THE DEVIL IS IN THE DETAIL.
Effecting efficient evolution for the European securities markets – a TARGET2-Securities (T2S) viewpoint, by Fiona Hamilton, Vice President EMEA Operations, Volante Technologies Inc.
Change has been on the European securities agenda since the 1990s. But has there been any urgency? Giovannini and Lamfalussy were right though; domestic markets worked fine, cross-border trading was not a big issue and somehow the horrendous costs and complexity from European heterogeneity did not kill the goose that laid the golden egg of profitable operations.
Today it’s clearly different. The status quo received its seismic shock in 2008 and, since that time, the agenda has been in continual evolution towards a world of reduced risk (operational and systemic included), transparency, and increased market volume and velocity. Cross-border harmonisation (aka T2S) is not a novelty, but indeed, an integral part of balanced investment strategies.
Left to its own devices, the market can expect various responses to T2S.
The regulatory driven landscape of central entities will see some obvious candidates in these new functions that fail to arrive at the starting line; new names will innovate into leadership positions and others will limp along oblivious to strategy, tactics and the realities of commercial viability.
Visionary commentary on T2S is one thing; for operations and IT however, the devil is in the detail.
Looking at the likely evolution, some common denominators are clear. There will be more parties with which to interact electronically, the STP ‘holy grail’ of universal standards and reduced costs will not necessarily be achieved, application vendors will continue to promise future-proofed technology and consultants will abound, allegedly positioned to reduce programme implementation risk. These factors aside, the perpetual lingua franca of financial services will be electronic messages.
With more counterparties across the transaction life cycle, message volumes will increase. As Europe’s 30+ settlement systems manoeuvre into the new regime to offer seamless choice in service, the on-going challenge will be how best to reduce the friction cross-market.
The financial services industry may not change fundamentally but the way we ‘do’ it will. Counterparties, currency, value date, amount, etc, are perennial. Therefore today’s processing engines should still be largely fit for purpose – subject to their handling of risk information, high volumes and IT’s related cost of ownership and latest trends.
A world of message and connectivity-based thinking is arriving where ‘intra’ takes second place to ‘inter’. Welcome to the new regime of message exchange-based processes.
As the June 2015 T2S date looms, connectivity-based thinking needs to take hold and a renewed focus made on the enablement of message-based business processes. The European securities industry is set to have its engines upgraded and to reduce friction successfully the mechanism that we use (i.e. messaging), should be addressed.
Much of the T2S operating landscape has been mapped and it is exhausting reading. Physical connection will be via SWIFT, SIA/Colt, VAN (Value added Networks) or via Direct CoreNet. The 700-page General Functional Specifications maps how the centralised service will operate and will dictate the role of new entities and in all likelihood, impact current processes performed by in-house systems. Formats, timings, functions and destinations of messages will change; adeptness in multilingual messaging and reconciliations will be required.
The increase in message-based connectivity that T2S will stimulate means additions to the vocabulary. New T2S functional messages will be developed into ISO 20022 compliant XML formats, which can be structurally defined in electronically consumable format as XML Schema. The 1575-page T2S ‘User Detailed Functional Specifications’ v1.2.1, published in 2012, defines 130 new messages broken down across 8 categories which reveal the gap between current settlement messages and those required to operate under T2S. Entities must be able to handle new messages in this evolved, ISO 20022 lingua franca.
Two responses to T2S messaging look viable. Where equivalent messages, such as ISO 15022 or proprietary, are already being generated, reformatting or transforming into ISO 20022 and vice versa to handle in and outbound T2S messages, can be implemented with appropriate enrichment where necessary. Where messages are completely new, they will have to be created from scratch. Generally speaking, ISO 20022 messages are richer and more verbose than existing ones. Content mapping between formats must be watertight, notably compatibility between current systems and T2S’s enriched XML schema to name but one detail. The devil really is in the detail.
Current middle and back office systems ideally need to be augmented, re-written or replaced to cover the changes which will involve significant costs which most organisations will want to minimise. Lifting the lid on current systems and processes can also be a dangerous pursuit.
In the immediate timeframe, new functions will be in flux and it will be a hard and risky process to integrate into large and complex core systems. It is arguably better therefore, to take this opportunity now, to adopt a messaging architecture which insulates tried and tested from new and emerging. Across the transaction lifecycle the creation of a new messaging domain delivers the flexibility to connect and communicate with new settlement services functions as they emerge and mature. New messaging dashboards will illuminate settlement status and highlight risk across the transaction lifecycle which, after all, is part of the raison d’etre of T2S.
Moving up the food-chain
As the industry moves to more and more cloud and pay-as-you go service approaches, one can see how an evolution in technology investment makes further commercial sense. As new entities emerge, the market needs the agility to respond to choices in service provider, redirect communications and be able to despatch different levels of information to authorities and counterparties in details yet to be defined.
To date, messaging has been seen as a commodity activity – post trade at the end of the settlement cycle. The central theme of this article is that the role of messaging will become its own discipline and its importance as a mechanism to provide flexibility and speed through which to introduce new practices, accelerates it up the hierarchy. Individuals and companies with these skills will assume enhanced status.
© Best Execution 2014