Richard Young

30th June 2010

Introduction to SWIFT and the value it provides to the Securities Industry- Presentation for the Chartered Institute for Securities & Investment

Agenda

• SWIFT Overview• SWIFT Initiatives in the Securities

Industry– Clearing and Settlement– Asset Servicing– Fund Distribution

2

SWIFT: A Global «Community Inspired » Financial Utility

IPPlatform

Fina

ncia

l

Comm

unity

Industry

Standards

Cost – Risk – Revenue

• Not for profit industry utility

• 9,304 financial institutions

• 209 countries

• 3.8 billion business msgs

• Registrar for ISO

• No corrupt, misrouted, lost msgs

Banks

InvestmentManagers

Corporates

InsuranceCompanies

GovernmentInstitutions

Trustees/Administrators

Broker-Dealers

Payment Systems

Clearing & SettlementSystems

Custodians/ Depositories

Stock Exchanges

SWIFT: Connecting the Global Financial Community

Regulators Market infrastructures

5

High risk manual ops

Slow processing model

Open architecture pressures

Multiple proprietary links

Spiralling Costs

Compliance

Client Dissatisfaction

Operational Threats Increase

SWIFT Community: Harnessing Economies of Scale

Pri

ce (

EU

Rce

nt/

msg

)

Vo

lum

es (

Mill

ion

s o

f m

essa

ges

)

0

5

10

15

20

25

30

35

40

45

50

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

-

500

1,000

1,500

2,000

2,500

3,000

3,500

Mil

lio

ns

Banking, Trade Finance, Capital Markets, Asset Management, Insurance

Agenda

• SWIFT Overview• SWIFT Initiatives in the Securities

Industry– Clearing and Settlement– Asset Servicing– Fund Distribution

7

IMI: Investment Manager

B/D: Broker DealerVMU: Virtual Matching

UtilityETCP: Electronic Trade

Confirm ProviderGC: Global CustodianSC: Sub-CustodianSA: Settlement Agent

(Clearer)CCP: Clearing House/

Central Counterparty

ICSD: (Int‘l) Central Securities Depository

Space 4Asset Servicing

Non trade-related activity

Exchange

VMU / ETCPTr

ade

dat

e

Sp

ace

1P

re-t

rad

e/Tr

ade

Sp

ace

3C

lear

ing

&

Set

tlem

ent

OrderTrade

Institutional (buy) side Street (sell) side

Sp

ace

2P

ost

Tra

de/

Pre

-Set

tlem

ent

Trad

e d

ate

+ X GC CCP

SA

IMI B/D

(I)CSD

SC

B/D

1

2

3

SA

Cash Clearingsystems/

Central Banks

SWIFT in Securities – Bringing Standards to the Securities Ecosystem

An Introduction to Sds 2

Standards used on SWIFT

SecuritiesmarketsISO 7775

syntax = traditional FIN MT 521, MT 500, etc

ISO 15022 compliant syntax = enhanced FIN

MT 502, MT 54x, etc

UNIFI (ISO 20022) syntax = XML

Investment Funds, Cash Reporting, Bulk Credit Transfers, etc

Traditional FINMT 103, MT 103+, etc

Traditional FINMT 100, MT 202, etc

Payments & other markets

Message standards on the ‘FIN system’ (SWIFTNet FIN)

Message standards on the ‘SWIFTNet system’ (SWIFTNet)

70s 80s

90sLate 90s

Early 2000’s

‘MTs’

‘MXs’

10

Securities Industry is changing(Driven by MiFID & Code of Conduct)

Trading

Clearing CCPs

Exchanges

Yesterday’s situation:• ‘Place of trading’ send their trades to one

CCP• Typical silos (LSE-LCH, Euronext-Clearnet,

Borsa Italiano-CCG, etc) for each country with active CCP

Trading

Clearing CCPs

Exchanges and MTFs

New landscape in EU building:• Many new trading venues (Turquoise, Chi-

X, NasdaqOMX Europe, BATS, Equiduct, Smartpool, NYSE Euronext Arca, etc) and new clearing venues (EMCF, EuroCCP, etc)

• Desire to create links with multiple counterparts

11

SWIFT in the Clearing Space

Clearing role

(GCM)

Regulators

CCP

CSD

CentralBank

Settlement Agents

Market place(SEs, MTFs)

CCP

Trading role

(NCM)

1Business Areas

1. Communication between Trading Venues with CCPs or related routing and netting engines

2. Communication between matching facilities and CCPs

3. Communication between CCPs, GCMs and ICMs (the clearing members) and NCMs (the non-clearing members)

4. Inter-CCP communication (support to Code of Conduct)

5. Post-clearing CCP communication with CSDs and settlement agents, and CBs and cash correspondents

6. Reporting from CCPs to regulators

3

4

Matching venues

2

6

Trading role

(ICM)

Cash corres-

pondents

5

Providing solutions for the Clearing industryBringing communication efficiency to GCMs and ICMs

12

Using existing

solutions

MX-based solution

On demand of some CCPs and CMs:Using ISO 15022 and/or prop stds.FIN and FileAct.

Developing ISO 20022 msgs specifically for clearing industry.

SWIFT in Settlement: (15022 MT flows)

Broker’sCounterpartBroke

r

MT 518

MT 502

InvestmentManager

Broker’sCustodia

n

MT 547MT 543

IMI’sCustodia

n

MT 541

MT 541

Sub-Custodia

n

MT 541

MT 547

MT 576

MT 545

MT 545

MT 545

MT 535/536/537/548/578

SettlementSystem (e.g. CSD)

MT 543

MT 514MT 517

MT 513

MT 515

MT 547

MT 509 MT 584

Market

side

MT 502

MT 513cl

cl

cl

CCP

Trading

Venue

14

SWIFT Alliance

Gateway

Common Communication Interface

Euroclear Single Platform

Infrastructure for communications within the Euroclear Group

Back Office Applications

EUIEuroclearBE

EuroclearNL

EuroclearFR

FIN/MX

Interface

File

Transfer

Interface

EUCLIDServer/

PC

WSHA

SWIFTNet

EuroclearBank

CREST

Interface

15

Giovannini Barriers

• SWIFT was asked to ensure the definition of a protocol for the removal of Barrier 1 through the Securities Market Practice Group (SMPG), the protocol had the aim of:

Eliminating national differences in the information technology and interfaces used by clearing and settlement providers and defining an EU-wide protocol in its place.

• SWIFT consulted widely with participants in the European space in the definition of this protocol

• Protocol was published by SWIFT in March 06 for implementation by March 2011

• Work to remove other Barriers was assigned to industry groups, e.g. ECSDA, whilst the removal of some barriers was recognised to be dependent on action by national governments, with help from the EU Commission.

F&A October16

200816

Giovannini Barrier 1 - Protocol Scope

Transfer

Data

Transfer

Data

STANDARDS

SECURITY

SERVICES

1

4

3

6

2

5

Participant A Participant B- Mandatory use of

ISO15022/20022 for x-border

- Optional for domestic

Not applicable

- Available in TARGET opening hours

- Satisfy local business, regulatory performance & resilience needs

- Message/file log, guaranteed delivery, delivery once & only once

- Authentication/ Data integrity via PKI

- Non-repudiation- Time stamping

- SWIFT to complete ISO15022/20022 gap analysis & fill gaps

- Other initiatives adopt protocol, e.g. MiFID

- ISO15022/20022 compliant

- Internet Protocol (IP)- Message, file transfer &

GUI

21

The TARGET2-Securities (T2S) project

TARGET2-Securities can be defined as a central securities settlement utility, delivered by the Eurosystem and to which CSDs can outsource settlement.

It will promote harmonised settlement between participating CSDs and their users and be in line with SMPG recommendations.

It will be Giovannini compliant and will make use of ISO 20022 messages such as:

Settlement and Reconciliation Cash and Liquidity management Reference Data messages (Securities, Cash and

Securities Accounts, Party) Collateral management (interaction with CCBM2)

18

T2S connection optionsT2S parties have choice between direct and indirect connection to the platform.

Source: ECB website and T2S URD www.ecb.int

Illustration of the concept of direct connectivity:

source: ECB / T2S URDsource: ECB / T2S URDsource: ECB / T2S URD

The CSD’s environment.

The settlement service has been outsourced to T2S.

The directly connected T2S Party, using CSD’s settlementservices and other services as well (such as corporateevents management, lendingand borrowing, tax services etc).

Direct connection to T2S.

Connection to the CSD.

SWIFT in Post Trade Matching (Prime Broker/Executing Broker) Industry Challenges

Hedge FundExecuting

Broker

Prime Broker

Daily Trade report

Settlement Agent

CSD

1. Mistake in Trade details

2. Pre-matching

is manual

4. Risk of Settlement

fails

3. Poor reporting

from Prime Brokers

Settlement Agent

19

Solution for PB/EB Industry Challenges

Hedge FundExecuting

Broker

Prime Broker

Daily Trade report

Settlement Agent

CSD

Settlement Agent

20

Accord

1. Automated pre-matching,

status and exception handling

2. Real time status

updates

3. Removes Settlement

Risk

MT 515

MT 515

MT 998

MT 998

Agenda

• SWIFT Overview• SWIFT Initiatives in the Securities

Industry– Clearing and Settlement– Asset Servicing– Fund Distribution

21

Asset Servicing

• Asset Servicing is the processing of events (Corporate Actions) related to holdings of securities assets. Examples of such events include:

• Distributions– Distributions (without Options):

• Cash Distributions (e.g. cash dividends, interest Payments)• Securities Distributions (e.g. stock dividend)

– Distributions with Options (e.g. dividend Options)

• Reorganisations• Mandatory Reorganisations with Options (e.g. conversion)• Mandatory Reorganisations without Options (e.g. stock split)• Voluntary Reorganisations (e.g. tender offer)

One Horrific Example• 300+ pages to describe an

‘Exchange Offer’

• 38 separate updates were published from Dec 08 to May 09, as new information was made available

• Validation took 12 separate sources of data

• Five resources worked on it extracting 63 data elements, amassing 44 pages of audit trail changes

Corporate actions frequently originate with detailed free-text documents

The challenge is to find the right data, in the right pages, buried alive somewhere in the free-text document

Corporate Actions processing often involves multiple versions, of what should be the same information,

passing between multiple parties

24

Multiple CAs produce multiple Documents - leading to further multiples of messages downstream

25

Issuers and their agents~1,000,000 events annually for ~85,000 companies and funds

Intermediaries, Market Infrastructures~20 global custodians hold 95% of all assets under custody

Investors, investment/fund/asset managersMany millions of investment accounts at many layers

Quantification:~1,000,000/yrUnique CA Events

= ~5,000,000Documentspublished= ~ 2,800,000,000Messages

ISO 15022 & ISO 20022

Documents

SWIFT’s Current Corporate Actions Offering

STaQS

& Market Practices

Training

ISO 15022 Messaging for Corp. Actions (MT560s)

ISO 20022 Messaging for Proxy V.

Data Distribution

Drive for standardisation & automation

to reduce risk, loss & cost, working with XBRL for data capture

28

SWIFT in the Funds Market

Automating Distribution Across Mutual, Hedge, Money Market & Pension Fund Processing

28

“SWIFT is now the trusted brand sitting at the heart of the platforms’ and fund managers’ strategy to more effectively distribute multi asset class products and provide enhanced, value add services to their global client base”

Executive Summary

29

Account opening

Order placement

Settlement

Reconciliation

Price report

Transfers

Switches

Cash Forecast

Corporate Actions,

Payments

Holistic Fund Distribution Enablement

Institutional investorsInvestors’ intermediaryDistributor

Transfer AgentFund accountingagent

End investors

Cash agentsDistributor-side

Cash agentsFund -side

Other intermediaries &platforms

Portfolio managers

(I)CSD (when applicable)

500 Fund Players, 40 Countries, 25 Million Messages

Payments

30

Summary

31

Next steps to automation…How SWIFT Helps the Securities Industry

31

Solutions

Consulting Services Training

Connectivity

32

Thank you & Questions

richard.young@swift.com

+44 207 762 2029