Financial messaging standards: how many is too many?

Financial services firms have used electronic messaging services to do business for many years. Formats and syntaxes have evolved over time, with messaging now used across the entire value chain of financial transactions.

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Date published
December 23, 2015 Categories

Financial services firms have used electronic messaging services to do business with each other for many years. Messaging formats and syntaxes have evolved a great deal since the days of the telex – which industry veterans may still remember – and messaging is now used across the entire value chain of financial transactions.

Among the core users of messaging standards are corporate treasury departments, which utilise these standards to give payment instructions to their banks. However, the messaging landscape has become crowded and general consensus is that treasury management systems (TMSs) are frequently overburdened by operational risks and a lack of efficiency; often due to outdated legacy technology.

This is further exacerbated by the sheer abundance and variety of messaging standards. Many long-established messaging systems are now supplemented by bespoke, closed message formats that have been adopted in parallel on an ‘as-needed’ basis – contributing to the complexity of the structure.

In the never-ending quest to lower costs, improve efficiency, reduce risk and increase competitiveness, many different ‘open’ message standards have also emerged in different markets. These include the well-known ISO 15022 and ISO 20022 financial standards for securities settlement and payments, the Financial Information eXchange (FIX) for electronic trading and Financial products Markup Language (FpML) for over-the-counter (OTC) derivatives.

While it could be said that choice is a good thing, many in the industry hold a different view. Indeed, the variety of standards today means financial firms, especially those spanning different jurisdictions, must deal with multiple messaging platforms – each having its own service and operating requirements. As existing standards are adopted across different sectors, they grow to accommodate additional market requirements. Regulations have further spurred the proliferation of messaging standards, by mandating the use of a specific standard to conduct business in a particular market.

So not only are there different standards to deal with, but also multiple maintenance issues associated with aligning systems with each new standard as it is updated.

Why less is more

The difficulties associated with managing numerous systems has spurred a drive within the sector to reduce the number of financial message standards in use. Indeed, evidence suggests that the industry has started to focus on ISO 20022 as the universal standard for payments messaging. Yet even this is implemented differently in individual jurisdictions. It will be some time before it truly goes global.

On the face of it, firms that need to process financial messages should benefit from the adoption of open standards and the consolidation of different message formats. Reducing the number of financial message standards means less need for different back-office systems, while allowing wider collaboration and market participation.

But how far will the consolidation of standards go? Certain legacy systems – in the post-trade world in particular – have functioned without problems for many years, so why modify them now? Any change is, after all, costly and potentially introduces risk. Furthermore, standardisation is viewed by some parties as compromising their differentiation in the market.

Corporate payments is, however, one area that would undoubtedly benefit from the adoption of a single, comprehensive message standard. Corporate treasury departments have typically been slow to introduce straight-through processing (STP). As the complexity of treasury reporting requirements grows, corporate treasurers are increasingly looking to adopt industry-wide financial messaging standards that allow them to communicate electronically with their banking partners, while improving efficiency in their payments and foreign exchange (FX) functions.

With last year’s introduction of the single euro payments area (SEPA), new regulations and immediate payments services extend this demand. While SEPA data formats do not constitute an exclusive European standard, they are based on the global ISO 20022 message standard. So will the banks respond in a consistent way, allowing treasurers to manage multiple banking relationships? Or will they continue to promote their own proprietary systems, making it difficult for corporate treasurers to switch banks? Co-operation from all parties is required to accommodate such a change.

Migrating to a standardised messaging platform is a huge challenge for firms. It is therefore vital to have the right foundation on which to build that platform: one that can support diverse operations as they work today and enable a migration to new standards in a controlled manner.

There are ways for firms to consolidate messaging volumes without having to entirely redevelop their back-office systems. Using an established underlying network that provides the essential characteristics of secure, reliable, irrefutable message exchange without any dependency on message format or content is one logical option. By combining such a network with other tools to facilitate data integration and message translation between different standards, firms can link disparate functions into a single, harmonised messaging strategy.

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