Consistency in the implementation of the ISO 20022 messaging standard matters. Unless the standard is implemented in a broadly homogeneous fashion, many of the benefits to both financial market infrastructures and their users will be hard to capture.</p> Consistent use of ISO 20022 reduces implementation risk</strong></p> Consistency mitigates that risk in seven principal ways. First, it enables market infrastructures to predict and control the costs of their and their customers’ implementation. </p> Secondly, it reduces the cost of customer connectivity with market infrastructures, and the costs of maintaining and upgrading those interfaces over time. As Edwin de Pauw, head of product management, Europe, at Euroclear, puts it, consistent adoption of the ISO 20022 standard can “avoid solving common problems in different ways.”</p> Thirdly, market infrastructures are able to implement changes in a way that matches industry best practices. Bob Masina, head of technology and operations at the Australian Payments Clearing Association, says “the cost of implementation for participants, and alignment with global best practice, are key factors in a successful roll-out.”</p> Fourthly, with a consistent implementation of ISO 20022, market infrastructures are able to provide their customers with standard, proven message specifications for testing, even before their own system developments are complete. </p> Fifthly, market infrastructures can provide a familiar environment for customers, and thereby reduce the time and effort spent on educating stakeholders and readying market participants for the change. Familiarity also increases the likely take-up of new services by customers. “Harmonisation is necessary to reduce the learning curve for the market,” explains Bernard Lenelle, senior vice president in product management at Clearstream.</p> Sixthly, market infrastructures are able to use a consistent messaging standard to provide an end-to-end, fully automated, straight-through-processing solution. In fact, consistent adoption of ISO 20022 increases the predictability of business processes and, as a result, increases rates of automation and straight-through-processing.</p> Finally, consistency in the implementation of the ISO 20022 messaging standard increases the scope for inter-operability between different market infrastructures. Wilfree Ho, chief information officer at Hong Kong Interbank Clearing Limited, describes this inter-operability as “critical.”</p> Market infrastructures have less incentive than banks to be consistent</strong></p> Bank-to-bank business creates “many-to-many” networks, which entail participants using highly automated straight-through-processing to exchange high volumes of messages with each other. This cannot work unless all participants are using the same version of each message and upgrade at the same time, creating a natural pressure to converge on common practices. The adoption of the ISO 20022 standard, by contrast, is being driven mainly by market infrastructures, especially in payments and corporate actions messages. Infrastructures work to a “one-to-many” or “many-to-one” model rather than a “many-to-many” model.</p> In an environment in which single market infrastructures are exchanging messages with multiple customers, each market infrastructure is free to choose - in conjunction with its users - which version of a message to deploy, and when to switch to the newer version. Moreover, market infrastructures are also free to impose their own market practices and rules to govern how their participants actually use the messages.</p> This potentially leads, as ISO 20022 implementations proliferate around the world, to a high degree of variability in the ways in which the standard is used. Already, there are multiple versions of the same message, different market practices and rules, and asynchronous release cycles. This variability threatens to undermine the ability of the standard to deliver greater flexibility in transaction processing, richer information, lower costs, reductions in risk, and inter-operability between market infrastructures. </p> Users of market infrastructures need a global standard</strong></p> In short, the ISO 20022 implementation process is at risk of creating a variant of the problem Andrew Tanenbaum identified as a major obstacle to the successful networking of computers: “The nice thing about standards is that there are so many of them to choose from”.</p> The present degree of variation is causing connectivity problems and additional costs for global users of market infrastructures. “We need to be clear about the problem we are looking to address,” as Arthur Cousins, the former chief executive officer of the International Payments Framework Association, has explained. “The global financial institutions are facing the problem of version proliferation.” </p> It is because it is creating problems for users of market infrastructures that achieving consistency in implementation of the ISO 20022 messaging standard is so important. The ultimate aim must be for customers that interface with multiple market infrastructures around the world – whether they are central banks, clearing houses or CSDs – to be able to do so in a consistent fashion. “50 flavours of ice cream is fine, but not for standards,” says David Renault, head of STEP2 services at EBA Clearing.</p> Since market infrastructures are the source of the problem of variation, it might seem counter-intuitive to argue that it also makes sense for them to take the lead in solving the problem. However, this responsibility must fall to the institutions that are taking the lead in the adoption of the ISO 20022 message standard - and that means the market infrastructures.</p> Market infrastructures must lead the campaign for consistency in ISO 20022 implementation</strong></p> Given this demonstrable leadership role, market infrastructures are the obvious leaders of a global campaign for greater consistency in the implementation of the ISO 20022 standard as well.</p> In April 2015, market infrastructures agreed to work with SWIFT on a four-fold strategy for enhancing the level of consistency.</p> First, a common platform will be provided for the publication of information on messages implemented, new versions of messages, and new version release cycles. Secondly, the use of harmonised global market practices will be promoted by and to market infrastructures operating in the same business domain, whether it is payments or securities. Thirdly, a common standards release cycle, aligned with existing financial industry processes, will be agreed and promulgated. Fourthly, implementation support will be provided to users of market infrastructures, especially in the fields of testing and connectivity. The below chart illustrates the four elements of the strategy.</p> The elements of the ISO 20022 consistency promotion strategy</strong></em></p> </p> This four-dimensional strategy aims to bring consistency to the implementation of ISO 20022 in a way that benefits users without sacrificing the flexibility market infrastructures need to deal efficiently with their own participants. It acknowledges that differences in market practices are sometimes necessary to take account of local regulatory and tax regimes and other individual circumstances.</p> But the strategy is also based on the knowledge that local variations are often no more than accidental: a result of independent groups specifying different ways of using the ISO 20022 standard to achieve the same objectives. “All markets have their unique aspects,” as Richard Dzina, a senior vice president at the Federal Reserve Bank of New York points out. “But variations in practice that threaten harmonization objectives need to be classified as ‘convenient’ or ‘essential,’ with those in the ‘convenient’ category subject to greater scrutiny.”</p> Market infrastructures support the case for a new approach</strong></p> Market infrastructures are enthusiastic about the potential of the programme to achieve harmonisation. It will be the subject of further discussion at Sibos 2015 in Singapore in October 2015, but a course towards harmonisation of the implementation of ISO 20022 by the market infrastructures of the world is now firmly set.</p> To adapt the metaphor used by David Renault, the market infrastructures of the future will have fewer flavours of ice cream to choose from, but the ice cream they do have will be of higher and much more consistent quality.</p> </p> The full version of this article will appear in the upcoming edition of the MI Forum Magazine – which will be available at the Market Infrastructures Forum </a>at Sibos 2015 Singapore. The magazine will also be published on swift.com following Sibos.</em></p> This topic will be discussed in detail at the Sibos workshop ‘Driving the industry towards a truly global ISO 20022 standard’</a>.</em></p>