BT Secure Messaging Solution Looks A Clear Winner

 

As Europe continues to evolve as a single financial market the securities industry is struggling to bring harmony into its post trade operations. MiFID has been very important in creating the potential for a single securities market but is incapable of completely fulfilling its objectives without fundamental changes in post trade operations of both buy side and sell side enterprises.

 

With any number of new trading venues flowering across Europe the choice of execution has never been greater or more complicated. This fact alone is putting untold pressure on clearing and settlement operations across the securities market. For most domestic markets within the EU the supply chain has been created from historical facts rather than a clear design for operational cost and risk efficiencies. Replacing or more likely evolving these domestic supply chains into a new modern structure meeting the European political ideals of a single capital market, is easier said in Brussels than achieved, in a highly competitive market under duress from the financial crisis. However, the good news is that the technical solutions are already here and ready to be implemented.

 

The European communication infrastructure between wholesale banks is dominated by SWIFT but significantly this is not the case in the retail stock market or with the corporate issuer. The complications are illustrated best in the UK which accounts for an estimated 40% of the transactional volume across the EU and over 60% of the value.

 

The UK stock market was foundering in the early nineties as the doomed Taurus project designed to automate the settlement of UK stocks was replaced by a more radical solution in CREST.

 

The CREST design and implementation was managed by the Bank of England in the guise of one of its finest project managers Iain Saville. Despite the ‘backs to the wall’ situation most UK financial institutions were in at the time’, the vast difference that the CREST solution offered, created a perfect environment for Iain Saville and his newly assembled team of eclectic geniuses to introduce the most fundamental changes in the structure, procedures and processes which the UK or any other sophisticated stock market had ever undertaken. The result could have been catastrophic but history shows it was one of the last century’s most successful projects that totally changed forever the operational capabilities of the UK financial markets.

 

The plan included CREST becoming not just the settlement system for equities but all financial products. The system also became inclusive of market firms and investors who were able to connect and communicate directly for settlement. Under the CREST system, banks could intra-day manage risks of CREST users and the Bank of England could monitor performance and ensure financial liquidity. The UK supply chain from the issuer down had been reduced and transactional costs and risks dived to unforeseen low levels. Even the most positive of CREST people had to be overwhelmed by the success of the system and the audacity of its design to solve the UK problem. When the CREST solution was implemented it immediately put the UK years ahead of the rest of Europe who were still struggling with their domestic problems and where political protectionism was rife.

 

CREST was subsequently acquired by Euroclear the leading Clearing and Settlement Company and system in mainland Europe. From the outset it was obvious that the Euroclear system and CREST were miles apart in design and a harmonisation project was instigated. Overall it was Euroclear changing to fall in line with CREST rather than the other way round but CREST was also going to be enhanced during the process further building on its outstanding foundations.

 

When CREST was designed it included a choice of networks for users to communicate directly with it. The choice being either BT (Syntegra was created by BT at the time but since rolled back into its parent) and SWIFT.

 

A push for market share was commenced by both BT and SWIFT with both offering their own ideas of system solution but at the time it was equally important to estimate message costs. This estimate was extremely difficult as the majority of the UK retail market had never been confronted with electronic messages and had no way of accessing this cost and messages of course would become a very important factor in operations.  

 

At the end of the day the UK market mostly gravitated to BT with only Banks who already had SWIFT connections, staying with SWIFT and thus a split in the UK market was established. Remember this was just a few years before the Internet began changing businesses and lives and only a few years after SWIFT moved in to the Securities Market.

 

This split is important to recognise as the scenario had been established that leaves us today with the majority of UK securities transactions settling in CREST over the BT network rather than SWIFT making it difficult for the UK to harmonise with the rest of Europe.

 

The changes we are now seeing in the European markets therefore have to be inclusive of both BT and SWIFT as it’s fair to say that it’s unlikely that a BT user will switch to SWIFT.

 

BT’s superior technology and their managed service operation is top notch and it’s highly unlikely that any financial services firm is going to give this up. Indeed the recent presentation from BT and some of their software partners indicates a high degree of enthusiasm to push further for new customers. But could BT start winning business in continental Europe and turn customers from SWIFT? It may not be far fetched if any financial services firm bases their decision on technology and costs.  Therefore, the future should not only include these networks but feasibly even more commercial suppliers in a global context.

 

The financial crisis is certain to cause much reshaping of market structures which have proved to be ineffective in the past and it should open up possibilities for BT as a result.

 

Is this possible for BT? Certainly BT’s reach extends too many of the corporates worldwide and through its acquisition of Radianz already has a significant presence in most of the dealing rooms worldwide; a fact that SWIFT must glance enviously at, as they struggle to break out of their industry cooperative straight jacket. 

 

The interaction and connectivity between network suppliers is really what customers want. It should not matter what network each financial services firm uses, the securities industry, through the use of messaging standards, should open up both domestic and international markets to competition between network suppliers and bring about greater efficiency and reduce costs while increasing industry wide STP. The issue of non integrated networks is similar to the problems in the early days of mobile networks and a solution was found bringing an explosion of new customers and reduced costs. We must now look for a solution that consigns messaging as a commodity and enables the network supplier to innovate new technical and service products. The old fashioned idea of hard coded structure messaging could possibly be replaced through any of the many XML derivatives, which would enable Corporate Issuers come closer to the market and the market to move closer to other relevant services such as accounting and legal. BT appears to be not only in prime position to lead their customers towards a new age of connectivity but also to demonstrate to the world that commercial networks have an important role in the redesign of financial markets as we recover from the financial crisis. 

 

To summarise, through the benefits of message standards, the solution for financial markets is to establish network interconnectivity and commoditise messaging standards, building greater choice for the consumer and more competition between networks. To a degree choice already exists with ISO15022 and ISO20022 able to be delivered over any network chosen by the financial services firm. However, there is a significant monopoly issue with SWIFT as the ISO agent in financial services that effectively controls the markets to the benefit of the banking owners. This appears odd in an industry where monopolies are often being pulled down and where SWIFT remains part of the problem as well as part of the solution.

 

The Euroclear harmonisation project is moving steadily toward conclusion and each financial services firm in the UK and Europe will have to start considering now their communication architecture and how they can best take advantage of the benefits that are forthcoming. They need to look closely at their systems architecture and question how capable is their technology to support their business in the future. Difficult as the financial markets are bound to change through legal and regulatory pressure as well as the introduction of new market structures. It appears that for most FS firms they are between a rock and a hard place with changing business requirements having to be accommodated and where maintaining their legacy systems will be attractive. This has to be avoided and the bigger picture kept in focus.

 

BT are working with its software solution partners to provide the answers and give direction to its customers as this vitally important period in UK and European development is commenced. I was particularly impressed by the presentation from Fiona Hamilton, Senior Manager, FS Standards Practice Group of Progress Software at a recent BT briefing. Progress has real relevance to the harminisation project as their system can drag legacy systems within financial services firms into the 21st Century.

 

The harmonisation project is cross industry impacted and will have a cost bearing in both 2009 and 2010 that needs to be factored into annual budgets. Failure to plan today for the future could jeopardise business operations as well as opportunities in the future.

 

There are many different industry message types that could ultimately by condensed in the future, as a result of the harmonisation and this could eventually involve some decommissioning of legacy functionality, which is long over due for replacement and is already very risky. So we can anticipate the next phase of post trade operations to be as radical as the first phase that I like to think started with CREST.     

    

By Gary Wright MSI