Letters obtained by Finextra show an exchange by the ECB and Swift regarding the latter’s responsibility to mitigate risks caused by its decision to delay migration to ISO 20022.
During its March 2020 meeting the Swift Board and Executive endorsed a decision to shift their ISO 20022 migration date for cross-border payments from November 2021 to end 2022.
The unexpected decision was met with surprise from institutions across the European market which now face another hurdle in the monumental transition to the new data-rich financial messaging language.
Within the letters, the central bank points to the implications the migration delay will cause for the European Banking community and requires that Swift “mitigate associated risks on European banks in view of their migration to the new T2-T2S consolidated platform in November 2021.”
In the letter addressed to Swift’s CEO Javier Pérez-Tasso, the ECB’s director general of market infrastructure and payments, Ulrich Bindseil, says: “In your e-mail on 03 April 2020, you confirm being fully aware that your decision would have consequences for participants in Target2 and that it was thoroughly and widely discussed within the SWIFT community. In this context whilst we would have preferred deeper consultation before the decision, we also appreciate the engagement with Swift after the Swift board took its decision in March.”
The letter highlights the concerns held regarding the postponed adoption of ISO 20022 for cross-border payments as negatively affecting banks’ internal adaptation plans for the migration to the T2S service. European banks have worked under that assumption that their capability to send existing MT messaging would be decommissioned after November 2021, however, as this assumption is now void European banks will have to review their plans on short notice.
In Swift’s response dated 21 April 2020, Pérez-Tasso acknowledges that the change of plan “introduced a limited but significant data truncation issue for euro HVP participants that operate as intermediaries in transaction with a cross-border ‘leg out’.”
The CEO continues that consultation on the new strategy was limited due to market sensitivities “to bilateral exchanges with a cross-section of Swift users and central banks (including ECB) this concern was identified before the decision was taken, and mitigating measure were proposed. Swift is committed to working with the ECB…to develop fully these measures, as requested and detailed in your letter.”
The non-exhaustive list of mitigating measures that Swift must undertake are as follows, noting that SWIFT:
is accountable for the creation of an updated market practice and message usage guidelines for ISO 20022 cross-border payments together with the European banking community by end June 2020;
offers free validation software for cross border payments traveling via European payments market infrastructures;
offers free translation software for cross border payments which have to be mapped from ISO 20022 to MT;
is accountable for the creation of an opt-in solution for ISO 20022 cross border payments, i.e. a dedicated Closed User Group (CUG) to exchange ISO 20022 messages for correspondent banking use cases.
The ECB also requires that Swift publish a blueprint no later than early May 2020, in order for European banks to adapt their plans and Swift is to share the draft blueprint with the ECB in advance. As the community testing phase for the T2-T2S Consolidation project is set to commence in March 2021, the ECB recognises that this looming deadline means it is “critical” that these measures are “communicated without delay to the community of TARGET2 users.” The ECB’s Ulrich Bindseil comments: “the ECB and Swift have worked closely together to ensure that financial institutions in the euro area can efficiently transition their systems to ISO 20022." “We have developed a plan to ensure data compatibility between cross-border payments sent with ISO 20022 and the MT message type. This will help eliminate the risk of data truncation as financial institutions in the euro area migrate to the ISO 20022 standard." “More concretely Swift will develop market practice rules and guidelines and provide message validation and translation software for cross-border payments to the T2 members. Both the ECB and Swift will continue to work closely together during the ISO 20022 migration to ensure all market participants are able to realise the benefits that rich data services will bring to the market.” Swift explains that the decision to delay was endorsed in order to support the platform’s “ambitious” new strategy announced in March to make “account-to-account cross-border transactions as seamless as domestic ones.” Pérez-Tasso states: “We want to ensure that our community can quickly realise benefits from their investments to adopt ISO 20022, so it’s important that we have the foundation of this new platform in place. Swift has a strong and very collaborative relationship with the ECB, and we have worked together closely and quickly to ensure this modified timeline is workable for the Eurozone financial services community. We will continue to coordinate closely to ensure the successful migration to ISO 20022 and the many advantages it will bring to the market.” What remains to be confirmed is the estimated cost of Swift’s decision to delay migration for European banks, whether the ECB will enforce penalties should Swift fail to deliver on the set of measures and for how long Swift's supplementary measures will remain available to European banks. We await the imminent publication of Swift's blueprint for further clarification.