Page: 1 ©2011 Object Management Group Two Faces of Financial Services Standardization Richard Mark...

Page: 1

©2011 Object Management Group

Two Facesof

Financial Services Standardization

Richard Mark Soley, Ph.D.Chairman and CEO

Object Management Group, Inc.

20 October 2011

Elemental Links©2011 Object Management Group - Page: 2

A Story from My Hometown

• Great Baltimore Fire of 1904• Response from Philadelphia, Washington, New York, Virginia,

Atlantic City… hundreds of firefighters• Burned for two days, 60 hectares• Why?


Standards Are Important

• Sometimes they have life-or-death consequences

• Successful standards start, maintain and build ecosystems & businesses

• Standards are product differentiators:– Marks of quality– Expertise (certification, validation)– Interoperability, Portability & Reuse


Integration is Hard

Executive decisions, mergers & acquisitions have a way of surprising us…


One Standard?

• No…but the cost of adaptation must be low.


OMG’s Mission

• Develop an architecture, using appropriate technology, for modeling & distributed application integration, guaranteeing:– reusability of components– interoperability & portability– basis in commercially available software

• Specifications freely available• Implementations exist• Member-controlled not-for-profit


Who Are OMG?

Adaptive

Atego

Boeing

CA Technologies

Citigroup

Cognizant

CSC

EADS

Eclipse Foundation

EDS

FICO

Firestar Software

Fujitsu

HCL

Hewlett Packard

Hitachi

HSBC

IBM

Lockheed Martin

Mayo Clinic

Microsoft

MITRE

Model Driven Solutions

National Archives

NEC

NIST

No Magic

NTT DoCoMo

Northrop Grumman

OASIS

OIS

Oracle

PrismTech

SAP

SWIFT

TCS

THALES

Unisys

Wells Fargo

W3C


You Can’t Do it Alone


OMG & Modeling

• Best known for key standards in modeling languages and middleware:– UML (broad software & systems)– SysML (systems engineering)– SoaML (service-oriented architectures)– BPMN (business processes)– CWM (data warehouses)– MOF (modeling languages)– UPDM (enterprise architectures)– CORBA (distributed object-oriented middleware)– DDS (real-time publish & subscribe middleware)


OMG’s Focus

• Three key “infrastructure” standards foci:– Modeling– Middleware– Real-time & other specialized systems

• More than 20 “vertical market” foci:– Healthcare– Financial services– Robotics– Etc.

• Focused working groups– Business Architecture– Cloud Computing

• All in a common context


21st Century Enterprise: Globalization


21st Century Enterprise: Connectedness


21st Century Enterprise: Digital Markets & Value Chains


21st Century Enterprise: Continuous Innovation


21st Century Enterprise: Change Creation & Adaptation

"If you don't like change, you're going to like irrelevance even less.”

- General Eric Shinseki, Chief of Staff, US Army.


21st Century Enterprise

=

Complexity


The Enterprise Architecture Mission

Create an Environment for:

That Embraces: And Manages:


An Enterprise Blueprint

This is not an architecture

This is not a house


The Environment

Business IT Integration Portfolio Planning & Management

Business Agility Platform Enforcement to Compliance


Enterprise Architecture in 2010

• Technology Focused

• Governance & Control Origins

• Business & Technology Focus

• Business Advancement

• Portfolio Productivity

• True Enterprise Level Function


Traditional Business and IT Collaboration


Service-Oriented World Business and IT Collaboration

EA 2010

STANDARDS


Beware the Alignment Trap

"A lack of alignment can doom IT either to irrelevance or to failure”.

“…a narrow focus on alignment reflects a fundamental misconception about the nature of IT.

Underperforming capabilities are often rooted not just in misalignment but in the complexity of systems,

applications and other infrastructure.”

“Aligning a poorly performing IT organization to the right business objectives still won’t get the

objectives accomplished”. - Avoiding the Alignment Trap in IT, MIT Sloan Review, Fall 2007


Enterprise Architects Need Business Smarts

“One of my VPs said, I’m never bringing [architect] to another meeting because he opens his mouth and all that ever comes out is SOA, SOA, services-oriented architecture, and I can’t bring him to my business

clients.

A year later, he is the most articulate business speaker and has really turned the community where they now

say, we want [architect] at all of our meetings.”

- CIO, Fortune 200 Company


You Are Not Alone

• There are plenty of organizations that are on this path• There are thousands of people learning to be

enterprise architects and spanning the business/technology gap

• From the standards perspective, modeling is an important way to understand systems– That’s not a particularly new idea, see bridge-building– Don’t forget where the word “architecture” came from

• There are organizations that bring together people– Business process excellence: service architecture meets the

business– Object Management Group: business architects & modeling

standards


Financial Services Standards Proliferation

• The Financial Services world already features dozens of standards– In inter-bank payments & trading alone, hundreds of

standards, near-standards, in-house standards and one-off solutions: ISO 20022, ISO 15022, MT, FIX, FpML, IFX, etc.

– Financial services richly displays the “N+1 Problem” – one standard to rule them all


Two Standards in Financial Services

• Let’s focus on two specific OMG standards• Consortium for IT Software Quality

– Increasing the measured quality of delivered software

• OMG’s Financial Services Task Force: Financial Industry Business Ontology– Increasing the interoperability of financial services

messaging and reporting without increasing complexity


Software Quality: The Problem

Regardless of methodology & approach, the biggest problem in IT today is inconsistent and unreliable software quality

Cloud computing and SOA make the problem 10 times worse: you must rely on software you don’t own, you don’t see, you don’t control, and you can’t fix

CMMI solves the process problem, butdoesn’t address the product problem.


The Software Quality DilemmaThe Software Quality Dilemma

National Research CouncilNational Research CouncilSoftware for Dependable SystemsSoftware for Dependable Systems

“As higher levels of assurance are demanded…testing cannot deliver the level of confidence required at

a reasonable cost.”

“The correctness of the code is rarely the weakest link.”

“The cost of preventing all failures will usually be prohibitively

expensive, so a dependable system will not offer uniform levels of

confidence across all functions.”

Jackson, D. (2009). Communications of the ACM, 52 (4)


Software Engineering’s 4Software Engineering’s 4thth Wave Wave

What: 3rd & 4th generation languages, structured programming

When: 1965-1980

Why: Give developers greater power for expressing their programs

What: 3rd & 4th generation languages, structured programming

When: 1965-1980

Why: Give developers greater power for expressing their programsLanguagesLanguages

11

What: Design methods, CASE tools

When: 1980-1990

Why: Give developers better tools and aids for constructing software systems

What: Design methods, CASE tools

When: 1980-1990

Why: Give developers better tools and aids for constructing software systemsMethodsMethods

22

What: CMM/CMMI, ITIL, PMBOK, Agile

When: 1990-2002

Why: Provide a more disciplined environment for professional work incorporating best practices

What: CMM/CMMI, ITIL, PMBOK, Agile

When: 1990-2002

Why: Provide a more disciplined environment for professional work incorporating best practicesProcessProcess

33

What: Architecture, Quality characteristics, Reuse

When: 2002Why: Ensure software is constructed to standards

that meet the lifetime demands placed on it

What: Architecture, Quality characteristics, Reuse

When: 2002Why: Ensure software is constructed to standards

that meet the lifetime demands placed on itProductProduct

44


Why CISQ?Why CISQ?

• Industry needs software quality measures:– Visibility into business critical applications

– Control of outsourced work

– Benchmarks

• Current limitations:– Manual, expensiveinfrequent use

– Subjectivenot repeatable or comparable

– Inconsistent definitionsburdens usage


CISQIT organizations,

Outsourcers,Government,

Experts

Define industry issuesDrive standards adoption Application quality standard

Other standards, methodsTechnical certification

Partnership

IT Executives

Technical experts

What Is CISQ?What Is CISQ?


CISQ MembersCISQ Members


Initial CISQ ObjectivesInitial CISQ Objectives

Raise international awareness of the critical challenge of IT software quality1

Develop standard, automatable measures and anti-patterns for evaluating IT software quality2

Promote global acceptance of the standard in acquiring IT software and services3

Develop an infrastructure of authorized assessors and products using the standard4


Integrating Existing Standards

CISQExec

Forum

Function Points

Maintainability

Reliability & Performance

Security

Methods for Metrics Use

OMG

Technical Work Groups

BestPractices

Defined Measures

Knowledge Discovery Meta-modelStructured Metrics Meta-model

Weaknesses& Violations

Pattern Metamodel; KDM

ISO250001414327000

ISO15939

ISO17799CVSS


Another Example: FIBO

• Financial Industry Business Ontology– Industry initiative to define financial industry terms,

definitions and synonyms using semantic web principals and widely-adopted OMG modeling standards

– A joint effort of the OMG and the Enterprise Data Management Council (EDM-C)

– Driven by immediate requirements to capture financial surveillance (reporting) data (e.g., Dodd-Frank laws in the United States and similar post-2008 rules worldwide)

– Relentlessly focused on not reinventing but integrating existing standards (avoid the “N+1 Problem”)


Financial Industry Business Ontology

IndustryStandards

Term, Definition, Synonym

ISO 20022 FpML

XBRL

Financial IndustrySME Reviews

RDF/OWL

OMG

Input

Generate(via ODM)

Graphical Displays

Semantic Web Ontology

UMLTool

Representations


Initial Mission & Goals

• Mission Statement: Demonstrate to the regulatory community and the financial services industry how:

– semantic technology and the Financial Industry Business Ontology (FIBO) model can be effectively utilized to fulfill:

• regulatory governance• data standardization• risk management• data analytics requirements

– specified by the Dodd-Frank legislation– using currently available data sources and messaging protocols

• Intent: To encourage open discussion and sharing of ideas among regulatory and financial industry stakeholders about the value and applicability of semantic solutions to effectively realize transparency, risk mitigation and systemic oversight objectives

• Members include 89 major financial institutions worldwide (BOA, Barclays, Citigroup, Deutsche, Fannie Mae, Federal Reserve Bank NY, HSBC, Goldman Sachs, JP Morgan Chase, Morgan Stanley, RBC, RBS, UBS, Wells Fargo, etc.


Initial Drivers & Strategy

1) Define Uniform and Expressive Financial Data StandardsAbility to enable standardized terminology and uniform meaning of financial data for interoperability across messaging protocols and data sources for data rollups and aggregations

1) Define Uniform and Expressive Financial Data StandardsAbility to enable standardized terminology and uniform meaning of financial data for interoperability across messaging protocols and data sources for data rollups and aggregations

2) Classify Financial Instruments into Asset Classes*Ability to classify financial instruments into asset classes and taxonomies based upon the characteristics and attributes of the instrument itself, rather than relying on descriptive codes

2) Classify Financial Instruments into Asset Classes*Ability to classify financial instruments into asset classes and taxonomies based upon the characteristics and attributes of the instrument itself, rather than relying on descriptive codes

3) Electronically Express Contractual Provisions**Ability to encode concepts in machine readable form that describe key provisions specified in contracts in order to identify levels of risk and exposures

3) Electronically Express Contractual Provisions**Ability to encode concepts in machine readable form that describe key provisions specified in contracts in order to identify levels of risk and exposures

5) Meet Regulatory Requirements, Control IT Costs, Incrementally DeployAbility to define data standards, store and access data, flexibly refactor data schemas and change assumptions without risk of incurring high IT costs and delays, evolve incrementally

5) Meet Regulatory Requirements, Control IT Costs, Incrementally DeployAbility to define data standards, store and access data, flexibly refactor data schemas and change assumptions without risk of incurring high IT costs and delays, evolve incrementally

4) Link Disparate Information for Risk Analysis *Ability to link disparate information based upon explicit or implied relationships for risk analysis and reporting, e.g. legal entity ownership hierarchies for counter-party risk assessment

4) Link Disparate Information for Risk Analysis *Ability to link disparate information based upon explicit or implied relationships for risk analysis and reporting, e.g. legal entity ownership hierarchies for counter-party risk assessment

*Swap Data Recordkeeping and Reporting Requirements, CFTC, Dec 8, 2010*Report on OTC Derivatives Data Reporting and Aggregation Requirements, the International Organization of Securities Commissioners (IOSCO), August 2011**Joint Study on the Feasibility of Mandating Algorithmic Descriptions for Derivatives, SEC/CFTC, April 2011


Meeting Swap Regulatory Requirements

1) Monitor gross and net counterparty exposures for:Notional volumes per contractCurrent values per swap based on valuation criteria dependent upon market conditions and/or lifecycle events

daily margindaily mark-to-market

Exposures before collateralExposures net of collateral

1) Monitor gross and net counterparty exposures for:Notional volumes per contractCurrent values per swap based on valuation criteria dependent upon market conditions and/or lifecycle events

daily margindaily mark-to-market

Exposures before collateralExposures net of collateral

2) Monitor across full counterparty breakdownsIdentify counterparty risk concentrations for individual risk categories and overall marketIdentify all swap positions within the same ownership group

2) Monitor across full counterparty breakdownsIdentify counterparty risk concentrations for individual risk categories and overall marketIdentify all swap positions within the same ownership group

3) Identify products in a categorical wayAggregate and report swap transactions at various taxonomy levels of asset classesEstablish position limits that spans across futures, options, and swap markets

3) Identify products in a categorical wayAggregate and report swap transactions at various taxonomy levels of asset classesEstablish position limits that spans across futures, options, and swap markets

*Swap Data Recordkeeping and Reporting Requirements, CFTC, Dec 8, 2010


Initial Drafts & Proof of Concept

1) Provide Standard Financial Data Terminology using SemanticsProvide standardized and unambiguous terminology that can electronically describe the content of an OTC Swap (and related financial terms) using the FIBO conceptual model and ontology.

1) Provide Standard Financial Data Terminology using SemanticsProvide standardized and unambiguous terminology that can electronically describe the content of an OTC Swap (and related financial terms) using the FIBO conceptual model and ontology.

2) Provide Semantic Mapping between FpML and FIBOProvide mapping between messaging protocols e.g. FpML and common domain models e.g. FIBO to enable interoperability and to avoid imposing changes and alterations to existing messaging protocols

2) Provide Semantic Mapping between FpML and FIBOProvide mapping between messaging protocols e.g. FpML and common domain models e.g. FIBO to enable interoperability and to avoid imposing changes and alterations to existing messaging protocols

3) Semantically Classify Swaps into Asset ClassesClassify swap instruments into asset classes based upon rules that evaluate the attributes and structure of the actual swap data, rather than relying on descriptive codes.

3) Semantically Classify Swaps into Asset ClassesClassify swap instruments into asset classes based upon rules that evaluate the attributes and structure of the actual swap data, rather than relying on descriptive codes.

5) Semantically Define Contractual Provisions to Infer Counterparty Risk CategoriesDemonstrate how provisions of master agreements (e.g. calculations of net exposures, timing of transfers of collateral, forms of eligible collateral etc.), can be electronically realized to infer levels of counterparty financial risk (phase2).

5) Semantically Define Contractual Provisions to Infer Counterparty Risk CategoriesDemonstrate how provisions of master agreements (e.g. calculations of net exposures, timing of transfers of collateral, forms of eligible collateral etc.), can be electronically realized to infer levels of counterparty financial risk (phase2).

4) Demonstrate Advanced Semantic Query CapabilitiesProvide query capabilities that report legal entity hierarchies, levels of asset class taxonomies, exposures of risk across ownership groups and asset classes (phase 2), as well as extract data to be used for risk analytics

4) Demonstrate Advanced Semantic Query CapabilitiesProvide query capabilities that report legal entity hierarchies, levels of asset class taxonomies, exposures of risk across ownership groups and asset classes (phase 2), as well as extract data to be used for risk analytics


That’s Just the Beginning

• In financial services alone, OMG is also defining– Property & Casualty insurance models– XBRL abstraction mechanisms for corporate reporting (with XBRL

International)– Business event-based costing models

• Other standards groups at OMG focus on– Healthcare: defining healthcare systems interoperability standards

(with HL7)– Automotive systems assurance– Smart energy grids– Military & commercial communications (software radio)– Space systems interoperability– Over a dozen other market areas

• End-user focused groups help make transitions– Cloud computing (fastest growing group at OMG)– Business process excellence (business architecture & planning)

Page: 43

©2011 Object Management Group

Contacts

OMG: http://www.omg.org/

Financial Services Standards: http://finance.omg.org/

Software Quality Standards: http://it-cisq.org/

Cloud Computing: http://www.cloudstandardscustomercouncil.org/

Business Excellence: http://www.business-ecology.org/

Richard Soley: [email protected]

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