Confirmation matching on Accord: Extending the benefits from treasury to securities

Confirmation matching on Accord: Extending the benefits from treasury to securities Jan Dings Head of Product Delivery Broker-Dealers and Pre-settlement Services

Agenda The pre-settlement value chain Standards and messaging: FIN/MT, XML, FpML Processing: matching, exception handling and reporting 2

The pre-settlement value chain 3

The value chain Zooming in on pre-settlement Pre-Trade Trade Post-Trade Pre-Settlement Settlement (incl.nostro) Manage Trade Lifecycle The following slides focus on messages that : were recently changed/created, for which SWIFT is involved in some initiative to increase STP for which SWIFT provides or plans to provide central processing. Many more messages are available. 4

Messaging: FIN/MT, XML, FpML 5

SWIFT in post-trade / pre-settlement Offering per asset class: FX (options) Asset Class Standard Processing What s going on? FX MT 300 Matching; smart copy (CLS TPS) Work towards usage for giveups from IMI to Prime Broker NDFs MT 300, MX FX (option) allocation instruction FX Options (vanilla) FX Options (Exotic) MT 303 Matching; smart copy (CLS TPS); Accord to be extended with search functions for NDFs See below Usage guidelines steadily improved (e.g. extending code set with solution for crosscurrency NDFs) MT 305 MT 306 Matching; smart copy Matching SWIFT working with G-16: review difference MT305/306; enrich matching rule set. All G-16 scheduled to implement MT 306 soonest More messages for FX are available; consult the SWIFT Standards Guides for more information 6

SWIFT in post-trade / pre-settlement Offering per asset class: deposits and FRAs Asset Class Standard Processing What s going on? Deposits MT 320 Matching Work with community to define usage guidelines to handle deposits with floating rates Accord rules tuning in 2010 Call/notice deposit MT 330 Matching Forward Rate Agreement MT 340 Matching FRA Reset MT 341 Matching More messages for deposits are available; consult the SWIFT Standards Guides for more information 7

SWIFT in post-trade / pre-settlement Offering per asset class: Commodities Asset Class Standard Processing What s going on? Metal trading MT 600 Matching (2010; TBC) Metal Option MT 601 - Metal fixed loan/deposit Was extended (2008) to cover Base Metals MT 620 - Newly introduced (2008) message for deposits of metals More messages are available; consult the SWIFT Standards Guides for more information 8

SWIFT in post-trade / pre-settlement Offering per asset class: Swaps and other OTC derivatives Asset Class Standard Processing What s going on? Interest Rate Swap (IRS) MT 360 Matching Cross-Currency IRS MT 361 Matching Reset/advice of payment for IRS IRS & Credit Default Swaps (CDS, CDX, CDT) MT 362 Matching Renewed interest in usage of exchange of reset messages for early discovery of discrepancies in expected amount. FpML confirmation (InterAct Store & Forward) Validation More messages for Swaps are available in MT or FpML; consult the SWIFT Standards Guides for more information 9

SWIFT in post-trade / pre-settlement Offering per asset class: equity and fixed income Asset Class Standard Processing What s going on Equity/Fixed Income MT 515 Matching See below regarding future services based on matching of this Message Type Several more messages for securities transactions are available; consult the SWIFT Standards Guides for more information 10

FpML messaging over SWIFTNet 11

FpML messaging over SWIFTNet 2 flows Notification Flow Trade is allocated and confirmed Buy-side Dealer Trade notification process Custodian ContractCreated & ContractCancelled ContractNovated & ContractNovatedCancelled ContractIncreased & ContractIncreasedCancelled ContractPartialTermination & ContractPartialTerminationCancelled ContractFullTermination & ContractFullTerminationCancelled 12

FpML messaging over SWIFTNet 2 flows Confirmation Flow Trade negotiation Buy-side Trade confirmation process Dealer RequestTradeConfirmation ModifyTradeConfirmation CancelTradeConfirmation 13

FpML over SWIFTNet The Solution Release 2.1: live August 08 Transport and validation of the FpML messages Inclusion of MX payment initiation messages Release 2.2: live July 09 Replacement of the 2.1 MX messages with a set of updated MX payment and statement messages Initial focus Credit and Interest rate derivatives, all FpML defined products supported SWIFTNet InterAct Store-and-Forward 14

FpML over SWIFTNet Current Status Live traffic started (August 2008) All pilots are active live Continue building up traffic Discussions with the FpML working groups re: versions 4.6 and 5.0 15

FpML over SWIFTNet Need to know more? FpML Community FpML Community www.swiftcommunity.net Restricted to Derivatives users and interested parties Administrators: marie-paule.dumont@swift.com joshua.derrick@swift.com Documentation, info about user meeting, discussions 16

Some treasury traffic statistics 17

FX Market by FIN Confirmations sent Total June 2009: 13,590,000 MT 300 messages Hong Kong 2% Japan 4% Germany 4% France 2% Switzerland 5% Canada 2% Singapore 2% Australia 2% Rest 16% UK 39% Strong concentration in single cities, even single institutions Excludes direct input into CLS further increases dominance of top 10 USA 22% 18

Vanilla FX Options Market by FIN msgs sent Total June 2009 : 201,000 MT 305 messages UK 43% Rest 10% Luxemburg 1% Japan 1% Germany 2% Taiwan 3% Hong Kong 4% France 5% Singapore 7% USA 9% Switzerland 15% 19

Money market by FIN Confirmations sent Total June 2009: 1,187,000 MT 320 messages Rest 39% Japan 1% Hong Kong 3% France 4% UK 20% Netherlands 4% Luxemburg 4% Germany 4% Singapore 4% Italy 5% USA 5% Switzerland 7% 20

Accord: matching, exception handling and reporting 21

Accord overview SWIFT s central confirmation matching service Software as a Service Now split in two different services Accord for Treasury (MT 3xx) Accord for Securities (MT 515) Different business models, one infrastructure New! 22

Accord for Treasury 23

Accord for Treasury Single-slide overview Accord Subscribers (>458 in 70 countries) Banks Brokers Custodians Fund mgrs Corporates Real-time reporting & exception handling Integration available for various Back-Office Systems Deal Confirmations: (MT 300,305,306,320, 330,340,341,360, 361,362,392) Copies of confirmations SWIFT Accord Real-time Confirmation Matching Service Availability of >99.97% last 5 years >90K msgs/hour observed matching capacity Common matching rules + user-defined rules Financial Liability for Matching results Accord subscriber or non- subscriber Copies of non-swift data: fax, e-mail, e-fx portals, Broker feeds, Reuters, etc. 24

Accord for Treasury Seen from the customer s perspective Long Term Archive of matching history and audit trail (10 years) on line Back Office Integration using XML-based API Accord Central Server Accord Central Server SIPN Gateway Exception Handling using Graphical Interface Confirmations + Matching results, operator actions, history, audit trail for live trades Archive Access (e.g. auditor) 25

Accord for Treasury Exception and back-office integration - globalised UK Branch Accord Front-End US Branch SIPN Accord Central Server Head Office/ Regional hub in HK SIPN DE Branch Branches accessing their own data, or dividing the work between them Real-time access to all or specific deals of branches in UK, US, DE 26

Confirmation matching market trends What are the main trends? Commoditisation Functional & technological evolution Positioning in the value chain 27

Confirmation matching market trends Trend 1: Commoditisation Strong pressure for increased performance, increased operator efficiency, at lower price, for higher volumes Necessity of Confirmations and Matching challenged for vanilla trades Attention shift to processes beyond matching Accord: price reductions, to keep TCO truly low Brick pricing for large users = fixed, must lower annual cost 10%-15% reduction for smallest users + free LTA for small branches Philosophy kept: new releases included in usage fees of community 28

Confirmation matching market trends Trend 2: Functional and technological evolution Integration Pressure from volumes and cost full STP required. (=automated settlement based on a matched status) Partnerships and labelling between back-office systems and Matching systems and services Also for Accord: growing number of Labelled applications. Evolution towards thin clients Preparations towards thin Accord GUI started; first step delivered (Citrix compliance: single installation for multiple users) Operator efficiency Every release to increase functionality for operators dealing with higher volumes, more complex transactions Stress on Management reporting functions 29

Integrating Accord for treasury Feeding matching statuses into the back-office Accord Central Server Front-End Treasury Management System SWIFTNet Alliance Real-time Query Response Integration application Rule-based STP: payment triggered by e.g. Match - always Forced Match except if >50M Manual Match only if. Mis- / Un-Match only if 30

Confirmation Matching Market Trends Trend 3: Position in the value chain Attention shift to processes beyond confirmation and matching. New Services take away work from customers: Generate and send confirmations on behalf of customers Generate and distribute guaranteed correct data (settlement instructions, allocations ), based on a matched confirmation Matching systems become distributors of clean data, to subsequent processes Two projects illustrate this: E-trading portal integration project (Bloomberg / Accord) Equity/fixed income trade matching (Accord for Securities) 31

E-trading portal integration project Bloomberg s POMS service teaming up with Accord Bloomberg customer POMS GUI updates customer on status: Confirmed Matched Nostro/Custodian notified 5 Bloomberg exchanging confirmation for customer Bloomberg queries Accord matching status 1 4 Trading (FX, Options, ) SWIFTNet 3 2 Counterparty Confirmations copied to Accord & matched Nostro / Custodian Bloomberg sending settlement instruction (MT 304) to Nostro/Custodian 32

Confirmation matching market trends Trend-4: Central Matching, for closed communities For specialised business, with limited set of players Standard(s) and matching defined at the same time, by the same group Collective choice for single central matching solution, (=to avoid, viz. for complex confirmations: different matching results on different systems). Peer pressure ensures uniform, correct implementation Example: Accord for Securities 33

Accord for Treasury Stats (1/2) Where are customers located? (June total = 458) Rest, 210.0 Luxemburg, 17.0 Japan, 21.0 Germany, 19.0 UK, 46.0 Italy, 26.0 Hong Kong, 16.0 China, 14.0 France, 41.0 USA, 34.0 Singapore, 14.0 34

Accord for Treasury Stats (2/2) Invoiced matches by country (June total = 1,657,000) Rest 20% Hong Kong 2% Switzerland 2% Spain 2% Italy 3% UK 21% Japan 6% USA 6% Australia 8% Netherlands 9% France 21% 35

Accord for Securities 36

Accord for Securities From problem statement to live service in 1 year Live since 18 May 2009 Matching of MT 515 for Prime Broker versus Executing brokers, or between Executing brokers Radically different model: Direct submission to Accord, no copies Always with BOTH parties using Accord Collective decision of a community No API, but FIN-based near-real-time status reporting (August 09) GUI for smaller users / occasional usage Initially: top 10 Prime brokers/executing Brokers; ramp up to include +/- 200 second tier brokers Also complemented with Long Term Archival (October 2009) 37

Prime Brokers/Executing Brokers The industry problem 1. Hedge fund trades with executing broker Hedge Fund [1] 1. Mistake in Trade details Executing Broker 2. Hedge Fund sends details of trades to PB (can contain errors) Trade report [2] Prime Broker 3. Settlement Fails due to errors in Hedge Fund files [3] 2. 2. Settlement Fails [3] Custodian Agent Bank Agent Bank Custodian Via SWIFT Not over SWIFT 38

Prime Brokers/Executing Brokers Solution overview Phase 1 Q2 2009 Hedge Fund Executing Broker 2. Real time status updates Daily Trade report Prime Broker Settlement Agent 1. Automated pre-matching, status and exception handling Settlement Agent 3. Removes Settlement Risk 39 CSD

Solution overview Phase 2 Q3 2009 [3+] Hedge Fund [1+] LITE GUI Executing Broker 1 + Hedge Fund uses LITE to communicate via SWIFT. Standardised communication MT 515 [2+] MT 998 2 + Accord sends status updates via FIN Prime Broker MT 998 MT 515 [2+] Accord 3 + Hedge Fund Managers given unique BIC identifier 4 + PSET agents local code is x-ref to a BIC in Accord Custodian Agent Bank Agent Bank Custodian CSD (PSET) Sibos 2009 Hong Kong - Pre-Settlement Via Services SWIFT Not over SWIFT [4+] Settlement OK 40

Accord for Securities Participants positioninig Buy Side Hedge Fund Manager Allocation matching Allocation matching Asset Manager Sell Side Prime Broker ACCORD (2) Prime Broker ACCORD (1) Executing Broker ACCORD (3) Investment Banks ACCORD (4) Settlement If Prime broker not self-clearing Custodian/ Agent Bank ACCORD (5) CSD Local Custodian CCP Service providers 41

Accord central matching improves process for all players Better Risk Control with T+0 matching, + global access 1 to one system One Rule Book, one central common view on matches 2 3 Better controls, Long Term Archive, Secure, Audit compliance Better client service Multi-Asset class matching 4 5 6 See Allegements, + Reasons for Mis-matches in real time 42

1 Broker to Broker Solution overview 1. Broker A trades with Broker B Broker [1] Broker 2. Broker A copies trades + settlement info in MT 515 3. Broker B copies Trade & Settlement details in MT 515 [5] MT 998 [3] MT 515 MT 515 [2] Accord [5] [4] 4. Accord matches (MT 515) to (MT 515) [6] 5. Accord sends match status updates via (MT998) 6. Brokers instruct settlements (MT 54x) Global Custodian Local [7] [6] 7. CSD agents local code is x-ref to a BIC in Accord Custodian CSD Local Custodian Accord X-ref table Settlement OK 43

2 MT 515 - Background Sent by broker to confirm a trade and/or allocation to Investment Manager Legally binding confirmation in some markets Contains Trade and Settlement details Point of inter-operability between FIX and SWIFT ISO messaging FIX Execution message can map into a MT 515 Widely supported message with more than 2,200 receivers Growing in adoption from 1,500 users in 2005 44

2 MT 515 Syntax & Matching rules agreed by community Primary fields (Unmatch) Sender - Physical sender Sequence C C-98a::TRAD - Trade Date/Time C-98A::SETT - Settlement Date C-22H::BUSE - Buy/Sell Indicator C-22H::PAYM - Payment Indicator C1-95P::ETC2 - ETC2 service provider C1-22F::TRCA - Party Capacity Indicator C-36B::CONF - Quantity of Financial Instrument C-35B - Identification of the Financial Instrument Secondary fields (Mismatch) Sequence C C-19A::SETT Settlement Amount C1-95a::BUYR Buyer C1-95a::SELL Seller Sequence D (if present) D1-95a::PSET Place of Settlement D1-95a::DEAG Delivering Agent D1-97a::SAFE Safekeeping Account (Delivery Agent) D1-95P::DECU Deliverer's Custodian D1-97a::SAFE Safekeeping Account (Deliverer's Custodian) D1-95a::REAG Receiving Agent D1-97a::SAFE Safekeeping Account (Receiving Agent) D1-95P::RECU Receiver's Custodian D1-97a::SAFE Safekeeping Account (Receiver's Custodian) C1-95P::ETC2 Sequence C C-98a::TRAD C-98A::SETT C-22H::BUSE C-22H::PAYM Physical sender C1-22F::TRCA C-36B::CONF C-35B Full details available on signature of a Non-Disclosure Agreement Sequence C C-19A::SETT C1-95a::BUYR C1-95a::SELL Sequence D D1-95a::PSET D1-95a::DEAG D1-97a::SAFE D1-95P::DECU D1-97a::SAFE D1-95a::REAG D1-97a::SAFE D1-95P::RECU D1-97a::SAFE 45

6 Accord for Securities Using the GUI to work on exceptions Accord Alliance WebStation with Accord GUI Alliance Gateway SWIFTNet 46

6 Example of Mismatched MT 515 47

6 Accord for Securities August 2009: Processing FIN status updates FIN Interface Alliance Gateway MT998 Status updates SWIFTNet Accord MT998 Sender: ACCOBEB3 Receiver: BANKGB2L Backoffice exception Management system List of matched, unmatched, mismatched confirmations 48

2 Current Rule Book for Prime Brokers Minimum Business and Operational Rules applicable Excludes US settled trades Broker Steering to set Amount Tolerances Optional Good Practice recommendations Participants to provide settlement details How to populate settlement fields Use of ISIN to identify securities Use of text NOBIC when client does not have a BIC Statistics on use of service to be shared amongst users 49

3 Accord for Securities October 2009: GUI access to long term archival LTA (Long term archival) service accessed via Browse Read-only database with a simple querying mechanism Data stored for 10 years 50

5 Accord for Securities Upcoming... More players, richer functionality, more asset classes Same solution will provide matching for OTC broker-to-broker trades (EB/EB instead of PB/EB), and to Custodian/EB flows. Extensions studied: Allocated trades Possibility to feed matched trades to Clearers Extension of asset classes covered Current: Equity and Fixed income Future: Securities Financing (Repos and Lending/Borrowing) 51

Proposed Post Trade Flows Off-exchange Trade Confirmation to Accord Confirmation to Accord Matched trade details to CCP Clearing System CCP Exchange SWIFT Messaging Trading venue Settlement System 52 CSD

Thank you 53