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Swift’s Bernini Discusses Work Around Entity Identification and ECB’s Utility Proposals

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Swift may have been rather cautious about its place in the business entity identification (BEI) space over recent years, but this is set to change, explains Paolo Bernini, head of information products at the industry owned cooperative. The financial messaging network provider is also not ruling out a possible future role in the European Central Bank’s (ECB) proposed reference data utility initiative, provided its users are keen on the idea.

Earlier this year, Swift’s Fabian Vandenreydt, head of broker-dealers, buy side and pre-settlement programmes, indicated to Reference Data Review that the industry owned cooperative’s future in the business entity identification space was still up for debate. It seems however, that there is a lot more clarity about Swift’s future in the space at this point, according to Bernini.

“The lack of a standard for unique and unambiguous legal entity identification has always been an issue for the industry, but 18 months ago it was thrown into the spotlight and highlighted as a priority,” he explains. Market events such as the fall of Lehman Brothers and the inability of firms to quickly track and identify their counterparty exposure have thrown this issue into the spotlight. However, efforts to introduce standardisation in this space have been problematic thus far, largely as a result of political wrangling about the format of such an identifier.

“It became clear that many of our customers were keen for Swift to contribute to the debate and get involved in providing a solution,” says Bernini. “Swift is the registration authority for the Bank Identifier Code (BIC) as nominated by ISO and customers were keen for us to get involved in the work off the back of the BIC.”

Swift is therefore an obvious candidate for this role but has thus far shied away from the responsibility of taking on a project that could become unwieldy. In July last year, it clarified that it would not be establishing an all-encompassing international business entity identifier (IBEI) but would instead be extending the BIC to cover non-financial institutions on its network. Accordingly, in September this year, the ISO standard 9362 related to BIC registration was extended to include financial and non-financial institutions, following an application made by Swift in 2008.

“Financial institutions have already invested in integrating the BIC into their back office systems and are keen to leverage this investment rather than have to accommodate for a whole new code. With the cost pressures of the market at the moment there is no appetite for another identifier in this space,” explains Bernini. Swift’s position as an industry owned utility rather than a vendor could also potentially stand it in good stead for avoiding any conflicts of interest.

Swift is currently working on the business case to leverage the BIC as a legal entity identifier and has been engaged in consultations to examine the universe of entities that actually need unique identifiers, he elaborates. “Many initiatives in the past have failed because their scope has been too wide. Based on the results of our consultations we think that the financial community expect a pragmatic solution. This would be based on the 80/20 rule, where 20% of entities drive 80% of the exposure in the market. We think there are less than a million entities that need to be tackled. We are refining our assumptions around this 20% and options in terms of operational models that could be used.”

Swift is some way down the line with this project and Bernini contends that there is general support for it within its user community. “The cost challenge is a real one and we are looking to find a model that will allow us to keep costs down to a reasonable level and we are optimistic about this. If the service adds value, clients will be willing to pay for it. As a cooperative we may be less demanding that commercial organisations on ROI, but we would certainly need to cover our costs,” he continues.

Exactly what these costs will turn out to be is something that the vendor community will be monitoring carefully. Earlier this year, Avox and Cusip Global Services (CGS), which is managed by Standard & Poor’s on behalf of the American Bankers Association, joined forces to create a new universal identification system for global business entities that could potentially be threatened by the entry of Swift into this space.

Vendors and a number of other players in the market have already expressed concern about the use of BICs beyond their banking remit. Some corners of the industry feel that it is not an appropriate format for business entity identification because of its granularity, which means that rather than referring to one entity, the BIC has multiple BICs relating to one entity.

It will be up to Swift to tackle these concerns and this will require a great degree of openness about progress being made. “Our top priority at the moment is to keep the market aware of what we are doing and we hope to come to some sort of conclusion in the next three to six months with regards to progress,” says Bernini. “We have already received permission from ISO to extend the BIC to non-financial institutions and this is proof of a tangible first step in this direction.”

As well as entity identification, Swift is also being pulled in the direction of getting involved in reference data standards as a whole as part of the ECB’s utility proposals. At FIMA in London this month, Francis Gross, head of the central bank’s external statistics division, suggested that Swift’s position as an industry owned utility with global scope could mean it is an ideal operator for a utility such as this.

Bernini indicates that Swift is supportive of the goals of the ECB’s proposed reference data utility and says that the cooperative believes they address the fundamental issue of a lack of transparency and standardisation in the market around securities reference data. This lack of transparency contributed to and was an underlying cause of the financial crisis. Swift has been talking to the ECB about the subject for around 12 months.

“The ECB’s proposals tick all the right boxes for us in terms of tackling these issues. It will also significantly reduce the total cost of ownership (TCO) for the industry with regards to cleansing and processing this data,” he explains.

The first time Bernini discussed the idea with Gross, he talked about the utility plans and Bernini discussed the idea of a standardised legal entity identifier. “We realised that these are two sides of the same problem and there needs to be a legal entity identifier aspect to the securities reference data utility in order for the solution to be complete. Legal entity identifiers are the foundation of most business processes along with instrument identification,” he elaborates.

However, Bernini acknowledges that progress may be slow in getting such an idea off the ground. “It is a very big project that will require some legislative and regulatory changes and those don’t happen overnight. The industry will have to allow the utility to grow over time and be implemented gradually, which is a critical success factor for the project,” he says.

“On the operational side, I believe there is broad support within the market for the utility concept. Moving forward, the project needs to move from this conceptual phase into a more detailed operational model. Once broad support and agreement has been achieved, then the ECB can focus on refinement of the idea and definitions,” Bernini continues.

Much like the business entity identification space, the vendor community has displayed some concern about the impact of such a utility. Bernini is convinced that the utility could instead be of benefit to these vendors: “The model will not directly interfere in the relationship between vendors and their clients and will not replace this interface. Data vendors will still have a role and could even benefit from the increased consistency and standardisation of the data with which they deal. It will increase the quality of their service and the cost of acquiring the data will go down.”

He does note that a utility will mean that vendor revenue from areas such as data cleansing maybe impacted, but indicates they can instead focus their energies on more value added services.

In the interim, Swift is a part of the consultation process rather than adopting a fixed role to begin with. “It is not yet determined whether in the future we will be involved much more closely in an operational sense. In the meantime, we bring to the table our experience of operating a utility and leading the industry in several standard initiatives,” concludes Bernini.

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