Message in a bottle
The spectre of regulation, interference by Europe’s political classes and the perils of industry complacency joined those hardy perennials standards and market practice at the top of the agenda at Sibos – the annual payments and securities processing jamboree organised by messaging co-operative SWIFT, held this year in Copenhagen.
Although well received, a keynote address by the European Commission’s favourite fixer, Alberto Giovannini, detailing the work of his eponymous advisory group and progress towards eliminating the 15 ‘barriers’ to European clearing and settlement it identified back in 2001, was somewhat overshadowed by the comments of fellow panellist Bob Wigley, managing director and chairman, EMEA at Merrill Lynch.
Progress towards the establishment of a pan-European clearing and settlement infrastructure has “in common with so many other well-intentioned European initiatives, been derailed by the pursuit of vested and perceived national interests”, Wigley told delegates. With years having passed since the identification of the ‘Giovannini barriers’, Wigley asked why more progress had not been achieved, before going on to identify four ‘roadblocks’ of his own which were hindering industry efforts.
These included a lack of consensus regarding the ‘endgame model’ the industry is looking to build, the role of vested and national interests in blocking cost reductions and failing to prioritise the needs of users and consumers, and the failure of the industry leaders to commit senior resource and capital. “Education and information dissemination is key to dispelling myths, counteracting protectionist strategies and creating greater awareness among our clients and the investment community that harmonisation will generate substantial benefits,” Wigley added.
During a session on regulation, Joseph De Feo, CEO, CLS Group AG and president and CEO, CLS Bank International, concluded that the industry could benefit from adopting a more self-critical attitude. “Perhaps we need to be a bit more introspective about how much we have actually done to protect ourselves against these excesses,” said De Feo. “Perhaps we should have learned more from our experiences over the past 30 years, and used those experiences to collaborate more effectively.”
Certainly if the industry does not drive the reform process itself, it will inevitably feel the heavy, unwelcome hand of the regulators on its shoulder. As Donald Kittell, executive vice-president at the US Securities Industry Association, reflecting on recent scandals on the US market, noted: “There is nothing so violent as a regulator scorned, they went through a lot of punishment over being asleep at the switch – and of course they are now trying to catch up via a very extreme legislative and regulatory programme.”
Jeff Tessler, chief executive officer at Clearstream International, reminded delegates that regulation is a tough job - “damned if you do, damned if you don’t” - and also stressed that it can be a force of good. “Regulation is needed when there is a clear role for it – where it is going to used to counteract crime, or terrorism, or build investor confidence after a market failure.” However, Tessler went on to advocate the importance of a functional approach to legislation, focusing on services rather than entities, to ensure the industry does not become suffocated by overly inflexible and restrictive regulatory regimes.
Having lamented the manner in which a “laudable undertaking” such as the Financial Services Action Plan has been hijacked by politicians determined to impose “a prescription” on the industry, Dick Saunders, chief executive, UK Investment Management Association, stressed that “regulation is not going away”. Consequently the industry must adopt a “proactive and voluntary” approach, working more closely with regulators in order to head off their worst excesses.
Elsewhere, SWIFT was keen to highlight its progress in the asset servicing sphere, an area where the securities industry has long struggled to achieve even minimal advances in straight-through processing. Simon Cleary, head of securities markets at SWIFT, told delegates that some 40m corporate actions messages have been sent via the co-operative’s network using the more flexible ISO 15022 message format over the past 12 months, a 23% rise.
Meanwhile there has been an increase in both automated notifications and instructions, as well as a relative decline in potentially troublesome ‘free format’ messages. Indeed the shift from the use in messages of narrative - which is very open to misinterpretation - towards more structured message fields, is central to SWIFT’s standardisation efforts.
Cleary also highlighted the adoption of 15022 messaging for corporate actions by the Tokyo, Singapore, Australian and London stock exchanges, as well as by the US Depository Trust & Clearing Corporation for its global corporate actions service, and said that a new ISO 20022 standards for proxy voting was now under development. Nonetheless, Cleary acknowledged that there was more work to do: “Is this enough? I suspect the answer is no.”
The stakes are particularly high when it comes to corporate actions, an area described in another session as “a minefield waiting to explode”. Jim Femia, managing director, DTCC Global Corporate Action Services, said that diverse formats, languages and market practices, combined with a multiplicity of intermediaries - the average institution uses seven data providers - mean that “multiple potential points of failure” exist along the processing chain.
A single missed or miscommunicated event could cost a firm tens of millions of euros, said Femia, while the potential industry annual loss runs into the trillions. A number of challenges need to be urgently addressed – the need for timely and accurate information, managing information flow, the proliferation of more sophisticated and complex instruments and events, increased volumes, and the need to harmonise and implement ISO15022 in this space. “The introduction of ISO15022 messages for corporate actions is a good start, but it is just a start ,” said Femia. “On top of that we need new market practices and greater automation, as it is only with all those in place that we will be able to achieve STP.”