Introduction to SWIFT and the value it provides to the Securities Industry - Presentation for the Chartered Institute for Securities & Investment Richard Young 30th June 2010

Agenda SWIFT Overview SWIFT Initiatives in the Securities Industry Clearing and Settlement Asset Servicing Fund Distribution

SWIFT: A Global «Community Inspired » Financial Utility Not for profit industry utility 9,304 financial institutions 209 countries 3.8 billion business msgs Registrar for ISO No corrupt, misrouted, lost msgs Industry Standards Financial Community . IP Platform Cost – Risk – Revenue

SWIFT: Connecting the Global Financial Community Banks Corporates Payment Systems Insurance Companies Clearing & Settlement Systems Custodians/ Depositories Broker-Dealers Government Institutions Stock Exchanges Regulators Market infrastructures Investment Managers Trustees/ Administrators

Operational Threats Increase High risk manual ops Slow processing model Open architecture pressures Multiple proprietary links Spiralling Costs Compliance Client Dissatisfaction

SWIFT Community: Harnessing Economies of Scale Price (EURcent/msg) Volumes (Millions of messages) Banking, Trade Finance, Capital Markets, Asset Management, Insurance

Agenda SWIFT Overview SWIFT Initiatives in the Securities Industry Clearing and Settlement Asset Servicing Fund Distribution

Cash Clearing systems/ Non trade-related activity SWIFT in Securities – Bringing Standards to the Securities Ecosystem Institutional (buy) side Street (sell) side IMI: Investment Manager B/D: Broker Dealer VMU: Virtual Matching Utility ETCP: Electronic Trade Confirm Provider GC: Global Custodian SC: Sub-Custodian SA: Settlement Agent (Clearer) CCP: Clearing House/ Central Counterparty ICSD: (Int‘l) Central Securities Depository Trade date Order Pre-trade/ Trade Space 1 IMI B/D B/D Trade Exchange 1 VMU / ETCP Pre-Settlement Post Trade/ Space 2 Trade date + X GC CCP 2 SC SA SA Clearing & Settlement Space 3 Cash Clearing systems/ Central Banks (I)CSD 3 Non trade-related activity Space 4 Asset Servicing

Standards used on SWIFT ‘MTs’ Message standards on the ‘FIN system’ (SWIFTNet FIN) Payments & other markets Securities markets 70s Traditional FIN MT 100, MT 202, etc 80s ISO 7775 syntax = traditional FIN MT 521, MT 500, etc 90s Late 90s Traditional FIN MT 103, MT 103+, etc ISO 15022 compliant syntax = enhanced FIN MT 502, MT 54x, etc Message standards on the ‘SWIFTNet system’ (SWIFTNet) Early 2000’s UNIFI (ISO 20022) syntax = XML Investment Funds, Cash Reporting, Bulk Credit Transfers, etc ‘MXs’ An Introduction to Sds 2

Securities Industry is changing (Driven by MiFID & Code of Conduct) Trading Yesterday’s situation: ‘Place of trading’ send their trades to one CCP Typical silos (LSE-LCH, Euronext-Clearnet, Borsa Italiano-CCG, etc) for each country with active CCP Exchanges Clearing CCPs New landscape in EU building: Many new trading venues (Turquoise, Chi-X, NasdaqOMX Europe, BATS, Equiduct, Smartpool, NYSE Euronext Arca, etc) and new clearing venues (EMCF, EuroCCP, etc) Desire to create links with multiple counterparts Trading Exchanges and MTFs Clearing CCPs

SWIFT in the Clearing Space 2 Business Areas Communication between Trading Venues with CCPs or related routing and netting engines Communication between matching facilities and CCPs Communication between CCPs, GCMs and ICMs (the clearing members) and NCMs (the non-clearing members) Inter-CCP communication (support to Code of Conduct) Post-clearing CCP communication with CSDs and settlement agents, and CBs and cash correspondents Reporting from CCPs to regulators Trading role (NCM) Market place (SEs, MTFs) 1 Matching venues Trading role (ICM) 3 Clearing role (GCM) CCP CCP 4 Central Bank Regulators Settlement Agents Cash corres-pondents CSD 6 5

Using existing solutions Providing solutions for the Clearing industry Bringing communication efficiency to GCMs and ICMs Developing ISO 20022 msgs specifically for clearing industry. MX-based solution Using existing solutions On demand of some CCPs and CMs: Using ISO 15022 and/or prop stds. FIN and FileAct.

SWIFT in Settlement: (15022 MT flows) Trading Venue Investment Manager MT 502 Broker’s Counterpart Broker MT 502 cl MT 513 MT 576 cl Market side cl MT 518 MT 513 MT 514 MT 517 MT 515 MT 545 MT 509 MT 584 MT 541 MT 543 MT 547 CCP IMI’s Custodian Broker’s Custodian MT 541 MT 545 MT 543 MT 547 MT 547 MT 541 Sub- Custodian Settlement System (e.g. CSD) MT 545 MT 535/536/537/548/578

Infrastructure for communications within the Euroclear Group Back Office Applications FIN/MX Interface File Transfer Interface CREST Interface EUCLID Server/ PC SWIFT Alliance Gateway WSHA SWIFTNet Common Communication Interface Euroclear Single Platform EUI Euroclear BE Euroclear NL Euroclear Bank Euroclear FR

Giovannini Barriers SWIFT was asked to ensure the definition of a protocol for the removal of Barrier 1 through the Securities Market Practice Group (SMPG), the protocol had the aim of: Eliminating national differences in the information technology and interfaces used by clearing and settlement providers and defining an EU-wide protocol in its place. SWIFT consulted widely with participants in the European space in the definition of this protocol Protocol was published by SWIFT in March 06 for implementation by March 2011 Work to remove other Barriers was assigned to industry groups, e.g. ECSDA, whilst the removal of some barriers was recognised to be dependent on action by national governments, with help from the EU Commission.

Giovannini Barrier 1 - Protocol Scope Not applicable Mandatory use of ISO15022/20022 for x-border Optional for domestic SWIFT to complete ISO15022/20022 gap analysis & fill gaps Other initiatives adopt protocol, e.g. MiFID Available in TARGET opening hours Satisfy local business, regulatory performance & resilience needs Message/file log, guaranteed delivery, delivery once & only once ISO15022/20022 compliant Internet Protocol (IP) Message, file transfer & GUI Authentication/ Data integrity via PKI Non-repudiation Time stamping F&A October16 2008

The TARGET2-Securities (T2S) project TARGET2-Securities can be defined as a central securities settlement utility, delivered by the Eurosystem and to which CSDs can outsource settlement. It will promote harmonised settlement between participating CSDs and their users and be in line with SMPG recommendations. It will be Giovannini compliant and will make use of ISO 20022 messages such as: Settlement and Reconciliation Cash and Liquidity management Reference Data messages (Securities, Cash and Securities Accounts, Party) Collateral management (interaction with CCBM2)

T2S connection options T2S parties have choice between direct and indirect connection to the platform. Source: ECB website and T2S URD www.ecb.int 18

SWIFT in Post Trade Matching (Prime Broker/Executing Broker) Industry Challenges 3. Poor reporting from Prime Brokers Hedge Fund Executing Broker 1. Mistake in Trade details Daily Trade report 2. Pre-matching is manual Prime Broker Settlement Agent Settlement Agent 4. Risk of Settlement fails CSD

Solution for PB/EB Industry Challenges Hedge Fund Executing Broker MT 515 2. Real time status updates Daily Trade report Accord MT 998 MT 515 Prime Broker MT 998 1. Automated pre-matching, status and exception handling Settlement Agent Settlement Agent 3. Removes Settlement Risk CSD

Agenda SWIFT Overview SWIFT Initiatives in the Securities Industry Clearing and Settlement Asset Servicing Fund Distribution

Asset Servicing Asset Servicing is the processing of events (Corporate Actions) related to holdings of securities assets. Examples of such events include: Distributions Distributions (without Options): Cash Distributions (e.g. cash dividends, interest Payments) Securities Distributions (e.g. stock dividend) Distributions with Options (e.g. dividend Options) Reorganisations Mandatory Reorganisations with Options (e.g. conversion) Mandatory Reorganisations without Options (e.g. stock split) Voluntary Reorganisations (e.g. tender offer)

Corporate actions frequently originate with detailed free-text documents One Horrific Example 300+ pages to describe an ‘Exchange Offer’ 38 separate updates were published from Dec 08 to May 09, as new information was made available Validation took 12 separate sources of data Five resources worked on it extracting 63 data elements, amassing 44 pages of audit trail changes The challenge is to find the right data, in the right pages, buried alive somewhere in the free-text document 23

Corporate Actions processing often involves multiple versions, of what should be the same information, passing between multiple parties 24

Multiple CAs produce multiple Documents - leading to further multiples of messages downstream Quantification: ~1,000,000/yr Unique CA Events = ~5,000,000 Documents published Issuers and their agents ~1,000,000 events annually for ~85,000 companies and funds Documents Intermediaries, Market Infrastructures ~20 global custodians hold 95% of all assets under custody = ~ 2,800,000,000 Messages ISO 15022 & ISO 20022 Investors, investment/fund/asset managers Many millions of investment accounts at many layers

SWIFT’s Current Corporate Actions Offering Professional Services STaQS & Market Practices Training ISO 15022 Messaging for Corp. Actions (MT560s) ISO 20022 Messaging for Proxy V. Data Distribution Drive for standardisation & automation to reduce risk, loss & cost, working with XBRL for data capture

SWIFT in the Funds Market Automating Distribution Across Mutual, Hedge, Money Market & Pension Fund Processing

Executive Summary “SWIFT is now the trusted brand sitting at the heart of the platforms’ and fund managers’ strategy to more effectively distribute multi asset class products and provide enhanced, value add services to their global client base”

Holistic Fund Distribution Enablement Account opening Order placement Settlement Reconciliation Price report Transfers Switches Cash Forecast Corporate Actions, Payments End investors Other intermediaries & platforms Portfolio managers Fund accounting agent Institutional investors Investors’ intermediary Distributor Transfer Agent (I)CSD (when applicable) Cash agents Distributor-side Cash agents Fund -side 500 Fund Players, 40 Countries, 25 Million Messages Payments

Summary

Next steps to automation… How SWIFT Helps the Securities Industry Solutions Connectivity Consulting Services Training 31

Thank you & Questions richard.young@swift.com +44 207 762 2029