ISITC’s chair and vice chair update FTF News on a wide range of Ops initiatives, including those for corporate actions, margin and collateral management, the regulatory front, derivatives and securities lending.
(FTF News got a rare chance to check in with Erica Borghi, the current chair of the International Securities Association for Institutional Trade Communication (ISITC), and Lisa Iagatta, current vice chair for ISITC, an industry group that advances standards, technology and best practices for financial services operations. In a wide-ranging Q&A, they provide updates on advances for key securities operations and insights about cutting-edge trends. Borghi has been involved with ISITC since 2004 and a board member since 2008. In addition to her work at ISITC, she is a vice president and the head of the risk and administration team within BBH Infomediary. For the past six years, Iagatta has been co-chair of the ISITC Reconciliation Working Group. Aside from ISITC, Iagatta is director of account management for investment services at Fiserv.)
Erica Borghi, chair, ISITC
Q: What would you say have been ISITCs biggest achievements during the first half of 2018?
A: ISITC’s primary focus over the first half the year has been creating and collaborating on market practices and discussing key industry issues and challenges.
Organizationally, the execution of our March Securities Operations Summit (“Financial Services Disrupted: Navigating Change”) was a tremendous accomplishment.
We focused primarily on the technological trends in our industry, the evolution of big data, and included an update on policy developments around cryptocurrencies and use of newer technologies.
For the first time, we featured three keynote speakers, Mike McGovern from Brown Brothers Harriman, Dan Houlihan from Northern Trust, and Cheryl Nash from Fiserv.
We also had SWIFT host an Innotribe session, which allowed members to talk about challenges we face as an industry and brainstorm on potential solutions.
We are excited about our September program in Baltimore, where we plan to have two general sessions. Monday’s Session will have a speaker from ANSI XP Financial Standards to discuss Security Aspects for Digital Currencies followed by an update from SWIFT on the ISO 20022 migration study. On Tuesday we have a number of data experts joining us to share their thoughts on the future of reference data.
We have done a lot of work organizationally to create quality information sharing and thought leadership programs focused on hot topics and challenges facing our membership.
ISITC collaborated on a webinar with the EDM Council, ISDA, and ISO, on “Data Interoperability in Financial Services.” The panel discussed barriers in the industry around the standardization of data, such as language, context, usage, and geography, to name a few.
We have also focused on showcasing the value of ISITC and expertise of our members in other industry organizations. ISITC members are participating in panels at SIFMA, defining standards at X9, and setting Market Practices at SMPG. We also work closely with ISITC Europe and have been collaborating on strategies for engaging universities as well as experts in Brexit, GDPR, and MiFID II.
Lisa Iagatta, vice chair, ISITC
Q: What has surprised you the most about the first half of 2018?
A: We anticipated hearing more about use cases for APIs [application programming interfaces] and DLT [distributed ledger technology] to solution operational inefficiencies.
While there has been some movement, we recognize that many of these efforts are happening behind closed doors or bilaterally and are not being widely discussed.
Q: Were there any important developments on the following fronts:
Working groups are actively updating market practices resulting from the Standards Release changes that will be going live November 18, 2018.
Here are some additional highlights from some of the groups.
Corporate Actions:
- Hosted a roundtable discussion at the March Securities Operations Summit. The discussion focused on best practices for reporting security lending positions and whether there is a need to develop a market practice for corporate actions payments on cryptocurrencies.
- Developing a Market Practice recommendation for tax on non-distributed proceeds. A new indicator will be introduced as part of the SWIFT Standards release in November.
Margin & Collateral:
- The industry is preparing for initial margin rules for uncleared swaps —waves 4/5 in 2019 and 2020 with buy-side firms/accounts being subjected to the rules
- FIA, ISITC, and SIFMA AMG T+1 working group published margin call and settlement workflow best practices document for approval this week
Regulatory Forum:
Thus far in 2018 we have educated our constituents on various financial regulations and their impact on data, most notably, Consolidated Audit Trail (CAT), General Data Protection Regulation (GDPR) and FinCEN Customer Due Diligence (CDD).
- At our March Securities Operations Summit we featured a guest speaker, Josh Beaton from Morgan Stanley, who presented and provided materials on Rule 613 of Reg NMS/Consolidated Audit Trail (CAT), highlighting why the rule was established, the general requirements, reportable events, customer data requirements, frequency and timing of data submission and the severity of the impact to broker/dealers.
- The forum provided an overview of GDPR, outlining the intent of the regulation, the general requirements, the definition of personal data, and the concept of “consent” to store/share data. The group also discussed the steep fees/penalties for non-compliance and the requirements regarding data destruction.
- In April, the Regulatory Forum provided materials on the FinCEN CDD rule. The group discussed the impact of the rule which consists of; verification of beneficial ownership, development of customer risk profiles; management and maintenance of customer information on a more frequent basis and conducting on-going monitoring to identify and report suspicious transactions.
- For the remainder of 2018, the Regulatory Forum will focus on “Digital Assets — A Regulatory Viewpoint” and “LEI Expansion following the Post-MiFID World.” In addition, we are in the process of cataloging relevant regulatory topics, by region and implementation date, and will be sharing the results with our membership to be discussed at upcoming working group calls.
Derivatives:
- In conjunction with the Margin and Collateral Working group, the Derivatives Working group participated in the T+1 Working Group with SIFMA AMG and FIA to create the market practice creation for margin calls on cleared OTC and exchange traded derivative. The collaboration across these industry groups will streamline the process to better communicate settlement date and hopefully reduce reconciliation breaks that currently can take months to resolve.
- The Derivatives Working group is organizing an educational effort to demonstrate both impacts of LIBOR’s potential retirement on 12/31/2021. The focus is on how firms can be involved in the outcome of planning this effort that is largely not regulation driven but market based. There are hedge accounting concerns, fallback rate provision implementation and replacement rate term structure impacts to name a few.
- The group has participated in the ISDA Symbology group’s two consultations on UPI governance.
Securities Lending:
- The Securities Lending Working Group has focused on two topics, the first being the treatment of corporate action events, particularly the notification and entitlement flow when shares are on loan. The second topic is creating a best practice for market buy-ins. We also plan on collaborating with RMA to see if there is an opportunity to align best practices around documentation to support securities lending, for example the securities lending agreements, etc.
Q: Given the huge progress that blockchain/distributed ledger technologies (DLT) have made, what securities operations areas are likely to be impacted first by distributed ledgers?
A: Jason Ward of Fidelity Investments is our DLT expert on the board and provided the following response:
In answering the question, it is important to acknowledge there is a difference between open public blockchains and private permissioned ledgers.
Public blockchains facilitate the transfer of value and information amongst participants of “trustless networks.” Public blockchains typically entail use of cryptocurrency and block-miners who maintain network security by contributing computing power to perform complex consensus calculations. Miners compete to be the first to solve the computational puzzle and receive the block reward. Many public blockchains prioritize decentralization of the network ahead of attributes such as privacy and transaction processing velocity.
In contrast, permissioned ledgers are “trusted networks” which may prioritize privacy and network speed over decentralization.
Permissioned ledgers, a.k.a. distributed ledger technologies (DLT), may leverage different economic incentives, such as operational cost reductions. They are often used to solve for enterprise problems such as workflow inefficiencies, data management and governance challenges, and reduction if not elimination of reconciliation activities.
Highly automated activities may not be top priorities for exploring blockchain / DLT solutions.
Rather, highly manual and document intensive activities may represent better candidates for application of DLT.
Examples of securities processing related use cases that have been promoted to production include international trade financing, private equity fund administration, and equity swaps processing.
Bank loans and collateral management also represent areas of opportunity for the industry to explore.
Q: How has the DLT phenomenon affected what ISITC does?
A: Jason Ward of Fidelity Investments is our DLT expert on the board and provided the following response:
ISITC may want to consider developing support for the introduction of standards for new asset classes such as cryptocurrencies and cryptographically issued securities (such as equities and bonds).
Standards for these new asset classes are evolving in disparate ways. Given the rapid pace of development within the crypto community, it’s important that common standards be prioritized to promote interoperability between platforms and integration with legacy infrastructure over the long term.
Q: What are your thoughts about the progress of the following disruptive technologies:
- Artificial Intelligence (AI)
- Machine Learning
- Robotic Process Automation (RPA)?
A: Most of the progress our member firms are seeing is around specific use cases.
RPA is widely being adopted to reduce redundant tasks in operations, such as reconciliation, reporting, and account opening processes.
The most common use cases for AI and machine learning we know of are in fraud detection, customer service, risk management, and portfolio management (robo-advising).
We are hoping that within the next five years we will see more use cases, particularly in advancing security leveraging facial recognition or biometrics.
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