Why Standards Matter

Renewed focus on the creation of an international business entity identifier (IBEI) has put the International Organization for Standardization (ISO) debate back in the spotlight. Market participants have worked on creating an IBEI for a decade and the disappointment was huge when the proposed identifier was stalled by the ISO last year. In recent months, there has been significant interest in finding alternative solutions to the problem, and Swift is currently reviewing the business case for IBEI.

But progress is slow. Many professionals now admit that they do not expect to see an IBEI being introduced during their working life. Although the ISO process is for many seen as the ideal way to create standards for the industry, as ISO standards are recognized internationally, the process is certainly not recognized as delivering results overnight. So is it worth waiting for?

Most vendors and user firms agree that ISO standards are necessary for reference data. In fact, MiFID has made the use of many ISO standards mandatory for reporting purposes, for example. Nevertheless, consensus among the players involved is not always easy to achieve.

London-based Bob Cumberbatch, director of European business lines at data vendor Interactive Data says: "One of the difficulties in achieving consensus on standards is the complex process. Each participant brings their own knowledge, experience and expertise and more particularly their own unique perspective."

In terms of IBEI, the ISO process was stalled when several countries voted against the approval of the standard. The differing requirements and opinions of various business areas do become a challenge. "Think about the different kinds of banks, the different kinds of market players and multiply this diversity by the number of different countries or different cultures. Getting a quick consensus is quite utopian," says Zurich-based Nourredine Yous, head of data quality development at data vendor Telekurs Financial and chairman of ISO TC68/SC4, the ISO body dealing with standards for the securities industry.

The working groups creating the standards must take all these different views into account and accommodate all firms, countries and cultures to succeed in the ISO process. And just understanding the requirements and potential future requirements takes time. Cumberbatch says that "often the heart of the matter revolves around agreeing a common suite of definitions. Conflicts, if any occur, may need to be resolved to stop the process stalling."

Adoption process

While the ISO process is long, it can take the industry much longer to finally adopt that approved standard. With ISO standards having a regular five-year review process, the time-frame is key "to ensure the content of the standard adequately reflects the needs and practices of the market. However, amendments to a standard or the introduction of a new standard take considerably less time - complemented by an ISO fast-track procedure," says Dan Kuhnel, chairman of the Association of National Numbering Agencies (Anna).

So time is the price paid for trying to reach a consensus among market participants. And it is often said that although it would be possible to shorten the process, it would not be beneficial in the long term. According to Yous, everybody agrees that the day-to-day business is the main priority. Standards work is often something market participants do on the side. "Standards are looked at as important but not as extremely urgent. It is maybe not the worst thing to sacrifice timeliness in favour of worldwide consensus," he says.

Other players also agree that the ISO process needs to take years. Cumberbatch says shortening the time-frame could have a negative impact on the ISO process, as it would potentially reduce the level of thought and understanding that would go into the definition and application of the standard. "One of the risks of shortening the time is that the standard might not get the full consideration it needs, which could result in the standard becoming obsolete or requiring major revision," he says.

But some might argue that it could easily be out of date by the time it becomes a standard. Nonetheless, the people involved in the process suggest the thorough work on how the standard will be designed and how it will function ensures the standard will still be relevant to the market. The effectiveness depends on the thought that goes into the standard in the first place, says Cumberbatch. "The aim of any standard is to meet an immediate need and to reduce the risk of obsolescence in the near term. Therefore, sufficient time is required to meet both these needs. Additionally, flexibility must be built into it to avoid compulsory changes to the resultant standard," he adds.

Still, this is not to say an ISO process always lasts for decades. Brussels-based, Jean-Marie Eloy, senior manager, Standards, Swift says not all ISO projects require long periods of time to be concluded. The Structured reference to remittance information (ISO/DIS 11649) proposal, for example, didn't undergo a long process of preparation, he says. The proposal, issued in June 2007, was approved for development by the ISO countries in September of the same year. In April 2008, a Draft International Standard (DIS) was issued to be approved by the ISO countries by September 1, 2008. "The approval process may be finished before the end of the year so in total it would take one and a half years to get a standard published. It's not yet adopted by the industry but I think this particular standard will get immediate momentum. The standard allows an automatic reconciliation of the payments by the corporates, and countries are already engaging," says Eloy.

For IBEI, lack of popularity is not a problem either. So far, one of the main issues has been that the most suitable organizations for distributing and maintaining the identifiers have not been able to establish a strong business case for the project. Cumberbatch says in the case of the IBEI, maintenance and costs are likely to be a challenge as IBEIs are likely to change frequently. Changing company ownerships, mergers, acquisitions and changes in firms' legal entity structures will all have an impact. "I believe our industry is both fast-moving and innovative," he says, explaining that the IBEI has to cater for this. Anna's Kuhnel also says there are issues over revenue, uncertainty about the short-, medium- and long-term benefits and associated system and development costs to implement the identification codes.

In fact, while the allocation of a number to an entity is an ongoing challenge for the parties involved, the high costs and necessary maintenance further complicates the issue. "Not only are the numbers required to be assigned in shorter time-frames but data quality is key to ensuring database accuracy," says Kuhnel. The large volumes of data need to be maintained, date records must be kept and security must be high.

Yet, it is not all doom and gloom. Costs could be cut. But so far, Yous says the industry lacks the appropriate models to do this. "If we had appropriate models to share the costs of the standardization among all market players, the costs would be acceptable for everybody. However, with market and customer pressure, the current costs are worth the investment," he says.

But even if they are worth it, how sure is the market that this is really what customers want? It is not only the ISO approval process that takes time, but the adoption of ISO standards has also historically proven to be slow. In terms of corporate actions, asset managers still complain that some custodians are not ISO 15022 compliant, although the main focus in the market now is preparing for the next standard - ISO 20022.

The same is true for the international security identifier - ISIN. Many professionals complain that they would have hoped to see a wider adoption of this standard by now. "In the securities industry it sometimes takes many years before a standard is widely implemented. The market players react as soon as they feel the pressure from the market," says Yous.

At the moment, it certainly does not seem as if there is a lack of pressure on financial institutions to reduce risk and improve data quality. With recent turmoil in financial markets, firms are focusing on finding solutions to data issues that can provide immediate benefits. And this is where standardization becomes important. "The global adoption of available standards brings in my opinion great benefits," says Cumberbatch.

But a global adoption will rarely take place straight away - there is usually a progressive adoption of ISO standards. "ISO doesn't have any authority to impose its standards, so it all depends on the attractiveness of the proposal and the commitment of the countries that propose and approve the standards," says Eloy. But what the industry can do is promote the standards and try to push firms in the right direction. Industry bodies and initiatives in the European framework, such as MiFID, the Giovannini Group, and the Single Euro Payments Area have encouraged the global application of ISO standards.

Even if initially the implementation is not global, it can act as a starting point. Eloy says "the ISO standards already issued can act as a reference for emerging countries that have no solution yet... instead of inventing their own domestic solution they would immediately have the possibility to implement an international solution that allows them to better communicate with other countries."

One of the most difficult and longest step of standards development and approval is to get the consensus of involved countries, as Eloy says everybody involved in the process will want to push their existing domestic solution to become the global standard to reduce the complexity of migrating their domestic solution to the international standard. "Good standards are those that take existing systems into account and/or limit the investment of each country when moving to the standard solution," says Eloy. The consensus and approval process is long, but critical: "These countries are the future users, if you don't consider the future users, if they don't agree that the proposed standard is something they can use, then there is no point in developing them, you will never get the buy-in, says Eloy.

And for IBEI, Cumberbatch says regular debate and discussions about the topic suggests the industry's needs are not currently being met. "If our industry did have an offering that met its needs, I don't believe there would be much discussion of IBEIs," he says.

So far some numbering agencies, such as Telekurs and WM Datenservice, actually provide an IBEI. But market participants want more. The availability of an IBEI is key and the goal is for all market participants to have access to a shared common identifier. "Coverage must be global, the 'I' in IBEI must be global and it must be very timely both in terms of allocation and maintenance. It must also be widely available for our industry to use," says Cumberbatch. And even if the allocation of the IBEI using the ISO 16372 standard is better than using none, coverage limited to anything less than global is not as much of a benefit as having a truly global IBEI," he says.

However, now that the IBEI process has started from scratch once again, it is up to those who have experience to demonstrate that the IBEI is feasible. But this is all the experts can do. It is up to the market to decide whether they want to use it, says Yous.

The adoption of a global IBEI might now finally be seen as an essential move forward, but there is still a long way to go. It is therefore the next generation that stands to benefit. Yous suggests the industry is asking itself the same questions about the IBEI as it did about ISINs 25 years ago. "Why did we need a common identifier for financial instruments worldwide? Today, the reasons are clear and the benefits are obvious," he comments.

But again, the adoption of ISINs has not been as widespread as many firms hoped. There has been a long-running debate about ISIN licensing (Inside Reference Data, December 2007), and because of this, Anna, the registration authority for ISO 6166 (ISIN) and ISO 10962 (CFI), has been cautious about taking on additional standards. This has also affected the IBEI process (Inside Reference Data, April 2007). The lack of a registration authority was in fact one of the reasons for countries voting against the IBEI standard. Anna declined to be the registration authority for the IBEI, as it did not want to take on further standards responsibilities until the ISIN issue was settled. Yous says "this is frustrating, because we have standards that are frozen because of the lack of a registration authority."

This represents a major setback for the full implementation of the standards. Eloy says "some standards require a registration authority to manage them on behalf of ISO. For example, if a standard proposes a format and allocation scheme for a new international code, it needs to also identify the organization that will allocate the codes according to the approved scheme. Without such a registration authority, the standard cannot be proposed for approval." Swift accepted to be the registration authority for several ISO standards such as the BIC (ISO 9362), the MIC (ISO 10383), the IBAN (ISO 13616), ISO 15022 and ISO 20022."

Luckily, the ISIN licensing debate is moving closer to being resolved (Inside Reference Data, April 2007) and organizations based on a consortium of firms are also seen as potential registration authorities for the long-awaited IBEI.

The IBEI standard might have been voted out of the ISO process once, but this is obviously not the end. Although many market participants want an ISO standard for business entities, this might not be the only solution. ISO standards have not always proved to result in higher adoption rates than standards issued by other bodies. So the outlook remains positive.

The two main challenges for securities standards

1. Every working group (WG) in charge of a standards project must ensure there is an excellent level of expertise among its members

2. Find registration authorities (RA) to take on responsibility for standards that require allocating for instance codes or any data item daily. The RA task often means a huge workload without a direct return on investment or equitable compensation

Nourredine Yous, head of data quality development, Telekurs Financial and ISO securities standards chairman.