The recent market conditions may drive a necessary rationalisation of the current message standards within the financial services space. As an industry, we have built a patchwork of message standards to cover discrete business processes that reflect the ecosystems within financial institutions and also between groups across the financial services value chain. Collective business interests between manufacturer, distributor and consumer drive organisations to achieve tighter systems integration. This happens through exchanging information in efficient electronic formats, forming closed user groups and developing message standards that meet specific needs.
In the past, the industry has perhaps overly concerned itself with debates about message standards interoperability, when what we were actually looking for were streamlined business processes. We sometimes reached for an answer before fully understanding the business problem. We should, therefore, embrace the functional specialisms that make front office operations – as well as the financial information exchange protocol (FIX) as the most appropriate and innovative mechanism to support trading. It is necessary for trade negotiation and order management to recognise that SWIFT is the global standard for many interactions in the payments and securities processing space post-trade.
By respecting functional specialisms, such as International Swaps and Derivatives Association (ISDA) and Financial products Markup Language (FpML) for over-the-counter (OTC), and FIX for general trading, we will maximise the investment we make in each standard and reduce inefficiencies. The industry must not underestimate the investment required to create a standard, from ideation through to definition, pilot phase and broader adoption usually takes between three to five years.
Corporate Actions Automation – An Example of Message Standards Proliferation
The financial services industry is more inter-connected than ever before, and real-time messaging across many business processes has enabled operations to be optimised for financial gain. In the corporate actions arena, the ability to make decisions closer to market deadline due to the ability to exchange information in electronic formats is a significant business benefit. It gives the decision maker the ability to make choices based on latest information and allows the internal deadline for capturing those decisions to be closer to the market deadline. Competitive edge is a by-product of the investment in time to model the business process and create the ISO 15022 messages to support the corporate actions process from announcement through to instruction.
So why, given all this investment, has message adoption not delivered broader business results? The more complex the business problem and the amount of variations that need to be considered to solve the problem means the complexity of the message standard is equally high. Complexity is a barrier to standard adoption because there needs to be clear implementation guidelines for and enforcement of the standard at a message level for success to be realised.
Given it takes three to five years for a standard to become widely adopted, during that time the business problem may have evolved, mutated or been superseded by a more pressing business need. Standards, by their very nature, are difficult to achieve since there is the challenge of respecting different perspectives to reach common ground, while at the same time embracing regional and market participant variation to accomplish the goal of standardisation.
Over-engineering the solution can act as a barrier to adoption, and the co-existence of ISO 15022, 20022 and XBRL will lead to market fragmentation and a higher cost of ownership to solve the industry issue than was first envisaged.
OTC Derivatives Automation – An Example of Functional Specialisation
OTC derivatives automation, on the other hand, has managed to achieve a more coherent strategy for business results through the stewardship of ISDA and FpML. While individual asset classes may innovate at different speeds to align to the packaging of product providers and demand to create new offerings, the approach that has been taken gives a well understood framework within which this innovation can occur.
The use of FpML within the inter-dealer community, its adoption as the lingua franca by derivatives market utilities and a more recent adoption by buy-side firms and the notifications to custodians means that FpML has transitioned from being an inter-dealer solution to a global standard inter-linking market participants throughout the derivatives value chain. While FpML has become functionally specialised within asset classes for equity, interest rates and credit products, it has remained intact as the de facto standard, making global adoption and business benefits more easily realisable.
Standards – Not the Only Way to Achieve Business Process Automation
In many cases, standards evolve faster than the ability of organisations to adopt them, either due to the dependency on budget cycles to make the necessary funding available, or due to additional investments required to put in place systems to be able to speak the same language as the new standard.
In many cases, the adoption of a new message standard may not be the appropriate route for all organisations to go. As with many decisions, getting the business benefit does not always require an investment in internal capabilities. With the higher availability of service bureaus and business process outsourcing (BPO) options available, financial organisations can insulate themselves from getting caught in maintaining standards which may not be a core competency of the organisation.
Choosing to support message standards internally is a costly business due to their constant revision and the number of functionally specialised standards that need to be supported to cover a single institutions operational process from front, middle and back office operational requirements.
In many instances, financial institutions look to third parties to provide the specialist knowledge to enable the business process, while not getting exposed to message standards, application programming interfaces (APIs) and tracking standards innovation and versioning. The plethora of message standards is usually enough for firms to outsource to financial technology providers. Even financial systems providers outsource this to specialists in the industry – for example, how many order management suppliers (OMS) have built their own FIX engine?
What Are the Alternatives to In-house Standards Adoption?
The choice to be straight-through processing (STP)-enabled comes back to a basic buy, build or partner discussion. For many organisations, internal development is not an option due to the complexities mentioned previously. Purchasing the technology may also be preventative and this comes down to a basic question of whether a company absolutely needs to automate the process using a message standard, due to volume or risk criteria that may drive the decision and justify the investment as a cost of business.
For the majority of firms that do not process thousands of trades per day, there are alternative ways to solve the issues of business integration and plumbing into counterparties, agents and other market infrastructure. As the need for more market participants to engage in a common business process increases, so does the number of available access mechanisms. At first, the innovators create the high end availability solution that meets their needs, and later comes the broader market access methods, including fixed-width files and spreadsheet uploads. All of these mechanisms provide business process transformation at a price point and technical sophistication appropriate to support the value of the business.
In addition to the technical infrastructure, new operating models of market access have been made available where firms intermediate to offer products and services to enable different parts of the value chain. Looking at a fairly standard electronic trade confirmation and settlement process, firms may now look to their fund administrator or middle office outsourcer to provide post-trade connectivity and access to global infrastructure, such as Omgeo or SWIFT. Or lower volume clients may look to their investment accounting providers to be the STP enabler via less sophisticated file transfer mechanisms.
Internal Systems as the Enabler of STP
Whether the ultimate solution to achieve STP is achieved via internal systems message enablement or outsourced BPO, the process starts with the core internal systems and is a key dependency of any automation project whether for internal STP or external business process integration. Systems integration and the decoupling of the specialisms of core systems is a key theme for 2010 to provide cost effective and appropriate solutions to the numerous business processes that cannot rely on human conversations or manual processing via fax or e-mail.
Just as important as the message standard is the exceptions management capability, since one thing is inevitable building a business process around a message standard that is only machine-readable is never a good practice, since exceptions are a significant part of the complex financial services industry.
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