DTCC Connection

Most financial market infrastructure giants have adopted ISO 20022, and many of those who are not yet on board have agreed to do so by 2020. Within the mutually agreed technology messaging framework, and standard interface, the flow of information around global financial markets has not only gained traction, and improved efficiencies, but led to greater cooperation and security in cross-border transactions, and a reduction in operating costs for all parties involved.

The Depository Trust & Clearing Corporation (DTCC) has taken a leadership role in the growth of ISO 20022. Back in 2013, Daniel Thieke, DTCC Managing Director and General Manager, Settlement & Asset Services, gave the keynote at the Bank Depository User Group (BDUG) Annual Meeting. During his keynote, Thieke said that DTCC had (then) surpassed the 100 million mark (June 2013) for the number of ISO 20022 corporate actions announcement messages distributed to banks, brokerages and other financial institutions.

"We've grown exponentially since then,” Thieke said. “The latest figure is 2.6 billion. ISO, as a standard, forces the financial community to engage in constant dialogue which evolves over time, taking into consideration the way business is changing, and bringing the community together to agree on priorities and necessary changes, providing the rigor of consensus to the maintenance of the standard.”

ISO 20022 and Fintech
The plans to integrate and possibly include ISO 20022 within DLT are just beginning to be considered and the business rules and logic that are considered part of “Smart Contracts” are currently beyond the scope and capabilities of ISO 20022, according to Robert Palatnick, DTCC Managing Director and Chief Technology Architect. Further, he added, mining, cryptographic immutability and consensus are not specific to business rules and data, so the overall DLT architecture needs to mature to determine where those protocols need to be standardized. It might be at a lower infrastructure layer than ISO 20022.

As ISO 20022 sees wider adoption within the industry, the tasks ahead are to find coherence, not just in the representation of data, underlying and agreed definitions, and applicable rules, but also to consider newer concepts such as mining, cryptographic immutability and consensus mechanisms - not present in traditional and legacy interbank clearing systems.

Thieke acknowledges the risks inherent in doing this. “Now, with the emergence of newer technologies, we’re seeing a rush in the fintech space to be a first mover and get out there, and, unsurprisingly, that leads to some disconnect,” Thieke said. “Our concern is, just in the way that standards have helped make this world more connected, we want to make sure what happens with distributed ledger technologies, doesn’t run counter to that, bringing fragmentation.”

Palatnick agreed, saying that solid technology structural project management needs to be put in place.

“In the conversations I’ve been having lately, people have asked me why it’s taking so long - but collaboration at the industry level is hard,” Palatnick pointed out. “We’re working through industry standards at multiple levels. Let’s not forget, ISO 20022 was an improvement on what went before and that, in turn, was an improvement on the old SWIFT protocol - and all those were built on top of technologies that were relatively mature.

“Now you have a technology where people don’t have a solid definition on what the elements are, the new models coming out, and what the distributed database looks like - all the different layers aren’t yet agreed on,” he added.

DTCC has been a leader in financial services for more than 40 years and bring great experience to bear as technology takes the industry into a new era. As a result, Palatnick prefers to take a longer-term view and a steady approach.

“The transactions that we support are long-lasting transactions that require long-term solutions; credit default swaps, other financial instruments, literally decades in duration - it’s not a one and done settlement,” he said. “DTCC is owned by the financial industry for the purposes of the investing public - we are heavily regulated by those who are totally focused on protecting the consumer. Some fintech startups have dollar signs in their eyes and an exit strategy on the table. But what we do has to be durable, and scale to the highest volume performance.”

Concurrent Development: ISO 20022, Blockchain + DLT
DTCC is a big proponent of open source. Palatnick confirmed his technology teams are handling multiple workstreams with a variety of vendors, all with the goal of opening development and bringing standards that ensure interoperability between tech innovations.

“Our projects with Axoni and IBM are public,” he said, “and we have a commitment as part of the project to bring the code into open source after the project goes live. But some vendors have proprietary stacks and all vendors have commercial models.

“Then there are other blockchain platform models based on open source: Ethereum and Hyperledger, both of which we are involved in at the leadership level,” he added. “But what we believe is that the very base of a distributed decentralized ledger (that can be used across the industry and that the retail public can gain confidence in) has to be open source. It cannot be owned by a single entity. Yes, vendors can bring in additional security, smarter smart contracts: adding value to the chain, but if anyone thinks a single entity can emerge as the de facto owner of this, they’re wrong.”

Widening the Client Pool

It’s clear that establishing mutually understood standards, like ISO 20022, has increased new business opportunities. Thieke said it’s imperative to remain competitive.

“Adopting ISO enables firms to standardize its technology, leading to less customization when enabling transactions, saving costs and reducing risk,” he said. “In terms of winning new business, ISO makes it a level playing field. When acquiring a new client, they’re going to ask you if you’re adhering to the new standards. Because, if you’re not, that’s an additional cost they’re going to have to incur, which, from a business perspective, is a risk - you have to remain competitive.”

But there are still variants in cross-border interactions, as well as national legacy tech, still in place.

“In terms of global market practices, it’s challenging,” said Thieke. “The hope is that establishing a community-led standard will ensure harmonization. But, for instance, DTCC is very active in the corporate actions world, and the way they’re processed in the U.S. differs from that in Europe. We need everyone involved so the standard doesn’t drift to a US or another local market practice, but is truly global.”

Fintech and Beyond

Palatnick is looking to other industries to bring fresh ideas to concurrent development of ISO 20022, blockchain and DLT. He cites the many emerging digital health startups, built from the ground-up on artificial intelligence and machine learning to power new services, who are storing ongoing medical data transactions on a blockchain, as potential partners.

“In terms of blockchain,” said Palatnick, “once you have some neutral players in the game, including those from other industries like healthcare, joining us in the financial industry to continue the hard work on defining standards and defining use cases - you’ll see big changes occur.”