citi opts for swift t2s link as industry readies for · pdf filethe euro, target2 securities...

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12 Emerging markets

16 Operational risk

27 Swift standards testing

Citi has opted for Swift’s Value Added Network to connect to the European Central

Bank’s (ECB’s) settlement system for the euro, Target2 Securities (T2S). The move indicates the financial industry has accepted that T2S, which will go live in June 2015, will become a reality.

At Sibos last year, the ECB announced a delay to the launch of T2S as it recognised it was not realistic to stay with the 2014 launch plan. The bank cited the amount of change requests that had come from users and the need to expand user testing periods as reasons for the delay.

The introduction of T2S is expected to cause consolidation among Europe’s central securities depositories and may also lead to financial institutions settling directly in T2S, rather than through agent banks.

Swift, along with a joint venture between Italy’s SIA and the UK’s Colt, hold a connectivity licence for T2S. They will build the network that will link CSDs with the ECB and charge fees to users.

Citi said it opted for Swift because of the cooperative’s status as a long-standing provider of critical infrastructure for the financial industry, the highly competitive pricing being offered, and finally the choice of Swift will give Citi the ability to leverage its existing infrastructure for T2S.

Alain Raes, chief executive, Emea, Swift, said any remaining doubts in the European market about T2S and whether it would happen have been removed and firms are now focused on the benefits it will deliver.

“There is some concern about the costs of T2S, which have been estimated at between half to three billion euros,” he said. “Financial institutions have been asking how they can cope with compliance and regulation in the context of limited growth in the securities industry.”

Given Swift’s “natural footprint” of activity in every country in Europe and its connections to CSDs, Raes said the cooperative could offer economies of scale that are very attractive to financial institutions. Also, the more traffic

that comes over the network, the more Swift can pass on in terms of cost reductions to its users.

“T2S will help the general drive towards efficiency in Europe’s securities industry, which aims to have as efficient and cost effective settlement for the euro as exists for the US dollar,” he said.

It was also announced yesterday that T2S and Citi had signed up to use MyStandards, joining Clearstream, which announced its adoption of the standards methodology on Tuesday.

MyStandards will enable T2S to consistently share standards specifications with its user base. Brian Crabtree, director of market practice, standards and Swift at Citi, said having the T2S specs on MyStandards will let Citi see what is required and what isn’t.

Raes said MyStandards was about helping the financial industry put together information about local practices and standards use. “T2S is bringing ISO 20022 into the loop and is a huge re-engineering project for firms to adopt and integrate new standards into their operations.”

ThE indEpEndEnT nEwSpapEr ThurSday 1 nOvEmbEr 2012

DAY 4

IN THIS ISSUE

citi opts for swift t2s link as industry readies for 2015By Heather McKenzie

anniversary: CElEBRATING 20 yEARS OF Daily News at sibos

“We must remember that OTC derivatives are just another financial instrument”Tomas Kindler, siX securiTies services

22 Clearing

www.bankingtech.com/sibos/

Compliance is Swift’s “most important topic”, Swift chairman Yawar Shah told delegates at yesterday’s Compliance

Forum opening address, where the speakers focused on the US sanctions against Iran.

Banks are demanding help with increasingly costly compliance, said Shah, and Swift is ideally positioned to assist with a staff that is “second to none.” However, he stressed that the organisation would not be a lobbying group for financial institutions. “It is our job to be aggressive on your behalf” creating standards but, ultimately, Swift’s position is like any other vendor: compliance liability sits with the operator.

Adam Szubin, director of the US Treasury Department’s Office of Foreign Assets Control (Ofac) said international financial institutions had a stark choice under the US financial sanctions against Iran: stop dealing with blacklisted Iranian

banks, or be denied access to the US financial system.

Szubin said the US had designated 23 Iranian financial institutions suspected of facilitating the country’s nuclear program and supporting “terrorist” groups. US sanctions targeted Iran’s primary source of income: oil exports. Oil revenues comprised about 80 per cent of the Islamic republic’s incoming profit stream, said Szubin. Financial institutions that handle Iranian oil export transactions risk censure under various regulations, but there are exemptions for countries that reduce oil imports from Iran.

When queried by Toshihiko Ogata, chief economic correspondent of Asahi Shimbun about concerns among international banks that the US Government is trying to regulate outside of its jurisdiction, Szubin said the Treasury

Department and Congress can regulate activity and threaten consequences only for banks in the US, but they recognise the powerful deterrent on international financial institutions of losing their correspondence with US banks. Szubin further asserted that sanctions against Iran were not an exclusively American campaign, citing multiple United Nations sanctions and initiatives by countries other than the US.

Okada raised the issue of the Threat Reduction Act, commenting that it may compromise Japan’s (and other countries’) ability to source the oil it needs even with an exemption, but Szubin countered that the act was not intended to prevent countries from buying oil or exporting goods, but rather to circumvent evasions of the sanctions. “We expect that Japan will be able to continue to purchase Iranian oil,” he said.

w w w.bankingtech.com/sibos/

Daily News at sibos

Thursday 1 November 2012 3

NEws

Banks hear customer care tips from car makers By George Bourdaniotis

Compliance is king, but we don’t lobby, says swift By Gareth Swain

The fact that there has not been a focus on consumer standards in

financial services is an actual failure of the industry, said Alistair Milne professor of financial economics at Loughborough University, yesterday. “During the past decade, the UK has had a succession of mis-selling scandals. The automobile industry is getting it right in terms of consumer safety, but the financial industry is not doing it so well.”

Fellow speaker in yesterday’s Standards Forum session on lessons banks could learn from the automotive industry, Richard Soley, said the consumer was not less important in finance, just less focused on. Soley, chairman and chief executive at Object Manage Group, said the lack of focus on business to consumer (B2C) standards is why it took a decade to get ATM interoperability.

Milne said standards in the retailing, finance and other industries concern product design, rather than the actual production

process as in the automobile industry.

Automobile products are used by the general user in diverse and dynamic environments, so the Toyota group, which accounts for 7 per cent of Japan’s GDP, focuses most on human-machine interface. The end-consumer decides if a product is successful, and by default decides which standards are successful.

“End-users evaluate our products. Our business fails if we don’t get a good evaluation. So the top-down approach is not good for our products,” said Akira Ohata, senior general manager, Advanced Engine Development Division at Toyota.

The automobile industry has both standards and regulations. The industry must adhere to regulations that concern safety, exhaust emissions, noise protection systems and other factors. Standards are set by individual companies, or the industry, to increase development efficiency and maintenance

efficiency in the industry; they should be advantageous to the end-user. Standards are also important for companies to work with suppliers.

“In the financial industry, getting rid of legacy systems may be a way of improving and adhering to the standards,” said Ron Berndsen, professor of financial infrastructure and systemic risk at Tilburg University.

Soley said standards, in general, are set in many ways, but the most successful standards grow from collaboration, through standards organisations. Ohata explained how an employee’s proposal to the company regarding an existing problem led to the development of the Japan Automobile Manufacturers’ Association. A committee was created across the industry, and it succeeded. In most cases, standards start bottom up in the automobile industry. Milne said the German automobile industry is setting a good example by working with the retail supply chain body, GS1, on standards

of components, not for the new car but for the spare part market. By establishing the standard, manufacturers have reason to produce parts and consumers are reassured parts will be available at a reasonable price in ten years’ time.

“More focus needs to be on the consumer rather than regulatory demand and financial organisation demand. The plethora of ways we deal with retail banks shows there is a need for standardisation there,” said Soley.

Milne said the biggest cause of public discontent about the financial industry since the crisis was its failure to supply services for consumers.

Bernsden added: “Most of the financial industry sees regulations and standards as things that need to be adhered to and that cannot be used to their own advantage. Whereas in the automobile industry there are standards that the industry wants to adhere to, because it’s what the consumer wants.”

Asia makes inroads into financial crimeBy Gareth Swain

Focus shifts to volatile MEA for Sibos 2013By Heather McKenzie and David Bannister

The past 12 months have been the “most focused” in terms of tackling financial crime, according

to Tom Scampion, partner, information and technology risk at Deloitte. “Banks are making significant investment in the tools to combat crime.”

Speaking during yesterday’s Compliance Forum discussion on financial crime in Asia, fellow panellist Neil Katkov warned that the Asian financial landscape, though, still has “nooks and crannies where different things can happen”. Katkov, head of Asia at Celent, said virtually every country had laws and regulations to prevent financial crime, but enforcement was lacking in some places.

Cassandra Hewett, deputy group money laundering reporting officer at ANZ, also saw distinctions between Asia and other regions. There was a lot more “diversity in political ideals, regulatory approaches, maturity and infrastructure of regulators and relationships with law enforcement” in Asia, she said.

Legislation was not as good as it could be, but would improve as risks increased. “It’s hitting closer to home.”

This sentiment was echoed by David Howes, global head of financial crime risk in the Wholesale Banking Division of Standard Chartered Bank, who said: “There is diverse financial regulation in this region. Hong Kong, Japan and Singapore are consistent with what we’d see in Europe or North America, but that’s not true in some of the less developed places.”

Howes suggested banks operating in multiple jurisdictions needed to decide if they are going to apply a consistent global standard for vigilance against financial crime or simply meet the minimum standards in each country. The former is “the only approach that can make sense”, he said. “That’s your best protection, and also just good business practice.”

Howes said there were certain region-specific issues relevant to the identification of predicate crimes to money laundering. A bank such as

Standard Chartered that had a high volume of cross-border transactions would typically look at typologies linked to the corruption that exists in many countries in Asia. Hewett concurred and cited the Asia Pacific Group Typologies Report of 2011, which listed corruption, laundering of corrupt proceeds and bribing of officials as the top risks.

All three panellists agreed on the importance of front-line vigilance and the need for financial institutions to know their customers. Katkov said technology was improving and many organisations were trying to centralise work in this area, but over-reliance created the risk of “pulling things away from the front line”. Tools to assess financial crime risks, he said, should include those that people on the front lines can use.

“We can’t underestimate the human element,” added Hewett. “The front line staff know who these customers are, and know that they have a political affiliation before we’ve even on-boarded them.”

With Sibos coming to a close, focus is turning to the Middle East and Africa regions as the Sibos juggernaut moves to Dubai next September. The themes of 2012 are likely to remain, although the focus on emerging markets may well shift from Asia Pacific to Africa.

The unrest and revolutions in the Middle East during the past year, and continuing problems in countries such as Bahrain and Syria, mean the region is foremost in financial institutions’ minds. Political stability has returned to many countries, particularly Egypt, said Arindam Das, head of HSBC securities services Middle East and North Africa at HSBC Bank Middle East. “This region has very prosperous oil exporting companies and surpluses that are being invested into infrastructure,” he said. “The capital markets in the Middle East don’t always reflect the economics of the region. There are very wealthy family businesses and government

bodies that are not listed companies.” This is changing, he said, albeit slowly. There are also very sophisticated sovereign wealth funds, which tend to invest outside of their home markets, because local markets don’t have the depth to absorb such wealth.

George Nast, global head, product management transaction banking at Standard Chartered Bank said the unrest in the Middle East separated the “fly by night” providers from those that had core relationships with their clients. During times of turbulence, he said, it was important to stand by customers.

Stability was also cited as important during such times by Alan Verschoyle-King, global head of sales and client management, treasury services, at BNY Mellon. “Clients investing in the region want stability and security. Clients within the region want us to stand by them as political and economic challenges arise. For some foreign institutions operating

in such regions, this commitment can be too difficult.”

Nast said Dubai was “in the heart of our footprint”. The themes of 2012 would continue at Sibos Dubai, with a particular focus on the shift towards the East, in which the Middle East has a role to play. “There are significant trade corridors between the Middle East and India and the Middle East and East Asia. There are major energy producers in the Middle East and big energy consumers in East Asia.”

Colin Nutt, vice-chairman financial institutions, Barclays Corporate Banking, said Dubai would be “home turf” for the bank as it hosts its FI business centre. “It’ll be easier for us in that it is closer to base and we have operations there. But I’ve been surprised how well it has gone in Osaka. The logistics were challenging, and it is expensive, but the quality is outstanding.”


Daily News at sibos

Thursday 1 November 2012

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2

EditorHeather McKenzie

dEsign, production and photographyKosh Naran sub-Editor and rEportErPaul Skeldon

rEportErsDavid BannisterElliott HolleyGeorge BourdaniotisGareth Swain

publishErTim Banham

salEs ManagErSadie Jones

MarkEting ManagErSophie Burdajewicz

printEd by The Daily News at sibos is an independent newspaper. It is wholly owned and published by Informa Telecoms & Media, a subsidiary of Informa plc and publisher of banking technology. The editorial content and design is dictated by the editor and no other outside source.

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Compliance is Swift’s “most important topic”, Swift chairman Yawar Shah told delegates at yesterday’s Compliance

Forum opening address, where the speakers focused on the US sanctions against Iran.

Banks are demanding help with increasingly costly compliance, said Shah, and Swift is ideally positioned to assist with a staff that is “second to none.” However, he stressed that the organisation would not be a lobbying group for financial institutions. “It is our job to be aggressive on your behalf” creating standards but, ultimately, Swift’s position is like any other vendor: compliance liability sits with the operator.

Adam Szubin, director of the US Treasury Department’s Office of Foreign Assets Control (Ofac) said international financial institutions had a stark choice under the US financial sanctions against Iran: stop dealing with blacklisted Iranian

banks, or be denied access to the US financial system.

Szubin said the US had designated 23 Iranian financial institutions suspected of facilitating the country’s nuclear program and supporting “terrorist” groups. US sanctions targeted Iran’s primary source of income: oil exports. Oil revenues comprised about 80 per cent of the Islamic republic’s incoming profit stream, said Szubin. Financial institutions that handle Iranian oil export transactions risk censure under various regulations, but there are exemptions for countries that reduce oil imports from Iran.

When queried by Toshihiko Ogata, chief economic correspondent of Asahi Shimbun about concerns among international banks that the US Government is trying to regulate outside of its jurisdiction, Szubin said the Treasury

Department and Congress can regulate activity and threaten consequences only for banks in the US, but they recognise the powerful deterrent on international financial institutions of losing their correspondence with US banks. Szubin further asserted that sanctions against Iran were not an exclusively American campaign, citing multiple United Nations sanctions and initiatives by countries other than the US.

Okada raised the issue of the Threat Reduction Act, commenting that it may compromise Japan’s (and other countries’) ability to source the oil it needs even with an exemption, but Szubin countered that the act was not intended to prevent countries from buying oil or exporting goods, but rather to circumvent evasions of the sanctions. “We expect that Japan will be able to continue to purchase Iranian oil,” he said.


Daily News at sibos


NEws

Banks hear customer care tips from car makers By George Bourdaniotis

Compliance is king, but we don’t lobby, says swift By Gareth Swain

The fact that there has not been a focus on consumer standards in

financial services is an actual failure of the industry, said Alistair Milne professor of financial economics at Loughborough University, yesterday. “During the past decade, the UK has had a succession of mis-selling scandals. The automobile industry is getting it right in terms of consumer safety, but the financial industry is not doing it so well.”

Fellow speaker in yesterday’s Standards Forum session on lessons banks could learn from the automotive industry, Richard Soley, said the consumer was not less important in finance, just less focused on. Soley, chairman and chief executive at Object Manage Group, said the lack of focus on business to consumer (B2C) standards is why it took a decade to get ATM interoperability.

Milne said standards in the retailing, finance and other industries concern product design, rather than the actual production

process as in the automobile industry.

Automobile products are used by the general user in diverse and dynamic environments, so the Toyota group, which accounts for 7 per cent of Japan’s GDP, focuses most on human-machine interface. The end-consumer decides if a product is successful, and by default decides which standards are successful.

“End-users evaluate our products. Our business fails if we don’t get a good evaluation. So the top-down approach is not good for our products,” said Akira Ohata, senior general manager, Advanced Engine Development Division at Toyota.

The automobile industry has both standards and regulations. The industry must adhere to regulations that concern safety, exhaust emissions, noise protection systems and other factors. Standards are set by individual companies, or the industry, to increase development efficiency and maintenance

efficiency in the industry; they should be advantageous to the end-user. Standards are also important for companies to work with suppliers.

“In the financial industry, getting rid of legacy systems may be a way of improving and adhering to the standards,” said Ron Berndsen, professor of financial infrastructure and systemic risk at Tilburg University.

Soley said standards, in general, are set in many ways, but the most successful standards grow from collaboration, through standards organisations. Ohata explained how an employee’s proposal to the company regarding an existing problem led to the development of the Japan Automobile Manufacturers’ Association. A committee was created across the industry, and it succeeded. In most cases, standards start bottom up in the automobile industry. Milne said the German automobile industry is setting a good example by working with the retail supply chain body, GS1, on standards

of components, not for the new car but for the spare part market. By establishing the standard, manufacturers have reason to produce parts and consumers are reassured parts will be available at a reasonable price in ten years’ time.

“More focus needs to be on the consumer rather than regulatory demand and financial organisation demand. The plethora of ways we deal with retail banks shows there is a need for standardisation there,” said Soley.

Milne said the biggest cause of public discontent about the financial industry since the crisis was its failure to supply services for consumers.

Bernsden added: “Most of the financial industry sees regulations and standards as things that need to be adhered to and that cannot be used to their own advantage. Whereas in the automobile industry there are standards that the industry wants to adhere to, because it’s what the consumer wants.”

Partnerships between financial institutions and other firms such as telcos offer a chance to bring

new services such as mobile banking and payments to millions of customers. But innovators should be prepared for the long haul, according a panel of senior industry representatives speaking on Wednesday.

“Way back in 2006 in Barcelona, it was announced that an Indian mobile payment system would be in place within a year,” said A.P. Hota, chief executive at the National Payments Corporation of India. “In fact, it took six years to realise that idea. That wasn’t because of resistance from the regulator – the rules to allow it have been in place since 2008. The truth is it’s not an easy job. Mobile banking requires far more than just technology.”

The classic example of banking innovation is M-Pesa, a mobile payments service that has some 15 million users in Kenya. Established by Vodafone subsidiary Safaricom, the service allows users to send and receive payments on their mobile handsets.

Drawing on the relatively high rate of mobile penetration in Kenya, coupled with

the low uptake of traditional banking services and undeveloped infrastructure, the service gained success, effectively banking millions of ‘unbanked’ customers who had previously dealt solely with cash.

Financial services firms have been seeking to find ways of expanding similar services around the world in the past five years. However, Alice Zanza, senior payment systems specialist at the World Bank, suggested that many innovative technologies, including mobile payment services, do not make a profit in the first three to four years of operations. Instead, they succeed due to long-term planning.

“You need to be aware that you’re not going to make any money if you’re going for a quick buck,” she said. “M-Pesa was sustainable because someone was funding it. The Kenyan Government also invested in making the project work. That story needs to be put into perspective – yes it is a success, but it didn’t happen overnight.”

In India, several banks offer mobile banking services. In addition, independent services such as My Mobile Payments offer customers the ability to use a mobile wallet, in which the

handset can be used to make retail payments using NFC contactless technology. But according to Hota, any new service must be simple, widely available and easy to use if it is to succeed globally.

“Almost everyone in India has a mobile, but not everyone who can open a mobile account actually does so,” he said. “If the application has to be downloaded, that’s too cumbersome. Customers should be able to dial star-nine-nine-hash on their mobile handsets to access their mobile accounts. That’s the kind of solution we need.”

Other observers agreed with Hota, but also cited factors behind adoption of new financial services. For Gil Gadot, president at electronic payments provider Fundtech, simplicity of use should also be combined with ubiquity and availability for an innovation to achieve mainstream success.

“You need to be able to go anywhere and within three or four clicks complete a payment,” he said. “SMEs need to send money, view their payments and understand their balance. If you don’t have services available over the weekend, the customer will go elsewhere to transact.”

Banks and telcos must partner for the long haulBy Elliott Holley

w w w.bankingtech.com/sibos/ Thursday 1 November 20124

Daily News at sibos

NEws

PingIt for Corporates to boost use of m-walletsBy David Bannister

Barclays is hoping that the introduction of a version of its PingIt

service for corporates will yield a significant boost to the use of mobile payments and wallets by providing the missing link between consumers, retailers and corporates.

The bank has prepared some 100 use cases for PingIt for Corporates, ranging from utility bill payment to charitable donations to roadside assistance companies. “It’s all about efficiencies and the efficient receipt of funds, and providing customers with an alternative means of payment,” said Maurice Cleaves, global head of cash management at Barclays Corporate Banking.

Introduced as a person-to-person payment mechanism in February, Pingit uses a proxy system to allow funds to be transferred from one mobile phone to another. The corporate version simply extends this to corporate banking accounts, but in doing so it opens a range of new services.

Cleaves said corporate use of the service can answer a number of needs in different scenarios. Utility bills, for instance, “have never really moved to electronic payments”, said Cleaves. Pingit allows billers to add a QR code to each bill that a customer’s PingIt smartphone app can scan to initiate payment. It also

automatically populates the transaction with the correct billing details, including reference numbers, amounts, customer details and so forth, and so combines the same immediacy of payment enjoyed by the customer with the benefits of automatic account reconcilation.

Ultimately, the use cases are limited only by the imagination of the corporate customers, Cleaves said. One example he gives is that of a roadside assistance service, where the member’s status might not cover the cost of spare parts: a QR code displayed on the door of the recovery vehicle to initiate the payment and generate

an SMS message to the driver confirming the transaction.

Cleaves points out that 13 per cent of downloads of the PingIt consumer version have been made by customers of banks other than Barclays, who can use it as a stored value wallet by transferring funds to it.

In this way they have a primary wallet and a series of subsidiary wallets for Starbucks or other wallet services. “If you think of it in corporate cash management terms, where you have pooling for instance, you can see how that joins the consumer, retail and corporate needs to the bank,” said Cleaves. “Barclays customers have the advantage of PingIt linked to their primary account.”


Daily News at sibos

NEws

Swift is upgrading its confirmation matching engine Accord and

will release a new, cloud-based platform in early 2014. Technology company SmartStream has been chosen to undertake the upgrade and will implement elements of its lifecycle management system.

The aim is to provide a centralised confirmation matching service that is more rationalised, more flexible and more personalised. The new system will provide support for multiple asset classes and will enable fax and email connectivity. The first release is available for testing next year and will go live by 2014 and ongoing rollout of improvements afterwards.

“Accord has been in use for approximately 20 years and has provided good value,” said Arun Aggarwal, head of Swift in the UK, Ireland and Nordics and head of post-trade Emea. “It is very reliable. But it is

not sufficiently flexible, and the legacy technology is becoming more difficult to support. That’s why we have started a project to improve our capabilities.”

The advantage of cloud solutions is that they are considered cheaper and faster to deploy. The main disadvantage is that financial services remain concerned about the security of cloud networks, particularly for handling sensitive financial data and customer information.

However, modern private cloud solutions designed for businesses often include the ability to encrypt data, reducing the risk for users.

Aggarwal said delivering Accord in the modern cloud provides cost savings, especially for small/medium users. “For the bigger institutions, cloud technology offers rationalisation. We are creating a confirmation management hub. It’s a single, user-friendly portal to

many venues.” At present, 500 institutions worldwide use Accord.

Swift is also keen to point out the collaborative model behind the project, which already has been discussed with customers over a period of nine months. According to Aggarwal, banks are increasingly willing to collaborate in the post-trade space, because they share a common interest in reducing risk.

For Alastair McGill, executive vice-president of business development and alliances at SmartStream, the community approach also brings other advantages. “This is a great accolade – it’s the first time Swift has trusted to a third party rejuvenation of an existing product,” he said. “It’s also great for us to get access to the Swift community view. It’s all based on automation and reducing the cost per trade. Doing that with a community is a great way of using the technology to full effect.”

Bank of America Merrill Lynch and financial technology provider SunGard have formed an Asia Pacific treasury alliance

that focuses on sharing knowledge, promoting best practices and driving technological innovation in the regional treasury industry.

The two firms will work on providing an Asia Pacific treasury knowledge platform, designed to give corporate treasurers Asia Pacific-focused industry studies, market-inspired thought leadership and editorial content, combined with a series of in-country knowledge-based events. Under the terms of the alliance, Bank of America Merrill Lynch will draw on its client-centric service model and integrated treasury products and solutions within the collaboration, while SunGard

AvantGard, which focuses on treasury and cash management solutions, will provide insight on global automation and centralisation expertise in cash, compliance and risk services.

“Every day we support our Asia Pacific treasury clients through knowledge – the more we know, the more we can help them to achieve their business ambitions and balance their risk,” said Ivo Distelbrink, head of global transaction services, Asia Pacific at BAML. “As market sophistication continues to evolve and competition intensifies across the region, treasury knowledge is more reliant on technological innovation than ever before.” He described the alliance as innovative and said SunGard would bring cutting-edge technology to the venture.

The problem of liquidity fragmentation in equity markets has been tackled by Deutsche Bank with the launch

of dbIntegrate, an outsourcing service that provides end-to-end execution, settlement and custody services.

The solution is based on the bank’s execution technology capabilities in more than 70 equities trading venues globally and its presence as a direct custodian in 33 markets. The solution is based on Autobahn, an electronic trading platform and on the capabilities of Deutsche Bank’s Direct Securities Services division.

Autobahn offers customised trading content and analytical solutions, including a large suite of algorithms and direct market access (DMA). DSS has one of the world’s largest securities services agent bank networks with a presence in Asia Pacific, the Middle East, Europe and the Americas. It provides settlement, custody and related services.

Rhomaios Ram, head of product management, global transaction banking at Deutsche Bank, said investment in transaction banking technology is crucial. “We are making big investments in technology to optimise our platforms during the next two to three years,” he said. “We want to provide a stable environment for our clients. Innovation is about leveraging platforms, providing stability and enabling the regulatory initiatives to happen.”

dbIntegrate is part of this approach, providing vertical integration of Deutsche Bank’s global markets and custody operations. “dbIntegrate enables customers to have end-to-end execution, clearing and settlement of their equities trades,” Ram said.

The bank has also expanded its FX4Cash multi-currency solution into Malaysia and Thailand. FX4Cash combines Deutsche Bank’s global foreign exchange with its cash management services to provide a cross-currency payments solution that gives its clients access to a total of 125 currencies, through a single platform, and the ability to manage cross-border, cross-currency payments via one base currency account.

In June this year, Deutsche Bank added the renminbi to FX4Cash, which is used by more than 2000 financial institutions and corporates.

swift upgrades Accord to cloudBy Elliott Holley

BAML-sunGard Asia allianceBy Elliot Holley

dbIntegrate on AutobahnBy Heather McKenzie


Daily News at sibos

NEws

JsCC goes live with yen IRs service

KYC Report due diligence launched

Citi and Swift stake Indian claims

Broadridge upgrades Proactive

The Japan Securities Clearing Corp (JSCC) has gone live with

the Calypso system for its interest rate swaps (IRS) central counterparty clearing service. The system, from US-based Calypso Technology, will be used for initial and variation margin calculations, using yen overnight index swap discounting, trade lifecycle processing and risk management. Calypso claims it is the first yen-denominated IRS clearing service in Asia Pacific. Yasushi Suzuki, managing director of JSCC, said the system would be able to scale to the volumes of the OTC business in Japan. Financial analysts

Celent said the Japanese OTC derivatives market in 2011 recorded 5.1 million transactions.

Calypso also announced at Sibos the launch of a liquidity management solution that will enable financial institutions to comply with Basel III standards. The treasury system provides intraday, short-term and long-term liquidity management capabilities in addition to extensive cash management functionality. The single platform offers treasurers the ability to manager enterprise concerns such as asset liability distortion and intraday liquidity usage.

Broadridge Financial Solutions has upgraded its Proactive reconciliation and operational control system to

enable combined reconciliation of related cash and stock positions with all underlying transactions in a single unified, optimised process. This will enable firms to benefit from incremental levels of operational efficiency, while further mitigating their cost and risk exposure. Broadridge said many financial firms base their reconciliations on entirely separate matching processes for cash and stock, even when they relate to the same underlying transactions. While this approach

has improved operational efficiency for each process, it has been necessary to provide a separate link or manual check between the cash and stock in order to trade the impact of a failed match in one area upon the other. This causes exposure due to the time and effort required to track and resolve the issue. The upgrade will give users a choice of continuing with separate reconciliations for stock and cash or adopting the combined approach whereby cash and stock transactions are matched in a single operation that is linked to all related cash balances and stock positions.

BankersAccuity has launched KYC Report, a know your

customer due diligence solution that provides details on financial counterparties, including sanctions data, headline financials, proprietary ownership information, an overview of key anti-money laundering document availability, board member details and more. KYC Report gathers information across the entire suite of BankersAccuity solutions, including Bankersalmanac.com, Credit Risk and the Due Diligence Repository.

Citi has expanded its Express Wire for Asia capabilities with a dedicated India desk. Express Wire for Asia streamlines the execution of USD payments by sending transactions to the beneficiary bank in Asia expediently. It also provides additional

liquidity to banks that need to process their payments within Asia’s morning business hours. The India desk will provide local expertise and improved access to help expedite payments in India. Also in India, Swift has announced a joint venture with six partner banks to build a financial messaging system for the Indian banking sector. The venture is a first for Swift and board member Bhavesh Zaveri of HDFC Bank, said the venture would enable a domestic Swift secure financial messaging service to be rolled out in the country.

Big data is not about volume, said Amir Halfon, CTO at MarkLogic during yesterday’s Innotribe session

on the future of big and small data. The real challenge, he said, was the velocity at which data is found. The solution to unstructured data may be shredding it to fit into a relational schema.

Daniel Erasmus, owner of The Digital Thinking Network, shared the experiences learnt while developing news databank @NewsConsole: be disciplined to kill code, put data in the right place the first time, clean data early and testing is impossible.

Sean Gourley, CTO at Quid, said our brains cannot cope with the volume of information, so we use software to augment our intelligence. Algorithms account for 90 per cent of trades and are essential because of human constraints on strategic thinking. Artificial intelligence dominates when once traders relied on collective intelligence. How algorithms react to the news they read affects the market. A stop button exists, but when do we press it? Historically, the best ability to regulate is a check and balance system.

Big data almost travels at the speed of light, explained Alexander Wissner-Gross, institute fellow at Harvard University Institute. Data is distributed geographically, and cables criss-cross the earth to coordinate its flow. A data round trip between New York and London takes 14 milliseconds. But we are approaching the physical latency limitations.

Social media is big data. Author Andrew Keen debunked the myth that social media brings us closer and unites us. Data’s attractiveness is only skin deep. We are becoming data. After the urban migration, we had anonymity; on the network we have none. Visibility is a trap. We are now the product. We must teach the internet how to forget. “The world is living in a Hitchcock movie.”

Data VertigoBy George Bourdaniotis

social media is big data. Visibility is a trap. we are now the product. we must teach the internet to forget

Andrew Keen, Author

• Reduce time, effort and risk to manage andimplement your standards

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NEws

The rise of card networks for business payments represents an opportunity

for financial institutions to improve efficiency for customers and capture an estimated $17 trillion in untapped payment volumes, according to MasterCard Worldwide.

Based on 2011 data, MasterCard found that in total, annual commercial and government spending accounted for $93 trillion, of which $17 trillion could be handled by card networks. However, cash still accounts for 85 per cent of global consumer transactions – and consumer transactions are only a portion of the total global payments figure. The actual current commercial card network spend is $1.6 trillion.

The firm also found that during the procure to pay process, US customers paying by cheque were paying an estimated 86 per cent of their costs not for the payment, but for business processes such as reconciliation, approval, requisition and invoicing. The average cost of a transaction was $92 for cheques, compared to $10 for a card network. Conversely, using a card network would bring a financial institution an average profit of $120,000 for each 10,000 transactions. That compares against $80,000 for wire, which is the next best option, and just $5000 for cheque.

“We are disintermediating an inefficient form of payment – cash,” said Mike McManus,

senior business leader, strategy, planning and innovation, global commercial products, at MasterCard Worldwide. “There is a huge opportunity here to improve business efficiency for banks and their customers by using more efficient payment channels.”

MasterCard cites five main benefits to card networks versus other forms of payment. Networks allow customers to see every transaction, potentially providing the opportunity for businesses to make better risk decisions; they contain authorisation systems to reduce fraud and limit exposures to banks from over-extension of credit lines; allow users to set network spending controls such

as single use account numbers; provide a simpler cross-border payment process; and offer the possibility of cost savings through single net settlement.

“The value is reduced paperwork, enhanced reconciliation, greater efficiency and flexibility through improved working capital for the customer company, and a reduction in discrepancies such as over-charges,” said McManus.

“When you use our network, you have single net settlement, as opposed to multiple nostro and vostro accounts with multiple institutions. In addition, the customer can then audit the purchases and ensure the process went as it should,” McManus said.

MasterCard sets sights on $17 trillion payments marketBy Elliot Holley

• Reduce time, effort and risk to manage andimplement your standards

• Increase effi ciency and accuracy

• Centralise all of your standards-related information

• Compare and analyse new & old versions ofstandards defi nitions and guidelines fast

• Share, comment and defi ne usage guidelines together

• Generate and share documentation

• Generate schemas for implementation and use them for additional add-ons

such as GUIs and on-line help

Discover MyStandards today:www.swift.com/MyStandards

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emerging markets

Foreign Banks in China survey. This significant growth was achieved as a result of strong demand for corporate credit from multinationals expanding within China and an increasing number of state and private-owned enterprise customers, said the report. RMB internationalisation with strong demand in derivative trading with financial institutions and corporate clients also helped drive results. Meanwhile, total assets grew 24 per cent to RMB2.15 trillion over the same period.

Those banks surveyed predicted annual revenue growth of 20 per cent or more until 2015 in China. “China’s foreign banks have performed strongly despite barriers such as lending caps and the relatively slow pace of new branch approvals,” said Mervyn Jacob, PWC financial services leader for China and Hong Kong. “Not only are their profits and total assets on the rise, they hold a significant market share in major markets such as Shanghai [12 per cent in 2011].”

Jacob said as the Chinese economy shifts to a more domestic consumption driven model, new opportunities will emerge for foreign banks to diversify into sectors such as IT and clean energy. “Foreign banks will also be able to leverage their global expertise as more Chinese firms seek to expand offshore.”

It is not only Chinese corporations that will expand offshore, but also the country’s financial institutions. Industrial and Commercial Bank of China (ICBC), for example, took a 20 per cent stake in South Africa’s Standard Bank in 2008, paying $5.5 billion. When an ICBC client in China expands into South Africa, it is directed to Standard Bank and when South African companies look to do business in China, they are directed to ICBC. In May this year an even more significant acquisition by ICBC took place; the bank took an 80 per cent stake in the Bank of East Asia (USA), which has offices in New York and California. The deal was significant because the US Fed issued the ‘ICBC order’, which paves the way for Chinese banks to expand their presence in the US financial markets through the acquisition or establishment of US banking organisations.

Western financial institutions recognise the importance of collaboration in expanding into emerging markets. “Collaboration will be an important part of a successful strategy in emerging markets,” says Gautam Hazarika,

Singapore-based managing director in Royal Bank of Scotland’s markets and international banking team. “A global or regional bank will not necessarily have a huge presence in some of the emerging countries. By partnering with local banks they can provide stronger solutions, such as in cash clearing.”

Karen Fawcett, group head of transaction banking at Standard Chartered, says while collaboration between global banks and local or regional banks works “to some extent”, the key to success in serving supply chains in emerging markets is to have “real information sharing” between the anchor client in the West and their supply chain relationships in emerging

markets. “If you don’t have this, there will be a disconnect in the lending relationship between the East and the West. If the same institution can do everything, end to end, that is extremely powerful.”

The challenge of emerging markets should not be underestimated, says Daniel Schmand, head of trade finance and cash management corporates for Emea at Deutsche Bank. “Some of these markets come with significant administrative burdens when it comes to regulations,” he says.

“For example, an international bank that wants to operate in Saudi Arabia, is required to host all of its data services in the country. There’s no possibility of operating in the

The nexT big ThingWith Sibos staged for Dubai next year, the Middle East North Africa (Mena) region will be an obvious focus. The political turmoil in the region during 2011 scared off investors but there are signs growth is returning.

“While there were outflows of foreign investment from the region during 2011, the markets have rebounded slightly in 2012 and investment is coming back in,” says Andy Duffin, head of sales for emerging markets at Société Générale Securities Services.

Financial authorities and regulators in the region are working to improve the market infrastructure – through initiatives such as relaxing foreign ownership rules – in order to attract foreign investment. An aim is to join the MSCI Emerging Index, says Duffin.

In July, Abu Dhabi Commercial Bank joined Clearstream’s triparty repo service as a new cash provider. Stefan Lepp, member of the executive board and head of global securities financing at Clearstream, described the Middle East as “one of the most dynamic regions in the global economy”. The arrangement aims to strengthen the region’s repo markets and build liquidity.

Duffin says hedge funds are beginning to enter the Mena region as it becomes increasingly mature. A strong retail presence in the region brings a closeness to the markets that sets financial institutions such as SocGen apart. “By being present in the market in such a big way, we have access to regulators, market knowledge and influence. During the turbulence of 2011 our clients were most interested in information – that was key to them. Being able to advise clients on what was happening in Egypt, for example, was very important.”


Daily News at sibos


emerging markets

he absence of Chinese banks from this year’s Sibos is a real blow, particularly as the event is in their backyard.

During the past few years the Chinese banks have expanded their presence at Sibos, refl ecting the rising infl uence of China as its economy continues to thrive compared with Western economies.

Earlier this month, trade fi gures from China indicated the economy was stabilising after a slowdown that began in

the fi rst quarter of 2011. Exports grew 9.9 per cent in September on the previous year and money supply was up 14.8 per cent. China’s economy expanded by 7.6 per cent year on year in the second quarter, slowing from 8.1 per cent in the fi rst quarter. The slowdown in China was expected as the government seeks greater balance between export-oriented economic activity and domestic growth. However, predicting a China crash is something of a sport among Western commentators, some of whom have been predicting one for a decade.

Slowdown or not, the ailing state of many European economies and the painfully slow recovery in the US make any area of growth attractive to investors seeking better rates of return and multinational companies seeking new markets to tap. Where the investors and corporations go, banks follow.

And the banks that are following are reaping rewards. China’s 181 foreign banks more than doubled profi ts to RMB16.73 billion ($2.66 billion) in 2011 from RMB 7.78 billion in 2010, according to PWC’s

t

into the greAt UnKnown

As the western economies continue to suff er sluggish growth or recession, opportunities are being sought in alternative markets. Financial institutions are following their corporate clients into emerging markets, writes Heather McKenzie


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emerging markets

Foreign Banks in China survey. This significant growth was achieved as a result of strong demand for corporate credit from multinationals expanding within China and an increasing number of state and private-owned enterprise customers, said the report. RMB internationalisation with strong demand in derivative trading with financial institutions and corporate clients also helped drive results. Meanwhile, total assets grew 24 per cent to RMB2.15 trillion over the same period.

Those banks surveyed predicted annual revenue growth of 20 per cent or more until 2015 in China. “China’s foreign banks have performed strongly despite barriers such as lending caps and the relatively slow pace of new branch approvals,” said Mervyn Jacob, PWC financial services leader for China and Hong Kong. “Not only are their profits and total assets on the rise, they hold a significant market share in major markets such as Shanghai [12 per cent in 2011].”

Jacob said as the Chinese economy shifts to a more domestic consumption driven model, new opportunities will emerge for foreign banks to diversify into sectors such as IT and clean energy. “Foreign banks will also be able to leverage their global expertise as more Chinese firms seek to expand offshore.”

It is not only Chinese corporations that will expand offshore, but also the country’s financial institutions. Industrial and Commercial Bank of China (ICBC), for example, took a 20 per cent stake in South Africa’s Standard Bank in 2008, paying $5.5 billion. When an ICBC client in China expands into South Africa, it is directed to Standard Bank and when South African companies look to do business in China, they are directed to ICBC. In May this year an even more significant acquisition by ICBC took place; the bank took an 80 per cent stake in the Bank of East Asia (USA), which has offices in New York and California. The deal was significant because the US Fed issued the ‘ICBC order’, which paves the way for Chinese banks to expand their presence in the US financial markets through the acquisition or establishment of US banking organisations.

Western financial institutions recognise the importance of collaboration in expanding into emerging markets. “Collaboration will be an important part of a successful strategy in emerging markets,” says Gautam Hazarika,

Singapore-based managing director in Royal Bank of Scotland’s markets and international banking team. “A global or regional bank will not necessarily have a huge presence in some of the emerging countries. By partnering with local banks they can provide stronger solutions, such as in cash clearing.”

Karen Fawcett, group head of transaction banking at Standard Chartered, says while collaboration between global banks and local or regional banks works “to some extent”, the key to success in serving supply chains in emerging markets is to have “real information sharing” between the anchor client in the West and their supply chain relationships in emerging

markets. “If you don’t have this, there will be a disconnect in the lending relationship between the East and the West. If the same institution can do everything, end to end, that is extremely powerful.”

The challenge of emerging markets should not be underestimated, says Daniel Schmand, head of trade finance and cash management corporates for Emea at Deutsche Bank. “Some of these markets come with significant administrative burdens when it comes to regulations,” he says.

“For example, an international bank that wants to operate in Saudi Arabia, is required to host all of its data services in the country. There’s no possibility of operating in the

The nexT big ThingWith Sibos staged for Dubai next year, the Middle East North Africa (Mena) region will be an obvious focus. The political turmoil in the region during 2011 scared off investors but there are signs growth is returning.

“While there were outflows of foreign investment from the region during 2011, the markets have rebounded slightly in 2012 and investment is coming back in,” says Andy Duffin, head of sales for emerging markets at Société Générale Securities Services.

Financial authorities and regulators in the region are working to improve the market infrastructure – through initiatives such as relaxing foreign ownership rules – in order to attract foreign investment. An aim is to join the MSCI Emerging Index, says Duffin.

In July, Abu Dhabi Commercial Bank joined Clearstream’s triparty repo service as a new cash provider. Stefan Lepp, member of the executive board and head of global securities financing at Clearstream, described the Middle East as “one of the most dynamic regions in the global economy”. The arrangement aims to strengthen the region’s repo markets and build liquidity.

Duffin says hedge funds are beginning to enter the Mena region as it becomes increasingly mature. A strong retail presence in the region brings a closeness to the markets that sets financial institutions such as SocGen apart. “By being present in the market in such a big way, we have access to regulators, market knowledge and influence. During the turbulence of 2011 our clients were most interested in information – that was key to them. Being able to advise clients on what was happening in Egypt, for example, was very important.”


Daily News at sibos


emerging markets

cloud, and banks have to adopt a business model to comply with this requirement.”

For this reason, he says, banks that wish to operate in many countries need the organisational strength and presence to meet the regulatory challenge. “Global banks will need to cooperate with local players in some emerging markets because not even banks of their size and scale have the capacity to be everything to everyone. Given the environment we operate in, we expect to see more cooperation and collaboration between global, regional and local banks in the emerging economies.”

Local market knowledge is invaluable, says Andy Duffin, head of sales for emerging markets at Société Générale Securities Services. “In entering an emerging market, we follow the structure of the group, leveraging where we have bricks and mortar and the infrastructure in place along with the connections to regulators.”

Hazarika agrees: “Local presence is crucial in being able to negotiate the regulatory landscape in different countries. Financial institutions need knowledge and a good working relationship with regulators in order to lobby on the behalf of clients.”

The size and scale of the domestic and regional institutions in Asia Pacific is growing very dramatically, says Fawcett. “There also has been a rapid increase in sophistication; for the past five years banks in China, for example, have extended their investment in systems capabilities and also in people.”

While global players have been talking about extending their presence in these emerging markets, it is not a simple task,

she says. “The growth of intra-regional trade in Asia Pacific is on the radar screens and Standard Chartered’s focus is to be on both sides of the trade flows. A small number of regional players are developing capabilities and becoming reasonable players. But there are challenges – it is still extremely difficult to get banking licences in many of these countries and some centres, such as Singapore and Hong Kong, are not cheap to set up in; banks could be adding substantial costs for what could be sub-scale business.”

In global trade finance, the number of “truly global” banks that can offer a strong footprint and capabilities will be limited, says George Fong, head of trade product management and FI trade advisory, Asia Pacific JP Morgan Treasury Services. This is because corporates are becoming much more demanding and require information in real time. “There will be pockets of up and coming local and regional banks that will be able to offer trade finance services, but I think we will see more collaboration and partnership between these banks and global banks such as JP Morgan. “This will help the global banks but also the regional and smaller banks that want to reach outside of their home markets can work with us to do that. It will be a mutual relationship.”

SwifT keepS TrackSwift has a keen interest in emerging markets as financial institutions in these countries become more international in their outlook. The cooperative tracks payment traffic in RMB and publishes monthly reports in its free RMB tracker service.

Wim Raymaekers, head of banking market at Swift, says there needs to be a “mental shift” in how Swift is perceived in emerging markets. While payments volumes are likely to keep rising in China as the burgeoning middle class buy more consumer goods, most of these payments are domestic, not international. “The opportunity in payments in emerging markets is initially in the domestic sphere. Swift can provide domestic infrastructure and is doing this in a number of countries.”

In addition, of course, Swift brings international connectivity with the rest of the world’s financial community. This connectivity will be important as the internationalisation of the renminbi continues.

“Swift’s value proposition in emerging markets is very strong – if you want to play on the international stage you have to use open standards and be able to connect to a large number of players internationally,” he says.

By building infrastructure on a local level, he says, Swift will be able to add traffic volumes and build economies of scale, leading to reduced message pricing.

In entering an emerging market, we follow the structure of the group, leveraging

where we have bricks and mortar and the infrastructure in place along with the connections to regulatorsAndy duffin, Société GénérAle SecuritieS ServiceS ”

“


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operational risk

public offering at Nasdaq OMX, in which a rush of orders caused a collapse in the exchange’s trading systems, are becoming increasingly commonplace as financial technology pushes the boundaries of speed and throughput.

“We have seen some big scares about fraud lately,” says Neil Vernon, development director at Gresham Computing. “People have been unaware of how transactions are moving. Mid and back office have been left behind by the front office and unauthorised movements have taken place. We did an analysis that found 2500 places where a transaction could fall out of the STP flow.”

Rising levels of technological complexity have gone hand in hand with exponential increases in the quantities of data handled by financial institutions. Company systems and processes have struggled to keep pace, with the result that half of senior risk executives at major banks believe that capturing and processing risk information across their businesses is inadequate, according to a white paper released in September by research firm IDC Financial Insights. To make matters worse, many control checks result in problems being identified months after the original trade by the trader in the front office, according

to Vernon, while some 80 per cent of controls are held in manually updated spreadsheets that are notoriously prone to errors and outdated information.

“How do we replace that kind of infrastructure with real-time controls for a T+1 minute kind of world? We need reconciliation technology,” he says. “There shouldn’t be a single point of a transaction where somebody isn’t notified of a change.”

In October, US business intelligence company QlikTech reported that capital markets firms are relying on outdated information that is inadequate for controlling risks.

Based on a study of risk managers within capital markets companies, the report found that only 5 per cent of risk managers are receiving the information needed to do their jobs in real-time. Some 38 per cent said it took more than four hours to get the latest data after the markets had changed, and 31 per cent of those questioned said they were relying on information only updated on a monthly basis to make important decisions around risk management.

The research also found that 42 per cent of the data was still presented in a static spreadsheet format, with 34 per cent unable to drill further down into the information to get detailed insights. Some 14 per cent admitted that the data held by front office personnel and risk managers was contradictory.

“It’s imperative for risk managers in the financial services industry to have access to up to date, accurate information on which to base trading decisions,” says Mike Saliter, senior director, global market development, financial services at QlikTech. “Traders need the agility to be able to change their minds frequently about what information they need to see as they react to changes in the market. At the same time, risk managers need to take a holistic view of the entire organisation, enabling them to make firm-wide decisions about risk appetite and limits.”

As regulators around the globe struggle to get to grips with the financial crisis and ensure a safer, more transparent market for financial services, more stringent criteria are


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operational risk

anaging operational risk is an unglamorous part of life at every major financial institution. Yet as a string of

recent court cases, fines and regulatory actions testify, it is an area that is increasingly forcing its way into company boardrooms and commanding top-level attention.

In August, Standard Chartered agreed to pay $340 million to US regulator the New York State Department of Financial Services. The bank had allegedly breached US sanctions on Iran; in response, the regulator threatened

to revoke the firm’s licence. Under the settlement, the bank’s risk controls will be monitored for two years by regulatory personnel and the bank has been forced to install permanent personnel in New York to make certain that it does not breach anti money laundering (AML) legislation again.

The Standard Chartered case was notable for revealing the long reach of US regulators to punish actions taken beyond that country’s borders – a factor that has also affected other large financial institutions. Since July, HSBC has also been facing a fine of up to $1 billion for failures in its AML controls, mostly

related to its Mexican operation, which resulted in the company acting as a conduit for funds to drugs gangs and terrorists.

These incidents comprise only one aspect of the operational risk that financial institutions face on a daily basis. Rogue trader events, management scandals, reputational risk, IT risk all have the potential to cause firms major difficulties. To cite just one example, broker Knight Capital suffered a technology glitch in August that left the company facing a $440 million loss. Other technological problems, such as the Facebook initial

m

All Along the wAtchtowerA string of fines for AML and sanctions infringements have pushed operational risk back up the agenda of financial institutions. But as Elliott Holley reports, there are challenges to efficient operational risk management


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›

operational risk

public offering at Nasdaq OMX, in which a rush of orders caused a collapse in the exchange’s trading systems, are becoming increasingly commonplace as financial technology pushes the boundaries of speed and throughput.

“We have seen some big scares about fraud lately,” says Neil Vernon, development director at Gresham Computing. “People have been unaware of how transactions are moving. Mid and back office have been left behind by the front office and unauthorised movements have taken place. We did an analysis that found 2500 places where a transaction could fall out of the STP flow.”

Rising levels of technological complexity have gone hand in hand with exponential increases in the quantities of data handled by financial institutions. Company systems and processes have struggled to keep pace, with the result that half of senior risk executives at major banks believe that capturing and processing risk information across their businesses is inadequate, according to a white paper released in September by research firm IDC Financial Insights. To make matters worse, many control checks result in problems being identified months after the original trade by the trader in the front office, according

to Vernon, while some 80 per cent of controls are held in manually updated spreadsheets that are notoriously prone to errors and outdated information.

“How do we replace that kind of infrastructure with real-time controls for a T+1 minute kind of world? We need reconciliation technology,” he says. “There shouldn’t be a single point of a transaction where somebody isn’t notified of a change.”

In October, US business intelligence company QlikTech reported that capital markets firms are relying on outdated information that is inadequate for controlling risks.

Based on a study of risk managers within capital markets companies, the report found that only 5 per cent of risk managers are receiving the information needed to do their jobs in real-time. Some 38 per cent said it took more than four hours to get the latest data after the markets had changed, and 31 per cent of those questioned said they were relying on information only updated on a monthly basis to make important decisions around risk management.

The research also found that 42 per cent of the data was still presented in a static spreadsheet format, with 34 per cent unable to drill further down into the information to get detailed insights. Some 14 per cent admitted that the data held by front office personnel and risk managers was contradictory.

“It’s imperative for risk managers in the financial services industry to have access to up to date, accurate information on which to base trading decisions,” says Mike Saliter, senior director, global market development, financial services at QlikTech. “Traders need the agility to be able to change their minds frequently about what information they need to see as they react to changes in the market. At the same time, risk managers need to take a holistic view of the entire organisation, enabling them to make firm-wide decisions about risk appetite and limits.”

As regulators around the globe struggle to get to grips with the financial crisis and ensure a safer, more transparent market for financial services, more stringent criteria are


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operational risk

being enforced in many business areas. Tougher compliance and greater rigour in areas such as examining acquisitions, new applications and systems and data protection have forced company chief executives and senior-level management to look more closely into their operational risk. The IDC Financial Insights report found that seven out of ten financial institutions surveyed cited the importance of risk infrastructure in driving strategy. The study also found that the same proportion of firms was reviewing its risk infrastructure.

“Risk is coming into the board room,” says Andrew Aziz, executive vice-president, buy-side business at risk systems specialist Algorithmics. “Within companies, risk is increasingly being recognised as a resource, just like the capital a financial institution deploys. We’re seeing risk management staff taking a much more active role within firms and risk is increasingly making its presence felt in the front office, as well as the traditional middle office. Its importance is expanding on multiple levels at once.”

Regular reviews of risk infrastructure are necessary, according to Henry Balani, head of risk compliance at BankersAccuity, because in the current regulatory environment even if a firm is

compliant today, it cannot be sure that it will still be compliant in the near future. Citing the case of HSBC, in which the firm’s Mexico operation saw $7 billion in cash transferred to the US during the period 2007-2008, Balani points out that changing conditions, coupled with a company structure that allowed the bank’s local operation to assess its own risk, led to disaster.

“Seven billion dollars in cash transfers from Mexico to the US? That’s considerably more than the figures reported by other banks that were much larger in the region,” says Balani. “HSBC should have been aware that the money likely came from drug sales. It’s no excuse to say that ten to 15 years ago, Mexico was considered safer than it is today. They were too relaxed, and they didn’t update their view of that country to take account of changing realities on the ground.”

Predictably, HSBC’s Mexican branch had classed itself as ‘low risk’. So how can large financial institutions ensure that the operational risk resulting from their regional subsidiaries is kept to a minimum?

“You need to check whether there is an assessment procedure done externally to validate the process,” says Balani. “In the case of HSBC Mexico, the answer was no, and HSBC is now paying the price.

It’s also worth remembering that policies transferred from a head office to an emerging markets-based subsidiary, for example, may not be enforced as tightly as the original rules. This too needs to be checked.”

However, part of the difficulty for many firms is that the local regulations they face around the globe are often lacking in cohesion and sometimes conflict with each other. The European Union’s European Market Infrastructure Regulation reforms to OTC derivatives markets are not coordinated with the US Dodd-Frank legislation on the same topic. Hong Kong and Singapore are following their own versions of the G20 requirements on reducing systemic risk in financial markets. That can make it difficult to adopt a holistic approach to operational risk in multiple jurisdictions.

“There isn’t a coherent plan,” says Tony Freeman, executive director, industry relations at post-trade services firm Omgeo. “Regulators have their own timetables. There are overlapping projects, some of them similar, but not the same. It would be helpful if they were more aligned with each other – but at the moment that’s not really the case.”

Fortunately, there is a growing number of technological solutions that attempt to resolve some of the


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operational risk

issues relating to lack of information and risk oversight. In September, data management systems provider GoldenSource launched GoldenSource Insight, a graphical dashboard and data visualisation tool designed to provide clear, real time information about processes, positions and risk exposures to help staff make better decisions.

Available on mobile devices, GoldenSource Insight provides real time dashboards and reports to help users make observations and analyse information and to take action with a drill-through to the GoldenSource enterprise data management suite. The service provides users with exposure analysis, exception management to help identify and resolve problems, and data quality, coverage and completeness views to help manage their compliance responsibilities.

“The raft of new regulations is changing the face of data management,” says Stephen Engdahl, senior vice-president of product strategy for GoldenSource. “Operations and executives require self-service capabilities to get answers to their questions about exposure, data quality and governance. GoldenSource Insight provides a clear, easy way for business users to effectively analyse processes, positions and risks, which improves transparency and enables many regulatory requirements to be met efficiently.”

While the credit crunch has arguably acted as a catalyst for greater transparency in financial markets, the costs incurred by attempting to reform have not been popular everywhere. That has led some observers to suggest that a reluctance to properly invest in systems to prevent abuse and ensure compliance may be just as much to blame.

“This industry has a problem,” says Freeman. “Often, firms start complaining that it costs money every time they are asked to clean up their act. But reducing operational risk is like building a safer car. Safety costs money. Objecting to new rules because you don’t want to spend money is not a valid argument.”

Complex rules and a reluctance to spend precious funds can sometimes combine to create other kinds of abuse. Citing a pub in London’s East-end that serves alcohol without holding a licence (by selling beer mats and then

handing over the drink for free) Geoff Kates, chief executive at management consultancy Lepus, warns that there is almost always a way to get around the rules. It is alleged by some other market observers that Standard Chartered had a branch operating in the Cayman Islands, removing references to Iran, and that this activity was based on explicit instructions from the firm’s senior management. For Kates, this simply illustrates that the more complex the rules, the easier they are to break.

“The whole culture of the banking sector is the problem,” he says. “When rogue trading incidents happen, everyone looks, and it moves to the top of the priority list. Then it gradually loses attention and slides into the background, until it happens again. Pay needs to be reduced across the board, and firms should try to use an infrastructure to flag up unusual or suspicious events, such as an individual trader suddenly making uncharacteristically high profits.”

While the technology available to counter AML is arguably getting better at finding suspicious payments, inevitably operational risk is a huge area. Monitoring every aspect of a major financial institution’s activities is a daunting task, according to Balani and it isn’t likely to go away anytime soon.

“Banks need to check they are doing enough,” he says. “They probably aren’t.”

... reducing operational risk is like building a safer car. Safety costs money.

Objecting to new rules because you don’t want to spend money is not a valid argumenttony freemAn, omGeo ”

“


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23

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clearing

George Nast, global head of product, transaction banking, Standard CharteredThe G20 directive for the central clearing of standardised OTC derivative transactions, with mandatory trade reporting via trade repositories, is a positive for the industry as it significantly reduces counterparty risk and provides increased transparency of the current OTC marketplace.

However, the proliferation of CCPs has its risks as well as some unintended consequences.

First, there could be greater fragmentation. CCPs typically require a concentration of OTC derivative transactions for market participants to realise any cost benefits that come with a ‘scale’ business. Furthermore, the operational impact of managing the daily mark to market process, posting collateral and reconciling the activity across multiple CCPs will likely be significant.

Second, there could be reduced benefits for market participants as margin offsets and netting capabilities diminish. As the OTC derivatives market is a truly global one, the cross-margining benefits market participants would realise through interconnectivity of CCPs would be significant. However, these potential benefits all but disappear in the multi CCP model.

Finally, market participants may select CCPs for regulatory arbitrage if stringent standards are not met across various CCPs. Interoperability between CCPs and different jurisdictions is proving to be complex and we’re unlikely to see CCPs fully connected across the globe any time soon. So it’s therefore critically important in the multi CCP model that all CCPs adhere to the same stringent standards in order to minimise regulatory arbitrage. Otherwise one may open the door to market participants selecting the CCP with the most ‘efficient’ model, which may also have the lowest standards.

Some may argue for greater interconnectivity of CCPs since the cross-margining benefits for market participants would be significant. However, our observation to date is that interoperability between CCPs and different jurisdictions is proving to be extremely complex, and we’re unlikely to see CCPs fully connected across the globe in the near future.

Olivier Laurent, director, alternative investments products RBC Investor ServicesMajor existing clearing houses are currently developing capabilities to support OTC contracts. Some competition is needed between CCPs, but in order to avoid fragmenting the market too much, leaders will emerge on a product or asset class basis.

It is vital to build strong connectivity with them through clearing members, as well as consolidated views of positions. We also have to take into account that market participants will try to benefit from netting effects where possible. Still, regulators of smaller markets wonder if they need to mandate local clearing to protect their market against any risk imported by foreign CCPs. The main risk is having too many CCPs with low capitalisation.

The best model for OTC clearing should incentivise all participants to clear by imposing capital charges for non-cleared versus cleared trades and robust CCPs that accept high quality collateral. CCPs should also rely on strong risk management processes and have clear client assets protection protocols in place. There should also be no arbitrage between countries to escape the model. Custodians can contribute to transparency, as well as to the protection of participants’ assets with account segregation and collateral management offers. Yet, even with capital charges for market participants, the model should leave some room for non-cleared trades with a strong counterparty risk framework in which the custodian has a central role.

... even with capital charges for market participants, the model should leave some room for non-cleared trades with a strong counterparty risk framework in which the custodian has a central role”

“


Daily News at sibos


Daily News at sibos

clearing

The G20 recommendation for central clearing of OTC derivatives has driven a surge in CCP numbers. Is there a risk that too many CCPs will be launched? What is the best model for OTC derivatives clearing? Sibos delegates tell Daily News at Sibos what they think

Sanjay Kannambadi, chief executive, BNY Mellon ClearingFollowing the call by the G20 for the exchange or electronic trading of all standardised OTC derivatives contracts and clearing to be conducted through central counterparties by end 2012, global regulators and the industry itself have made significant progress in developing the rules and processes of the road.

Incumbent central counterparty clearing houses (CCPs) in the US, Europe and Asia have been investing in developing platforms to support clearing of rates, credits, FX and other OTC swaps contracts. CCPs have been working closely with the buy-side, sell-side, regulators and other market participants. With the industry’s strong support we now see meaningful momentum in the cleared OTC swaps space.

The concern regarding multiple new CCPs and a ‘race to the bottom’ in terms of risk management has not emerged as regulators

focus on safety and soundness issues. For example, global regulators including CPSS-Iosco have been focused on developing guidelines and standards to minimise systemic disruption.

CCPs that are appropriately transparent, provide open access, have consistent regulatory oversight and work in conjunction with market participants are well positioned to serve the market. Multiple clearing venues and healthy competition will be good for the market at large as it has historically shown resilience while delivering choice and democratisation for all market participants.

PAnAceA or PAin?

Marisol Collazo, managing director, The Depository Trust & Clearing Corporation

Global initiatives to develop new rules to govern the OTC derivatives markets will go a long way toward solving certain problems that led to the financial crisis. But to prevent the next crisis, regulators need to have the ability to better understand the trends contained in the large caches of raw data that are being collected as a result of new regulations. This can only happen if global data sets are complete and readily accessible across all jurisdictions.

Policymakers have identified trade reporting and central clearing as essential to achieving their goals of bringing greater transparency and stability to the OTC markets. Trade repositories, in particular, have emerged as one of the major pillars of systemic risk management because of their ability to collect, store and disseminate comprehensive OTC derivatives data.

For example, DTCC’s multi-asset class Global Trade Repository network houses aggregate information on exposure, valuation and legal entity relationships and makes this available at no cost to the regulatory community. Its effectiveness is bolstered by its global scope, which allows market participants to report through a singular hub

and fulfil myriad reporting requirements of jurisdictions throughout the world. Similarly, regulators globally can access this information based on their jurisdictional authority from anywhere in the world using the service’s online regulatory portal.

Most importantly, however, is the completeness of data produced by such an approach. When aggregated across jurisdictions, the data housed in the Global Trade Repository forms a complete and global data set that paints a holistic picture of risks developing in the marketplace.

Armed with this data, the Repository ensures that regulators have access to accurate and timely information that enables them to more effectively conduct market surveillance and mitigate systemic risk.

During times of market stress, the ability to quickly identify risks developing in the system is critical. Maintaining a global data set is paramount to these efforts.


Daily News at sibos


›

23

Daily News at sibos

›

clearing

George Nast, global head of product, transaction banking, Standard CharteredThe G20 directive for the central clearing of standardised OTC derivative transactions, with mandatory trade reporting via trade repositories, is a positive for the industry as it significantly reduces counterparty risk and provides increased transparency of the current OTC marketplace.

However, the proliferation of CCPs has its risks as well as some unintended consequences.

First, there could be greater fragmentation. CCPs typically require a concentration of OTC derivative transactions for market participants to realise any cost benefits that come with a ‘scale’ business. Furthermore, the operational impact of managing the daily mark to market process, posting collateral and reconciling the activity across multiple CCPs will likely be significant.

Second, there could be reduced benefits for market participants as margin offsets and netting capabilities diminish. As the OTC derivatives market is a truly global one, the cross-margining benefits market participants would realise through interconnectivity of CCPs would be significant. However, these potential benefits all but disappear in the multi CCP model.

Finally, market participants may select CCPs for regulatory arbitrage if stringent standards are not met across various CCPs. Interoperability between CCPs and different jurisdictions is proving to be complex and we’re unlikely to see CCPs fully connected across the globe any time soon. So it’s therefore critically important in the multi CCP model that all CCPs adhere to the same stringent standards in order to minimise regulatory arbitrage. Otherwise one may open the door to market participants selecting the CCP with the most ‘efficient’ model, which may also have the lowest standards.

Some may argue for greater interconnectivity of CCPs since the cross-margining benefits for market participants would be significant. However, our observation to date is that interoperability between CCPs and different jurisdictions is proving to be extremely complex, and we’re unlikely to see CCPs fully connected across the globe in the near future.

Olivier Laurent, director, alternative investments products RBC Investor ServicesMajor existing clearing houses are currently developing capabilities to support OTC contracts. Some competition is needed between CCPs, but in order to avoid fragmenting the market too much, leaders will emerge on a product or asset class basis.

It is vital to build strong connectivity with them through clearing members, as well as consolidated views of positions. We also have to take into account that market participants will try to benefit from netting effects where possible. Still, regulators of smaller markets wonder if they need to mandate local clearing to protect their market against any risk imported by foreign CCPs. The main risk is having too many CCPs with low capitalisation.

The best model for OTC clearing should incentivise all participants to clear by imposing capital charges for non-cleared versus cleared trades and robust CCPs that accept high quality collateral. CCPs should also rely on strong risk management processes and have clear client assets protection protocols in place. There should also be no arbitrage between countries to escape the model. Custodians can contribute to transparency, as well as to the protection of participants’ assets with account segregation and collateral management offers. Yet, even with capital charges for market participants, the model should leave some room for non-cleared trades with a strong counterparty risk framework in which the custodian has a central role.

... even with capital charges for market participants, the model should leave some room for non-cleared trades with a strong counterparty risk framework in which the custodian has a central role”

“


Daily News at sibos


Daily News at sibos

clearingNick Burge, managing director, head of OTC clearing, Lloyds Bank Wholesale Banking & Markets

Robin Poynder, head of regulation, marketplaces, Thomson Reuters

Anticipated growth in the number of entities using CCP services following G20 recommendations for central clearing of OTC derivatives and the ensuing new regulations, have resulted in the growth of CCP numbers and the range of products they cover.

CCPs are typically commercially driven organisations facing competitive pressure to expand product ranges to attract business and retain liquidity. However, there is a trade-off between service and security. A CCP must be able to value and margin positions and potentially hedge or unwind these quickly in the event of a member default to ensure effective risk reduction.

The capability, bandwidth and product complexity constraints to existing CCPs’ product expansion encourage proliferation, along with external drivers from jurisdictional and geographic pressures. While the G20 anticipated coordinated regulation, diverse local legal and specifically bankruptcy regimes are currently increasing CCP numbers. A multiplicity of CCPs will split liquidity, reduce offsets thereby increasing aggregate collateral demands. The proliferation of complexity and connectivity issues is also unwelcome.

There is no agreed best model for the CCP landscape. Logically, a single global CCP clearing all derivatives products (and other cash instruments) might be a ‘holy grail’. However its ‘too big to fail’ status would necessitate, if not a matching global governance structure, then at least much stronger global regulatory co-operation. The compromise is a limited number of CCPs covering the major regulatory and geographic areas with strong agreed substitutive regulatory compliance regimes.

There’s no doubt that centralised clearing is becoming an even greater part of the integrated life cycle of the markets. However it is no secret that politicians, regulators and market participants have been engaged in an increasingly vociferous debate as to whether it is indeed the panacea that some had first anticipated.

While CCP risk management will impose minimum levels of capital and strict margin requirements, not all regulators are comfortable with the potential for further concentration risk or contagion risk in the event of a CCP default.

Increased trading costs are also a concern as new trading venues and CCPs could result in further fragmentation of the markets, resulting in higher margin management costs. It is widely accepted that the cost of trading will increase due to additional clearing fees, however there is a wider cost implication involved in clearing OTC derivative trades. With capital being both expensive and scarce, both buy-side participants and banks are paying particular attention to efficient management of collateral and its impact on cost of trading.

Mandating centralised clearing of OTC derivatives is designed to improve the overall risk management across markets, but the associated costs and ultimate outcome remain uncertain. What is clear, however, is that the regulation and management of CCPs will need to be both robust and diligent to ensure ongoing financial stability in this period of significant change.

Mike Reece, market executive banks, brokers and infrastructures, JP Morgan WSS EmeaThe G20 agreement in 2009 to centrally clear OTC derivatives will be the single biggest change to the OTC derivatives market. In the resulting drive to create new clearing house models for OTC derivatives, the market should be focused on ensuring the design meets the objectives set out by legislators. The core objective is to reduce systemic risk by centrally netting obligations between counterparties, segregating investor positions and protecting collateral and creating a pool of capital to secure the clearing house from the default of counterparties.

Central counterparties (CCPs) are responding in various ways. Some are remaining competitive by implementing creative segregation models that will provide security over and above the regulatory minimum, but perhaps with increased costs. Others are attempting to reduce the impact of the new risk management requirements, by defining contracts as futures. This reduces the initial margin required when compared to cleared swaps with identical underlying risk.

Many industry participants are concerned by the proliferation of CCPs, causing a reduction in market liquidity, the bifurcation of initial margins for all and guaranteed funds for clearing members, leading to inefficient capital employment and increased costs of integration. Derivative users are often keen to encourage competition to ensure no one CCP is provided with excessive pricing power, however the optimisation of margins will become a strong incentive to consolidate the number of CCPs utilised for a particular portfolio. After an initial increase in the number of OTC CCPs, it is therefore likely there will then be a reduction in the number of commercially viable CCPs in the longer term. In order to retain competition between remaining CCPs, clients and clearing members may need to maintain a suboptimal allocation of capital to multiple CCPs, so it is unclear whether participants will make choices that benefit the whole at the expense of the individual. ›

Established in 1984, Banking Technology is the leading provider of news and insight for the financial IT services sector, providing independent reporting and expert comment. The Banking Technology website keeps over 12,000 unique monthly users up to date through international coverage of transaction, investment and retail banking – making it the essential online resource for any global financial IT professional.

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Daily News at sibos


Daily News at sibos

clearingNick Burge, managing director, head of OTC clearing, Lloyds Bank Wholesale Banking & Markets

Robin Poynder, head of regulation, marketplaces, Thomson Reuters

Anticipated growth in the number of entities using CCP services following G20 recommendations for central clearing of OTC derivatives and the ensuing new regulations, have resulted in the growth of CCP numbers and the range of products they cover.

CCPs are typically commercially driven organisations facing competitive pressure to expand product ranges to attract business and retain liquidity. However, there is a trade-off between service and security. A CCP must be able to value and margin positions and potentially hedge or unwind these quickly in the event of a member default to ensure effective risk reduction.

The capability, bandwidth and product complexity constraints to existing CCPs’ product expansion encourage proliferation, along with external drivers from jurisdictional and geographic pressures. While the G20 anticipated coordinated regulation, diverse local legal and specifically bankruptcy regimes are currently increasing CCP numbers. A multiplicity of CCPs will split liquidity, reduce offsets thereby increasing aggregate collateral demands. The proliferation of complexity and connectivity issues is also unwelcome.

There is no agreed best model for the CCP landscape. Logically, a single global CCP clearing all derivatives products (and other cash instruments) might be a ‘holy grail’. However its ‘too big to fail’ status would necessitate, if not a matching global governance structure, then at least much stronger global regulatory co-operation. The compromise is a limited number of CCPs covering the major regulatory and geographic areas with strong agreed substitutive regulatory compliance regimes.

There’s no doubt that centralised clearing is becoming an even greater part of the integrated life cycle of the markets. However it is no secret that politicians, regulators and market participants have been engaged in an increasingly vociferous debate as to whether it is indeed the panacea that some had first anticipated.

While CCP risk management will impose minimum levels of capital and strict margin requirements, not all regulators are comfortable with the potential for further concentration risk or contagion risk in the event of a CCP default.

Increased trading costs are also a concern as new trading venues and CCPs could result in further fragmentation of the markets, resulting in higher margin management costs. It is widely accepted that the cost of trading will increase due to additional clearing fees, however there is a wider cost implication involved in clearing OTC derivative trades. With capital being both expensive and scarce, both buy-side participants and banks are paying particular attention to efficient management of collateral and its impact on cost of trading.

Mandating centralised clearing of OTC derivatives is designed to improve the overall risk management across markets, but the associated costs and ultimate outcome remain uncertain. What is clear, however, is that the regulation and management of CCPs will need to be both robust and diligent to ensure ongoing financial stability in this period of significant change.

Mike Reece, market executive banks, brokers and infrastructures, JP Morgan WSS EmeaThe G20 agreement in 2009 to centrally clear OTC derivatives will be the single biggest change to the OTC derivatives market. In the resulting drive to create new clearing house models for OTC derivatives, the market should be focused on ensuring the design meets the objectives set out by legislators. The core objective is to reduce systemic risk by centrally netting obligations between counterparties, segregating investor positions and protecting collateral and creating a pool of capital to secure the clearing house from the default of counterparties.

Central counterparties (CCPs) are responding in various ways. Some are remaining competitive by implementing creative segregation models that will provide security over and above the regulatory minimum, but perhaps with increased costs. Others are attempting to reduce the impact of the new risk management requirements, by defining contracts as futures. This reduces the initial margin required when compared to cleared swaps with identical underlying risk.

Many industry participants are concerned by the proliferation of CCPs, causing a reduction in market liquidity, the bifurcation of initial margins for all and guaranteed funds for clearing members, leading to inefficient capital employment and increased costs of integration. Derivative users are often keen to encourage competition to ensure no one CCP is provided with excessive pricing power, however the optimisation of margins will become a strong incentive to consolidate the number of CCPs utilised for a particular portfolio. After an initial increase in the number of OTC CCPs, it is therefore likely there will then be a reduction in the number of commercially viable CCPs in the longer term. In order to retain competition between remaining CCPs, clients and clearing members may need to maintain a suboptimal allocation of capital to multiple CCPs, so it is unclear whether participants will make choices that benefit the whole at the expense of the individual. ›

Daily News at sibos

Thursday 1 November 2012 w w w.bankingtech.com/sibos/

The launch of MyStandards earlier this year was a major milestone in the use of financial messaging standards. For users, the platform offers an effective way to manage standards usage and communicate with counterparties to create efficient message processing.

For Swift’s standards developers, it potentially marks the beginning of a new era of simplicity, in which deployment, conformance testing and validation can be provided as a central service.

For Marc Delbaere, head of research & development for standards at Swift, the first few months has been like hosting a party. What if nobody comes?

“It is a question of critical mass: the value of the platform is proportional to the number of people using it,” says Delbaere. “You need more than one entity to have any communications in the first place, otherwise it’s like having one phone and no-one to call.”

He is breathing a little easier these days. “All of the indicators at the moment are that it is happening. We launched the platform three months ago and already we have 10 premium customers, including a lot of the big names who are driving their own communities behind it.”

Premium indeed – the list of pilot users is impressive, and these are translating into a customer list that includes some heavy hitters: on the market infrastructure front there are the European Central Bank’s T2S project, the Australian Securities Exchange and the Japan Securities Depositary Center, while Citi, JP Morgan and ING are leading the charge for the banks.

“It is a very simple vision; it is about standardisation of standards,” says Delbaere. “All of the communication formats between banks have been defined ad hoc, which means that all of the chains were ad hoc too – all the chains of testing, processing and putting the information to good use. The plot is conceptually very simple but more complicated to execute. What do we standardise? The way that people define and use standards really and this is the basis of it all – once you do that, if the industry follows, you can start providing community services like testing, validation, and management of test libraries.”

Let’s not forget the bottom-line too, says Delbaere. “It will help the industry as a whole reduce costs. Instead of everyone developing their own approaches, you can push common technologies and common platforms to get economies of scale. If Swift can provide a central technology stack that anyone across the industry can use, we can

do it at a fraction of what it would cost if everyone in the industry were to do it themselves. Total cost of ownership reduction is the standardisation play.”

Following on from this, it will be possible to build further tools. “If all of these things are defined centrally, you can start looking at how conformant you are to certain definitions,” says Delbaere.

And once you have collaborative tools, other benefits will naturally follow. Quite what those might be can’t be foretold with great accuracy, because it is a question of unleashing creativity and enabling the community to come up with better ways of doing things together.“It is standards based, but it is primarily a platform, and what you do with platforms is build on them”, says Delbaere. “The bottom line is that you don’t know upfront what all of the end usages are; you are enabling people, who will start doing things and finding new ways of using the platform. This isn’t the end of it – it is just the beginning.”

He has something of an inkling, however. “Testing is just one of the first things that you can do and that we have started building collaboratively with another wave of pilot customers like Barclays and HSBC. After that there might be more you can do in terms of certification, in terms of local ecosystems and compliance elements, perhaps adding some business intelligence to see what people are actually doing rather than what they say they are doing. There are a lot of possibilities, but it goes back to the point that the platform has to be adopted – and from all the names that we can see coming to the party we think that is going to happen.”

Marc Delbaere will be taking part in the Standards Forum session Standards testing: The next big thing in Standards? on Thursday 1 November at14:00 - 14:45

27

SponSored Feature

Testing time for standardsSwift’s MyStandards tool provides a platform for firms to manage their standards usage and communicate with their customers. The next part of the jigsaw is to automate the testing process. Marc Delbaere, head of research & development for standards at Swift, spoke to David Bannister about its plans in this area.


Daily News at sibos


clearing

Tomas Kindler, head of clearing relations, SIX Securities ServicesAs OTC derivatives are currently traded directly between two parties without going through an exchange, the market remains under-regulated. This has led to a drive to clear OTC derivatives through a central clearing house so that counterparty risk can be better mitigated.

However, we must remember that OTC derivatives are just another financial instrument. For any instrument that passes through a clearing house, we should be focusing not on that instrument itself but rather on the capital strength and access to liquidity of the CCPs.

The G20 recommendations have certainly led to a surge in CCP numbers and the market is set to fragment further with more being announced all the time. While we welcome competition, it cannot be denied that risk is not efficiently mitigated with so many partners. At some point, financial institutions will say that it is too expensive to post collateral to so many different parties.

Many CCPs are also implementing irrational pricing on clearing and making heavy losses in an attempt to attract clients to other services. These models will not be sustainable in the long term.

The focus therefore should be on the better oversight and regulation of CCPs themselves. We should accept that regulators will have to lead the charge in the debate over risk models and collateralisation in the event of another crisis situation occurring.

This will inevitably lead to some consolidation among clearing houses. While the cost of clearing is important to financial institutions, it is not the deciding factor when choosing with whom to clear. Robust risk models and extremely fast processing in multiple markets are two other factors of great importance. In the future, those clearing houses with deep collateral reserves, wide market reach, superb risk models and viable business models will survive.

Joe Halberstadt, head of FX and derivatives markets, SwiftThe wave of new regulation being implemented in the wake of the financial crisis is starting to bite. Though these changes are an inevitable response to the failures that precipitated the crisis, for market participants, the obligation to comply creates a considerable challenge, because it requires significant operational change.

A major source of regulatory impact is the new obligations around OTC derivatives. The European Market Infrastructure Regulation (Emir) and Title VII of the Dodd-Frank Act in the US mandate a move towards centralised clearing of OTC derivatives by central counterparties (CCPs).

One could argue that CCPs concentrate risk – or indeed that having too many CCPs weakens their power to mitigate risk as they are designed to do. But the fact remains that these new measures are progressing quickly into force and centralised clearing for OTC derivatives will be a reality.

In order to be compliant, firms will have to modify their processes and the operational impact could be significant. While the core objectives of these infrastructures – to improve safety and transparency in the OTC derivatives markets – are closely aligned, in many instances the functional and technical requirements to interact with them differ.

In particular, connectivity mechanisms vary, and although most infrastructures offer some form of direct connectivity, this can lead to a plethora of new connections for firms operating across multiple markets. Communicating with numerous CCPs without taking advantage of standardised messaging formats and existing industry-standard connectivity solutions could lead to significantly higher levels of complexity and cost.

It is important that market participants push for and support the reuse of industry standard messaging formats and communications mechanisms for interaction with CCPs, in order to minimise the cost and complexity of compliance and relieve the burden of the new regulation that will be a reality so very soon.

Communicating with numerous CCPs without taking advantage of standardised messaging formats and existing industry-standard connectivity solutions could lead to higher levels of complexity”

“

Daily News at sibos

Daily News at sibos

Thursday 1 November 2012 w w w.bankingtech.com/sibos/

The launch of MyStandards earlier this year was a major milestone in the use of financial messaging standards. For users, the platform offers an effective way to manage standards usage and communicate with counterparties to create efficient message processing.

For Swift’s standards developers, it potentially marks the beginning of a new era of simplicity, in which deployment, conformance testing and validation can be provided as a central service.

For Marc Delbaere, head of research & development for standards at Swift, the first few months has been like hosting a party. What if nobody comes?

“It is a question of critical mass: the value of the platform is proportional to the number of people using it,” says Delbaere. “You need more than one entity to have any communications in the first place, otherwise it’s like having one phone and no-one to call.”

He is breathing a little easier these days. “All of the indicators at the moment are that it is happening. We launched the platform three months ago and already we have 10 premium customers, including a lot of the big names who are driving their own communities behind it.”

Premium indeed – the list of pilot users is impressive, and these are translating into a customer list that includes some heavy hitters: on the market infrastructure front there are the European Central Bank’s T2S project, the Australian Securities Exchange and the Japan Securities Depositary Center, while Citi, JP Morgan and ING are leading the charge for the banks.

“It is a very simple vision; it is about standardisation of standards,” says Delbaere. “All of the communication formats between banks have been defined ad hoc, which means that all of the chains were ad hoc too – all the chains of testing, processing and putting the information to good use. The plot is conceptually very simple but more complicated to execute. What do we standardise? The way that people define and use standards really and this is the basis of it all – once you do that, if the industry follows, you can start providing community services like testing, validation, and management of test libraries.”

Let’s not forget the bottom-line too, says Delbaere. “It will help the industry as a whole reduce costs. Instead of everyone developing their own approaches, you can push common technologies and common platforms to get economies of scale. If Swift can provide a central technology stack that anyone across the industry can use, we can

do it at a fraction of what it would cost if everyone in the industry were to do it themselves. Total cost of ownership reduction is the standardisation play.”

Following on from this, it will be possible to build further tools. “If all of these things are defined centrally, you can start looking at how conformant you are to certain definitions,” says Delbaere.

And once you have collaborative tools, other benefits will naturally follow. Quite what those might be can’t be foretold with great accuracy, because it is a question of unleashing creativity and enabling the community to come up with better ways of doing things together.“It is standards based, but it is primarily a platform, and what you do with platforms is build on them”, says Delbaere. “The bottom line is that you don’t know upfront what all of the end usages are; you are enabling people, who will start doing things and finding new ways of using the platform. This isn’t the end of it – it is just the beginning.”

He has something of an inkling, however. “Testing is just one of the first things that you can do and that we have started building collaboratively with another wave of pilot customers like Barclays and HSBC. After that there might be more you can do in terms of certification, in terms of local ecosystems and compliance elements, perhaps adding some business intelligence to see what people are actually doing rather than what they say they are doing. There are a lot of possibilities, but it goes back to the point that the platform has to be adopted – and from all the names that we can see coming to the party we think that is going to happen.”

Marc Delbaere will be taking part in the Standards Forum session Standards testing: The next big thing in Standards? on Thursday 1 November at14:00 - 14:45

27

SponSored Feature

Testing time for standardsSwift’s MyStandards tool provides a platform for firms to manage their standards usage and communicate with their customers. The next part of the jigsaw is to automate the testing process. Marc Delbaere, head of research & development for standards at Swift, spoke to David Bannister about its plans in this area.


Daily News at sibos


Caught on Camera

Your cut-out-and-keep souvenir picture of the view we’ve shared for what seems like the past six months

... but at least we were among friends

... even for the more dedicated members of staff...


Daily News at sibos


Caught on Camera

Photo caption writer regrets telling editor “I need this job like a hole in the head”

I know how she feels... it’s exhausting doing Sibos...

28


Daily News at sibos


Caught on Camera

Your cut-out-and-keep souvenir picture of the view we’ve shared for what seems like the past six months

... but at least we were among friends

... even for the more dedicated members of staff...


Daily News at sibos


Caught on Camera

So far, so sushi... so proud

Two of Sibos’ biggest fans

The bottom inspectors have been busy this year

“... and then this jet of water comes

shooting out and bullseye”

w w w.bankingtech.com/sibos/w w w.bankingtech.com/sibos/

Daily News at sibos


Caught on Camera

Tuning up the bottle orchestra took some time, but the resulting

tinkly version of Lady in Red was well worth the wait

It can be a palaver getting a hot beverage here in Osaka...

... but if you succeed don’t, whatever you do, ask for milk

Check and checkmate

To reserve your advertising and sponsorshipfor Daily News at Sibos 2013 please contactSadie Jones on Tel: +44 203 377 3506 or Email: [email protected]

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a / Sh

utter

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Daily News at sibos


Caught on Camera

... see you next year in Dubai

Even the small matter of a broken leg ain’t

gonna stop him getting outta here

If either of you is really German, then I’m a Dutchman

Our carriage awaits, let’s get out of here...

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