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Reflections on Applications of International Standards for Financial Data Exchange in China Securities and Futures Markets

2013年05月17日   Views

1. Trend of international standards for financial data exchange in securities field
1.1. Development of international data exchange standards in securities field
    Securities market involves a large number of participants, like investors, securities companies, exchanges, clearing corporations and so on. Businesses among the participants are completed via data exchange. Therefore, the data exchange protocols serve an important factor to determine and promote the safe and rapid development of the securities market. 
    The development of international data exchange standards in securities field can be divided into three stages:
    The first stage: from paper-based information exchange to electronic data exchange.
    In the early stage of securities business, the information exchange between securities market participants was basically completed through natural language or written language in pre-defined format. In the 1970s and 1980s, with the emergence of computers and development of electronic data exchange channels, the bilateral or regional electronic data exchange protocols appeared. Replacing paper-based information exchange with electronic data exchange helped improve the efficiency of information exchange, and reduce the risk of exchange error, greatly expanded the scale of market participants and drove the securities market to a new stage of development.
    Different market participants can develop different information exchange protocols according to the needs of their business. With the development of financial business, the inconsistency among different protocols increasingly hindered the further expansion of business. Market participants came to realize the seriousness of such protocol inconsistency, and gradually developed a data exchange protocol used in wider region or industry in the form of co-organized industry alliance.
    The second stage: standardization of data exchange protocol.
    In early 1980s, with the development of global standardization, aiming to optimize securities information exchange, reduce costs and achieve cut-through data processing, ISO released ISO 7775, an international standard for messages mainly in the post-transaction and settlement stage.
    In that period, due to the lack of international standard in pre-trade and trade stage in securities transactions, the FIX protocol was developed in 1992. Later in 1994, a nonprofit self-regulatory organization FPL was established to take charge of the promotion and maintenance of the protocol. The FIX protocol was soon applied to pre-trade and trade stage of securities transaction. 
    The third stage: technological progress promotes the development of international standards for data exchange.
    Since the 1990s, the information industry has witnessed unprecedented and rapid development in history. As a language to describe the information on Internet, the easy-to-use HTML more effectively promoted development of Internet. However, the application of HTML is hindered in electronic data exchange, database, search engine and so on due to its disadvantages such as inextensibility, poor interactivity, less semantics and one-way hyperlinks, etc. To solve the problem, a new language - Extensible Markup Language, i.e. XML is developed by W3. Generally, XML defines the structure of data transferring between different applications. The structure is not described with binary codes which can only be interpreted by programs, but with a simple text which is accessible with any editor.
    The messaging design of XML-based data exchange has unique application advantages: With XML, it is easy to design textual structure and syntactic structure of the messages. Considering the characteristics of XML and the development of Internet technology, much attention has been paid by international financial standards organizations who have accordingly introduced XML technology into their protocols. In 2004, ISO released ISO 20022 on the basis of ISO 15022 XML.

1.2. Analysis on trend of international standards for financial data standards in securities field
1.2.1. Demand of data exchange protocol in securities field in future
1.2.1.1. End-to-end transaction
    Along with the market and regional integration brought by the economic globalization, counterparties used to complete transactions through a number of intermediary service institutions or middlemen, which not only delayed the transaction and increased transaction costs, but also to a greater extent increased transaction difficulties, hindered the development of securities industry and reduced the efficiency of the global market. People began looking for an automatic network and platform, to carry out the end-to-end transaction without any middlemen. And such demand grows stronger and stronger.
1.2.1.2. Transaction speed and accuracy
    At present, a lot of cross-market transactions have been completed in T+N days, causing high settlement risks and occupation of capital to both parties. If the transaction processing involves multiple information exchange protocols or standards, the inaccuracy of information in the transfer will be the biggest risk of the transaction, particularly in the matching transactions. Transaction speed and accuracy are very important factors restricting the development of securities activities.
1.2.1.3. Reduction of costs
    The reduction of costs has been an issue discussed all the time by global financial industry. The release of ISO 20022 undoubtedly brings down the costs of the entire industry. But because many organizations are devoted to different standards or other protocols, it is impossible for the whole industry to achieve unity in a certain period to come. Therefore, how to reduce transaction and operation costs is still the problem to be considered by international standards organizations in the future.
1.2.1.4. User transparency
    User transparency is an important idea of ISO 20022. With the independent business process store and ungrammatical data dictionary, the establishment of business model has nothing to do with specific standards, and business modules are represented by various specific message modules based on unified rules of using XML while users may not feel the changes at all, so increased user transparency greatly enhances the convenience of users.

1.2.2. Development trend of international standards for financial data standards in securities field
    According to the research on the development of international data exchange standards and the analysis on needs of data exchange protocol in the future securities field; data exchange protocol will take on the following development trend to meet business needs: 
1.2.2.1. Servitization trend
    As the international competition intensifies, data exchange protocols will be servitized. The revolutionary servitizaiton of data exchange protocol provides new ways of profiting for all participants in securities market with lower cost and higher efficiency, while enabling more accessible and comprehensive service for users.
    On the other hand, the enhancement of the service of data exchange protocols will also help to increase relevant business. 
1.2.2.2. UML for business models, XML for data format
    With the market integration and technological advancement, the transaction tends more to end-to-end transaction, in other words, counterparties complete transactions through fewer or even no middlemen. In the future protocol design, more consideration should be given to the full business scope, including transaction process, transaction processing, business interaction, etc. Therefore, with the use of UML, it is easier to extract business characteristics, so that the protocol business model will better meet the overall business needs. At the same time, to create the business model in UML will also make the protocol business needs independent of the physical implementation.
    XML is a semi-structured data description language, including not only the data content but also description of the data format. It separates the content and presentation, giving XML the information self-describing function and extensibility function and strengthening the lingual design capabilities. Therefore, according to the characteristics of XML, the protocol business model built with UML requires XML schemas to describe the protocol message structure.
1.2.2.3. Standardization and unification of data exchange protocol
    Currently promoted and supported by a majority of large financial institutions in the industry, ISO 20022 integrates all data exchanges before, during and after transactions and settlements to cover the whole process, and meets the needs of OTC and derivatives trading, mutual funds, unit trusts, foreign exchange transactions, exchange-traded derivatives, fixed income products, stock trading, etc.
    In summary, the development trend of international standards for financial data exchanges in the securities field may be concluded as follows: In terms of the drive type, data exchange standards tend to be servitized, and full consideration should be given to the needs of the service objects in the development of standards, as servitization is the main driver for the development of protocols; in terms of technology realization, data exchange standards tends to create the business model with UML and unify data formats with XML; in terms of the convergence trend, data exchange standards gradually closes up to the ISO standards; in terms of the applications range, the application of data exchange standards will not be limited to some stages of the securities market (pre-trade, transaction and settlement), but cover the entire industry, unifying the standards for in the whole industry.

2. Reflection on the promotion of international financial standards in domestic securities depository and settlement 
2.1. Data exchange protocol plays an important role in the construction of depository and settlement system
    The data exchange protocol belongs to the infrastructure work in the construction of the depository and settlement system. Its significant functions in the depository and settlement system include: 
2.1.1. Important performance indicator of the depository and settlement system 
    The depository and settlement system involves many participating institutions. The data exchange protocol serves crucially as the link connecting system constituent modules and participating institutions. The host system of the depository and settlement system determines the performance of the internal core business. The data exchange protocol not only affects the efficiency of billing information exchange and the risk degree of settlement results, but also impacts the adaptability of the depository and settlement system, directly impacting participants'' evaluation and judgment of the depository and settlement system. 
2.1.2. Support cross-border settlement, improve international competitiveness
    With the opening of China''s financial market, the demand of cross-border settlements with other countries become more and more intense, and the adoption of international standards protocols is the basis for cross-border settlements. The introduction of the depository and settlement system will arouse the enthusiasm of foreign participants to participate in the domestic securities market, thereby increasing the international competitiveness of China''s securities market.
2.1.3. Support business innovation effectively
    With the market development and technological advancement, various innovations of financial derivative products and new settlement patterns are emerging. To adapt to the market changes, the depository and settlement system requires the support of good data exchange protocols.

2.2. Flexible system interface, multifarious ports
    At present, the adopted depository and settlement protocols are mainly DBF database interface protocol, the interface protocol is too simple to support international business. However, the interface of depository and settlement system in major countries and regions support multifarious access as well as international standards such as ISO 15022 (ISO 20022), etc.
    In terms of future technology realization, data exchange gateway access may be used to convert different protocols and dock with exclusive protocols of the depository and settlement network, to realize data exchange with the depository and settlement system.
    Data exchange gateway will not only support the access of original DBF database and the data exchange protocol of securities depository and settlement business (financial industry standards), but also the ISO 15022 (ISO 20022) and so forth. In this way, it on the one hand maintains the independence of the core business of the future depository and settlement system, while on the other hand supporting multiple accesses based on the continuity of established conventions of market data exchange protocols.

                                                                                                     (From China Standardization May/June 2013)

 

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