Alain Raes

1
Target 2 and SEPATechnology and standards

• Alain Raes
• Director, Continental Europe

SWIFT Regional Conference Istanbul, 7 March 2006
2
European community post EURO
TIME FOR HARMONIZATION
3
Same

• Objectives of EU harmonization
• TARGET2 pan European clearing and settlement
• SEPA single euro payments area
• Giovannini EU cross-border clearing and
  settlement
• Players
• Direct impact on FI, ACH, CSD, ICSD, CCP
• Domino effect on others Corporates, Custodians,
  IMI, VMU, ETCP, SA, etc
• Timing
• TARGET2 2007-2012
• SEPA 2008-2010
• Giovannini 2008 -2011

4
Different

• Project status
• TARGET2 in implementation for testing February
  2007
• SEPA in discussion within the community, lead by
  EPC
• Giovannini solution definition within advisory
  groups
• SWIFT involvement
• TARGET2 SWIFT as provider of network,
  standards, messaging and interfaces
• SEPA SWIFT proposition includes standards,
  messaging and Interoperability enablers
  (FileCopy, Netting, Routing database)
• Giovannini SWIFT is involved in solution
  definition Barrier 1 for common communication
  protocol (via Independent Advisory Group)

5
Trans-European Automated Real-time Gross
Settlement Express Transfer A system of systems
(1 Jan 1999)
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TARGET2 - Single Shared Platform
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SWIFTNet FIN Y-Copy
SWIFTNet FIN
Payment order
Y- Copy
1
4
Payment Instruction
1
Bank B
Bank A
2
2
Settlement request
5
5
3
3
Settlement response
SWIFT Interface
Final Payment Instruction received
4
Sender / receiver notification and reporting
(Optional)
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Settlement Application
8
Three complementary core SWIFTNet messaging
services
Browsing
Secure browsing with standard internet
technologies. Appropriate for data exchange in
thin-client browser-based financial solutions. To
be used with SWIFTNet InterAct and FileAct.
SWIFTNet Browse
Messaging
Secure, reliable, and STP-oriented. Appropriate
for exchange of individual structured financial
messages and short reports.
SWIFTNet messaging
SWIFTNet InterAct
File transfer
SWIFTNet FileAct
Secure, reliable, and flexible. Appropriate for
exchange of batches of structured financial
messages and large reports
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SWIFTNet infrastructure for SSP
Bank B
Bank A
SWIFTNet
Internal payment system
SWIFTNet FIN
SWIFT interface
payment message
SWIFTNet FIN Copy
settlement request
authorisation/
refusal
SWIFTNet FileAct Real-time reporting
SWIFTNet InterAct Real-time cash management
SWIFTNet Browse On-line visualisation of
information
Payment module (PM)
Central SWIFT interface
Payment processing Bank A Bank B
Information control module (ICM)
SWIFTNet services
FIN/FIN Copy
10
Payment processing in the SSP

• Credit transfers and direct debits
• MT103, MT103, MT202 are mandatory
• MT204 is optional
• Settlement process
• FIN Copy MT096 and MT097 (full copy)
• MT012 sender notification (optional- by
  participant individually)
• MT019 Abort notification
• Statement of RTGS accounts (optional)
• MT940 customer statement message
• MT950 statement message
• For end-of-day reporting on all transactions
  settled on the RTGS account
• Update of credit lines (optional)
• MT900 confirmation of debit
• MT910 confirmation of credit

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SEPA - what will it take?
Payment schemes managed by EPC
Infastructure
Clearing settlement mechanisms
Intra Group
Bilateral / Multilateral
PE-ACH
SEPA compliant ACH
Common schemes, multiple clearing settlement
mechanisms
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The SEPA challenge an operational angle

• New instruments, new standards
• A tight timetable for readiness
• An uncertain environment
• Multiple clearing settlement mechanisms
• A multi-year co-existence and migration period
• Lower costs, higher efficiency than today

Building highly efficient payment processes,
infrastructures and back offices
13
The need for interoperability
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Preparing for SEPA

• Standards
• Credit transfers
• Direct debits
• r transactions
• Exceptions and investigations
• Cash management

• ISO 20022 UNIFI
• XML
• End-to-end
• Global
• Partners

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Preparing for SEPA

• Standards
• Services
• SWIFTNet
• SWIFTAlliance
• Reference Data Directories
• Partner Programmes

• Resilience
• Integration
• Reach

16
Three complementary core SWIFTNet messaging
services
Browsing
Secure browsing with standard internet
technologies. Appropriate for data exchange in
thin-client browser-based financial solutions. To
be used with SWIFTNet InterAct and FileAct.
SWIFTNet Browse
Messaging
Secure, reliable, and STP-oriented. Appropriate
for exchange of individual structured financial
messages and short reports.
SWIFTNet messaging
SWIFTNet InterAct
File transfer
SWIFTNet FileAct
Secure, reliable, and flexible. Appropriate for
exchange of batches of structured financial
messages and large reports
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Preparing for SEPA

• SWIFT challenge
• Total cost of ownership
• SWIFTNet

• Standards
• Services
• Price

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Conclusions

• ISO 20022
• SWIFTNet

• Standards
• Services
• Price

Making financial messagingsafer and less costly
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European community post EURO
TIME FOR EU HARMONIZATION THROUGH SWIFT
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The role of technology and standards

• Finn Otto Hansen

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Agenda

• External Drivers
• DnB NOR's Position and Challenges
• Our Objectives and how to Benefit on using SWIFT

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Globalisation

• Movement of production and operations
• Regions or the world as one market
• Borders are disappearing
• Competition on whatever from wherever
• Changes in national rules and legislation
• A barrier

There is a difference between natural regions and
artificial created regions
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Consumers and Competition authorities

• Low prices
• Transparencies
• Simplicity
• Belief in regulations

Basic traditional marketing beliefs about a
perfect market and competition. This is difficult
to achieve in all countries, for instance
airlines, bus lines, banks, i.e.
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Central banks

• Risk aversion for own losses
• Concerned about competition between the players,
  low risk within systems
• Don't like competition towards themselves

Can be our best and most important ally
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Politicians

• Seldom in charge of the agenda
• Influenced especially by consumer organisations
  and competition authorities

May, with a different point of view, start a
development that have consequences for the banks.
For instance, electronic ID, The Single Market,
etc.
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Technology

• Electronic communication
• Security and fraud
• Open networks
• Standardisation

Technology looking for usage. The technology is
ahead of the applications. Not all technology
that is smart, is smart to implement. When you
have a choice among a lot of alternatives
simplicity for the consumer, costs and
competitors initiatives always must be taken in
consideration
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Organised customer groups

• Cost efficiency
• Global standardisation
• Banks as customers

Standardisation for instance, Rosetta net Banks
for instance, Cash Reporting.
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Distribution and service

• Cost pressure
• You can't support all technological possibilities
  
• Customers requirements for issues to be solved in
  a simple way
• All queries solved in "one place"
• Disinvestments in products, services and channels
• This is a great challenge
• Examples for reflection cheques, TF, giros, i.e

Sale and marketing are more restrictive than
technology itself. Product sponsors may become
"little kings".
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Competitors existing and new entrants

• Understand how competitors reacts on different
  drivers
• Understand your own strengths and weaknesses, and
  ditto for your competitors

We must understand that NOK and Norwegian
language are the only external advantages for DnB
NOR There is a lot of talk about new entrants,
but these are normally the least dangerous
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What are the relevant infrastructures
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Case study using SWIFT as the only network
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Case study SWIFT as only network
Central Bank
Oslo Stock Exchange
Correspondent banks
ACH/RTGS
CSD
CLS
Target 2
Corporates on SWIFT
EBA
DnB NOR
Clearstream/ Euroclear
International DnB NOR Offices
Consentrator model
Domestic branches
Terra-banks
Cooperation banks
) Other European Central Banks
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SEPA The role of Technology and Standards

• EDB Business Partner ASA, Norway a SWIFTNet
  Service Bureau

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About EDB Business Partner ASA, Norway

• Operating revenue of over NOK 4.82 billion in
  2005.
• The EDB-Group have 3.400 employees at the start
  of 2006.
• One of the strongest Nordic centres of expertise
  for the development and operation of IT
  solutions.
• One of the largest SWIFTNet "Service Bureau" in
  the Nordic region.
• 16 Norwegian customers/banks.
• Solutions in production
• SWIFTNET FIN (INTERACT), EBA STEP2(FILEACT), CLS
  (INTERACT), CHAPS Bank of England - Enquiry Link
  (BROWSE)
• SWIFTNet FIN
• 20 million FIN-transactions per year, peak is
  above 16.000 FIN-transactions per hour.

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Our Service Bureau Policy
"EDB is committed to make SWIFTNet Connectivity
simple, secure and efficient for our customers.
EDB will continuously put effort in understanding
the business - complying with our customer's
needs and requirements of regulatory authorities.
EDB will enable our customers to utilize current
and future services on SWIFTNet".
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The Challenge Question 1

• DnB NOR Bank ASA
• Standardization
• "What if we used SWIFTNet as a common platform
  for domestic financial messaging?"

FIN InterAct FileAct Browse
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The Challenge Question 2

• DnB NOR Bank ASA
• Consolidation
• "What if we satisfied our external communication
  needs on a common network infrastructure?"

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Networks.
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Operational Project Goals

• To provide DnB NOR Bank ASA with material for
  strategic evaluation
• Describe relevant current infrastructure
  services.
• Identify cost elements.
• Estimate "AS-IS" costs.
• Draft a future SWIFTNet Connectivity
  Infrastructure.
• Identify cost elements.
• Estimate "TO-BE" costs.
• Compare
• Identify possible drop-out costs.
• Scope Domestic DnB NOR Foreign Branch Offices.

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Cost Comparison Model
SWIFT
Costs from SWIFT
Planned projects
Dependent on future SWIFT costs for EDB.
Prioritized initiatives
Costs from EDB
SWIFT Connectivity
Domestic
Foreign Branch
Drop-out costs
BBS (ACH)
BBS (ACH)
DnB NOR
DnB NOR
"AS-IS"
"TO-BE"
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Project Team Composition
"Limiting number of people involved by finding
key personnel within EDB possessing the
knowledge, able to find the information, simplify
the details, and keep an open dialogue with all
parties. DnB Supervisors making course
adjustments on the way".
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Close cooperation with S.W.I.F.T. S.C.R.L.

• Workshops.
• Open and creative dialogue.
• Understanding the value of SWIFT Services.
• Realize limitations ("AS-IS").
• Mapping cost elements (EDB/SWIFT).
• Challenge SWIFT on covering needs for the future
  ("TO-BE").

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Findings

• "AS-IS" costs greater than initially expected.
• Utilizing SWIFTNet Messaging Standards some
  migration scenarios possible, others not.
• Domestic 50, some clear candidates.
• Foreign Branch Offices Limited possibilities.
• Searching for other possibilities.
• Proposal SWIFT-Managed VPN.
• Comparing "AS-IS" and "TO-BE" not a straight
  forward task.
• Enhancements on Security Resilience.
• Just complying is more efficient.
• SWIFT Value Added Service elements highly
  relevant in many scenarios.

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Solution Proposal
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Back Office Migration
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"The Road Ahead"

• Proceeding with cost comparison.
• Re-evaluate current SWIFTNet Connectivity
  Infrastructure in more detail.
• Await feedback from S.W.I.F.T. S.C.R.L. on
  possibilities and new price models.
• Dialogue with DnB NOR Bank ASA on future EDB
  SWIFTNet Service deliveries.