Independent Advisory Group Giovannini Barrier 1 Meeting 1

1
Independent Advisory GroupGiovannini Barrier
1Meeting 1

• July 19th, 2005

2
Agenda

• The Independent Advisory Group
• What is it why do we need one?
• What is it going to do when?
• Barrier 1
• What progress has been made so far?
• What is there still left to do?
• Agreement of terms
• Focus on the Network Layer
• Standards
• Security
• Service
• Any other business

3
Agenda

• The Independent Advisory Group
• What is it why do we need one?
• What is it going to do when?
• Barrier 1
• What progress has been made so far?
• What is there still left to do?
• Agreement of terms
• Focus on the Network Layer
• Standards
• Security
• Service
• Any other business

4
Independent Advisory GroupWhat is it why do
we need one?

• Responses emphasised importance of original key
  principles
• Leverage
• Open
• Neutral
• Inclusive
• Feedback identified creation of an independent
  advisory group as a way of maintaining principles
• Business not technology focus
• Maintain congruency with G30

5
Independent Advisory GroupWhat is it why do
we need one?

• CESAME group meeting 10th June concurred with
  suggestion to form IAG
• Membership criteria
• CESAME member
• Respond to the consultation
• 4 exceptions
• Independent chair
• Independent observer

6
Independent Advisory GroupWhat is it why do
we need one?
7
Independent Advisory GroupWhat will it do
when?

• Ratify
• Where consultation provides conclusive direction
• Recommend
• Where consultation results are unclear
• Meetings scheduled
• 19th July
• 3rd August
• 23rd August
• 12th September

8
Agenda

• The Independent Advisory Group
• What is it why do we need one?
• What is it going to do when?
• Barrier 1
• What progress has been made so far?
• What is there still left to do?
• Agreement of terms
• Focus on the Network Layer
• Standards
• Security
• Service
• Any other business

9
Barrier 12003 Giovannini Report states...

• Barrier 1
•  National differences in the information
  technology and interfaces used by clearing and
  settlement providers should be eliminated via an
  EU wide protocol. SWIFT should ensure the
  definition of this protocol through the
  Securities Market Practice Group. Once defined,
  the protocol should be immediately adopted by the
  ESCB in respect of its operations. This barrier
  should be removed within two years from the
  initiation of this project. 

10
Barrier 1 Progress

• 2004, Market research
• 2005, Market consultation
• Paper published 5th January, 2005
• Consultation closed 15th April, 2005
• 70 physical responses
• Responses from 21 out of 25 EU countries
• Responses from 30 countries globally

11
Barrier 1Progress EU Response statistics

• 74 from EU organisations
• 56 from FIs
• 23 from Infrastructures
• 21 from miscellaneous (Central Banks,
  Consultancies etc)
• 29 Institutions FI clubs (e.g. ISITC Europe)
• 2 ICSDs
• 64 of EU CSDs
• 50 EU Equity Exchanges
• 1 Clearing House

12
Barrier 1What is there still left to do?

• Independent advisory group formed July 05
• Summary of consultation responses July 05
• Pre-publication of protocol model Q4 05
• Final publication Q1 06

13
Agenda

• The Independent Advisory Group
• What is it why do we need one?
• What is it going to do when?
• Barrier 1
• What progress has been made so far?
• What is there still left to do?
• Agreement of terms
• Focus on the Network Layer
• Standards
• Security
• Service
• Any other business

14
Agreement of termsProtocol - Definition

• Technical protocol
•  Any agreement that governs the procedures used
  to exchange information between co-operating
  entities
• Diplomatic protocol
•  A code of conduct prescribing how those taking
  part should behave

BEST PRACTICE
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Agreement of termsStandard - Definition

• Standard
•  something established by authority, custom or
  general consent as a model or example 
•  a rule for the measure of quality 
•  regularly and widely used 
• Uniform and well established by usage and widely
  recognised as acceptable 

LEVERAGE
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Agreement of termsStandards
Treasury
Payments
EPC/ECBS
EACT
CHIPS
IGTA
TCH
RosettaNet/PMP
IFSA
TWIST
NACHA
OAGi
FpML
IFSA
ISTH
W3C
X12
OMG
Fedwire
ISDA
TC68/SC67 CEFACT/ TBG5
TC68/SC47
IFX
ISO/TC68
UNIFI - ISO 20022
UN/CEFACT
FIX
TC68/SC4 WG8 WG11
Bolero
CEFACT/ TBG15
BMA
OASIS
SMPG
e-bMoU
FISD/MDDL
IIBLP
IFSA
SIA
EAN/UCC
G30
ISSA
Acord
ISITC-IOA
ICC
Insurance
Giovannini
UNCITRAL
Securities
Trade Finance
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Agreement of termsSyntax - Definition

• Syntax
•  the way in which elements are put together to
  form a message 

INTEROPERABILITY
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Agreement of termsProtocol, Standard Syntax
- proposed ratification

• End to end STP can be achieved via
  interoperability of agreed standards (inc market
  practices) within a best practice protocol
• Interoperability achieved through the adoption of
  a single data dictionary

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Agreement of termsProtocol scope - Definition

• Scope defined in the consultation paper as
• All post trade processes
• All traded instruments
• All participants

20
Agreement of termsProtocol scope - All post
trade processes
Institutional (buy) Side
Street (sell) Side
Trade Date
Order
IMI
B/D
B/D
Trade
Space 1 Pre-trade / Trade
Exchange
IMI Investment Manager B/D Broker Dealer VMU
Virtual Matching Utility GC Global Cust SC
Sub-Cust SA Settlement Agent (Clearer) CCP
Central Counterparty ICSD (Intl) Central
Securities Depository
1
VMU / ETCP
CCP
Space 2 Post Trade / Pre-Settlement
Trade Date X
2
GC
SA
SC
SA
Space 3 Clearing Settlement
(I)CSD
3
Non Trade Related Activity
Space 4 - Custody Services
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Agreement of termsProtocol scope - All traded
instruments

• Giovannini Reports 1 2 refer to securities
  derivatives
• Equities
• Fixed Income
• Derivatives (Exchange traded)
• Giovannini 1 also includes Clearing Settlement
  process flows for Derivatives (Chart 2.6)

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Agreement of termsProtocol scope - All
participants
Institutional (buy) Side
Street (sell) Side
Trade Date
Order
IMI
B/D
B/D
Trade
Space 1 Pre-trade / Trade
Exchange
IMI Investment Manager B/D Broker Dealer VMU
Virtual Matching Utility GC Global Cust SC
Sub-Cust SA Settlement Agent (Clearer) CCP
Central Counterparty ICSD (Intl) Central
Securities Depository
1
VMU / ETCP
CCP
Space 2 Post Trade / Pre-Settlement
Trade Date X
2
GC
SA
SC
SA
Space 3 Clearing Settlement
(I)CSD
3
Non Trade Related Activity
Space 4 - Custody Services
23
Agreement of termsProtocol scope -
Consultation responses

• 59 responses in total Agree
• 14 EU FI 8 57
• 16 FI EU rep orgs 8 50
• 10 EU CS Infrastructures 6 60
• Total (inc above) 32 54
• Disagreements
• Too narrow 10 17
• Too broad 10 17
• Phasing required 17 29

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Agreement of termsProtocol scope -
Consultation responses

• Too narrow, should include
• Pre-trade/trade 3 responses
• Geographic Europe 3 responses
• Market data 2 responses
• Too broad, should not include
• Interfaces networks 4 responses
• Total (agree too narrow) 42 responses (71)

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Agreement of termsProtocol scope - Proposed
ratification

• The scope is appropriate to the definition of a
  communication protocol for CS and asset
  servicing activity
• Phasing by Participant/sector

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Agreement of termsProtocol framework -
Definition
Participant B
Participant A
Data
Data
2 5 8
SECURITY
1 4 7
STANDARDS
SERVICES
3 6 9
Messaging
Messaging
Network
Network
27
Agreement of termsProtocol framework -
Consultation responses

• 53 responses in total Agree
• 15 EU FI 14 93
• 12 FI EU rep orgs 9 75
• 10 EU CS Infrastructures 8 80
• Total (inc above) 42 82
• Disagreement
• Should only include Layer 1, Data

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Agreement of termsProtocol framework -
Proposed ratification

• The proposed 9 element framework correctly frames
  a potential communication protocol

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Agreement of termsInteroperability

• Interoperability
• Participants?
• Standards/syntaxes?
• Network?
• G30 Clearly refers to participant standards/
  syntaxes interoperability
• Giovannini less clear but refers to
  interoperability of users, payment instruments
  standards/syntaxes

Global Clearing Settlement Plan of Action,
2003
Giovannini Second Report, 2003
30
Agenda

• The Independent Advisory Group
• What is it why do we need one?
• What is it going to do when?
• Barrier 1
• What progress has been made so far?
• What is there still left to do?
• Agreement of terms
• Focus on the Network Layer
• Standards
• Security
• Service
• Any other business

31
The Network Layer
Participant B
Participant A
Data
Data
SECURITY
2 5 8
STANDARDS
SERVICES
3 6 9
1 4 7
Messaging
Messaging
Network
Network
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The Network LayerElement 7 Network Standards

• G30 IP
• Consultation paper IP (based on discussions with
  COLT Equant)
• Most end devices (PC, Servers etc) communicate
  /route using IP
• There is no "Best Practice" for building or
  operating IP networks, each has its own rules but
  if interoperability between networks is not a
  requirement, IP implementation is academic

33
The Network LayerElement 7 Proposed
ratification

• The minimum acceptable network standard is the
  implementation of IP for communication and routing

34
The Network LayerElement 8 Network Security

• G30 Security should be set at a level that
  satisfies business regulatory requirements and
  that meets the needs of all stakeholders in the
  industry
• Barrier 1 Consultation paper Secure private
  network (VPN) plus data encryption using a strong
  standard algorithm
• Network encryption vs message encryption
• Message validation or not

35
The Network LayerElement 8 Network Security -
Policing

• 51 responses in total Agree
• 14 EU FI 12 86
• 12 FI EU rep orgs 8 67
• 9 EU CS Infrastructures 7 78
• Total (inc above) 37 73
• Disagreement
• 12 respondents (24) explicitly disagreed that
  network standards should be policed

36
The Network LayerElement 8 Network Security -
Policing

• Validate against std structure 26 - 51
• Report violation to sender 10 - 20
• Stop traffic 8 - 16
• Optional 13 - 25

37
The Network LayerElement 8 Proposed
ratification

• Security, at either the network or the messaging
  layer, must be set at a level that satisfies
  business regulatory requirements

38
The Network LayerElement 9 Network Service

• Is service a commercial differentiator between
  network providers?
• Is a minimum level of service required?
• Performance - inc. provisioning implementation
  times, availability, restore time etc
• Resilience - diversity, contingency etc (Fed,
  ECB, FSA guidelines already exist Leverage)
• Management maintenance, fault identification
  rectification etc

39
The Network LayerNetwork Service - Consultation
responses

• 49 responses in total Agree
• 15 EU FI 14 93
• 11 FI EU rep orgs 7 64
• 9 EU CS Infrastructures 8 89
• Total (inc above) 39 80
• Disagreement
• 7 respondents (14) explicitly disagreed that
  network standards are required

40
The Network LayerNetwork Service - Consultation
responses

• 24x7 Agree
• EU FI 6 40
• FI EU rep orgs 3 27
• EU CS Infrastructures 2 22
• Total (inc above) 15 31
• 99.999 availability Agree
• EU FI 5 33
• FI EU rep orgs 2 18
• EU CS Infrastructures 2 22
• Total (inc above) 11 22

41
The Network LayerElement 9 Proposed
ratification

• Service must satisfy business regulatory
  requirements for performance, resilience and
  network management

42
Agenda

• The Independent Advisory Group
• What is it why do we need one?
• What is it going to do when?
• Barrier 1
• What progress has been made so far?
• What is there still left to do?
• Agreement of terms
• Focus on the Network Layer
• Standards
• Security
• Service
• Any other business

43
The next meeting is..

• 3rd August at 11.00am
• The subject will be the messaging or interface
  layer

44
AoB Time permitting

• Accreditation
• Do we need accreditation of Messaging/Network
  suppliers?
• If yes, who should provide the accreditation
  service?

45
Communication solution providersAccreditation -
Consultation responses

• 53 responses in total Agree
• 14 EU FI 13 93
• 12 FI EU rep orgs 9 75
• 9 EU CS Infrastructures 6 67
• Total (inc above) 43 81
• Disagreement
• 5 respondents (9) explicitly disagreed that
  accreditation

46
Communication solution providersAccreditation -
Consultation responses

• Who should accredit?
• Independent organisation 20
• SWIFT 9
• Regulator 2
• ECB 2
• ISO 3
• EU 2
• Self certification 5
• Market forces 10

47
Communication solution providersAccreditation -
Proposed ratification

• Accreditation of messaging/network providers is
  required
• This activity should be carried out by ______
• _______ should determine the accreditation
  process based on the criteria laid out in the
  Giovannini protocol