Financial Sector Overview

Major Categories of institutions

► ► ► ► ► ► ► ► ► Retail Banks, Thrifts, and Credit Unions Commercial & Merchant banks Investment Banks Wealth & Asset Managers Securities trading and servicing Property & Causality insurers Life & Annuity insurers Financial Utilities, Processors, & Exchanges Government and industry regulators

Key Terms

► ► ► Clearing*  Denotes all activities from the time a commitment is made for a transaction until it is settled.   Clearing is necessary because the speed of trades is much faster than the cycle time for completing the underlying transaction. In its widest sense clearing involves the management of post-trading, pre-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.

Settling*  The process whereby securities or interests in securities are delivered, usually against payment, to fulfill contractual obligations, such as those arising under securities trades.

  This involves the delivery of securities to perform contractual delivery obligations. It usually also involves the corresponding payment of a purchase price. Time between clearance and settlement varies by product type and market infrastructure Netting  Process by which the intraday transactions are reconciled and the offsetting credits and debits between institutions are summed.

  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 transactions Used for both cash and securities transactions and facilitated by financial utilities *Source: Wikipedia

Cash - Market Infrastructure

Payment System Interconnections

High Value Payments Low Value Payments Graphic Source :SWIFT MI= Market Infrastructure

Electronic Payment Systems

► Credit Card processing networks ► ATM interbank connections ► ACH ► Swift ► CHIPS ► FedWire ► Continuous Linked Settlement (CLS)

Credit Card processing networks

► ► ► Connects acquiring banks to issuing banks  Interconnected via a series of different networks and processors with direct relationships  Interchanges via major associations for indirect relationships ► American Express, Master Card, VISA, etc Daily Volumes US (2006)*, ~60 Million transactions per day, average of $10 each, ($2.1 Trillion per year) Significant area of cyber attacks by criminal groups  Attacks target card processors, merchants, and customers *Source: http://www.frbservices.org/files/communications/pdf/research/2007_payments_study.pdf

ATM Interbank Networks

► ► ► ► Connects Automated Teller Machines & Point of Sale devices  Interconnected via a series of different networks and processors  Cash withdrawals and payment card debit PIN based and signature based transactions  Daily Volumes US(2006)*, ~100 Million transactions per day, average of $82 each ~60% of transactions stay within the same institution “On us” Significant area of cyber attacks by criminal groups  Attacks target card processors, merchants, and customers *Source: http://www.frbservices.org/files/communications/pdf/research/2007_payments_study.pdf

Payment Card Transactions

ATMs CARD Processor “A” CARD Processor “B”

Associations & Networks MC / VISA/ NYCE/ etc All Other banks

X Bank

` Compromised Box Customer Crook Some banks

Automated Clearing House (ACH)

► ► ► ► ► ► ► ► Used for primarily customer to business payments (direct deposit, direct payment, recurring bill payments, electronic check payments, etc) Customer instructions sent via file transfers over leased line or Internet Payment transaction amounts under $100MM 15,000 participating financial institutions More than half of all U.S. households use ACH for at least one recurring payment Multiple ACH processors  Public Sector: FedACH  Private Sector: Electronic Payments Network (EPN) Daily Volumes US (2008)*: 60 Million payments average of $2,000 per transaction ($120 Billion per day) Emerging area of cyber attack by criminal groups  Initial targeting was of retail customers  Recent targeting of corporate customers for bigger dollar transactions *Source: NACHA

Society for Worldwide Interbank Financial Telecommunication (SWIFT) ► ► ► Financial message transfer network connecting 209 countries & ~8,800 participants  Used for both cash and securities transactions  Proprietary network and store and forward message formats (FIN & ISO 20022) and batch file transfers Multi-currency payments  Daily Global Volume: 15 Million messages per day, ~50% cash payments & ~50% securities, Dollar volume?

Modest attacks to date by criminal groups  Attacks against Prime Brokerage (hedge fund) clients

Clearing House Interbank Payment System (CHIPS)

► Supports Large Dollar payments (Greater than $100MM USD) ► Slightly under 50 Participants ► Daily Volumes US(2008): 365,000 payments of about $5MM per transaction (~$2 Trillion per day total) ► Provides netting of payments intraday ► No history of direct cyber attacks from criminals (yet?)

CHIPS

Graphic Source :The Clearing House

FEDwire Funds

► Provides “real time gross settlement” (RTSG) via large dollar fund transfers  Settlement of funds is immediate, final and irrevocable ► Used by a ~9,300 Fed member banks ► Daily Volumes US(2008): 521,278 payments of about $5.75MM per transaction (~$3 Trillion per day total)

Continuous Linked Settlement

► ► ► CLS Bank settles Foreign Currency Exchange (FX) transactions in 17 currencies  Connects to central banks’ RTSG systems 59 Direct member banks, ~6000 participating banks Average Volume (2008) $4.0 Trillion, 700,000 transactions  Peak volume (Sept 2008) $8.6 Trillion, ~1.5 Million transactions in one day  Netting on this day’s transactions reduced to $50 Billion

Companies that produce critical payment system software

CHIPS ► ACI Worldwide ► ► ► ► Dovetail Systems FUNDtech GIFTS Software Inc.

HP ► ► ► ► ► Keystone Computer Associates, Inc.

LogicaCMG Misys Montran Many more… ACH ► Treasury Software ► ► ► ► FUNDtech S1 Enterprise NexTec Group Coastal Software & Consulting, Inc.

► ► ► Accuity TROY Group 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 Infrastructure

Trading, Clearing, and Settling

► Exchanges ► Clearing & Settling Corporations   Depositories Central Counter Parties

Exchanges

► Stock Exchanges provide venues for trading of cash equities and derivative products  NYSE US (Aug 2009) – Average 2.9 billion shares per day (cash) ► Last 2 weeks average of 1.4 Billion Shares in 3.8 Million Trades for $34 Billon Dollar per day  NASDAQ US (Aug 2009) – Average of 2.1 billion shares per day (cash) in 172 million trades for $39 billion per day

Source: DTCC

Sample Securities Transactions Settlement

Clearing Volumes & Stats

► Equities – NSCC (2008) - Daily   $1.25 Trillion, 86 million transactions, peak day 209 million transactions 98% netting ► Fixed Income – FICC (2008) - Daily  $4.5 Trillion, ~140,000 transactions per day ► Options – OCC (2008) - Daily  $16 Billion, 14 million contracts, peak day 30 million contracts