Adoption of ISO 20022 in Transaction Reporting

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Despite being a relatively new standard, adoption of ISO 20022 in Transaction Reporting is gaining increasing significance and traction within the world of European regulatory reporting. ISO 20022 is the successor to ISO 15022 and at the risk of revealing my age I recall implementing ISO 15022 standards for SWIFT messaging when I worked at Blackrock many years ago.

Adoption of ISO 20022 in Transaction Reporting

As with ISO 15022, SWIFT is one of the main proponents of the ISO 20022 standard – calling it “The standard of the future”. ISO 20022 is not limited to just the SWIFT network though and is described by them as “A global and open standard”, that “can be used by anyone in the industry and implemented on any network”.

 

So what exactly is ISO 20022?

ISO 20022 is an XML schema or language for the “electronic data interchange between financial institutions”. In non-technical terms it’s a map of what fields need to be populated in what sequence, and what data elements can be used. The ISO 20022 schema is therefore a recipe where different groups can work together to define and prescribe the exact fields and values that are permitted for each field in order to completely define a ‘message’. This message format once defined is the standard template that must be followed in order to accurately submit that message type.

In Transaction Reporting the message type is essentially the report to be submitted to the regulators for each transaction. For example there is a message type defined within the ISO 20022 message library for submitting a MiFIR transaction report. This message specification details all the permitted XML data elements and tags required to populate the 65 fields required for transaction reporting under the MiFIR RTS (Regulatory Technical Standards) issued by ESMA.

Let’s look at an example. In the MiFIR spec for ISO 20022, the XML block for the fields relating to ‘Buyer’ are defined as starting with the <Buyr> tag. Different values are permitted for identifying the buyer such as LEI (Legal Identifier Code) or MIC (Market Identifier Code). So if the XML block that starts with <Buyr> has the tag <LEI> populated then we know an LEI is being used to identify the Buyer. Relatively straight-forward for a machine readable language.

This ability to define what fields come in which order, the relationship between different fields, and the formats or values that are acceptable is a recipe well suited to transaction reporting. Such clearly defined standards harmonize the data and provide better, more complete data. That’s the theory driving why we are seeing the increased usage of ISO 20022 by European regulators. 

 

So ISO 20022 is like FpML then?

Yes and no. Both are XML (Extensible Markup Language) schemas,  and both are firmly directed towards financial markets usage. FpML’s full name is Financial Product Markup Language. Both contain many similar characteristics. This is not by accident either as ‘interoperability’ is one of the principles driving the development of both protocols.

They differ however on a few key considerations. FpML was developed by the banks and financial community to represent OTC derivatives. ISO 20022 by contrast covers a wider range of asset classes and financial instrument types. FpML is a more verbose message schema with many different accepted structures permitted for representing similar data elements, whereas the ISO 20022 schema should in theory define the message structures more rigorously and impose a tighter definition around how the messages are constructed.

The ISO Standards Evaluation Group (SEG) have made no secret of the fact that in time they hope that ISO 20022 will replace the need for FpML and other standards such as FIX. A presentation from the ISO 20022 Registration Authority stated “Long term we want one standard, but in the interim several standards need to co-exist”. Whether the people at ISDA (that run the FpML working groups), FIX and indeed their clients (that have these standards firmly entrenched within their infrastructures) agree remains to be seen.

 

So ISO 20022 is being used in MiFIR?

ESMA has mandated for MiFIR that transaction reports submitted to the NCAs (the National Competent Authorities or local regulators in the EU countries) must be submitted in ISO 20022. Under MiFIR firms have the choice of reporting to an ARM (Approved Reporting Mechanism) or directly to an NCA. Any firm reporting directly to an NCA must, under the legislation, submit these reports in ISO 20022. The ARMs also must submit their reports to the NCAs in ISO 20022. The ARMs however are still free to accept submissions in formats other than ISO 20022. But if they do so then they must accurately convert these messages to ISO 20022 in order to deliver them onwards to the NCAs.

So where else are regulators using ISO 20022?

The two SFTR consultation papers published in March and September by ESMA went even further with the adoption of ISO 20022. All the transaction reports sent to ESMA and the NCA’s must be provided in ISO 20022 format. This follows the MiFIR model as ISO 20022 must be the format the regulators receive. But SFTR is closer to EMIR in structure as all the firms are obliged to report to a TR (Trade Repository) rather than an optional ARM. The TRs then having the obligation to provide all the reports to the relevant regulators. The bar is raised for SFTR as ESMA has mandated that all firms must report to the TRs using ISO 20022. For the first time the legislation is mandating that the whole reporting process must be done using a single schema.

Assuming that SFTR transaction reporting is implemented as per the consultation paper, then for the first time the regulations will require a complete end-to-end use of a common XML schema throughout the chain from reporting firm to infrastructure to regulators. It could be argued that regimes like MMSR (Money Market Statistical Reporting) already use ISO 20022 end to end but the key difference is MMSR involves the firms reporting directly to the ECB. The evolution in thinking with SFTR is that the regulators are imposing the format before and after the infrastructure (the TRs) to increase consistency.

ESMA’s aims here are fairly straightforward to see. By implementing a common standard across all the reporting firms, TR’s and the NCA’s - the data will be significantly harmonized with fewer reporting discrepancies due to poor formatting or differing interpretations around what values are permitted. They state as much in the consultation paper:

“A harmonised XML schema should be defined in order to ensure full standardisation of the reporting to be submitted to the TRs. Such standardisation will enable TRs to aggregate and provide data to NCAs without unnecessary data processing or transformations, thus limiting the recurring costs and reducing the risk of incorrect manipulation of the data.”

As an ex-employee of a TR (and one who is very proud of the work we, our clients and indeed the other TRs achieved in getting EMIR reporting live) I read the above with mixed feelings, since it implies that incorrect manipulation of data occurs at the TR.

In fairness ESMA acknowledged some responsibility with the next statement in the CP:

“when a common XML schema is used, basic data quality validations can be embedded in that schema, allowing for the first verification of data when the reporting counterparties generate their reporting. It will also ensure that, to the extent possible, market participants are provided with the comprehensive and transparent information on the reporting requirements as soon as the reporting regime is defined, rather than through ex-post additional guidance.”

For “ex-post additional guidance”, read the many EMIR Q&A revisions, along with the ESMA Level 1 and Level 2 validations; ESMA is clearly drawing on lessons learned through the EMIR experience. In terms of effort and future project budgets all round, this makes a lot of sense. Get the schema clarified in as much detail as possible ahead of reporting in order to mitigate against the extent that it may need to be revisited later.

 

Adoption of ISO 20022 in Transaction Reporting - In Summary

In the few years since the implementation of EMIR reporting we have seen ISO 20022 increasingly adopted by ESMA for transaction reporting. EMIR reporting itself had no ISO 20022 element until ESMA introduced the TRACE programme. TRACE is the project between ESMA, the TRs and the NCA’s to build a common platform where essentially an NCA can send one data query to several TRs and receive a common format back. That format is ISO 20022-based. MiFIR/MIFIDII had ISO 20022 from the start as the only acceptable format for ARMs and direct reporting firms to send transaction reports to the regulators. MMSR and the UK equivalent SMMD both have ISO 20022 as the only acceptable format but these regulations involve reporting directly to the Central Banks and don’t have the infrastructure element of TRs or ARMs. SFTR therefore is the first European transaction reporting regime that involves a wholesale usage of ISO 20022 as the only format the firms can send to the TRs and the only format the TRs can send to the regulators.

It will be interesting to see whether other regulators outside Europe start to adopt a similar approach. The CFTC bemoaned the lack of a common standard in their consultation paper earlier this year (http://www.cftc.gov/idc/groups/public/@newsroom/documents/file/specifica...). It’s probably fair to assume that other jurisdictions (especially those that have dual-sided reporting such as ASIC) will be watching with interest to see whether the SFTR model improves data quality and harmonization. Time will tell. But the following statement within the ISO 20022 newsletter issued by the ISO 20022 Standards Evaluation Groups (SEG) seems to point towards this:

“ISO 20022 candidate messages will be developed to address regulatory reporting requirements in the UK, the EU, and the US. A subgroup of the Securities SEG will be formed to address these. These new messages will create an opportunity to further interoperability of existing derivatives messages with ISO 20022. (Resolution 15/336 – Derivatives SEG)”

According to the www.iso20022.org website the members of this Derivatives SEG group includes representation including the CFTC, the US Treasury Department and the Bank of Japan. I was intrigued to not see more regulators on the list. But then again, ESMA and the ECB are not on this group and that hasn’t prevented them from adopting ISO 20022 as their reporting standard.


This article was first published in edition 8 of Rocket, our magazine. Download available Rocket editions here, and save your up to date address in your profile to to indicate your interest in receiving a printed copy of the magazine. Copies are also available to purchase and subscribe to via the shop.

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