Goldman Sachs and FPML

OPSREPORT

Tower of Babel, in Messaging Standards

Chris Kentouris
Voices, October 19, 2010

"Investment roadmap. "

The phrase sounds a little like what financial planners prepare for a client's retirement. It's a map of what to invest in, how much to invest and when. The goal is to have enough saved up to live a comfortable life during their retirement years.

Now a group of six trade associations have come up with their own investment roadmap for securities messages with a slight twist – there won’t be any retirement. All existing message types will live on.

The six groups issuing the roadmap are SWIFT, FPL, FpML, FISD, XBRL US and ISITC.

Got that?

SWIFT is the acronym for the Society for Worldwide Interbank Financial Telecommunications, the operator of a global messaging network whose messages are endorsed by the International Standardization Organization; FPL is the trade group endorsing the FIX, short for Financial Information Exchange for trading. FISD, short for Financial Information Software Division, has its own little-used protocol for transmitting information on market data called Market Data Definition Language (MDDL). XBRL US is the US arm of XBRL International, a group endorsing the extensible business language or XBRL tagging for financial documents and most recently corporate actions. ISITC, short for International Standardization for Institutional Trade Communication, has typically endorsed post-trade messages which meet ISO's requirement.

"The investment roadmap is an important step in the harmonization of the securities industry using the ISO 20022 business model and domain specific syntaxes," says Gerard Hartsink, senior executive vice president at ABN Amro and convenor of the ISO 20022 registration management group.

Translating that message into plain English: There won’t be a single message type covering front, middle and back office services. But one day those message formats might be interoperable, confirms Alexandre  Kech, head of securities and alternative investment standards at SWIFT in La Hulpe, Belgium.

Interoperable is the SWIFT-buzzword for the fact that financial firms might find it easier to translate one message type into another. We just don’t exactly know how easy it will be or when that will happen.

Why might translation be easier: all of the securities messages will rely on a common data dictionary. That means a stock, bond or derivative will be defined in the same way regardless of what function the message serves. So will other important elements of a security such as a dividend or interest payment. And that data dictionary will describe asset classes and business functions under the standards accepted by ISO called ISO 20022.

It’s the psychological equivalent of a multiple personality disorder. Each of the messages – or personalities – will coexist and be fully aware of the other. The securities industry appears to think that such a scenario is perfectly normal.

The six trade associations have agreed that:

• FIX is the format that should be used for communicating trade instructions

• ISO-compliant messages should be used for communicating most post-trade instructions, such as for confirmations, affirmations, clearing and settlement; and,

• FpML format should be used for over-the-counter derivative transactions.

That's just a broad answer. There is still plenty of overlap: FIX and ISO messages can still be used in the post-trade space as well as clearing for listed-derivatives and regulatory reporting.

For asset servicing -- aka processing of corporate actions-- XBRL US has developed a corporate actions taxonomy that will allow issuers to tag corporate actions in the XBRL protocol and financial intermediaries to translate those tags into ISO 20022-compliant messages. In the case of collateral management for OTC-derivative transactions, FIX, FpML and ISO 20022 compliant messages will "co-exist.”

So what is the real goal of the roadmap?

To help financial firms understand which message formats they need to accept, for which asset class and function. Knowing that will help them understand how to invest their time and money in preparing front, middle and back-offices to interpret the formats for trading and post-trade processing of transactions, according to Steve Goswell, vice president of business operations at Blackrock in New York. Goswell also serves on the ISITC’s board of directors

“Co-existence of standards and syntaxes is inevitable and using ISO 20022 will reduce investment in the messaging infrastructure,” says Goswell.

How much do firms invest in maintaining multiple messaging standards? Nobody is willing to say publicly but privately some large banks and broker dealers cite figures of more than $2 million annually for a mid-tier brokerage firm. Large global banks could easily spend more than $5 million annually.

Will that be reduced with the new investment roadmap? It’s unlikely but, at the very least, the industry won’t be spending more in coming up with new syntaxes for each message type, says Kech.

The silver lining say IT experts: there will still be plenty of work for programmers, middleware and data transformation vendors.