Bridging the gulf
Set to kick off this year on 20 October in Singapore, the occasion of SWIFT’s annual Sibos conference and exhibit is always an apposite moment to reflect upon the Belgium-based cooperative’s progress over the preceding year.
This year, however, SWIFT ceo Lenny Schrank and his fellow executives could be forgiven a little self-congratulatory breast-beating and back-slapping. Sibos 2003 comes at a crucial juncture in SWIFT’s implacable march up the evolutionary ladder: from bank-centric payments utility to an entity that can help bind together the disparate processes and participants within the securities processing chain.
Despite predictions of ignoble failure, SWIFT’s migration of its user base across from the venerable ISO 7775 message formats to the new, more versatile ISO 15022 standard was a resounding success (see IPE, January 2003). Fears of a last-minute logjam – as tardy firms rushed en masse to test newly 15022 compliant systems with their custodians – proved unfounded: in the event no less than 94% of securities message traffic had made the transition by last November’s deadline.
Without a doubt ISO 15022 was an important test for SWIFT, and one many people would have liked to see them flunk. Securities messages now account for 36% of all SWIFT traffic, up from 31% a year ago and 13% in 1997. But antipathy towards the cooperative still lingers, a sourness that dates back to the early 1990s’ decision to deny the buy-side access to its messaging network.
That schism gave rise to the FIX initiative, which saw the front office develop its own, incompatible set of protocols. It is only in the past two years that SWIFT has begun working with the FIX camp in an effort to bridge that gulf, which represents a major disconnect within the securities lifecycle. This convergence initiative should benefit greatly from the introduction of the new SWIFTNet architecture and attendant business solutions. A fundamental reengineering of SWIFT’s messaging network that promises ‘more for less’, SWIFTNet seeks to provide a ‘single window’ onto an ever-increasing range of value added business solutions spanning the entire transaction lifecycle. The result will be enhanced straight-through processing (STP) through technical and business interoperability, along with cost reductions derived from the ‘reusable’ nature of the platform (of which more shortly).
The (mandatory) migration onto SWIFTNet is now underway – by the end of 2004, all users of FIN, SWIFT’s store-and-forward financial messaging service, will have moved across from the creaking X25 transport mechanism first introduced in 1977 onto a new secure IP network (SIPN). In addition to accessing multiple service providers, correspondents, counterparties and customers alongside SWIFTNet alternatives to existing proprietary access methods (such as RTGS+, NewChaps and Euroclear’s EUCLID) SWIFT members will be able make use of the aforementioned business solutions.
“These business solutions act to remove a number of critical barriers on the road to STP and are linked to services such as FIN to pull together previously disparate parts of the securities transaction lifecycle into a seamless flow,” says Simon Cleary, securities product manager at SWIFT.
Although the evidence suggests that it is only the largest institutions that currently are preparing to take advantage of these business solutions – smaller users having been deterred by the significant cost and effort involved in merely completing the FIN element of the migration – Cleary is nonetheless confident that the majority of users will come to see the benefits of using the new platform for multiple services.
Ironically, there is a cost benefit in using SWIFTNet to access multiple applications. SWIFT has estimated that, when used for five services, SWIFTNet messaging costs would total $1.61m (e1.4m) over five years, compared to $3.38m for proprietary messaging – a saving of over 50%. By contrast, utilising SWIFTNet for just one application, FIN for instance, is more expensive than proprietary messaging ($930,000 compared to $770,000).
As already intimated, SWIFTNet FIX is one of these business solutions. Having already made a significant investment, SWIFT recognised that new and current FIX users would only be persuaded to adopt an ISO 15022 XML version of the standard if they could retain communications with existing users. Accordingly, SWIFT has worked with Financial Fusion to develop a centralised hub that acts as a routing mechanism to manage communications between all the institutions connected to it.
Another key business solution seeks to address the fragmentation, lack of standardisation and automation – and concomitant inefficiencies and risk – within the investment fund industry, both in Europe and Asia. “There is a burning need to bring order to this chaos,” says Cleary. “It is clear that the benefits of STP need to be better aligned with the business priorities of the investment funds industry. There is a pressing need to demonstrate that investment in STP will facilitate the industry’s open architecture model, allow firms to reduce costs and errors and enable them to increase the level of orders and monies flowing into their funds.”
Having ‘templated’ various securities messages as a stopgap measure to allow mutual fund participants to automate the order routing process, SWIFT is now creating around 40 bespoke, XML-based funds message types based upon the ISO 15022 structures. These will treat funds as a wholly isolated asset class with its own distinct processes and will support the entire transaction flow whilst covering both domestic and cross-border flows, including cash and FX related movements.