Published on February 20, 2014
RISK in focus Leverage SWIFT’s messaging services to mitigate your risks
How SWIFT messaging and standards reduce risk in the financial world Managing risk is a fundamental part of financial services. On a daily basis you and your colleagues and counterparties must balance the need to make a profit with that of protecting your institution from financial and reputational loss. In this setting, the certainty and reliability of SWIFT messaging are powerful assets in the fight to mitigate risk. SWIFT was created more than 40 years ago by the banking industry to provide a secure, private network for exchanging financial messages. The consequences of risk management failure can be far-reaching. In recent years, record fines have been issued by regulators for anti-money laundering and sanctions violations. As a member-owned cooperative, we are an organised, focused community with a clear role to play in helping you to manage and mitigate operational, liquidity, legal and counterparty risks. Such penalties, along with failures in payments processing, have attracted negative public and media responses. Risk management failure therefore affects both reputation and the bottom line. 2 This brochure – based on interviews with industry executives and SWIFT experts – provides insight into our users’ risk management strategies and offers examples of how we are helping our community to tackle operational, liquidity, legal and counterparty risk. The list of possibilities is far from exhaustive, and we welcome the opportunity to discuss specific ways we could help you address the topic of risk in your institution. 1 2 3 4 5 6 SWIFT messaging and standards 4 A holistic approach to risk mitigation Operational risk 10 Mitigating operational risk in corporate actions processing Liquidity risk 16 Optimising liquidity management with SWIFT messaging Legal risk 22 Common messaging standards and protocols enhance legal certainty Counterparty risk 28 Protecting against counterparty risk through trust and verification Looking ahead 34 Building a strong future together with SWIFT 3
SWIFT messaging and standards A holistic approach to risk mitigation In transaction banking, connectivity is everything; bringing together a complex network of correspondent banks, counterparties and clients. Among these actors, a variety of transactions are conducted that can pose operational, counterparty, liquidity and legal risks. Payments must be made, corporate actions fulfilled and new counterparties signed up. The threats to an integrated transaction chain Transaction banking is characterised by a complex chain of parties and processes. Transaction banking is characterised by a complex chain of parties and processes. One of the main risk management challenges is to ensure that all of the relevant parties, from the front office to the back office, are securely connected. One of the main risk management challenges is to ensure that all of the relevant parties, from the front to the back office, are connected. This holistic approach will give a complete picture of risk and enable senior management to manage risk more proactively. Any incident that compromises the ability to communicate between actors in the transaction chain can have a significant impact on how you undertake your business. Many factors can threaten the interaction between you and your clients and counterparties. Among these are service disruptions or outages, which can be caused, for example, by a power outage due to a natural disaster or by a cyber attack on your website or processing systems. Information security is another area of concern. The increased use of the internet has added another layer of risk; the large global, integrated platforms you run are a key target for hackers. Infiltration of such platforms could deliver proprietary client information into the hands of criminal gangs, posing economic and reputational risk. Risk can also arise as a consequence of change – change enforced by regulatory mandate or change as a natural consequence of improving client service and meeting client expectations. Any change is inevitably an operations and technology issue. Managing change, while ensuring operations continue as normal, is a significant challenge. At SWIFT, we believe failure is not an option. We strive to ensure that our main messaging services are available at least 99.999% of the time. This equates to less than 10 minutes of unscheduled downtime per year. In 2013, we had zero unscheduled downtime for our messaging services, even while continuing the renewal of our core messaging platform. “The technology work required to meet regulatory change is staggering, particularly for a bank such as ours which has a presence in many markets around the world. We are a transaction bank and we have to keep systems running while implementing the changes required within the regulatory environment.” Head of technology, global transaction bank 4 5
Leveraging SWIFT solutions to reduce your risk burden SWIFT messaging, connectivity and standards provide the availability, resilience, security and assurance that you require to carry out your day-to-day business while maintaining high levels of risk management. We have invested considerable resources to ensure our messaging is secure and reliable. SWIFT messaging is resilient – multiple channels with fail-over provision to other data centres mean our users can continue their operations without suffering any downtime. By utilising SWIFT messaging, you know you will not be running the risk of being unable to communicate with your counterparties or clients. Five key values underpin SWIFT messaging: safe storage, validation, secure delivery, copy services and retrieval. Safe storage SWIFT’s store-and-forward capabilities enable you to send messages and files at any time, knowing that when your counterparty comes online it will be immediately notified of any instructions. SWIFT’s store-and-forward based messaging services enable over 10,000 SWIFT users to exchange financial data in a secure, cost-effective and reliable way. Validation Since its inception, SWIFT has led collaborative efforts to develop standards that provide validation of the financial transactions being sent over our messaging platform. Upon receiving a SWIFT message, our users know instantly what type of information the message will contain and how it will be structured. This facilitates straight-through processing and automation, reducing operational risk and cost. Secure delivery SWIFT provides a closed, proprietary messaging platform that always authenticates and validates all messages and protects the identity and confidentiality of all message senders and receivers. In an age of increasing cyber threats, the strong security features of SWIFT messaging and related services provide further assurance of safe delivery. And while SWIFT gives customers the flexibility of connecting via the internet, such connections use highly advanced security technology for maximum protection. Copy services Y-Copy mode enables a designated third party to authorise or reject a message before it is delivered to the intended recipient. For example, you can send a Y-Copy message to your central bank and a payment recipient. After verifying that you have sufficient funds on account, the central bank authorises delivery of your message – and the funds – to the end recipient of the message. T-Copy mode lets you provide a copy of a message or file to one or more destinations for reporting or archive purposes. Message BANK A Our Copy services are a value-added feature of our messaging services that are ideal for both intra- and inter-institutional copying needs. For example the ‘Y-Copy’ mode enables a designated third party such as a central bank to authorise or reject a message or file before the messaging service delivers it to the intended recipient. In ‘T-Copy’ mode, SWIFT delivers the original message or file to the recipient and at the same time provides a copy to one or more destinations for reporting or archive purposes. Both services enable a higher level of authorisation to ensure only relevant, correct messages are sent to recipients. Message Y-COPY Copy Authorisation/ refusal BANK B BANK B Copy Copy destination Copy destination Central bank Archive destination Retrieval If the worst happens and your systems suffer a disaster or serious outage, SWIFT can help you manage the situation more effectively. A retrieval capability in SWIFT messaging enables you to rebuild a new copy of your message traffic flow at another site or on a backup system. The risk that a message was not sent or received is greatly reduced as operators can track the status of the message traffic flow from the point at which a problem occurred. Multiple messaging services We understand that you communicate with your counterparties in different ways. Our three messaging services FIN, FileAct and InterAct, provide store-and-forward and interactive (real-time) exchange of messages and files to enable the transmission of individual messages or bulk file information. When new services or platforms become available – such as TARGET2-Securities (T2S) – SWIFT users can leverage their SWIFT connectivity to add the required messaging. 1 FIN Financial institutions use FIN for individual, richly featured messaging which requires the highest levels of security and resilience. Features include validation to ensure messages conform to SWIFT message standards, delivery monitoring and prioritisation, message storage and retrieval. 6 BANK A T-COPY 2 FileAct Financial institutions use FileAct to send batches of structured financial messages and large reports. It is primarily tailored for the reliable transmission of large volumes of less critical information. 3 InterAct Financial institutions use InterAct to send structured financial messages and short reports. It supports real-time messaging, store-and-forward messaging and real-time query and response between two customers. 7
King Albert II, then Prince of Belgium, sends first SWIFT message on 9 May 1977 Supported by 239 banks in 15 countries, SWIFT begins mission of creating shared worldwide communications link and common language for international financial transactions 1970 1971 1972 SWIFT goes live First SWIFT message sent 22 countries • 518 customers • 3.4 million messages/year 1973 1974 1975 1976 1977 1978 1979
Operational risk Mitigating operational risk in corporate actions processing Managing operational risk in banking can become extremely complex, particularly when high volumes and multiple clients and counterparties are involved. Managing operational risk – risk related to the people, systems or processes through which a company operates – is a fact of life for every financial institution. Regulatory actions and financial losses have forced the issue into the boardroom, commanding toplevel attention. Operational risk is particularly significant in the transaction banking business, where volumes are high and the number of clients and counterparties are diverse. Manual processes, such as rekeying information into systems, are one the main sources of operational risk. This lack of automation can result in human errors, with the potential for financial losses. However, automation and standardisation can improve straight-through processing (STP) rates, eliminating many of the manual processes that lead to heightened operational risk. One of the most challenging areas of operational risk is the processing of corporate actions. A corporate action is a process that brings material change to a company and affects its stakeholders. It involves many different counterparties that communicate with each other in different parts of the process, generating a complex web of communication. Every year around 10 million corporate actions events are issued. The vast majority are relatively straightforward: plain cash dividends, interest payments or bonus issues. But some events are more difficult to process. Issuers have become increasingly innovative in their efforts to raise capital. In fact, while the number of events has remained steady since 2008, the events are increasing in complexity as debt restructuring and M&A activity grows. This means you are engaged in a continuous catch-up game to accurately capture and disseminate these corporate action events to your clients. These events have to be communicated accurately to shareholders around the world. Communications have to be timely – the nearer to the date of an event you can communicate with all of the actors in the processing chain, the more precise and current the information will be – and there will be less chance of error. Processing of corporate actions is a critical area due to the high number of different events and the multiplicity of options available to investors. The pitfalls are many: event terms can be complex and ambiguous; information sources may require manual input and validation; and standards can be loose or vary by markets, creating further interpretation challenges down the chain. In such a complex environment, the quality of the information you exchange is crucial to reduce manual processes and errors and to minimise risk. The consequences of a missed or mistaken corporate action can be costly, in terms of financial losses and loss of reputation. As a service provider, you know that accuracy and completeness of corporate actions processing are basic expectations of your client base. Anything that endangers that – input errors, missed deadlines, ambiguity in instructions, et cetera – cannot be tolerated. “Event terms can be complex and ambiguous; information sources may require manual input and validation; standards can be loose or vary by markets, creating further interpretation challenges down the chain.” Jyi-chen Chueh, Director, Group Product Management, I&I Services, Transaction Banking, Standard Chartered Bank 10 11
Reducing operational risk through automation Human error is a major risk factor whenever manual processes are involved. By automating as much of the corporate actions processing chain as possible, you can significantly reduce operational risk. A number of features of SWIFT’s messaging services are designed to improve automation and straightthrough processing rates. Store-and-Forward – be sure you reach your counterparty Global standards are the lingua franca for corporate actions The delivery notification provides immediate confirmation that a message has been received. This removes any uncertainty that a message has not reached the intended recipient and reduces the risk that an event deadline may be missed. Sent by SWIFT in store-and-forward mode or by a recipient in real-time mode, it can be used for non-repudiation purposes because it contains information related to the original message. SWIFT’s Corporate Actions solution combines ISO 15022 messaging standards and our connectivity to enable the standardisation and automation of corporate actions communication flows between information sources, market infrastructures, local agents, global custodians and investment managers. The solution enables you to reduce the costs and operational risks associated with processing corporate actions. In virtually all markets, ISO is replacing proprietary standards and is now the lingua franca for corporate actions. The development of ISO 20022 standards for corporate actions is bringing additional opportunities for automation as message functionality has been enhanced and enriched. To enable coexistence between these standards, ISO 15022 corporate actions messages have been reverse engineered to create ISO 20022 messages that will contain, at a minimum, equivalent business functionality. Validation – the right message to the right receiver The use of standards also ensures message validation. SWIFT’s standards give you the confidence that message content will be correctly structured and formatted in the same way across all of the parties involved in the corporate actions process. Before a notification or instruction is accepted by SWIFT for transmission, the information within specific fields is validated. Incorrectly formatted messages are not accepted for transmission and the sender is notified. This removes the operational challenges for receiving parties as only information relevant to each field is included. Given the multiplicity of actors in the corporate actions processing chain and the various time zones involved, it is unlikely all of your counterparties will be connected at the same time. Our store-and-forward capabilities enable you to send messages and files at any time, safe in the knowledge that when a particular counterparty comes online it will be immediately notified of any pending instructions. 1 2 3 Delivery notification The delivery notification is a technical message sent by SWIFT in store-and-forward mode or by a recipient in real-time mode. Delivery notifications provide immediate confirmation that a message has been received, contain a reference to the original message, and can be used for nonrepudiation purposes. We provide you with the ability to obtain information, including the origin of a received message, the time it was sent and the time it was received by the intended party. This information can be retrieved online from SWIFT’s database for up to 124 days. After that, digital signatures provide evidence for the non-repudiation of transactions for up to 13 years. Adding value through consulting and Business Intelligence Our consulting services teams are experts at helping institutions improve their corporate actions processes to maximise business and operational efficiency. We use our broad industry knowledge to help you achieve your business objectives – from reducing risk to improving service to your end-clients and identifying areas for future growth. Store-and-Forward Store-and-Forward enables SWIFT users to communicate with each other even when one of the parties is offline. SWIFT can store messages and files centrally and deliver them when the recipients are ready to receive them. Non-repudiation – rapid resolution of disputes Non-repudiation involves the generation and secure storage of evidence to support the resolution of disagreements about the outcome of electronic transactions. SWIFT’s messaging provides legal proof that a message or file was sent or received, thus enabling any disputes regarding the sending or receipt of corporate actions to be rapidly resolved. Validation FIN and InterAct messaging can provide central verification that message content is correctly structured and contextually correct. Messages are formatted in the same way by all counterparties, enabling higher levels of straight-through processing and automation. Delivery notification – proof your message has been received Due for launch in 2014, our new Business Intelligence for Securities Corporate Actions product will enable you to benchmark your operational performance and efficiency against your peers. This will help you to improve your automation rates by, for example, minimising the use of narrative within message fields. 12 Messaging features 4 Non-repudiation This ensures the ability to prove that a specific message was sent or was received. Information, including the origin of a received message, the time it was sent and the time it was received by the intended party can be obtained from SWIFT for up to 124 days. 13
In 1980, Hong Kong and Singapore become first Asian countries to connect to SWIFT First Asian countries connect SWIFT exceeds 1,000 customers 36 countries • 768 customers • 46.9 million messages/year 1980 1981 1982 SWIFT exceeds 100 million messages/year 1983 1984 SWIFT enters securities market SWIFT exceeds 2,000 customers 1985 64 countries • 2,360 customers • 222.3 million messages/year 1986 1987 1988 1989
Liquidity risk Optimising liquidity management with SWIFT messaging Financial institutions must meet stricter regulatory requirements for liquidity management by monitoring intraday positions and ensuring sufficient funding to meet objectives and obligations. Since the financial crisis, financial institutions and their corporate clients have been searching for efficient mechanisms and best practices to manage liquidity risk and meet regulatory requirements. Capital and liquidity have become scarce resources. This has raised concerns about financial institutions’ ability to cover their payments obligations, particularly during times of market stress. Financial regulators have identified intraday liquidity as a key element of the overall liquidity risk management framework and have imposed specific requirements to monitor liquidity. The Basel Committee on Banking Supervision (BCBS) has formulated a number of requirements regarding liquidity monitoring. Starting in 2015, all internationally active banks will be expected to provide monthly reporting of their intraday liquidity flows for all accounts and currencies where they act as a self-clearer, Nostro user or Vostro provider. Reporting will be required at both the global group level and at the level of each legal entity. In some jurisdictions, these reporting requirements will extend beyond internationally active banks and beyond the retrospective reporting. In this case all impacted organisations will need to demonstrate that they manage their intraday positions in real-time. For example, you will be expected to monitor intraday liquidity positions against expected activities and available resources; have arrangements in place to acquire sufficient funding to meet intraday obligations; be able to manage and mobilise collateral as necessary to obtain intraday funds; manage the timing of liquidity outflows in line with intraday objectives; and deal with unexpected disruptions to intraday liquidity flows. To meet these requirements you need a central, institution-wide view of liquidity. Being able to monitor intraday liquidity risks and meet payment and settlement obligations in a timely manner – even in stressed conditions – is a key priority for your institution. In the interconnected world of global finance, keeping track of balances at correspondents around the world has become an onerous task. In order to accurately assess the use of liquidity within your institution, you must be able to also keep track of the liquidity status of your branches. The larger a transaction bank is, the more branches it will have spread across the globe and the more complex the task will be. Gathering and centralising such information is not always straightforward, particularly where the level of sophistication of IT and processes varies across branches. “Financial regulators have identified intraday liquidity as a key element of the overall liquidity risk management framework and have imposed requirements to monitor such liquidity. ” 16 17
Achieving transparency in liquidity management Managing liquidity is all about transparency – you need to know, with certainty, your liquidity position at any time. SWIFT messaging allows you to exchange standardised financial information securely, reliably and in an automated manner, as required for your liquidity flows and related intraday and end-of-day reporting. Globally, all major cash correspondents are connected to SWIFT. You can also leverage your SWIFT messaging infrastructure to connect to more than 70 high value payments systems around the world. Building group-wide transparency Debit/credit confirmations A crucial factor in liquidity management is the guaranteed delivery of credit/debit confirmation messages between your branches and your correspondent network. The time stamp from such messages can be used to feed your liquidity dashboard, enabling rapid updates if the messages are sent as soon as debits or credits have been posted on your account. Our messaging services help you to manage and monitor exposure across accounts, correspondents and currencies, monitor positions globally, feed BCBS reports and as a result, reduce liquidity buffers. These messages can be complemented with interim transaction reports and delivery versus payment (DVP) and receipt versus payment (RVP) confirmations to cover 100 per cent of your transactions. Maintaining an overall view of your liquidity picture is a major challenge, involving the integration of multiple systems and data sources. FINInform is a very cost-effective alternative to internal integration projects, which can be lengthy, complex and expensive. It provides the ability to automatically copy your headquarters on payments and intraday cash reporting messages sent from or received by branch offices, enabling your central treasury to monitor the liquidity flows of remote branches. With FINInform, you can build a group-wide liquidity position on a real-time basis without any disruption to the flows from your branches. You can choose to receive real-time copies of a set of payments or reporting messages from any or all of your branches and entities, for some or all of your currencies or accounts. We manage the service set-up based on your configuration requirements, and the process is transparent to the IT and operations of your branches and correspondents. FINInform allows you to copy up to 25 message types, and you can define a flexible set of criteria to trigger the copy mechanism. For countries with strict data confidentiality or privacy regulations, specific customer data can be filtered out of the copy sent to you. The partial copy can be restricted to the information that you need. Messaging features 1 Guaranteed delivery The inherent features of the SWIFT platform – availability, resilience and security – ensure that SWIFT can guarantee delivery of message traffic. Financial institutions can send messages and files via SWIFT knowing they will be received by the intended recipients. 18 2 Global reach SWIFT users encompass all globally relevant correspondents and counterparties. These institutions are connected to SWIFT’s messaging layer and enjoy all of the benefits that brings. 3 FINInform FINInform is a value-added service that enables institutions to monitor the activity of remote branches as well as fulfil reporting obligations. It automatically copies predefined message types and forwards them to selected destinations such as head offices or repositories for archiving, authorisation or further processing. 19
SWIFT connects more than 10,000 institutions in more than 200 countries and territories. SWIFT reaches more than 100 countries SWIFT exceeds 5,000 customers SWIFT exceeds 1 billion messages/year 106 countries • 3,986 customers • 457 million messages/year 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999
Legal risk Common messaging standards and protocols enhance legal certainty The multitude and diversity of business relationships in financial services mean dispute resolution is complex and time consuming. The financial crisis highlighted the complexity and interconnectedness of the financial industry. The multiplicity of relationships and characteristics of the transaction chain created issues around legal ownership of assets. These were laid bare in the aftermath of the Lehman Brothers collapse as some financial institutions took many years to fully unravel their positions. This dramatic event highlighted the need for legal certainty and the ability to determine exactly when a transaction took place or indeed whether a transaction took place. As a financial institution, you need to know the details of your transactions with counterparties: when instructions were sent and to whom and at what point those instructions were verified. Legal risk is vastly important to you because when a counterparty fails, you must know as soon as possible what the implications are for your business. When a trade is transacted, it is accompanied by an irrevocable payment instruction that is sent to a settlement system – the institution cannot back out of that commitment. But legal certainty is not only essential in times of crisis and failure; financial services are a complex business, involving multiple counterparties across the world. Inevitably, disputes will arise and the ability to resolve these rapidly will ensure a smoothrunning business, with relevant assets returned in a timely manner. Your legal department needs to understand your exposures to all of your counterparties. In securities transactions, they need to know which form of securities transfer has taken place; in the European Union alone there are 17 different legal forms of transfer. Being able to identify the form of transfer and the legal position of any transaction will greatly reduce the legal risk you face. “Differing definitions of irrevocability caused problems in the aftermath of the Lehman Brothers collapse. Dealing with trades that have failed as a result of insolvency is something the industry is still grappling with. Simon Gleeson, Partner, Clifford Chance ” 22 23
Underpinning your legal status with SWIFT messaging Legal risk can often be mitigated with mechanisms that provide proof. SWIFT messaging features such mechanisms, which can be used in the event of disputes. By using SWIFT messages, every institution enters into our nonrepudiation terms. Non-repudiation is a major differentiator. When you send a message via SWIFT, you know and can prove your counterparty has received that message. Information, including the origin of a received message, the time it was sent and the time it was received by the intended party, is contained in the message and can be used in case of dispute. Message archival for easy retrieval As an independent carrier and holder of the message, SWIFT offers you – either as a sender or receiver of a message – the ability to retrieve specific messages for up to 124 days after they have been sent. The content within any message will provide you with the proof you may need to resolve a dispute. The details of a transaction such as the price and conditions will be contained within the message. Time stamping for further accuracy Common understanding = legal certainty Messages sent over SWIFT are time-stamped, providing further evidence that can be used in cases of dispute. Exactly when a message is sent or received may be an important factor if a counterparty fails. The messaging standards we have built up over many years help to provide legal certainty. By correctly entering all of the relevant information within the message fields you can mitigate legal risk and have an important tool in times of dispute. Because our messages are standardised, we have eliminated any doubt as to what a particular message means. Your ability to act on a transaction and determine your position regarding individual assets will depend on the time a transaction took place. Knowing what has or has not entered the clearing system before the exact time a counterparty fails will remove uncertainty about your position and exposure to that counterparty. Messaging features 1 Availability SWIFT’s typical availability for its main messaging services is 99.999%. Financial institutions can send messages with the assurance that services will be available to all users at all times. 24 2 Security Underpinned by PKI technology, SWIFT messaging services provide authentication of sender and receiver, guaranteed integrity and confidentiality of the transported information. The identity of senders and receivers is also protected. 3 Resilience SWIFT maintains multiple operating centres and can continue operations even in the event of the loss of one or more of these centres. This resilience lies at the heart of SWIFT and is the cornerstone of its users’ trust in its services. 4 Retrieval capability In case of a systems failure at their site, SWIFT users can retrieve messages exchanged on the platform during the outage. Financial institutions can rebuild a new copy of the message flow at another one of their locations, for up to 124 days after messages have been sent or received. 25
First SWIFTNet message sent SWIFT exceeds 2 billion messages/year ISO 20022 introduced Corporate category approved 198 countries • 7,601 customers • 1.8 billion messages/year 2000 2001 2002 2003 2004 2005 2006 SWIFT exceeds 3 billion messages/year 2007 SWIFT introduces fixed fee pricing 2008 2009
Counterparty risk Protecting against counterparty risk through trust and verification Regulators require financial institutions to understand with whom they are conducting business and to protect themselves against extraneous transactions. Striking the correct risk/reward balance is a considerable task for today’s financial institutions. Counterparty risk – the risk to each party in a transaction that its counterparty will not meet its contractual obligations – is an issue for practitioners in many areas of financial services. But there are also other issues when it comes to counterparty risk, particularly as concerns grow about terrorist financing and money laundering. Many financial regulations require you to ensure that you know with whom you are dealing across the world. Complying with Know Your Customer (KYC) and Know Your Provider (KYP) rules, along with Anti-Money Laundering (AML) laws and sanctions lists has become increasingly timeconsuming and costly. The issues around counterparty risk are well illustrated in the trade finance world, where it is a constant concern. While you may have conducted the correct procedures when bringing on board new clients – whether other financial institutions or corporates – the status of those clients’ clients may not be as well understood. Trade is now a much more global, interconnected business; a large transaction bank may exchange messages with between 100-3,000 correspondent banks per quarter. This requires a much more robust approach to due diligence and counterparty risk. When communicating with counterparties, you need to know that every counterparty has been validated and authenticated. Establishing relationships requires mutual trust and extensive KYC procedures. Carried out correctly, you will reduce the risk of extraneous transactions entering your institution. But performed incorrectly, you run the risk of heavy fines and censure. Trade finance remains a very paper-based procedure, thus exacerbating some of the challenges you face in mitigating counterparty risk. Paper- and telex-based transactions need to be reviewed in the same way as electronic transactions. “Concerns about counterparty risk continue to be heightened around aspects of terrorist financing, money laundering and sanctions. As a large transaction bank we are more diligent than ever before.” Trade product executive, global transaction bank 28 29
Protecting the identity of SWIFT users SWIFT messaging is extensively used in the world of trade for communication from financial institution to financial institution and from financial institution to corporate client. We understand the importance of trust and verification when it comes to trade – counterparties are engaging in commitments to pay and collateral is taken or finance offered based on such commitments. All institutions go through extensive due diligence processes before they are admitted as SWIFT users. This protects all of our users and enables them to benefit from a number of additional messaging features that provide the foundation stones of trust and verification. In addition, SWIFT offers sanctions screening and testing services and is developing its KYC offering for correspondent banking, providing SWIFT users with more tools to help assure their compliance. Know your counterparties We have combined our technology offering with a legal component, taking responsibility for the authentication of the senders and receivers of messages on our platform. The message sender can be identified, which is crucial for a receiving bank because if it receives a message from the wrong institution, the consequences can be dramatic in terms of financial losses. We have undertaken this authentication since day one of our existence through a messaging database of identities, backed up by verification through our networks of national member groups and the rules these groups have established. Unlike on an email service, it is not possible to create a false identity on SWIFT. This means you as a SWIFT user can process the messages you receive without having to verify the identity of the senders. Controlled access for greater security A further weapon in the fight against counterparty risk is the ability to create Closed User Groups. These enable you to limit access to a service, infrastructure or application to a specific community or customer base. A Closed User Group is a subset of customers that have been grouped to use certain SWIFT services and products in a defined context. You can create specific communities in order to isolate message flows and communities from each other. 30 Either SWIFT or a service administrator defines the eligibility criteria and participation in the Closed User Group. Such a group can provide you with even greater security that those conducting transactions with you within the group have been fully vetted and can undertake only the transactions you have specified. Messaging features 1 SWIFT provides certainty about the identities of senders and receivers of transactions exchanged over the SWIFT messaging platforms. The integrity of specific information can be proved and message authentication determines the source of a message, verifying that no-one has modified or replaced the message in transit. Enhanced management of ‘many-to-many’ services A means to manage business relationships in ‘many-to-many’ services, the Relationship Management Application (RMA) is a filter that enables you to limit the correspondents from which you can receive messages and also the type of messages correspondents can send to you. Use of the RMA is mandatory for the FIN messaging service. The RMA is a powerful system, acting as a filter and preventing you from receiving particular flows, based on configurations that you control and can update when necessary. This decreases the risk of receiving fraudulent messages or messages from sanctioned counterparties, which have to be reported to regulators. When it comes to counterparty risk, you need a trusted third party that can intermediate on your behalf, taking responsibility to validate and authorise communications between you and your counterparties. We provide this protection at the messaging layer, mitigating the very real risks that exist when dealing with multiple counterparties. Beyond trade finance 2 SWIFT has worked with the industry to develop message standards for the exchange of information such as margin calls and netting results with Central Counterparties, and to support the whole procedure of collateral negotiation, from reconciliation until dispute management, with every counterparty. Closed User Groups Closed User Groups define a subset of customers that can use specific SWIFT services and products within a defined context, enabling access control to particular services, applications, market infrastructures and solutions. Either SWIFT or a member service administrator defines the eligibility criteria and participation rules within a Closed User Group. 3 Relationship Management Application The Relationship Management Application (RMA) enables message recipients to filter or restrict the messages they receive from particular counterparties. RMA helps users to better manage business relationships and protects against risks related to unwanted traffic and audit and compliance-related risks. Another clear example of how SWIFT supports the mitigation of counterparty risk is in the area of message standards, where specific standards support information flows involved in clearing and collateral management. Since 2008, a number of regulatory recommendations have been put in place to reduce counterparty risk related to instruments such as OTC and listed derivatives that are deemed to be particularly critical in terms of economic stability. Clearing is being enforced in some cases, while strict collateralisation of the outstanding risk is required in others. Identification and authentication 4 Copy services SWIFT messaging allows you to automatically send a copy of a message or file to a separate destination for authorisation or further processing. This supports the clearing and settlement of highvalue payments, treasury and securities-related transactions, as instructions can be authorised by a copy destination, before release to the beneficiary. 31
In 2013, average daily traffic on SWIFT exceeded 20 million messages SWIFT exceeds 4 billion messages/year SWIFT exceeds 10,000 customers SWIFT exceeds 5 billion messages/year 2010 2011 2012 2013 SWIFT announces 2013 rebate of 33 million euros Live operations start at Swiss Operating Centre 212 countries • 5 billion messages/year 212 countries • 4.6 billion messages/year FIN messages price cuts to generate 50 million euro in savings in 2014 2014 2015
Looking ahead Building a strong future together with SWIFT Many SWIFT users run very large technology operations that are the engine rooms of global transaction banking. In this era of great change for financial institutions, spurred on by regulatory action and technology developments, disruptions to your operations can have serious consequences. At the same time cost pressures are high, which emphasises the need to increase efficiency. SWIFT provides the certainty and reliability you need to conduct your business and protect yourself from risks. Our neutrality, governance, global platform and reach are valued by our members around the world. We are driven by our community, innovating to meet their needs and to bring their costs down. In 2013, we exceeded 5 billion FIN messages per year – over 20 million messages per day – and continue to deliver price reductions to our users. Price cuts announced in 2014 will generate more than 50 million euros in savings for our customers. Helping you manage risk more effectively At SWIFT, we have invested in ensuring our platform is always there when you need it. We take our classification as a systemically important entity seriously – from the highest to the lowest levels of the company, risk avoidance is part of our culture. Like SWIFT, you continue to invest in automation and standardisation to mitigate and eliminate sources of risk. You want consistency and standardisation across your operations, no matter where they are in the world. SWIFT’s messaging and standards are great enablers of automation. The move towards ISO 15022 and ISO 20022 standards has significantly boosted straight-through processing rates across different areas of global transaction banking. You have become more diligent than ever before when it comes to KYC and AML and sanctions regulations. You have told us that SWIFT’s authenticated and validated messages give you a higher level of comfort that you are dealing with known and trusted counterparties. This validation and authentication mitigates counterparty risks and enables you to execute transactions in a safer and more efficient manner. In addition, SWIFT offers a portfolio of financial crime compliance services, giving you additional tools to manage risk. Here today, here tomorrow - for you One of our greatest assets is the trust in our messaging that we have built over our past 40 years. Our users know that they can rely on a SWIFT message to get through to their counterparties, no matter where they are. They know the message will be validated, authenticated and if necessary retrievable should a dispute arise. Our mission remains unchanged after more than 40 years: to provide a secure, reliable, member-owned messaging platform which enables the financial world to conduct its business operations with speed, certainty and confidence. Sustained cost reductions for all SWIFT members for over twenty years SWIFT is committed to helping its customers reduce the cost of doing business. Since 1990, the cost per FIN message has decreased more than 90 per cent. Meanwhile, total FIN volumes have increased more than 10-fold, from less than 500 million messages per year to over five billion messages per year. This was achieved through a combination of innovative operational efficiencies and robust volume growth. The Fixed Fee programme introduced in 2008 has been widely adopted and now covers more than 80 percent of FIN traffic. Initially aimed at the largest SWIFT users, Fixed Fee pricing is increasingly being adopted by mid-sized institutions, which value the cost certainty, peace of mind and savings it provides. Today’s financial executives have many responsibilities and worries, but one thing they never need to worry about is SWIFT. 34 35
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Risk Zoom: Dynamic wide-angle depth-of-field - Realisms in high-risk focus for integrated risk assessment (IRA) Timo Assmuth, Finn Environ Inst (SYKE)
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