AsiA set to boom, but is still vulnerAble to shocks E€¦ · Asia’s vulnerability to financial upheaval and “external shocks” as underscored by the crises of the 1990s, but

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Emerging markets in Asia have recovered from the crises of the 1990s and, while

challenges remain, the region has tantalising opportunities for banks.

In yesterday’s “big issue” discussion on emerging markets, three panellists – Nobuyuki Hirano, president the Bank of Tokyo Mitsubishi UFJ, KV Kamath, chairman of Icici Bank and Simon Tay, chairman of Singapore Institute of Internal Affairs – agreed with predictions that Asia will account for 50 per cent of global GDP by 2050, while Kamath cited the sizeable population of “unbanked” people as a potentially huge opportunity for financial institutions.

The trio raised the issue of Asia’s vulnerability to financial upheaval and “external shocks” as underscored by the crises of the 1990s, but concurred that those crises have spurred Asian economies to become stronger. Despite these improvements, Hirano warned against prematurely viewing Asian banks

as resilient enough to absorb all shocks and Kamath said the rise of Asian economies was an “evolutionary process” that would take time.

The regulatory environment was also a hot topic. When asked whether the Association of Southeast Asian Nations (Asean) would emulate the Western trend toward re-regulation of financial institutions, Tay said: “Medicine administered to US banks may not be best for Asian banks”, but

that the region was still struggling to find its own “Asian regulation”. However, if Asian banks could present a united viewpoint, he said, Asian regulators should be open to listen to them.

Talk of Asian vulnerability and regulation was, however, secondary to the main theme of opportunity. “There is a great deal of hope in emerging markets – is it misplaced?” asked session moderator, Dominic Hobson, editor in chief of Global Custodian, and the response

The indePendenT newsPaPer wednesday 31 OCTOber 2012

DAY 3

IN THIS ISSUE

AsiA set to boom, but is still vulnerAble to shocksBy Gareth Swain

AnniversAry: celeBrATING 20 yeArS oF Daily News at sibos

“Seeing where collateral is forms only part of the picture”Jason Paltrowitz, JP Morgan

12 Collateral management

www.bankingtech.com/sibos/

Continued on page 2

The idea that Swift should shed its not-for-profit status has been dismissed by Gottfried leibbrandt, chief executive.

During one of the Up close and Personal one-on-one interviews at the Standard Forum, he was asked if he could see a future in which Swift would operate on a for-profit basis and replied that he thinks it would be a bad idea.

“I was talking to some senior bankers at dinner about this,” he said. “They’d made a lot of money when the banks sold Visa and Mastercard and they were looking to make some more.” The result of doing the same with Swift would cost banks dearly, said leibbrandt. “The first thing that would happen would be that you’d double the price,” he said.

“Mastercard and Visa are now competing with banks in their core franchise, so I don’t think it would be a good place to go,” he said.

In dealing with compliance areas, he said banks need to talk to regulators to help shape regulations, while Swift can help build systems. “We have to find a mechanism to engage the regulators in a meaningful way, and that has to be done through our bank members,” he said. compliance remains the biggest issue for banks. “It is foremost in people’s minds. The big guys are spending millions and even the smaller banks are spending tens of millions just on compliance. That is money that doesn’t give any commercial advantage; it just comes off the bottom line.”

leibbrandt had been head of standards earlier in his career at Swift, and he has previously said it was his favourite job. reflecting on that time, he said when he took over the standards operation he realised Swift

faced a challenge with the introduction of ISo 20022. “The community had been sold on a move to ISo 20022 and we realised it wasn’t that simple: the big banks had huge legacy issues,” he said.

leibbrandt retains his fascination with standards though he is no longer directly involved. Asked what his favourite standard was, he replied, “language”. It has parallels with the standards used in financial messaging, he said: “We’re all sitting here speaking english though it’s not our native language – and I don’t think it is going to be an international language any time soon. It is similar to the standards we use, in that we all have a legacy that is hard to get rid of, it’s free, and it’s flexible – there are thousands of variations of english – and there are market practices in the form of jargon, and jive and criminals’ language.”

w w w.bankingtech.com/sibos/

Daily NewS at SiBoS

Wednesday 31 october 2012 3

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Be the hunter, not the hunted when tackling fraudBy George Bourdaniotis

swift sale would cost banks, warns LeibbrandtBy David Bannister

Fraudsters are motivated by more than money – they have information.

For David Bannatyne, executive general manager, banking and payments services at National Australia Bank (NAB), information is the “ball” in a ball game, once the fraudsters have it, they win. And they are becoming more creative and innovative to get it.

Many times, the bank is not at fault; the customer is compromised. So “customer education is paramount, a never ending challenge”, he said.

But customers are still gullible and vulnerable to phishing attacks despite constant warnings and education. Srood Sherif, group chief information officer at National Bank of Abu Dhabi said the phishing pages and systems are such sophisticated replicas, customers are deceived.

Although people are street savvy, said Mark clancy, managing director of technology risk

management at DTcc, they need to be educated so they are cyber savvy. They dare not walk a dark alley at night, but they cannot recognise a “dark alley” online.

one problem is banks no longer have proprietary software and business banking platforms. customers use the internet to access platforms, so the risks are greater. With more connectivity through computers and mobile devices, people do not need to visit the branches to make transactions. Mobile devices are a particular concern and Bannatyne saw “big challenges on the horizon. Android, which has 70 per cent market penetration, has a lower level of security than the iPhone, because of the way applications are deployed”.

Banks cannot ignore the fact customers want to do their banking using their mobile platforms. All mobile payments pass through NAB’s real-time fraud detection systems to detect customer patterns. Users are

profiled on their habits, behaviours and location. If something different is found, they call the customer.

While banks must make it more difficult for the fraudsters, Srood said they cannot make the authentication process too complicated for the customer. customers must understand that the more levels of authentication, the better security.

But QF codes are very problematic, because users cannot tell the destination, making them perfect attack tools. NAB uses a loop 2 factor, SMS, to confirm transactions and increase security. But attackers can use social engineering and intercept the texts. Attacks are constantly changing and it is difficult to predict how they will evolve.

legislation is geographical and not specific about what or how information is shared. As clancy emphasised, law enforcement takes months and years, but the industry needs to respond immediately, because

attacks cross borders. Unlike physical attacks, the origins of cyber attacks are not obvious, so response is difficult, especially from other countries.

clancy said American institutions in 2007 were handling five events a month, but today they handle that number in one day and it is doubling daily. every tool deployed has a life span of maybe two years, so there is a constant need to create new strategies. It is difficult to keep ahead. “Investment in security should be constantly reviewed into whether it is adequate or not,” said Bannatyne.

Sherif said banks must detect where they are hacked and where attempts are made so they can act quickly.

“If you are not seeing evil, malicious things happening, you are not looking hard enough,” said clancy. “If you are not involved in information sharing and take advantage of community defence, you will miss things.”

Hyper-economies need an open approachby George Bourdaniotis

Aggregated services are decomposing, said Mark Pesce, founder of FutureStreet, in

yesterday’s Innotribe session on hyper-economies. Using a hotel room as an analogy, he divided the aggregate into components – the room, water, electricity, carpet – all paid for in the room rate. The disaggregate services that hotels offer for an extra charge are arbitrary. As components, they can be reconfigured to create more scope of business. less aggregation means infinite ways to mix and match services in any industry.

“Many of the things we use today were invented for free,” said Michel Bauwens, founder of Peer to Peer (P2P) Foundation. Bauwens defined the “old business model” as value and “wealth created in a private sphere”. People invest, pay for r&D and produce products to be sold.

In the new model, things are “created and deposited in a commons of code and design”. one player in the new playground is the commons community and its contributors – paid and unpaid. The second player is the collaborative infrastructure, the open-source project foundations that do not control production but enable it to occur on a continuing basis. The third player is the entrepreneur. “When an open source becomes a success, it creates an institution and a vibrant economy of entrepreneurs around it.” The three players work together on a new basis in the “playground”, which can go from being local to global.

once this happens, different approaches are necessary. classically, permission was needed to do something; the new model is permissionless. Quality control goes from the front to the back. The editors, administrators and others now work after the fact. A traditional company needs discussion to find solutions to problems. In the new, people are free to create what they think are solutions, though they may not always work.In their self-interest, corporations need new attitudes to shared property, like the creative commons licence. There is a vested interest in cultivating a new type of governance and ownership. corporations also need to work differently with their competitors. Bauwens is convinced this shift is inevitable.

corina Mihalache, director business analysis at Allevo, presented his firm’s FinTP open source software as an example of how these concepts are working within the banking industry. Allevo had a closed, core piece of banking software, but it

wanted to do something new with banks. It needed to keep its software up-to-date and in line with regulations.

Telcos and social media companies are entering the financial world. And young people want to use deivces and social media to make payments – and banks should let them. “They are the future of banking,” said Mihalache. These companies’ first idea was to sell the source code to their customers, but that failed to generate interest. The second idea was popular with young employees – open distribution for free to clients and others.

Since making its software open, all features it builds are shared with the banking community, which is building its own features for integrated transactions. Mihalache said FinTP was the block on which other shared blocks and functionality could be added.

Pesce said business needed a connection strategy, which Mihalache said was addressed by FinTP, a common platform for banks to start using the same language.


Daily NewS at SiBoS

Wednesday 31 october 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

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was uniformly affirmative of Asia’s possibilities.

Hirano saw potential for Japanese financial institutions to provide solutions on Asian markets, increase trade in Asian currencies such as the renminbi to reduce dependence on the dollar, and promote cooperation between the public and private sectors such as the Asian Bond Market Initiative and the Asean+3 credit Guarantee and Investment Facility.

His bank was “very much committed” to helping develop bond markets in Asia to spur economic growth, he said.

Kamath added that the growing

integration of Asia into the world economy will strengthen regional economies and demand for money and products would be strongest in Asia during the next 20-30 years.

There is, he said, “an exciting relationship emerging between Asia and the rest of the world. This is an age of opportunity”.

Tay saw opportunities in cross-regional economic ties. The renminbi would become another global reserve currency in the next two or three decades, he said, and a number of Asian countries offered enticing

possibilities. Myanmar was still in the early days of political reform but the change was irreversible and would create chances to harness the country’s natural resources.

At the other end of the spectrum, Tay’s native Singapore was open and integrated with sound macroeconomic policy and was well prepared to handle the downturn. Tay thought Singapore’s role was as a global economic hub. “everyone’s trying to get in there,” he said. Meanwhile, Indonesia was a “truly underrated” and a “severely underbanked” economy.

Continued from page 1

The idea that Swift should shed its not-for-profit status has been dismissed by Gottfried leibbrandt, chief executive.

During one of the Up close and Personal one-on-one interviews at the Standard Forum, he was asked if he could see a future in which Swift would operate on a for-profit basis and replied that he thinks it would be a bad idea.

“I was talking to some senior bankers at dinner about this,” he said. “They’d made a lot of money when the banks sold Visa and Mastercard and they were looking to make some more.” The result of doing the same with Swift would cost banks dearly, said leibbrandt. “The first thing that would happen would be that you’d double the price,” he said.

“Mastercard and Visa are now competing with banks in their core franchise, so I don’t think it would be a good place to go,” he said.

In dealing with compliance areas, he said banks need to talk to regulators to help shape regulations, while Swift can help build systems. “We have to find a mechanism to engage the regulators in a meaningful way, and that has to be done through our bank members,” he said. compliance remains the biggest issue for banks. “It is foremost in people’s minds. The big guys are spending millions and even the smaller banks are spending tens of millions just on compliance. That is money that doesn’t give any commercial advantage; it just comes off the bottom line.”

leibbrandt had been head of standards earlier in his career at Swift, and he has previously said it was his favourite job. reflecting on that time, he said when he took over the standards operation he realised Swift

faced a challenge with the introduction of ISo 20022. “The community had been sold on a move to ISo 20022 and we realised it wasn’t that simple: the big banks had huge legacy issues,” he said.

leibbrandt retains his fascination with standards though he is no longer directly involved. Asked what his favourite standard was, he replied, “language”. It has parallels with the standards used in financial messaging, he said: “We’re all sitting here speaking english though it’s not our native language – and I don’t think it is going to be an international language any time soon. It is similar to the standards we use, in that we all have a legacy that is hard to get rid of, it’s free, and it’s flexible – there are thousands of variations of english – and there are market practices in the form of jargon, and jive and criminals’ language.”


Daily NewS at SiBoS

Wednesday 31 october 2012 3

NEws

Be the hunter, not the hunted when tackling fraudBy George Bourdaniotis

swift sale would cost banks, warns LeibbrandtBy David Bannister

Fraudsters are motivated by more than money – they have information.

For David Bannatyne, executive general manager, banking and payments services at National Australia Bank (NAB), information is the “ball” in a ball game, once the fraudsters have it, they win. And they are becoming more creative and innovative to get it.

Many times, the bank is not at fault; the customer is compromised. So “customer education is paramount, a never ending challenge”, he said.

But customers are still gullible and vulnerable to phishing attacks despite constant warnings and education. Srood Sherif, group chief information officer at National Bank of Abu Dhabi said the phishing pages and systems are such sophisticated replicas, customers are deceived.

Although people are street savvy, said Mark clancy, managing director of technology risk

management at DTcc, they need to be educated so they are cyber savvy. They dare not walk a dark alley at night, but they cannot recognise a “dark alley” online.

one problem is banks no longer have proprietary software and business banking platforms. customers use the internet to access platforms, so the risks are greater. With more connectivity through computers and mobile devices, people do not need to visit the branches to make transactions. Mobile devices are a particular concern and Bannatyne saw “big challenges on the horizon. Android, which has 70 per cent market penetration, has a lower level of security than the iPhone, because of the way applications are deployed”.

Banks cannot ignore the fact customers want to do their banking using their mobile platforms. All mobile payments pass through NAB’s real-time fraud detection systems to detect customer patterns. Users are

profiled on their habits, behaviours and location. If something different is found, they call the customer.

While banks must make it more difficult for the fraudsters, Srood said they cannot make the authentication process too complicated for the customer. customers must understand that the more levels of authentication, the better security.

But QF codes are very problematic, because users cannot tell the destination, making them perfect attack tools. NAB uses a loop 2 factor, SMS, to confirm transactions and increase security. But attackers can use social engineering and intercept the texts. Attacks are constantly changing and it is difficult to predict how they will evolve.

legislation is geographical and not specific about what or how information is shared. As clancy emphasised, law enforcement takes months and years, but the industry needs to respond immediately, because

attacks cross borders. Unlike physical attacks, the origins of cyber attacks are not obvious, so response is difficult, especially from other countries.

clancy said American institutions in 2007 were handling five events a month, but today they handle that number in one day and it is doubling daily. every tool deployed has a life span of maybe two years, so there is a constant need to create new strategies. It is difficult to keep ahead. “Investment in security should be constantly reviewed into whether it is adequate or not,” said Bannatyne.

Sherif said banks must detect where they are hacked and where attempts are made so they can act quickly.

“If you are not seeing evil, malicious things happening, you are not looking hard enough,” said clancy. “If you are not involved in information sharing and take advantage of community defence, you will miss things.”

Swift has surpassed the 1000 mark in corporate memberships. The announcement yesterday highlights the

growth of non-bank financial institutions (NBFIs) and non-banks on the cooperative’s network.

Elie Lasker, head of corporate market at Swift, said: “This year’s corporate forum [left] is the biggest to date, with more than 250 representatives from corporations registered to attend.”

The corporate segment now represents more than 10 per cent of Swift’s total customer base. “Corporates are becoming a significant segment and Asia represents the highest growth area for corporate traffic on the network,” said Lasker.

“It is clear that the economic climate is pushing corporate treasurers and others to have more visibility of cash and more control. In addition, the regulatory environment is forcing them to centralise and streamline their operations. When they do that, Swift becomes a natural piece of the puzzle.”

Since July 2009 any corporate has been able to join Swift, provided it is recommended by a bank operating in a Financial Action Task Force country that is willing to exchange Swift messages with it. The ability to communicate with multiple banks over a single connection is appealing to many corporate treasurers. Moreover, Swift’s moves to simplify connection to the network via solutions such as Alliance Lite have attracted more participants who previously viewed the network as costly and complex.

Non-bank membership of Swift has gained momentum. The decision in 2009 to enable corporates to join directly, rather than through a closed user group, has accelerated numbers. The picture has been a little slower in the fund arena, where Swift announced back in 1992 (the year Daily News at Sibos was launched) that it would allow fund managers on to the network. Today, there are 1000 fund manager members.

As with corporates, Asia represents an important target market for Swift. “Asia is the fastest growing funds market in the world, with significant hubs of activity in Korea, Hong Kong and Taiwan,” said Ed Glyn, director of funds at Swift. “Swift now has more than 1000 fund players on its network in 76 countries and many of these organisations are looking to intermediate themselves into the flows that are coming out of the Asian economies.”

As the markets have evolved since the financial crisis, corporates and non-bank

financial institutions, such as asset managers, transfer agents, hedge funds, insurance companies, private equity houses, broker dealers and exchanges are facing similar challenges as banks, said Karl Turnbull, Emea head of non-bank FI sales, global treasury solutions at Bank of America Merrill Lynch. “These challenges highlight the need for solutions that deliver visibility and effective cash management, globally and often in multiple currencies. All financial institutions, including non-banks, are looking for the best connectivity solutions, increased efficiency and reduced costs while also seeking partners that can support them as they expand into new markets.”

Glyn agreed: “The pressures on securities services providers and non-banks are similar to those that banks face. These include a need to please the customer, be more competitive, comply with regulations and reduce inefficiencies in their organisations.”

He said Swift had made “a concerted effort” during the past few years to ensure not only that it is as inclusive as possible in welcoming different types of financial institutions and non-banks into the Swift “community”, but also to work together to reduce the total cost of ownership to connect to the Swift network. This has been done through initiatives such as Alliance Lite, which makes it easier for organisations to connect to the Swift network. “We want to make sure that Swift is as relevant to the very small hedge funds or asset managers as it to the large global banks or securities services providers.”

Alliance Lite 2, which went live in April this year, was extensively pilot tested by fund

distributors and administrators, transfer agents and investment managers from around the world. It is designed by Swift to support securities settlement and funds distribution messaging. It provides new users with both manual operations and integration with back office systems. Swift says the new version of Lite will be attractive to low volume securities players.

It is not just Swift that is making an effort to encourage non-bank participation in the network; member banks are also pulling their weight. Glyn said: “We are also working with the large Swift members to ensure they are offering solutions to their smaller clients in order to connect to Swift. Our larger members say they can service their clients more efficiently via Swift.”

Turnbull added: “Sibos is a good forum for non-banks to get access to potential solutions and to discuss their issues. We’ve seen Swift and its member banks raising awareness of Swift in the non-bank area too. This is likely to increase as central banks encourage NBFIs to join clearing systems. Moreover, the finalisation of the Sepa end date is now forcing NBFIs to rethink how they will process payments in the euro zone – there are real benefits to be gained in cross-border payments processing with Sepa.”

Turnbull said he has observed more active involvement of NBFIs at Sibos and similar conferences. “While all of the sectors will operate in slightly different ways, they are similar in terms of transaction flows and movement; for example, a hedge fund administrator or an asset manager deals with subscriptions and redemptions or investments and repatriation of funds, which are not dissimilar to a bank simply processing payment and receipt transactions.”

NBFIs and corporates swell Swift numbersBy Heather McKenzie

w w w.bankingtech.com/sibos/ Wednesday 31 October 20124

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Thailand’s Kasikornbank has become the first user of a new cross-

currency automated clearing house (ACH) established in Asia Pacific by JP Morgan Treasury Services. The Thai bank plans to use the service to make it easier for corporates and individuals to send and receive money across Asia Pacific.

“The Asean countries are growing, both in terms of population and connectivity to the outside world, but it’s not easy to transfer funds,” said Songpol Chevapanyaroj (above, left , with Lim Kiat Seng of JP Morgan), group head, corporate and SME products division at Kasikornbank. “In Malaysia and Vietnam, you may have to maintain a minimum balance in an account to be able to send or receive funds, and that minimum is too high. In addition, if the account is in a foreign currency, you can’t use it to transfer any money to a beneficiary.”

The JP Morgan ACH service is designed to combine the national clearing systems of 14 Asia Pacific countries into a single regional payment network. The idea is to automate payments and FX processes, making it cheaper and easier for clients to transfer funds in the region. Instead of dealing with each country

separately, users can submit a single payment file for multiple markets. Whereas previously customers would have needed to deal with several different local service providers, the concept behind the JP Morgan service is to reduce that need to just one point of contact.

“It’s like the internet of pan-Asian clearing,” said Thomas Wiles, executive director, treasury services at JP Morgan. “Connecting to a single node – your account with JPM – you get a single plug and play solution pan-Asia. We’ve heard about localisation, reducing cost and innovation. We think it could address all this.”

Traditionally, Asia always has been a fragmented collection of markets. While Kasikornbank previously used Swift for cross-border payments, the bank found that it was unable to transfer amounts smaller than $50,000. “The smaller the company you are, the bigger the charge you have to pay,” he said. “But using this JP Morgan link, we don’t have to pay that charge.”

Asean (Association of Southeast Asian Nations) is a regional cooperation body that includes Indonesia, Singapore, Malaysia, Thailand and Vietnam among its members. It has been working on a capital markets project to connect the

stock exchanges of six member states and attract more foreign investment to the region’s capital markets. Despite this, clearing and settlement always has been one of the more difficult aspects of the region’s financial landscape. Alternative trading platform Chi-East closed down in May 2012, partly following its failure to realise the cost reductions in pan-Asian clearing that the venue had originally promised. But for Hendra Lembong, head of cash management Apac at JP Morgan Treasury Services, the ACH platform is about taking the complexity out of cross-border payments in Asia Pacific for individuals and corporates.

“It’s very expensive to send $50 alone,” he said. “But we can channel payments through cost-effective local and domestic pipes, using partnerships with local banks. Through combining payment flows and using economies of scale, we can save individuals from paying hefty fees every time they need to make a cross-border payment.”

Chevapanyaroj added that the ACH service will be useful in the bank’s home market of Thailand for outflows to students studying abroad, domestic remittances and SME transactions.

Singapore-based Swift service bureau Decillion has sealed a deal with Fundtech that will provide the US

company with a physical presence in Asia through its local offices in Australia, China, Hong Kong, Indonesia, Malaysia, Thailand and Vietnam. It will give customers in Asia access to local support in their own language and time zone. Fundtech already has a network of 600 banks outside Asia, making it the largest Swift service bureau in the world.

“A few years ago, I was told not to talk about the cloud: it was seen as scary by financial institutions. I’m glad that has changed,” said George Ravich, executive vice-president of Fundtech, who views the move as a step towards building a global financial cloud.

Ravich argues that firms with experience and a background in financial services will always be able to out-compete non-specialist cloud services providers, especially in terms of security provision. Concerns about security, and in particular the security of confidential client information, always has been the main perceived disadvantage of cloud computing services, especially for large global financial institutions.

“There are issues in terms of the laws for customer data,” he said. “Customer data often needs to stay within a customer’s home country borders. Security and reliability issues are where we differentiate ourselves from competitors.”

Separately, Fundtech also announced that it has teamed up with Accenture to provide liquidity management services to banks. Drawing on changing global regulations, including Basel III capital requirements, Ravich said banks will have to do a better job of managing their liquidity.

“The tools today are not real time, intra-day,” he said. “A bank doesn’t know where its money is. That’s just not good enough. That used to be OK when liquidity was freer, but now it isn’t. Together with Accenture, our product addresses that real time need to see and manage that money, throttle how much is going out at different times of day, reserving capital for key clients when they need it.”

Kasikorn signs up for cross-border ACHBy Elliott Holley

Fundtech slips into Asia with Decillion dealBy Elliot Holley


Daily News at sibos

NEws

Citi has announced a $1 billion shared-risk trade finance facility in partnership with International Finance Corporation

(IFC). The new deal is an extension of an existing facility under the IFC Global Trade Liquidity Program aimed at stimulating the growth of trade, driving job creation and developing economies in emerging markets.

Citi and IFC initially launched the three-year facility in October 2009, which reached $900 million at its peak and supported $6 billion of trade in emerging markets by financing more than 2000 funded trade investment instruments through 92 banks in 23 developing countries.

Speaking to Daily News at Sibos, John Ahearn, global head of trade supply chain management at Citi, said the inaugural term of the facility and the new extension were framed by distinct financial crises. The original period began in the aftermath of the global downturn of 2008, while the extension is set to start amid the uncertainty of the European financial crisis.

Ahearn said the program was particularly significant at a time when European banks, which traditionally have been a major source of liquidity, are suffering from the crisis. The extension was a chance to double down on the “huge success” of the program, which offered benefits for Citi in access to clients and for emerging markets through access to liquidity they currently lacked.

The extension will expand the availability of trade finance for clients in emerging markets for a further three years through a 50-50 risk-sharing structure. IFC and its partners, including other development finance institutions, will contribute $500 million, and

Citi will provide an additional $500 million.Citi will use the funding to originate trade

finance transactions in Africa, Asia, Central and Eastern Europe, Latin America and the Middle East, enabling its bank clients to extend financing to local importers and exporters. Citi expects the facility will support emerging market trade flows of up to $6 billion through 2015.

“Citi’s partnership with the IFC has been a tremendous success, helping to stimulate the recovery and growth of global trade in the emerging markets,” said Naveed Sultan, global head of treasury and trade solutions business at Citi. “We look forward to continuing our partnership with banks, corporations and the public sector across the emerging markets to continue to stimulate global trade.”Ahearn drew a parallel between Citi’s aims

in extending the facility and the aims of Sibos. “Sibos is all about collaboration,” he said, and Citi sought collaboration in a range of ways to provide clients with greater access to tools and liquidity.

Citi and IFC extend shared-risk finance dealBy Gareth Swain

Huge growth will ride on inter-African trade boomBy David Bannister

T rading between the major regions of Africa will be more important

and grow faster than African trade with other parts of the world over the next few years, as a booming population and rapid technology adoption transform the continent.

“Forget everything you’ve seen on television,” said Bob Blower, head of cash and trade at South Africa-based Standard Bank at a community session yesterday. High bandwidth fibre cables running the length of the continent along both coasts and new highways are being built as individual governments among the 54 African nations focus on infrastructure projects.

Blower and his co-presenter Simon Freemantle, senior economist at Standard Bank, told the session that in less than a generation Africa has gone from having three democracies to having 23, and there is a political will among those goverments to forge alliances and build trade. “It is ridiculous that it is easier to ship goods from Nigeria to the US than from Nigeria to Kenya,” said Blower.

Freemantle said he had a “very bullish outlook”, but warned that the same rapid growth factors that will boost economies could lead to social and political unrest. The emergence of megacities such as Cairo and Lagos and the related growth of

urban corridors – sprawling conurbations that spread over 600 kilometres – raises problems of food. Lagos, for instance, has grown so rapidly that its actual population is unknown, with official estimates varying between 20 and 29 million.

Finding the food shouldn’t be a problem: Freemantle said while people are generally aware of the continent’s mineral wealth, they are surprised to hear that “60 per cent of the world’s available crop land is in sub-Saharan Africa”.

Similarly, people are familiar with the fact that mobile banking has taken off in Africa – 20 per cent of Kenyan GDP is transfered by mobile – the fact is that while there are 350

million mobile banking users, it is expected that 400 million new deposit accounts will be opened over the next ten years.

“It is still a tremendously difficult place to do business, but we are very optimistic about the opportunities,” said Freemantle.

Blower said since joining Standard Bank a year ago from HSBC, he had been surprised by the “emerging level of sophistication” in the banking systems that will have to deal with this growth in cross-border trade. “Across the regions, the actual business of bringing it all together is happening, with governments, central banks, Swift and vendors such as Fundtech and Dovetail all contributing.”

The extension... offers benefits for Citi in access to clients and for emerging markets through

access to liquidity they currently lack

John AheArn, Citi

Daily News at sibos

NEws

Two-thirds of securities market participants are in favour of the imposition of

financial penalties as an incentive to encourage improvements in operational efficiency, according to an Omgeo study released today.

Tony Freeman, executive director of industry relations at Omgeo, said whereas in the past there was pushback from the industry regarding financial penalties because they were seen as a source of increased costs, the debate had moved on. “If you apply penalties fairly, across all markets – and the CSD Regulation in Europe does this – then penalties can work,” he said.

The survey was conducted with 590 custodian banks, broker dealers, fund managers and other financial institutions in Asia Pacific, North America and Europe. Respondents

were asked to assess their own state of preparedness for T+2 settlement and comment on the benefits and potential financial penalties posed by tighter settlement deadlines.

A report, Preparing for T+2 Settlement, has been issued today. It has found that market participants are not prepared for shorter settlement cycles, despite being strongly in favour of a move to T+2. Freeman pointed out that in many Asian markets and in Europe, T+2 settlement is a “done deal”. The US market is analysing shorter settlement cycles in more detail, he added.

Half of survey respondents, however, are making no preparations for shorter settlement cycles. “There is a global shift towards shorter settlement cycles to reduce exposure to

counterparties and market prices and to achieve liquidity, capital and collateral savings. The lack of meaningful preparation is concerning as we gain increasing momentum towards shorter settlement cycles globally,” he said.

The survey found that awareness of the case for shortening the settlement timetable is the highest in Europe (59 per cent), which is poised to move to T+2 by mid-2014 ahead of the implementation of Target2Securities (T2S), and in Asia-Pacific (22 per cent), where a number of markets already settle on T+2. In North America, however, awareness of shortened settlement cycles is the lowest (6 per cent), with the topic only starting to re-emerge following a recent study by the Boston Consulting Group that estimates that it would take three years to move the US securities industry to T+2.

The timely receipt of trade details from counterparties was identified

by 60 per cent of respondents as the most crucial determinant in successfully moving to T+2.

In terms of achieving T+2, the survey found that 60 per cent of respondents considered the timely receipt of trade details from counterparties to be crucial.

Freeman said broker dealers and custodian banks are aware of the drive towards shorter settlement cycles, but buy-side firms were not well acquainted with the concept. “Firms in this sector tend not to make a move until something is absolutely official,” he said.

Most brokers and custodians have platforms that can support T+2 but they need to review their deadlines in order to ensure everyone can move to it. “Market participants clearly appreciate that their own readiness to settle trades on T+2 is only as good as that of their counterparties, hence the insistence on timely delivery of trade details.”

Penalties get the nodBy Heather McKenzie

right time, right plaCe

w w w.bankingtech.com/sibos/Wednesday 31 October 2012 13

Daily News at sibos

collateral management

Broker-Dealer Services. “There will not only be a need for collateral, but there will be an increased need to optimise the management of that collateral.”

OTC derivatives clearing is not the only source of increasing demand for collateral – other regulatory initiatives, such as Basel III, are adding to the rise in claims on collateral. The large global custodian banks, which provide asset services to buy side fi rms, are jockeying for position in the race to provide collateral management and related services. At the same time they, and all fi nancial institutions, realise that their own collateral related processes need to be optimised in order to keep control of costs.

“Collateral is a big issue for banks such as Lloyds – both in terms of our internal use of collateral and the services we need to provide to our customers

for their collateral use,” says Nick Burge, head of alternative fund sales, Lloyds Banking Group. “It has become a much more complex management issue than it was, say, fi ve years ago. Banks must improve their internal systems and the management programmes around those.”

The “$64,000 question”, he adds, is whether there will be enough collateral of suffi cient quality. “How much more collateral will be required, and the cost of the collateral, depends to a large extent on netting when liquidity contracts are moved between fi nancial institutions and clearing houses. Estimates vary wildly – from half a trillion up to two to four trillion dollars. But everyone is aware that there will be a massive increase in demand for collateral. This will be a good market in which to issue high grade government debt because there will be a lot of demand for it. The regulations are

making it diffi cult for fi rms to stray very far from high grade collateral.”

Using collateral as effi ciently as possible, getting it in the right place at the right time, in the most effi cient manner will be an issue for all fi nancial institutions, he adds.

Jeroen Kremers, head of collateral management at Royal Bank of Scotland, says “good housekeeping” will require fi nancial institutions to make sure they have the right collateral and that it is managed well to minimise costs. “Most banks will be looking to do this and some will further look to leverage the work they are doing to roll out off erings to their clients that don’t have adequate collateral management processes and systems.”

While it sounds simple enough – fi nancial institutions should have systems that enable collateral to be in the right ›



Daily News at sibos

Wednesday 31 October 201212


from OTC derivatives activities is under-collateralised to the tune of up to $2 trillion, relative to the risk. Moving this risk to central counterparties (CCPs) will require the posting of additional collateral. In addition, the demand for high quality collateral has increased signifi cantly and the sovereign debt problems in the euro zone have led to fears of a shortage of collateral of suffi cient quality.

The PRMIA survey found that in addition to the 25 per cent of respondents who had withdrawn from capital-intensive businesses, 58 per cent said they were more selective when undertaking such business. Eighteen per cent said they would pass on extra capital costs to clients. While regulators intended to encourage OTC contracts on to central clearing, the survey found a majority of respondents – 64 per cent

– thought that less than half of their OTC contracts would be cleared via CCPs. The PRMIA said this suggests that bilateral clearing will still have a signifi cant role to play in the OTC markets.

Interestingly, this belief was held by 84 per cent of buy side fi rms surveyed, whereas only 43 per cent of sell side fi rms, which are more closely involved in clearing processes, agreed. The push towards central clearing is bringing the concept of collateralisation to the buy side world, in many cases for the fi rst time.

“The changing regulatory environment has had the most signifi cant impact on buy side fi rms, bringing new rules and regulations that require them to receive or post collateral to their counterparties,” says James Malgieri, executive vice-president, head of global collateral services, BNY Mellon

aquarter of fi nancial institutions are exiting some lines of business because of increased capital

requirements, says a survey conducted by the Professional Risk Managers’ International Association (PRMIA), a non-profi t professional association of 86,717 members in 210 countries. Survey respondents said they expected the introduction of central clearing to result in lower profi t margins, increased collateral requirements and a general increase in the cost of doing business in areas such as OTC derivatives.

Central clearing of OTC derivatives contracts is a central tenet of the G20’s approach to preventing another fi nancial crisis like that of 2008. The International Monetary Fund, in various papers, has estimated counterparty risk stemming

Myriad regulations are drawing many more fi nancial industry participants into the collateral arena. Heather McKenzie discovers there are plenty of providers lining up to off er collateral solutions


w w w.bankingtech.com/sibos/Wednesday 31 October 2012 13

Daily News at sibos


Broker-Dealer Services. “There will not only be a need for collateral, but there will be an increased need to optimise the management of that collateral.”

OTC derivatives clearing is not the only source of increasing demand for collateral – other regulatory initiatives, such as Basel III, are adding to the rise in claims on collateral. The large global custodian banks, which provide asset services to buy side fi rms, are jockeying for position in the race to provide collateral management and related services. At the same time they, and all fi nancial institutions, realise that their own collateral related processes need to be optimised in order to keep control of costs.

“Collateral is a big issue for banks such as Lloyds – both in terms of our internal use of collateral and the services we need to provide to our customers

for their collateral use,” says Nick Burge, head of alternative fund sales, Lloyds Banking Group. “It has become a much more complex management issue than it was, say, fi ve years ago. Banks must improve their internal systems and the management programmes around those.”

The “$64,000 question”, he adds, is whether there will be enough collateral of suffi cient quality. “How much more collateral will be required, and the cost of the collateral, depends to a large extent on netting when liquidity contracts are moved between fi nancial institutions and clearing houses. Estimates vary wildly – from half a trillion up to two to four trillion dollars. But everyone is aware that there will be a massive increase in demand for collateral. This will be a good market in which to issue high grade government debt because there will be a lot of demand for it. The regulations are

making it diffi cult for fi rms to stray very far from high grade collateral.”

Using collateral as effi ciently as possible, getting it in the right place at the right time, in the most effi cient manner will be an issue for all fi nancial institutions, he adds.

Jeroen Kremers, head of collateral management at Royal Bank of Scotland, says “good housekeeping” will require fi nancial institutions to make sure they have the right collateral and that it is managed well to minimise costs. “Most banks will be looking to do this and some will further look to leverage the work they are doing to roll out off erings to their clients that don’t have adequate collateral management processes and systems.”

While it sounds simple enough – fi nancial institutions should have systems that enable collateral to be in the right ›



Daily News at sibos



from OTC derivatives activities is under-collateralised to the tune of up to $2 trillion, relative to the risk. Moving this risk to central counterparties (CCPs) will require the posting of additional collateral. In addition, the demand for high quality collateral has increased signifi cantly and the sovereign debt problems in the euro zone have led to fears of a shortage of collateral of suffi cient quality.

The PRMIA survey found that in addition to the 25 per cent of respondents who had withdrawn from capital-intensive businesses, 58 per cent said they were more selective when undertaking such business. Eighteen per cent said they would pass on extra capital costs to clients. While regulators intended to encourage OTC contracts on to central clearing, the survey found a majority of respondents – 64 per cent

– thought that less than half of their OTC contracts would be cleared via CCPs. The PRMIA said this suggests that bilateral clearing will still have a signifi cant role to play in the OTC markets.

Interestingly, this belief was held by 84 per cent of buy side fi rms surveyed, whereas only 43 per cent of sell side fi rms, which are more closely involved in clearing processes, agreed. The push towards central clearing is bringing the concept of collateralisation to the buy side world, in many cases for the fi rst time.

“The changing regulatory environment has had the most signifi cant impact on buy side fi rms, bringing new rules and regulations that require them to receive or post collateral to their counterparties,” says James Malgieri, executive vice-president, head of global collateral services, BNY Mellon

aquarter of fi nancial institutions are exiting some lines of business because of increased capital

requirements, says a survey conducted by the Professional Risk Managers’ International Association (PRMIA), a non-profi t professional association of 86,717 members in 210 countries. Survey respondents said they expected the introduction of central clearing to result in lower profi t margins, increased collateral requirements and a general increase in the cost of doing business in areas such as OTC derivatives.

Central clearing of OTC derivatives contracts is a central tenet of the G20’s approach to preventing another fi nancial crisis like that of 2008. The International Monetary Fund, in various papers, has estimated counterparty risk stemming

Myriad regulations are drawing many more fi nancial industry participants into the collateral arena. Heather McKenzie discovers there are plenty of providers lining up to off er collateral solutions


Daily News at sibos

Wednesday 31 October 2012 15

›


place at the right time – in practice, it is not quite so straightforward.

One of the banks looking to leverage its collateral management overhaul is JP Morgan. Jason Paltrowitz, banks and broker dealer segment head, JP Morgan worldwide securities services, says the collateral story has changed recently from whether there is enough collateral to how banks can optimise their use and management of collateral. “That’s not to say that some individual firms may not experience hiccups in trying to get their hands on collateral and there may be additional costs. But optimisation is now a big focus.”

Large banks are beginning to

think about how they can corral their collateral and treat it in an efficient way, he says. “Historically, the collateral needs of different parts of a bank were treated separately, but in order to be more efficient, they need to consider centralising. This will enable them to understand what collateral is being used and where and whether collateral is being used in the most efficient way possible.”

Some firms are transforming their internal front offices to manage collateral in a holistic way, asking each business line to prove why it needs collateral and allocating it if it makes sense. Centralising collateral management will be costly,

however. Custodian banks are well placed to offer services around this because they are sitting on the assets for the customers, he says. For example, JP Morgan has built its own systems and allocation engines for collateral and can offer these to clients. “Our system enables us to view all of our obligations across multiple entities and jurisdictions and to allocate collateral to meet requirements.”

Paltrowitz says major market participants are in the midst of retooling their businesses while also considering new regulatory requirements. “New collateral management solutions, optimisation engines and robust reporting mechanisms are key

Historically, the collateral needs of different parts of a bank were treated separately, but in

order to be more efficient, they need to consider centralisingJason Paltrowitz, JP Morgan ”

“


Daily News at sibos


›


place at the right time – in practice, it is not quite so straightforward.

One of the banks looking to leverage its collateral management overhaul is JP Morgan. Jason Paltrowitz, banks and broker dealer segment head, JP Morgan worldwide securities services, says the collateral story has changed recently from whether there is enough collateral to how banks can optimise their use and management of collateral. “That’s not to say that some individual firms may not experience hiccups in trying to get their hands on collateral and there may be additional costs. But optimisation is now a big focus.”

Large banks are beginning to

think about how they can corral their collateral and treat it in an efficient way, he says. “Historically, the collateral needs of different parts of a bank were treated separately, but in order to be more efficient, they need to consider centralising. This will enable them to understand what collateral is being used and where and whether collateral is being used in the most efficient way possible.”

Some firms are transforming their internal front offices to manage collateral in a holistic way, asking each business line to prove why it needs collateral and allocating it if it makes sense. Centralising collateral management will be costly,

however. Custodian banks are well placed to offer services around this because they are sitting on the assets for the customers, he says. For example, JP Morgan has built its own systems and allocation engines for collateral and can offer these to clients. “Our system enables us to view all of our obligations across multiple entities and jurisdictions and to allocate collateral to meet requirements.”

Paltrowitz says major market participants are in the midst of retooling their businesses while also considering new regulatory requirements. “New collateral management solutions, optimisation engines and robust reporting mechanisms are key

Historically, the collateral needs of different parts of a bank were treated separately, but in

order to be more efficient, they need to consider centralisingJason Paltrowitz, JP Morgan ”

“


Daily News at sibos


›


Euroclear Bank.” The service will go live in November in Spain and Italy. Seven other markets and three other agents will be linked to the Collateral Highway before the end of the second quarter of 2013. “We are collaborating with domestic agent banks to provide seamless collateral inventory management for Euroclear Bank and for our customers. This is addressing a growing need for collateral and its mobilisation,” says Awan.

Another ICSD, SIX Securities Services, is also targeting collateral management. “Because SIX Securities Services has provided domestic repo services for a number of years to the Swiss National Bank and the interbank market, we have a strong basis on which to create a robust operating environment for repo,” says Robert Almanas, member of the management committee at SIX Securities Services. “We have since extended this out to ten currencies, which demonstrates the growing interest in flexible and broad-based products for collateral management.”

Almanas points up that there are obstacles to optimisation – a large investment bank, for example, operates many product silos and across multiple legal entities, leading to internal collateral fragmentation. In addition to this there are many different players involved, such as intermediaries and infrastructures. “Our view is that you have to provide as robust a processing environment as you can to minimise risk.” A system that can deliver relevant information to users in real time will provide the best environment for clients to determine where to allocate collateral quickly and efficiently.

Whereas in the past collateralisation was considered on a desk by desk basis, today firms are looking to collateralise exposures across their global book, says Mark Gem, head of business management and member of the executive board at Clearstream. “Collateral management has become very central to many organisations’ agendas. This is not solely a result of regulation; after 2008 and in the continuing euro zone crisis, firms need to mitigate counterparty risk. But even before 2008, the growing collateralisation of exposures was an evident trend. In 2006, Clearstream

launched the GC Pooling product with Eurex Clearing in Germany where money market participants were beginning to collateralise bilateral money market trades and their exposures.”

The barriers to the clearing and settlement of securities across borders are also barriers to the cross-border deployment of collateral. In moving collateral from one country to another, firms are locked into different settlement cycles, making it either impractical or uneconomic to move collateral. Clearstream’s Global Liquidity and Risk Management Hub is designed to address this problem and delivers integrated securities lending, borrowing and collateral management services in cash, fixed-income and equities. The system enables a broad range of participants to implement individual service requirements and has seamless connections to GC Pooling.

Swift is also playing its part in addressing obstacles to efficient collateral management and movement. Richard Young, Swift head of regulatory affairs for securities markets, says similar themes are emerging in regulations in Europe, North America and Asia particularly around the safety of derivatives markets. The implications of many regulations come back to collateral and the need to find additional collateral to secure transactions.

While there are some differences in timing and in some other areas between regions, the general theme of regulators

is clear – OTC markets in particular must be more transparent. “To help increase transparency, regulators are advocating trade reporting to repositories, the use of centralised clearing, and with clearing there is a need for good quality collateral to secure the transactions,” says Young.

One of the ways to deal with the high demand for collateral is to optimise the management and use of collateral and that means ensuring collateral is not locked in a silo when it could be used somewhere else, he says. “Swift is looking at developing messaging and standards based solutions around collateral management flows, working with custodians to help optimise the use of collateral.”

A more standardised approach to infrastructure will help in collateral management, says Evan Goldstein, head of product management, financial institutions Asia at Standard Chartered. “There are many questions surrounding collateral including how much collateral will cost in the future and how financial institutions can transform and optimise it and make it work better for them.”

The financial industry needs to develop a more standardised approach, he says, that will balance the interests of all concerned parties. “We need a less customised approach to the valuation of collateral and the determination of what is eligible for swapping into and out of contracts. In the face of greater regulatory complexity, there is a need for greater sophistication in terms of solutions.”


Daily News at sibos



Malgieri at BNY Mellon agrees that collateral management is just one piece of the puzzle. He says effective collateral solutions must bring together a variety of products and functions to meet the needs of buy side firms. “There will be more emphasis on segregation and many more accounts will be required; firms will need an infrastructure to do margin calls between themselves and their counterparties, and once a collateral movement has been made, where the collateral is held has to be considered. The seismic shift that new regulations are bringing will lead to the market shrinking as some players opt out of derivatives transactions, for example, because they cannot bear the increased costs of collateral.”

The markets are moving to a standardised environment, including bilateral transactions, but when firms are trading on a bilateral basis in OTC markets, there always will be some negotiation, he adds.

BNY Mellon has brought a number of related businesses together to form a

global collateral services team. This brings together the sell side broker dealers, with whom the bank has strong relationships, and the buy side firms to offer innovative, efficient solutions around account opening, segregation, optimisation and collateral transformation. “We stand in the middle of the two parties to ensure both are appropriately collateralised at

all times,” says Malgieri.Many financial institutions

are redefining collateral operating models, says Saheed Awan, head of collateral services

at international central securities depository Euroclear. “The key aims of

collateral management in the years ahead will be optimisation

of balance sheet assets, the ability to mobilise inventory quickly and efficiently, and the ability to view collateral on a global, consolidated basis.”

A number of firms achieve these objectives by outsourcing collateral management tasks to triparty service providers, he says. This is a market Euroclear is targeting with its Collateral Highway, which is designed to enable market participants to source and move collateral across borders. Euroclear gives banks a consolidated, real time picture of their securities holdings, and they can call on the ICSD to allocate the assets as collateral to meet their obligations to individual counterparties.

The next stage of development will be to provide a consolidated view of the assets clients hold with Euroclear and with other organisations, such as agent banks and CSDs. “A cooperative agreement between Euroclear and BNP Paribas Securities Services [BNPPSS] will enable the two organisations’ mutual clients to use fixed income and equity assets held with BNPPSS as collateral in triparty managed transactions at

components for market participants to consider in order to service their clients as well as to meet new regulatory requirements.”

JP Morgan has been working with clearing houses directly to put an infrastructure in place that will allow it to connect to and manage the collateral between futures commission merchants (FCMs), custodians and CCPs. This will enable the FCMs to see where their collateral is.

“Seeing where collateral is forms only part of the picture – we are also layering on the ability to move collateral, within a matter of seconds, across many obligations. This is where custodians have an advantage because they hold the assets. There is in fact a mad dash among global custodians to build capabilities, to be in front of the CCPs and have options for customers.”


Daily News at sibos


›


Euroclear Bank.” The service will go live in November in Spain and Italy. Seven other markets and three other agents will be linked to the Collateral Highway before the end of the second quarter of 2013. “We are collaborating with domestic agent banks to provide seamless collateral inventory management for Euroclear Bank and for our customers. This is addressing a growing need for collateral and its mobilisation,” says Awan.

Another ICSD, SIX Securities Services, is also targeting collateral management. “Because SIX Securities Services has provided domestic repo services for a number of years to the Swiss National Bank and the interbank market, we have a strong basis on which to create a robust operating environment for repo,” says Robert Almanas, member of the management committee at SIX Securities Services. “We have since extended this out to ten currencies, which demonstrates the growing interest in flexible and broad-based products for collateral management.”

Almanas points up that there are obstacles to optimisation – a large investment bank, for example, operates many product silos and across multiple legal entities, leading to internal collateral fragmentation. In addition to this there are many different players involved, such as intermediaries and infrastructures. “Our view is that you have to provide as robust a processing environment as you can to minimise risk.” A system that can deliver relevant information to users in real time will provide the best environment for clients to determine where to allocate collateral quickly and efficiently.

Whereas in the past collateralisation was considered on a desk by desk basis, today firms are looking to collateralise exposures across their global book, says Mark Gem, head of business management and member of the executive board at Clearstream. “Collateral management has become very central to many organisations’ agendas. This is not solely a result of regulation; after 2008 and in the continuing euro zone crisis, firms need to mitigate counterparty risk. But even before 2008, the growing collateralisation of exposures was an evident trend. In 2006, Clearstream

launched the GC Pooling product with Eurex Clearing in Germany where money market participants were beginning to collateralise bilateral money market trades and their exposures.”

The barriers to the clearing and settlement of securities across borders are also barriers to the cross-border deployment of collateral. In moving collateral from one country to another, firms are locked into different settlement cycles, making it either impractical or uneconomic to move collateral. Clearstream’s Global Liquidity and Risk Management Hub is designed to address this problem and delivers integrated securities lending, borrowing and collateral management services in cash, fixed-income and equities. The system enables a broad range of participants to implement individual service requirements and has seamless connections to GC Pooling.

Swift is also playing its part in addressing obstacles to efficient collateral management and movement. Richard Young, Swift head of regulatory affairs for securities markets, says similar themes are emerging in regulations in Europe, North America and Asia particularly around the safety of derivatives markets. The implications of many regulations come back to collateral and the need to find additional collateral to secure transactions.

While there are some differences in timing and in some other areas between regions, the general theme of regulators

is clear – OTC markets in particular must be more transparent. “To help increase transparency, regulators are advocating trade reporting to repositories, the use of centralised clearing, and with clearing there is a need for good quality collateral to secure the transactions,” says Young.

One of the ways to deal with the high demand for collateral is to optimise the management and use of collateral and that means ensuring collateral is not locked in a silo when it could be used somewhere else, he says. “Swift is looking at developing messaging and standards based solutions around collateral management flows, working with custodians to help optimise the use of collateral.”

A more standardised approach to infrastructure will help in collateral management, says Evan Goldstein, head of product management, financial institutions Asia at Standard Chartered. “There are many questions surrounding collateral including how much collateral will cost in the future and how financial institutions can transform and optimise it and make it work better for them.”

The financial industry needs to develop a more standardised approach, he says, that will balance the interests of all concerned parties. “We need a less customised approach to the valuation of collateral and the determination of what is eligible for swapping into and out of contracts. In the face of greater regulatory complexity, there is a need for greater sophistication in terms of solutions.”


Daily News at sibos


›

corporate actions

lots of intermediaries; there are brokers and custodians, local agent banks. They all have very tight deadlines, and if you send an instruction five minutes too late it will be done on a ‘best efforts’ basis. If you elect for stock when you meant to elect for cash or vice versa, it can be expensive, so asset managers like us have kept our arms tightly around it.”

The level of risk makes the acceptable error rates in processing far lower than for certain other activities.

“Until relatively recently proxy voting has been the poor relation of corporate actions; nobody cared if they went missing or not,” says Hardy. “Post-financial crisis that is changing, things like the Kay Review in the UK are putting corporate governance in the spotlight, the post-stewardship code means that asset managers are being held more to account by our clients on how we voted.”

The crisis has led regulators and politicians to look more closely at the back-office processing between issuers and asset owners. Buy-side firms are checking more frequently that every vote makes it down the pipe and is audited more frequently. Stock lending is under supervision as the vote is lent with the stock and custodians have not been great in the past at reconciling positions on loan.

“I might instruct on a million shares and then find out half of that is on loan,” says Hardy. “That is invisible to me down the chain because these processes haven’t been well resourced. As we are all held to more account we all want improvement.”

The challenge as he sees it is that no-one wants to pay for improvements along the convoluted chain from investment manager to global custodian to local sub-custody agent to registrar to issuer.

“We all want more controls and more confirmation, the dream is end to end vote confirmation. You know straight away if something has happened with a corporate action because someone is asking where his £100,000 is.”

global corporate actions are widely recognised as having some of the highest risks outside of the trading floor, says

Rob Hardy, head of governance at JP Morgan asset management. “There are lots of pits and traps – out of all the back office functions it’s the one where you could lose the most money.”

The processing of corporate actions bears this risk without offering any reward to the processor. At one end is a corporate trying to raise money, at the other is an end investor trying to ensure it gets the best value from its investments. If an action takes place, for example a tender offer, it is imperative that the information is passed down to the end investor whose instructions are closely followed. But no one is making money from that; as a result there is little motivation to add risk or invest funds.

“There is no standardisation at the moment in corporate actions, but there is an attempt to automate some of it,” says Mike Foley, managing director at peterevans, a supplier of front and back office systems. “Certain corporate actions can be mopped up, but the complexity of others makes it practically impossible.”

Receiving dividends or cash and stock reconciliations, much like standing orders at retail banks, can be set up to happen automatically. Investment has been made by many firms in back office automation with appropriate checks and controls put in place so that as few pairs of human hands are involved as possible in simple processes and therefore error is reduced. The big buy-side clerical departments of 20 years ago have vanished, to be replaced by automated processes with large parts outsourced to custodians and specialist service providers. The exception has been corporate actions.

“It’s very easy to lose money by getting corporate actions wrong,” warns Hardy. “There are lots of quirks in local legislation and market practice. There are


Daily News at sibos


corporate actions

Corporate inaCtionWithout issuers willing to standardise corporate actions data, other efforts to automate corporate actions processing are struggling, writes Dan Barnes


Daily News at sibos


›

corporate actions

lots of intermediaries; there are brokers and custodians, local agent banks. They all have very tight deadlines, and if you send an instruction five minutes too late it will be done on a ‘best efforts’ basis. If you elect for stock when you meant to elect for cash or vice versa, it can be expensive, so asset managers like us have kept our arms tightly around it.”

The level of risk makes the acceptable error rates in processing far lower than for certain other activities.

“Until relatively recently proxy voting has been the poor relation of corporate actions; nobody cared if they went missing or not,” says Hardy. “Post-financial crisis that is changing, things like the Kay Review in the UK are putting corporate governance in the spotlight, the post-stewardship code means that asset managers are being held more to account by our clients on how we voted.”

The crisis has led regulators and politicians to look more closely at the back-office processing between issuers and asset owners. Buy-side firms are checking more frequently that every vote makes it down the pipe and is audited more frequently. Stock lending is under supervision as the vote is lent with the stock and custodians have not been great in the past at reconciling positions on loan.

“I might instruct on a million shares and then find out half of that is on loan,” says Hardy. “That is invisible to me down the chain because these processes haven’t been well resourced. As we are all held to more account we all want improvement.”

The challenge as he sees it is that no-one wants to pay for improvements along the convoluted chain from investment manager to global custodian to local sub-custody agent to registrar to issuer.

“We all want more controls and more confirmation, the dream is end to end vote confirmation. You know straight away if something has happened with a corporate action because someone is asking where his £100,000 is.”

global corporate actions are widely recognised as having some of the highest risks outside of the trading floor, says

Rob Hardy, head of governance at JP Morgan asset management. “There are lots of pits and traps – out of all the back office functions it’s the one where you could lose the most money.”

The processing of corporate actions bears this risk without offering any reward to the processor. At one end is a corporate trying to raise money, at the other is an end investor trying to ensure it gets the best value from its investments. If an action takes place, for example a tender offer, it is imperative that the information is passed down to the end investor whose instructions are closely followed. But no one is making money from that; as a result there is little motivation to add risk or invest funds.

“There is no standardisation at the moment in corporate actions, but there is an attempt to automate some of it,” says Mike Foley, managing director at peterevans, a supplier of front and back office systems. “Certain corporate actions can be mopped up, but the complexity of others makes it practically impossible.”

Receiving dividends or cash and stock reconciliations, much like standing orders at retail banks, can be set up to happen automatically. Investment has been made by many firms in back office automation with appropriate checks and controls put in place so that as few pairs of human hands are involved as possible in simple processes and therefore error is reduced. The big buy-side clerical departments of 20 years ago have vanished, to be replaced by automated processes with large parts outsourced to custodians and specialist service providers. The exception has been corporate actions.

“It’s very easy to lose money by getting corporate actions wrong,” warns Hardy. “There are lots of quirks in local legislation and market practice. There are


Daily News at sibos


corporate actions

The motivation for automating corporate actions stems not from the end investor, who will still get compensated by an intermediary if it loses money, or from the issuer who is typically trying to raise capital from an action, but from the intermediaries in this process who bear the risk for errors but see no reward for success.

Before it can automate actions between all participants, the industry must adopt standardised templates so that the information contained can be processed effectively.

“Some 130 market standards for corporate actions processing were developed in 2008, endorsed in 2009 and have been in the process of implementation at a national level since then,” says Werner Frey, head of post-trade at trade body the Association of Financial Markets in Europe (AFME). “The implementation process is well advanced to the extent that some 85-90 per cent of standards have been implemented

in what AFME has defined as the eight major European markets: France, Germany, Italy, the Netherlands, Spain, Sweden, Switzerland and the UK.”

He says central securities depositories (CSDs) and intermediaries have been very successful in their progress towards adopting standards.

Annette Brandt, director product management at one of those CSDs, Euroclear, says: “As a core part of the capital market infrastructure, we have put market practice standardisation high on the agenda of the Euroclear group of central securities depositories.” She cites the common platform that was launched in 2009 to support Euronext’s single order book in Belgium, the Netherlands and France. Known as Euroclear Settlement of Euronext-zone Securities (Eses) it has enabled Euroclear to deliver to all three markets a single post-trade platform complete with significant levels of harmonised rules and practices. “When agreeing on the harmonisation of

practices it is important to know what the impact will be on processing. For example, defining the order of dates for cash distributions was a key element to the proper functioning of such corporate event processing,” she says.

The US national depository, the Depository Trust and Clearing Corp (DTCC), will mandate the use of an ISO 20022 structure by 2015, which will lead to the retirement of 60 legacy systems. This year it has been implementing ISO 20022 corporate actions message standards for its corporate clients and is undergoing a pilot with several third party administrators including JP Morgan, Brown Brothers Harriman, ITG and BNY Mellon to use ISO standards to communicate between those institutions.

“In reality the US has been the last market to adopt ISO,” says Paul Kennedy, business manager for reference data at data provider Interactive Data. “In Europe and Asia people have determined ›


Daily News at sibos


corporate actions

that this will service assets in a more efficient manner and determined that this can help them than more manual processes. But the DTCC will drive the whole US market into using the ISO 20022 standard because you have to talk with the DTCC and the only messaging standard they will support in the US will be an ISO standard. So in the past 18 months I suddenly have US clients taking ISO 20022 products when none was interested two years ago.”

Elsewhere he says the work around standards adoption has been changing the conversation about corporate actions. A few years ago 98 per cent of his clients would be taking corporate actions information on an end of day basis as a

batch file, with 50-60 per cent taking data in a proprietary or legacy format.

This has changed, he says: “If you fast forward to today virtually every conversation starts on the subject of the structure of the data, which can go two ways. The market standard is ISO 15022 but because of evolving technologies in back offices anyone with any nous is looking to get data in ISO format or at least XML format, which allows institutions the freedom to programme to the feed with the minimum amount of effort.”

Although more of the marketplace is embracing the ISO 15022 standard a conundrum exists, he notes, as there is an evolution path to the new ISO 20022 message standard. The corporate actions information they can each carry is more or less the same in each standard but, “there are smarter elements in ISO 20022 because it is an XML-based format and allows people to put in proprietary extensions”, he says.

The real difficulty in automation is the lack of issuer buy-in to development of standards.

“What we are struggling with is getting the issuers on board,” says Frey.

“We need a golden copy, or golden source, by which I mean getting the information provided by the issuer in an electronically formatted way, is essential and this is one of the key issues for the time being.”

In the present situation at the start of a corporate action an intermediary could be faced with a 50-page document that requires an expert to read through and understand before the relevant information is passed on to the end investor.

“Can you expect a piece of software to handle that?” asks Foley. “We may end up with the 80/20 rule where processing of dividends and standard rights issues are automatic but there is always the chance that something weird and wonderful will be in there.”

Brandt adds: “We really need to work towards reaching the maximum level we can to make sure every part that is practical to automate, is automated. With the more complex corporate actions we must be more nuanced because we cannot automate 100 per cent. But, every part in the lifecycle that can be automated should be. For those complex processing areas which cannot be automated, it would make sense to

With the more complex corporate actions we must be more nuanced because we cannot

automate 100 per cent. But, every part in the lifecycle that can be automated should beannette Brandt, euroclear ”

“

›

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Daily News at sibos


corporate actions

that this will service assets in a more efficient manner and determined that this can help them than more manual processes. But the DTCC will drive the whole US market into using the ISO 20022 standard because you have to talk with the DTCC and the only messaging standard they will support in the US will be an ISO standard. So in the past 18 months I suddenly have US clients taking ISO 20022 products when none was interested two years ago.”

Elsewhere he says the work around standards adoption has been changing the conversation about corporate actions. A few years ago 98 per cent of his clients would be taking corporate actions information on an end of day basis as a

batch file, with 50-60 per cent taking data in a proprietary or legacy format.

This has changed, he says: “If you fast forward to today virtually every conversation starts on the subject of the structure of the data, which can go two ways. The market standard is ISO 15022 but because of evolving technologies in back offices anyone with any nous is looking to get data in ISO format or at least XML format, which allows institutions the freedom to programme to the feed with the minimum amount of effort.”

Although more of the marketplace is embracing the ISO 15022 standard a conundrum exists, he notes, as there is an evolution path to the new ISO 20022 message standard. The corporate actions information they can each carry is more or less the same in each standard but, “there are smarter elements in ISO 20022 because it is an XML-based format and allows people to put in proprietary extensions”, he says.

The real difficulty in automation is the lack of issuer buy-in to development of standards.

“What we are struggling with is getting the issuers on board,” says Frey.

“We need a golden copy, or golden source, by which I mean getting the information provided by the issuer in an electronically formatted way, is essential and this is one of the key issues for the time being.”

In the present situation at the start of a corporate action an intermediary could be faced with a 50-page document that requires an expert to read through and understand before the relevant information is passed on to the end investor.

“Can you expect a piece of software to handle that?” asks Foley. “We may end up with the 80/20 rule where processing of dividends and standard rights issues are automatic but there is always the chance that something weird and wonderful will be in there.”

Brandt adds: “We really need to work towards reaching the maximum level we can to make sure every part that is practical to automate, is automated. With the more complex corporate actions we must be more nuanced because we cannot automate 100 per cent. But, every part in the lifecycle that can be automated should be. For those complex processing areas which cannot be automated, it would make sense to

With the more complex corporate actions we must be more nuanced because we cannot

automate 100 per cent. But, every part in the lifecycle that can be automated should beannette Brandt, euroclear ”

“

›


Daily News at sibos


corporate actions

develop an exception management tool to deal with them.”

The challenge for the industry will be to motivate issuers to use standards. In effect a corporate action is a marketing exercise to raise capital and firms may feel any restriction on the process could limit their potential success.

Kennedy notes that regulators have only compelled the industry to use market standards in one instance, the use of legal entity identifiers.

“There is no compulsion in the marketplace,” he says. “In this cost sensitive environment people only want to do something when they have a business case for it or it is driven by regulation.”

Mark Taylor, director of investor services at registrar and custody services provider Equiniti, concurs: “It’s going to be a long haul to get standardisation in and I think it is going to have to be a combination of legislation and industry bodies. I don’t think corporates will be doing it on their own.”

Taylor says there must be some benefits in automation for the industry. “If you’re investing in a benchmark or standard there has to be a commercial impetus for the registrars that don’t

operate custody services. If you’re a custody agent as well there is a vested interest in making the system more efficient.”

One potential driver for the overall process may be the concern among politicians that a disconnect is developing between end investors and their target corporate markets. Politicians have expressed anxiety that asset management firms manage corporations effectively, for example in merger situations.

However at the other end The Kay Review into equity market efficiency and governance in the UK found evidence that issuers were already hard pressed, noting “considerable disenchantment by companies with public equity markets. Companies find the regulatory burden demanding: some viewed corporate governance initiatives as sterile exercises in box-ticking and were particularly critical of the role of proxy voting agencies. They complained about the costs associated with issuance.”

The effect of this disenchantment was reflected in firms going private rather than public with “many companies… unwilling to list: alternative means of obtaining finance, such as private equity

and debt, have become more popular. As we observed… equity markets have ceased to be a significant source of funds for investment in UK business.”

This may mean that the rule makers are less than keen to impose further restriction on issuers.

At a European level the European Commission is kept updated regularly on developments in standards and implementation, as automation of corporate actions is seen as key to removal of the Giovannini Barriers. Nevertheless, at the June 2012 Milan meeting of national market implementation groups, it was asked whether or not the project was losing momentum.

“In a former life I dealt with corporate actions, long enough ago to remember the 1987 crash,” says Hardy. “I’m getting old and cynical, and at a recent Swift conference on corporate actions they were dealing with the same issue we were dealing with ten years before. There are too many people with too many vested interests looking in different directions and we haven’t succeeded to date. However, I was more optimistic coming out of that conference than I was going in.”


Daily News at sibos


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trade finance

financing via Swift’s Trade Services Utility to its customer, Nanjing Textile Import and Export Co. The cross-border transactions involving the BPO were between Bank of China and BMO Financial Group. “The BPO can function as the backbone for banks to offer alternative forms of financing and also creates opportunities for banks to provide value-added supply chain management services,” said Guosheng Wang, chief product manager, Bank of China.

André Casterman, head of banking and trade solutions at Swift and co-chair of the BPO at the ICC, says the open account model in trade, where buyers and sellers exchange information with each other, means banks are relied on

only to execute payments and cover risk. “Banks have no visibility of the trade transactions, which makes it difficult for them to offer any financing of the trade. The BPO offers a new option, which sits alongside the LC and the guarantees that secure the transactions.” While the BPO will not replace LCs, it is an option for trading participants that wish to increase efficiency and gain from the financial benefits that are possible. It is sometimes described as providing bank-assisted open account trade.

Kah Chye Tan, global head of trade and working capital at Barclays and chair of the ICC Banking Commission, says the BPO brings many advantages to corporations as well as to banks. “The BPO will definitely lower costs in

providing services to our clients, but more importantly it will improve overall efficiency levels. From a customer’s view that should translate into better transaction turnaround time.” For example, every day that can be removed from the days sales outstanding (DSO) of a corporation translates into interest savings on their working capital.

Patrik Zekkar, head of trade and supply chain at SEB, agrees the cost saving element of the BPO is very important. In addition to improving risk mitigation and liquidity in trade receivables, the BPO fills “an obvious and vital need in enabling cost cutting in processing trade receivables and attached documents, through making the process more straightforward”.


Daily News at sibos


trade finance

t last year’s Sibos, Swift and the Banking Commission of the International Chamber of Commerce (ICC)

signed a cooperation agreement aimed at enabling industry-wide adoption of the Bank Payment Obligation (BPO). One year on and there are still questions surrounding the “electronic letter of credit” and how successful it will be.

An alternative means of settlement in international trade, the BPO provides the benefits of a letter of credit (LC) in an automated environment. Importantly for banks, it opens the possibility of intermediation earlier in the supply chain by enabling them to offer risk mitigation and financing services.

A BPO is an irrevocable undertaking given by one bank to another bank that payment will be made on a specified date after a specified event (such as delivery of goods) has taken place. The specified event is evidenced by a match report that is generated by Swift’s Trade Services Utility or any equivalent transaction matching application.

BP signed up to test the BPO with a selection of its customers in a proof of concept trial for the first quarter of 2012. Selected data from invoices and related documentation for trade transactions were electronically matched, providing BP Chemicals with the same level of payment assurance as with a letter of credit, but with a much simpler and quicker automated process. With 50 per cent of the company’s receivables based on LCs, it hopes dematerialised document exchange will speed up the supply chain and deliver significant savings.

The first live commercial use of the BPO was by Bank of China in 2010. The bank’s Jiangsu branch provided BPO

The ICC cites a number of BPO benefits including: ■ Mitigating risks in international trade

for buyers and sellers;■ Speed, reliability, convenience;■ Reduced costs and improved

accuracy;■ Improved risk management;■ Assurance of payment;■ Access to flexible financing options;

and■ Securing the supply chain.

In May this year, Standard Chartered Bank claimed a BPO first, using the instrument in a transaction with the petrochemical division of energy giant BP. The fully automated trade finance transaction was made through the bank’s Straight2Bank online cash management platform.

David Vermylen, global credit manager, petrochemicals, BP said: “The BPO programme offers us a number of efficiency benefits through reduced document handling and lower confirmation costs, and by conducting business with less paper compared to traditional letters of credit.”

a

rattling

Having been squeezed out by open account trading during the past few years, banks are pinning their hopes on the Bank Payment Obligation to get back into the trade finance supply chain. Heather McKenzie reports

the Chain


Daily News at sibos


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27

trade finance

financing via Swift’s Trade Services Utility to its customer, Nanjing Textile Import and Export Co. The cross-border transactions involving the BPO were between Bank of China and BMO Financial Group. “The BPO can function as the backbone for banks to offer alternative forms of financing and also creates opportunities for banks to provide value-added supply chain management services,” said Guosheng Wang, chief product manager, Bank of China.

André Casterman, head of banking and trade solutions at Swift and co-chair of the BPO at the ICC, says the open account model in trade, where buyers and sellers exchange information with each other, means banks are relied on

only to execute payments and cover risk. “Banks have no visibility of the trade transactions, which makes it difficult for them to offer any financing of the trade. The BPO offers a new option, which sits alongside the LC and the guarantees that secure the transactions.” While the BPO will not replace LCs, it is an option for trading participants that wish to increase efficiency and gain from the financial benefits that are possible. It is sometimes described as providing bank-assisted open account trade.

Kah Chye Tan, global head of trade and working capital at Barclays and chair of the ICC Banking Commission, says the BPO brings many advantages to corporations as well as to banks. “The BPO will definitely lower costs in

providing services to our clients, but more importantly it will improve overall efficiency levels. From a customer’s view that should translate into better transaction turnaround time.” For example, every day that can be removed from the days sales outstanding (DSO) of a corporation translates into interest savings on their working capital.

Patrik Zekkar, head of trade and supply chain at SEB, agrees the cost saving element of the BPO is very important. In addition to improving risk mitigation and liquidity in trade receivables, the BPO fills “an obvious and vital need in enabling cost cutting in processing trade receivables and attached documents, through making the process more straightforward”.


Daily News at sibos


›

trade finance

AD The cost of processing is increasing, and will continue to do so because of enhanced operational risks with greater complexity than previously seen in trade finance. “Operational risks driving risk in LC processing arise from political risk such as sanctions, export embargoes, etc. These significantly expand the grey areas in interpretation of regulation and consequently lead to disputes in checking the conformity of documents,” says Zekkar.

Paul Johnson, senior product manager with the global trade and supply chain team at Bank of America Merrill Lynch, says the industry may be at a tipping point in terms of awareness of and adoption of the BPO. “We need to keep our focus on the value the BPO can deliver to corporates, rather than treating this as a technology story,” he says. “The instrument accelerates the financial settlement process and helps corporates to optimise their working capital.”

Casterman says more than 40 banks or banking groups have signed up to use the BPO, including 15 of the top 20 trade finance banks. “These banks have confirmed that they will adopt the BPO as a new product within their

trade finance portfolios. Of these, six have gone live,” he says. Banks in Asia, such as Standard Chartered, have been particularly active in commercialising the BPO opportunity. “The banking community is getting behind the BPO, but it will take time for banks to get ready for it,” says Casterman.

The BPO is taking on the very well established LC, or documentary credit, which has become established as a universal market practice, due largely to the publication and maintenance by the ICC of a set of rules, the Uniform Customs & Practice (UCP). These rules are accepted by banks and corporations in countries with widely divergent economic and judicial systems.

However, the BPO goes a step further. Both ICC and Swift believe that by working together and leveraging their respective positions across the trade finance community, they can ensure that the BPO will have an important role to play in supporting the development of international trade in the 21st century, addressing cost pressures in the face of increased automation and changes in the regulatory environment.

While the banking community may be familiar with the BPO, the corporate world is not. Johnson says initial interest in the BPO has come from the metals and mining and oil and energy verticals. “The common denominator among these companies is that they conduct big ticket transactions that involve complex paper documentation. For these firms LCs can be very expensive, particularly if goods arrive before the documentation,” he says.

The repetitive nature of transactions undertaken by these industry sectors also makes them ideal for the BPO, adds Casterman. “The BPO is a win-win for exporters and importers. The exporter gets its money earlier than it would with a LC because the BPO uses electronic flows and therefore accelerates the processes. The importer knows that it will get the documents directly and quickly so it won’t have to wait around to get access to the goods.”

Getting all but the very largest banks and corporations on board may be an issue, however. Thierry Roehm, head of trade services, Société Générale Global Transaction Banking, says although the BPO is a wonderful idea to secure


Daily News at sibos


›

trade finance

AD The cost of processing is increasing, and will continue to do so because of enhanced operational risks with greater complexity than previously seen in trade finance. “Operational risks driving risk in LC processing arise from political risk such as sanctions, export embargoes, etc. These significantly expand the grey areas in interpretation of regulation and consequently lead to disputes in checking the conformity of documents,” says Zekkar.

Paul Johnson, senior product manager with the global trade and supply chain team at Bank of America Merrill Lynch, says the industry may be at a tipping point in terms of awareness of and adoption of the BPO. “We need to keep our focus on the value the BPO can deliver to corporates, rather than treating this as a technology story,” he says. “The instrument accelerates the financial settlement process and helps corporates to optimise their working capital.”

Casterman says more than 40 banks or banking groups have signed up to use the BPO, including 15 of the top 20 trade finance banks. “These banks have confirmed that they will adopt the BPO as a new product within their

trade finance portfolios. Of these, six have gone live,” he says. Banks in Asia, such as Standard Chartered, have been particularly active in commercialising the BPO opportunity. “The banking community is getting behind the BPO, but it will take time for banks to get ready for it,” says Casterman.

The BPO is taking on the very well established LC, or documentary credit, which has become established as a universal market practice, due largely to the publication and maintenance by the ICC of a set of rules, the Uniform Customs & Practice (UCP). These rules are accepted by banks and corporations in countries with widely divergent economic and judicial systems.

However, the BPO goes a step further. Both ICC and Swift believe that by working together and leveraging their respective positions across the trade finance community, they can ensure that the BPO will have an important role to play in supporting the development of international trade in the 21st century, addressing cost pressures in the face of increased automation and changes in the regulatory environment.

While the banking community may be familiar with the BPO, the corporate world is not. Johnson says initial interest in the BPO has come from the metals and mining and oil and energy verticals. “The common denominator among these companies is that they conduct big ticket transactions that involve complex paper documentation. For these firms LCs can be very expensive, particularly if goods arrive before the documentation,” he says.

The repetitive nature of transactions undertaken by these industry sectors also makes them ideal for the BPO, adds Casterman. “The BPO is a win-win for exporters and importers. The exporter gets its money earlier than it would with a LC because the BPO uses electronic flows and therefore accelerates the processes. The importer knows that it will get the documents directly and quickly so it won’t have to wait around to get access to the goods.”

Getting all but the very largest banks and corporations on board may be an issue, however. Thierry Roehm, head of trade services, Société Générale Global Transaction Banking, says although the BPO is a wonderful idea to secure


Daily News at sibos


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trade finance

AD

open account trade business, it requires technological changes that small banks may not have an immediate appetite for. “Indeed, in order to manage BPO, banks need access to Swift’s TSU, to implement the required technology infrastructure and to adapt their internal processes. Therefore, I am not sure that a small or medium sized bank will want to invest in BPO. Nor am I sure that a small company, for example, dealing with China using traditional LCs and forfaiting them, will rapidly change its way of handling its trade business, because of the organisational impact that adoption of the BPO may entail.”

However, BPO “is the future”, Roehm says, and banks, particularly large ones, should “move forward” and promote it. “I think it is a great solution to deal with real, existing issues. It should especially attract large corporations that use open account and Société Générale is ready to implement a BPO solution with such companies.”

Tan says the BPO is about “providing innovative services to our customers in an area that can be very paper intensive”. While he recognises that at this early stage

the user base is dominated by mining and energy firms, he says the end state of BPO use will be a good cross-section of corporate segments. “BPO means we can offer services that are not available in market today. BPOs will lower banks’ operational costs and significantly improve overall efficiency, accuracy and STP.”

As much as every bank wants to “conquer the world of trade”, he says, in the trade business all banks are partners. And being a partner means you are only as good as your partner. “If my trading partner on the other side of the world cannot provide BPO, then it won’t be useful to me. This must be an industry-led initiative and will benefit when it has a cross-section of banks.”

Johnson says the BPO will be driven by the global trade banks and a clutch of 20-30 multinational corporations. But, he is confident that it will eventually work its way down to the middle

market corporations and tiers two and three banks. “In order for the BPO to be successful, banks have to demonstrate to corporates that it represents advantages in terms of working capital. Customers need to realise that with the BPO they can manage receivables and payables in the open account space in the way they have done with LCs, and that they can get risk protection,” he says.

The “secret sauce” that will drive adoption, he says, will be low-cost, easy implementation of electronic, multibank links that can support the ISO standards associated with BPO.

Says Zekkar: “All the necessary pre-requisites are there to enable the BPO to fly, but trade finance is complex: it is a multi-party business involving not only the seller, but also banks, logistics firms, insurance companies and authorities among others, and changing behaviour takes time.”

”I am not sure a small company dealing with China using traditional LCs will rapidly change its way of handling trade thierry roehM, société générale

“


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trade finance

AD

open account trade business, it requires technological changes that small banks may not have an immediate appetite for. “Indeed, in order to manage BPO, banks need access to Swift’s TSU, to implement the required technology infrastructure and to adapt their internal processes. Therefore, I am not sure that a small or medium sized bank will want to invest in BPO. Nor am I sure that a small company, for example, dealing with China using traditional LCs and forfaiting them, will rapidly change its way of handling its trade business, because of the organisational impact that adoption of the BPO may entail.”

However, BPO “is the future”, Roehm says, and banks, particularly large ones, should “move forward” and promote it. “I think it is a great solution to deal with real, existing issues. It should especially attract large corporations that use open account and Société Générale is ready to implement a BPO solution with such companies.”

Tan says the BPO is about “providing innovative services to our customers in an area that can be very paper intensive”. While he recognises that at this early stage

the user base is dominated by mining and energy firms, he says the end state of BPO use will be a good cross-section of corporate segments. “BPO means we can offer services that are not available in market today. BPOs will lower banks’ operational costs and significantly improve overall efficiency, accuracy and STP.”

As much as every bank wants to “conquer the world of trade”, he says, in the trade business all banks are partners. And being a partner means you are only as good as your partner. “If my trading partner on the other side of the world cannot provide BPO, then it won’t be useful to me. This must be an industry-led initiative and will benefit when it has a cross-section of banks.”

Johnson says the BPO will be driven by the global trade banks and a clutch of 20-30 multinational corporations. But, he is confident that it will eventually work its way down to the middle

market corporations and tiers two and three banks. “In order for the BPO to be successful, banks have to demonstrate to corporates that it represents advantages in terms of working capital. Customers need to realise that with the BPO they can manage receivables and payables in the open account space in the way they have done with LCs, and that they can get risk protection,” he says.

The “secret sauce” that will drive adoption, he says, will be low-cost, easy implementation of electronic, multibank links that can support the ISO standards associated with BPO.

Says Zekkar: “All the necessary pre-requisites are there to enable the BPO to fly, but trade finance is complex: it is a multi-party business involving not only the seller, but also banks, logistics firms, insurance companies and authorities among others, and changing behaviour takes time.”

”I am not sure a small company dealing with China using traditional LCs will rapidly change its way of handling trade thierry roehM, société générale

“


Daily News at sibos


payments

Roy DeCicco, industry issues executive, JP Morgan treasury and securities servicesGood risk management – across a broad spectrum of factors – provides the best path to safe, sound and efficient payment systems.

While there are multiple risk factors payment system operators and participants need to track and manage to ensure that payment systems do what they are designed to do, namely operate efficiently and settle every day, a case can be made that managing credit, liquidity and operational risks form the foundation for a risk management framework. In worst case scenarios these risks can take out a payment system or create gridlock which effectively prevents payments from being made. The risk management framework is designed to identify risks associated with the safety, soundness and efficiency of a payment system and ensure that these risks are understood and appropriately managed and mitigated.

Operational risk was highlighted by several regulators as a critical risk factor in the post 9/11 world. It also became part of the risk framework in Basel II. When bad things happen to a payment infrastructure’s operational platform and contingencies do not work as planned, that payment system is “dead in the water.” Operational risk management and mitigation strategies are critically important to the safety, soundness and efficiency principles all payment infrastructures aspire to achieve, but they stand separate and apart from risk mitigation strategies employed to manage credit and liquidity risk.

Credit and liquidity risks are more nuanced and dynamic, in that these risks, to the extent they exist, will change constantly throughout a processing day and must be monitored on a real-time basis. The importance of intraday liquidity for the smooth and efficient functioning of a payment system cannot be overstated. Simply put, without sufficient liquidity, a payment system will not function properly, if at all. In the post financial crisis environment, regulators are focused on the issues associated with credit and liquidity risks. Both the Financial Services Authority in the UK and the Basel Committee on Banking Supervision have proposed new requirements to monitor and manage these risks.

This assessment is not meant to imply that credit and liquidity risks are more important to manage than operational risk. The risk management plans are different and a payments community must have full confidence that acceptable risk mitigation strategies exist for all three risk factors. These risk plans and any new regulatory proposals must maintain the right balance to guard against unacceptable or unintended consequences. Where a comprehensive operational review has been done and the appropriate operational risk management plan is in place, a market should focus on the challenges that credit and liquidity risks pose to their payments system, and on the tools necessary to mitigate these risks in order to maintain a safe, sound and efficient payments system.

Ather Williams, head of global payments at Bank of America Merrill LynchInefficient payment systems can create several types of risk: settlement, credit, and operational. For example, delayed payments to suppliers may create the need for interim financing facilities, which generates credit risk. When processes are not sufficiently automated, human error can creep in and introduce operational risk. And when payment data is incomplete or not transparent, there is the risk that payments will not settle on time.

Efficient payment systems can actively mitigate these risks, but format standardisation is key to achieving this efficiency. Additionally, transparency in payment information and the move to real-time, end to end settlement are vital, with some countries – most notably Singapore and India – pushing for this on all payments. Real-time settlement on all payments is more challenging to achieve with the legacy systems in place today, but is undoubtedly possible, with the right strategic focus and investment, particularly if banks and providers help their clients see the benefits of truly real time payments.

While the industry has made great strides toward efficiency, not all banks or corporates are Swift enabled yet. Industry collaboration is important, and regulation can certainly play a part in encouraging initiatives, but client demand for greater efficiency is what’s most critical to spurring action.

Real-time settlement on all payments is more challenging to achieve with the legacy systems in place today, but is undoubtedly possible, with the right strategic focus and investment, particularly if banks and providers help their clients see the benefits of truly real time payments”

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Daily News at sibos


payments

How do credit, liquidity and operational risks relate to each other in the payments system? What needs to be in place for efficient payment systems? Sibos delegates give Daily News at Sibos their views

Kevin Brown, global head of transaction services product, Royal Bank of Scotland

If we look across the payments landscape we can see significant differences between individual payments infrastructures. This is because the design of any particular system essentially involves some degree of trade-off between credit, liquidity and operational risks, or looked at another way, between liquidity efficiency, operational efficiency and credit risks. The question of which payment infrastructure is the most efficient is therefore not one with a simple or single answer.

Typically payment infrastructures were designed and developed over time within the context of a specific (usually currency) market. As such the dynamics were driven by the specific requirements of that market including market scale in terms of payment volumes and values, the numbers of direct and indirect participants, and whether at the time the primary focus was on elimination of settlement risk, liquidity efficiency, transaction costs or some other. For that reason we can see substantial differences between the current payments infrastructures in, for example, the UK, the US and Europe. Markets such as the US and the euro zone are large enough to support two high-value payment systems; a central bank operated RTGS (Fedwire and Target2 respectively) focused on minimisation of credit risk and a wide direct membership, alongside commercial bank owned high-value netting systems (Chips and Euro1) focused on liquidity efficiency among a narrower direct membership. So, within a single currency market, payments infrastructures can complement one another through their different profiles (liquidity efficiency, finality, operational risk, costs, volume, value, speed etc).

The specific requirements and attributes of the payment product offered to clients will determine which payment infrastructure(s) banks actually use to route their payments. Banks with broad geographic networks and access to multiple infrastructures have the capability to use the most effective and efficient payment system taking account of liquidity, credit and operational risks, and the associated costs.

Ashutosh Kumar, global head of cash and trade product, transaction banking, Standard Chartered

The key risks in payment systems are: ■ credit risk: counterparties not paying up when due to do so;■ liquidity risk: non-payment within agreed settlement time frames; ■ operational risk: non-payment due to failed processes internally or those of the clearing provider; and■ legal and regulatory risk: non-payment resulting from issues in contractual terms or local regulations.

These risks (in combination or individually) – if not well managed – can manifest into liquidity shortages for all the parties involved. In addition, such failures don’t just increase the borrowing costs for the affected parties, but can potentially drive up the cost of liquidity in the larger economy.

Failure to contain these risks will have domino effects on financial networks that are supported by such payment systems locally or globally. These systemic events could spread from one member financial institution to another; especially in high-value and cross-border payment systems. Therefore, such payment systems are systemically important to the countries’ as well as the global financial system’s health.

Efficient payment systems must economically deliver transactions (cash or cash-less) quickly, reliably, with repeatable accuracy and service guarantees. Clients do appreciate predictability, dependability, scalability, straight-through capability with active feedback loops; but it is not adequate to focus solely on speed, cost and other operational efficiencies. Payment systems should be backed by good quality jurisprudence of the payment ecosystem: one that is designed to contain risks and shocks from expanding over the interconnected payment networks. Such a definition of efficiency irrevocably links the need for risk management with the need for service efficacy. Money always follows financial institutions and centres which demonstrate good governance.

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Roy DeCicco, industry issues executive, JP Morgan treasury and securities servicesGood risk management – across a broad spectrum of factors – provides the best path to safe, sound and efficient payment systems.

While there are multiple risk factors payment system operators and participants need to track and manage to ensure that payment systems do what they are designed to do, namely operate efficiently and settle every day, a case can be made that managing credit, liquidity and operational risks form the foundation for a risk management framework. In worst case scenarios these risks can take out a payment system or create gridlock which effectively prevents payments from being made. The risk management framework is designed to identify risks associated with the safety, soundness and efficiency of a payment system and ensure that these risks are understood and appropriately managed and mitigated.

Operational risk was highlighted by several regulators as a critical risk factor in the post 9/11 world. It also became part of the risk framework in Basel II. When bad things happen to a payment infrastructure’s operational platform and contingencies do not work as planned, that payment system is “dead in the water.” Operational risk management and mitigation strategies are critically important to the safety, soundness and efficiency principles all payment infrastructures aspire to achieve, but they stand separate and apart from risk mitigation strategies employed to manage credit and liquidity risk.

Credit and liquidity risks are more nuanced and dynamic, in that these risks, to the extent they exist, will change constantly throughout a processing day and must be monitored on a real-time basis. The importance of intraday liquidity for the smooth and efficient functioning of a payment system cannot be overstated. Simply put, without sufficient liquidity, a payment system will not function properly, if at all. In the post financial crisis environment, regulators are focused on the issues associated with credit and liquidity risks. Both the Financial Services Authority in the UK and the Basel Committee on Banking Supervision have proposed new requirements to monitor and manage these risks.

This assessment is not meant to imply that credit and liquidity risks are more important to manage than operational risk. The risk management plans are different and a payments community must have full confidence that acceptable risk mitigation strategies exist for all three risk factors. These risk plans and any new regulatory proposals must maintain the right balance to guard against unacceptable or unintended consequences. Where a comprehensive operational review has been done and the appropriate operational risk management plan is in place, a market should focus on the challenges that credit and liquidity risks pose to their payments system, and on the tools necessary to mitigate these risks in order to maintain a safe, sound and efficient payments system.

Ather Williams, head of global payments at Bank of America Merrill LynchInefficient payment systems can create several types of risk: settlement, credit, and operational. For example, delayed payments to suppliers may create the need for interim financing facilities, which generates credit risk. When processes are not sufficiently automated, human error can creep in and introduce operational risk. And when payment data is incomplete or not transparent, there is the risk that payments will not settle on time.

Efficient payment systems can actively mitigate these risks, but format standardisation is key to achieving this efficiency. Additionally, transparency in payment information and the move to real-time, end to end settlement are vital, with some countries – most notably Singapore and India – pushing for this on all payments. Real-time settlement on all payments is more challenging to achieve with the legacy systems in place today, but is undoubtedly possible, with the right strategic focus and investment, particularly if banks and providers help their clients see the benefits of truly real time payments.

While the industry has made great strides toward efficiency, not all banks or corporates are Swift enabled yet. Industry collaboration is important, and regulation can certainly play a part in encouraging initiatives, but client demand for greater efficiency is what’s most critical to spurring action.

Real-time settlement on all payments is more challenging to achieve with the legacy systems in place today, but is undoubtedly possible, with the right strategic focus and investment, particularly if banks and providers help their clients see the benefits of truly real time payments”

“

›

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Nick Downes, principle consultant at LogicaAs a result of the industry’s ongoing quest for efficiency, financial institutions have made significant technology investments with the aim of achieving faster settlement times and better access to payments services than ever before. In spite of this, multiple updates over the years have led to greater complexity and interdependence of systems within and between banks. This can lead to an operational risk profile that extends beyond individual service providers and increases the potential for susceptibility to liquidity and credit risk for customers.

The spread of social media means that any operational glitches within a bank’s payment systems are quickly publicised. News of such problems can now travel across the globe in an instant, shining a spotlight on issues that damage the bank’s reputation and undermine customer confidence. Service limitations that lead to liquidity issues and delayed payments can have damaging consequences and a huge negative impact on its customers. It is clear that any problems with payments operations have a direct bearing on a bank’s liquidity risk and credit risk profile.

In order to rebuild customer confidence and to address growing industry concerns, an operational stress test review of national payment service provision is needed urgently: spanning end to end payment services and contingency arrangements. As operational problems in this area can have such wide reaching effects, it is clear that operational stress tests are as important as financial ones.

Ray Fattell, global head of payments and cash management product management, HSBCStrong oversight and governance of settlement members and their most significant clients is required in order for a payments system to operate with sufficient resilience through times of stress.

Financial regulators from the largest markets have recognised the interrelationship of liquidity, credit and operational risks. Their concerns are reflected in the capital adequacy requirements of Basel II as well as of Basel III (inclusive of the Basel III supplemental document on monitoring indicators for intraday liquidity management).

As per the latter document, settlement members must incorporate the credit extended to their largest clearing clients, as well as the urgency, volume and timing of their payments in the evaluation of their intraday liquidity requirements.

From an operational perspective, settlement members must be able to monitor and manage their intraday exposures, be able to access sufficient liquidity, as well as manage their extension of credit.

If the settlement member is dependent on liquidity across multiple payments systems and/or currencies, sufficiently robust operational capabilities must be in place.

The increased focus that financial regulators are placing on liquidity, in addition to external market developments, is likely to reshape the correspondent banking and payments businesses. Among the implications are that the the combination of low interest rates and the

inability to consider the deposits of financial institutions as core funding will reduce the value of associated liabilities, resulting in heightened reliance on income derived from fees.

Moreover, intraday monitoring and timing of execution requirements will require significant development efforts. Both the costs of intraday, as well as the capital investment, will need to be recovered. This could result in greater adoption of intraday liquidity charges.

With the assignment of cost for intraday liquidity, RTGS infrastructures may need to explore new liquidity efficiency models, to avoid potential payment gridlock.

Also, the increasing standard of due diligence and associated cost in assessing financial institution customers and counterparties may require a significant streamlining of counterparties and a shift towards strategic partnerships.

Finally, the emergence of 24 hour payment services and the proliferation of non-bank payment services companies, such as telecos, will alter the competitive landscape, changing the way customers behave and requiring new modes of payments settlements.

George Ravich, executive vice-president and chief marketing officer, FundtechToday more than ever, liquidity is an issue that banks must address throughout their entire enterprise. The forces of regulatory change (Basel III), global economic conditions and the sorry state of the global banking business all point to better tools to manage liquidity and risk. If there is anything the industry woke up to during the 2008 financial crisis, it was the need for tools to manage intraday cash and collateral both internally and across all nostro accounts globally, on a real-time basis. This is the only way banks can possibly manage the risks associated with sovereign debt and counterparty risk that now seem to be the new normal.

However on the flip side, there is true profit potential for these enhanced tools. For example, with better global liquidity forecasting and analytics banks will be able to offer new premium services to their best clients such as reserving liquidity for unexpected large payments. Looking ahead to the day when central banks close the liquidity fire hose, such tools will also help banks create a pricing scenario for internal bank users of liquidity. This will bring about better accountability and profitability by instilling a discipline across the enterprise that acknowledges there is a true cost to the bank for liquidity.

›


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Nick Downes, principle consultant at LogicaAs a result of the industry’s ongoing quest for efficiency, financial institutions have made significant technology investments with the aim of achieving faster settlement times and better access to payments services than ever before. In spite of this, multiple updates over the years have led to greater complexity and interdependence of systems within and between banks. This can lead to an operational risk profile that extends beyond individual service providers and increases the potential for susceptibility to liquidity and credit risk for customers.

The spread of social media means that any operational glitches within a bank’s payment systems are quickly publicised. News of such problems can now travel across the globe in an instant, shining a spotlight on issues that damage the bank’s reputation and undermine customer confidence. Service limitations that lead to liquidity issues and delayed payments can have damaging consequences and a huge negative impact on its customers. It is clear that any problems with payments operations have a direct bearing on a bank’s liquidity risk and credit risk profile.

In order to rebuild customer confidence and to address growing industry concerns, an operational stress test review of national payment service provision is needed urgently: spanning end to end payment services and contingency arrangements. As operational problems in this area can have such wide reaching effects, it is clear that operational stress tests are as important as financial ones.

Ray Fattell, global head of payments and cash management product management, HSBCStrong oversight and governance of settlement members and their most significant clients is required in order for a payments system to operate with sufficient resilience through times of stress.

Financial regulators from the largest markets have recognised the interrelationship of liquidity, credit and operational risks. Their concerns are reflected in the capital adequacy requirements of Basel II as well as of Basel III (inclusive of the Basel III supplemental document on monitoring indicators for intraday liquidity management).

As per the latter document, settlement members must incorporate the credit extended to their largest clearing clients, as well as the urgency, volume and timing of their payments in the evaluation of their intraday liquidity requirements.

From an operational perspective, settlement members must be able to monitor and manage their intraday exposures, be able to access sufficient liquidity, as well as manage their extension of credit.

If the settlement member is dependent on liquidity across multiple payments systems and/or currencies, sufficiently robust operational capabilities must be in place.

The increased focus that financial regulators are placing on liquidity, in addition to external market developments, is likely to reshape the correspondent banking and payments businesses. Among the implications are that the the combination of low interest rates and the

inability to consider the deposits of financial institutions as core funding will reduce the value of associated liabilities, resulting in heightened reliance on income derived from fees.

Moreover, intraday monitoring and timing of execution requirements will require significant development efforts. Both the costs of intraday, as well as the capital investment, will need to be recovered. This could result in greater adoption of intraday liquidity charges.

With the assignment of cost for intraday liquidity, RTGS infrastructures may need to explore new liquidity efficiency models, to avoid potential payment gridlock.

Also, the increasing standard of due diligence and associated cost in assessing financial institution customers and counterparties may require a significant streamlining of counterparties and a shift towards strategic partnerships.

Finally, the emergence of 24 hour payment services and the proliferation of non-bank payment services companies, such as telecos, will alter the competitive landscape, changing the way customers behave and requiring new modes of payments settlements.

George Ravich, executive vice-president and chief marketing officer, FundtechToday more than ever, liquidity is an issue that banks must address throughout their entire enterprise. The forces of regulatory change (Basel III), global economic conditions and the sorry state of the global banking business all point to better tools to manage liquidity and risk. If there is anything the industry woke up to during the 2008 financial crisis, it was the need for tools to manage intraday cash and collateral both internally and across all nostro accounts globally, on a real-time basis. This is the only way banks can possibly manage the risks associated with sovereign debt and counterparty risk that now seem to be the new normal.

However on the flip side, there is true profit potential for these enhanced tools. For example, with better global liquidity forecasting and analytics banks will be able to offer new premium services to their best clients such as reserving liquidity for unexpected large payments. Looking ahead to the day when central banks close the liquidity fire hose, such tools will also help banks create a pricing scenario for internal bank users of liquidity. This will bring about better accountability and profitability by instilling a discipline across the enterprise that acknowledges there is a true cost to the bank for liquidity.

›

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Barry Kislingbury, global solution manager, payments and messaging, Misys

Operational (and reputational) risk is something that is regularly discussed, but it’s only when something goes badly wrong (and usually very publicly) that investment is forthcoming. Payment systems in corporate, retail and investment banks are no different. The vast majority of payment systems are legacy, often file-based, patched together through years of mergers and acquisitions with multiple staff and technology changes, so no one really knows how it all works. But what’s the link to credit and liquidity?

Well, if a bank’s payment system fails to the point that it cannot meet its obligations to clients and counterparties, not only does this make the bank’s own cash positions uncertain, but if not corrected quickly, it will first affect its counterparties’ and clients’ ability to do business. Then it will affect the liquidity within the bank’s national borders, and of course this can have knock-on effects internationally.

One can cite many examples: Royal Bank of Canada several years ago, National Australia Bank a few Christmases ago and NatWest in the UK this year. All were attributable to small hiccups or upgrades that grew to entire system failures, making it impossible to make payments for days. This caused problems for each of the banks, for their clients, counterparties and in some cases affected the liquidity of the country.

The mistake made to fix this often is to “buy a new payment engine”, but changing the payment engine for a nice shiny new one may make the situation worse. The issue is not the processing engine, but how payments move through the bank’s systems from initiation to final settlement, that is, the legacy infrastructure. The current spaghetti of systems will have grown from disparate components and technology over decades and doesn’t provide consistent management information over the entire payment lifecycle.

Today there are modern payment hubs, which are specifically designed to encompass the entire payment lifecycle and the processing engines within a modern, reliable and flexible infrastructure; together the engines and the hub are what make an efficient payment system that is easy to manage and most importantly, to fix when things go wrong.

Interlinking risk management systems and business operations both domestically and internationally is critical, but achieving that cost-effectively with the technology architecture that most banks have in place today is not feasible”

“

Chris Pickles, head of industry initiatives, global banking and financial markets, BT

Keeping money moving is how more money is made, but today the profit margins that can be generated from moving money around are getting smaller and smaller. Customers expect more and more that payment processing is free – and if it isn’t free, they are less prepared to pay for it. For a bank or payment processor, keeping tight control over credit and liquidity is critical to staying out of the red and in the black. But today that has to happen faster than ever before.

Payment processing in many countries has been a lethargic process, with transaction processing times measured in days or even weeks in some cases and national volumes rising to millions of transactions per day. As a parallel, financial markets’ operations are now measured in microseconds and involve millions of transactions per second.

Payment processing is a volume business. To be successful in that business you have to attract ever-increasing volumes of payments and process that volume faster and more cost-efficiently; as fast and as cost-efficiently as a high-frequency trader driving a hedge fund. That’s because there is competition in payments as never before, not just between banks and between clearing houses but by banks in competition to clearing houses as well and also from all of those new market entrants.

Faster payment processing necessitates faster global risk management, addressing both credit management and liquidity management. Interlinking risk management systems and business operations both domestically and internationally is critical, but achieving that cost-effectively with the technology architecture that most banks have in place today is not feasible. Hoping to hold on to legacy technology while new market entrants overtake you on the competitive highway has died as an option for financial institutions. Survival will mean getting rid of that old technology before your competition gets rid of you.


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The payments industry is experiencing a state of flux. The shadow of the credit crunch still looms in the shape of increased regulation and decreased customer loyalty. Combine this with the backdrop of technological advancement and new market entrants which offer more innovative services, and it’s easy to see why the traditional payment players are struggling to keep pace. Mobile payments is one major area of innovation into which we see both traditional and new players entering the fray.

‘Mobile payments’ has been the buzz term of the payments world for the past few years, but it’s clear that this is a trend for which the only way is up. Whether using apps to manage banking or using phone browsers to shop online, the public is increasingly using mobile phones to manage and make payments.

This trend has not gone unnoticed – a few months ago payments start-up, Square, announced it has finalised a funding round totalling U.S. $200 million, resulting in a company valuation of U.S. $3.25 billion. It is unsurprising then that we are seeing new market entrants in this space, keen to capitalise on increasingly disloyal banking customers and growing alternative payment popularity.

Yet, despite the excitement and potential around mobile payments, barriers to adoption remain, which could potentially damage the long-term success of this innovative payment method. The registration processes associated with mobile apps are certainly responsible for putting off some users, whilst the relatively few mobile payment Point of Sale terminals available in the shops result in a situation in which for many it is easier to simply use cash or card. While this remains the case, mobile payment methods will not be adopted by the masses.

There is an opportunity for banks and other traditional financial service providers to break down these barriers and reclaim control of the payments space by offering innovative and value-add services to customers. Given that over 50 per cent of the UK population now owns a smartphone, and the growing popularity of mobile payments for consumers, banks can boost both their popularity and their revenue streams with mobile payments.

There are two key elements that banks will need to secure if they are to be the key force behind the ubiquity of mobile payments. One is trust and the other is simplicity.

As with any form of payment, consumers must be assured of the security of the transaction. At present we are seeing a vast array of start-ups entering the payments market – they have the technology and the on-trend anti-bank messaging, but they also require customer trust. This is where banks, which have traditionally handled payments, already have the upper hand.

Another barrier is that of simplicity, or the lack thereof. The Payments Council is currently working with banks in the UK to populate a central database, built by VocaLink, which will link customers’ mobile phone numbers to their banking details. Once up and running this database will provide the infrastructure for banks to offer true bank-to-bank mobile payments. All an individual will require is the recipient’s mobile phone number. The emphasis will be very much on simplicity and encouraging mobile transactions, to the point where they are as easy to make as an everyday debit card transaction.

The truth is that banks have some making up to do – and what better way of improving customer loyalty than by offering true value-add and innovative new services, with the benefit of the security they are used to?

Mobile and alternative payments offer banks the opportunity to impress current customers with value-add services, reach out to new customers and take on the new players looking to disrupt the market. Despite complicated registration processes and infrequent mobile payment opportunities, consumers are itching to spend their e-money, and banks are perfectly placed to offer this.

Mobile payments create a chicken and egg situation for retailers, banks and customers – they will only become a mainstream form of payment once the process has been simplified, but how do we go about achieving this? By working together on collating bank account details and mobile phone numbers, banks will be half-way there in the battle for mobile payment simplicity and ubiquity.

Mobile money is certainly the future of payments but banks must act today to shape the payments landscape of tomorrow.

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Documents

AsiA set to boom, but is still vulnerAble to shocks E€¦ · Asia’s vulnerability to financial upheaval and “external shocks” as underscored by the crises of the 1990s, but