Closing the settlement gap
Clive Davidson reports from Sibos
Nothing good happens in the period between making a trade and its final settlement, said Monica Singer, project manager for the Johannesburg Stock Exchange's new electronic securities settlement system, recently.
The securities industry agrees. That's why it wants to reduce the period to final settlement from three days after the trade, or T+3, to T+1. No one ever thought this would be easy, but recent industry discussions reveal just how complex it will be. At the annual Sibos conference organised by financial network and messaging services provider Swift in October, securities industry representatives had difficulty even agreeing on priorities for moving towards T+1.
There's many a slip 'twixt cup and lip' in processing a securities transaction. Information might be incomplete, or arrive late, or be coded differently, causing the matching and settlement process to fail. Failures cost time and money to fix and until they are fixed they represent a risk. Investment firms commonly cite settlement failure rates of between 10-20% at present. But even a transaction that is successfully processed represents an exposure until it is finally settled.
One thing the industry does agree on is that automation is the key to reducing failures. Straight-through processing" (STP), where trade information is keyed in once only and handled electronically through to final settlement, will eliminate errors that result from rekeying of data, clerical lapses and so on.
Last year a group of leading investment firms, broker/dealers and custodian banks set up the Global STP Committee (GSTPC) to develop a strategy to automate securities transactions processing. In September this year, they formed a private company, the GSTP Association (GSTPA).
The association's plan entails building a technology framework that will facilitate electronic processing and, by distributing information among all the parties involved with a transaction at an earlier stage, reduce the time to settlement. But this technology framework, dubbed the Transaction Flow Monitor, will need to receive transaction information in a standardised format if it is to operate effectively.
At the moment, there is no single standard for securities information. At the front end of the process, many investment firms have adopted the FIX (Financial Information Ex-change) protocol for indications of interest. Further down the chain, organisations often use ISITC standards or Swift messages for matching and settlement. These standards overlap but are not compatible. And even where a single standard prevails, or-ganisations often implement it in proprietary ways that undermine its usefulness. So organisations use 'mapping' technology, which translates messages from one format into another.
But mapping is a stop-gap that ultimately hinders moves towards STP, says Singer. "Convergence of standards is the way to STP," she says. Together with a number of senior industry representatives, Singer recently set up the Cross Border Market Practice Working Group (CBMPWG) that advocates the use of the new ISO 15022 draft securities message standard.
This takes a "data field dictionary" approach. Instead of attempting to pre-define every possible message, it provides a dictionary of data fields from which users can create their own messages. Established messages are catalogued and available for use by others. Because of the breadth of the dictionary, ISO 15022 can embrace FIX, ISITC and other message formats and avoid the mapping problem.
But this assumes that everyone implements the standard in the same way. This has not been the case even with new standards such as FIX.
Singer suggests that the industry sits down and works on a standard implementation before ISO 15022 is widely adopted. And once this implementation is agreed upon, it should be rigorously enforced, she says.
But many at Sibos had their doubts about this approach. Representatives from custodian banks argued that it was not their role to police their customers. Others suggested that proprietary interpretations of standards were inevitable as firms adapt them to their individual business practices. While still others believed mapping is an adequate solution and preferred to focus on speeding up the process through something like the Transaction Flow Monitor.
In fact, the initiatives of the GSTPA and the CBMPWG are complementary. To get to T+1 will require the speed of new technology and the accuracy that comes from a common implementation of standards."