ISO 20022 adoption poses challenges and presents opportunities for the securities industry
ISO20022 as a financial messaging standard is based on business data dictionary with different layers of business concepts, logical messages and syntax. This offers enhanced data structuring, user extendibility and ease of technology development over prevalent ISO 15022 standards. It has gained significant traction in the payments space where it has enabled improved compliance, sanctioned screening and open banking. Beginning November 2022, the payments community will start migrating cross-border payments and cash reporting messages to the ISO 20022 standard, with a target completion date of November 2025.
However, the situation is different in the securities industry. ISO 15022 messages for corporate actions and securities settlement and reconciliation are already well-structured and based on a data dictionary. As recent data from SWIFT shows, two-thirds of the total securities traffic exchanged over its network still uses the older ISO 15022 standard, and out of the 6,000 entities that use SWIFT, fewer than 300 use ISO 20022.
The members of International Securities Services Association (ISSA), including IHS Markit, formed a working group to assess the state of adoption of ISO 20022 in the securities industry. The group recently released a report that assesses the state of adoption, including its challenges and opportunities.
Here are the key takeaways from the latest report.
The industry remains unconvinced by the business case
A switch to ISO 20022 would incur significant costs as it would require industry participants to upgrade their technology infrastructure and undergo a rather large transformation exercise with many having to rewrite their data models.
Much of the business case challenge has to do with the effectiveness of the current standard, ISO 15022. While ISO 20022 represents a considerable improvement in terms of providing more granular and structured data along with above mentioned advantages, ISO 15022 can already support a high degree of automation and a 95% straight-through processing rate in key processing areas such as settlements. For much of the industry, the marginal benefits of ISO 20022 are outweighed by the costs. As a result, industry participants simply do not see a clear business case for full adoption at present.
Adoption is driven by limited external pressures
In absence of a compelling business case, current adoption levels are primarily driven by external pressures rather than internal incentives.
Regulations and standards such as the Shareholder Rights Directive II, SCoRE standards driven by Eurosystem Collateral Management System, the Central Securities Depositories Regulation and the Securities Financing Transaction Regulation have forced securities firms to embrace ISO 20022 to stay compliant. The adoption is highest in the meeting and shareholder disclosure space, due to both Straight Through Processing advantages and the Shareholder Rights Directive II regulatory pressure. The use of ISO 20022 within market infrastructure entities such as the US Depository Trust & Clearing Corporation and the EU TARGET2-Securities settlement engine has also spurred adoption amongst the financial institutions that have to connect to these market infrastructures.
But these external pressures are limited. The divergence in regulatory impetus across different markets and the lack of an overarching global regulator has resulted in largely uncoordinated approaches. As for the investment managers and asset owners who make up the industry's customer base, they are more invested in gaining access to real time data and actionable insights, delivered through open platforms, interoperability and APIs—which is already being achieved through proprietary APIs and mechanisms today—than in specifically demanding the adoption of ISO 20022. This also points to an opportunity to drive the adoption of 20022 standard, by leveraging it for APIs and preventing divergence in how data will be exchanged with the use of these APIs.
ISO 20022 adoption brings clear industry benefits
The lack of appetite for a wholesale switch to ISO 20022 should
not be an excuse to halt efforts to generate adoption momentum. The
ISSA working group believes there are significant opportunities
that the industry can realize by accelerating adoption.
Improving automation. Although ISO 15022 already provides for a considerable degree of straight-through processing, there is room for improvement, especially in areas where automation and client satisfaction are lower, but risk is higher. A few examples of such areas include general meetings, corporate actions, and account opening. By enabling a better structured data, ISO 20022 can create new business value by automating more complex, manual processes. Corporate actions automation appears to be the biggest opportunity for ISO 20022 adoption.
Supporting technology innovations. Helping the securities industry build interoperable APIs based on a common suitable standard such as 20022 will prevent further fragmentation in the way firms deliver on-demand data to their customers and increase interoperability and reduce overall investment in the industry. Distributed Ledger Technology (DLT) supporting asset tokenization is another area where ISO20022 can be used to devise new interactions and support interoperability between financial institutions. These are just a few examples of innovations that are already happening - but whose effects have yet to be truly felt on the larger global landscape. As these innovations take hold and scale, the need for a common data sharing standard for interoperability has never been greater.
While it may be a long-term investment, early adoption of ISO 20022 enables securities firms to lay a foundation for future market innovations so that they can be ready to capitalize on them sooner and more fully.
Next steps in the industry's adoption
The good news for forward-looking securities firms is that technology providers already have the capability to support the ISO 20022 standards for migration in areas of corporate actions and meetings which can produce the biggest business benefits. Further, platform upgrades are constantly happening and are part and parcel of the business environment. As the working group notes, these can serve as the perfect opportunity to adopt the more flexible ISO 20022 standard - and reap the attendant benefits, including processing efficiencies and early access to industry-wide innovation by leveraging modern open architecture, API and cloud based platforms for corporate actions and securities processing.
Despite a lack of appetite among securities participants for a "big bang migration", the ISSA working group concludes that momentum can be driven by focusing on the above highlighted high benefits areas, industry standards and collaborating to define a set of standardized utility APIs.
How IHS Markit can help:
IHS Markit's corporate actions technology solutions and managed data services enable firms to transform their corporate actions infrastructure with high quality validated corporate actions data delivered through ISO 20022 APIs and a modern, scalable cloud & API enabled platform supporting latest ISO 20022 standards
IHS Markit provides industry-leading data, software and technology platforms and managed services to tackle some of the most difficult challenges in financial markets. We help our customers better understand complicated markets, reduce risk, operate more efficiently and comply with financial regulation.
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