wires: functionality & risk study · mifid ii - emir art mifir 25 qfcs target2 securities fbar...
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The Payments InstituteJuly 21-24, 2019 • Emory University, Atlanta GA
Wires: Functionality & Risk Study
July 15, 20194:00 PM
Steve Wojciechowicz, AAP, CTPDeutsche Bank Trust Company Americas
Learning Objectives
I. Understand the transaction system players
II. Process and settlement
• Compare and contrast Real-Time Gross Settlement (RTGS) with Net Settlement
III. Risk and benefits associated with wire process
2
Agenda
I. Correspondent Banking
II. The Fed
III. CHIPS
IV. CHIPS vs. Fedwire
V. Open Loop Operations
VI. Regulation
VII. Market Changes
VIII.Dynamic Environments
Correspondent Banking
OriginatorOriginating Institution
Settlement and
Clearing Operation
Receiving institution
Beneficiary
Moving Funds
Please pay your client
Our client was paid
Nostro Vostro
$10 $10
Vostro Nostro
$10 $10
Beneficiary Bank
$
Originating Bank
$
My record of
your account
on my books
My record of
my account on
your books
Agenda
I. Correspondent Banking
II. The Fed
III. CHIPS
IV. CHIPS vs. Fedwire
V. Open Loop Operations
VI. Regulation
VII. Market Changes
VIII.Dynamic Environments
The Fed: an RTGS network
Originating Bank Beneficiary Bank
US Urgent Payment Flow
Originator Beneficiary
$ $
Federal Reserve
$
The Fedwire Process
• Hours
• Clearing and Settlement
• Participation Options
The Fed: Hours09:00 HKT 13:00 NZT03:00 CET21:00 ET18:00 PT
06:30 HKT 10:30 NZT00:30 CET18:30 ET15:30 PT
Open
Close
Day before value
Next-day value
The Fed: Clearing and Settlement
Originating
BankFed GL
$10 $10
Fed GL
$10 $10
OBK instructs Fed
to debit account
and pay
BBK receives
notice of credit
details from Fed
Originating Bank Beneficiary BankOriginator Beneficiary
$ $
Federal Reserve
$ Beneficiary
Bank
The Fed: Participation Options
US Urgent Payment Flow
(RTGS)
Originating Bank Beneficiary BankOriginator Beneficiary
$ $
Federal Reserve
$
Fedline Direct
Fedline Advantage
About 7,500 FI’s
Agenda
I. Correspondent Banking
II. The Fed
III. CHIPS
IV. CHIPS vs. Fedwire
V. Open Loop Operations
VI. Regulation
VII. Market Changes
VIII.Dynamic Environments
The CHIPS Process
• Hours
• Participation Options
• Clearing and Settlement
CHIPS: Hours09:00 HKT 13:00 NZT03:00 CET21:00 ET18:00 PT
05:30 HKT 09:30 NZT11:30 CET17:30 ET12:30PT
Open
Close
Day before value
Next-day value
CHIPS: Participation Options
Originator
CHIPS
Federal Reserve
$
Beneficiary
Originating Bank
$
$
Beneficiary Bank
$
$ $
Direct Connection
44 FI’s
CHIPS Participants*
Banco Bilbao Vizcaya Argentaria, S.A.Banco do Brasil, S.A.Bangkok Bank Public Company LimitedBank Leumi USABank of America, N.A.Bank of ChinaBank of CommunicationsThe Bank of Nova ScotiaMUFJ Bank, Ltd. Barclays Bank PLCBranch Banking and Trust CompanyBNP ParibasBrown Brothers Harriman & Co.China Construction Bank Corp.China Merchants BankCitibank, N.A.Commerzbank AGCredit Agricole Corporate & Investment Bank Crédit Industriel et CommercialDeutsche Bank AGDeutsche Bank Trust Company AmericasFifth Third Bank
Habib American Bank
HSBC Bank USA, N.A.
Industrial & Commercial Bank of China
Intesa Sanpaolo S.p.A.
Israel Discount Bank of New York
JPMorgan Chase Bank, N.A.
KBC Bank N.V.
Manufacturers and Traders Trust Company
Mashreqbank psc
Mega International Commercial Bank Co., Ltd.
Mizuho Bank, Ltd. – NY
The Northern Trust Company
Société Générale
Standard Chartered Bank
State Bank of India
State Street Bank and Trust Company
Sumitomo Mitsui Bank and Trust Company
The Bank of New York Mellon
UBS AG
MUFG Union Bank, N.A.
Wells Fargo Bank NY INTL.
Wells Fargo Bank, San Francisco
* www.theclearinghouse.org
CHIPS: Clearing and Settlement
Efficiency
STP
Liquidity
NATS Table
Netting
$1 used 18 times95% STP
The CHIPS Process
* = Payment Order
Originator
CHIPS
Federal Reserve
$
Beneficiary
Originating Bank
$
$
Beneficiary Bank
$
$ $
CHIPS: Liquidity Example
$ $
FIFO Netting
FIFO Netting
Payment Release Order $30, $50, $50, $50 $30, $50, $50, $50
Payments Actually Released $30 $30, $50, $50, $50
Liquidity Used $30 $50
Value of Payments Effected $30 $180
$ $
$ $
$ $
AStart: $50End: $20
$30
DStart: $30End: $0
CStart: $0End: $0
B
AStart: $50End: $20
DStart: $30End: $30
CStart: $0End: $0
B
$50 $50
$50
$30 $50 $50
$50
CHIPS: Clearing and Settlement
1970’s
Electronic communication
STP for clearing
1980’s
Bilat’s
Debit Caps
1990’s
Collateral2000’s
Payment Finality
Agenda
I. Correspondent Banking
II. The Fed
III. CHIPS
IV. CHIPS vs. Fedwire
V. Open Loop Operations
VI. Regulation
VII. Market Changes
VIII.Dynamic Environments
CHIPS vs. Fedwire
CHIPS Fedwire
Payment Volume
Reach
Ease of use
STP
Payment Value
Liquidity
Agenda
I. Correspondent Banking
II. The Fed
III. CHIPS
IV. CHIPS vs. Fedwire
V. Open Loop Operations
VI. Regulation
VII. Market Changes
VIII.Dynamic Environments
Open Loop Operations
OriginatorOriginating Institution
Settlement and
Clearing Operation
Receiving institution
Beneficiary
Correspondent Banking
Please pay your client
Our client was paid
Nostro Vostro
$10 $10
Vostro Nostro
$10 $10
Beneficiary Bank
$
Originating Bank
$
SWIFT
Platform
Making Financial Messaging
MORE SECURE And LESS EXPENSIVE
Serial Payments
* = Payment Order
Simple Flow
(Serial)
Originator’s Bank
$
Beneficiary's Bank
$
BeneficiaryOriginator
U.S. U.S.
Cover Payments
= Payment Order
= Settlement Message$
U.S. Not-U.S.
Complex Flow
(Cover)
Originator’s Bank
$
Beneficiary's Bank
$
BeneficiaryOriginator
Sender’s
Correspondent
$ $
Sending
Bank
$
Receiving
Bank
$
Receiver’s
Correspondent
$
Agenda
I. Correspondent Banking
II. The Fed
III. CHIPS
IV. CHIPS vs. Fedwire
V. Open Loop Operations
VI. Regulation
VII. Market Changes
VIII.Dynamic Environments
Regulation: What keeps us up at night?
NIS
AMLD
IV/VBasel IV
Intraday
Liquidity
CCP
Recovery
MIFID II -
MIFIREMIR Art
25
QFCs
TARGET2
Securities
EMIR ECFBAR
AIFMD
ATAD
MMF
T2 XML
European
GDPR
DF & CFTC
EU FTTCRR/CRD
IV
CGI-MP
LEI
CIG-REG
SCCL
Regulation: Who’s in Charge?
CongressFederal Reserve
Treasury
FinCEN
CFPB
UCC
Regulation: What’s happening?
• GDPR
• PSD2
General Data Protection Regulation
GDPRBinding on EU member states, with “extra-territorial” impact
Supersedes existing laws
Requires organizations to provide detailed information about private data How is it stored
Why is it held
How is it being used
Offers the “right of retrieval” of data
Payment Services Directive II – Amendments [non exhaustive list]
Access to Account:One key element in PSD II is the access to accounts proposal which will require banks to open their customer accounts to third party providers (“TPPs”)
Access to Account contains the following services:
Payment Initiation Service
Account Information Service
The “TPPs” will need to be licensed and registered and obliged to fulfill security and consumer protection requirements similar to banks.
Scope Extension [International Payments]One Leg Out
All Currencies
Payment Service Providers to provide information and transparency on the costs and conditions and held liable if something goes wrong (*).
-Establishes security procedures to protect clients data.
(*) for their part of the payment transaction
Agenda
I. Correspondent Banking
II. The Fed
III. CHIPS
IV. CHIPS vs. Fedwire
V. Open Loop Operations
VI. Regulation
VII. Market Changes
VIII.Dynamic Environments
Market Changes
•ISO 20022
•SWIFT Customer Security Program
•gpi
ISO 20022 Implementation Approaches
Migration Timeline Currently under revision
Previously planned for 2020
Market sounding under way
First functionalities, such as central liquidity management – 2019/2020
RTGS – 2021/2022
Migration Approach
Fedwire: 2 phases – interoperability between “old” & “new” systems until mandated
sunset date
CHIPS: tbc
Eurosystem “Big Bang”
EBA: tbc
Standards ISO 20022 ISO 20022 HVP+
Operating Model V-shape Eurosystem: V-shape
EBA: Y-copy
Challenges / Fears
World’s primary FMIs modernizing RTGS in parallel
Market readiness with >6,000 banks involved
Some parties/fields in ISO messages not covered under the US funds transfer law
(UCC 4A)
Mapping between highly structured ISO messages into limited (MT/proprietary)
formats– standard & market practice required
World’s primary FMIs modernizing RTGS in parallel
Operational & liquidity risk due to “big bang” approach in multi-country market –
market readiness key for success
Disconnected ecosystem due to move from Y-copy to V-shape – e2e
transparency & traceability of payments at risk
Mapping between highly structured ISO messages into limited (MT/proprietary)
formats– standard & market practice required
Opportunities /
Expectations
More structured & richer information allowing for
straight-through processing
higher quality & accuracy of financial data supporting operational efficiencies, automated data analytics (AML/compliance duties)
value-added services
Rich Remittance
Information
Several options being evaluated to determine how to leverage functionalities of ERI
in the future Extended remittance information is under consideration
Engagement with
Market
Infrastructures
FED’s Wholesale Payment Advisory Group
CHIPS’ Business Committee
Eurosystem’s Advisory Group on Market Infrastructures – Payments
Eurosystem’s Task Force on Future RTGS Services
SWIFT- Customer Security Programme(CSP)
CSP objectivesSWIFT Security Controls Framework
1. Secure Environment: For example, two factor
authentication (2FA)
2. Know and Limit Access: For example, delete dormant
RMAs (Relationship Management Application)
3. Detect and Respond: For example, FS-ISAC (Financial
Services Information Sharing and Analysis Center) –
the global financial industry’s go to resource for cyber
and physical threat intelligence analysis and sharing
• Final version of the SWIFT Customer Security Controls Framework
document issued in April 2017
• SWIFT will require customers to provide self-attestation against the
mandatory controls (possible as of July 2017)
• All users connecting to SWIFT directly or indirectly must comply with
the mandatory security controls
• Enforcement of mandatory requirements will start from January 2018
Enhancing Cross-Border Payments via SWIFT gpi
1If received prior to receiving bank’s cut-off time, banks
will credit funds on day of receipt
2 Any charges will be documented & replicable via the cloud
3 Cloud will allow communication end-to-end
4 End-to-end tracker reference will be generated for payment
Same day availability of funds
Characteristics Benefits
Corporate Buyer Correspondent Bank Intermediary Bank Intermediary Bank Correspondent Bank Corporate Seller
SWIFT as main carrier of the messagesCorporate systems
Payment Landscape TomorrowView into SWIFT gpi cloud information
Clearing
e902893a-9d22
SWIFT gpi Cloud
e902893a-9d22
e902893a-9d22
e902893a-9d22 e902893a-9d22 e902893a-9d22 e902893a-9d22
End-to-end transparency of fees
End-to-end payments tracking
Transfer of rich payment information
1
2
3
4
Agenda
I. Correspondent Banking
II. The Fed
III. CHIPS
IV. CHIPS vs. Fedwire
V. Open Loop Operations
VI. Regulation
VII. Market Changes
VIII.Dynamic Environments
Dynamic Environment
Learning Objectives
I. Understand the transaction system players
II. Process and settlement
• Compare and contrast Real-Time Gross Settlement (RTGS) with Net Settlement
III. Risk and benefits associated with wire process
42
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