Swift is close to completing an ISO 20022 formatted transaction reporting message which it plans to pilot for three months on its network prior to launching a commercially available solution by the end of October in readiness for the November 1 Markets in Financial Services Directive (MiFID) implementation deadline.
As an ISO standard, the message will be useable over any network. Swift is hopeful however that there will be take-up of the solution on the Swift network itself, and anticipates final agreement from its board in June to enable regulators to join and access Swift directly.
While the Committee of European Securities Regulators (CESR) has recommended the use of ISO standard reference data elements for transaction reporting under MiFID, Swift’s view is that there is a need to go further and put a structure around them for messaging, says Richard Young, manager, market reform at the co-operative. The transaction reporting message effort is running in parallel to Swift’s ongoing work to clean up and extend BIC coverage for use to identify reporting entities under MiFID. “We are certainly co-operating with the regulators to fill in the gaps in BIC coverage for reporting. Institutions that need to be will be identifiable by BICs or by the various extensions to the BIC coverage, such as the new CIVICs for collective investment vehicles,” he says.
According to Andrew Douglas, manager of the market reform team at Swift, it has established that there is customer demand for the new message type. Swift surveyed 18 firms across all the major European markets, asking them firstly whether a standardised transaction reporting message would be appropriate and secondly whether Swift should develop it. The answer to both was a resounding yes, and Swift kicked off the effort in December, despite the fact that CESR had declined its offer to develop a reporting message on its behalf. “CESR said for its purposes directed at building the inter-regulator system, the work it was doing would be sufficient. It wanted to keep the development of the inter-regulator system in-house,” Douglas says.
CESR was however represented at a meeting of the business validation group for the new MX message at Swift’s La Hulpe headquarters in Brussels in March – along with several large banks, three European regulators and four of the likely-to-be-approved FSA reporting mechanisms. “The purpose of this meeting was to get industry input to the message construct and validate the work done by Swift’s standards people,” says Young. “There’s been another meeting since then, and the final meeting will be in late April, after which we will have a finalised schema of the standard, with the completed messages ready in a May/June timeframe,” he adds. “There will essentially be one reporting message – plus status and cancellation mess-ages – which is what the investment banks told us they wanted,” Douglas continues.
Swift faced a challenge in creating the message because of the lack of information from the regulators about what data they would collect, Young says. “We based the message development on the requirements of the leading regulators except BaFIN in Germany, because they haven’t been published yet.” According to Douglas, most of the regulators are not expected to require much data beyond the 23 elements specified by MiFID. “They can’t really, without the risk that we will end up with a very mild form of regulatory arbitrage.”
Signing up participants for the pilot of the new message on Swift is a “work in progress”, according to Young. Adds Douglas: “We are going through with many of the new solutions on Swift a process that we call internally ‘marriage broking’, between organisations that are prepared to do the development to send and receive the messages. This means we have to create a business case, which is invariably better for the sender than the receiver.” He is confident the market will back the standardisation effort, however. “Standardisation has got to be a good thing where there is a ‘cost of doing business’ mentality. Transaction reporting is a prime candidate for taking cost out of the process.”
In light of the possibility that entities will be required to report to more than one authority, the case for standardisation is even stronger, Young adds. “We don’t know what the extent of that will be at the moment. But even without multiple reporting it makes sense to standardise. There is a minimal data set specified by Level 2: it makes no sense to have multiple flavours of reporting.”
Swift accepts that the ongoing uncertainty about transaction reporting requirements coupled with the tight timeframes in place for MiFID might lead firms to cobble together a solution quickly to ensure they are ready in time, rather than opting to do the work to accommodate the new ISO message and the Swift solution to carry it. “This may turn out to be a two stage process, with people migrating to the ISO standard and the Swift solution over time,” Young says. Another challenge is that the regulators have not historically been Swift users. “We have some work to do with the regulators,” he accepts. “They need to get to know us better. Though they will be able to join Swift and connect directly to the network, in the interim the most likely way in which the messages will be sent to them over Swift will be via intermediaries already on Swift or eligible to join. In many cases these will be entities that are approved reporting mechanisms today.”
The regulators’ default position is to deploy an internet-based delivery mechanism, says Douglas. “The regulators seem to be going down a predominantly cost-driven route whilst we believe the reporting community favours a cost and risk-based approach. This is confidential information.”
Transaction reporting is not likely to be a big money-spinner for Swift, says Young, though the volumes in question are quite significant. “There are currently 6-10 million reports a day in the major EU markets, and this will increase vastly.” There is the potential to extend the standard and the Swift service supporting it beyond MiFID reporting, he adds.