CLEARIT

> Onion skin and payments Interview with Romeo Lacher, Credit Suisse

> ISO 20022 vision

> Out of Africa

The Swiss professional journal for payment trafficEdition 47 | March 2011

2 CONTENT / CLEARIT | March 2011

Interview Page 4Onion skin model for the payments infrastructure For three years now, the Swiss financial center infrastruc-ture services have been offered from a single source. Dr. Romeo Lacher from Credit Suisse, Vice Chairmen of the Board of Directors and one of the architects of SIX Group, highlights in retrospect the positive experiences with the new governance structure and spotlights the strategic challenges and opportunities, particularly in regard to payment traffic.

Business & Partners Page 9IPFA is becoming operational Within SEPA, cross-border euro payments are considered domestic transactions among the European countries. This lowers the foreign payment traffic volume without proportionately lowering fixed costs. This is where the In-ternational Payments Framework Association (IPFA) offers valuable potential savings to banks.

Standardization Page 10ISO 20022: Standardizing vision in payments Today's plethora of processes and formats causes high costs for financial institutions, their customers and the Swiss financial center as a whole. A uniform payment approach, handled identically by all parties involved, can substantially lower overall transaction costs.

Products & Services Page 12New SWIFT services within the current 5-year strategy SWIFT regularly defines its five-year strategy. The frame-work for it is developed by SWIFT users and serves as a guideline for cooperation in the development and imple-mentation of new services. Two new services intended to improve compliance and STP at the banks provide a great example of the current ”Strategy 2015“: a new screening service in the area of sanctions systems and a new directory with a diagnostic tool.

Compliance Page 14Out of AfricaAre the European efforts to create a uniform payments area unique? Is SEPA having effects beyond Europe? On each continent, SEPA-type visions are emerging. But it's usually a long and rocky road until a full implementation becomes reality. Two African examples.

Photo front cover: SIX Group headquarters in Zurich

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Dear readers,Standards and norms are part of everyone's daily lives without us ever really noticing. For the rail systems, uniform track width and standardized engines guarantee uninter-rupted travel between Frankfurt and Berne, or Paris and London, for instance. Obviously, standards play a major and important role in the finance world. Today, they are so accepted that their existence only becomes apparent again when there are significant changes. The introduction of ISO 20022 – commonly known as the XML standard – has raised many questions. I believe that there is no other option than to adopt this new and very forward-looking standard. Financial centers, with their market infrastructures, need to determine for themselves how the standard can be imple-mented intelligently and with the least amount of friction. You'll be interested in reading the corresponding article about ISO 20022.

SEPA forms the European payment zone, which functions on the basis of uniform regulations as well as standards and processes. This development has been noticed not only in Europe, but also around the world, and is followed closely. An initiative of banks operating internationally has launched the International Payments Framework Association (IPFA). Similar to the SEPA but less politically motivated, this project also focuses on processing cross-border payments extending beyond the euro, with uniform standards and processes. SECB Swiss Euro Clearing Bank has participated in this project since the beginning. You'll find an article about the current status in this issue of CLEARIT.

The payment traffic landscape is continually changing, and the requirements on the banks' systems and infrastructures keep growing, while at the same time, the pressure on fees and costs is mounting. More and more often, this leads the institutions to consider outsourcing certain processes to a central infrastructure, rather than executing them within their own applications. See the article on that topic about what SWIFT has to offer.

When I first started out in the banking industry more than forty years ago, laws, regulations and governing bodies' requirements were far more manageable than today. The complexity has increased dramatically, caused in large part by the overwhelming number of new products in the various areas of the banking industry. Efficiency and cost awareness have become a major focus. Often, the results have been centralization or outsourcing of processes or entire process-ing areas. However, this development also brought with it the opportunity for institutions to offer corresponding solutions, such as efficient and cost-effective processing, at high service levels.

For more than ten years, SECB and euroSIC, the joint venture for the processing of euro payments for the Swiss financial center, have been offering centralization of euro payments through one channel into the European clearing systems. Because of this function, SECB has garnered a high level of recognition throughout the financial center. For this, I thank you! <

Roland BöffCEO, SECB Swiss Euro Clearing Bank

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For three years now, the Swiss financial center infrastructure services have been offered from a single source. Dr. Romeo Lacher from Credit Suisse, Vice Chairmen of the Board of Directors and one of the architects of SIX Group, highlights in retro­spect the positive experiences with the new governance structure and spotlights the strategic challenges and opportunities, particularly in regard to payment traffic.

Onion skin model for the payments infrastructure

CLEARIT: Mr. Lacher, let's assume that in the not too far off future you had the option of paying for your daily pur-chases online directly, in real time through your bank account. As a consumer, have you felt a need for such an e-payments solution?Romeo Lacher: I truly believe that customer demand exists to be able to pay for online purchases as easy and efficiently as possible. From a consumer’s perspective, I ask myself whether another option really would give me added value over the payment methods that I am already accustomed to using in my daily life.

Creating financial value

And where do you stand in this regard as a representative of Credit Suisse and the Swiss financial center? My position from a banker’s perspective, and I am open and honest about it, is also rather critical. I believe that there are currently at least two established online payment instruments that already work very well. These include payments through providers such as PayPal, and logically, also with credit cards.

However, the question is: Does it offer the bank and thus also its customers an additional benefit if we now offer a third or fourth payment option in addition to those that are already established? If we compare the costs and benefits of e-payments in the current European or Swiss context, then I do not see how any financial value shall be created.

“I am more interested in bringing the eco­nomic point of view into the discussion.”

Internet technologies are developing very rapidly. Con-sider, for example, the new social payments methods associated with social networks. Markets are arising there which the financial center has to deal with.Absolutely. I see it the same way. With my previous state-

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ment, I do not mean to signal my opposition to any potential future developments. I am more interested in bringing the economic point of view into the discussion. If there is a latent customer benefit, then we must metic-ulously see whether the benefit really does materialize. Let’s take "CASH" as an example of a product for which we believed that the adaptation rate would be greater among customers. Do we now need another complemen-tary element that comes with the risk of never reaching a critical mass? And the other issue is that of economic fea-sibility. The systems available today – I am thinking especially about credit cards – are established, run effi-ciently and do not cause any additional investments. I'm afraid that e-payments could generate costs without re-sulting in advantages for the bank or as part of the value chain, or without finding readiness among customers or online merchants to cover the additional costs.

Reacting more quickly along the entire value chain

You were Chairman of the Board of Directors of the Swiss Central Securities Depository and Vice Chairman of the Board of Directors of the former Telekurs Group. You are also one of the architects of SIX Group. Since the merger of the two companies with the Swiss Stock Exchange you are the Vice Chairman of the Board of Directors of the new group. What did you expect from the merger and what has it since delivered?One of the very important drivers behind the merger of the three companies was the idea of being able to make future decisions easier, faster and more practically. For example: In many areas we have value creation chains within the three companies that are very closely interwoven among them. Due to the very dynamic market environment – es-pecially in the European context – we have determined the following: If we make a decision on the stock market side, this can potentially have consequences on the central de-pository which must in turn be agreed to accordingly. There were different governance structures in the two organiza-tions, different executive boards, boards of directors and

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Short biography Romeo Lacher studied business administration at the University of St. Gallen and received a Dr. oec. HSG diploma. After three years of professional experience in the insurance industry, he switched to Credit Suisse in 1990. Romeo Lacher has since occupied manage-ment positions in various departments with the bank. After working in the marketing department, he headed the retail customer business and then Internet banking and product management. Since 2004, Romeo Lacher is the Global Head of Private Banking Operations and Member of Private Banking Management Committee Credit Suisse.

Board positions:• DeputyChairman,SIXGroupLtd• Chairman,SIXInterbankClearingLtd• Member,CLSGroupHoldingsLtd• Member,SwisscardAECSAG

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in our considerations? I am an advocate for the onion skin model. This means that instead of trying to build the “entire onion” at once, we should first concentrate on refurbish-ing the core, the innermost part of the onion. And then we can think about whether we want to add further layers in terms of additional peripheral systems. The discussion in the coming months will reveal how we intend to master these complexities. In this regard, it is very important to us that the Swiss National Bank is 100 percent in agreement with our plans.

The most inexpensive and efficient system internationally by far

Our SIC system is extremely cost efficient. Ten years ago, the price per transaction was around 17 centimes, while today it is just 4.5 centimes. Will the onion become even cheaper?I believe that the job to be done must be viewed sepa-rately from cost considerations. We are dealing here with a lifecycle topic. The primary consideration is that we also have a highly available, reliable and robust Swiss franc clearing system for the coming years that meets the re-quirements of the Swiss National Bank and the market participants. Technical renovation projects tend to cost money and these investments must somehow be financed. It is still too early to make any statements about the definite methods of the financing sources. I would not want to rule out that we might temporarily have slightly higher average transaction prices due to the investment costs. Other financing options are also currently being reviewed. It goes without saying that we will proceed in the most cost-saving manner possible and will do everything we can to be able to continue operating the cheapest and most efficient system by far in international comparison.

One of the top goals among banks is to boost customer profitability. At the same time, cost pressures continue to grow, also in terms of higher capitalization and liquidity re-quirements. What impact do you see for the services operated jointly by the Swiss financial institutions?This will be a very major challenge for all banks operating in Switzerland. Unfortunately, all regulatory requirements, such as Basel III, come with upgrades pertaining to with-holding tax, or FATCA or the FATF recommendations for combating money laundering and other international rules, which lead to higher costs. And as a rule they do not generate additional revenue for us. Yet, opportunities actually exist for SIX Group in this environment. Because not every bank must do everything for itself, banks can outsource certain tasks cost-efficiently to SIX Group. The question is which tasks make sense to outsource from the banks' perspective and whether SIX Group really sees itself in the role of service provider. For example, I can well imagine that SIX Group will provide basic services regarding reference data needed to meet taxation requirements.

so forth. We were convinced that the Swiss financial center had to be able to act more quickly to meet future challenges regarding the entire value chain. In retrospect, the positive experiences we have had with the unified governance have proven us right.

Can you give me a specific example?Take the developments involving SEPA or TARGET2-Se-curities. We need no longer deal separately with each individual component of trading, clearing and settlement. Moreover, we now can speak with one voice, whether in a European context or towards the FINMA supervisory au-thorities or the Swiss National Bank. This was advantageous during the financial crisis for example, because it meant that there were fewer interfaces involved.

A second essential objective of the merger involved the issue of innovation. We wanted to be able to offer innova-tive services to our customers from a single source which extended throughout the individual SIX Group divisions. For example, I am thinking about the new Connexor reference data standard or the eGris electronic property information system project. These are very specific, positive examples that not only contribute to strengthening the financial center, but which particularly also benefit SIX Group customers.

“In this regard, it is very important to us that the Swiss National Bank is 100 per­cent in agreement with our plans.”

Infrastructures in general, the Swiss payment traffic platform specifically, have proven themselves in the recent financial crisis to be very robust and receive good grades from the BIS and the Swiss National Bank. Nevertheless, there are various upgrades and extensions pending. As the Chairman of the Board of Directors of SIX Interbank Clearing, how do you assess the strategic challenges? In my opinion, we have every reason to be proud as an in-frastructure operator. It cannot be emphasized enough that throughout all phases of this crisis we did not have any problems, either on the exchange, post-trading or payments sides, which deviated from business as usual. That bears witness to the highest levels of professionalism and relia-bility. This also applies for payment traffic clearing, which in contrast to outside the country, is not run by the central bank itself, but which we operate independently on behalf of and under supervision by the Swiss National Bank. This assignment both honors and obligates us to maintain this stability and availability in good times and hectic times alike, and also to be equipped to meet the future. We have been intensely occupied with updating the clearing platform since last year. One important question is that of limitation: Do we primarily concentrate on the core of this platform – on clearing and settlement – or do we also include pe-ripheral systems, such as the direct debit scheme (LSV),

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“UBS and Credit Suisse must prepare themselves in terms of organization so that they can maintain their systemically critical elements in times of crisis.”

The federal government’s experts’ report demands “or-ganizational measures that guarantee the continued operation of system-related functions (e.g., payment traf-fic) in the face of threatened insolvency." How should this be concretely imagined? Can outsourcing solutions also be envisioned here? This regards the “to big to fail” problem, which primarily concerns the two big banks. It means that UBS and Credit Suisse must prepare themselves in terms of organization so that they can maintain their systemically critical elements in times of crisis. Just how to accomplish this is the subject

of intensive discussions within both big banks. I primarily believe that these challenges are to be solved by both banks internally.

Efficiency and quality consciousness

Do the models stemming from field of science, e.g., the Uni-versity of St. Gallen, developed in cooperation with the banks, help you?Yes, they help us in our thinking process. They are impetuses that we carefully monitor. We also conduct a regular exchange with our colleagues at the universities. While much of what they to offer is conceptually logical, it may prove to be in-feasible in practice. I’ll give you an example: When it comes to payment traffic at the two big banks, we have platforms that cover not only systemically critical components, but also those that are non-system-crucial. Specifically: The

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payment instructions from our SME customers and large-value payments run over the same platform as payment from our offshore or institutional customers. To separate these two groups is not extremely difficult in technical terms, but it would also mean a reduction in cost efficiency.

“Quality in the financial services sector is a central value driver.”

“In a sector marked by increasing market saturation, func-tionally sophisticated offers and increasingly demanding customers, service quality is becoming the decisive strate-gic success factor for financial services providers. You wrote this back in the mid-1990s. As both a co-owner and user, how do you estimate the service quality of the Swiss Value Chain and its parts?I still stand behind that statement, because I am convinced that quality is still a central value driver in the financial services sector. It is appreciated and rewarded by customers. To be able to guarantee high service quality to customers, as banks we depend on the smooth functioning of our internal processes as well as the interfaces upstream and downstream from us. This means that SIX Group has an extremely important role to play in the areas of securities and payments. If the quality is not up to par here, then this has an immediate impact upon our customers. However, I can confirm that in nearly every case the services provided by the individual SIX Group business units are distinguished by extremely high service quality. We can be proud that in Switzerland we have a financial market infrastructure that is marked both by its great efficiency and quality awareness. We shine in any international comparison.

“Our ownership structure is the right one.”

“User-owned, user-governed.” The Swiss financial market infrastructure under the SIX Group umbrella is a joint ven-ture of the financial institutions. Who is to say that this ownership structure for the Swiss Value Chain won't some day change?Never say never. However, for the near future, I believe that our ownership structure is the right one. When I look back on international developments over the past years, I notice that at the beginning the user-owned, user-governed model was nearly always predominant. Then there was a trend among the banks to silver-plate their ownership shares and list their exchanges or post-trading units on the stock market. More recently, however, there is a countermove-ment and the same banks are founding or participating in multilateral trading or clearing systems. <

Gabriel Juri, SIX Interbank Clearinggabriel.juri@six-group.com

André Gsponer, Enterprise Services AGandre.gsponer@eps-ag.ch

9EdiTORiAL / CLEARIT | September 2010 9BUSiNESS & PARTNERS | March 2011

Within SEPA, cross­border euro payments are considered domestic transactions among the European countries. This lowers the foreign payment traffic volume without proportionately lowering fixed costs. This is where the International Payments Framework Association (IPFA) offers valuable potential savings to banks.

IPFA is becoming operational

Most likely, at the end of the years 2012 and 2013, euro payments within Europe will be equivalent to domestic payments as a result of the planned SEPA replacement of the national processes for credit transfers and direct debits. This will further decrease the already low number of foreign payments traffic (FPT) transactions in comparison to the domestic payment traffic.

Proper FPT not very profitableLower volumes notwithstanding, banks have to operate a second system for the FPT, in addition to the SEPA payments instruments. Overheads remain the same, based on existing infrastructures and statutory provisions, such as the Financial Action Task Force on Money Laundering (FATF) or the Office of Foreign Assets Control (OFAC), with a negative impact on the revenue and expense ratio for this business segment.

Same standard as for SEPA paymentsThat's why banks are asking for lower costs and more efficient solutions for the processing of their FPT transac-tions. This is where the IPFA offers a real benefit, especially for European banks: non-European credit transfers are based on the ISO 20022 standard, the same as the SEPA payments. IPFA members can use the same investments they have to make to comply with this standard for the FPT, as well.

Equens as a payments service provider is able to offer banks lower processing fees for FPT by processing non-European low-value payments based on the ISO standard valid for SEPA.

Even though the same ISO standard is adhered to, there are two basic differences between SEPA and IPFA: First, the IPFA is a market initiative, while SEPA pursues a politically based goal. Second, the IPFA is a global system, whereas SEPA applies to Europe only.

IPFA further along than earlier initiativesEarlier market initiatives to generate low-cost global pro-cessing of low-value payments, such as the WATCH project (WATCH: Worldwide Automated Transaction Clearing House), all failed.

There are two deciding factors that are different between the IPFA and earlier initiatives: This time, the idea was actually turned into a project. In February of 2010 the initiative was made manifest with the founding of the IPFA. Additionally, the direct, trans-Atlantic processing of low-value payments between the U.S. Federal Reserve and Equens, started in October 2010, is proof that this global payment service actually works. The two IPFA members currently exchange payments in euros, U.S. dollars and British pounds sterling.

Additional currencies and membersSince the IPFA launch, the application has already been expanded to include payments in the currencies of Canada and Mexico. Currently, negotiations are being held about including additional currencies, such as those of Brazil and South Africa.

Thus, there are new arguments in favor of the IPFA, and apparently, membership is a worthwhile cause recognized by other market players: The number of original founding members has grown from 21 to 26 as of the end of 2010. <

Michael Steinbach, IPFA Vice Chairman michael.steinbach@equens.com

FGO’s USDSettlement

Agent in the US

Financial Gateway Operator

(FGO)

USBank

FEDEuro-pean Bank

Equens ReceiverUSD

D+0

Blue: clearing route Red: settlement route

Target credit to beneficiary is D+2 with guarantee of D+3

D+2/D+3

USD

Equens confirms settlement

USD USD

Example: US to Europe/USD to USD

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Today's plethora of processes and formats causes high costs for financial institutions, their customers and the Swiss financial center as a whole. A uniform payment approach, handled identically by all parties involved, can substantially lower overall transaction costs.

ISO 20022: Standardizing vision in payments

The first steps toward uniform standards have been taken: First, the financial center with its Swiss Payments Council decision commits to the ISO 20022 as the future payments data structure. Second, the Swiss financial industry supports the customer-bank data exchange based on ISO 20022.

High costs resulting from many processes and formatsCompanies want to clear received payments more easily with debtors; customers want to pay more conveniently; and financial institutions want to process payments more efficiently and less expensively. Ever since the introduc-tion of payment systems, all participants are continually looking for lasting improvements.

The local value-added chain in payments covers a broad spectrum between the billing process and the debtor re-conciliation at the customer, with its various processes, formats and their manifestations:• In view of the structure of their customer base, creditors

often support various billing options (red postal deposit slip, BESR, LSV+/BDD, Debit Direct, e-bill). In addition, software solutions are being used from the accounts receivable side that not only support all formats and processes, but also support connectivity, possibly to several financial institutions.

• Debtors can settle their invoices in various ways: cash payments at the post office counters, e-banking, in writing, direct debit processing, etc. Sometimes they use several payment variations without being aware that more appropriate, or less expensive alternatives might be available.

• The ability of SIX Interbank Clearing and PostFinance payment systems to process transactions between financial institutions straight through (STP) has been complemented by additional processes since the SEPA launch three years ago. The STP of all euro transactions is secured by the financial institutions through complex validation and conversion mechanisms.

The historically grown processes (e.g., LSV+/BDD, BESR), formats (e.g., DTA, EPO) and their manifestations require enormous efforts in order to remain efficient.

These costs are charged to the customer, either directly, as part of the transaction fee, or indirectly, in other banking fees. The main cost driver is operations: Specialized IT staff is required to develop and maintain each combination of processes and formats. Compared to that, transaction costs of the respective system operators (SIX Interbank Clearing, PostFinance) are relatively low.

International contextThe Swiss bulk business has an annual volume of approx-imately 1.9 billion inter-bank and intra-bank transactions and, with its European market share of 4% and worldwide market share of 1.5%, is rather small in comparison. Switzerland uses a much higher number of processes and formats than other countries but only processes a small number of transactions onto which the generated costs could be distributed. This raises the price of individual trans actions in comparison with other countries.

For a little math example, let's assume a fee of CHF 1 per transaction. Included in our example are the payment system costs of the channels and the processing by the financial institutions – in 2010, the average fee per SIC transaction was CHF .045. Beneficiaries' and debtors' expenditures are not reflected.

Thus, with our example, we can derive a total value of payment traffic fees for the Swiss financial center of

STANdARdiZATiON / CLEARIT | March 2011

Standardized interfaces with savings potential.

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CHF 1.9 billion. It's probably safe to assume – even if our example is fictitious – that with such a high amount, there is a significant potential for costs savings.

Standardization leads to lower costsThere is relatively little beneficiary information (IBAN, name and address) required in order for a financial insti-tution to be able to process a payment. The beneficiary generally identifies payment entries by the name of the debtor or by details of payment, which are supplied either as unstructured text or as structured data (e.g., ISR or ISO reference). But today, depending on the process, format and manifestations, data is collected that is either converted or transcoded (postal account/party number to BC number) or that isn't used any more within the process.•Based on the relatively simple requirements, it would

stand to reason to use a uniform payment data record for all payment processes.

•This idea goes hand in hand with the steady trend towards standardization (e.g., IBAN, SEPA, and ISO reference efforts).

• Increasingly, this trend also continues internationally with SWIFT and is based on regulatory requirements that apply to transparency in payments (money launde-ring regulations, FATF).

•The costs for a customer's software connection and use are lowered with the use of a uniform payment data record. The requirement for support and conversion of various formats becomes obsolete.

•Corporate clients and business customers seeking to optimize their cash management and to obtain improved conditions from their financial institution with faster processes and more transparent account information ultimately benefit from minimizing formats and conver-sions, too.

Conclusion: A uniform payment record can lower overall transaction costs substantially. This can be demon strated with our fictitious math example: If the consolidation resulted in a 20% cost reduction annually, the players in the Swiss financial center would save CHF 380 million per year. Add to that cost/process improvements on the debtor side. In light of the existing plethora of formats and processes, this savings potential seems realistic.

Opportunity for the financial center and customersThe legal framework allows the Swiss financial center to determine the formats and the number of standards freely.In order to improve efficiency and lower costs, it seems appropriate in the long run to generally shorten the val-ue-added chain and to use international formats and standards (ISO 20022, IBAN, ISO reference, etc.) instead of improving and consolidating existing Swiss standards.In doing so, financial institutions will realize cost savings that they can pass on to their customers in the form of improved conditions.

Uniform standards provide the customer with improved transparency, increase the compatibility between the customer and any and all financial institutions, reduce the potential for errors and rejects by means of better valida-tion options, and enable a simpler integration of processes (accounts payable and receivable and cash management), thereby resulting in minimized costs.

International standards also enable structured billing and payments in cross-border payment traffic, since they are also being pursued within the European framework. <

Dieter Bolliger and David Bircher, Credit Suissedieter.bolliger@credit-suisse.comdavid.bircher@credit-suisse.com

What is ISO 20022?

The International Standards Organization ISO has published the UNIFI (UNIversal Financial Industry message scheme), a collection of message types basedonExtensibleMarkupLanguage(XML)forthefinancial industry. The message types for payments are described under ISO 20022. The long-term goal is to reach agreement on a standard—something that could be compared to a language used consistently throughout the entire financial world.

Credit Suisse activities

Credit Suisse has been offering the SEPA Credit Transfer Scheme since the beginning of 2008; in the fall of 2009, the SEPA Core Direct Debit Scheme was introduced. Both schemes are based on ISO 20022. Since the beginning of December 2010, business customers have been able to submit their payment ordersusingtheXMLformat.Thelatteriscompati-ble with the recommendations of the Swiss financial industry for the customer/bank data exchange using ISO 20022.

Credit Suisse plans to provide its customers with the messages for cash management/reporting using the ISO 20022 format starting in 2011.

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SWIFT regularly defines its five­year strategy. The framework for it is developed by SWIFT users and serves as a guideline for cooperation in the development and implementation of new services. Two new services intended to improve compliance and STP at the banks provide a great example of the current ”Strategy 2015“: a new screening service in the area of sanctions systems and a new directory with a diagnostic tool.

New SWIFT services within the current 5­year strategy

These new services both follow up on the classic SWIFT data transfer core functions and open up new applications areas.

Standing Settlement Instruction DirectoryReliable reference data is crucial for Straight Through Processing (STP). SWIFT publishes a series of directories containing current and relevant information. This series has been expanded to become the ”Standing Settlement In-struction (SSI) Directory.“

The SSI Directory contains the correspondence banks for financial institutions the world over that maintain nostro accounts in foreign currencies at other institutions for trade and retail purposes. In addition to the Directory, SWIFT provides the corresponding tool: ”SSI Diagnostics” is a check-up service able to actively update the counterpart's SSI database even before a payment transaction fails. A database excerpt is sent to SWIFT, where the SSI data is compared with the latest BIC list and the ISO currency list, as well as with altered, cancelled and unpublished BICs, common SSIs and, of course, the SSI Directory. In response, SWIFT sends back a diagnostic report with an error listing and suggestions for correction.

SWIFT works together with specialized data-gathering organizations to compile both the SSI Directory and the BIC-PlusIBAN Directory – in this particular case, with REFDATA in Verona, Italy, previously known as CB.net Italia.

Sanctions Service Economic sanctions are of great significance to the inter-national community, since governments increasingly resort to them in pursuing external goals to fight financial crime. SWIFT has developed a low-cost and user-friendly solution to help small and mid-sized financial institutions adhere to continually changing and newly introduced sanctions acts. This service permits the institutions to screen their SWIFT messages in real time.

The Sanctions Service is a central screening application available through the SWIFT network. Depending on customer need, the selected FIN messages are submitted to a central screening application that compares this data with a list of official sanctions (e.g., the United Nations, the U.S. Office of Foreign Assets Control (OFAC), the European Commission of the British Ministry of Finance HMT). This applies both to incoming and outgoing messages. The Sanctions Service filters the messages in real time. If there is no hit, the message is forwarded as usual. If there is a hit, the customer is notified with a warning and prompted to decide whether the message should be forwarded by SWIFT or its transmission stopped, or whether it should be marked false or true positive. The service registers all warnings and corresponding decisions of each institution. This allows the Screening Service users to prove adherence to the regulations in case of an inspection.

With a subscription, financial institutions receive access to a screening service that •can be applied immediately without the need of a hard

or software installation, and thus no need of an IT imple-mentation;

•can be used rather simply with standard installations and Web access to the case manager;

•offers real time processing, since the matching and com-parison of SWIFT messages with the official sanctions lists can occur “on the fly“ during the transmission;

• is always up to date, since SWIFT uses market leaders as partners for filtering of software and supplying sanctions lists;

• is operated by SWIFT, a neutral and trustworthy supplier meeting all required guarantees in reference to security, failure protection and operative top-rated performance.

The new Sanctions Service will go live as a pilot project during the second quarter of 2011 and will be launched no later than the last quarter of 2011, possibly in two steps – for outgoing transactions in fall and for incoming ones in

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winter. The key markets for this new service are the EMEA and Asia-Pacific regions, where sanctions requirements are imposed.

Sanctions Service is an ideal tool available to all financial institutions with access to the SWIFT network.

Beyond the SWIFT coreThese two examples provide an impression of the intended expansion of SWIFT's core functions. The new aspect of the SSI Directory is the cooperation between SWIFT and outside organizations to improve the application of existing and reliable services in the market. The recent acquisi-tion of the “Ambit Messaging Hub” area from SunGuard is another case in point. The latter is now managed by the SWIFT subsidiary Arkelis under the name “Advanced Messaging Hub.“ The components acquired in this step complement the SWIFT data transfer system portfolio by adding high-end multi-standard and multi-network capa-bilities.

Sanctions service SWIFT adds more added-value functions to its classic data transfer services. A similar added-val-ue service already exists in the Treasury Confirmation Matching area. SWIFTNet Accord links business con-firmations with its central reconciliation system, while the message is processed by SWIFT. Here, too, SWIFT is already in the process of increasing this reconciliation service to include additional asset classes and markets. <

Thomas Ramadan, SWIFT Schweizthomas.ramadan@swift.com

SWIFT NetworkFINcopy

Screening engine managed by SWIFT

Outgoing transaction

Case management

of alerts

1

Transaction abort notification (true hit)

Transaction is delivered (no hit or false positive)

Decision to deliver (no hit/false positive) or abort transaction (true hit)

Sending bank

Serviceuser

Receiving bank

GUI

Transaction is copied

Sanctions Service function: SWIFT’s new screening service

5c5a 5b

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14 iNHALT / CLEARIT | September 2010

Are the European efforts to create a uniform payments area unique? Is SEPA having effects beyond Europe? On each continent, SEPA­type visions are emerging. But it's usually a long and rocky road until a full implementation becomes reality. Two African examples.

Out of Africa

The eco. In this case, the name stands for neither a green car nor a popular Swiss economic TV program of the same name. Rather, it is the new currency of fifteen West African countries that should have been established two years ago. ECOWAS – something like the EU but double the size – postponed the introduction of the single currency to 2020, not the least because of the financial crisis, a lack of economic convergence, and regional political instabili-ty, with the latter manifesting in the recent fallout of the Ivory Coast's presidential elections. Essien Abel Essien, responsible for strategic planning of the ECOWAS Com-mission, put his finger on it when he said that in order to create a uniform currency, the number of wars must first be reduced.

UEMOA + WAMZ = ECOWASAdd to this already-challenging situation the fact that some day the two regional currencies will have to be combined into one: The five countries of the West African Monetary Zone (WAMZ), with the eco as their future currency, and the West African Economic and Monetary Union (UEMOA) of those eight nations that have shared the CFA franc as their common currency since 1945. The franc is issued by

14 COMPLiANCE | March 2011

the Central Bank of West African States (BCEAO), compa -rable to the ECB, and is tied to the euro. Since 2004, high-value payments have been processed by a SWIFT-based RTGS system (comparable to SIC or TARGET2) with a linked-in net system for processing low-value payments resulting from credit transfers, direct debits and card trans-actions. Furthermore, the Francophone currency union is about to introduce an EMV-based card system. This puts them quite far ahead of the game in compari-son with their "merging partner", the WAMZ. Besides a significant need to catch up in terms of the implemen-tation of Automated Clearing Houses (ACHs), securities processing systems and ATM/POS infrastructures, most of the member states still process payments manually. None-theless, all WAMZ countries should have their own bulk payments and RTGS systems by the end of 2013. These systems will most likely be connected by an interlinking mechanism – with a nod to TARGET – and start processing the new unit of account eco by 2015. Until then, however, a lot of water will have to flow down the Niger. A function-ing currency union not only depends on technical solutions (infrastructures), economic integration (convergence) and

BeninBurkina FasoCôte d'Ivoire

Guinea-BissauMaliNiger

SenegalTogo

UEMOA

WAMZ

ECOWAS

ECCAS IGAD

EAC

IOC

COMESA

SACU

CMASADC

CFACEMAC

CameroonCentral African Rep.

ChadCongo

Equatorial GuineaGabon

DjiboutiEritrea

EthiopiaSudan

Kenya UgandaBurundi

Rwanda

TanzaniaMalawi Zambia Zimbabwe

LesothoNamibia South Africa

Swazi- land

Botswana

Mozambique

MauritiusMadagascarSeychelles

Comoros Reunion

Sao Tome and Principe

Somalia

Angola Dem. Rep. of

the Congo

Cape VerdeLiberia

GambiaGhanaGuineaNigeria

Sierra Leone

Source: UNCTAD

Regional integration in Africa

15EdiTORiAL / CLEARIT | September 2010

0

10

20

30

40

50

60

70

80

90

An

go

la

Bo

tsw

ana

Co

ng

o

Les

oth

o

Mal

awi

Mau

riti

us

Mo

zam

biq

ue

Nam

ibia

Zam

bia

Zim

bab

we

So

uth

Afr

ica

Sw

azila

nd

Tan

zan

ia

Sey

chel

les

*M

adag

asca

r

Sources: SADC (2007, 2008), SARB (2009), Wikipedia

Number of banks Population (in million) EFTPOS terminals (in hundred)

GDP/capita (in hundreds of USD/year)

* n.a.

Facts & figures of the SADC member states

2366

15COMPLiANCE | March 2011

political intention, but it also poses serious legislative chal-lenges to regulatory policy, since among other things, bank and financial market regulations have to be introduced or synchronized, similar to the European Union’s introduction of directives and regulations as a foundation for SEPA. It remains to be seen whether banks or banking associations in West Africa are able to play an equally responsible role in formulating processes for payment instruments as does the European Payments Council.

The Southern African Development Community (SADC)There is a similarly ambitious project under way in southern Africa, except that the Southern African Development Community (SADC), which consists of 15 countries, ac-companies its perspectives with more specific measures. By building on the experiences in Europe. The defined macro-economic convergence criteria covering inflation rates, annual net government borrowing, exchange rate stability and long term interest rates reflect the Maas-tricht EU criteria. Beyond that, a central bank law was formu lated, intended as a regulatory guideline for all par-ticipating countries. A pilot project, initiated at the end of 2010 and focusing on standardizing the payments in-frastructures (clearing and settlement systems) of four countries within two years, is scheduled to grow to include all SADC member states by 2018, with the goal of being able to process cross-border transactions without correspon dence agreements. According to Tim Masela of the South-African central bank, this project is patterned explicitly after the SEPA. One prerequisite is a solid, reliable RTGS system in each member nation – something already

a reality everywhere except the civil war-riddled Demo-cratic Republic of Congo.

ReservationsThe SADC Central Bank is scheduled to be founded no later than 2018, in order to subsequently introduce the new single currency. However, the hurdles on the way to a successful economic integration of the SADC region are comparable to those in the first African example. The single market (2015) and the monetary union (2016) need to become a reality first. How can such projects be realized in such a short period in Africa, when it took Europe decades to do the same? Especially considering that many of these projects – such as linking the stock exchanges – lack the necessary funds?

Even the central banks in question voice considera-ble concern. There is an underlying fear that the single currency could have a negative impact if the economic gap within the union isn't reduced. This realization comes as no great surprise when comparing the economic per-formance of countries like South Africa and Zimbabwe. <

Gabriel Juri, SIX Interbank Clearinggabriel.juri@six-group.com

PublisherSIX Interbank Clearing LtdHardturmstrasse 201CH-8021 Zurich, Switzerland

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EditionEdition 47 – March 2011Published regularly, also online at www.CLEARIT.ch. Circu-lation German (1300 copies), French (400 copies) and English (available in electronic format only on www.CLEARIT.ch).

CouncilPatrick Bürki, PostFinance, Boris Brunner, UBS Ltd, SusanneEis, SECB, Martin Frick, SIX Interbank Clearing Ltd, Andreas Galle, SIX Interbank Clearing Ltd, André Gsponer (Head), Enterprise Services Ltd, Gabriel Juri, SIX Interbank Clearing Ltd, Roger Mettier, Credit Suisse Ltd, Christoph Weder, Liechtensteinischer Bankenverband, Jean-Jacques Maillard, BCV

Editorial TeamAndré Gsponer, Enterprise Services AG, Andreas Galle,Gabriel Juri (Head) und Christian Schwinghammer, SIXInterbank Clearing Ltd

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