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Granularity Ltd. Kathleen Tyson-Quah [email protected] April 2001. Granular Payment Control. Compelling Need. An Elegant Solution. Sensible Technology. Model Validation. Payment Risk Reduction. Next Steps. Compelling Need. The Payments Business Problems in Payments.

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Granularity ltd

Granularity Ltd

Kathleen Tyson-Quah

[email protected]

April 2001


Granular payment control

Granular Payment Control

Compelling Need

An Elegant Solution

Sensible Technology

Model Validation

Payment Risk Reduction

Next Steps


Compelling need

Compelling Need

  • The Payments Business

  • Problems in Payments


The payments business

The Payments Business

14%

50%

36%


The payments business1

Payment System

Bank A

Bank B

Client A

Client B

The Payments Business

  • $4 trillion in daily payments

  • 2000 banks dominate payment flows

    • Wide variety of internal hierarchies

    • Wide variety of technical and management processes

  • 40 currencies actively traded

  • Each currency has different payment systems

    • different platforms,

    • different data formats,

    • different language characters

  • Multicurrency systems very complex

A

B


Problems in payments

Payment System

Bank A

Bank B

Problems in Payments

A

B

  • Liquidity “Hoarding”

  • Liquidity gridlock

  • Liquidity uncertainty

  • Credit uncertainty

  • Periodic major crises

    • operational failures (Bank of New York)

    • defaults (Barings, Drexel)

  • Poor system controls and integration

  • Fragmented management hierarchies


An elegant solution

An Elegant Solution

  • The Granularity Solution

  • Advantages of Granular Payments Control

  • Payment Banks & Users

  • Granularity Network Overview

  • Payment Bank Filter Integration

  • The Filter Process

  • Improved Information

  • Backward Compatibility


The granularity solution

The Granularity Solution

  • Addresses risk on two-way flows in a currency with the same counterparty on the same day (e.g. pay $1 billion and expect $800 million)

  • Real-time controls on risk of paying but not receiving

  • Real-time window on payment flows during the day

  • Suspend & Reinstate capability


Advantages of gpc

Advantages of GPC

  • Each bank controls its payment risk and liquidity risk independently

  • Effective for all counterparties

  • Effective for all currencies

  • Comprehensive for all payments

  • Simple

  • Unilateral

  • Low Cost ($250,000 or less basic fee)

  • Complementary to netting and CLS


Payment banks users

Payment Banks & Users

  • Payment Banks buy Filter Module

    • implements Clean Payment Limits

    • improves payments transparency

    • powerful correspondent service

  • Users buy User Interface

    • comprehensive tool for risk reduction

    • Clean Payment Limits

    • Suspend & Reinstate

    • Overrides

    • periodic and real-time reporting

    • flexible account & counterparty structures


Network overview

Network Overview

USD

Fedwire

User Interface

Payment Bank Filter Module

CHIPS

Reuters

USD

Routers

EUR

Target

ATT

VPN

EUR

EBA

JPY

BOJ-NET

S.W.I.F.T. IP Network

Router

FEYCS

JPY

Routers

Granularity Core System

CHF

SIC

CAD

LVTS

CHAPS

GBP

Domestic Payment Systems


Payment bank filter integration

Payment Bank Filter Integration

Liquidity/Payments Manager

Queue

ClearingFunds?

NO

YES

AccountFunds?

NO

YES

OK

Gateway to Payment System


Payment bank filter integration1

Payment Bank Filter Integration

Liquidity/Payments Manager

Application Programming Interface

Payment Bank Host Application

Queue

ClearingFunds?

NO

YES

Filter Process Module

AccountFunds?

NO

FAIL

YES

PASS

OK

Gateway to Payment System


Gpc filter process

REJECT& Notify& CACHE

FOR EACH

YES

IDENTIFY

Account Holder

Is Counterparty Suspended?

IDENTIFY

Payee & Intermediaries

YES

Is Payee or Intermediary a Counterparty?

Override forTRN or Counterparty?

YES

Account Holder a User or 3rdParty?

NO

NO

NO

NO

YES

PASS

YES

NO

Is Payment Amount less than Available Balance?

YES

IDENTIFY

Payment Type

CALCULATE Available Balance

IDENTIFY

Payment Amount

Is Payment Type listed?

NO

GPC Filter Process

(REVISE) & STORE Available Balance & CACHETransaction


Improved information

Improved Information

  • Payment Banks gain

    • real-time information on liquidity allocation and usage

    • much finer detail on payments behaviour

    • metrics for liquidity pricing

  • Users gain

    • on-demand and periodic reports

    • alerts to intraday problems and shortfalls


Backward compatibility

Backward Compatibility

NO CHANGES TO LEGACY PROCESS FOR

  • Trading

  • Confirmations

  • Matching

  • Payment Instruction & Pre-Advice

  • Payment Confirmations

  • Payment Reconciliations

  • Domestic Payment Systems

  • Netting (and CLS)


Sensible technology

Sensible Technology

  • Low risk as a design objective

  • Web Technology Components


Low risk as a design objective

Low Risk as a Design Objective

  • Pre-existing, proven components selected for basic architecture

  • Applications will use pre-existing standards: SWIFT and ISO data elements, data formats and objects as available in repositories

  • Solution design minimises integration task and project risk for Users and Payment Banks


Technology components

Technology Components

  • Internet protocol network with VPN/PKI security

  • Browser Interface for ease of use and low integration costs

  • Platform independent languages

  • XML data format protocol and ebXML compliance

  • Application to application data interchange (XML/EDI)


Model validation

Model Validation

  • Banks and Central Banks

  • Software & Technology Vendors

  • The Granularity Advisory Board


Banks and central banks

Banks and Central Banks

  • Opinion-leaders at major banks targeted first

  • 4 central banks offer “no objection”

  • 30 banks consulted for product validation

  • Follow-up meetings with senior department executives and operations teams


Software technology vendors

Software & Technology Vendors

  • 4 vendors of Payment/Liquidity Management Software consulted

  • All are interested in adapting their solutions to integrate to the Payment Bank API as an upgrade feature

  • Minimises integration task for Payment Banks using vendor solutions


The advisory board

The Advisory Board

  • Chaired by Richard Goulding

  • Top ranking individual experts on risk management, payments and operations from leading banks

  • Comfort factor for banking industry

  • Best practice, marketing and product development guidance


Payment risk reduction

Payment Risk Reduction

  • Credit Risk

  • Liquidity Risk

  • Systemic Risk

  • Operations Risk

  • Multicurrency Impact


Gpc and credit risk

GPC and Credit Risk

  • Credit risk is capped at the Clean Payment Limit in each currency

  • Intraday notification of payment failure enables rapid remedial action

  • Real-time suspension of payments in all currencies cuts forward risk from 3 days (Allsopp) to less than one day


Gpc and liquidity risk

GPC and Liquidity Risk

  • Liquidity risk is capped at the CPL

  • Fixed, knowable risk can be covered by liquidity or credit facilities

  • Intraday notification of shortfall

  • Shortfall can be funded while the money market and payment system are still operating

  • Contingent payment failures should become extremely rare


Gpc and systemic risk

GPC and Systemic Risk

  • Default losses should be survivable to financial counterparties

  • Operations failure impact limited

  • Intraday remedial measures should prevent contingent payment failures

  • Fixed, knowable loss avoids effects of uncertainty, rumour and speculation on trading markets

  • Local liquidity and credit problems should not spread as rapidly through global markets


Gpc and operations risk

GPC and Operations Risk

  • GPC System

    • hot-offsite back-up and full resiliency

    • worst case failure results in status quo payments processing

  • GPC compatible with multiple nostros in each currency

  • GPC limits impact of operations failure on payment processing


Multicurrency risk reduction

Multicurrency Risk Reduction

Values are illustrative only


Next steps

Next Steps

  • First Round Funding

  • Requirements & Prototype Development

  • Beta Bank Selection

  • Applications Development & Testing

  • Live Operations

  • Controlled Scaling


Granular payment control1

Granular Payment Control

Compelling Need

An Elegant Solution

Sensible Technology

Model Validation

Payment Risk Reduction

Next Steps


Questions

Questions

[email protected]

or

[email protected]


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