Wires: Functionality & Risk Study · MIFID II - EMIR Art MIFIR 25 QFCs TARGET2 Securities FBAR EMIR...

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


II. The Fed

III. CHIPS



VI. Regulation

VII. Market Changes


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


II. The Fed

III. CHIPS



VI. Regulation

VII. Market Changes


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


II. The Fed

III. CHIPS



VI. Regulation

VII. Market Changes


CHIPS vs. Fedwire

CHIPS Fedwire

Payment Volume

Reach

Ease of use

STP

Payment Value

Liquidity

Agenda


II. The Fed

III. CHIPS



VI. Regulation

VII. Market Changes


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


II. The Fed

III. CHIPS



VI. Regulation

VII. Market Changes


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


II. The Fed

III. CHIPS



VI. Regulation

VII. Market Changes


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


II. The Fed

III. CHIPS



VI. Regulation

VII. Market Changes


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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