Diapositive 1

1
Interdependencies between payment systems and
settlement systems Sophie Gautié Strategy and
Public Affairs, BNP Paribas Securities Services
Bank of England/ECB Conference 12 November 2007
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BNP Paribas perspective

• ALM Treasury strong focus on Euro, USD, GBP, CHF
• Participant in most Payment / CCP / Settlement
  Systems in Europe
• The management of liquidity risk is a global
  issue, already well covered by the IIF working
  group, in relation with the Basel Committee
• Not to be confused with the day-to-day monitoring
  of payments related to cash and securities
  settlement systems
• Operational issues with participants and systems
  are not uncommon
• They create pressures in the daily management of
  a bank treasury, which are not an indication of a
  liquidity risk issue

BNP PARIBAS
Liquidity risk
Operational risk
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High interdependency between cash payments and
securities settlement systems in Europe
SECURITIES SETTLEMENTDVP / Central Bank MOReal
time / IrrevocableESES / Express 2 / T2S
Irrevocable Cash Securities transfer
Irrevocable Cash Securities transfer
CASH Central Bank MoneyReal time /
IrrevocableTarget 2 ECH
CCP Securities, Listed DerivativesLCH.Clearnet
/ CCG / Eurex, etc
Securities Cash Industry
TRADING Stock ExchangesNew Trading Platforms
Risk Managementfully secured
For participants implies management of
collateral needs and real time management of
liquidity
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Protection of systems against participant default

• Cash Irrevocable payment in Central Bank Money
  (Target2) Secured ECH (Retail payments)
• Securities RTGS systems, irrevocable transfers
  in Central Bank Money
• Trading securities Mainly processed through
  CCPs, secured by initial margins and
  listed derivatives and deposits
• Use of Central Bank Money protects systems
  against participant insolvency
• Operational outages (participant, payment or
  securities systems)
• Importance of BCP plans
• No evidence of a participant operational outage
  creating effects beyond national borders
• Use of marginal lending facility to close
  business day

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Remaining risks related to systems interdependency

• Securities transfers outside RTGS systems
• Commercial bank money liquidity trap
• Interaction with payment systems difficulty to
  rapatriate cash in Central Bank Money
• Interoperability between CCPs remains to be
  validated
• Novation / guarantees / collateral management

SYSTEMS INTERDEPENDENCY
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BCP plans at BNP Paribas

• All internal BCP plans have been reviewed in
  preparation for Target2
• Identification of key stress scenarii
• Organisation of back-up across multiple sites, in
  coordination with Banque de France
• Dual site policy at BNP Paribas Securities
  Services
• However, individual participant BCP plans are not
  sufficient
• Regular tests involving all participants and
  systems are necessary to ensure that BCP
  effectively works
•  Plan de Secours de Place  experience for
  Target 1
• No equivalent plan in place for Target 2 at this
  stage

BUSINESS CONTINUITY PLAN
BCP is not a matter for large participants
only Need of BCP tests involving all parties
connected to Target2
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Some lessons from the recent market crisis

• A crisis of confidence generating a severe
  increase in the cost of liquidity and strain on
  collateral
• Importance of a swift information and
  appreciation of the market situation by Central
  Banks
• Very efficient ECB / Eurosystem intervention in
  August 2007
• Dialogue with market participants
• Timely analysis and intervention which removed
  stress from the market
• Insolvency cases
• Role of regulators and Central Banks in taking
  preventive measures
• Swift intervention needed when refinancing issues
  do materialise

CENTRAL BANK ROLE IN MARKET CRISIS
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Conclusion

• Liquidity risk already tackled by IIF
  recommendations
• Effective governance and organizational structure
  for managing funding risk are critical
• Resolute investments in analytical approaches for
  measuring, monitoring and controlling liquidity
  must be made
• Substantial attention must be paid to Stress
  Testing and Contingency Planning
• Operational risk
• Large participants invest heavily in BCP, need
  for a concerted effort involving all
  participants particularly in preparation for
  Target2
• Recourse to marginal lending facility as a
  standard tool to facilitate close of business day
  in case of operational issues

LIQUIDITY RISK
OPERATIONAL RISK
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