Sibos 2020 - Day 3

As the Sibos community comes together for its first virtual conference, the flow editorial team are standing by to report on each day’s proceedings. From “Dream Big, Stay Fit” morning wake-up sessions, to understanding more about how emerging technologies and the accelerating move to digitalisation are becoming business as usual in payments and securities processing, the essentials of each day will be summarised here in five handy take-away points every 24 hours.

Virtual Sibos 2020

Sibos has always been and remains stressful for its organisers and participants. But that is part of what Sibos is; all that intensity and energy. Diaries are packed with meetings (and it is no different in a virtual world) and nobody wants to miss anything. Add to that we have sessions to address all time zones – as Head of Sibos Chantal Van Es reminded us at the start, “It’s a long day so people can catch the sessions in real time.”

So it was fitting that our resident Dr Rangan Chatterjee started Day 3 with a reminder in Dream Big! Stay Fit: Mood that stress levels need to be managed. Tips include writing down one’s feelings about the day ahead, breathing in for three seconds, holding it there for four and breathing out for five. Getting out into fresh air is a good one, “Walk around in nature as the brain processes the serenity and this reduces cortisol,” which works a treat until one bumps into a colleague (or in the case of one of the flow team, their WFH partner) who has just lit a cigarette…which leads us neatly onto our first theme.

Managing cyber-attack risk

“A business falls victim to a cyber-attack every 14 seconds, the financial services industry is predisposed to this,” noted Deborah Hrvatin, Chief Risk Officer at CLS Group in a session aptly named Risk management: the world of worries. While a number of risks were discussed, cyber security was the one that also resonated in a number of other sessions that day. These panellists recalled ECB President Christine Lagarde stating on 5 February that a cyber-attack on a major financial institution just after the European System Risk Board had published a report estimating the cost to the global economy in 2018 of cyber breaches could be as much as US$654bn.

Former rail network risk manager Helen Hunter-Jones (now Chief Risk Officer at Pay.UK) compared payments to railways, as “when something goes wrong there is a huge contagion event” and observed that the criminal fraternity is seeing the move to digital payments as “an opportunity”.

Matt Comyn, CEO of Commonwealth Bank of Australia on fraud risk with real-time payments

Matt Comyn, CEO of Commonwealth Bank of Australia confirmed in his View from the Top that the move to real-time payments had brought a new focus. “Fraud is always an issue, but with real time payments this has become a competitive element for bank to how they deliver on trust.” He added, “As we are sharing more data we need to be conscious of where data privacy is going and protect individual customer identity.”

Episode 11 of Sibos TV took this theme further, with Professor Stuart Madnick, Founding Director of Cybersecurity at the MIT Sloan School of Management to the 2019 Capital One data breach. He commented on how slow companies are to learn and adapt to new threats. “You need to understand the most valuable resource of your business and what protection methods are in place. People leave the back door open and windows unlocked and a key under the mat.”

Stuart Bailey, Head of Industry, Strategy and Design at Lloyds Banking Group helpfully shared how the bank’s Counterparty Cybersecurity Risk Management programme embedded protection into the customer relationships via the relationship managers. The UK bank processes 15.5 trillion payments each year, he said, so onboarding “clean” customers is vital. “The last thing we want to do is tell them ‘sorry you are not compliant’”. His particular worry, he said, was that while the larger financial institutions have programmes like this in place, the smaller “long tail” providers “don’t have the resources and need more attention”.

Cross-border payments

Victoria Cleland a year ago at Sibos London 2019, talking on Payments, a platform for innovation

In the Big Issue Debate, Cross-border payments: what role for banks in 2025?, Haslinda Amin, Chief International Correspondent for Southeast Asia at Bloomberg deftly moderated a panel comprising:

• Victoria Cleland, Chair, CPMI Task Force on cross-border payments and Executive Director for Banking, Payments and Financial Resilience at the Bank of England;
• Diane Reyes, Group General manager and Global Head of Liquidity and Cash Management, HSBC;
• Paul Stoddard, New Payment Platforms, Mastercard; and
• David Watson, Chief Strategy Officer, SWIFT

The panel concurred that Covid-19 has intensified the push for more efficient cross-border payments, but they are still too slow, inefficient and lacking in transparency. Too many are still not settled within 24 hours, noted Cleland and making them cheaper and more efficient will give a much-needed boost to the global economy. In 2017 the total value of cross-border payments was US$150trn, with the expectation that this figure will increase by a further US$100trn over the next 10 years.

In a follow up video interview with The Banker’s Joy McKnight, Cleland explained that ISO 20022 was hugely important to the Bank of England’s revamped Real Time Gross Settlement (RTGS) system and they were pushing ahead with the RTGS renewal programme.

Stoddard noted that the pandemic has produced winners and losers, with cross-border transactions impacted by the sharp fall in leisure and business travel but offset by a major rise in e-commerce volumes. Asked if banks are recognising the value of strategic partners in a time of crisis, he thought they had recognised the strengths and those areas where ceding some control was worth it if it resulted in a better customer experience. Mastercard, he said, “had been able to forge strong relationships with banks in times of stress”, which he hoped would continue after the pandemic.

Reyes agreed that recent months had seen a fall in cross-border volumes from late 2019 and a 20% drop in April this year followed by a slow recovery in subsequent months. Cross-border payments had been particularly in demand for medical supplies and PPE and the bank had been able to expedite supplies to the front line.

“What banks want in the cross-border payments arena is for them to be as secure as domestic payments,” added Reyes. “But we still suffer from a lack of consistency in areas such as sanctions screening and differing national payment schemes.” However, all agreed that the transition to ISO 20022 marks a major step forward.

Utilities, cooperation and regulatory reach

In the Sibos session, The future of post-trade, global platforms and strategic partnerships on Tuesday 6 October, it was agreed that more regulation and standardisation would be helpful – particularly since many participants are feeling the squeeze on fees.

Panellists from across the securities services spectrum highlighted that utilities have been proven to reduce costs and can add value to the rest of the industry. Functions such as corporate actions, dividend payments, know your customer (KYC), and collateral management – which can be standardised – have frequently been cited as being ripe for an industry utility model. Yet firms have historically been unable to work together, largely due to competition concerns.

This particular baton was taken up again in the 7 October Sibos session, SWIFT strategy overview: capital markets. Also called the ‘SWIFT gpi for securities’, the platform is being tested with industry partners with the view to announcing a pilot in 2021 and bringing the service to market in 2022.

Commenting on the vision, SWIFT head of Capital Markets strategy Lisa O’Connor said the platform is based on the use of data to provide end to end visibility on securities transactions moving through the entire chain in near real time. This will create efficiencies in the cash, securities and FX leg of transactions.

By standardising securities data SWIFT could validate information on any issues that might occur in the securities settlement chain further down the line; for example, reducing risk and settlement failure due to incorrect details, such as SSI information or information on a sanctioned entity. Industry users could address 30% of settlements that fail due to incorrect or incomplete data. The standardised securities identifier, or SSI information, could also help with end to end transaction monitoring.

Securities industry participants will be able to track and provide visibility on the latest state of the settlement instruction in near real time, said O’Connor. So everyone throughout that chain will have visibility of the information and be able to act on it, if required. This will enable the industry to deal with incoming regulations, because they have oversight of which securities transactions could potentially fail and hence be penalised under the Central Securities Depository Regulation’s Settlement Discipline Regime.

Through a mutualised platform that will enable end to end transaction management models for securities, users can reduce settlement failure, fraud risk unwanted costs and leverage the platform to offer more value to their own customers over time, said O’Connor.

Overall, there was a general consensus that the combination of new regulatory regimes, digitalisation and, of course, Covid-19 had triggered or accentuated pain points within the capital markets – and that the standardisation SWIFT can provide, based on industry feedback and factoring in tailoring for end clients at the point of service, can help resolve many of them.

Building on this theme, during a workshop session at the Deutsche Bank festival of finance on Day 2, Securities Services market advocacy experts, Emma Johnson, Mike Collier and Boon Hiong Chan provided an update on how regulation and standardisation could be seen as helpful. The Central Securities Depository Regulation (CSDR), the Shareholder Rights Directive II (SRD II) and rules governing the take-up of digital tools are three areas where regulators are pressing ahead with reforms, albeit at different paces and these should be seen as enablers of further innovation through digitalisation.

Europe’s SRD II lays down the minimum requirements as regards shareholder identification, the transmission of information and the rights of shareholders. The directive covers issuers’ rights to know who their shareholders are and intermediaries’ requirement to assist in the discovery process. In doing so, it aims to improve the dialogue and long-term engagement of shareholders with issuers to stimulate good corporate governance and company stewardship. Live from 3rd September 2020 its main impact would be felt by all intermediaries in the securities value chain, including CSDs and custodians and company shareholders or final beneficiaries owners of the equities.

Explaining that SRD II affects us all, Collier said that since the regulation makes custodians the conduit of real-time information between issuers and investors, this fosters more efficient capital markets. “By making the issuer CSD as the main source of information that can be transmitted through the holding chain in an STP manner, this will potentially mitigate the need to data scrub information and create a truly STP process”.

This process relies on the ISO20022 message standard for shareholder identification disclosure. It is the only ISO standard that is compatible with the obligation that enables an STP environment for messaging so it presents an opportunity to get the message through the securities chain quickly. This enables innovation, where new tools such as the ability to upload client data to a web portal are emerging to potentially replace today’s email and excel file exchanges, which carry risk through that process, and ensure the confidentiality of the data that is being transmitted. “As an industry we are encouraging standardisation in the identification space to be used productively to ensure security”, said Collier.

On CSDR, the next big date is February 2022, when the Settlement Discipline Regime (SDR) takes effect for anyone using a CSD to settle securities in Europe. Emma Johnson, director, market advocacy, corporate bank, Securities Services at Deutsche Bank told her festival of finance audience that the delay was welcome given the complexity of the regulation (which carries more than 70 articles) but urged them to use the time to factor it into their budgets. The regime will impose cash penalties for settlement fails. In order to avoid financial penalties, intermediaries in the transaction chain will need to conduct robust testing of their end to end systems.

Johnson said the cash penalty regime is unlikely to pose a major challenge for intermediaries in contrast to the mandatory buy-in rules. She pointed to the spike in settlement fails during the March 2020 time of volatility, highlighting mandatory buy-ins, which – had they been enacted under CSDR – would have worsened the situation. The jump in settlement fails exposed a lack of automation in post-trade processes and reinforced the need for digitalisation.

The future of money

David Birch is an author and commentator on digital financial services

Although this was the theme of the entire day, the SWIFT Innotribe session moderated by EY Parthenon’s James Lloyd at one stage made some of us wonder whether there would be any financial system at all in five to 10 years’ time.

We actually thought it was quite brave to invite author and blogger David Birch, who promptly came out with the observation “SWIFT is an affectionate tribute to the 1970s and in a world of central bank digital currencies (CBDCs) it is not clear what is going to happen.” His point was that given the “messy structures” needed to move money around such as reconciliation, confirmation, etc., once central banks could work through CBDCs SWIFT would be disintermediated. SWIFT’s Chief Innovation Officer Thomas Zschach took the jibe remarkably well and pointed out that money and payments connected to money have become digital – and this was the primary driver for the new SWIFT strategy. “SWIFT solved a practical problem of the time of payments not talking to each other and our new strategy is based on the fact the world is going digital, with payments going digital,” Payments lies at the heart of it, as CEO Javier Perez-Tasso explains in our flow cover story article, Responsible innovation.

Another interesting reflection was the reminder that just because the USD dominates now as the world’s reserve currency, this was not always the case and might not be so in the future. In the past it was the GBP and in some parts of the world not everyone, as Birch put it, necessarily thinks it’s great that America determines their monetary policy. He reminded his audience that former UK Bank of England Governor Mark Carney had, just over a year ago, articulated the need to "do something about the destabilising dominance of the US dollar".

It’s never a dull moment at Sibos, and there is something about Day 3... In short:

• Cyber threats are stepping up as payments become instant and frictionless.
• Counterparty risk has evolved into liquidity risk, but bar a major cyber security breach, controls are in place.
• Smaller businesses and financial institutions need support from larger ones and their governments.
• Utilities and regulation can reduce cost in a low-interest rate environment.
• Central Bank Digital Currencies could completely change the landscape and ecosystem – but will they really?

Festival of finance session videos

Central Bank Digital Currencies (CBDC): the most important trend in payments?

Session from the Deutsche Bank Festival of Finance, running alongside Sibos 2020, with Ignacio Terol, Robert Crozier and Marion Laboure, moderated by Alexander Bechtel

Deep Dive into SWIFT gpi

"Deep Dive into SWIFT gpi" workshop moderated by Dennis de Weerdt, Global Head of Service & Implementation, Deutsche Bank, with the following attendees

• Christian Fraedrich, Cash Management, Deutsche Bank
• Sebastian Rojas, Head of SWIFT gpi products, SWIFT
• Javier Orejas, Head of Banking – EMEA & Americas, IATA

Sibos Daily Digest

with Ole Matthiessen