Steering Committee Members Present
Merrill Lynch (Cecilia Holden, Sanjay Vatsa)
Salomon Smith Barney (Jim Leman)
Morgan Stanley (Judy Smith)
Goldman Sachs (Steve Kelly, Marcel Deuber, Jim Perry)
Fidelity (Jane Stedman)
Massachusetts Financial Services (Martin Pearce)
State Street Bank (Stuart McKinlay)
Northern Trust (Iman Szeto)
DTCC (Sandy Dinetz)
Others
FISD (Michael Atkin, REDAC Secretariat; James Hartley, MDDL)
Reuters (Tony Kirby – representing John Gubert, HSBC and RDUG)
Executive Summary
This was the inaugural meeting of the REDAC Steering Committee. The primary
objectives of global coordination, standards development/implementation, and
operational oversight to ensure that the proposed solutions are focused,
viable and practical were validated. The following initial priority areas
for REDAC were established:
- Unique and precise security identification – including definition of the
requirements for unique identification, the range of possible options to
address the challenge associated with multiple listings and evaluation of
the viability of London Stock Exchange/SEDOL proposal.
- 15022 Data Field Dictionary – including the efforts to incorporate
reference data and corporate event information into the new Second XML
Edition of 15022 and to make the DFD the central repository for all data
elements required for trade cycle processing.
- Legal entity hierarchy identification – including support for and
participation in the new International Business Entity Identification (IBEI)
work item recently approved by ISO/TC68/SC4.
- Corporate actions – including the definition of corporate action data
elements to be incorporated into the 15022 Data Field Dictionary as well as
its relationship to the normalization exercises currently underway within
the industry.
REDAC Objectives
The REDAC Steering Committee reviewed and approved the “Terms of Reference”
document and verified the value of REDAC as a global coordinating body on
issues related to reference data, corporate actions, ISO standards and XML
specifications for the financial industry.
REDAC verified the data challenges associated with inaccurate or incomplete
reference data as well as the overall STP objectives of reducing overhead,
minimizing exception processing and reducing the costs associated with trade
failures, trade repairs and settlement delays.
STP and shorter settlement cycles are the motivation behind the focus on
reference data. Shorter cycles mean that more automation is needed. And
automation needs accurate data that is compatible across multiple functions
throughout the enterprise. If the data was consistent, firms could
standardize processes and there would be less manual intervention. And fewer
manual operations mean less risk and less expense. Examples of inefficient
practices include:
- Re-keying data as it gets passed along the trade processing chain.
- Manually maintaining security master files fed by different data sources,
by different departments, and between the front, middle and back offices –
all with disparate data definitions and multiple delivery formats.
- Researching security identification mismatches and the problems associated
with cross referencing due to multiple numbering schemes.
The REDAC Steering Committee also verified the fact that multiple
organizations – all throughout the industry – are independently addressing
the link between reference data and STP automation. All REDAC members agree
that independent and uncoordinated activities are obstacles to dealing with
the complexities and dimensions of reference data. Coordination is required
to resolve the information needed for global securities processing – and
that will become a primary objective of REDAC.
Priority Areas
The REDAC Steering Committee recognizes the valuable work of other groups in
defining and sizing reference data management problems. REDAC supports those
activities and will not duplicate ongoing efforts.
The objective of REDAC is to verify the problems on a very specific basis,
evaluate the practicality and operational implications of proposed
solutions, direct the requirements for data definitions and related
standards and ensure buy-in among all involved parties on a global basis.
The four immediate areas of focus are:
1. Unique security identification. 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 for a variety of functions. The underlying problem is that
the international standard (ISIN) alone is not sufficient for the automation
requirements of STP. ISIN is a unique issue identifier, but it is not always
a unique security identifier. ISIN alone is not sufficient for unique
identification because one ISIN can be shared among offerings in multiple
locations where each offering may have slightly different characteristics
that nonetheless have significant impact in many places along the lifespan.
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.
In addition to OPOL, the industry needs register level information for
determining transferability across markets and to help route the security to
the correct place of settlement and holding. Registration is needed to
determine settlement compatibility and must be known at the point of trade
to ensure that the risk is manageable.
Current Status
- FISD has been managing the unique security identification discussion with
ANNA and the ANNA Service Bureau for the past year. FISD and its members
feel that the research on the requirements for uniqueness has been validated
by practitioners from a diversity of segments within the industry.
- ANNA agrees with the definition of the problem but maintains that it is
not in position to guarantee the collection of OPOL and register level
information.
- The ANNA Service Bureau is in position to collect OPOL and link it to ISIN
(and is interested in doing so) but has not received authorization to
provide this product as part of the ISIN feed.
- The London Stock Exchange agrees with the definition of the issue and has
proposed the extension of SEDOL to address this problem. The LSE proposal is
being (mostly) favorably discussed among industry participants. LSE is
having some difficulty getting the SEDOL proposal endorsed on a consistent
basis – even within the same firm. LSE is moving forward with its plan to
extend SEDOL and is initiating commercial discussions on product rollout.
Next Steps
- The REDAC Steering Committee asked to review the results of the FISD
research to re-verify the definition of the problem and the requirements for
unique and precise identification.
- The LSE has volunteered to brief REDAC on its research and on the details
of the SEDOL extension proposal.
2. 15022 Data Field Dictionary. Throughout these discussions, the one area
that virtually everyone agrees to is the critical importance of a standard
vocabulary for reference data and the potential value of the ISO 15022 data
field dictionary (DFD) as the central repository for that data. The 15022
DFD is an accepted standard for the transactions side of the business, but
it does not do much in the way of defining the descriptive attributes of a
security. This is an important missing element. In the absence of
appropriate industry standards, firms often strike bilateral agreements on
the meaning and use of proprietary codes.
FISD has approached ISO 15022 about the process of integrating reference
data into the DFD. We were concerned that if every entity currently working
on reference data applications petitioned 15022 independently, we would wind
up with a reference data mess of competing self-interests – and forget the
overall objective.
ISO agrees and is the process of creating a reference data and corporate
actions project team under the umbrella of the ISO TC68/SC4. FISD has been
nominated as the “convener” of this project team and is in the process of
creating an international working group on this effort. The mission of the
project team is to come up with a unique list of reference data and
corporate action data elements for integration into the 15022 DFD.
Current Status
- FISD has proposed a scope statement for the reference data/corporate
actions project team. Once it is accepted by SC4, there will be an
international call for experts to participate in the activities of the
working group.
- The overall objective is to identify all terms, definitions and
relationships (TDR) affecting processing throughout the security lifecycle
(from set-up through settlement). Some of the terms are being defined by the
15022 pre-trade and post-trade/settlement project teams. This project team
will focus on security identification, instrument descriptors, legal entity
relationships, global sector identification and corporate action specific
information.
- FISD is in the process of talking with vendors and others to create the
list of terms, definitions and relationships for both reference data and
corporate actions. The conversations have been productive and the outlook
for a unified path forward looks promising.
3. Legal Entity Identification. Financial institutions interact with a
variety of “entities” associated with trading, settlement and account
management. Identifiers for these entities are required for counterparty
identification on transactions, counterparty and issuer risk management,
collateral management, legal agreements, corporate research, data management
and regulatory reporting. The underlying problem is that international
standard identifiers linking legal entities and subsidiaries with issues do
not exist.
The objective is to create precise linkages between legal entities,
subsidiaries and investment programs. There does not seem to be a problem
creating effective links from an issuer to a specific issue within a firm
SMF databases. The problem is that there is no standard methodology for
linking multiple investment programs to a common legal entity. Firms are
currently using name (problems with accuracy and consistency), internal
codes (manual and error-prone process) or proprietary codes (commercial
concerns and redistribution restrictions) to create these linkages.
What’s desired is an industry standard master company identifier for
non-financial entities that links issues to investment programs to legal
entity. This type of coding scheme would make it easier for investment firms
to assess and manage total risk.
Current Status
- This is not a new issue. In 1998 there was a SWIFT working group formed to
address the identification of non-financial business entities. They
recommended the assignment of BIC-standard codes to serve as a short-term
solution to business entity identification. They also recommended the
creation of a BEI ISO standard (13735) – as an “envelope” approach to
leverage other existing standards.
- This issue has run hot and cold. Various task forces have been formed and
a number of business scenarios have been created – but none deal with a
standard identifier that links issues to investment programs to legal
entities for risk management, a fund identifier code or a standard
identifier for issuers of securities. New regulations (i.e. Patriot Act) are
making it more important.
- A work item on the creation of a standard for International Business
Entity Identification (IBEI) was approved by ISO TC68/SC4 last week. A call
for experts has been developed and FISD has been asked to support the
standards activity.
4. Corporate Action Information. Corporate events present a unique challenge
because of their complexity and local implications. Developing a common set
of terms, definitions, controlled vocabularies, relationships and
interpretations is a requirement for the second edition of 15022 as well as
MDDL and is a significant task. FISD is just beginning the process
associated with the development of a common TDR for corporate actions.
Guidance is needed from REDAC on the appropriate path forward.
