ISITC Glossary

In an ever-changing and complex environment like financial services, staying abreast of key industry developments is critical for professionals – regardless of role, department, or function. As with many emerging trends and issues, the information brought forward in the media can be diverse and conflicting, and it’s not always simple to find or know what information is reliable and meaningful.

At ISITC, continuous education and improvement is what drives each of our initiatives and we take great pride in equipping our members with accurate, timely, and actionable insights into the latest industry issues, trends, and topics. ISITC devotes significant time and resources into understanding the emerging issues and trends we believe to be critical to our membership’s profession.

Want to get an ISITC subject matter expert’s take on an industry issue, trend, or topic? Ask ISITC by clicking the orange envelope button at the bottom right-hand corner of this page and we’ll be sure to address it below, as well as in upcoming blogs or at our next event.

Q: For the Single Security Initiative, based on the SWIFT standards, we do not see the "UMBS" tag of field 22F: SETDET sequence - 22F::STCO/FHMC/UMBS. It seems that "/FHMC/UMBS" has not been defined with SWIFT. Can this be clarified with SWIFT?

A: The process for creating a new codeword within the SWIFT standard requires a full year maintenance cycle. For example, the deadline for new changes to the SWIFT standard this June 1st is for the November, 2020 release. So, there is no opportunity for SWIFT to update their handbooks on the fly to create a new codeword.  As a work around, the SWIFT standard allows for the use of data source schemes to bypass SWIFT validation on a field. 

Option F :4!c/[8c]/4!c (Qualifier)(Data Source Scheme)(Indicator) - 22F::STCO/FHMC/UMBS

So, the FHMC data source scheme is recommended to ensure the UMBS codeword can be sent over the SWIFT network.

Q: Are you aware of any Custodians who change the default option that is set by DTCC on voluntary corporate actions? If so, are there any potential impacts?

A: Generally speaking, a custodian should always reflect the default option as announced by the market/depository. However, historically we have seen a few instances, where it has occurred with some custodians changing the Default Option ( although these are not specifically related to DTCC events). 

Quick formatting recap: The default processing flag field indicates whether or not a corporate action option will be selected by default if no instruction is provided by the participant.  This flag is provided at the option level and formatted as: “:17B::DFLT//Y”

Impact?: Without getting into details around specific processes and policies, the impact could be severe, both financially and reputational to your firm and/or your underlying client(s). 

Some examples to illustrate this:

1. a custodian reports the default as “Tender” (TEND), but you understand it to be Take no action, there could be significant costs to repurchase those bonds back into the account

2. a custodian defaults a rights offer to SELL  the rights, and you wished to exercise them, could miss acquiring shares at the stated exercise rate (which can be favorable to the market price)

Next Steps?: Should you discover that a custodian is reporting an incorrect default option, challenging them on their reasoning is a good place to start to avoid this exposure.  As this is an SLA discussion, you should collectively work on coming an amendable conclusion to handle this situation

Another clarification here, and worth noting,  that this is not the same when the representative option number  is different ( i.e. Option #1 Take No actions vs #3 Take no Action).  The default flag should remain with the related option number and detail.

Q: What are the practical, immediate steps the industry can take to organize and utilize reference data efficiently?

A: One thing that we want to make clear is that there is no “silver bullet” answer to this question. The data landscape is complex and multi-faceted, making one simple solution impossible – the data journey is one that stretches off into the horizon. That being said, there are certainly actions that can be taken to optimize firms’ data management strategies and efficiently utilize reference data.

We would recommend implementing three practices to improve data management practices:

1) Embrace Best Practices: Best practices comprise adoption of standards for specific purposes, as well as common sense approaches for addressing areas where standards do not exist or are not mature enough or appropriate.  Best practices include understanding that solutions are not "One and Done" but constantly evolving and changing.  Don't think that because you implemented a solution that you can go away and ignore it.  Understanding and using existing data standards will help organize and streamline the use of reference data.

2) Collaborate: Standardization, not just of data, but also of policies and practices, facilitates collaboration among various entities, which will be critical to driving the industry forward. By increasing interoperability, firms are also able to use each other’s source data, across different standards, and build on each other’s successes to improve operational efficiencies and the customer experience across financial services.

3) Engage with the industry: Firms should share their in-depth knowledge and experiences with other industry professionals. Knowledge sharing at events and within various industry organizations will allow all of us to make better use of the vast amounts of data that are at our fingertips.

As we noted above, efficient reference data organization and utilization is not a quick fix – there needs to be an umbrella of coordination to move all of our firms into the future. That’s why ISITC continues to be focused on the topic, utilizing our subject matter experts and resources to collaborate on data not just within our own organization, but also with other organizations like EDM Council and ISO as well.

For more in-depth information about particular standards and groups that are involved in this issue, we’ve included the following resources:

ISITC's Reference Data & Standards Market Practices – Offers Classification Code List and Standing Settlement Instruction Market Practices

Financial Industry Business Ontology (FIBO) – An open source business ontology of various financial instruments, businesses, and financial processes that is developed by EDM Council.

ISO/TC 68 / SC 8 Standards Catalogue – Catalogue of reference data for financial services

"Navigating the Data Landscape" Webinar – Webinar that discusses the challenges and opportunities when dealing with data connectivity, regulation, and semantics. Includes insights from panelists from ISITC, EDM Council, and ISDA.

Q: What are your thoughts about the progress of artificial intelligence (AI), machine learning, and 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.

Q: Given the industry's focus on developing blockchain and distributed ledger technologies (DLT), how do you think that will impact securities operations in the future? What areas of securities operations will be impacted?

A: 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 ledger, 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 governanc 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: Can you advise your guidelines for claims process if counterparty threshold is higher than claim amount, but recurring settlement delays occur?

A: The Compensation Claims Guidelines and Best Practices defines the minimum amount for a claim charge as US $500.00 or Foreign Equivalent.  

Based on your question, it appears that the CP has chosen a minimum over the amount of US $500.00.  You might consider asking the CP how they came up with their threshold as it does not conform to the industry standard?  Also try to work with the CP to determine if your two organizations can compromise on an acceptable amount between the US $500.00 and the minimum the CP uses.

You might also benefit by getting a client facing person from your firm involved in this discussion.  If for example the CP is a Broker/Dealer, you could ask your trader to discuss the settlement delays and subsequent costs with the B/D Sales Desk.  This could put some pressure on their settlements team to reduce the delay in settlements or to negotiate a service level agreement on the amount of the compensation for fails.