Reference data continues to be a hot topic within the financial industry – and on top of the market data agenda for FISD. Over the past month:

• The industry has created a new Reference Data Coalition (REDAC) to facilitate coordination among the various reference data initiatives and to ensure that standards development is aligned with industry objectives. FISD is the Secretariat of REDAC.
   
• FISD is working with ISO 15022 XML Working Group 10 on the creation of a new reference data/corporate action Project Team. The goal is to develop a single list of normalized terms, definitions and relationships to populate an initial UML/XML repository.
   
• The London Stock Exchange has formalized and announced its plans to extend SEDOL to meet industry requirements for a market level identifier. The live date for the enhancements to the LSE Securities Masterfile (SMF) service is January 5, 2004.
   
• The London Stock Exchange has made a commitment to use MDDL for the XML version of its new security master file (SEDOL database). The Bond Market Association has made a commitment to use MDDL for its SMF portal project. Other entities are in the process of final evaluation of MDDL.
   
• The ANNA Service Bureau met with FISD members to review adjustments to the standard modular contract for access to ISIN data. The ASB reports that the final contract will be ready in February.
   
• FISD continues to be invited into discussions on reference data and its relationship to MDDL. Over the past two months we’ve met with DTCC, SIA’s Cross Border Committee, ISITC, the Boston Buy-Side User Group and the UK Reference Data User Group. In addition, we’ve made presentations at the WS&T reference data conference and at the Technology Council’s newsmakers conference.

Background

It’s of no surprise to anyone in the industry that the economic climate is forcing firms to retrench – meaning continued layoffs, IT reprioritization and restrictions on discretionary initiatives. Cost containment and operational efficiency will continue to be priorities within the financial industry. As such, the issues surrounding reference data – namely trade failures, trade repairs and settlement delays – are becoming increasingly important. User firms are clearly looking at solving reference data problems to reduce overhead, minimize exception processing, and increase front office efficiency.

According to the Tower Group, corporate action processing is still seen as a significant problem. Almost 80% of the firms surveyed cite “inconsistent, inaccurate and incomplete reference data as the major cause of internal STP failure”. According to the latest study, reference data is characterized as

• Decentralized (respondents had an average of 43 systems containing client and counterparty data and 37 systems containing securities data),
   
• Lacking automation (respondents average 58 FTEs to maintain reference data),
   
• Expensive (an average of US$3.2 million per year to acquire data)
   
• Causing operational risk (30% of trade failure is a direct result of inaccurate reference data) and
   
• A priority (reference data projects are now being considered a top or high priority by over 60% of respondents and 70% of the projects are either currently funded or will be in 2003).

The decline of GSTPA and T+1 has demonstrated that STP and securities administration automation are not solely about connectivity. Most of the problems are data related – and automation falls short if the data is wrong. The reference data discussion is about eliminating manual processes, reducing errors and making the entire transactions chain – from security set-up through settlement – more efficient. Reference data fuels STP and is a component of virtually every process within the firm … in the front office for sales, research, trading and order management …in the middle office for collateral management and regulatory reporting … and in the back office for trade confirmation, settlement and asset management.

As the industry continues to consolidate trading, IT and sales, the need for data standardization as well as a common understanding of data attributes will become essential. Settlement cycles are shrinking. Shorter cycles mean that more automation is needed. And automation needs accurate data that is compatible across multiple functions throughout the enterprise.

Larry Tabb (Tower Group) gave an excellent presentation on the outlook for reference data at the FISD General meeting.

Reference Data Coalition (REDAC)

Discussions about the link between reference data and STP automation are becoming pervasive. Consider:

• The Securities Industry Association (SIA) has formed a working group with The International Securities Association for Institutional Trade Confirmation – International Operations Association (ISITC-IOA) to examine the problems associated with multiple listed securities.
   
• The Securities Markets Practice Group (SMPG) has been dealing with these issues with SWIFT.
   
• The Bond Markets Association (BMA) portal project focuses on the challenges of bond set-up for initial offerings.
   
• The London Stock Exchange (LSE) and the ANNA Service Bureau (ASB) have been working to address issues associated with security identification numbers.
   
• The UK Reference Data Group (RDUG) has been working to define the strategic issues related to the problems of reference data.
   
• The Depository Trust Corporation (DTCC) has been exploring a host of reference data issues as well as its role in this arena.
   
• The CLS Bank is thinking about creating a directory for its settlement members to help with the problems of “static data.”
   
• TC68/SC4/WG10 is working on a new XML edition of ISO 15022.
   
• A number of vendors have been independently focusing on commercial responses to reference data requirements.

And there is more to come! Independent and uncoordinated activities are clearly not the best way of dealing with such a complex and multi-dimensional issue. Everybody involved in these activities has recognized that they need to be coordinated across all functions of the firm and all segments of the industry – on a global basis.

That’s the rationale behind the creation of the Reference Data Coalition (REDAC). The overall goal is to define the data elements, and the essential industry standards, needed to precisely describe assets and account entries required for global trade processing. The initial objectives are:

1. To ensure that data reference requirements for STP are well defined and clearly articulated to all involved parties, specifically related to multiple-listed and other “non traditional” securities. The goal is to resolve the information needed for instrument, client/counterparty, trade specific and accounting identification -- throughout the security lifecycle (creation, research, trade, confirmation, settlement, clearing, reporting) – as well as how it will be collected, disseminated and implemented by industry participants.
    
2. Evaluate and promote coordination among the standards activities affecting reference data. REDAC will help ensure that standards bodies are aligned with industry requirements and will help drive these standards toward implementation on a global basis.
    
   • Standards for identification -- including numbering schemes, instrument symbology, sector codes and business entity relationships required for unique and precise identification.
      
   • Standards for content -- to ensure that there is a common understanding of all reference data attributes needed to describe assets and account entries particularly within security master files.
      
   • Standards for communication – focusing on trade massages and standing settlement instructions.
      
3. Ensure that the operational challenges associated with implementation of solutions are well defined and viable – and ensure that the commercial models are not an impediment to global electronic commerce.

REDAC was officially launched on December 6, 2002. The first meeting of the REDAC Steering Committee is scheduled for January 29. REDAC is designed as an inclusive international forum facilitated by FISD. The chair of the REDAC Steering Committee is Steve Kelly (Goldman Sachs). Information about REDAC and the Terms of Reference document have been posted.

Reference Data and MDDL

FISD’s Market Data Definition Language (MDDL) is being positioned as the XML standard for security set-up as well as pricing. Over the past month, there have been a number of active discussions about – and member adoption of -- MDDL for security master file applications.

The objective of MDDL is to define all market data elements – including reference data and corporate actions -- for all domains in the financial industry. One of the core benefits of MDDL is that is allows firms to integrate multiple data sources and feed multiple applications without the need for data translation and data normalization. The creation of a common and shared vocabulary (with terms, definitions and data relationships) is a core outcome of the MDDL process.

FISD has been coordinating with the other XML specifications and is a participant in the cross-industry protocols activity being managed by BMA and FIXML. The number one objective is to avoid duplication of effort. One area that everyone agrees to is the critical importance of a standard vocabulary and the potential value of the ISO 15022 data field dictionary (DFD) as the central repository for that data. In fact, many of the entities working on reference data want to become “15022 compliant”

The 15022 DFD is an accepted standard for the transactions side of the business, but it does not do much in the way of defining the descriptive attributes of a security. This is an important missing element. In the absence of appropriate industry standards, firms often strike bilateral agreements on the meaning and use of proprietary codes.

Reference Data and 15022

FISD approached ISO 15022 about the process of integrating reference data into the DFD. We were concerned that if every entity currently working on reference data applications petitioned 15022 independently, we would wind up with a reference data mess of competing self-interests – and forget the overall objective.

The International Standards Organization (ISO TC68/SC4) agreed and is in the process of creating a reference data project team under the umbrella of the ISO 15022 XML Working Group (WG10). FISD has applied to become a direct “type A” liaison to ISO and will be part of an international working group on this effort. The mission of the project team is to come up with a unique list of reference data and corporate action data elements for integration into the 15022 DFD.

15022 Uncovered

The current edition of 15022 doesn’t support XML. It supports the creation of messages in the “enhanced 7775 syntax.” Only a small subset of reference data terms is included in the current edition of 15022. If entities want to be 15022 compliant, the terms must be added to the DFD. Once they are added, an entity will be compliant with the first edition of 15022.

The new (second XML edition) of 15022 introduces a UML-based business modeling methodology to define business needs and uses XML as the message/field syntax. The second edition is expected to be approved by the ISO process in 3Q03 with a new registration website implemented by the end of 2003. Work has already started under the umbrella of ISO 15022 XML Working Group (WG10) to populate an initial UML/XML repository.

All messages in the current edition will be “reverse engineered” into the new edition to ensure interoperability. Most of the securities industry has implemented the first edition, and will likely only move to the second edition as XML progresses as an industry standard.

WG10 has also launched a “pre-trade/trade” project team headed by FIX to define the 15022 XML compliant messages for this area. The plan for reference data is to go directly for a 15022 XML solution, rather than registering the reference data elements in the current 15022 DFD. The WG10 Project Team will be developing an agreed list of data elements to be registered in the new ISO 15022 XML Repository – including what’s currently defined in MDDL, in the current 15022 DFD, and in the few overlapping files that have been defined for pre-trade.

FISD is finalizing the 15022 XML project scope/work statement for reference data. Once it’s completed and accepted, FISD members will be invited to participate in the activities of the working group.

SEDOL Extension

The London Stock Exchange (LSE) has announced formal plans to extend SEDOL to meet industry requirements for a market level identifier. The live date for the enhancements to the Securities Masterfile service is January 5, 2004.

After consultation with FISD members, LSE has made some modifications to its original SMF proposals. According to the latest LSE service announcement, the SMF service will be enhanced to meet market demand for the following:

• Issuance of alphanumeric SEDOL codes with additional identification data including ISIN codes, allowing users to also identify securities at an issuer level.
   
• Timely code issuance for a wider variety of asset classes, including all global listed equities and fixed income instruments.
   
• Recognize the official places of listing for each security, making reference to all the markets within that country using the Market Identifier Code (MIC).
   
• 24/7 SEDOL code allocation via a web browser.

Details of the LSE proposal are documented in the November 7 FISD symbology report and are posted on the LSE web site.

ASB Contract

The ANNA Service Bureau (ASB) has been working on the creation of a single, modular contract for access to and usage of ISIN numbers. FISD members have been participating in that discussion as part of ANNA’s ISIN User Group. Final adjustments to the contract were discussed on December 18 and we expect the final contract to be ready next month.

The modular approach promotes a core license with separate addenda for NNA’s that currently require additional licensing terms. The modular agreement centralizes contract administration (to avoid complex or non-available bilateral agreements), creates a uniform template, promotes transparent pricing and data usage policies and provides a starting point for ongoing discussions about rights, obligations and usage requirements.

The overall objective of the ISIN User Group is to facilitate the discussion about commercial structures that simplify the acquisition, redistribution and usage of primary identifiers and support the objectives of T+1 and STP while continuing to protect the commercial requirements of the data originators. ISIN User Group members continue to make a distinction between two primary data types – (1) the unrestricted use of core ISIN (including all data elements required for unique identification) and (2) all other information including cross-references, fundamental information and any other enhanced data sets. Primary identification numbers (ISIN) are fundamental to business process automation and commercial structures should be designed to promote widespread access and usage of ISIN.

Conclusion

The global market data spotlight is clearly shining on reference data issues and its relationship to cost containment, interoperability and overall operational efficiency. FISD members should be paying close attention to these developments in that they will have an impact on virtually every dimension of the securities industry. The discussions are multi-dimensional – ranging from security master file applications to the new edition of ISO 15022 – and incorporate international standards processes related to both the definition of reference data attributes as well as those describing instruments and account entries required for trade processing.

FISD believes we are at a rare moment in our business cycle – where a number of related activities are beginning to converge. In addition, FISD (the organization) is well positioned to ensure that the data requirements for STP automation are both fully defined and clearly articulated to all involved parties. FISD intends on managing this discussion in an open and inclusive manner. As such, we encourage our members to make sure the right people within your organization are plugged into the process.

All interested members should make sure they are added to the new FISD reference data working group for notification of activities and developments. Details will be posted on the reference data section of our web site. As always, please don’t hesitate to contact me (p) 202-789-4450 (e) matkin@siia.net with questions, comments, rants or raves.