dialogue 2007q3

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a ogueTHE VOICE OF THE SWIFT COMMUNITY

TARGET2-SECURITIESThere at the

birthPAGE 26

TRANSACTIONSERVICESDrawing on

globalstrengthsPAGE 22

COVERSTORYManagingexpansion ina crowdedworldPAGE 18

Jamie Dimon,chairman and CEO,

JPMorgan Chase

Q3 2007

Sibos 2007 Boston, Uni ted States | 1-5 October |Register onl ine at www.swift.com/sibos2007

Paul Galant, CEO,Global TransactionServices, Citi Markets& Banking

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DialogueTHE VOICE OF THE SWIFT COMMUNITY

22INTERVIEW

Drawing on global

strengths

Paul Galant, Citi

18COVER STORY

Managing expansion in a

crowded world

Jamie Dimon, JPMorgan ChaseJad Khallouf, STET

7OPINION

The future of payment

infrastructures

DIALOGUE Q3 2007 |CONTENTS

DIALOGUEQ3 2007 3

Correspondence should be addressed to:[email protected]

SWIFTAvenue Adle 1, B-1310 La Hulpe, BelgiumTel: +32 2 655 31 11Fax: +32 2 655 32 26SWIFT BIC: SWHQ BE BB

EXECUTIVE SUMMARY

4 An overview of this issue

OPINION7 The future of payment

infrastructures

Jad Khallouf, CEO, STET

11 MEPS+: Lessons for payment

market infrastructures

Terry Goh, director, Payments &

Infrastructure, Monetary Authority of

Singapore

15 Raising the standard

Jacques-Philippe Marson, president

and CEO, BNP Paribas Securities

Services

INTERVIEWS

18 Managing expansion in a crowded

world

Jamie Dimon, chairman and CEO,

JPMorgan Chase

22 Drawing on global strengths

Paul Galant, CEO, Global Transaction

Services, Citi Markets & Banking

REPORTS

26 TARGET2-Securities

There at the birth

32 Corporate treasury

One for all

36 Reference Data

Beyond the BIC

42 Single Euro Payments Area

Preparing for the revolution

48 Globalisation in Latin America

Taking on the world

54 Regulation

All clear for MiFID?

CASE STUDY

58 Pioneering XML financial messaging

Bank Of America and Sun

Microsystems

INDUSTRY ROUNDTABLE

63 Standards: From convergence

to coexistence

Participants

Scott Atwell, co-chair, Global Steering

Committee, FIX Protocol Limited

(FPL) and manager, FIX trading and

connectivity, American Century

Investments

Robert Pickel, executive director and

CEO, International Swaps and

Derivatives Association (ISDA)

Matthew Rawlings, chairman,

Working Group 4 (ISO 20022),

member, FpML Standards

Committee, vice president and

distinguished engineer, JPMorgan

Chase

Jamie Shay, head of Standards,

SWIFT

Publisher: Lzaro Campos, SWIFT. Managing editor: Martine De Weirdt, SWIFT. Editor: Euan Sellar, SWIFT. Dialogue is written and produced by Information Partners on behalf of SWIFT.Advertising: [email protected], Tel. +32 2 655 3068. Graphic design: Tina Eldred. Printed by: IPM Printing. Copyright S.W.I.F.T. SCRL (SWIFT) 2007.

All rights reserved. Reproduction is however authorised with acknowledgement of the source, reference and date of publication, and all notices set out here. This publication is supplied for information purposes only, and shall

not be binding nor shall it be construed as constituting any obligation, representation or warranty on the part of SWIFT. SWIFT, S.W.I.F.T., the SWIFT logo, Sibos and SWIFTderived product and service names such as but

not limited to SWIFTNet and SWIFTAlliance are trademarks of S.W.I.F.T. SCRL. SWIFT is the trading name of S.W.I.F.T. SCRL. Photographs feature SWIFT employees, customers and business partners.

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executive |summary

dialogueQ3 2007

interview |Jamie Dimon

J

amie Dimon, chairman o the board and chie executive

ofcer o JPMorgan Chase, does not subscribe toconventional business thinking when it comes to globalexpansion. When asked i he preers to be a frst mover intoa market or a ast ollower, he answers simply, Neither. Itsnot a distinction I value. He argues that a well-thought-out business plan matters more than whether a companyleads or ollows into a new product or area.

Equally, unlike other business managers, he is notnecessarily put o by already-crowded markets whenexpanding. You have to run all your businesses well togrow organically and that means better products and

better services in both new and established areas, he says.In this in-depth interview, Dimon shares his thoughtson global expansion, banks increasing ability to adapt tonew situations, and the adoption o technology.

Page 18 Jamie Dimon, chairman and CEO, JPMorgan Chase

opinion |Th futur

of paynt

nfrastructurs

Jad Khallouf,

CEO,

STET

Marketinrastructures

were originallydeveloped with specifcpurposes in mind orexample the exchange,

processing and clearingand/or settlement ocertain classes opayments. Theydiverged in manyareas. But severalrecent developmentshave brought aboutnew drivers or change,which may eventuallylead to moreconvergence ininrastructurestrategies.

Page 7

Pleasing all othe people

all o the time isno mean eat.But as a globalbank, this isexactly whatCiti has to do.Far rom being aburden,however, Citi sees its global statureas a strength that allows it toprovide customers with a wide

array o products and services.A key element to all this,

according to Paul Galant, CEO,Global Transaction Services, CitiMarkets & Banking, is listeningintently to clients and not tryingto orce them to buy in to thebanks own vision. No matterhow brilliant we think an idea is,we will never bring it to market,never invest time and money onit, unless it is o immediate andimportant relevance to ourclients, he says.

Page 22

interview |Paul GalanT

Paul Galant, CEO, GlobalTransaction Services,Citi Markets & Banking

mePS+: lssons

for paynt arkt

nfrastructurs

Terry Goh, director,

Payments & Infrastructure,

Monetary Authority of

Singapore

At the end o last year,Singapore

implemented its newMAS Electronic PaymentSystem (MEPS+) anext generation real-time

gross and governmentsecurities settlementsystem to replace theoriginal MEPS system.The Monetary Authorityo Singapore (MAS)opted to use the SWIFTmessage ormats andnetwork. O particularimportance was theresilience o the newsystem, especially giventhe emergence o newthreats.

Page 11

Rasng th

standard

Jacques-Philippe Marson,

president and CEO, BNP

Paribas Securities

Services

Implementation ouniorm market

practices andstandardstransormed theglobal securities

industry. Followingthe issue o TheGroup o Thirtys1989 report onclearing andsettlement, concertedeorts were made tocreate efciency inthese areas. But thereis still much work tobe done on straight-through processingand implementationo XML standards.

Page 15

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executive |summary

dialogueQ3 2007 5

Rports

Th t th bth

Wha sag s h tARGet2-Srs proj a?Wha ar mark parpans rsraons abo hproj?How s SWiFt gng nold?

tARGet2-Srs ams o nrals h slmn ofro-dnomnad srs n nral bank mony on htARGet2 pan-eropan ral-m gross slmn sysm.ths s a good da on papr, b no ryon s onnd wll work wll n pra.

Page 26

on f

How an bank-nral paymn mssags bnfiorporas?How an hy b mplmnd?How do banks w hs ffors?

A sysm ha nabls a orpora o snd paymn naonmssags o banks wh no rgard o h nson, onryor nsrmn s a rasry managrs dram. B n Oobr,hs wll bom a raly for Mrk, a globalpharmaals manfarr. iSO 20022 xML sandardsplayd a bg par n makng hs possbl.

Page 32

Bn th BiC

Wha ar h smblng bloks o mprong rfrndaa qaly?Wll rglaon hlp?is hr a rol for porabl iBANs?

th finanal srs ndsry s blghd by nlan, poor-qaly, non-sandardsd rfrn daa. Alhogh ffor s arndrway o mpro h saon, a ompl solonrmans ls. cold rglaon, or n h s ofporabl inrnaonal Bank Aon Nmbrs (iBANs) hlp?

Page 36

Ppn f th vtn

is h SePA proj on arg?How s h dlayd Paymn Srs Dr affngprogrss?Wha old banks b dong o hlp h proj?

th Sngl ero Paymns Ara proj was dsgnd o hlph eropan commsson ah s goal of bomng hmos omp onomy n h world by 2010. B hPaymn Srs Dr a ky omponn was onlyadopd n h eu conl n h sond qarr of hs yar,whh has hamprd h lanh of pan-eropan drdb srs.

Page 42

Tkn n th w

How ar Lan Amran firms pandng globally?Wha hallngs do hy fa?Wha hlp do hy nd from hr finanal srprodrs?

inrnaonal nsors ar bomng nrasngly nrsdn byng Lan Amran soks and also ompans. BgLan Amran firms ar rspondng by pandng globally,prsnng nw hallngs o h rgons banks andfinanal nfrasrrs.

Page 48

a c f mFid?

How wll pos-rad prossng b affd by MFiD?How old h addonal daa rqrmns aff banksnrnal sysms?is hr room for ndsry oopraon n addrssngMFiD rqrmns?

MFiDs man fos s on radng, b wll also ha anmpa on h pos-rad nronmn n erop. thrglaon wll ra an ploson n rad daa, whh olda banks nrnal sysms.

Page 54

Cas study

Pnn Xml finnc n

Why ar Sn Mrosysms and Bank of Amra plongiSO 20022 mssag forma?Wha bnfis do hy hop iSO 20022 wll brng?cold h plo promp frhr nas?

in Fbrary n yar, hnology ompany SnMrosysms and s prmary bankng parnr Bank ofAmra plan o plo iSO 20022 xML mssag formas fornd-o-nd paymn prossng. th plo wll nally foson Sn Mrosysms sndng rd ransfrs o Bank ofAmra and h bank sndng paymn sas rpors bak.

Page 58

industry roundtab

stn: F cnvnc t cxtnc

i has bn sad ha h n hng abo sandards s hahr ar so many oo hoos from. is hs rahr ynalw sll warrand? Wold hang on or-arhngsandard for all yps of finanal mssagng rly m hndsrys rqrmns?

Page 63

ALSo in THiS iSSUe

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The design o the Single Euro Payment Area(SEPA), which aims at an integrated retailpayment market in euros, has highlighted a

number o structural adjustment issues orinrastructures. These questions may in act be relevantbeyond Europe, or both mature and emerging markets.

It is worth noting that payment inrastructures havebeen o a hybrid nature, combining inter-bankoperational arrangements and shared technical

platorms to support them.At a business level, inrastructures were historically

endowed with special purpose missions pertaining tothe exchange, processing, clearing and/or settlement ocertain classes o payments. With business rules set bytheir user community, most inrastructures were ullydetermined by the specic inter-bank arrangementsthey were designed to support.

At a technical level, architectures and processes weredeveloped by inrastructure operators under constraintsstemming rom both technologies available at the timeand user banks IT systems. The ensuing proprietaryarchitectures oten lacked fexibility to address changesin market demand, which meant new user needsrequired sometimes heavy IT developments.

Hence, most inrastructures grew historically withocused purposes and with strong adherence tocommunity choices and to the specic services sharedby their users. Refecting market diversity, they came todiverge on such undamentals as business models andservices, payment schemes and ormats, architectureand process fows, scale and operating costs.

Factors for change

In recent years, three developments have brought aboutnew drivers or change that may eventually lead tomore convergence in inrastructure strategies.

First, in the context o their cross-border expansion onthe back o globalisation, large banks have been aced withmultiple local arrangements and channels needed to carryout their payment business. That has required banks tomaintain ad hoc system capabilities, which has meantadditional costs to organic growth or lower-than-expectedsynergies rom cross-border mergers. Large banks havethus become eager to streamline their systems and torationalise their use o inrastructures. By contrast, in theabsence o an all-purpose single inrastructure window, aew large banks may have wondered about theopportunity o in-sourcing more o the processing even

Is a new paradigm in the making?

Jad Khallouf, CEO, STET

opinion |Jad Khallouf, STET

dialoguEQ3 2007 7

The future

of paymentinfrastructures

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opinion |Jad Khallouf, STET

dialoguEQ3 2007

i that meant pulling out rom multilateral clearing andsettlement mechanisms. However, one would expectmarket solutions or shared ecient inrastructures to besuperior to stand-alone in-house ull chain processing, as

the latter may lack economic scale and would require abank to dedicate resources and management attention todeal with the underlying complexity.

Second, the dramatic progress achieved in inormationtechnologies and in telecoms during the past decade makesit possible now to conceive o technical architectures thatcan deliver service fexibility, scalability, and perormance insupport o a broad-based inrastructure service oerings.Nevertheless, as we have experienced at STET, technologycannot achieve that ambitious goal on its own. Architectureand process design have to be directed every step o the way

by strategic vision and business anticipation o uturemarket needs.Third, but certainly not least, the search by policymakers

or increased market eciency and systemic resilience in thelarger regional economies, chiefy in Europe and North

America, has also been a pressing driver or inrastructureadjustments. In the case o SEPA, inrastructures are toprocess new SEPA instruments, in compliance with newSEPA policies and standards, and to provide users withcounterparty reach throughout the area. Such policy-drivengoals translate obviously into opportunities and challengesor existing inrastructures, which are expected to lead in

turn to market consolidation.

Demands on infrastructure

So what does the uture spell or inrastructures? In essence,they will be expected to produce additional gains ineciency to the benet o their users and the broadereconomy. But where are those eciency gains to be ound?

The short answer to that complex question isthreeold: scale, scope and reach. Lets call thisapproach the SSR strategy, which we maycharacterise now as ollows:

Economies o scale are paramount to theinrastructure business case, which is mostly drivenby the delicate balance between high xed costs andlow pricing margins. Too many dierent productionseries, each limited in volume, would end up addingcosts and unnecessary risks. By contrast, sustainableeconomies o scale would typically come rom provenmainstream services shared by many users.Expanding the scope o services may, i careullyorchestrated, prove to be a win-win situation or theinrastructure and or its users. In practice, beyond inter-bank processing, inrastructures may provide selectiveback-oce support to banks and possibly some o theircustomers. That should be assessed in light ocomparative advantages. A dividing line relates to the

competitive nature o the services or to the responsibilityor certain tasks rom a banks perspective. The sameargument holds true as above: the inrastructure shouldnot spread its business ocus too thin!

Geographic reach has been required in SEPA onstandard commodity payments basic credittransers and direct debits. A broader concept orreach may yet emerge with the delivery to banks obroader services in dierent market segmentsthrough a single window connection, a solutionSTET has been developing.

The SSR strategy will work best or inrastructures withestablished comparative advantages, namely a procienttechnical platorm and a large existing business base.Optimisation is required in the actual mix o growth targets

to avoid conficting eorts that would drain resources orproduce unwarranted outcomes. Among other issues,careul attention is to be paid to the range o services and tothe geographic granularity o payment fows.

To be sure, though, we are unlikely to witness thedawn o the supra-inrastructure that could deliver allservices everywhere. That assertion goes beyond thespecics or comparative merits o consolidationpatterns that may unold in dierent markets. It tiesinto undamentals including the ollowing arguments:

Inrastructures are meant to deal with complexity at alow cost. Spreading their business in terms o content or

geography beyond reasonable limits to scope and reachwould put pressure on their resources and induceunnecessary risks that would prove dicult to control.Inrastructure consolidation should not be carriedout to the point o establishing broad monopolies.Obviously, the service oering o any industry shouldremain competitive, refecting market conditions inboth supply and demand. But also, importantly inthe payment industry, systemic resilience orbids riskconcentration and single points o ailure.

Overall, although some o the above structural

adjustments may take time to unold, it is clear thatinrastructures have entered a new market age. Theirpast business optimisation occurred sometimes inisolation. They will now compete more on servicecontent, quality and pricing. However, competitionalone cannot produce the most ecient solutions.Cooperation is also critical in certain instances,particularly or standards and interoperability. In auture consolidated market, with ewer inrastructures,interoperability may help prevent ragmentation,

which should in turn help competition and industryresilience. The interoperability ramework producedrecently by the European Automated Clearing House

Association (EACHA) is an illustration o how ocusedcooperation may sometimes acilitate competition.

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Singapore implemented the new MAS ElectronicPayment System (MEPS+), a next generationreal-time gross and government securities

settlement system, on 9 December 2006. MEPS+provides improved eatures over its predecessor, MEPS,

which had been in operation since 1998. A signicantchange is the use o the SWIFT message ormats andnetwork. Other major improvements include advancedqueue management unctionalities, automatedcollateralised intra-day liquidity acilities andautomated gridlock resolution.

The industry expressed a strong preerence orSWIFT early in the planning stage. Ong-Ang AiBoon, director o The Association o Banks inSingapore, made the case on behal o the industrythat, The use o SWIFT will result in cost savingsor the industry in the area o implementation,straight-through processing, training, and messagetranslation since all MEPS+ participants are alreadySWIFT members.

As a nancial sector regulator, MAS is concernedabout the saety and eciency o payment systems andtheir compliance with the Core Principles orSystemically Important Payment Systems. Network andmessages orm the backbone o payment systems and are

important to consider when assessing saety issues.

Risk management

The management o nancial risks is an important areain payment systems. Without real-time inormationand adequate queue management unctionalities,participants risk management eorts will be hampered.

MEPS+ provides real-time inquiry o paymentinstructions and receipts. Advanced queuemanagement unctionalities are also provided orparticipants to manage their credit and liquidity risks.Participants can, or instance, dictate a conditional andunconditional hold on payments on queue. Theearthquake in Taiwan on 26 December 2006 did notaect MEPS+ operationally as many participants had

What was involved for the Monetary Authority of Singapore in moving

from MEPS to MEPS+?

Terry Goh, director, Payments & Infrastructure, Monetary Authority of Singapore

opinion |Terry Goh, MoneTary auThoriTy of SinGapore

dialoGueQ3 2007 11

MEPS+:Lessons for

paymentmarket

infrastructures

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opinion |Terry Goh, MoneTary auThoriTy of SinGapore

12 dialoGueQ3 2007

entered critical payment instructions into the system atthe beginning o day. They were subsequently able tomanage these using MEPS+ queue managementunctionalities despite connectivity issues.

In the event that participants require additionalliquidity, automated collateralised intra-day liquidityacilities are also available. At the system level,automated gridlock resolution helps to reduce queuedtransactions.

To complement queue management eatures, weimplemented time-based transaction pricing toencourage early settlement. Transactions that are settledlater in the day can cost up to three times more.However, we have observed that dierential transactionpricing has not had any material impact on the overall

payment fows in MEPS+, unlike the experience inother countries.While banks have been able to make all their

payments by the end o the day, earlier payments wouldhelp reduce liquidity risk in the system, especially duringcontingencies. Further analysis and discussion withparticipants will be needed to establish i adjustmentsshould be made to regulate the payment fows.

Security

Condentiality, integrity, authenticity, and non-repudiation underpin a sae and reliable electronic

messaging platorm. Setting up a new proprietarynetwork and messaging standards that meet all theserequirements would take up considerable time andresources. This was not a easible option or us since we

were implementing an entirely new system and wewanted to ocus our resources on the systemunctionalities to minimise our project risk.

We decided to migrate to SWIFT ater assessing thesuitability o various SWIFTNet messaging servicesagainst our requirements. Eventually, we selectedSWIFTNet FINCopy, SWIFTNet Browse/InterAct,

and SWIFTNet FileAct to acilitate transmission opayment and settlement messages, real-time inquiry,queue management and end-o-day reporting. Inaddition, a closed user group was created to preventunauthorised institutions rom accessing MEPS+.More importantly, as a payments market inrastructureprovider, we had control over the subscription oSWIFTNet messaging services or MEPS+.

Resilience

The resilience o MEPS+ is an important area or us,especially with the emergence o new threats. From thestart o the MEPS+ project, we spent considerable timeexamining ways to enhance the robustness o MEPS+or both system participants and the operator. To

ensure business continuity, a layered approach wasadopted to minimise participants operationaldowntime. Participants are expected to activate theirbackup site i they encounter any operational problem.

Mandatory allback connectivity testing required bySWIFT provides assurance that disaster recoveryacilities will be working once activated. MEPS+ alsoallows participants to submit CD-ROM and paper-based instructions in the event o more severe ailures,such as the unavailability o SWIFT.

At the payment system operations level, MEPS+ hasredundant inrastructure at the production site toaddress hardware ailure. We are also able to activatethe MEPS+ hot backup site within 30 minutes. Lastly,manual settlement procedures are in place to cope with

total unavailability o the system.Going orward, we will continue to assess otheroptions to urther enhance the resilience o MEPS+ inextreme scenarios.

Our experience

Overall, the problems and diculties in migrating toSWIFT were quite manageable. Most implementationissues were quickly resolved by SWIFT and its networkpartners. However, more needs to be done to educatethe industry on various SWIFTNet messaging servicesused by MEPS+ and the related subscription

procedures.From an operations standpoint, special attention had

to be devoted to the annual Standards Release Guide(SRG) to make sure that aected SWIFT MT messagesused by MEPS+ continued to work. Previously, we hadcontrol over the extent and timing o message ormatupdates in MEPS, which ran on a proprietary network.This year is particularly challenging or us as we haveto meet both SRG 2007 and SWIFTNet Phase 2deadlines, within one year o MEPS+ implementation.

Extensive testing was conducted to ensure that

MEPS+ was reliable, stable, robust and secure beoregoing live. In addition to unit, system integration, useracceptance and industry tests, we also engagedindependent third parties to veriy systemunctionalities against specications, assess securitycontrols, conduct system penetration tests and perormapplication source code reviews. As MAS assistantmanaging director and chairperson o the Payment andSettlement Steering Committee, Foo-Yap Siew Hong,aptly put it, MEPS+ is an important nationalpayment system and rigorous testing is paramount toensure its successul implementation. It is better toover-test MEPS+, even i it makes MEPS+ the mosttested system ever. Sound advice or those planning toimplement a new market inrastructure.

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I

t is no exaggeration to say that the implementationo uniorm market practices and standards has

transormed the global securities industry.The rst concerted eorts to introduce global

securities standards began in the US in 1989, when theGroup o Thirty (G30) in which I participated released its report on clearing and settlement. It was atime when standardisation did not exist, or marketdata or or market practices and concepts.

The report contained nine recommendations ornational securities clearing and settlementstandards. One o the major recommendations wasthat every market should have a central securitiesdepository. Another was to implement deliveryversus payment. A third introduced the concept osecurities lending and borrowing to avoid ails inthe settlement process.

The report also recommended the creation ocommon standards or communication in a way,

early recognition o the role SWIFT perorms today.

Biblical status

The G30s 1989 report had a proound impact on thesecurities industry. In a speech at the 2004International Securities Services AssociationSymposium, John Walsh, the then executive director othe G30, said that the report has achieved biblicalstatus in the clearing and settlement eld as the guidebook both or reorm and how reorm should beaccomplished.

The report essentially kick-started the process ocreating eciency in the clearing and settlement eld.The nine recommendations were pursued enthusiasticallyby all markets. Some 25 years later, the world has adopted

How does the widespread implementation of standards affect a marketover time?

Jacques-Philippe Marson, president and CEO, BNP Paribas Securities Services

opinion |Jacques-PhiliPPe Marson, BnP PariBas securities services

dialogueQ3 2007 15

Raisingthe

standard

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opinion |Jacques-PhiliPPe Marson, BnP PariBas securities services

16 dialogueQ3 2007

most o those standards. SWIFT still a relatively youngorganisation when the 1989 report came out hasbecome the driving orce behind standards in data andcommunication.

The push to introduce global securities standards didnot stop there. The success o the G30s 1989 initiativeprompted a second report in 2003, titled GlobalClearing and Settlement: A Plan o Action. Thiscontained 20 recommendations and to improve theeciency o global cross-border securities trading.

The G30s initiatives had a great infuence in Europe,and prompted eorts to harmonise clearing andsettlement unctions within the European Union. TheGiovannini Group was ormed in 1996. Named aterthe chairman, Alberto Giovannini, it comprised 72

individuals rom a cross-section o the private andpublic sectors o the EU securities industry. In a 2001report, the group identied 15 barriers to creatingecient cross-border clearing and settlement inEurope. This was ollowed by a second report thatassigned responsibilities or the removal o such barriersto CESAME (Clearing and Settlement Advisory andMonitoring Experts Group).

Paving the way

It is not just uniorm business practices that areimportant. Data and messaging standards, such as the

ISO 20022 XML standard messages that SWIFTpromotes, allow straight-through processing (STP) andthe automation o processes. This cuts operational riskbecause it reduces human error, and allows a companyto run more quickly and eciently crucial in todayscompetitive nancial services industry.

Messaging and data standardisation are also playing akey role in continued eorts to harmonise Europesnancial markets. For example, the European Marketsin Financial Instruments Directive (MiFID) isincreasing competition at trading platorm level. This

needs standardisation to ensure eciency and cost-eectiveness. Furthermore, the European CentralBanks TARGET2 Cash pan-European real time grosssettlement system, due to come into eect inNovember 2007, is another example o standardisation.TARGET2 Securities, meanwhile, is due in 2013.

Thanks to these initiatives, exchanges, centralcounterparties and central securities depositories willbe able to communicate with one another acrossEurope. The TARGET2 initiative is using SWIFTstandards or communication.

Standards also play a vital role in compliance withthe new regulations on the horizon. Standard messagescan enable accurate and timely reporting to regulators.

Accordingly, SWIFT has recently added the capability

or market participants to report to nancial regulatorsover its network.

More to do

Although much has already been accomplished inbringing standards to the global securities market,more needs to be done. For example, the sell-side othe capital markets can now boast STP levels o 98%.On the other hand, the buy-side has invested much lessin standards and automation, and on average its STPrate is 50% at best.

Also, there is a need to migrate to the new ISO20022 XML messages rom the old ISO 15022standard. For example, SWIFTs Securities Committee,

which I chair, has decided not to create any new ISO

15022 unds message types, despite exponential growthin their use. All new message types will be created inISO 20022.

Individual bank response

As one o the worlds leading providers o securitiesservices and asset servicing with a networked presence,BNP Paribas Securities Services recognises theimportance o developing and implementing standardsin the global securities industry.

We invest heavily in the standardisation process, bothin terms o technology and human resources, and were

the rst company to adopt the SWIFT ISO 20022unds standards in France. The company will spend20% o its IT budget in 2007 on adapting to newregulatory changes.

As well as investing heavily in standards, we alsoparticipate extensively in industry orums that workon dening standards and establishing best practice inthe investment industry. For example I am a membero CESAME and chair o the SWIFT SecuritiesCommittee. We have been very active at theEuropean level in promoting standardisation o

market practices. And we have pushed or legislativechanges in some countries.

We also actively support SWIFT as the driver odata standards in the nancial world. I believe it is inthe best interests o the investment industry to useSWIFT as it will lead to signicant cost reductions; itis or this reason I am such a strong advocate oSWIFT remaining a mutual, cooperativeorganisation.

SWIFT has been moving quickly and eciently toautomate the more complex parts o the post-tradearea. Some believed that the post-trade area wascovered, but it is still in need o urther standardisation.I believe, however, that the post-trade area is now wellon its way to being covered.

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interview |Jamie Dimon, JPmorgan Chase

18 DialogueQ3 2007

Jamie Dimon, chairman and CEO, JPMorgan Chase

Managing

expansion ina crowdedworld

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Is the banking industry getting better at adapting

to change?

Yes. We are, or example, heavy users o technologyand, in many respects, were good at it. The retail sideo our business was always regulated, but it has becomeincreasingly competitive. Weve become retailers in thetrue sense o the word with all the elements that thatentails: products, services, platorms, systems anddesigns, all o which need to be reviewed within acontext o enormous consolidation. So banks havebecome good at both innovation and consolidation.

Are there any aspects o the changing environment

that, in your view, the industry hasnt yet got to grips

with?

At a global level, the process o consolidation is notover. In the US, there are ar too many banks. And thesame is still true in Europe, where there is now morereason to merge.

At the same time, we are also seeing greaterragmentation in the securities industry. I youretalking broadly about strategic inection points,

technology is very oten the spur. This has been truethroughout history. Without the computer, youcouldnt have had mutual unds, or example.

Exchanges are very good users o technology too. Thequestion is, who is going to use technology to win inthe marketplace? Ultimately, that will be what worksbetter or the customer.

Taking JPMorgans global expansion as an example,

do you look or opportunities across all your lines o

business or can one line lead you into a market?

One line o business can bring us into a market,though the dividing lines are not rigid. We have sixlines o business seven i you include private equity but in some ways, its a bit o an artifcial construct


DialogueQ3 2007 19

because o regulatory walls. Our lines o business arejust how we manage the broad ranchise. We couldhave chosen to manage things in a dierent way.

You also have to look at the world much more romthe point o view o the customer. The customerdoesnt care that theyre being served by three o ourlines o business: Treasury & Securities Services, AssetManagement and the Investment Bank, or example.They have a relationship manager who handles therelationship as a whole. So you have to be careul. Iyou think too much about lines o business, your

approach to the business can become too silo-ed.The members o our Operating Committee the

executives who actually run each line o business workwell together. Recently, or instance, most o us ew outto Asia and we did a series o country reviews, including

Japan, Korea, India and China. We went to the peopleon the ground there and said, Okay, orget your line obusiness. I you owned JPMorgan Korea or JPMorgan

Japan, what would you be doing here? And they cameup with ar more aggressive business plans which wereapproved, budgeted and are being executed.

Weve done the same thing in Russia and the samething in the Middle East. It is as a result o thisapproach in India or Russia that were starting tobecome much more active in domestic securitiesissuance, or example. We havent yet done Latin

America, but once you start this process, people worktogether to develop opportunities.

I you take the examples o India, Russia and China,

does JPMorgan see the same opportunities in each o

those markets?

In some markets, we may negotiate to buy or merge withsomeone. In some, we think we can grow organically. Thequestion we have to ask ourselves in each case is: Whatbusiness exactly do we want to get involved in?

Jamie Dimon is chairman o the board and chie executive ofcer o JPMorgan Chase. He

became chairman at the start o the year, having been appointed CEO a year earlier. He also

assumed the title o president ollowing the merger with Bank One Corporation in July 2004.

In the our years beore the merger, he served as chairman and CEO o Bank One, taking thebank rom a hal-billion-dollar loss in 2000 to record earnings o USD 3.5 billion in 2003.

Dimon is a summa cum laudegraduate o Tuts University, and holds an MBA rom the HarvardUniversity Graduate School o Business, where he was a Baker Scholar. He serves on the boards

o a number o non-proft institutions, including the Federal Reserve Bank o New York, Harvard

Business School and the United Negro College Fund. He spoke to Dialogueabout the challengeso growing the banks various lines o business in a globally competitive environment.

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20 DialogueQ3 2007

Take the securities market. In Russia, to be a credibleparticipant, you need local traders and researchers, an

organic plan, real estate, systems, space, legal entities,management and compliance, but all integrated withthe rest o the company to support high levels o cross-border business.

In India, we see opportunities resulting rom a verystrong domestic market. Japan could be a source ogreat opportunities, but there are a number o paths wecould take to develop those. In China, we tried to get asecurities licence, but were unsuccessul, so werebuilding our business a little dierently there.

Do you like to be a frst mover or ast ollower?

Neither. Its not a distinction I value. You need acoherent, consistent, business plan thats synchronisedand well thought through. Sometimes that will makeyou a frst mover. For example, we are at the oreronto creating capital markets or mortality because one othe biggest risks or pension plans is retirees longevity.

Weve ound novel ways to address that challenge.In other areas, were a rapid ollower, because we

werent a frst mover, though maybe we should havebeen. In some other areas, however, the prospects areunclear to us and we dont mind being a ollower.

Does a crowded space put you o? Do you look or

areas that are commercially unexplored?

First o all, organic growth is Job Number One. Youhave to run your business well to grow organically andthat means better products and better services in bothnew and established areas. Organic growth also givesyou the ability to make acquisitions where you think itis appropriate. Its hard to acquire someone i yourenot doing a good job o running your own company.

In some areas, the act that its crowded is irrelevantto us. For example, weve been opening branches inChicago even though were already one o the biggestbanks in Chicago. Is there overcapacity in Chicago?

Yes, there is some, but say we decide we should have a

branch in Lake Forest, an auent suburb. We havecustomers who work in Chicago and live in Lake

Forest and thereore we know were going to winbusiness. The act that other banks have branches inLake Forest is irrelevant.

Or take energy trading. We know we are one o thelargest investment banks in the energy sector in termso mergers and acquisitions fnancing. We can handle alot o our customers energy swaps. Its another way orour customers to fnance their balance sheet and managetheir risk and so weve built the capability. The act thata lot o other people are doing it is irrelevant.

There are, however, other areas, such as equity primebrokerage, where I think it may be too late or us to

make signifcant inroads. Its a very consolidated arenaand our systems are not built or the way that businessoperates. It would cost a lot o money to build robustnew prime broker systems. Even i we built them, they

wouldnt necessarily be as good as the best already outthere. So well fnd another angle; maybe well innovatein the way things are done in that area.

...although a lot o people seem to be looking to move

away rom the idea o one prime broker?

Well, i you look at JPMorgan Treasury & Securities

Services (TSS), we have custody, we have execution, wehave securities lending, we can margin loans, so wehave all the abilities required; they are just not comingout o one place in the bank.

We might come up with a dierent way o puttingthose services together. For example, our productdevelopers came up with a concept called MasterSwap,

which is a brilliant idea, allowing you to put manyderivatives in one big swap, do one big margining, andgenerate one big report. It comes close to satisying

what is usually thought o as a prime broker service.But then you have some o our large hedge und

clients, who have separated things out and have said,We want one custodian, but we will execute wherever

we want. While this may be through a prime broker, all

First of all, organic growth is Job Number One. You have to

run your business well to grow organically and that means

better products and better services in both new and

established areas. Organic growth also gives you the ability tomake acquisitions where you think it is appropriate. Its hard

to acquire someone if youre not doing a good job of running

your own company.

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DialogueQ3 2007 21

the other services a prime broker normally provides like statements and reporting were going to doourselves. And we will margin product-by-product. Soone deal might be fnanced by Lehman, or example,and the next by Merrill, but some hedge unds are big

enough to do that.

Earlier you touched on the role o the relationship

manager. Since corporate and institutional clients have

a relationship manager who looks ater their needs

across the various lines o business, is there much

interaction between TSS and the other businesses?

Yes, constantly. I would call TSS a Warren Buet-typebusiness. It grows with time, it grows with ination, itsa dynamic payments and processing business. It has lowcapital requirements, good margins and its got its own

moat you cant duplicate a lot o the things it has.But its also part o the rail on which the wholecompany rides. TSS gets a tremendous amount obusiness rom Investment Bank clients, middle marketclients, small business clients and other customers othe company that need those services.

Scale is the moat or TSS. You cant just say, Imgoing to be a global custodian. You have to buildthese abulous systems around the world. There areonly so many people with the scale and experience whocan do it right. A lot o other services leverage that.TSS is, or example, a big source o FX business or the

investment bank. They do it jointly.Think o the ow that Heidi Miller, who runs TSS,

can bring to the FX business and vice versa. I wasrecently at a meeting in Grand Rapids, Michigan, withmiddle market clients and 75% o the people aroundthe table were doing business in China and India. A loto them are doing their oreign exchange through usand a lot o that is automated in TSS systems.

Who would think that private companies in GrandRapids would be doing that much FX? Some o them

were doing FX options. They said it was just a much

better way to manage their exposure. You and I wouldhave considered it a very esoteric investment bankingproduct a ew years ago and its now being driven by TSS.

In a business like that, which is technology-intensive

to a degree, how important do you think it is to own

or control the technology?

I think you have to be extraordinarily technology-competent. You have to be very good at it. That doesnot mean you have to do everything yoursel and writeall your own code. But you need to have people insideyour organisation who are deeply knowledgeable and

who are part o your management teams, because theefciency o the technology is a large part o whatyoure giving your clients.

But I always remind people that there is a continuum.We dont make our own light bulbs and our own energy.We could. We could buy power plants, but we dont. Wealso dont build all our own operating sotware, like

Windows NT or Oracle databases. But we could. The

act is we choose to buy those oundations and build alot o stu ourselves on top o them.

When youre investing in technology, how much at the

moment is directed towards the customer experience

as opposed to internal unctions and processes?

You cant separate the two. When we have a businessreview, we expect it to be holistic, meaning that weshould review whatever is important. TSS alone has ahuge number o applications. Some are customeracing, some are back-ofce, but i they arent timely,

efcient and cost-eective, theyll lead to high errorrates and that will negatively aect customers. So weshould know all o them, be good at all o them andhave a game plan going orward.

Are there any o those oundations to your business

that you would regard as naturally right or co-

operation with peers? So you would be happy to get

them in a cooperative way?

Yes. Anti-trust laws notwithstanding, banks by theirnature know how to share utilities. There are, or example,common clearing houses across a broad range o products

rom cheques to electronic payments to securities. Youalmost have to organise the industry in that way or thesake o efciency or the customer. Now the FederalReserve wants the industry to do better in creditderivatives processing and were in avour o that. It couldbe a business or us too as people standardise it. I thinkthose types o opportunities will continue to arise.

Lets take the example o SWIFT, which is in the

cooperative space. For years, most people thought o

it as essentially a cross-border messaging system. But

now it increasingly oers market inrastructureservices to what it perceives as the cooperative

space. Since its owned by the banks, they must

presumably agree on what that space is?

My experience is that when something is owned bythat many people, they can do what they want!

Well, i theyre doing what they want, is it what you

want them to do? Do you have a strategy or engaging

with it?

Yes, we do, because we take governance very seriously.We look at when we want something to be done by aclearing house, SWIFT or a central utility. Theres nobeneft in duplicating those unctions and signifcantbeneft in making sure theyre done right.

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interview |Paul Galant, Citi

22 dialoGueQ3 2007

Paul Galant, CEO, Global Transaction Services, Citi Markets & Banking

Drawing on

global strengths

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dialoGueQ3 2007 23

Why are the businesses that form Global TransactionServices together under that umbrella? Do they have

a common client base?

First, it is important to note that our three productlines, Cash Management, Trade Services andFinance, and Securities and Fund Services, share acommon purpose: to process those transactions thatare daily activities or corporations, fnancialinstitutions and governments. Its the mostundamental type o activity we provide. Ourclients, worldwide, number in excess o 65,000.Broadly, we are very much an extension o our

clients inner workings, whether by enabling asupply chain to provide working capital; enabling acompany to make payments to suppliers, vendors,and employees; or by moving securities. These are allcore activities. They are the lieblood o virtuallyevery one o our clients. The common theme is thatwe run a very large-scale processing andinrastructure environment to handle these types oactivities.

Within the world o corporate clients, all theproducts and services we oer are essential. Corporates

tend to use all o our solution sets. In the governmentspace, clients use us predominantly or cashmanagement. In the fnancial institution space, iyoure talking about non-bank fnancial institutions,clients use us or securities services.

But we have to be able to deliver credible solutions tomany dierent buying centres within all o theseentities. The uniying element that ties all o thesesolutions together is the inormation derived romthem. As you go rom one buying centre to another,theres a bit o a hierarchy; and i at the end o the daythe CFO wants to see the totality o their activity, ithey want to receive actionable advice, the inormationwe provide in real time across all these categories is ourkey dierentiator.

Does that mean that your customers, the differentbuying centres notwithstanding, treat this information

as an enterprise issue rather than a divisional issue?

The challenge is to give each o the buying centres theinormation they need in real time in a way that theycan use. I we supply enterprise-level inormation, itwill result in inormation overload. I they have tospend time erreting out what they need, they wonthave the time they need to act on it. Banking, or years,provided yesterdays inormation akin to gettingyesterdays weather report today. You simply cantmanage your business on it.

What we have endeavoured to do at Citi is deliverthat inormation as actionable advice, so clients canextract the relevant value. At the same time, we canprovide the uller, bigger picture to other levels in theenterprise. Its a ascinating process. Until youunderstand the magnitude o bringing it all together,you dont quite recognise the power o enabling thataggregation. We created a technology service calledTreasuryVision, which does just that. It works acrossour Cash and Trade lines, and were now in the processo providing the same to our Securities and Fund

Services clients.

How do you segment your client base?

Its one thing to have the worlds best capabilities, butits another to be able to package those capabilities intosolutions your clients need, instead o simply sellingproducts. To be able to provide eective solutions, youmust understand your clients needs and the industry,as well as you do your product set.

Heres an example: When we approach the publicsector as a vertical sector, dierent elements o ourpublic sector practice deal with OECD governmentsand with emerging market governments. When wepackage solutions, we dont view them as one-size-fts-all solutions. You can imagine the insensitivity we

Paul Galant is chie executive ofcer o Global Transaction Services (GTS), a division o Citi

Markets & Banking. He is a member o the Citigroup Management Committee and the Markets &

Banking Planning and Management Committee. GTS is one o Citigroups twelve publicly-reported

product lines, oering cash management, trade services and fnance, and securities and und

services capabilities to corporations, governments, fnancial institutions and investment advisorsworldwide.

Galant spoke to Dialogueabout the challenges o delivering a diverse range o solutions to abroad global client base.

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24 dialoGueQ3 2007

would be displaying i we were to oer a central bankor a fnance or treasury minister in an emerging marketthe same solution we are embedding in the UK. It justdoesnt work.

Our ability to tailor solutions and understand what is

critical or our clients is something we have the luxuryo doing because we are on the ground as a localprovider in more than 100 countries. Were notguessing rom a New York or London headquarters, orrom a correspondent banking position.

Because Citi serves various business segments, weare able to draw subject matter expertise rom acrossa very broad array o subjects and markets. Lets sayIm going to go see a telecommunications company:I can bring an investment banker who understandsthe telecommunications industry rom a strategic

vantage point. I can also bring a corporate bankerwho understands the necessary corporate structureto succeed. I can bring a commercial banker, whounderstands what a telecommunications companyneeds to do to provide services in the regulatoryenvironment in all the dierent countries. I canthen bring a transaction services team that packagesthe solution, delivers it to the client, and executesor the client. I I need a consumer banker whounderstands the clients behaviour, I can bring thatresource as well. This is the power o Citi. This isour corporate strategy.

Taking your point of understanding your clients from

being on the ground and looking more broadly at the

industry landscape, one thing weve seen is the

centralisation of corporate treasuries. Is this

something that the corporates have done in

consultation with the banks or are banks having to

catch up?

I think banks (local, regional or global) and theirclients (locally, regionally and globally) arecollaborating more and more, and this holds true or

the move we are seeing towards treasury centralisation.Citi will not build a solution without a client need. Nomatter how brilliant we think an idea is, we will neverbring it to market, never invest time and money on it,unless it is o immediate and important relevance toour clients.

We can lead with an idea and we do that all the time.But the client needs to be inspired by that idea enoughto contribute and collaborate with us on thedevelopment. We may point something out to a clientthat sparks six other ideas and they may say, You knowwhat, its not a need today but youve just given us anidea o how to expand our business.

In that scenario, we will bring in whatever partnerbanks and institutions are necessary to make an idea

work. Banks that partner with other banks is a well-worn path, and institutions like SWIFT enable thatthrough the use o standards.

Citi has also been working on partnering withlarge-scale technology organisations. We worked with

Microsot to create TreasuryVision; we partner withentities like Vodaone in the mobile remittancesspace; we partner with SAP to create connectivitysolutions; and with GXS to enable fle transer.Similarly, we are working with SWIFT to developconnectivity solutions or corporates. The wonderulthing about having the Citi brand is being able topull together the smartest, most driven, mostresource-rich institutions to come up with and delivergrowth solutions or our clients. So Im never shyabout walking into a clients ofce with Microsot to

say, We have an idea or you.

Where today do you think banks are most falling short

of customer expectations?

Clients today are acing many challenges, which inturn pose challenges to their providers. With so manydierent opportunities being presented daily, clientsability to prioritise the opportunities by a total valuecalculation is not easy. I think the decision-makingramework, whether RFP or RFI driven, will probablyevolve over time.

Secondly, having to integrate solutions into existing

legacy environments is extremely difcult. Itsexpensive, takes too long and holds these institutionsback. It can even hold back the overall economy.Thereore, banks ability to develop and bring tomarket solutions that are easy to integrate into legacyenvironments is terribly important.

Youve mentioned SWIFT as an enabler. What aspects

of your offering can best be provided collectively,

either through a utility or by combining with your

peers in some way to build something to which you

can each add value?I think certain building blocks are common to many othe solutions required today in the marketplace. Takeimage storage, or instance. Everyone builds thecapability slightly dierently, and weve all built ourown. But Im not confdent that banks are the best ableto lead that eort. I think thats a technology challenge,rankly. A brand-agnostic service is the right thing or autility to build.

SWIFT is a great example o providing a proven,standards-based utility, and there are many others.Transaction services providers can take these buildingblocks, deliver them, service them, and integrate them ina way that is industry- and client-specifc. Thats wherewe start competing on a non-commoditised basis.

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report |TARGET2-SEcuRiTiES

26 diAloGuEQ3 2007

There at the birthWhat stage is theTARGET2-Securities

project at?

With everyone ocused onMiFID and SEPA, athird wave o European

market transormation is gainingmomentum. In July 2006 theGoverning Council o the EuropeanCentral Bank (ECB) launched

TARGET2-Securities (T2S).It seemed to make sense.

Centralising euro securities settle-ment in central bank money on theTARGET2 platorm would increaseharmonisation and economies oscale, optimise liquidity andcollateral management, and increasecompetition among CSDs, CCPsand custodians. The our mainEurosystem banks are planning to

operate the technology platormrom 2013 as an optional, not-or-prot outsourcing service to theCSDs, who could also open it up to

their own large customers or directconnectivity, i they chose.

In principle, we have lived withcomponent-based architectures ora while now, and we rely onoutsourcing solutions in manyorms, so there is nothing wrong

with the T2S concept as such, saysChris Rowland, Global CustodyEMEA product executive at

JPMorgan Worldwide SecuritiesServices and co-chairman o T2STechnical Group 1. I we get itright, it should deliver benets.

The ECB sees T2S in a muchwider context. There is a generaltrend to separate inrastructurerom the service to the customer in

many industries, says Jean-MichelGoderoy, director general orPayment Systems and MarketInrastructure, ECB. With T2S

we are just building the motorwayon which the participants willtravel. Since most o theEurosystem central banks haveprovided local settlement servicesalready, it seemed a naturaldevelopment.

Goderoy draws a direct parallelwith TARGET2. On TARGET2Cash we have one inrastructure butthe accounts are held by the centralbanks, he says. For T2S there willagain be one inrastructure, butthe securities accounts will be heldby the CSDs. It should work well.

What are marketparticipants

reservations aboutthe project?

How is SWIFTgetting involved?

Advancing critical dialogue

There is a general trend to separate

inrastructure rom the service to the

customer in many industries. With T2S

we are just building the motorway on

which the participants will travel.

Jean-Michel Godeffroy, director general for Payment Systems and Market Infrastructure, ECB

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28 diAloGuEQ3 2007

retain the responsibility or risk.Will the ECB accept the liabilityor not delivering and the transpar-ency to allow us to manage therisks? Governance and contractualarrangements are still majorconcerns.

Which CSDs will join T2S isanother crucial issue becauseeconomies o scale need critical

mass. Although T2S should bemulticurrency rom the start,Nordic participants are pressing ormore unctionality to support, orexample, direct holdings. In theNordic countries our settlementprocess is very ecient, even orcross-border transactions with arich unctionality, says Fors. It isnot clear that T2S will meet ourneeds, at least in the rst phase. We

shall have to wait and see.Others hope they may eventually

join. T2S has to be multicurrency

to provide the solution the marketneeds, says Diana Chan, managingdirector, Global TransactionServices, Citi. It has to be designed

rom the outset in a way that willnot prevent it rom becoming thesingle settlement inrastructure orEurope.

Under pressure

The ECB expects market pressurewill encourage CSDs to join.Lets be absolutely clear: theCSDs have a real choice toparticipate or not, insistsGoderoy. But their customers

must also have a choice to useanother CSD i it is appropriate.There will be no more captivemarkets. The Code o Conduct isthere to ensure competition.

T2S is just one element o acomplex strategy to achieve e-ciency and reduce risk in Europeanclearing and settlement (see table).Other elements include MiFID,

which grants certain rights o access

and choice or post-trade services;the European Code o Conduct orClearing and Settlement issued by

the Federation o EuropeanSecurities Exchanges (FESE), theEuropean Central SecuritiesDepositories Association (ECSDA)

and European Association oCentral Counterparty ClearingHouses (EACH), which willenorce air competition on this;and other harmonisation initiativesaiming to remove the so-calledGiovannini barriers.

Some participants are clearlynervous about banks intentions.Ruud Sleenho, chairman o theEuropean Banking Federation(EBF)s T2S Task Force and senior

vice-president, head o MarketInrastructures, ABN AMRO,addresses this issue squarely.People have talked about inter-nalisation o some o these [post-trade] processes by the banks, andindeed we are seeing new ways tosettle cross border emerging rom

Will the ECB accept the liability or not

delivering and the transparency to allow

us to manage the risks? Governance and

contractual arrangements are still majorconcerns.

Paul Bodart, head of Custody Operations, Bank of New York Mellon

In the Nordic countries our settlement

process is very efcient, even or cross-

border transactions with a rich

unctionality. It is not clear that T2S will

meet our needs, at least in the frst phase.

Gran Fors, global head of Custody Services at SEB Merchant Banking

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diAloGuEQ3 2007 29

avoided but many national dier-ences and costs will remain,argues Jol Mrre, chairman oECSDA. The atter T2S wouldbecome, the easier it wouldprobably then be or CSDs todecommission systems or real

savings. But more harmonisationwould then be required and ocourse that adds to project risks.So it is a delicate balance.

Another hot issue is matching.The CSDs want to do the match-ing, and I initially thought itsensible, says Goderoy. But themore we consider it, the more it

would appear to increase costssubstantially. This is the debate weneed to have. One matching

engine should be more ecientthan 13, but even i people agree inprinciple, they may also recogniserisks. I we try to put too muchinto the T2S boat, insistsSleenho, it will sink.

Decision process

The real decisions will start soon,ollowed by another consultationand business case next spring, and

then the nal ECB decision toproceed or not.

In the meantime, SWIFTappears to be working in onepart o the T2S project withreasonable agreement.Standardisation is alreadydriving convergence, says

Andrew Douglas, director,Market Reorm Initiatives atSWIFT. For example, orGiovannini Barrier 1, we deinedand agreed with the industryback in March 2006 a EuropeanCommon Communications

the ECB anticipates urtherdiscussion. Regarding the govern-ance o the development andoperating companies or T2S thereare very dierent views, concedesGoderoy. There too we willparticipate in an open debate,

listen and orm our own view, butits too early now to say.The ECB has organised a T2S

Advisory Group, a number otechnical groups and national usergroups in EU member states toaddress all o the user requirements a process it is aiming to completeby the end o the year. Somequestion the need or such a tightdeadline. Why or a projecttargeted at 2013 must we run this

hard at the moment? asksSleenho rom the EBF. Its not asprint. Its a marathon.

The stress on resources could beraising the temperature o somedebates. The CSDs as well as thebanks have commented on theaggressive ECB timescales set tomaintain momentum, says Kirbyrom Euroclear. It takes time tobuild consensus and agree on the

best solutions. He suggests themarket is starting to eel pusheddown the road beore it has hadtime to think through the conse-quences, and ears that the ECBmay only discover the problemslater, when they will be much morecostly to x.

There are certainly many issuesto debate. Consider lean T2S, thedesire by the ECB to limit theunctionality wherever easible

without sacricing eciency. Ithe lean T2S approach is adoptedthen many problems will be

some o the MiFID initiatives likeTurquoise, he says. However,this is not happening as a result oT2S. We need to have a broadervision o how the market willevolve by 2013 beore we committo T2S, otherwise it may not be tor purpose. He sees rapid changeeverywhere.

All large projects experience such

doubts, argues the ECB. Theproject has evolved positively, saysGoderoy. The market is largelysupporting us. Naturally it is moredicult or the CSDs to completelyrethink their business model. Aterall its not an easy task. I amconvinced, however, that they too

will adjust.To win the markets trust, the

ECB has tried to manage the

project with openness and transpar-ency. We want to show people weare listening. There is nothing weare cooking in our kitchen. saysGoderoy. He uses the publicconsultation as an example.Although our principles were notup or discussion, we have listenedto the issues raised and will clariyour intent, keeping the principlesbut expressing them better to meetthe various concerns, he says.

Clearly this will resolve someissues. For those who have ques-tioned the governance structure,

I the lean T2S approach is adopted then

many problems will be avoided but many

national dierences and costs will remain.

Jol Mrre, chairman of ECSDA

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30 diAloGuEQ3 2007

Protocol (CCP). It includesthings like the mandatory use oISO 15022, 20022, IP messagetransport, and PKI authentica-tion and time-stamping.Euroclear is using it or itsCommon CommunicationsInterace (CCI) and now T2S hasalso committed to using it.

SWIFT is deeply involved inmany standards issues across the T2Sproject, helping to achieve compro-mise. For example, when queriesarose over the suitability o BIC as auniversal business entity identier,SWIFT responded quickly toconrm changes to resolve thediculties, which were planned orSEPA and MiFID in any case.

However, it is still early days. Wemustnt take or granted thatSWIFT will automatically be parto it, says Douglas. We have toearn our right to participate in

T2S. Besides access and messag-ing, SWIFT could provide reer-ence data administration, standardssupport and directory services.

Despite the debates, momentumseems to be building. The ECBinitiative has really changed expec-tations, says Kirby at Euroclear.Everyone now thinks that some-

thing will happen in the settlementenvironment and that there hasbeen a renewed impetus or harmo-nisation. More generally, it seemsunlikely that there will be the samenumber o platorms still inexistence by 2013.

Clearstream too sees real businessopportunities. For example, oursecurities nancing services, whereour strategy is to provide ourcustomers the optimal collaterallocation, would benet rom T2Sand improved interoperability, saysRosenkranz. It would mean new

opportunities or us, so we wouldreally like to nd a way orwardthat works.

Mrre at the ECSDA agrees thatthe European Code o Conduct orClearing and Settlement and T2Shave together prompted CSDs toocus more on strategy and evolu-tion. The world is changing and

everyone has to ace that now witha much greater sense o urgency,he says.

To harness that momentum, theEurosystem may also have tocompromise, but that is whatrequirements planning is all about.T2S will be transormational,says Chan at Citi. When themarket changes we must assess thecosts and opportunities, adapt andinvest. She concludes, Yes,change is painul and costly, butno one complains about childbirthater the baby.

Ge t Erpean earng an settement ntatves

intatve impat n earng an settement

Givannini tw sudis caid u by h euan Cmmissin in 2001 and 2003, chaid by Alb Givannini, which

idnifd 15 bais hamnisain claing and slmn acss eu. A sis wking gus w s

u by vaius assciains and mak aicians cm u wih sluins ach bai. th x gus

a advising h euan Cmmissin n hs mas. th Claing and Slmn Advisy and Mniing

ex gu (CeSAMe) is h cdinaing bdy ha is suvising h vall css. th Fiscal Cmlianc gu

(FISCo) is lking a axain hamnisain, whil h Lgal Cainy Gu (LCG) is addssing h lgal and

fnaliy issus.

MiFID Alhugh cusd mainly n ading, h Maks in Financial Insumns Diciv givs sm ighs gulad

maks, mulilaal ading aciliis and mak aicians chs hi claing and slmn vids,

and accss such vids m any mmb sa n a nn-disciminay basis. Aicls 34, 35 and 46 h

Diciv his.

euan Cd

Cnduc Claing

and Slmn

Vlunay guidanc agd by Fdain euan Scuiis exchangs (FeSe), euan Cnal Scuiis

Dsiis Assciain (eCSDA) and euan Assciain Cnal Cunay Claing Huss (eACH)

nabl mak aicians ly chs hi d svic vid a ach sag h valu chain ading,

claing and slmn and mak css-bd a dundan cnc. I aims incas cmiin hugh

icing ansancy, accss and inabiliy, svic unbundling and accuning saain.

tArGet2-Scuiis

(t2S)

A sal by h eusysm vid a cnal slmn lam which s dlivy vsus aymn

(simulanus xchang dcumns vsus aymns) in cnal bank mny.

eSCB-CeSr

Sandads

A s sandads scuiis claing and slmn agd by h euan Sysm Cnal Banks (eSCB)

and h Cmmi euan Scuiis rgulas (CeSr) aly h Cmmi n paymn and Slmn

Sysms-Innainal oganizain Scuiis Cmmissins (CpSS-IoSCo) cmmndains euan

gulay acic. Alhugh lacking c law, h sandads will b a nc bs acic, and gulas

suviss will inca hm in hi assssmn and ing ciia.

euan CCp euan Cmmn Cmmunicains pcl agd by h mak aicians mv Givannini Bai 1

gading inabiliy. SWIFt was snsibl managing his sandads aciviy and will ada is wn sysms

h sandad.

eCSA/eCSDA

sandads

Sandads agd by h euan Cdi Sc Assciains (eCSA) sning h banks and h eCSDA

gading h hamnisain ca acins acss eu mv Givannini Bai 3.

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report |Corporate treasury

32 dialogueQ3 2007

One for allHow can bank-neutral paymentinitiation messages

benefit corporates?

I want to call you anywhere inthe world, I only need to dial a 10-digit code into my mobile phone.

All the billing and the charges arealready taken care o, irrespective othe networks involved. But i I wantto send you money today, werenowhere close to those ten digits.This is how Hans van den Nouland,

director, International TreasuryServices, Europe, describes the chasmthat Merck & Co has attempted toleap in less than a year.

By 1 October 2007, Merck, aglobal pharmaceuticals manuac-turer, will have migrated its rst

wave o local business units to anew inrastructure that enables therm to send payment messages toits banks with no regard to bank,

country or instrument ormats. Forthe vast majority o payments,Merck will simply add the details othe paying and beneciary account,the amount and the value date to auniversal ormat, leaving the bankto execute at the lowest cost withinthese parameters.

The majority o industry-wideinitiatives over the past 15+ years rom EDIFACT to RosettaNet toTWIST to SCORE can be tracedto corporates desire to achieve low-cost multi-banking. Merck has builton the contributions o past pioneers

but has eschewed consensus-buildingin order to achieve considerablechange to a very tight deadline.

How it started

The project has its roots in acompany-wide process standardisa-tion initiative and global ERPsystem (SAP) implementation. At

Mercks European Treasury Centre(ETC), a highly centralised andautomated in-house bank, this wasseen as an opportunity to reormlocal payment processes shaped bythe services and technologies o in-country banks. Did we really wantto upgrade interaces with 100 banksglobally, some o which requiredseparate interaces or payments,collections and direct debits? At a

cost o EUR 50,000 per interace,this was not the right thing to do,says van den Nouland.

Merck decided to replace localbanks with global providers, withthe important caveat o no customi-sation o payments processes, proto-cols and technologies. It seemedthat every bank, every country andevery instrument had a dierent leormat even though its still thesame basic inormation, dierentlysequenced. Why do I as a customerhave to deal with that just to makea payment? asks van den Nouland.

In parallel, Merck had becomeincreasingly aware o the shortcomingso banks payments security mecha-nisms. A wave o anti-money launder-ing legislation meant sta wereconrming or updating their identitieson an almost daily basis. It alsobecame apparent that some banks

were not checking who at Merck had

authorised a payment le beoreaccepting its validity. There is such amyriad o orms and processes, andthen you nd the orms are always outo date, says van den Nouland.

Merck wanted a one-timevalidation process that providessta with a single digital identityaccepted by all banks and registeredon a website to enable signatories toupdate the accounts or which they

are authorised. Merck also wanteddigital signatures to address poten-tial control weaknesses in the newpayment fow between SAP, itstreasury system and its banks.

Merck wanted both local paymentclerks and treasury sta to authoriseany payment les they had created oramended with a valid that is to saycurrent digital signature and send anencrypted version to an externaldatabase or e-vault. Thus, Mercksbanks could rst check that thesignatory has authority to make thepayments, then match the elds in the

How can they beimplemented?

How do banks viewthese efforts?


I

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dialogueQ3 2007 33

received payment le against the copyheld at the e-vault to ensure there hadbeen no unauthorised intervention.

In the ourth quarter o 2006,

Merck approached leading cashmanagement banks speciying thecapabilities it was seeking: theability to send a single le ouniorm payment messages acrossSWIFTNet to a single branch perbank; account authorisation via auniversal digital identity manage-ment scheme; and standardisedconrmation and balance inorma-tion or automatic reconciliation.

The banks were largely verypositive and accepted that thisapproach would be shared by otherlarge corporates, so we realised that

we werent asking the impossible,says van den Nouland. Followingan RFP process, HSBC and Citinow share the mandate.

Merck is building its paymentmessage using the ISO 20022 XMLstandards or payment initiation.These were developed by the banks in

association with corporates, sotwareapplication providers, and a number ostandardisation organisations such asIFC, OAGi, TWIST and UNCEFACT TBG5, the UN standardsorganisation or nancial services. Theexisting SWIFTNet FIN MT 940-eld ormat standardises a lot o termsand parameters currently useddierently by banks, but neededconsiderable eort by Merck and its

banks to be useable globally. Thisincluded bi-weekly meetings to ensuremessages were interchangeable.

The ISO 20022 payment initiationmessage contains payment inorma-tion that is common to any payment,regardless o bank/location or paymenttype, and additionally contains a rangeo value-added services and marketpractices. Discussion o commonimplementation guidelines betweenthe banks and Merck helped to ocuson those elements that both stakehold-ers wanted to use to initiate bank-neutral payments.

The payment message Merck willuse will allow both automaticallygenerated inormation common toevery message and extra inormationadded by Merck in exceptional cases.But the vast majority o data requiredor routing and executing is deter-mined by the banks. Taking all thisormatting responsibility back romthe corporate is very painul or the

banks, but it is what corporates want,says van den Nouland. To be live onOctober 1 is a massive achievementconsidering we started getting down tothese details in March.

Breaking free

In nine months, Merck has virtuallyreed itsel rom the complexities othe global payments landscape.From October, the bank-neutralpayment initiation message will beintroduced or all wire paymentsrom Mercks ETC, some paymentsin western Europe and the US, and

all payments in Mexico. All otherregions, plus the bank-neutral digitalidentity management solution, willbe rolled out early in the new year.

Looking orward, no new interaceswill need to be created on MercksERP system to accommodate acquisi-tions or new banks. And the singlepayment process will be protected notonly by robust digital identity manage-

ment, but by IT support and contin-gency plans that could not be justiedor local interaces. We expect the useo digital identity management toensure security o payment les tobecome the industry benchmarkbecause o the need to ulll anti-money laundering requirements, saysvan den Nouland.

Moreover, the visibility and controlresulting rom use o standardprocesses with two banking partners

will enable Merck to consolidatesubsidiaries surplus liquidity moreeectively. And because all payment

Taking all this ormatting responsibilityback rom the corporate is very painul or

the banks, but it is what corporates want.

To be live on October 1 is a massive

achievement considering we started

getting down to these details in March.

Hans van den Nouland, director, International Treasury Services, Europe, Merck & Co

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34 dialogueQ3 2007

fows will go through its treasurysystem, post-transaction reconcilia-tion will be almost entirely automatic.

Van den Nouland believes many o

the benets are yet to be revealed and,in line with Mercks non-proprietaryapproach, HSBC and Citi will sharetheir experience o implementing thepayment initiation message withother banks. This is denitelysomething other corporates want. Im

just happy that the big banks havebeen willing to support it, he says.Firms are now changing theirinteraces to accommodate new elds

or SEPA. But do you really want towrite a SEPA-specic interace or doyou want to build a generic one thatsgood or all payments?

The challenge for banks

Van den Nouland acknowledges thediculty acing banks in acilitating auniversal payment initiation message,but Marcus Treacher, head o e-commerce, Global TransactionBanking, HSBC, asserts that it is in

the banks interest to partner withcorporates in their pursuit o bank-neutral solutions.

Clients like Merck are thought-leaders and market-movers. Thisproject has been made possiblethrough a number o technologiescoming to ruition, he says. Wealready had the single pipe throughSCORE, but the proposition reallycomes to lie when you couple it with

structured message standards built ona fexible language such as XML.

When you add ubiquitous identitysolutions you have a package that

oers a provider-agnostic level playingeld or delivery o banking services.

Treacher believes that whencorporates reduce costs by reengi-neering nancial processes, interaces

with banks are an obvious area oineciency. He adds that thechallenge is to replicate whatSWIFT has done in nancial

messaging by creating XML stand-ards that can be extended along thesupply chain. Banks need to acceptthat some o the things we do todayshould no longer be in the propri-etary realm and that standardisationis inevitable, he says. I we do it

well, we can ree ourselves up tocreate the kind o solutions corpo-rates really want.

Bndicte Wehnert, SWIFT

global manager, HSBC, believesinvestment in the shit to bank-neutral solutions will pay dividendsover many years. No matter how

good the relationship, a corporate isnever going to nd a bank that canmeet all its needs everywhere, shesays. Moreover, companies peri-odically shit their relationships totake account o bank consolidation,or example. By using bank-neutralormats, corporates can save thecost o migrating between banks.

Wehnert adds that equally, whencorporates merge, post-mergertreasury integration is simpler iboth rms are using bank-neutralormats and are not weighed downby hundreds o bank connections.She concludes, Using standardsmight looks like a big project, butthe benets are signicant.

Banks need to

accept that some o

the things we dotoday should no

longer be in the

proprietary realm

and that

standardisation is

inevitable.

Marcus Treacher, head of e-commerce,

Global Transaction Banking, HSBC

No matter how good the relationship, a

corporate is never going to fnd a bank that

can meet all its needs everywhere By

using bank-neutral ormats, corporates can

save the cost o migrating between banks.

Bndicte Wehnert, SWIFT global manager, HSBC

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report |RefeRence Data

36 DialogueQ3 2007

Beyond the BIC

While it is generally ac-cepted that the fnancialindustry is blighted by

unclean, poor-quality and non-standardised reerence data, fndinga solution to the problem has so arproved elusive. Although clean and

accurate reerence data is a linchpino straight-through processing (STP)in both payments and securities,there are still numerous challengesregarding the easibility o obtainingso-called golden copy.

In the securities market, or exam-ple, broker-dealers oten share thesame clients and trade the samesecurities, but their inormation on fleor both accounts and instruments is

not always identical. Despite millionso dollars being spent on the integra-tion o systems and middlewaretechnology, TowerGroup estimatesthat around 10% o all trades still ailon frst settlement attempt, with themajority o those trades ailing due toinaccurate, untimely or incompletereerence data.

Despite this fgure, MatthewNelson, senior analyst, investmentmanagement, TowerGroup, sayssome progress is being made throughan increased awareness that reerencedata is a signifcant contributor

throughout the trade liecycle.About fve years ago, institutionsstarted to realise that their reerencedata was a mess it was a criticalhurdle to achieving any type oSTP, says Nelson. Since then, a loto frms have been spending heavily

on technology and we have startedto see chie data ofcers beingappointed in some o the larger top-tier institutions. Thats all contrib-uted to improving the percentage otrade ailures.

Evidence that the problem stillexists, however, was provided earlierthis year in research conducted bythe Enterprise Data Management(EDM) Council, which measured

the quality o data and data discrep-ancies across fnancial services frms.It ocused on 42 core security-description and derived-dataelements required or fxed-incometrade matching and confrmations at13 bulge-bracket frms. As well asmissing elements, the study ounddata that was inconsistent, inappro-priately tagged and hard to compare.

It is not a new problem, buteveryone who took part in the pilotwas surprised by the extent to whichdata varied between frms, particu-larly when the data analysed was so

undamental to operations, saysMichael Atkin, managing director,EDM Council. Five years ago, mostfnancial institutions couldnt spellreerence data it was a problemburied in the bowels o technology orsomewhere in operations. But now

there is recognition that alignment odata assets is a requisite. I we had onesource o data, one warehouse storingit, it would be a heck o a lot easier.But we dont have that.

The same call or a centralisedsolution was heard at last years Sibosin Sydney. TowerGroups MatthewNelson was moderator on the panelsession A new age or reerence datawhich discussed the potential or

industry collaboration. Twelvemonths on, he believes there has beenlittle progress in this area. I haventseen much happening since Sibos2006, although the session certainlyhelped, says Nelson. Collaborationis a topic that is expanding in the datacommunity. Most o the discussion iscoming rom the academic worldabout creating more centralisedutilities or broader security masterinormation. The simple theorybehind this, says Nelson, is that thedata is common to all participantsand provides no competitive advan-

What are thestumbling blocks toimproving reference

data quality?

Will regulation help? Is there a role forportable IBANs?


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DialogueQ3 2007 37

tage. People are wasting hugeamounts o money in obtaining,managing and distributing the data,he contends. I we could create andshare data in a central utility thenhundreds o millions o dollars couldbe saved annually in terms o waste,and the risk that also exists.

One o the stumbling blockspreventing greater collaboration is

competing commercial interestsbetween data vendors. With thereerence data business worth aroundUSD 1.5 billion annually, Nelsonwarns o opposition rom data vendorswhose revenues could be reduced.Business interests, he believes, arestanding in the way o progress.Other signifcant actors are internal,political, security and privacy con-cerns. In the securities industry, there

has been hesitancy towards sharinginormation and eeding data into acentral repository because there is asense o competition between securi-ties frms, he notes.

Catalysts for change

The biggest driver or developingreliable and accurate data is compli-ance with regulatory objectives.Following obligations imposed byKnow Your Client (KYC) and Anti-Money Laundering (AML) proceduresand the Basel II accord, the EUsMarkets in Financial Instruments

Directive (MiFID), which becomeslaw in November, puts added pressureon participants to know who theircounterparty is and to show regulatorsthat they have ollowed due diligence.The problem is most acute or broker-

dealers, who may have to carry outregulatory due-diligence checks againstmany thousands o counterparties.Across the regulatory regime, you willfnd consistency in what the regulatorsare looking or: transparency, bestexecution, ull disclosure, risk mitiga-tion, says EDM Councils Atkin. Asthose initiatives go orward, all o themare data-precision-dependent.

In particular, the requirement toeectively manage exposure to

trading partners and o holdingsmeans that unique instrument andbusiness entity identifcationstandards are essential in helpingreduce this risk. MiFID is makingpeople pay attention to reerencedata, particularly in Europe, but ithas got implications elsewhere, saysAngela Wilbraham, CEO o researchconsultants A-Team Group. Thedirective increases the compliance o

the fnancial industry regarding theunambiguous identifcation obusiness entities. You have to showdue diligence and that you aredealing with the right people andthat is all about being able toidentiy the entity.

To analyse the implications orreerence data under the directive,the MiFID Reerence Data SubjectGroup published a discussion paperthat evaluated how instruments andentities are identifed, giving recom-mendations to support the directivesrequirements.

In terms o fnancial instruments,the group recommended theadoption o ISO 10383 MIC(Market Identifcation Code) toidentiy place o listing, place otrade, and place o quote or both

instrument and venue identifcation.Quite oten, the specifcation o thereerence data is not granular, saysDr Anthony Kirby, head o regula-tion and compliance, Accenture,who chaired the subject group. Wespecifed an ideal or instrumentdata that removed all the ambiguityby making sure that you havecaptured those three components:the security ID, the place o listing,and the place o trading.

In regard to entity identifcation,the group backed ISOs proposed16372 International Business EntityIdentifer (IBEI), a standardised codeallocated to all entities playing a rolein the liecycle o a fnancial instru-ment. But although the drat stand-ard is currently out or countryapproval through the ISO approvalprocess

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