Investment bankers can always think up new product features faster than custodians and standards bodies can come up with message standards for them. That was the conclusion of a panel on corporate actions at SWIFT’s Sibos conference last year in Copenhagen. And as long as they can make money, the bankers are happy to leave the details to the bank’s back office, the custodians, or whoever else has to take responsibility for clearing and settlement.

Part of the challenge of converting nonstandard communications to SWIFT standards is being met by companies that specialize in message transformation, such as Itemfield (p. 37) and Evare (p. 23). To banks, the value of SWIFT standard messages has long been recognized. Increasingly, corporations as well are looking to SWIFT as a way to reduce their costs in treasury management, and more importantly give them a better view of their global assets so they can improve their cash management. One of the leaders here is Microsoft’s corporate treasury (p. 39).

The world of OTC derivatives has so far resisted standardization. Now SWIFT has bravely waded into the midst of this, announcing at the end of June that it has entered into an agreement with the International Swaps and Derivatives Association (ISDA) to support FpML messages over SWIFTNet. For SWIFT, this is a move into the arena of alternative investments and derivatives.

Marlene McMahon, business manager, standards, at SWIFT, said the organization is simply responding to members’ needs.

“The demands are coming from all the usual suspects,” she told me, “members of ours who also belong to ISDA or ISITC. With all the financial institutions getting in the derivatives space and the complex instrument space, we have to go there with them.”

It’s a safe bet that a significant part of the automation will rely on Microsoft technologies. In past issues, we have reported on an automation solution for credit default swaps that Ira Fuchs of XML Associates – now with Microsoft – developed using Microsoft InfoPath.

Like many initiatives in financial services, automation of derivatives has received a hefty push from regulators and industry insiders. More than a year ago, the Federal Reserve Bank of New York called in 14 major derivatives players to discuss the number of outstanding contracts in credit derivatives. The New York Fed tends to get the industry’s attention and the result of its call to the industry has been a significant reduction in the backlog of outstanding contracts.

McMahon said that the industry needs to automate as much of the business as possible so firms can process the standard contracts, or the standard parts of complex contracts, and then focus their energies on the exceptions.

“This is about freeing up resources in the middle or back office to allow the firms to focus on the 15 to 20 percent that will never be automated,” she said. Hedge funds especially are going into different asset classes, and the back offices have been lagging behind.

“They are making so much money, it is easier to hire bodies than invest in automation. They should be embarrassed. There are things they can do.” And now with SWIFT getting involved, there is more that they can do.

- Tom Groenfeldt