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03:38 PM
Paul Allen
Paul Allen
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Slow, but Powerful

Creating data standards isn't much fun. But work being done now has the potential to transform the financial-services landscape.

Tracking the development of data standards has all the appeal of, oh, watching glaciers move. But both processes have similar potential to reshape the landscape. A snapshot of the data-standards work being done today reveals that a number of market segments have made marked progress toward achieving true standards. And awareness of the role standards need to play in automating transactions, and the lower costs and risks that can result, is growing.

Financial Products Markup Language (FpML), the messaging protocol developed to support derivatives transactions, is going through its fourth release and is being implemented around infrastructures such as SwapsWire, a centralized electronic platform supporting trade capture and confirmations for OTC derivatives that is owned by a consortium of derivatives dealers. And FIX, the real-time protocol that enables firms to exchange securities transaction information in a standard format, has seen significant uptake on the equities side in the U.S. and in Europe, says Tim Lind, senior analyst with TowerGroup.

FIX has succeeded on some fronts, though there are still too many ways to interpret the protocol. "Although there still are some challenges in terms of the flexibility of how organizations interpret FIX, the use of the protocol for indications of interest and pre-trade and trade activity, particularly among the larger investment managers, has been a huge success," says Bill Rosensweig, SVP in Brown Brothers Harriman's client solutions division.

The protocol's most recent version, FIX 4.4, is moving into new asset classes, with take-up most notably on the fixed-income side. In recent years, FIX Protocol Limited (FPL), which manages the protocol, has focused on expanding support beyond equities to fixed income, listed derivatives and foreign exchange products, says Scott Atwell, manager of FIX trading and connectivity with American Century Investments and co-chair of both FPL's Global Steering Committee and Global Technical Committee.

In the post-trade world, SWIFT has been the main facilitator of message standards and offers a model to strive for when it comes to global penetration. "When it comes to cross-border communication between, for example, a global custodian and sub-custodian, SWIFT is absolutely dominant," TowerGroup's Lind says. But its use today by the asset management community, especially in the U.S., is sporadic.

For SWIFT to expand from the intrabank market into the bank-to-customer market, it must improve product coverage and fill the gaps in its user base. SWIFT is taking steps to do just that, such as launching its SWIFTNet FIX messaging platform. It's also abetting the creation of ISO 20022, the new Universal Financial Industry (UNIFI) message scheme. SWIFT is moving into new areas, such as pre-trade with the cooperation of FIX, and it's been piloting a project for investment funds that was slated to go live in October, says Martine De Weirdt, head of standards at SWIFT.

The development of ISO 20022, in particular, is an area of great potential. "We are now working toward having a single standard for all financial services," says Sandy Throne, director, industry standards, for the Depository Trust & Clearing Corp., and convener for two critical ISO (International Organization for Standardization) working groups.

Defining Data

One key initiative that emerged from the working groups is a single dictionary of financial-data terms, relationships and definitions set up on SWIFT's Web site. "It's syntax independent, so it does not matter anymore if you are using the FIN-based standard, XML or any other syntax" says SWIFT's De Weirdt.

The goal is for all organizations that develop standards to use the single data dictionary. Therefore, the MDDL (Market Data Definition Language, which has defined a common format for market data) will use ISO's terms, definitions and relationships, so all its information is in the single dictionary, the DTCC's Throne says. But a lot of discussion still is needed to connect all the standards.

Standards organizations also are cooperating around instrument- and business-entity-identification reference data. The first challenge on the instruments side is achieving precise instrument identification, and the Industry Standardization for Institutional Trade Communication (ISITC), the Reference Data User Group (RDUG) and Reference Data Coalition (REDAC) are working together on it.

In terms of business-entity identification, being able to identify all counterparties for post-trade processing activities and track transactions for regulatory obligations requires an international business identifier, which at present doesn't exist. It has therefore become an ISO activity. "They are now determining the elements required, the maintenance strategies, who the registration authority would be and the practicalities of how it would work," says Mike Atkin, director with the Financial Information Services Division (FISD) of the Software and Information Industry Association and secretariat for REDAC.

Another part of the reference-data puzzle is promoting standards for protocols, in order to ensure that firms can receive delivered data in a consistent manner. "FISD has developed a distribution protocol - FISD Message - which is piloting with the Tokyo Stock Exchange, London Stock Exchange and Deutsche Borse, that is able to stream market data in real time," Atkin says. "We are planning to give our distribution standard to ISO so we can have a standard data model and standard distribution approach in ISO."

Investing in Standards

While there has been progress on global data standardization, and cooperation among the predominant standards bodies is evermore evident, there's still a long way to go. One of the biggest problems is the coexistence of numerous formats, which is likely to be the case for some time, says BBH's Rosensweig. "The solution is maybe in the vendor or outsourcing space, where organizations can offer solutions that allow for two firms with data systems that speak different languages to communicate through the form of message translation, reformatting and so forth," he says.

The ultimate success factor, though, is getting companies across the industry to actually implement the standards, and to do so with a common interpretation. Funding for standards projects can be hard to come by. But, there is a sense that firms' budget horizons have expanded beyond surviving this quarter, says TowerGroup's Lind, with more interest in the sorts of core infrastructure projects that will help them be competitive in three to five years.

Where firms invest, SWIFT encourages them to build architectures and systems that protect against syntax changes. "Our big message," says SWIFT's De Weirdt, "is, if you have to redesign your internal architecture, make sure you base it on agreed, standardized data elements. ... What is important is the agreement on the business model, as well as harmonization of market practices. But not many people see that yet. We are talking about a time frame of at least five to 10 years."

Ultimately, firms will build business cases one by one on whether to invest in standardization projects. BBH's Rosensweig says he's starting to see straight-through processing and operational capabilities not only cutting operating costs, but also showing up in the evaluation process of investment managers by institutional clients looking to place new assets. "More organizations will therefore focus on being compliant with current standards and market practices," he predicts.

Data standards, it seems, are finally on the agenda. The question is, will they make it on the budget? Because that's what it will take for standards to reshape the world.

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