Standards, Community and Change

Standards exist across industries and create efficiencies and cost savings for many. But the world of standards is not as simple as it initially appears. In this series, we’ll examine why standards matter, what kinds of questions to ask when standards are being created, and what this all means for the financial services industry.

Our world is constantly evolving. There is a point where existing standards have served their purpose, but to evolve and advance, there are new standards that must come into being. This is especially true in the area of information. We’ve seen it time and again. The cassette tape gave way to the compact disc. The CD gave way to multiple digital formats that converged around the mp3. In film, 90mm went to 35mm to 8mm home movies then digital HD to mp4. Photographs rapidly changed from various film types to digital.

In the financial industry, communication has also evolved quickly during the digital age, changing with technological advances and new understandings of how information is exchanged. In some cases, the specific standard has changed to meet evolving needs, but at some point tinkering with the standard becomes a function of diminishing returns when compared to creating a new standard that utilizes the latest tools and technology.

But these changes do not happen naturally. In fact, change is usually resisted, especially when the potential effect and improvement isn’t understood. For example, opposition to moving away from faxes resulted in OCR (Optical Character Recognition). While this may have made sense in earlier days, today even the smallest investor or firm should be able to use a web browser for data entry. Yet, we still have faxes.

There are a number of standards that exist in finance and few that have been retired in favor of new, more functional replacements. ISO7775 was the original ISO standard for communicating payment information and post-trade messaging. It was replaced in 1999 by ISO15022, which was based on modern modelling and communication methodologies. (And we shouldn’t forget ISO20022, which does not really ‘replace’ ISO15022, but serves a slightly different purpose.)

However, while both ISO7775 and ISO15022 provided messaging functionality, the FIX Protocol focused on broker-to-broker front office communication to meet a perceived gap in the ISO standards. At the same time, along came FpML as the new derivatives products requirements didn’t fit in either ISO15022 or FIX messaging. Note that all three of these are supported by different standards organizations that represent slightly varying communities.

Resisting change is easy. Those advocating for change are usually pushing the boundaries of what current standards can actually support. It is easy to say, “I don’t have that problem, so it must not exist.” But the first statement does not affirm the latter. Just because a group – even a majority group – does not have or ‘see’ a need for change does not mean that the issue does not exist, or that it doesn’t need to be solved. While FIX, ISO and FpML have come a long way in working together, for a long time each argued that the other wasn’t necessary or was duplicative.

And so I come full circle. Standards exist to enable a community. They should not be used to prevent change or ignore the needs of another community. Standards are necessary, reduce costs, create efficiencies, promote advancements and prevent a ‘wild west.’ But an approach that does not occasionally evolve – sometimes rapidly – can do more harm than good.

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http://www.bloomberg.com/enterprise/blog/standards-community-and-change/