Thomson Reuters is working with leaders in the corporate actions industry to drive a decision on how the coexistence of two standards in the discipline should be tackled to stem uncertainty in the market and help participants avoid the costs of implementing systems using both standards.
The company has brought together the thoughts and opinions of big-hitters in the corporate actions market – Brown Brothers Harriman (BBH), the Depositary Trust & Clearing Corp. (DTCC), Fidelity ActionsXchange, Information Mosaic and XSP – in an evocative paper entitled ‘The Business Case for Corporate Actions Standards: Black & White or A Hundred Shades of Grey?’.
Tim Lind, head of legal entity and corporate actions at Thomson Reuters, starts the debate describing the evolution of ISO 15022 for corporate actions financial messaging and the following development of ISO 20022, a standard aimed at greater sophistication and automation, but targeting the same business processes and information.
He writes: “As the old cliché goes, the road to hell is paved with good intentions. Yes, ISO 20022 may represent an upgrade over ISO 15022, but the initiative has thrown the future state of corporate actions standards into a troubling state of uncertainty. The lack of consensus on how ISO 20022 will be adopted is invariably creating a state of fragmentation, ironically from the very process designed to create harmonisation. The situation puts us at a critical crossroads and requires an escalation of the debate regarding the potential coexistence of two standards.”
He continues: “Make no mistake, coexistence may seem like a rational compromise that allows gradual migration, but it defeats the entire objective of ISO 20022. Coexistence equals fragmentation between standards and imposes prolonged cost and burden on all parts of the corporate actions community for an indefinite time.”
While acknowledging that there is no perfect solution to the problem of coexistence and that not all will agree on a final decision, Lind argues that Swift, the maker of the standards, is the right body to convene opinion from all involved, particularly practitioner banks, kick start discussion and force through a final decision.
Providing initial content for discussion he writes: “While the business case for ISO 20022 is debatable, the corporate actions industry must choose between the unpopular approach of a forced migration to ISO 20022 or managing a prolonged period of fragmentation between two standards. This is the financial messaging equivalent of being between a rock and a hard place. While none are particularly appealing, there are at least three alternatives: indefinite fragmentation between ISO 15022 and ISO 20022; minimising fragmentation by limiting use of ISO 20022 to specified market infrastructures; or setting a firm migration date for ISO 20022.”
Lind explains where he believes things went wrong in the first place, saying: “Standards are often developed with 99% of the effort creating the specification for the business requirement and little effort spent on the practical implementation and lifecycle of the initiative. ISO 20022 stopped at the specification stage. There is always effort, cost and uncertainty in a new system, but that hasn’t been considered here. In this case, it could be that 10% of the counterparties a firm works with use ISO 20022, forcing it to build an interface using the standard, but also continuing to endure the costs of ISO 15022. Let’s drive consensus here, the choices couldn’t be simpler, but we are not making progress.”
Christopher Remondi, a partner at BBH, which is a leader in the adoption of financial messaging standards and has adopted ISO 20022, covers the cost and cumbersome nature of coexistence in the paper, and argues: “We have before us a corporate actions standard solution that can propel the industry towards increased end-to-end straight through processing, improved client service and reduced risk and cost. Let’s forge ahead with clearly defined migration dates. We don’t want to be struggling with the problems of today when the problems of the future arise. The time has come to rip off the band-aid. We must not let the capabilities of ISO 20022 be stifled by the constraints of ISO 15022.”
DTCC is also heavily involved in ISO 20022. Moving away from a proprietary corporate actions system, the depository started a pilot programme covering corporate actions announcements – including BBH, BNY Mellon, JPMorgan Chase and National Financial Services – using the new standard in April 2011. Positive feedback led DTCC to implement ISO 20022 messaging into production in November of the same year, before setting up a pilot covering the entire lifecycle of distribution events in September 2012. Daniel Thieke, managing director at DTCC’s Depository Trust, is unequivocal on DTCC’s view of the coexistence issue. He writes: “DTCC is committed to the ISO 20022 standard for corporate actions and is mandating the migration of all of its users to the standard by 2015.”
Deborah Culhane, chief operating officer at Fidelity ActionsXchange, a supplier of data aggregation, event comparison and communication services, states: “Swift should continue to educate firms on the benefits and value of migrating from ISO 15022 to the 20022 standard. More importantly, the broader financial community needs to work with Swift to achieve industry consensus and a clear plan and timeframe for migration to the single standard.”
Among suppliers of corporate actions software, which could profit from licensing and supporting two standards, Information Mosaic and XSP state their views, again suggesting the need for migration, but with less urgency. Gerard Bermingham, senior vice president of business strategy at Information Mosaic, writes: “Organisations are generally conservative when it comes to change and are reluctant to make the investment if they don’t have to. In many cases, particularly outside of the US, ISO 15022 works, so the thought is, ‘if it’s not broken, why fix it?’. This mindset will continue unless Swift or other standards implementers present the benefits of ISO 20022 and set a definitive cutover date.”
As the leader of the charge to end uncertainty caused by coexistence, perhaps the last words should go to Thomson Reuters’ Lind, who concludes: “Whatever direction you support, now is the time for strong leadership, especially within the standards community. Without firm consensus on a migration plan, continued education and blind promotion of ISO 20022 ignore the real challenge and only make the probability of fragmentation greater. While the alternatives are clear, the current plan of deciding not to decide should not be an option.”
To read the full paper go to: http://forms.thomsonreuters.com/corporate_actions_standards/