Financial Sector Financial Sector OverviewOverview

Major Categories of Major Categories of institutionsinstitutions

► Retail Banks, Thrifts, and Credit UnionsRetail Banks, Thrifts, and Credit Unions► Commercial & Merchant banksCommercial & Merchant banks► Investment BanksInvestment Banks► Wealth & Asset ManagersWealth & Asset Managers► Securities trading and servicingSecurities trading and servicing► Property & Causality insurersProperty & Causality insurers► Life & Annuity insurersLife & Annuity insurers► Financial Utilities, Processors, & Financial Utilities, Processors, &

ExchangesExchanges► Government and industry regulatorsGovernment and industry regulators

Key TermsKey Terms► Clearing*Clearing*

Denotes all activities from the time a commitment is made for a transaction until it Denotes all activities from the time a commitment is made for a transaction until it is settled. is settled.

Clearing is necessary because the speed of trades is much faster than the cycle Clearing is necessary because the speed of trades is much faster than the cycle time for completing the underlying transaction. time for completing the underlying transaction.

In its widest sense clearing involves the management of post-trading, pre-In its widest sense clearing involves the management of post-trading, pre-settlement credit exposures, to ensure that trades are settled in accordance with settlement credit exposures, to ensure that trades are settled in accordance with market rules, even if a buyer or seller should become insolvent prior to settlement.market rules, even if a buyer or seller should become insolvent prior to settlement.

► Settling*Settling* The process whereby securities or interests in securities are delivered, usually The process whereby securities or interests in securities are delivered, usually

against payment, to fulfill contractual obligations, such as those arising under against payment, to fulfill contractual obligations, such as those arising under securities trades.securities trades.

This involves the delivery of securities to perform contractual delivery obligations. It This involves the delivery of securities to perform contractual delivery obligations. It usually also involves the corresponding payment of a purchase price. usually also involves the corresponding payment of a purchase price.

Time between clearance and settlement varies by product type and market Time between clearance and settlement varies by product type and market infrastructureinfrastructure

► NettingNetting Process by which the intraday transactions are reconciled and the offsetting credits Process by which the intraday transactions are reconciled and the offsetting credits

and debits between institutions are summed.and debits between institutions are summed. This effect of this is it allows a single transaction or payment be made between This effect of this is it allows a single transaction or payment be made between

counter parties to clear or settle a large number of transactionscounter parties to clear or settle a large number of transactions Used for both cash and securities transactions and facilitated by financial utilitiesUsed for both cash and securities transactions and facilitated by financial utilities

*Source: Wikipedia

Cash - Market Cash - Market InfrastructureInfrastructure

Payment System Payment System InterconnectionsInterconnections

Graphic Source :SWIFT

High Value Payments Low Value Payments MI= Market Infrastructure

Electronic Payment SystemsElectronic Payment Systems

►Credit Card processing networksCredit Card processing networks►ATM interbank connectionsATM interbank connections►ACHACH►SwiftSwift►CHIPSCHIPS►FedWireFedWire►Continuous Linked Settlement (CLS)Continuous Linked Settlement (CLS)

Credit Card processing Credit Card processing networksnetworks

► Connects acquiring banks to issuing banksConnects acquiring banks to issuing banks Interconnected via a series of different networks and Interconnected via a series of different networks and

processors with direct relationshipsprocessors with direct relationships Interchanges via major associations for indirect Interchanges via major associations for indirect

relationshipsrelationships► American Express, Master Card, VISA, etcAmerican Express, Master Card, VISA, etc

► Daily Volumes US (2006)*, ~60 Million Daily Volumes US (2006)*, ~60 Million transactions per day, average of $10 each, ($2.1 transactions per day, average of $10 each, ($2.1 Trillion per year)Trillion per year)

► Significant area of cyber attacks by criminal Significant area of cyber attacks by criminal groupsgroups Attacks target card processors, merchants, and Attacks target card processors, merchants, and

customerscustomers*Source: http://www.frbservices.org/files/communications/pdf/research/2007_payments_study.pdf

ATM Interbank NetworksATM Interbank Networks

► Connects Automated Teller Machines & Point of Connects Automated Teller Machines & Point of Sale devicesSale devices Interconnected via a series of different networks and Interconnected via a series of different networks and

processorsprocessors Cash withdrawals and payment card debitCash withdrawals and payment card debit PIN based and signature based transactionsPIN based and signature based transactions

► Daily Volumes US(2006)*, ~100 Million Daily Volumes US(2006)*, ~100 Million transactions per day, average of $82 eachtransactions per day, average of $82 each

► ~60% of transactions stay within the same ~60% of transactions stay within the same institution “On us”institution “On us”

► Significant area of cyber attacks by criminal Significant area of cyber attacks by criminal groupsgroups Attacks target card processors, merchants, and Attacks target card processors, merchants, and

customerscustomers*Source: http://www.frbservices.org/files/communications/pdf/research/2007_payments_study.pdf

Payment Card TransactionsPayment Card Transactions

Customer

ATMs

CARD Processor

“A”

CARD Processor

“B”

X Bank

`

Compromised Box

Associations & NetworksMC / VISA/ NYCE/ etc

All Other banks

Some banksCrook

Automated Clearing House Automated Clearing House (ACH)(ACH)

► Used for primarily customer to business payments (direct deposit, Used for primarily customer to business payments (direct deposit, direct payment, recurring bill payments, electronic check direct payment, recurring bill payments, electronic check payments, etc)payments, etc)

► Customer instructions sent via file transfers over leased line or Customer instructions sent via file transfers over leased line or InternetInternet

► Payment transaction amounts under $100MMPayment transaction amounts under $100MM► 15,000 participating financial institutions15,000 participating financial institutions► More than half of all U.S. households use ACH for at least one More than half of all U.S. households use ACH for at least one

recurring paymentrecurring payment► Multiple ACH processorsMultiple ACH processors

Public Sector: FedACHPublic Sector: FedACH Private Sector: Electronic Payments Network (EPN)Private Sector: Electronic Payments Network (EPN)

► Daily Volumes US (2008)*: 60 Million payments average of $2,000 Daily Volumes US (2008)*: 60 Million payments average of $2,000 per transaction ($120 Billion per day)per transaction ($120 Billion per day)

► Emerging area of cyber attack by criminal groupsEmerging area of cyber attack by criminal groups Initial targeting was of retail customers Initial targeting was of retail customers Recent targeting of corporate customers for bigger dollar transactionsRecent targeting of corporate customers for bigger dollar transactions

*Source: NACHA

Society for Worldwide Interbank Financial Society for Worldwide Interbank Financial TelecommunicationTelecommunication

(SWIFT)(SWIFT)

► Financial message transfer network connecting Financial message transfer network connecting 209 countries & ~8,800 participants209 countries & ~8,800 participants Used for both cash and securities transactionsUsed for both cash and securities transactions Proprietary network and store and forward message Proprietary network and store and forward message

formats (FIN & ISO 20022) and batch file transfersformats (FIN & ISO 20022) and batch file transfers Multi-currency paymentsMulti-currency payments

► Daily Global Volume: 15 Million messages per Daily Global Volume: 15 Million messages per day, ~50% cash payments & ~50% securities, day, ~50% cash payments & ~50% securities, Dollar volume?Dollar volume?

► Modest attacks to date by criminal groupsModest attacks to date by criminal groups Attacks against Prime Brokerage (hedge fund) Attacks against Prime Brokerage (hedge fund)

clientsclients

Clearing House Interbank Payment Clearing House Interbank Payment System (CHIPS)System (CHIPS)

►Supports Large Dollar payments Supports Large Dollar payments (Greater than $100MM USD)(Greater than $100MM USD)

►Slightly under 50 ParticipantsSlightly under 50 Participants►Daily Volumes US(2008): 365,000 Daily Volumes US(2008): 365,000

payments of about $5MM per payments of about $5MM per transaction (~$2 Trillion per day total)transaction (~$2 Trillion per day total)

►Provides netting of payments intradayProvides netting of payments intraday►No history of direct cyber attacks from No history of direct cyber attacks from

criminals (yet?)criminals (yet?)

CHIPSCHIPS

Graphic Source :The Clearing House

FEDwire FundsFEDwire Funds

►Provides “real time gross settlement” Provides “real time gross settlement” (RTSG) via large dollar fund transfers (RTSG) via large dollar fund transfers Settlement of funds is immediate, final Settlement of funds is immediate, final

and irrevocableand irrevocable

►Used by a ~9,300 Fed member banksUsed by a ~9,300 Fed member banks►Daily Volumes US(2008): 521,278 Daily Volumes US(2008): 521,278

payments of about $5.75MM per payments of about $5.75MM per transaction (~$3 Trillion per day total)transaction (~$3 Trillion per day total)

Continuous Linked Continuous Linked SettlementSettlement

► CLS Bank settles Foreign Currency CLS Bank settles Foreign Currency Exchange (FX) transactions in 17 Exchange (FX) transactions in 17 currenciescurrencies Connects to central banks’ RTSG systemsConnects to central banks’ RTSG systems

► 59 Direct member banks, ~6000 59 Direct member banks, ~6000 participating banksparticipating banks

► Average Volume (2008) $4.0 Trillion, Average Volume (2008) $4.0 Trillion, 700,000 transactions700,000 transactions Peak volume (Sept 2008) $8.6 Trillion, ~1.5 Peak volume (Sept 2008) $8.6 Trillion, ~1.5

Million transactions in one dayMillion transactions in one day Netting on this day’s transactions reduced to Netting on this day’s transactions reduced to

$50 Billion$50 Billion

Companies that produce critical Companies that produce critical payment system softwarepayment system software

CHIPSCHIPS► ACI WorldwideACI Worldwide► Dovetail SystemsDovetail Systems► FUNDtechFUNDtech► GIFTS Software GIFTS Software

Inc.Inc.► HPHP► Keystone Keystone

Computer Computer Associates, Inc.Associates, Inc.

► LogicaCMGLogicaCMG► MisysMisys► MontranMontran► Many more…Many more…

ACHACH► Treasury Treasury

SoftwareSoftware► FUNDtechFUNDtech► S1 EnterpriseS1 Enterprise► NexTec GroupNexTec Group► Coastal Coastal

Software & Software & Consulting, Consulting, Inc.Inc.

► AccuityAccuity► TROY GroupTROY Group► Many more…Many more…

CLS• BEC A/S• Calypso Technology Inc. • City Networks Ltd • Clearing and Payment

Services Pte Ltd• FUNDtech • IBM • KFTC• Logica• NTT DATA Getronics

Corporation • Polaris Software Lab

Limited• S.W.I.F.T. SCRL• Traiana Inc• Wall Street Systems• Many more…

Securities - Market Securities - Market InfrastructureInfrastructure

Trading, Clearing, and Trading, Clearing, and SettlingSettling

►ExchangesExchanges►Clearing & Settling CorporationsClearing & Settling Corporations

DepositoriesDepositories Central Counter PartiesCentral Counter Parties

ExchangesExchanges

►Stock Exchanges provide venues for Stock Exchanges provide venues for trading of cash equities and derivative trading of cash equities and derivative productsproducts NYSE US (Aug 2009) – Average 2.9 billion NYSE US (Aug 2009) – Average 2.9 billion

shares per day (cash)shares per day (cash)►Last 2 weeks average of 1.4 Billion Shares in Last 2 weeks average of 1.4 Billion Shares in

3.8 Million Trades for $34 Billon Dollar per day3.8 Million Trades for $34 Billon Dollar per day

NASDAQ US (Aug 2009) – Average of 2.1 NASDAQ US (Aug 2009) – Average of 2.1 billion shares per day (cash) in 172 million billion shares per day (cash) in 172 million trades for $39 billion per daytrades for $39 billion per day

Sample Securities Transactions Sample Securities Transactions SettlementSettlement

Source: DTCC

Clearing Volumes & StatsClearing Volumes & Stats

►Equities – NSCC (2008) - DailyEquities – NSCC (2008) - Daily $1.25 Trillion, 86 million transactions, $1.25 Trillion, 86 million transactions,

peak day 209 million transactionspeak day 209 million transactions 98% netting98% netting

►Fixed Income – FICC (2008) - DailyFixed Income – FICC (2008) - Daily $4.5 Trillion, ~140,000 transactions per $4.5 Trillion, ~140,000 transactions per

dayday►Options – OCC (2008) - DailyOptions – OCC (2008) - Daily

$16 Billion, 14 million contracts, peak day $16 Billion, 14 million contracts, peak day 30 million contracts30 million contracts