SIA Standards & Protocols Committee

1
SIA Standards Protocols Committee

• March 25, 2004
• Draft 1 (3/5/04)

Recommendations to SIA on Standards
for Securities Processing Automation Prepared by
Michael Atkin (FISD)
2
Executive Summary

• The SIA Standards Protocols Working Group was
  established to
• Assess the role of reference data standards in
  helping to establish the infrastructure for
  securities processing automation
• Identify the scope of relevant standards-based
  initiatives needed or underway
• Assess the possibility of delivering functional
  and operationally viable standards (that meet the
  objectives of efficiency and risk mitigation) in
  a reasonable time frame
• Define and understand the global standards
  development process including how and where SIA
  should leverage its position
• The initial recommendations of the Working Group
  are
• The ISO standards development process (while
  cumbersome) is both viable and functional
• There are four standards activities currently
  underway in three core areas that (if successful)
  will provide a common data and protocol
  infrastructure for securities processing
  automation. The objectives are real and
  achievable.
• The Working Group recommends that SIA should
• Publicly support these standards activities as
  both an organization and as a participant in the
  global Reference Data Coalition (REDAC)
• Provide oversight to the ISO standards
  development process to ensure that the
  initiatives remain on task to deliver value to
  SIA members
• Encourage SIA members to directly participate in
  the standards development process at the
  practitioner/operational expertise level

3
Standards Protocols Evaluation Process

• The SIA Standards Protocols Working Group met
  six times over the past 8 months (from June 2003
  February 2004)
• The active participants in the Standards
  Protocol Working Group are
• Norm Allen (Bear Stearns)
• Michael Atkin (FISD/MDDL, X9D, ISO TC68/SC4,
  REDAC, UII Working Group)
• John Bottega (Credit Suisse First Boston)
• Mary Dupay (Goldman Sachs)
• Cecilia Holden (Merrill Lynch)
• Steve Kelly (Goldman Sachs, Reference Data
  Coalition/REDAC)
• Kevin Smith (Bank of New York, ISITC IOA)
• Steven Lachaga (JPMorgan)
• Simon Leighton-Porter (Citigroup, RDUG)
• James Leman (Citigroup)
• Sandy Throne (DTCC, X9D, ISO TC68/SC4)
• John Panchery (SIA)
• Brad Smith (Capco)
• Judy Smith (Morgan Stanley)
• Sanjay Vasta (Merrill Lynch Asset Management)
• John White (State Street Global Advisors)

4
The Reference Data Connection (business case)

• Reference data is in the spotlight (according to
  Tower and others)
• Inconsistent, incomplete or inaccurate reference
  data is the 1 cause of internal STP failure
• Over 30 of all transactions breaks are caused by
  poor quality reference data
• Costs to repair trades to correct mismatches
  from settlement delays to maintain security
  master files and from trade failure are
  significant and increase as errors pass through
  front (6), middle (16) and back (50) offices
• Reference data is used everywhere (front, middle
  and back), is decentralized (multiple systems and
  processes) and relies on manual operations to
  scrub, update and maintain data. About 40 of a
  trade record is composed of reference data.
• Overall goals of the standards activities are to
  reduce costs and manage operational risk
  (efficiency is still the mantra)
• Information architecture and reference data push
  to normalize data, synchronize master files,
  reduce infrastructure costs for integrating data
  from multiple sources and promote information
  exchange
• Shorter cycles mean more automation is needed.
  Reference data standards are needed to facilitate
  automation

5
Four Pillars of Reference Data Standards

• Goal is a common market data infrastructure for
  securities processing automation
• Four core components
• Identify all financial instruments with precision
  (multiple listings)
• Identify all business entities for processing
  efficiency, regulatory compliance and risk
  mitigation
• Identify all data elements associated with a
  financial instrument lifecycle with absolute
  precision (standard terms, definitions and
  relationships)
• Define a common distribution protocol for
  efficient and accurate processing

6
Standards for Instrument Identification (UII)

• Instrument identification is fundamental
• ISIN alone is not sufficient (ISIN is unique at
  issue level, but not instrument level -- one ISIN
  is shared among offerings in multiple locations)
• Official place of listing (OPOL) is needed to
  differentiate instruments
• Place of trade is needed for intra-day pricing
  decisions and market compliance
• REDAC paper on requirements for UII has received
  global validation
• LSE SEDOL and ASB extension both meet the
  criteria
• New ISITC/REDAC/RDUG Working Group on UII
  Implementation
• Document errors caused by instrument
  identification problems by asset class and
  function
• Assess how issue can be resolved by adopting the
  UII scheme (at 15022 message level)
• Cost/benefit analysis (business case) to
  establish implementation priorities at the
  operational level

7
Standards for Business Entity Identification

• Real processing and regulatory compliance
  problems exist and there is no international
  standard for linking legal entities and
  portfolios under management
• Identifiers are needed for
• Due diligence to set up new accounts/verify
  entities for new business
• Communication of trade processing information and
  for automated post trade allocation/settlement
  (FIX)
• Regulatory compliance (KYC, AML) and timely
  reporting of transactional information and
  client/corporate entity relationships
• Managing risk requirements for grouping entities
  (operational risk, Basel II and G30
  recommendations)
• Instructions come in different formats with all
  sorts of proprietary and internal identifiers
• Difficult to automate the order execution, trade
  allocation and settlement processes (processing
  efficiency)
• Difficult to precisely extract reporting,
  transactional and relationship information
  (regulatory compliance and risk mitigation)
• IBEI activity has been correctly specified and
  approved by ISO TC68/SC4 Working Group 8
• Focus is beyond conceptual theory and on the
  design/structure of the identification scheme
  (complete, functional, operationally viable,
  commercially acceptable)

8
Standards for Content (market data
model/vocabulary)

• Standard terms, definitions and relationships for
  all market data elements
• Eliminate confusion about the meaning of terms
  regardless of source
• Ensure completeness of terms required for any
  application
• Common data format for efficient processing
• Common names, values, formats are the logical
  basis of any reference data strategy within
  financial institutions (information architecture
  level)
• Data Model/Common Market Data Vocabulary has been
  correctly specified and approved by ISO TC68/SC4
  Working Group 11
• Mission is to produce a data model and ISO
  Technical Specification that provides a single
  standard for describing a financial instrument
  throughout its lifecycle comprised of completely
  defined data elements and how they relate to one
  another.
• In essence define all data elements (and their
  relationships) used by all segments throughout
  the information chain (from issuance through
  asset servicing) correctly and with absolute
  precision
• WG 11 result will incorporate 15022 data field
  dictionary (transactions), MDDL specification and
  TDR (market data) and other specifications (i.e.
  FIX and SWIFT as interface points)

9
Industry Standard Protocol

• Industry standard distribution protocol for
  market data (both static and streaming)
• Decouple the technology of the interaction
  between provider and consumer of market data from
  the content
• Providing one set of software to receive and
  distribute data means less infrastructure costs
  for integrating data from multiple sources (no
  longer have to normalize, integrate and maintain
  multiple formats and interfaces)
• Bring static (reference data) and streaming (real
  time pricing) applications toward a common (the
  same) market data content standard
• Must overcome the chicken and egg problem (e.g.
  customers say we agree with the standards
  objective, and as soon as our vendors deliver it
  well adopt it. Closely followed by vendors
  saying as soon as our suppliers deliver XML,
  well adopt it for onward redistribution to our
  customers. On the heels of exchanges saying
  were interested in a standard distribution
  protocol prove it.)
• fisdMessage was developed to compress/compact
  streaming XML to be as efficient as existing
  datafeed distribution and it works!
• User firms are very interested in the industry
  standard protocol because of the economies of
  scale in design, production and maintenance of
  datafeeds, processing systems and applications
  as well as the extensibility benefits of XML for
  which fisdMessage is designed.
• The business case for an industry standard
  distribution protocol is very compelling

10
The Standards Landscape
Ownership Stake
Telekurs
American Bankers Assoc. (ABA)
SP
CUSIP
Contracts
Maintains
ISO Standards
Part of ISIN
Local Identifiers(65 in total)
LSE
DB
SEDOL
CFI
ANNA
DUNS
Maintains
Developed
Ownership Stake
Registration Authority
BSI (UK)
ISIN
Business Entity Identification
Legal Entity Identification
Instrument Identification
ISO
ASB
SWIFT(Network)
MIC
US Representative to ISO
RDUG
REDAC
SWIFT(Reg. Authority)
BIC
Registration Authority
Facilitation
TC68
ANSI X9D (US)
SIIA
15022
Agreement to make ISO 15022 XML Aware
Membership
WG11
FIX Protocol Limited
WG8
CFI
WG10
TBMAAMF
ConvergenceISO 15022 XML
FISD
Adopting
Membership
Owns
Omgeo
Recommenda-tions
ISDA
FIX
ALERT
Developed
Adopting
Owns
Membership Involvement
ISTIC-IOA
Developed
Standard (Reference Data or Message)
XML Conformance Standards
OASIS(XML Conformance Standards)
MDDL
FpML(Derivatives)
XML Conformance Standards
Organization
11
Standards Landscape Explained

• The ISO standards development and adoption
  process is complex but it is both viable and
  functional
• Global standards development needs careful and
  thoughtful analysis to ensure they are functional
  and operationally workable and the ISO
  structure works
• The pace of development/adoption can be
  significantly expedited if there is broad
  conceptual buy-in, operational practitioners are
  involved in the design of the standard and
  professional facilitators are involved in the
  development process.
• UII -- is already well out of the gate
  (commercial solutions)
• WG8/business entity identification has broad
  conceptual buy-in and the standards process is in
  place and correctly specified. Operational
  leadership is being managed by REDAC/RDUG
  (assistance is needed here)
• WG11/data model and vocabulary has broad
  conceptual buy-in, the standards process is in
  place and correctly specified and is based on
  real activities (MDDL and 15022 DFD).
  Additional operational leadership is being
  managed by FISD/MDDL (assistance is needed here)
• Global coordination to ensure that the four
  standards activities (and their associated
  business cases) are well defined, viable,
  functional, operationally palatable and
  commercially acceptable is required for success.

12
Recommendation

• Relevant SIA Committees should
• Challenge the hypotheses related to the
  importance of the four standards pillars (verify
  the premise)
• Publicly support these standards activities as an
  organization
• Actively participate in the global Reference Data
  Coalition (REDAC) to ensure there is a single and
  coordinated voice on reference data and protocol
  standards
• Closely monitor the ISO Standards development
  process (ISO TC68/SC4 Working Groups 8 and 11) to
  ensure the standards output remains in line with
  real industry priorities and requirements
• Provide operational experts (by function and
  asset class) to directly participate in the
  standards development process
• Continue to help steer the debate about STP as a
  business priority by helping define the business
  case and ROI metrics.
• Cost containment and risk mitigation is still the
  mantra standards are the key to achieving
  automation objectives leadership and global
  coordination is needed the global financial
  industry is paying attention the ISO process is
  oriented correctly this is our window of
  opportunity!