Strengthening Interbank Payment Systems

David Mazza, VP

Payments Systems Risk ManagmentNovember 4, 2003

Citibank N.A.

Citibank Payment Services Largest processor of cash flows (payments) globally

Global payment network spanning 90 countries

$92 billion in liability balances

Connection to over 270 payment systems globally

Process more than US $1 trillion in funds daily

Regular adviser on industry issues such as: settlement risk, receivables and payment processes, payments systems development

100 years operating in Asia, Latin American and Europe Operator of US dollar clearinghouses and FX clearinghouses in local

markets Maintains dedicated Payments Systems Risk Managment Group

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Strengthening Interbank Payments

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Business/Services

Risk Management

• Capabilities• Efficiency• Technology• Governance

• Credit• Legal• Operational• Liquidity

Cash (Payment) Products

Payables Liquidity Receivables

Capabilities Parameters

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Payable/Receivable Products

Payables Suite Paylink Mass Payments Multibank Payments Direct Debit Payments Citibank Worldlink

Receivables Suite Pick-up Services Branch/Network Collection Incoming Transfers Automatic Tellers Direct Debit Receivables Management CitiConnect eBilling

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Cash Management Products

Liquidity Suite Current Account Sweep Balancing Notional Pooling Investments

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Country Capabilities/Parameters Electronic versus manual clearing

Manual, semi-automated, automated, RTGS Cash clearing for securities/derivatives

LCY Cheque GIRO/ACH Direct Debits X-Border Electronic Funds Transfers All banks are member of the clearing house vs. bilateral agreements Timing of clearing process (D, D+1, D+2, etc) Introduction of “hybrid” systems

Euro Access Frankfurt (EAF), Paris Net Settlement Systems, CHIPS Allow third-party payments in interbank funds transfer systems

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Business Issues

Allow payers to pay directly into a Citibank account at our branches or via electronic transfer (local or from abroad) (Multibank Payments)

Regulations impacting file delivery contracts to allow files containing payments for various countries and currencies

Direct Debits Clearinghouse requires an initial mandate for all direct debits Limit set up by clearinghouses to process direct debits Consumer and corporate direct debits All banks in country or certain banks (bilateral agreements)

Can collections be made at automated tellers at branches or third-parties Accepts cash, cheques, cards? Requires information to be sent in advance?

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Business Issues

Cheques/Collections Same cut-off time for same-day deposit of cash/cheque pick up Coverage and quality of armored car/courier companies Cheque discounting (manual or automatic) Ability for branches to print cheques Validity period of cheques

Allow payers to visualize invoices to pay (finance) on the Web (CitiConnect); customers monitor receivables via Web/phone/email

Digital signature law Notional pooling is available in foreign currency (USD, Euros) Different legal entities allowed for sweep balancing Tariffs/fees on LCY and FCY accounts

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SWIFTNetTM Market Infrastructures

SWIFTTM is now making its services available to market infrastructures (MIs) in the securities and cash payment industries

Advantages The elimination of more than 100 proprietary machines and lines currently

used by banking community More efficient communications

– Real-time, interactive exchange of messages

– Automated exchange of files (bulk payments)

– Particularly suited for central bank reporting and intra-institution reporting

– Secure browser-based access to MIs Web servers Improves straight-through-processing rates on both infrastructure and client

sides Can be used where not all participants are eligible for direct SWIFT

participation (Closed User Groups)

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Risk Management Citigroup endorses BIS Core Principles for Systemically Important Payment

Systems Multilateral net settlement systems

Losses should be shared based on bilateral credit (or transaction volume) vis-à-vis defaulting participant

Cap on losses to non-defaulting banks Diversified selection of private-sector settlement banks for securities/

derivatives cash settlement Wider adoption of CLS for FX payments Development of USD/local currency (FX) clearinghouses Settlement finality in payment and securities settlement Structural limitations on legal liability to participants

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Risk Management Provision of central bank intraday (RTGS) liquidity Introduction of payment optimization procedures Elimination of unwind provisions Largest participants should not be sole liquidity providers Broader acceptance of foreign-currency denominated collateral for RTGS

intraday liquidity (G-10 central banks) Operational reliability/redundancy Concentration of critical market infrastructure Risk Management and Audit Functions in positions of authority Regular external audits Transparent and accountable governance structure Involve participants in planning strategic objectives and plans for achieving them

Central Banks are adopting “product” offices

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