FISD General Membership Meeting

1
FISD General Membership Meeting

• June 10, 2004
• Reuters Times Square
• New York City

2
Thank You Sponsors

• Meeting Sponsors
• Reception Sponsor

3
Meeting Agenda

• Industry trends
• Robert Colby, Division of Market Regulation,
  Securities Exchange Commission
• Market Data Business Issues
• Emerging themes
• VRXML
• Redistribution
• Service level improvement

• Securities Processing Automation
• MDDL
• fisdMessage
• Reference data standards (ISO TC68/SC4)
• Unique instrument identification
• Governance
• Regulation NMS
• Securities Transactions Settlement
• FISD Operations

4
Industry Trends

• Global battle for liquidity (exchanges)
• Changing nature of competition (what is added
  value?)
• Recovery, efficiency and cost control (firms)
• Global regulation (transparency, market
  structure, risk, faith in markets)
• Technology (distribution, XML, standards)
• Increasing link between front, middle and back
  office operations

5
SEC Update

• Robert L. Colby
• Associate Director
• Division of Market Regulation
• Securities and Exchange Commission

6
Market Data Business Issues

• New FISD Structure covering
• Billing and reporting (including VRXML)
• Market data administration
• Contractual issues (including data usage and
  redistribution)
• Service level issues (including lead time
  notification cycles)

7
MDBI Trends

• Accuracy, efficiency and protection of
  intellectual property are the mantras
• Standards-based infrastructure
• Tri-party relationship (core issue to address)
• Top issues
• Take cost out of the equation
• Electronic invoicing
• Automated billing and reporting
• Simplified reconciliation
• Rationalize business policies
• Standard units of count (multiple access fees)
• Data usage policies (redistribution)

8
Billing and Reporting

• The logic of billing automation is clear but
• Billing automation is complex
• Investment is required
• Other investment demands are still a higher
  priority
• Initial objective is a standard infrastructure
  for efficient BPA
• throughout the information chain
• There are lots of positive signs (finally)

9
FISD Strategy (again)

• Standard input/output format and vocabulary are
  fundamental
• VRXML for both reporting and billing (exchanges,
  vendors and inventory systems)
• Document all reporting business rules
  (consistency would be nice)
• Standard naming conventions

10
VRXML

• Interest remains high, but adoption lags behind
• Programming and testing is underway
• Separate VRXML from business rule validation
• Mapping and implementation assistance
• Demand for electronic invoices
• FISD to work with the top 20 reporting entities
  to move progress along
• Public statements from user firms coming shortly

11
VRXML Enhancements

• FAQ section coming to VRXML.org
• Separate generic from exchange specific business
  rules
• Role of Entity identifier
• To/From identifier
• Use of ISO 10383 Market Identifier Code (MIC)

• Date of Relevance identifier
• Vendor and exchange product codes (more
  discussion needed)
• Change log on VRXML.org
• VRXML mapping and implementation assistance from
  FISD

12
Other Administrative Issues

• Billing/Reporting
• Tri-Party (go direct)
• Unit of count
• Enterprise licenses
• Multiple access fees
• Reporting transparency
• Self Invoicing
• Procurement
• Product naming
• Electronic catalogues
• Data Usage
• Redistribution
• Derived works

• Agreements
• Click through agreements
• Standard subscriber agreements
• Notification
• Timing
• Escalation procedures
• System considerations (capacity and latency)
• Data recovery

13
Central Billing/Reporting Utility

• Business case as a mutual entity
• VRXML (common infrastructure) makes the concept
  viable
• Potential objectives
• Overcome industry inertia
• Manage, extend and implement VRXML
• Collect usage information
• Aggregate reports and reconcile errors
• Standard electronic invoices
• Collect/remit payment
• FISD will be formally exploring this concept

14
Market Data Redistribution

• The core problems still exist
• Vendors dont have control over downstream
  redistribution (datafeeds)
• Policies are complex with lots of varieties
• Compliance is covered by contracts that are open
  to interpretation
• Compliance involves many people that dont always
  know about, understand or care about the
  practical side of market data rules
• And yes there are some outright data pirates
• This challenge affects all segments of the market
  data industry

15
Redistribution Outline

• The lack of control over redistribution can
  result in under reporting, unauthorized
  redistribution, unfair competition and revenue
  leakage
• Within Financial Institutions (authorized to
  receive and redistribute -- wants to comply with
  policies)
• Web Sites (market data is a secondary component
  of the application and some outright pirates)
• Electronic Trading Engines (fee waivers to
  encourage electronic trading)
• Derived Data (do exchanges and vendors have the
  right to charge for the creation of derived
  products?)

16
Four Core Issues

• Contractual and Licensing
• Flexible, simple and cost effective to administer
• Rational enough to ensure compliance
• Entitlement Control
• Difficult to track downstream applications
  (multiple redistribution channels)
• Vendors not willing to assume liability for data
  they cant control

• Communication Mechanisms
• Clarity of market data policies
• Ability communicate requirements throughout the
  information chain
• Business Models
• Flexible price/value models
• Ensure a level playing field without
  cannibalizing existing revenue streams

17
Redistribution - The Initial Focus

• Control and management of market data usage by
  financial institutions
• Authorized to receive/redistribute data
• Fully intend to comply with policies
• Under reporting and unauthorized redistribution
  is assumed to be either a misinterpretation of
  obligations or a breakdown in communication about
  requirements along the distribution chain
• Exchanges view redistributors and institutions as
  partners in this initiative

18
The Initial Approach

• Compliance letter to compliance officers within
  financial institutions
• Four steps
• Understand obligations (proprietary rights
  framework and contractual requirements)
• Provide accurate and timely reports (compliance
  begins with good reporting see VRXML)
• Establish effective internal processes and
  procedures (technical and administrative)
• Open a dialogue with the exchanges (compliance
  can be complex dont guess or ignore)

19
Redistribution Other Ideas

• Market data compliance toolkit -- to help
  institutions audit their use of market data and
  implement effective policies and procedures
• Amnesty and safe haven incentives -- to
  alleviate concerns about admitting past errors
  and getting back on track
• Education and awareness materials -- to spread
  the gospel about proprietary property and the
  importance of compliance
• Ongoing FISD dialogue on the rationalization of
  market data policies as appropriate

20
Service Level Improvement

• New global project activity for FISD
• Initiated by vendors, supported by user firms
• Goals are
• Reduction of service interruptions
• Better response times
• More reasonable lead time notification
• Better escalation/communication procedures
• Reduced latency

21
Service Level Improvement

• Project objective is a series of best practice
  recommendations for
• Unplanned interruptions (notification,
  escalation, response targets)
• Planned interruptions (release schedules,
  documentation, testing)
• System considerations (capacity management,
  reliability, latency, BCP)
• Data recovery (complete recovery of missing data)
• Communication (ongoing review of plans,
  performance and next steps)

22
OPRA Traffic

• New OPRA traffic projections
• July 9 OPRA peak (52,000 MPS)
• August 13 (75,000 MPS)
• Vendor/recipient concerns over timing, accuracy
  of projections and cost
• Meeting with exchanges, ISCA, vendors, users and
  SEC
• Request for 120 day notification (from July 9 to
  September 7)
• Consideration of new process to include vendor
  readiness into ISCA planning process

23
Securities Processing Automation

• New FISD structure covering
• Reference data standards (ISO)
• Market data definition language (MDDL)
• Standard distribution protocol (fisdMessage)
• Unique instrument identification (UII)
• Symbology and numbering schemes

24
SPA Objectives

• Establish a common reference data infrastructure
  for automated securities processing (cost, risk,
  regulation)
• Provide a coordinated global voice on SPA
  requirements and priorities
• Participate in the ISO standards process to
  ensure the output is consistent with industry
  requirements
• Monitor standards implementation (functional,
  operationally viable, commercially acceptable)

25
Reference Data Connection

• Reference data is in the spotlight
• Changing margin structure makes processing
  efficiency more important
• Inconsistent/inaccurate reference data is the 1
  cause of internal STP failure
• 30 of transactions break because of poor quality
  reference data
• Costs to repair trades correct mismatches ...
  from settlement delays to maintain security
  master files ... and from trade failures are
  significant
• Reference data is everywhere, decentralized and
  relies on manual operations (40 of a trade
  record)
• Global push to normalize data, synchronize master
  files, reduce infrastructure costs and promote
  information exchange (reference data
  architecture)
• Data standards are needed to facilitate
  automation
• Regulatory requirements are pushing the envelope

26
Four Pillars of SPA

• Goal is to reduce costs, manage operational risk
  and meet regulatory obligations
• Identify all data elements associated with the
  financial information lifecycle (MDDL)
• Define a common distribution protocol for
  accurate and efficient distribution (fisdMessage)
• Uniquely identify all business entities (IBEI)
• Uniquely identify all financial instruments (UII)
  

27
MDDL Topics

• Change in Versioning Guidelines
• New Documentation Strategy
• Status of mddl Specification
• mddlQuery and mddlStatus
• Development of fisdMessage

28
Change in Versioning Guidelines

• Version in beta for about 3 Months
• Ongoing changes (perhaps frequently)
• Specific targets for content
• Promoted to draft When Done
• Begins review and adoption processes
• Promoted to final After 3 Months
• No more modifications
• Ready for production with planned content

29
New Documentation Strategy

• Focus on Items for Implementation
• How To for specific data content
• Snippets (fragments) with correct MDDL
• Fully document existing terms and content
• Next Stages
• Tutorial, based on snippets and how to
• MDDL Overview (business, content, guidebook)

30
mddl Status as of 2004/06/10

• MDDL 2.2 Elevated to final
• At direction of MDDL Steering Committee
• No more modifications
• MDDL 2.3 Elevated to draft
• To promote adoption on release cycle
• MDDL 2.4 Started
• With all pending modifications
• MDDL 2.5 Content Set
• Corporate Actions in Q3CY2004

31
Pending Content for mddl

• On Hold
• Risk Enhancements pending active participation
• Current Active Participation
• debtDomain (and other primary domains)
• indicatorsDomain/interestRateClass
• foreignExchangeDomain
• Data necessary for exchange datafeeds

32
mddlQuery and mddlService

• Formal Release Based on Participation
• Members to validate/implement concept
• Your active participation is needed
• In Development
• Loosely tied to fisdMessage specification
• As part of the streaming demonstration

33
Development of fisdMessage

• Most Active Topic of All Contacts
• More than other MDDL items combined
• Have Begun Discussions with FIXML
• Looking to use same compaction scheme
• FIXML requirements a subset of MDDL
• Brief Demonstration Given
• XML for Market Data 21 April in New York
• Prototype Products Under Development
• By FISD and a technology enabler

34
Financial Industry Standard Communication
Protocol Benefits

• Common Vocabulary for Data Elements
• Simplifies process of merging content
• Self-Describing So Data Can Be Added
• At the convenience of the provider
• Efficient Like Proprietary Feeds
• Minimizes use of bandwidth
• Uses the same tricks and conventions
• Receiver uses minimal processing power

35
Generic Market Data System
36
Reference Data Standards

• Market data model and vocabulary (ISO TC68/SC4
  Working Group 11)
• International Business Entity Identification (ISO
  TC68/SC4 Working Group 8)
• Unique Instrument Identification

37
Working Group 11

• Objective produce a data model that provides a
  single standard for describing a financial
  instrument throughout its lifecycle
• Description of a financial instrument includes
  completely defined data elements and their
  relationships (TDR)

38
Working Group 11

• Why this is important
• Integrate multiple data sources across various
  processes
• Feed diverse applications
• Add new functionality
• Reduce errors in trade processing (STP)
• Transition from data scrubbing to information
  management
• Logical basis of any reference data strategy --
  think barcodes for identifying financial
  products

39
WG11 Status

• Approved by ISO and active
• Three primary market data applications
• Set-up (security master files)
• Pricing (streaming and static)
• Maintenance (corporate actions)
• All financial domains and processes
• MDDL vocabulary will be incorporated into a
  single, global ISO-standard glossary and data
  model
• TDR and logical model nearing completion

40
Working Group 8

• Objective develop a global scheme for uniquely
  identifying business entities playing a role in
  the lifecycle of a financial instrument
• a business entity is an entity that is either
  regulated or on which due diligence is necessary
  under any jurisdiction

41
Identifiers are Needed for a Variety of Functions

• Counterparty and Issuer
• Risk Management
• Basel II
• Internal risk mgt.

• Counterparty identification
• on Transactions
• Orders
• Trades
• Settlements
• Payments

Collateral Management

• Regulatory Reporting
• KYC and AML
• Financial Services
• Act
• Patriot Act

• Legal Agreements
• Documentation
• Account set-up
• Customer relationship

• Data Management
• Capture / Sourcing
• Look-up Cross-referencing
• Maintenance

Corporate Research
42
A COMPLEX STRUCTURE
43
WG8 - IBEI

• Why this is important
• Help automate order execution, trade allocation
  and settlement processing for STP
• Help precisely extract reporting, transactional
  and relationship information required for risk
  mitigation and regulatory compliance
• There is no international standard for linking
  legal entities and portfolios under management
• Must support the one-to-many relationship between
  entities and their funds

44
WG8 Status

• Approved by ISO and active
• Recommendations exist
• Design and structure of the code
• Assignment and maintenance process
• Content of IBEI repository and data quality
• Access to IBEI data and information flows
• Open issues
• Requirements and obligations of repository
  operator
• Commercial issues
• Practical operational and implementation (ROI)

45
Unique Instrument Identification

• Underlying issue ISIN (by itself) is not precise
  for all applications in the transactions
  lifecycle
• Multi-listed instruments pushes the issue to the
  forefront
• Uniqueness varies depending on role
• Various roles use different identifiers
• Cross-referencing is required
• Delays in instrument identification slows down
  the process and contributes to STP failure

46
Unique Instrument Identification

• Requirements for precision
• Issue identifier (NSIN or ISIN)
• Official place of listing (OPOL)
• Place of trade (intra-day pricing)
• Where this is important
• Multi-listed instruments (currency)
• Multi-listed instruments (registration)
• Multi-listed instruments (settlement
  compatibility)
• Board lot size
• Local versus foreign ownership
• With/without accrued interest

47
Instrument Identification Challenge
48
UII Status

• FISD/REDAC paper on UII requirements (global
  validation)
• LSE and ASB product offerings both meet the
  criteria
• REDAC/RDUG/ISITC Working Group
• Identify full scope of UII issues
• Segmentation of issues
• Clear statement of identification requirements
  (with examples)
• Cost/benefit analysis (business case)

49
Regulatory Issues

• FISD Governance Advisory Committee determines
  FISD regulatory positions
• Regulation NMS (comments due June 30)
• Concept Release Securities Transactions
  Settlement (comments due June 16)

50
Regulation NMS

• SEC proposal to enhance and modernize the
  national market system
• Rename Section 11A of Securities Exchange Act
• Change terms and standards of access to quotes
  and orders
• Policies designed to prevent execution of
  trade-through
• Penny as minimum pricing increment
• Market data issues (six recommendations)

51
Reg NMS Market Data

• Implement some of the Seligman Committee
  recommendations
• New formula for allocating net income to SROs
• Exchanges can distribute additional data (beyond
  core data)
• Streamline consolidated display requirement
• Creation of non-voting advisory board to
  participate in governance
• More feedback needed on the reasonableness of
  exchange market data fees
• Did not propose adoption of competing
  consolidator model for market data dissemination

52
FISD Response?

• Unclear, but likely two points
• Reinforce FISD view against strict cost basis as
  the standard for reasonableness
• Caution on unintended traffic consequences of
  Reg NMS allocation formula

53
Concept Release Settlement

• SEC inquiry on ways to improve the efficiency of
  US clearing/settlement by moving toward STP
• Trade confirmation/allocation
• Sequential process for confirm/affirm
• Lack of reference data standards and automation
  causes settlement delay
• From T3 to T1
• Only bad things can happen between trade and
  settlement
• Reduce systemic risk and other risks of default
  

54
FISD Response?

• FISD will not comment on value/cost of shortening
  settlement cycles or modifying confirm/affirm
  process
• FISD likely will comment on the importance of
  reference data and messaging standards as a
  pre-requisite to automation

55
FISD Operating Structure

• Overall goal is to operate more effectively
• Four New Advisory Committees
• Market Data Business Issues (issues affecting the
  business of market data including
  billing/reporting, contracts, data usage, MD
  policies)
• Securities Processing issues (issues affecting
  automation of securities processing including
  reference data, MDDL, symbology, data
  distribution)
• Operations (issues affecting FISD including
  membership, meetings, data quality, web
  communications, budgets)
• Governance (issues affecting FISD members
  including appointment of Executive Committee,
  external relationships and the development of
  FISD regulatory positions)
• Projects are managed by Working Groups (billing,
  VRXML, redistribution, MDDL and reference data)
• All members are characterized by interest code
  (update your records and the records of your
  colleagues!)

56
FISD Operations

• FISD Database (shared member resource)
• Update records and pick interest areas
• Add missing people (cover the entire agenda)
• Web Sites (FISD.net MDDL.org VRXML.org)
• FISD Budget (New fiscal year is July 1)
• Welcome New Members (2004) ActivFinancial, AIM
  Software, American Century Investment, Bank of
  New York, CBS MarketWatch, Canadian Imperial
  Bank, Cicada, CRISP, Comtex News Network, Dun
  Bradstreet, Edgar Online, Fitch Ratings, GFI
  Group, HSBC, Infotec, MJ Innovative Solutions,
  Polar Lake, MCI, Radianz, Robeco, Spryware

57
Key Dates

• September 21-22, Hong Kong (and Asia trip)
• October 13, new Market Data Administration
  Conference
• December 14-15, NYC (Holiday Party)
• Fall 2005, 7th World Financial Information
  Conference (Madrid)
• Full schedule on FISD.net