SWIFT regional conference in Turkey

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Welcomeback
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Securities and treasury Daring to transform

• Istanbul
• 6 8 March 2006

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Todays plenary session

• Host OTC derivativesFabian Vandenreydt, Head
  of FX and Derivatives Market, SWIFT
• Market infrastructure Our foundation for
  growthArthur Cousins, Member of the SWIFT Board,
  Director, Standard Bank of South Africa and CLS
  Board Member
• Improving cross-border clearing and settlements
  arrangements in the European UnionPatrick Georg,
  Director ICSD Cash Securities Settlement,
  Clearstream
• Transformation in actionJohn Falk, Manager,
  Securities Market Infrastructures, SWIFT

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Market infrastructureOur foundation for growth

• Arthur Cousins
• Member of the SWIFT Board Director,Standard Bank
  of South Africa, and CLS Board Member

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Agenda

• Introduction
• Reform in The Securities Markets
• Issues in the Derivatives Markets
• Road to CLS
• Conclusion

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Objectives

• Cover Issues which apply to all markets
• Exchange views and learn from each other
• Chance to see what role SWIFT can play with
  regard to issues discussed

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Reform in the securities markets

• Up until late 1990s
• We had Paper Share Certificates
• No Settlement through an RTGS
• No Contractual Settlement
• T5 meant a cup of tea for five people
• We were at the bottom end of GSCS benchmark rating

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Action taken

• Created Central Securities Depository
• Changed legislation to allowfor
  demateriali-sation of Share Certificates
• Acquired settlement software
• Agreed to use ISO 15022 Standards and SWIFT
  network for messaging
• Agreed to settle in Central Bank Funds via RTGs
  which had recently been introduced

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Situation now

• We now have T5 Contractual Settlement
• We have DVP in Central Bank Funds
• We now have no paper certificates
• We now enjoy some of the highest settlement
  ratings in the world
• We even comply with the Giovaninni requirements

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Issues in the derivatives markets

• Back offices impacted by daily creation of new
  products
• Low profit margins means little money for
  investments in Operations
• Few standards for exchanging information
• Regulators concerned about operational risks

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Action required

• Agreement by Standards development entities to
  collaborate
• SWIFT should take a leadership role in Standards
  development and connectivity
• Market infrastructures/organisations, e.g. ISDA,
  DTCC, SWAPSCLEAR, SWIFT, FPML and others to
  create an agenda for back office reform (G30 type
  approach)

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Road to CLS

• South African Authorities share concern about FX
  settlement risk
• Supported all efforts to have Rand included in
  CLS
• Changed legislation finality of payment
• Changed RTGs to include SWIFT Y copy to support
  stable Rand
• Fiscal and monetary policies implemented to
  support stable Rand

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Conclusion

• South Africa now has a world class financial
  infrastructure
• Investors have the same level of certainty in
  South Africa that they enjoy in developed
  countries
• Urgent work needed in the area of derivatives

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Istanbul 6-8 March 2006
SWIFT regional conference in Istanbul
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OTC derivativesAddressing post-trade issues

• Fabian Vandenreydt
• Head of FX and Derivatives Markets

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Market trends
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Market trends
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Market trends
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OTC derivatives and Hedge Funds high industry
attention

• Corrigan report issued July 2005 by CRMPG II
• The primary focus of the Policy Group was
  directed at credit risk, market risk and
  liquidity risk

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Main themes and key lessons for treasurers

• Among the report's 47 recommendations are two
  strong themes
• Need to better monitor the role of hedge funds in
  the markets
• Urgent challenge of tackling the problems
  associated with credit derivative products and
  other complex instruments
• Key lessons for treasurers
• Ask more critical questions about the credit-risk
  management practices of their counterparties
• More proactively explain their credit-risk
  management approach to banks and other
  counterparties. This will determine access, and
  the terms of access, to credit including
  collateral arrangements

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the Policy Groups Recommendations and Guiding
Principles center on seven closely related themes

• Corporate Governance
• Risk Management and Monitoring
• Financial Infrastructure and Operational
  Integrity
• Understanding and Managing Complex Financial
  Instruments
• Reputational Risk Areas of Special Focus
• Transparency
• Hedge Funds

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Financial Infrastructure and Operational
IntegritySection IV of the Report contains 13
Recommendations and Guiding Principles

• 12 Immediate need to address the backlog of
  unsigned confirmations in some segments of the
  OTC market
• 15 Industry-wide need to accelerate the
  development of straight-through processing of OTC
  transactions
• 21 Need to develop a simultaneous net
  settlement system for credit default swaps
• 22 Urgent need for market participants to stop
  assigning or accepting assignment of trades
  without the consent of all three parties to the
  trade

Source Counterparty Risk Management Policy Group
II
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Derivatives and Hedge Funds eco-system
Investor
the servicing side triangle
Transfer agents
Fund Admin.
Transfer agents
Transfer agents
Investment Managers
Prime Brokers
Hedge Fund Managers
Custodians
Local custodians
Local custodians
Executing broker
Local custodians
Executing broker
Executing broker
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Derivatives and Hedge Funds servicingBurning
issues
Position and Control

• Trade lifecycle management
• IRS/CDS trade capture
• IRS/CDS confirmations
• Identify OTC trade
• Assignments
• Lending pools
• Buy-side connectivity to MIs
• Standardized access to MIs
• Contract management
• Repository of contracts
• Collateral negotiation

Corporate Actions
Core Transaction Processing
Funding and FX
Reconciliation
Investment
Decision
Order
Trade Reconciliation
Placement
Reference Data
Product and Financial Control
Portfolio valuation
Trade
Settlement
Execution
Post Trade Processing
Stock Lending and Borrowing
Risk/Collateral Management
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Derivatives and Hedge Funds servicingBurning
issues

• Trade settlement
• Projected cash flow reporting and reconciliation
• Payment SSI
• Valuation and risk management
• Portfolio/position reporting and reconciliation
• Fund NAV messaging aggregation
• Valuation reporting reconciliation
• Collateral management reporting and
  reconciliation
• Corporate actions

Position and Control
Corporate Actions
Core Transaction Processing
Funding and FX
Reconciliation
Investment
Decision
Order
Trade Reconciliation
Placement
Reference Data
Product and Financial Control
Portfolio valuation
Trade
Settlement
Execution
Post Trade Processing
Stock Lending and Borrowing
Risk/Collateral Management
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Strategic focus 2006-2007
Three main focus areas
? Derivatives post-trade processing ? Hedge Funds
servicing ? Cross-Asset reporting and Collateral
Management

• Leverage SWIFTNet Accord matching functionality
  for other instruments and services
• Leverage Collateral Management and portfolio
  valuation messages and SWIFTNet Funds solution
• Extend offering to buy-side players (Affirmation
  model)
• Align our efforts with the ISDA roadmap (eg,
  FpML, Collateral Mgmt)
• Build a common agenda for OTC derivatives
  post-trade processing with other market
  infrastructures

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Product focus 2006
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Product focus 2006
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Product focus 2006
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SWIFTNet Affirmations
4 Affirming Party agrees or disagrees 5 -
(Dis-)agreement is stored on Central HUB 6 - Bank
views (dis-)agreement -OR- hub sends
response in MT 398 envelope
1 - Bank and user enter into a deal 2 - Bank
sends confirmation to central hub 3 - User views
confirmations in graphical environment
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Istanbul 6-8 March 2006
SWIFT regional conference in Istanbul
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Improving cross-border clearing and settlements
arrangements in the European Union

• Patrick Georg
• Director ICSD Cash Securities Settlement,
  Clearstream

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Istanbul 6-8 March 2006
SWIFT regional conference in Istanbul
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Transformationin action

• John Falk
• John Falk, Manager, Securities Market
  Infrastructures, SWIFT

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Why do markets need to reform?

• The Lisbon Agenda
• By 2010, European Union to become the most
  competitive and dynamic knowledge economy in the
  world
• Assisted by creation of a single, integrated
  financial market
• Investor protection
• Business enhancement
• Financial Services Action Plan
• Directives moving into national law
• Best practice initiatives

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Recommendations, Barriers or Regulations

• A
• Single Protocol
• for
• Clearing and Settlement

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Recommendations, Barriers or Regulations

• 2001 CPSS-IOSCO, Recommendation 16
• Securities Settlement Systems should use or
  accommodate relevant international communication
  procedures standards
• 2003 Giovannini, Barrier 1
• Define EU wide protocol to eliminate national
  differences in IT interfaces used by Clearing
  Settlement providers
• 2003 G30, Recommendation 2
• Harmonise message standards communication
  protocols
• 2004 ESCB-CESR, Standard 16 (draft)
• Entities providing securities clearing and
  settlement services, and participants in their
  systems should use or accommodate relevant
  international communication procedures and
  messaging and reference data standards

G30 Recommendation 2 All market participants
should adopt ISO15022 as the global standard for
straight-through securities messaging across the
entire securities life cycle XML should become
the language to describe standardised
messages Market participants should support
and use communication networks that adopt open,
standardised, IP-based protocols for securities
transactions
Giovannini Barrier 1 National differences in
the information technology and interfaces used by
clearing and settlement providers should be
eliminated via an EU wide protocol SWIFT should
ensure the definition of this protocol through
the Securities Market Practice Group
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A Single Protocol for Clearing and Settlement

• What
• is being
• proposed?

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Terminology Protocol scope
IMI Investment Manager B/D Broker Dealer VMU
Virtual Matching Utility ETCP Electronic Trade
Confirm provider GC Global Custodian SC
Sub-Custodian SA Settlement Agent
(Clearer) CCP Clearing House / Central
Counterparty (I)CSD (International) Central
Securities Depository
Institutional (buy) Side
Street (sell) Side
Trade Date
Order
IMI
B/D
B/D
Trade
Space 1 Pre-trade / Trade
Exchange
1
VMU / ETCP
Space 2 Post Trade / Pre-Settlement
Trade Date X
CCP
2
GC
SA
SC
SA
Space 3 Clearing Settlement
(I)CSD
3
Non Trade Related Activity
Space 4 - Custody Services
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Giovannini Protocol content

• Mandatory use of ISO15022/20022 for x-border
• Optional for domestic

Not applicable

• SWIFT to complete ISO15022/20022 gap analysis
  fill gaps
• Other initiatives adopt protocol, e.g. MiFID

• Available in TARGET opening hours
• Satisfy local business, regulatory performance
  resilience needs
• Message/file log, guaranteed delivery, delivery
  once only once

• ISO15022/20022 compliant
• Internet Protocol (IP)
• Message, file transfer GUI

• Authentication/ Data integrity via PKI
• Non-repudiation
• Time stamping

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Protocol Content ExampleElement 1 Data
Standards

• EU Cash Securities Securities Clearing
  Settlement Systems, CS Infrastructures and
  Central CounterParties should implement relevant
  ISO data standards in support of ISO15022/20022
• Such as but not limited to
• ISO 3166 - Country Codes
• ISO 4217 - Currency codes
• ISO 6166 - ISIN
• ISO 8601 - Date/time format
• ISO 9362 - BIC
• ISO 10383 - MIC
• ISO 10962 - CFI
• ISO 13616 - IBAN
• ISO 16732 - IBEI (Provisionally)

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Giovannini Implementation Support

• Infrastructures fully involved
• ICSDs Clearstream, Euroclear NCSD
  (ECSDA)
• Clearing Houses/CCPs Eurex (via Clearstream),
  LCH.Clearnet
• Central Banks European Central Bank
• Protocol to include statement of compliance
  intent from
• Infrastructures
• Top 30 EU active Financial Institutions
• Thought leaders from the Fund Management community

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SWIFT meeting the challengePresent and future

• Communication network
• SWIFTNet (IP based service)
• Market Practice Standards worldwide
• Securities Market Practice Group (SMPG)
• Data Standards
• ISO15022
• SWIFT ISO XML Standards
• UNIFI (ISO20022 - Standards convergence)

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Next Steps

• Industry review
• October 25th, 2005 January 27th, 2006
• Posted to 350 institutions
• 2 questions
• Will this protocol eliminate Barrier 1?
• Will my institution support its implementation?
• Final publication
• March 31st 2006

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The Holy Grail for the EU Securities MarketA
true end to end Standards solution?
IMI Investment Manager B/D Broker Dealer VMU
Virtual Matching Utility ETCP Electronic Trade
Confirm provider GC Global Custodian SC
Sub-Custodian SA Settlement Agent
(Clearer) CCP Clearing House / Central
Counterparty (I)CSD (International) Central
Securities Depository
Institutional (buy) Side
Street (sell) Side
MiFID ISO20022
Trade Date
Order
IMI
B/D
B/D
Trade
Space 1 Pre-trade / Trade
Exchange
1
VMU / ETCP
Space 2 Post Trade / Pre-Settlement
Giovannini ISO20022 (inc ISO15022)
Trade Date X
CCP
SEPA ISO20022 Target 2 ISO20022
2
GC
SA
SC
SA
Space 3 Clearing Settlement
(I)CSD
3
Non Trade Related Activity
Space 4 - Custody Services
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And if it doesnt happen

• The Commission is taking a close look at the
  economic case for action. We will decide on
  whether any European legislation, or other
  intervention, is necessary on that basis and in
  the light of developments in the market. The next
  six months are crucial. As far as I am concerned,
  the clock is ticking
• Commissioner Charlie McCreevy,
• September 2005

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Istanbul 6-8 March 2006
SWIFT regional conference in Istanbul
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SWIFT regional conference in IstanbulWednesdays
agenda

• 0900-1030 Plenary session
• Securities and treasury Daring to transform
• 1100-1230 Panel session
• Transformation in action
• 1400-1530 Closing plenary
• Transforming the way you do business

1100-1230 Work session 5
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SWIFT regional conference in Istanbul

• Istanbul
• 6 8 March 2006