Transformations in the payments and securities business

At the occasion of the 2017 Standards Forum to be held at Sibos in Toronto, Canada from 16 to 19 October, I interviewed a number of SWIFT standards experts about the content of this year's programme. During the weeks leading up to Sibos, my posts will offer readers a preview of what people can expect to hear about in Toronto.

Today, I interviewed Neil Buchan and Charles-Raymond Boniver, Principal Standards Specialists in, respectively, the payments and securities market. I asked Neil and Charles about the transformations that are happening on their side of the business. Lisa O'Connor, Head of Standards Asia Pacific, offers an additional regional perspective from the APAC securities side. If you are attending Sibos, you are welcome to join our Standards Forum sessions where you will learn more about the way standards are enabling this transformation.

PAYMENTS

Paul Miserez: Let me start with you, Neil. The payments infrastructure around the world is being transformed to become faster, more open to new entrants, and to provide new services for consumers and businesses. Standards are at the heart of many of these transformations. Why are we talking about a 'global payments transformation'?

Neil Buchan: The global payments eco-system continues to be stimulated by a combination of regulatory enhancements, technological developments and evolving competition. As a result of this the industry is experiencing an number of activities which are transforming the payments environment we know today.　Discussing topics such as Instant Payment initiatives, open Application Programming 　Interfaces (APIs) and high-value payment system renewals all contribute to the transformation we are experiencing in the global payments market. This transformation has one commonality: the standards that reinforce these initiatives. That makes this an exciting and relevant topic to debate at the Sibos Standards Forum.

Paul: We have seen a lot of industry interest in the Global Payments Innovation (gpi) initiative. Why do you think it took so long to change the 'classic' correspondent banking model? Can you summarise the standards impact for organisations using gpi? And can we expect similar initiatives in other business domains?

Neil: That's a tough question. In my opinion there have been some really good industry concepts in the past which just have not gained momentum. The gpi initiative is probably one of the most successful ones I have seen during my banking career. It has certainly gained a lot of momentum. It is difficult to put my finger on exactly what is the recipe of this. I believe there is a variety of ingredients from different enactors. Certainly a more competitive banking environment could be cited as a significant driver, but I also think it is fair to suggest the banking environment has learnt from other industries and has an increased focus on the customer experience, rather than customer service.

I would not describe the gpi initiative as a change of the classic correspondent model, more as an evolution of it. In many ways the initiative has addressed the pain points to collaboratively increase efficiency and transparency, perhaps comparable to the tracking used by logistic companies.　 However, I would suggest the reason it has been a long time coming was to find that enabler to justify why there is a need to adapt a model which continues to stand the test of time. By nature most humans do not like change. Therefore, to gain consensus that change is needed on what is still widely viewed as a relevant banking model was always going to attract a lot of scepticism. However when you take that model and build on top of it to provide a better end-to-end user experience, without the need to redesign, and whilst addressing the key features causing irritation, this has the potential to be recognised as one of the most significant enhancement in the correspondent banking model we know today.

The fundamental standards impact of the gpi initiative is the introduction of the Unique End-to-end Transaction Reference (UETR), which utilises the Internet Engineering Task Force RFC4122 standard to generate a truly unique reference. It is this reference that provides the key component on which new gpi services leverage.

Without doubt, when you look at the straight-forward concept the gpi initiative has introduced, you could expect other business domains to look at their existing models through new lenses or even utilise what the gpi initiative has introduced. It could be perfectly conceivable for other business domains to establish a UETR at the point a transaction is established, which often involves a payment further in the process. This could potentially expand the end-to-end tracking concept.

Paul: SWIFT recently announced the launch of an instant payments messaging solution for the European market. How will this impact existing standards, market practice and therefore financial institutions?

Neil: Instant payments solutions continue to emerge, with many communities having already implemented domestic solutions. The recent announcement of an instant payment solution for Europe leverages the knowledge and experience we demonstrated as part of the development of the Australian New Payment Platform (AU-NPP). Most new implementations of an instant payments solution have opted to utilise ISO 20022 as the messaging standard, and the European solution is no exception. The real benefit, particularly in Europe, is that this is not a new standard. It is one that many financial institutions operating in Europe are already familiar with.

As far as market practise is concerned, as with many new payment solutions, the considerations which need to be discussed are practices that sit on the edge of the payment solution. This can be simple end-user inquiries related to payments, which can be solved by more traditional query and answer practises, or could utilise more innovative Graphical User Interface (GUI) tracking facilities. Other interesting practices emerging in certain communities are overlay services to complement the payment solution, such as account addressee solutions, where an e-mail account or a mobile telephone number can be registered against an end-user's bank account details to avoid the end-user having to share their bank details.

Paul: Last year at the Sibos Standards Forum, several new regulatory and compliance initiatives were debated, such as: PSD 2, LEI... How pivotal a component are standards in these initiatives? What strides did the industry make since?

Neil: Standards play a pivotal role in everything, both within the financial industry and outside of it. Whether they are food standards we expect of products purchased in supermarkets, or financial messaging standards we using within the financial industry. The new regulatory and compliance initiatives are no exception to this. Taking the example of PSD 2 and the use of APIs, a key contributor to this initiative is a common understanding of how to communicate using these APIs. If each Financial Institution uses a different messaging protocol within its API specification or does not have a common understanding of how to use elements consistently within a messaging protocol, the underlying directive has not achieved its desired outcome and most likely would need to publish more prescriptive guidance. The work the SWIFT Standards team has performed in documenting PSD 2 API standards utilising ISO 20022 messaging protocols will contribute significantly to this initiative. It will provide a strong opportunity for the community to collaborate.

Regulatory and compliance initiatives have been at the forefront of the industry for the last decade, and account for a significantly larger proportion of an institution's initiatives than in the previous decade. For this reason, they continue to be a relevant component when navigating the global payment transformation landscape.

Paul: It is said that the corporate-to-bank (C2B) space is the 'new frontier of digitisation in global corporate treasury'. Are we going to see important changes in corporate-to-bank flows, such as for gpi, and related standards? Will corporates be able to derive benefits of implementing XML standards?

Neil: I think we are starting to see traction within the C2B space, particularly with gpi. To an extent, corporates rely on banks to provide either an extension to their capabilities or to provide a strong foundation on top of which corporate themselves, or their vendors of choice, can innovate. The UETR, as part of the gpi initiative, is an example of how a standard can offer digital innovation to corporates. When we consider taking a UETR accompanying the payment to the next level, we could foresee overlaying the payment solution with an invoice being transferred with the payment using cloud technology, or even using the invoice exchanged by the creditor within the cloud to trigger and track the payment of that invoice. Of course, such solutions are derived from the value they add to the corporate. For the corporate, the underlying standard, whether that is XML or something else, becomes irrelevant when the initiative is less constrained by having to use existing secure and robust payment rails.

Paul: What has been the progress in payments harmonisation initiatives and new practices since last year?

Neil: The High-Value Payment Systems plus (HVPS+) initiative, under the sponsorship of the Payments Market Practice Group (PMPG), has achieved a significant accomplishment in documenting common guidelines of how global high-value payments system should use ISO 20022 payment messages ('pacs'). This includes the elements within the ISO 20022 standard that must be used, are optional, or should not be used. The group has further defined the mapping of newer elements, which have a less defined home in proprietary messages, such as the Legal Entity Identifier (LEI) and Payment Purpose Code, to mention just these.

As part of a second phase, sub-groups are now considering equivalent guidelines for reporting messages, interbank direct debit messages, liquidity management messages and interoperability between MT and ISO 20022. The HVPS+ guidelines are publicly available on the MyStandards Readiness portal, which will be key to promote future harmonisation.

SECURITIES

Paul Miserez: Charles and Lisa, let me move over to you now. The securities business is also seeing some important changes and evolutions. New regulatory initiatives are impacting players and standards. The post-trade industry is going through a phase of major transformation. And, last but not least, a mandatory maintenance of ISO 20022 funds order messages is upon us!

Let's focus on regulation first. We are seeing a number of new regulatory initiatives in the securities area. How will the most important ones impact the business and related message standards?

Charles-Raymond Boniver: First of all, the impact depends on the timing of the implementation of the regulation and on the role your organisation plays. In the Eurozone for instance, MiFIR/MiFID II will be implemented in January 2018 and it will have a big impact on the securities front-office business. Post-trade will be less impacted. But for the CSD Regulation (CSD-R), it's almost the opposite. The post-trade functions will be most impacted and front-office less so. CSD-R will be implemented in 2019/2020. Each regulatory initiative will of course have a specific set of standards that are impacted.

In the USA, on 15 November 2016 the Securities And Exchange Commission (SEC) unanimously approved the Consolidated Audit Trail (CAT) National Market System (NMS) plan. The NMS Plan outlines reporting requirements for industry participants as well as the plan processor's requirements. Self-Regulatory Organisations (SROs) will have twelve months to submit equity and options lifecycle events to the CAT. Large broker-dealers will be required to begin reporting within twenty-four months. For small broker-dealers the deadline will be thirty-six months. CAT will be the world's largest repository of securities transactions, receiving an estimated fifty-eight billion records per day.

Lisa O'Connor: In Asia, some of the largest regulatory developments have been related to China further opening up the 'capital account', which you could say is the two-way flow of investment into and out of mainland China. The significant move of China's Interbank Bond Market (CIBM) direct programme and Bond Connect effectively created open access to the third largest bond market in the world – making it accessible without quotas to international investors. That said, operational processes to streamline this access is still being worked on by the relevant Financial Market Infrastructures in Hong Kong and mainland China. Given the market evolution in China and ISO 20022 being used in the payment market and securities market infrastructures (SMIs), we should begin to see more of a drive towards the standard in the region.

Paul: The securities post-trade industry is going through a phase of major transformation, the so-called 'post-trade re-wiring'. Can you explain what this initiative entails, focusing on the standards perspective?

Charles: In the Eurozone, TARGET2- Securities (T2S) and the CSD-R are the catalysts of change in securities processing. These regulations aim to enhance competition, to stimulate efficiency and to improve risk management. But at the same time market players will use different business flows to communicate with each other and geographic borders will be removed. Settlement is likely to become more and more commoditised. It is the objective of the 'securities re-wiring' project to analyse all these elements and gauge their impact on the market, on existing business models and operations. Based on consultation with the industry, securities post-trade processing is expected to evolve over the next five years.

From a standards perspective, the market has already started to collaborate to achieve this, for instance with the adoption of the ISO 20022 Harmonisation Charter. On the harmonisation side, there are two initiatives worth mentioning. Firstly, SWIFT is looking at all relevant market regulations and will produce a mapping of data elements with the various regulations to ensure easy implementation and consistent use. Secondly, we are developing a new entry point as part of the list of 'business domains' in MyStandards, where users will be able to see all messages impacted by a specific regulation. As a final point, I want to remind that ISO 20022 was selected as the preferred reporting standard by European regulators.

In the Americas, similar to what is happing in APAC, the focus is on replacing legacy systems with new applications and technology and on adopting the newest ISO 20022 standards, for instance for asset-servicing processing (eg, DTCC in the USA).

Lisa: In most of the APAC markets we are also seeing a post-trade rewiring. This is because many of the SMIs there are decades old, built on old mainframe systems and as a result very expensive to change in a meaningful way. As a result, 'next generation' SMIs are shifting their attention to ISO 20022 as a future-proof standard that offers backward compatibility. There is also an effort to accomplish efficiencies beyond settlement, with a focus on asset servicing, collateral management and other flows, such as funds.

Paul: What can you tell readers about the mandatory maintenance of funds order messages that is on the horizon?

Charles: To ease the move from ISO 15022 to ISO 20022 there has been a ten-year maintenance freeze for funds order messages ('setr'). Now that around seventy-five percent of participants have moved to ISO 20022, the funds industry agreed to lift the maintenance freeze. All the change requests submitted by the industry were gathered, discussed and submitted for approval. Those that are approved will be implemented as part of the mandatory Standards MX Release (SR) 2017. In November 2017, a new version of the investment funds order messages will go live as part of the SWIFTNet funds solution and the older versions will be withdrawn.

Let me just mention the most important changes in the new release. The 'charges and commissions' sequence will be merged in a new overhead sequence, removing any existing ambiguity about this. Another important change is to add an optional sequence in support of 'alternative funds' (eg, hedge funds) within the same order messages. All these changes are mainly going to affect users in Europe and APAC, as Canada and the USA are not using ISO 20022 for funds. Lisa can tell you more about APAC.

Lisa: The additional 'richness' that the changes Charles just mentioned are going to offer will be particularly important in the APAC region. The reason for this is that there is a move towards regional fund passporting, which is aimed at aiding the cross-border sales of funds within the APAC region. We are using this opportunity to discuss the benefit of using the ISO 200222 funds messages with APAC SMIs and their participants. This will be critical to ensure that these fund passporting initiatives maintain a low total expense ratio and are not subject to operational risks as they go cross-border. This is the benefit of using ISO 20022 standards for funds to end-investors and why the regulators are keen to support standardisation efforts in the APAC region.

I would like to refer readers to the recently published Information Paper on 'ISO20022 Implementation Strategies' (July 2017), which covers the different combinations of implementation approaches and options. It includes a number of very interesting case studies covering all regions and businesses.

Please also read the other 2017 Sibos Standards Forum interviews:

1. Highlights and approach of the 2017 Sibos Standards Forum

2. ISO 20022 as innovation enabler 

3. New technologies and business standards