken down into individual messages, ensuring that the type defines the content. The shortcoming of this is that the message is no longer a reverse engineer but a new format to deal with. This is reasonable where the new format is a completely new introduction but as ISO20022 and ISO15022 will co-exist for a period technically this will present a challenge for business implementations.
The other major point is that the opportunity has not been taken to address all the shortcomings in the existing message data content through only providing reverse engineering. An example of this is the provision of counterparty stock lending, full details to be readily mapped into the format. Some shortcomings have been covered off, particularly around income and reclaim. However, whilst the message format is suitable for all business models it is not necessarily flexible enough to meet the detailed requirements of each specific model.
Finally within the data realm the ISO20022 project will still not eradicate the single biggest barrier to automation; the use of narrative within messages. There is common agreement that there is need for narrative to be present in some forms within the corporate action lifecycle – there can’t be a field for everything! What is a common problem is that the narrative field is abused and where it is perfectly possible to provide the necessary data through use and combinations of the structured fields the path of least resistance is always to use narrative.
Taking all of the considerations into account what is likely to be the impact of ISO20022 within the marketplace for corporate action processing?
At a high level it is reasonable to identify that it will provide a number of business and IT benefits:
§ It will keep corporate actions on the agenda for business. Whilst it is on the agenda there can be progress made towards adoption of common practices.
§ From an IT perspective the traditional headache of mapping SWIFT ISO15022 tag data will be removed with a more widely adopted XML format.
§ As adoption rates of the new standard go up so all businesses benefit through standardisation and therefore STP rates will increase.
However there are a number of notes of caution;
In the past when the standard was upgraded from ISO7775 to ISO15022 there was a transition date at which businesses needed to be compliant with the new format. This may not have been the most beneficial way of moving forward, particularly from a commercial perspective, but at least it ensured that all participants were dealing with the same standards and data formats.
The same will not be the case for ISO20022. There will be a period of interoperability where both ISO15022 and ISO20022 will co-exist. Commercially this makes sense. Operationally this will present IT and business units with a number of issues to overcome in terms of both capturing and processing inbound messages and also in ensuring that the correct format and type is used for any outbound message processing.
From a system vendor’s perspective the interoperability highlights the challenges that will be faced. In the real world the major problems faced are in production of a fully cleansed and matched event for onward processing – the Golden Record.
This is because, although all parties who are submitting data to the process are supposedly all referencing the same corporate event there is too much room for interpretation resulting in field placement being wrong, data being incomplete or multiple repeats of the same information. When the provision of this data can be through two message formats, this problem becomes even more difficult to overcome.
The main purpose of ISO20022 is to provide the opportunity for more businesses to leverage the standard and therefore provide further automation through scale and adoption rates.
The reality is somewhat different in the current environment with still poor adherence rates to the existing template guidelines and mixed operational messages coming out of various global markets that alternatives, even complementary ones, are under consideration.
The move to ISO20022 offers the potential to have a positive impact on the corporate actions market. However, it should be recognised that this will involve significant investment by the business community both in terms of resource and time. Because of this the business risk is increased, at a time when there is a squeeze on budgets and a desire to reduce cost internally; whilst minimising risk.
The opportunity to move to increased levels of automation through adoption of ISO20022 may be dampened by delaying projects to see how the market reacts over the period of interoperability and also project initiatives such as XBRL.
The proving ground will be through the pilot programme, and then into the published message formats. Provided we get clean cutover methodologies, particularly amongst the custodian and data vendor community, then we could see high early adoption rates and a growing sentiment in the market that ISO20022 is the right direction for corporate actions.