SWIFT with standards and network routing

The readers of this article will be concerned to understand the opportunities and limitations inherent in messaging and standards and to apply those into the management of their own projects. Messaging is an element within automation standards and should apply across the board and many of the issues here could be mitigated or processes made more efficient depending on whether the technology deployment is built, bought or outsourced . If a technology deployment is designed to be disruptive as a competitive advance or is a reaction to a disruptive technology then this will have an impact on other areas Overarching all of these are of course the issues of budget planning and testing So at this point, it would be useful to look at the concepts discussed already, to see what the practical effects are of a technology deployment in the twenty-first century. We will outline, with the permission of GlobeTax Services Inc., a US-based services provider of withholding tax solutions, a semi-disruptive technology which uses messaging and standards as its platform. The key creative issues in this implementation were the way in which existing technology was harnessed in conjunction with a new paradigm, to create a way of delivering a technology solution that was (and is) both elegant and cost effective.

The solution is targeted at wholesale banking in the custody sector where there are corporate action events that are created as a result of a corporate (issuer of shares) declaring an event (typically in this case, a dividend). As custodian banks manage the assets of their customers, they are significantly impacted by any dividend distribution where the recipient or ‘beneficial owner' is resident in a country different from that in which the income was received. This is because both the issuing country and the receiving country will try to tax the income. Double tax treaties between pairs of countries allow for a recipient to be entitled to recover tax that is essentially over-withheld by the issuing country, but the procedures and processes by which the recipient's custodian is able to do this are both complex and expensive because they are essentially manual. So this case study looks at how.

GlobeTax, with a processing solution, SWIFT with standards and network routing and one of the largest custodians collaborated to create a new paradigm. This new paradigm is important for two reasons. First, it is new and it is probably one of the most important technology management projects undertaken this century. Its ramifications flow well beyond the particular project which kicked it off. Many back-office financial services processes have a manual element which mitigates against the perfect solution of straight through processing . The unique way in which GlobeTax collaborated with industry participants is a good benchmark for others interested in the latest model for technology management in financial services.

As of January 2008 there were over US$100 trillion of assets under custody worldwide. Of these US$30 trillion were held cross-border, that is, the beneficial owner of the asset was resident in a country different from the country where the asset was issued. The growth in cross-border asset values is currently growing at just over 16% a year. With over 500,000 dividend events each year, there is an extant tax amount that is, the amount of tax to which beneficial owners can claim an entitlement under Double Tax Treaties either as ‘relief at source' or as a remedial claim of just over US$1 trillion. Of this, less than 7% ever reaches those who have the entitlement either because no claim is filed at all or because the claim is filed late. This establishes the scale of the need that customers of financial intermediaries have. SWIFT has over 8,200 member institutions and processes around two billion messages a year. Only 2% of those messages relate to corporate action events, of which dividends form a part even though there are ISO15022 messages defined and designed to support corporate actions messaging. graphically demonstrates the technology management issue.

All the boxes which are shaded and all the lines which are dashed represent parts of a process to optimise a customer's tax position and they are manual. As can be seen there are several different ‘actors' in the process, but the custodian, represented here as a SWIFT member, has the responsibility as the custodian of its customer's assets to ‘make things happen'. So, two things collide here, the rock and the hard place. Most, if not all custodians would espouse the concept of straight through processing (STP).

This would mean that all the elements of the process are reduced to data elements handled, validated and transmitted between the parties electronically. This is common among other corporate action events including proxy voting, stock splits, class actions and so on. So the problem is that while the financial institution wants STP, at the corporate action level it is simply not possible. In the case of withholding tax, apart from any given custodian's use of technology, there are others in the process chain that either cannot or will not accept STP, namely tax authorities either in their capacity as local certification authority or in their capacity as foreign tax authority receiving a claim. In the current scenario this is a paradox. There would appear to be no way to achieve STP through the use of technology.

The solution So, here we have it. Custodians can't use technology to automate this process. The solution actually lay in bringing together three concepts. GlobeTax already provides withholding tax services to beneficial owners and custodians. So, in principle, if the custodian were prepared to outsource this process, it would remove the manual process. The problem is that while the processing solution exists, the custodian has a regulatory obligation to keep its client data safe. So any transmission of data must not only be secure, it must also be protected in transit. Finally, if the custodian is to truly automate the process on a consistent level, any transmissions must use a recognised standard. Enter SWIFT. SWIFT worked with GlobeTax to identify the suite of ISO15022 standard messages that would be needed to encompass all the information movements needed to give the custodian a ‘data out, data in' solution. GlobeTax applied for and was granted the ability to run a Service Bureau on the SWIFT network which would give it the ability to receive data to work on. As in any technology management project, there were issues to resolve.

Service Bureaux on the SWIFT network are not permitted to have their own nodes (or Bank Identifier Codes). These BICs are the addresses used to send and receive data on the network. Although GlobeTax is a service bureau, it didn't have its own BIC. So the problem was finding an address to which a custodian could send data, from where GlobeTax could pick it up. The solution was quite simple. SWIFT allowed the custodian, already a SWIFT member, to be granted an ‘additional destination BIC' or ‘ADBIC'. The management of that ADBIC was assigned by the custodian to GlobeTax. Now, essentially the custodian is sending data to itself, that is, from its primary BIC to its own ADBIC. Its just that the ADBIC is managed by GlobeTax, so it picks the data up. The second problem was the nature of the messages. GlobeTax needed two types of data to do its job: Income data and Beneficial Owner data. The first could be delivered using a SWIFT message MT566. But there was no message type in the SWIFT corporate actions catalogue that allowed for a list of beneficial owners to be transmitted between the parties. At this stage, the methodology for standards development, discussed earlier, becomes important. Any institution can submit a request to SWIFT to modify the scale or scope of use for any given message.

Two years earlier, GlobeTax had already submitted a request to modify the scope of use for a message MT574 in order to support its ability to help its customers meet the regulatory requirements of US 1441 NRA tax regulations. That modification allows beneficial owner data to be transmitted. So the circle was complete. This highlights one of the keys to technology management in financial services. Its not always obvious what the solution is going to be, at the time that you define the problem. In many cases, its necessary to ‘posit' that a technology deployment would work if certain things could be done, even though they aren't possible at the time. In fact I would argue that many deployments are possible but never get designed simply because the business level always assumes that technology deployments will use existing techniques and not invent new ones or deploy them in a new way. To return to the corporate actions solution. The third problem was multiple blocks in messages. Certain message types can allow for several repeated subsections within one message. This makes certain data transmissions very efficient. The lack of repeatable blocks conversely means more pain as each subsection has to be sent as a separate message. SWIFT's solution here was to suggest one of its other products, FileAct which could wrap multiple data sets together wherever the equivalent

MT message did not have the appropriate functionality. So, as you can see, like any technology management issue, there were difficulties to be overcome. But the essential element was thinking about the technology problem in a different way and not presuming that just because it hadn't been done it could not be done. The solution, once the problems were ironed out created the potential for a process that, from the custodian's perspective, was STP. It wasn't real STP because all that had happened was that the manual parts of the process had been outsourced. But where outsourcing is usually seen as a business issue related to cost or risk reduction, in this case outsourcing was a tool designed to be a catalyst for a different model. above shows the summation of the solution. Each party brings certain elements to the solution. As a technology management project this demonstrates many of the issues discussed in this article. SWIFT brought ISO standards as well as a secure network over which data could flow. GlobeTax brought its processing solution so that the messages had a reason to flow and could be integrated into its proprietary systems. The custodian (SWIFT member) brought the manual problem it had to solve and ended up with something that wasn't STP, but wasn't manual either, and so the term was coined Virtual-STP or V-STP. Referring back to earlier in this article, the reader should now compare that with which represents the process flow of the ultimate solution.

SWIFT with standards and network routing

Legal Disclaimer

Related Articles