Software & Information Industry
Association • Financial Services Division
June 13, 2004
Jonathan G. Katz
Secretary
Securities and Exchange Commission
450 Fifth Street, NW
Washington, DC 20549-0609.
File number S7-13-04
Dear Mr. Katz,
The Financial Information Services Division (FISD) of
the Software & Information Industry Association (SIIA) is pleased to provide
these comments to the Concept Release on Securities Transactions Settlement
(Release No. 33-8398; 34-49405; IC-26384; File No. S7-13-04).
FISD members applaud the Commission on a balanced and
insightful review of the issues as outlined in the concept release. There
has been large scale and often-heated discussion on all of these issues
among FISD members on both sides of the Atlantic. While our diversity has
made it difficult for us to achieve consensus on the core issues of
improving the trade confirmation/affirmation process, shortening the
settlement cycle or reducing the use of physical securities, the FISD
Executive Committee has been able to coalesce around the importance of
reference data standards as a critical pre-requisite to securities
processing automation. As such, the focus of this comment letter is on the
relationship of reference data standards to STP automation, the current
status of the global standards discussion and the potential role of the
Commission in supporting standards implementation.
FISD is a unique trade organization that offers a
balanced and neutral business forum for exchanges, market data vendors and
financial institutions to address and resolve market data business and
securities processing automation related issues. Participants are
responsible for their own strategic and commercial interests within FISD.
Our role is to act as a neutral facilitator of the discussion and manager
of the consensus agenda that emerges as a result. The organization is
governed by a 27-member Executive Committee consisting of nine exchanges,
nine vendors and nine user firms. A complete list of the FISD Executive
Committee is available via the FISD web site (http://www.fisd.net/about/executive.asp).
FISD is an active participant in global standards
initiatives. We are the founders and facilitators of the global Reference
Data Coalition (REDAC). We sit on the Steering Committee of the UK-based
Reference Data User Group. We were recently named as a direct liaison to
ISO TC68/SC4 – the ISO body dealing with standards for the securities
industry – and participate on ISO Working Group 8 (standards for business
entity identification) and Working Group 11 (focused on the creation of an
industry standard market data model and common vocabulary). FISD is a
voting member of ANSI X9D, the group that holds the vote on ISO standards
for the US and a member of the Standards & Protocols Working Group within
the Securities Industry Association. We are also members of the ISIN User
Group within ANNA, focused on issues related to unique instrument
identification. Finally, FISD is the originator and owner of Market Data
Definition Language (MDDL), the XML specification for reference data,
corporate actions and pricing and fisdMessage, a standard distribution
protocol for exchanging XML content in real time streaming environments.
A number of FISD members are likely to comment
independently on the concept release. This letter represents the majority
view of the FISD Executive Committee, but should not be interpreted as the
views of any single member.
The Reference Data Standards Connection
Reference data and standards have been in the spotlight
of the financial information industry for the past few years. The
discussion is being driven by the objectives of cost containment, risk
mitigation and regulatory compliance. Financial institutions are working on
improving operational efficiency and automating transactions processing (the
objectives of STP) because it makes business sense for them to do so.
However, the challenge is made significantly more difficult due to the lack
of standards in three core areas:
- The lack of standards for precisely identifying and
communicating financial instruments listed and traded in multiple markets.
- The lack of standards for identifying and
communicating the one-to-many parent, subsidiary, legal hierarchy and fund
structures associated with complex financial transactions.
- The lack of a unified data model and standard
glossary of terms, definitions and relationships for all data elements
involved in the transactions lifecycle.
When the financial industry refers to “reference data”
they are focusing on the identification of the underlying accounts and
parties involved in a transaction, including who’s buying, who’s selling,
the parties involved in clearing, settlement and account management, the
instrument being traded and corporate action information affecting the
instrument. The common statistic that is used in the industry is that about
40% of a trade record is composed of referential data. Reference data
becomes very important because it is the underpinning of securities
processing automation and a component of virtually every process within
financial institutions. In the front office, reference data is used for
sales, research, trading, and order management. In the middle office, it is
used for collateral management and regulatory reporting. And in the back
office it is a fundamental component for trade confirmation, settlement and
asset management.
The core of the problem is that even though reference
data is ubiquitous, it is decentralized with multiple systems (up to 25
separate processes/systems for each cross-border trade) containing client,
counterparty and instrument data within a firm and managed, scrubbed and
maintained on a mostly manual basis. Recent studies by the Tower Group and
others consistently maintain that inconsistent, incomplete and inaccurate
reference data is the number one cause of internal STP failure. The latest
Tower study indicated that over 30% of all transaction breaks are caused by
poor quality reference data – and that 59% of instructions need some form of
repair, 10% result in mismatches and 15% fail to settle on time.
From our perspective, there is a clear link between
reference data and automated trade processing. If settlement cycles shrink
beyond T+3, more automation will be needed. And automation needs accurate
data that is compatible across multiple functions throughout the
enterprise. Bad data causes exception processing, the enemy of
automation. In this emerging STP environment, financial infrastructure and
reference data becomes much more important. Securities need to be set up
well before they trade and identifiers and descriptive data must be
accurate. Firms must make sure their security master files are up-to-date
because the new world of “just in time processing” won’t allow much time to
correct missing or inaccurate data. Consistent, accurate, timely and
standardized reference data could be viewed as almost a prerequisite for the
financial industry to meet the objectives of securities processing
automation.
The Three Pillars of Reference Data Standards
From the financial information industry perspective,
the overall goal is to establish a common infrastructure for STP
automation. That includes making sure that the standards are in place to
facilitate global electronic commerce. And as indicated above, those
standards fall into three broad categories. The first are the standards
required for unique and precise identification of financial instruments.
This includes discussions related to numbering schemes and instrument
symbology. The second are the standards required for unique and precise
identification of entities. This is a two sided discussion including
activities related to business entity relationships for managing risk and
counterparty relationships for improving the efficiency of clearing and
settlement. The third are the standards for content. This is the
vocabulary exercise required to ensure that there is a common understanding
of all terms, definitions and relationships so firms will know what they are
receiving at a very granular level and with absolute precision.
Unique Instrument Identification (UII)
Most of the initial attention on reference data has
been about the requirements for precision in instrument identification and
the issues associated with numbering schemes and symbology. This one is
fundamental. Financial institutions buy and sell a variety of instruments
that can be issued, priced, traded and settled in many ways. As such,
different types of identifiers are relevant at various levels and for a
variety of functions including -- investment decisions, portfolio valuation
and rebalancing, risk management decisions, trading decisions, pre-matching
and matching functions, back office and settlement compatibility issues,
corporate action processing, accounting challenges and regulatory reporting
requirements.
The underlying problem is that the international
standard (ISIN) alone is not sufficient for the automation requirements of
STP. And while ISIN is a unique issue identifier, it is not always a unique
security identifier because one ISIN can be shared among offerings in
multiple locations. The most critical data element for unique
identification is the official place of listing (OPOL). OPOL identifies the
primary and secondary markets where the security is listed and is needed to
differentiate the security in the case of multiple listings. A market
issuance in multiple locations will be subject to different settlement,
pricing, tax/corporate event treatment and allocation of national numbers.
UII Status
The issues related to unique instrument identification
have been under active global debate for the past three years. The good
news is that the industry has finally coalesced around both the importance
of precise instrument identification and the criteria for uniqueness (see
white paper). The challenges now are both operational and commercial.
On the operational side, the required level of uniqueness varies according
to the user role in the transactions lifecycle. Participants performing
various functions use different identifiers and there is a requirement to
cross-reference identifiers between each party of the trade. Any delay in
identifying the relevant instrument slows down the process and contributes
to STP failure. On the commercial side, multiple entities (including
international standards maintenance agencies) are engaged in creating
commercial products to address the UII requirement. The debate focuses on
both the nature of the commercial terms as well as on the acceptability of
the competing product offerings.
FISD is part of an international coalition working on
both the operational and commercial issues related to UII. We are available
to brief the Commission on the status of the discussions as well as the
nature of the issues under debate at your request.
International Business Entity Identification (IBEI)
The business entity identification activity is a
two-sided issue focusing on both processing efficiency as well as on
compliance/risk management requirements. At the core of the problem is the
fact that financial institutions interact with multiple entities for a wide
variety of functions without much operational coordination among the various
groups.
For example, financial institutions need to do their
due diligence to set-up new accounts and to verify entities before taking on
new business. They need identifiers for communication of trade processing
information. They need to identify individual funds (or pools of money
under management) for post trade allocation and settlement, particularly
with the use of electronic allocation via FIX. They need identifiers for
regulatory compliance and timely reporting to meet their obligations under
the UK Financial Services Act and to meet their KYC and AML procedures which
place emphasis on client reporting, transactional information and the
relationship of the client to corporate entities. And they need identifiers
for managing their risk requirements for grouping entities in order to
assess operational risk exposure towards organizations made up of multiple
legal and business entities.
The result is that the multiple parties involved in a
trade often have different identifiers for the same entity, fund or
counterparty – and different hierarchical structures on how these entities
relate to one another. There is no single view of the world – credit, risk,
front office trading, compliance, operations, etc all see the world from
their own perspective. As a result, many firms use internal proprietary
identifiers to communicate with their counterparties, resulting in manual
efforts, mismatches, reconciliation costs and delays in post-trade
processing. The problem is there is no international standard identifier
for identifying and linking legal entities and portfolios under management.
The lack of these standards, and their critical one-to-many relationships,
makes it difficult to automate the order execution, trade allocation and
settlement process as well as difficult to extract relevant information need
for regulatory compliance.
IBEI Status
The challenges of international business entity
identification are daunting and have been under debate within the financial
community for many years. Once again, the good news is that there is now
broad agreement on the importance of developing an IBEI standard. Earlier
this year, the International Organization of Standards (ISO) under the
direction of Technical Committee 68, Sub-Committee 4 (TC68/SC4) created
Working Group 8 (WG8) and charged them with developing a global scheme for
uniquely identifying business entities playing a role in the lifecycle of a
financial instrument.
ISO TC68/SC4/WG8 is very active and has made good
progress in defining the IBEI requirement and developing recommendations on
the design and structure of the standard, the assignment and maintenance
process, rights of access to IBEI data and on the data elements required to
help facilitate processing efficiency, risk management and regulatory
compliance objectives. These standards will form the basis for building
hierarchical relationships and facilitating automated processing. As with
UII, there are both operational and commercial challenges to overcome
because implementation of the IBEI standard is not a trivial matter. Firms
would have to either replace their internal identifiers with the
international standard or maintain cross-references between the two – and
there are likely to be significant commercial and intellectual property
rights considerations that need to be reconciled before implementation of
the IBEI standard is possible.
FISD is an active member of TC68/SC4/WG8 and is
available to brief the Commission on both the status of the discussion and
the nature of the operational/commercial challenges under debate.
Data Model and Standard Vocabulary
Financial institutions spend a significant amount of
time and money on data scrubbing and repair. The creation of a common data
model and standard vocabulary is really about the establishment of common
names, values and formats for all data elements involved in the transactions
lifecycle from set-up and indications of interest to post-trade settlement
and allocation. At the core of this issue are the problems financial
institutions have interpreting, comparing, translating and integrating data
delivered from multiple sources. The lack of precision and transparency at
the content level makes it very difficult to compare data across various
vendors and even more difficult to compare data between counterparties.
Data element precision and transparency is a prerequisite for reducing the
miscommunication and misinformation errors related to trade processing.
One of the best illustrations of the challenge is the
term “closing price.” Closing price could be the official closing price of
an exchange (although not all exchanges publish an official closing price).
It could be the last traded price. It could be a volume weighted price or a
mid-point price or an indicative price. All of these prices are valid
depending on the requirements of the specific application. The goal is to
eliminate confusion and ambiguity between and among sources.
This is also where we make the connection between
reference data and XML. And there are two sides of the XML story. On the
one hand, as a common format, XML allows firms to integrate data from
multiple data sources, feed numerous internal applications and add
functionality without the need to translate and normalize the data. On the
other hand, XML promotes a common understanding of the content of the data
including how one data element relates to another. The objective is to have
agreed terminology and transparent definitions so that people working with
the data delivered by lots of sources can understand what they are working
with and use it as appropriate for their specific application
Standard Vocabulary Status
FISD believes that the development of a common market
data model and standard vocabulary is at the core of every organization’s
reference data strategy. It was the prime motivator behind the development
of Market Data Definition Language (MDDL) – the XML standard for market
data, and remains the top reference data priority among our members.
Again, the good news is that the global market data
industry agrees with the importance of establishing common terms,
definitions and relationships. The issue has also found its way into the
ISO process with the creation of ISO TC68/SC4 Working Group 11 (WG11). WG11
is charged with producing a data model that provides a single standard for
describing a financial instrument throughout its lifecycle. ISO
TC68/SC4/WG11 is very active and has made significant progress toward
producing a single standard for describing financial instrument attributes.
However, this is a complicated activity in that it includes defining all
data elements required to build and maintain product master files as well as
those needed to price financial instruments. In addition, adoption of the
common vocabulary will require operational resources and a coordinated
strategy among financial institutions. Adoption will likely be associated
with technology migrations and incremental.
FISD is donating the MDDL vocabulary to the ISO process
and is working in cooperation with SWIFT, FIX and others to ensure the
development of a complete data model for the financial industry. We are
active members of TC68/SC4/WG11 and available to brief the Commission on
both the status of the discussion and the outlook for developing a common
data model and standard vocabulary for the financial industry.
Conclusion
FISD is grateful for the opportunity to comment on the
Commission’s concept release on securities transactions settlement. FISD
takes no position on the value of improving the confirmation/affirmation
process, shortening the settlement cycle or reducing the use of physical
securities. Our main points can be summarized as follows:
- We agree with the Commission’s hypothesis that
achieving straight through processing is a prerequisite to shortening
settlement cycles. The industry has not yet achieved STP, but there is
now broad agreement with the value and objectives of securities processing
automation. Based on the activities of our members, we feel confident in
stating that financial institutions are seriously working on making STP a
reality.
We believe that risk mitigation and processing efficiency are the two core
components of the STP equation. Without regulatory action on shortening
settlement cycles, financial institutions need a valid processing
efficiency business case, with measurable return on investment metrics, to
move toward STP. That business case has been slow to develop, but there
are now very promising indicators that these data and processing issues
are now becoming a priority. Mandating T+1 at this time is not the
preferred option. We’d rather see the financial industry continue its
quest to develop and build the core standards-based infrastructure as a
business, not a regulatory, mandate.
- The global financial industry has spent a
significant amount of time debating and defining the standards
requirements associated with building that infrastructure. The core
activities have been defined and there is broad agreement on objectives.
We believe the Commission could be helpful in moving the development and
adoption of these standards along by setting broad target for the
industry, monitoring the commercial/operational issues as they arise and
encouraging the adoption of common standards.
FISD stands ready to provide the Commission with more
detail on our activities and on the issues outlined in this letter. Thank
you again for the opportunity to respond. Please don't hesitate to contact
us if we can be of additional service.
Sincerely,
Michael Atkin
Vice President and Director,
Financial Information Services Division
Software & Information Industry Association
