Granularity Limited

April 2001 1

International Payment Systems Week 2001

Granularity Ltd

Kathleen Tyson-Quahktq@granularityltd.com

April 2001

Granularity Limited

April 2001 2

International Payment Systems Week 2001

Sensible Technology

Compelling Need

Model Validation

An Elegant Solution

Granular Payment Control

Payment Risk Reduction

Next Steps

Granularity Limited

April 2001 3

International Payment Systems Week 2001

Compelling Need

•The Payments Business•Problems in Payments

Granularity Limited

April 2001 4

International Payment Systems Week 2001

The Payments Business

Domestic Payments

Foreign ExchangeSettlements

CLS&FXNet-eligibleSettlements

50%

36%

14%

Granularity Limited

April 2001 5

International Payment Systems Week 2001

The Payments Business• $4 trillion in daily payments • 2000 banks dominate payment

flows Wide variety of internal

hierarchies Wide variety of technical and

management processes• 40 currencies actively traded• Each currency has different

payment systems different platforms, different data formats, different language characters

• Multicurrency systems very complex

Bank BBank A

Client A Client B

Payment System

A B

Granularity Limited

April 2001 6

International Payment Systems Week 2001

Problems in Payments

•Liquidity “Hoarding”•Liquidity gridlock•Liquidity uncertainty•Credit uncertainty•Periodic major crises

operational failures (Bank of New York)defaults (Barings, Drexel)

•Poor system controls and integration•Fragmented management hierarchies

Payment System

Bank A Bank B

A B

Granularity Limited

April 2001 7

International Payment Systems Week 2001

An Elegant Solution

•The Granularity Solution•Advantages of Granular Payments Control

•Payment Banks & Users•Granularity Network Overview•Payment Bank Filter Integration•The Filter Process•Improved Information•Backward Compatibility

Granularity Limited

April 2001 8

International Payment Systems Week 2001

The Granularity Solution

•Addresses risk on two-way flows in a currency with the same counterparty on the same day (e.g. pay $1 billion and expect $800 million)

•Real-time controls on risk of paying but not receiving

•Real-time window on payment flows during the day

•Suspend & Reinstate capability

Granularity Limited

April 2001 9

International Payment Systems Week 2001

Advantages of GPC•Each bank controls its payment risk and liquidity risk independently

•Effective for all counterparties•Effective for all currencies•Comprehensive for all payments •Simple•Unilateral•Low Cost ($250,000 or less basic fee)•Complementary to netting and CLS

Granularity Limited

April 2001 10

International Payment Systems Week 2001

Payment Banks & Users•Payment Banks buy Filter Module

implements Clean Payment Limits improves payments transparencypowerful correspondent service

•Users buy User Interfacecomprehensive tool for risk reductionClean Payment LimitsSuspend & ReinstateOverridesperiodic and real-time reportingflexible account & counterparty structures

Granularity Limited

April 2001 11

International Payment Systems Week 2001

Network Overview

VPN

User Interface

Router

Routers

Reuters

ATT

S.W.I.F.T. IP Network

Fedwire

CHIPS

Target

LVTS

BOJ-NET

SIC

EBA

FEYCS

CHAPS

Domestic Payment Systems

Routers

Payment Bank Filter Module

Granularity Core System

USD

USD

EUR

EUR

JPY

JPY

CHF

CAD

GBP

Granularity Limited

April 2001 12

International Payment Systems Week 2001

Payment Bank Filter Integration

Liquidity/Payments Manager

Queue

ClearingFunds?

AccountFunds?

Gateway to Payment System

OK

NO

NO

YES

YES

Granularity Limited

April 2001 13

International Payment Systems Week 2001

Payment Bank Filter Integration

Liquidity/Payments Manager

Payment Bank Host Application

Queue

ClearingFunds?

AccountFunds?

Gateway to Payment System

OK

Filter Process Module

FAILNO

NO

YES

YESPASS

Application P

rogramm

ing Interface

Granularity Limited

April 2001 14

International Payment Systems Week 2001

GPC Filter Process

PASSNONO

YES

RE

JEC

T&

Not

ify

& C

AC

HE

Is Payment Type listed?

IDENTIFY Payment

Type

NO

YESIDENTIFY

Payment Amount

Is Payment Amount less

than Available Balance?

YES

CALCULATE Available Balance

(REVISE) & STORE Available Balance &

CACHETransaction

NO

Account Holder a User or 3rdParty?

Is Payee or Intermediary a Counterparty?

IDENTIFY Account Holder

IDENTIFYPayee &

Intermediaries

YES

NO

FOR EACH

YES Override forTRN or

Counterparty?

YES

Is Counterparty Suspended?

NO

Granularity Limited

April 2001 15

International Payment Systems Week 2001

Improved Information•Payment Banks gain

real-time information on liquidity allocation and usage

much finer detail on payments behaviour

metrics for liquidity pricing•Users gain

on-demand and periodic reportsalerts to intraday problems and shortfalls

Granularity Limited

April 2001 16

International Payment Systems Week 2001

Backward CompatibilityNO CHANGES TO LEGACY PROCESS FOR

•Trading•Confirmations•Matching•Payment Instruction & Pre-Advice•Payment Confirmations•Payment Reconciliations•Domestic Payment Systems•Netting (and CLS)

Granularity Limited

April 2001 17

International Payment Systems Week 2001

Sensible Technology

•Low risk as a design objective•Web Technology Components

Granularity Limited

April 2001 18

International Payment Systems Week 2001

Low Risk as a Design Objective

•Pre-existing, proven components selected for basic architecture

•Applications will use pre-existing standards: SWIFT and ISO data elements, data formats and objects as available in repositories

•Solution design minimises integration task and project risk for Users and Payment Banks

Granularity Limited

April 2001 19

International Payment Systems Week 2001

Technology Components

•Internet protocol network with VPN/PKI security

•Browser Interface for ease of use and low integration costs

•Platform independent languages•XML data format protocol and ebXML compliance

•Application to application data interchange (XML/EDI)

Granularity Limited

April 2001 20

International Payment Systems Week 2001

Model Validation

•Banks and Central Banks•Software & Technology Vendors•The Granularity Advisory Board

Granularity Limited

April 2001 21

International Payment Systems Week 2001

Banks and Central Banks

•Opinion-leaders at major banks targeted first

•4 central banks offer “no objection”•30 banks consulted for product validation•Follow-up meetings with senior department executives and operations teams

Granularity Limited

April 2001 22

International Payment Systems Week 2001

Software & Technology Vendors

•4 vendors of Payment/Liquidity Management Software consulted

•All are interested in adapting their solutions to integrate to the Payment Bank API as an upgrade feature

•Minimises integration task for Payment Banks using vendor solutions

Granularity Limited

April 2001 23

International Payment Systems Week 2001

The Advisory Board

•Chaired by Richard Goulding•Top ranking individual experts on risk management, payments and operations from leading banks

•Comfort factor for banking industry•Best practice, marketing and product development guidance

Granularity Limited

April 2001 24

International Payment Systems Week 2001

Payment Risk Reduction

•Credit Risk•Liquidity Risk•Systemic Risk•Operations Risk•Multicurrency Impact

Granularity Limited

April 2001 25

International Payment Systems Week 2001

GPC and Credit Risk•Credit risk is capped at the Clean Payment Limit in each currency

•Intraday notification of payment failure enables rapid remedial action

•Real-time suspension of payments in all currencies cuts forward risk from 3 days (Allsopp) to less than one day

Granularity Limited

April 2001 26

International Payment Systems Week 2001

GPC and Liquidity Risk•Liquidity risk is capped at the CPL•Fixed, knowable risk can be covered by liquidity or credit facilities

•Intraday notification of shortfall•Shortfall can be funded while the money market and payment system are still operating

•Contingent payment failures should become extremely rare

Granularity Limited

April 2001 27

International Payment Systems Week 2001

GPC and Systemic Risk•Default losses should be survivable to financial counterparties

•Operations failure impact limited•Intraday remedial measures should prevent contingent payment failures

•Fixed, knowable loss avoids effects of uncertainty, rumour and speculation on trading markets

•Local liquidity and credit problems should not spread as rapidly through global markets

Granularity Limited

April 2001 28

International Payment Systems Week 2001

GPC and Operations Risk

•GPC Systemhot-offsite back-up and full resiliency

worst case failure results in status quo payments processing

•GPC compatible with multiple nostros in each currency

•GPC limits impact of operations failure on payment processing

Granularity Limited

April 2001 29

International Payment Systems Week 2001

Multicurrency Risk Reduction

0

20

40

60

80

100

120

US

Do

llar

Eur

o

Ye

n

Ste

rling

Aus

. Do

llar

Sin

g. D

olla

r

Me

x. P

eso

Ma

l. R

ing

git

Gross Payments

CPLs

Values are illustrative only

Granularity Limited

April 2001 30

International Payment Systems Week 2001

Next Steps

•First Round Funding•Requirements & Prototype Development

•Beta Bank Selection•Applications Development & Testing

•Live Operations•Controlled Scaling

Granularity Limited

April 2001 31

International Payment Systems Week 2001

Sensible Technology

Compelling Need

Model Validation

An Elegant Solution

Granular Payment Control

Payment Risk Reduction

Next Steps

Granularity Limited

April 2001 32

International Payment Systems Week 2001

Questions

ktq@granularityltd.comor

peter.davey@granularityltd.com