SWIFT data can help global custodians and fund managers raise agent bank service quality

20 Oct, 2014

SWIFT is an organisation which fund managers ought to be a lot more familiar with than most of them are.                                                                                       

It provides an array of standardised messages services, covering dealing and execution, trade matching, settlement, asset servicing, fund administration and distribution and collateral management, plus a low cost single-point-of-access messaging network linking banks, broker-dealers, exchanges, depositories, repositories and CCPs (see “What SWIFT can do for hedge funds, COO magazine, Winter 2013, pages 78-87), that would enable a lot of fund managers to dispense with a lot of other service providers.

The Watch for Securities offering announced by SWIFT at the end of last month is of characteristically high potential value to custodians but also to fund managers. The new offering, which is scheduled to go live in the first quarter of next year, is a much more interesting development than it appears at first glance.

It is the culmination of a consultation process going back at least three years, in which SWIFT has asked its securities market participants – chiefly custodian banks, market infrastructures and broker dealers, but also some larger fund managers which have a direct relationship with the organisation – not only what data they would find it most useful to see, but what data they will allow SWIFT to extract from the messages it transports on their behalf.

With SWIFT intermediating an average of 22 million cash payments, securities, treasury and trade messages a day between nearly 11,000 users scattered across 215 countries – and more than 90 per cent of that traffic split between payments and securities alone - no other organisation can match its access to data about messaging activity in the post-trade parts of the securities industry.

As the dominant transport network for information about a variety of securities and investment transactions, including settlement instructions, dividends, rights issues, swap payments and mutual and hedge fund purchases, sales and switches, SWIFT is an obvious source of information about buy- and sell-side activity, capital flows and market activity, and also about operational efficiency.

As a co-operative utility owned by the banks, SWIFT operates to constraints on its ability to peer into the content of the messages it is carrying over its network, in order to respect confidentiality and market positions. So the very fact that SWIFT is launching Watch for Securities as a data-driven business intelligence service for securities market participants suggests that its governing board has seen the potential of this offering to improve the services that banks deliver to their clients - including fund managers.

SWIFT reckons it has found ways to help its customers make better use of their data to measure and benchmark their performance versus the market. One is to use its wide coverage of securities transactions to provide them with insights about how markets are evolving, and their share of activity in particular markets. Another advantage is to measure the relative efficiency of their operations and the agents they use, against the market as a whole or against an anonymised peer group.[1]

The SWIFT data also has intrinsic limits. The proportion of information exchanged between market participants that is intermediated by SWIFT varies widely by the type of institution and activity. Some traffic that uses SWIFT message types is not carried over the SWIFT network either. In addition, 90 per cent of the securities messages are either settlement instructions or reconciliation messages and 5 per cent concern the richer, more interesting and potentially more valuable asset-servicing activities.

The SWIFT data is of greatest value where SWIFT actually dominates the exchange of transactional information in a market or market segment. This has meant Watch for Securities will initially concentrate its efforts on cross-border transactions between global custodian and global investment banks and their local agent banks, and not on domestic transactions. Since cross-border securities transactions are deemed to be the least efficient and the most expensive, it is nevertheless an interesting data set on which to build.

The service will doubtless evolve. SWIFT has shared payments message volume data, on a monthly aggregated basis, with its payments users for several years now, enabling them to see the number of messages they exchange with particular counterparties, and benchmark it against the market as a whole.  As shareholders gradually got used to the idea, SWIFT was able to add a “value analytics” product, which measures message volumes by value and currency as well, again on a monthly aggregated basis.

That analytical service has enabled SWIFT users to monitor the internationalisation of the renminbi payments and bond markets, for example. SWIFT says more than 120 financial Institutions have registered to use its “traffic analytics” service and more than 70 make use of the value analytics, some employing it to measure the volume of traffic generated by different arms of their own organisation.

As it happens, the new Watch for Securities service will go a lot further than volume alone. Simply mimicking the original payments data service, by looking at the volume and value of securities settlement instructions and asset servicing messages passing through SWIFT, would not add greatly to the understanding or decision-making knowledge of anyone active in the securities markets.

Such data is not useless, of course, but it needs to be supplemented by additional insights if it is to add value. This is why Watch for Securities will delve in the content of messages and extract some elements like the first two letters of the International Securities Identification Number (ISIN) and the type of corporate action being processed."

Data of this kind can yield useful insights. For example, by measuring actual versus expected settlement dates, it is possible to measure the settlement efficiency (indeed, the settlement failure rate) of a custodian bank in a given market, and benchmark it against the market as a whole.

Even managers which receive a contractual date settlement service from a global custodian, or which have outsourced their back and middle office needs to a global custodian, ought still to be interested in the relative degree of efficiency with which their transactions are settled. This is more important than ever, with TARGET2-Securities shortening the European settlement timetable to just two days, enforced by expensive buy-in procedures in the event of failure to deliver cash or securities. Similar plans are afoot in the United States.

In other words, settlement is about to get interesting again, because shorter settlement timetables can increase as well as decrease risk, and unmanaged risk translates into increased cost. But settlement is not the only area where SWIFT has data which is helpful to custodians and their clients.  For asset servicing processes, SWIFT data can also enlighten them about the relative timeliness of dividend payments, the efficiency of corporate actions announcements, and the competitiveness of the corporate action instruction deadlines set by their agents.

All of this data would enable custodians as well as fund managers (and their advisers) to manage their relationships with their agents on the basis of independent information. It would also help them demonstrate that they are monitoring and managing their outsourced relationships actively.  Accordingly, it would be more than worthwhile for fund managers to press their custodian banks to authorise SWIFT to drill deeper into the content of the messages they originate, and share the results with them.


[1] SWIFT produces and delivers peer benchmarking reports through its “business intelligence” services.