Slide 1 Independent Advisory Group Giovannini Barrier 1 Meeting 1 July 19th, 2005

IAG_190705_v3.pptSlide 2 Agenda  The Independent Advisory Group –What is it & why do we need one? –What is it going to do & when?  Barrier 1 –What progress has been made so far? –What is there still left to do?  Agreement of terms  Focus on the Network Layer –Standards –Security –Service  Any other business

IAG_190705_v3.pptSlide 3 Agenda  The Independent Advisory Group –What is it & why do we need one? –What is it going to do & when?  Barrier 1 –What progress has been made so far? –What is there still left to do?  Agreement of terms  Focus on the Network Layer –Standards –Security –Service  Any other business

IAG_190705_v3.pptSlide 4 Independent Advisory Group: What is it & why do we need one?  Responses emphasised importance of original key principles: –Leverage –Open –Neutral –Inclusive  Feedback identified creation of an independent advisory group as a way of maintaining principles  Business not technology focus  Maintain congruency with G30

IAG_190705_v3.pptSlide 5 Independent Advisory Group: What is it & why do we need one?  CESAME group meeting 10 th June concurred with suggestion to form IAG  Membership criteria: –CESAME member –Respond to the consultation –4 exceptions  Independent chair  Independent observer

IAG_190705_v3.pptSlide 6 Independent Advisory Group: What is it & why do we need one?

IAG_190705_v3.pptSlide 7 Independent Advisory Group: What will it do & when?  Ratify –Where consultation provides conclusive direction  Recommend –Where consultation results are unclear  Meetings scheduled: –19 th July –3 rd August –23 rd August –12 th September

IAG_190705_v3.pptSlide 8 Agenda  The Independent Advisory Group –What is it & why do we need one? –What is it going to do & when?  Barrier 1 –What progress has been made so far? –What is there still left to do?  Agreement of terms  Focus on the Network Layer –Standards –Security –Service  Any other business

IAG_190705_v3.pptSlide 9 Barrier 1: 2003 Giovannini Report states...  Barrier 1 SWIFT should ensure the definition of this protocol through the Securities Market Practice Group « National differences in the information technology and interfaces used by clearing and settlement providers should be eliminated via an EU wide protocol. SWIFT should ensure the definition of this protocol through the Securities Market Practice Group. Once defined, the protocol should be immediately adopted by the ESCB in respect of its operations. This barrier should be removed within two years from the initiation of this project. »

IAG_190705_v3.pptSlide 10  2004, Market research  2005, Market consultation: –Paper published 5 th January, 2005 –Consultation closed 15 th April, 2005  70 physical responses  Responses from 21 out of 25 EU countries  Responses from 30 countries globally Barrier 1: Progress

IAG_190705_v3.pptSlide 11 Barrier 1: Progress: EU Response statistics  74% from EU organisations –56% from FI’s –23% from Infrastructures –21% from miscellaneous (Central Banks, Consultancies etc)  29 Institutions & FI ‘clubs’ (e.g. ISITC Europe)  2 ICSD’s  64% of EU CSD’s  50% EU Equity Exchanges  1 Clearing House

IAG_190705_v3.pptSlide 12 Barrier 1: What is there still left to do?  Independent advisory group formed July 05  Summary of consultation responses July 05  Pre-publication of protocol model Q4 05  Final publication Q1 06

IAG_190705_v3.pptSlide 13 Agenda  The Independent Advisory Group –What is it & why do we need one? –What is it going to do & when?  Barrier 1 –What progress has been made so far? –What is there still left to do?  Agreement of terms  Focus on the Network Layer –Standards –Security –Service  Any other business

IAG_190705_v3.pptSlide 14 Agreement of terms: ‘Protocol’ - Definition  Technical protocol Any agreement that governs the procedures used to exchange information between co- operating entities» « Any agreement that governs the procedures used to exchange information between co- operating entities»  Diplomatic protocol « A code of conduct prescribing how those taking part should behave « A code of conduct prescribing how those taking part should behave» BEST PRACTICE

IAG_190705_v3.pptSlide 15 Agreement of terms: ‘Standard’ - Definition  Standard –« something established by authority, custom or general consent as a model or example » –« a rule for the measure of quality » –« regularly and widely used » –Uniform and well established by usage and widely recognised as acceptable » LEVERAGE

IAG_190705_v3.pptSlide 16 W3C UN/CEFACT e-bMoU OMG ISO/TC68 FIX ISITC-IOA ISSA SMPG SIA FISD/MDDL G30 Giovannini TC68/SC4 WG8 & WG11 EPC/ECBS ISTH IFX RosettaNet/PMP OAGi X12 BMA EACT FpML ISDA IFSA OASIS Bolero ICC TC68/SC6&7 CEFACT/ TBG5 IIBLP UNCITRAL IFSA Securities Trade Finance Acord TC68/SC4&7 Payments Treasury EAN/UCC Insurance UNIFI - ISO CEFACT/ TBG15 TWIST Fedwire CHIPS TCH NACHA IFSA IGTA Agreement of terms: ‘Standards’

IAG_190705_v3.pptSlide 17 Agreement of terms: ‘Syntax’ - Definition  Syntax –« the way in which elements are put together to form a message » INTEROPERABILITY

IAG_190705_v3.pptSlide 18 Agreement of terms: ‘Protocol, Standard & Syntax’ - proposed ratification  End to end STP can be achieved via interoperability of agreed standards (inc market practices) within a best practice protocol  Interoperability achieved through the adoption of a single data dictionary

IAG_190705_v3.pptSlide 19 Agreement of terms: ‘Protocol scope’ - Definition  Scope defined in the consultation paper as: –All post trade processes –All traded instruments –All participants

IAG_190705_v3.pptSlide 20 Agreement of terms: ‘Protocol scope’ - All post trade processes Exchange VMU / ETCP Trade Date Space 1 Pre-trade / Trade Space 3 Clearing & Settlement Order Trade IMI: Investment Manager B/D: Broker Dealer VMU: Virtual Matching Utility GC: Global Cust SC: Sub-Cust SA: Settlement Agent (Clearer) CCP: Central Counterparty ICSD: (Int‘l) Central Securities Depository Institutional (buy) Side Street (sell) Side Space 2 Post Trade / Pre-Settlement Trade Date + X GC SA CCP SA IMIB/D (I)CSD SC B/D Space 4 Space 4 - Custody Services Non Trade Related Activity 1 2 3

IAG_190705_v3.pptSlide 21 Agreement of terms: ‘Protocol scope’ - All traded instruments  Giovannini Reports 1 & 2 refer to securities & derivatives: –Equities –Fixed Income –Derivatives (Exchange traded)  Giovannini 1 also includes Clearing & Settlement process flows for Derivatives (Chart 2.6)

IAG_190705_v3.pptSlide 22 Agreement of terms: ‘Protocol scope’ - All participants Exchange VMU / ETCP Trade Date Space 1 Pre-trade / Trade Space 3 Clearing & Settlement Order Trade IMI: Investment Manager B/D: Broker Dealer VMU: Virtual Matching Utility GC: Global Cust SC: Sub-Cust SA: Settlement Agent (Clearer) CCP: Central Counterparty ICSD: (Int‘l) Central Securities Depository Institutional (buy) Side Street (sell) Side Space 2 Post Trade / Pre-Settlement Trade Date + X GC SA CCP SA IMIB/D (I)CSD SC B/D Space 4 Space 4 - Custody Services Non Trade Related Activity 1 2 3

IAG_190705_v3.pptSlide 23 Agreement of terms: ‘Protocol scope’ - Consultation responses  59 responses in totalAgree –14 EU FI8 – 57% –16 FI EU rep orgs8 – 50% –10 EU C&S Infrastructures6 – 60% –Total (inc above) 32– 54%  Disagreements: –Too narrow10 – 17% –Too broad10 – 17% –Phasing required17 – 29%

IAG_190705_v3.pptSlide 24 Agreement of terms: ‘Protocol scope’ - Consultation responses  Too narrow, should include: –Pre-trade/trade3 responses –Geographic Europe3 responses –Market data2 responses  Too broad, should not include –Interfaces & networks4 responses  Total (agree + too narrow) =42 responses (71%)

IAG_190705_v3.pptSlide 25 Agreement of terms: ‘Protocol scope’ - Proposed ratification  The scope is appropriate to the definition of a communication protocol for C&S and asset servicing activity  Phasing by Participant/sector

IAG_190705_v3.pptSlide 26 Agreement of terms: ‘Protocol framework’ - Definition Network Messaging Data Network Messaging Data STANDARDSSTANDARDS SECURITYSECURITY SERVICESSERVICES Participant A Participant B

IAG_190705_v3.pptSlide 27 Agreement of terms: ‘Protocol framework’ - Consultation responses  53 responses in totalAgree –15 EU FI14 – 93% –12 FI EU rep orgs9 – 75% –10 EU C&S Infrastructures8 – 80% –Total (inc above) 42– 82%  Disagreement –Should only include Layer 1, Data

IAG_190705_v3.pptSlide 28 Agreement of terms: ‘Protocol framework’ - Proposed ratification  The proposed 9 element framework correctly frames a potential communication protocol

IAG_190705_v3.pptSlide 29 Agreement of terms: ‘Interoperability’  Interoperability –Participants? –Standards/syntaxes? –Network?  G30: Clearly refers to participant & standards/ syntaxes interoperability*  Giovannini: less clear but refers to interoperability of users, payment instruments & standards/syntaxes** * Global Clearing & Settlement Plan of Action, 2003 ** Giovannini Second Report, 2003

IAG_190705_v3.pptSlide 30 Agenda  The Independent Advisory Group –What is it & why do we need one? –What is it going to do & when?  Barrier 1 –What progress has been made so far? –What is there still left to do?  Agreement of terms  Focus on the Network Layer –Standards –Security –Service  Any other business

IAG_190705_v3.pptSlide 31 The Network Layer: Messaging Data Network Messaging Data STANDARDSSTANDARDS SECURITYSECURITY SERVICESSERVICES Participant A Participant B Network

IAG_190705_v3.pptSlide 32 The Network Layer: Element 7: Network Standards  G30: IP  Consultation paper: IP (based on discussions with COLT & Equant)  Most end devices (PC, Servers etc) communicate /route using IP  There is no "Best Practice" for building or operating IP networks, each has its own rules but if interoperability between networks is not a requirement, IP implementation is academic

IAG_190705_v3.pptSlide 33 The Network Layer: Element 7: Proposed ratification  The minimum acceptable network standard is the implementation of IP for communication and routing

IAG_190705_v3.pptSlide 34 The Network Layer: Element 8: Network Security  G30: “Security should be set at a level that satisfies business & regulatory requirements and that meets the needs of all stakeholders in the industry”  Barrier 1 Consultation paper: Secure private network (VPN) plus data encryption using a strong standard algorithm –Network encryption vs message encryption –Message validation or not

IAG_190705_v3.pptSlide 35 The Network Layer: Element 8: Network Security - ‘Policing’  51 responses in totalAgree –14 EU FI12 – 86% –12 FI EU rep orgs8 – 67% –9 EU C&S Infrastructures7 – 78% –Total (inc above) 37– 73%  Disagreement –12 respondents (24%) explicitly disagreed that network standards should be policed

IAG_190705_v3.pptSlide 36 The Network Layer: Element 8: Network Security - ‘Policing’  Validate against std structure26- 51%  Report violation to sender10- 20%  Stop traffic 8- 16%  Optional %

IAG_190705_v3.pptSlide 37 The Network Layer: Element 8: Proposed ratification  Security, at either the network or the messaging layer, must be set at a level that satisfies business & regulatory requirements

IAG_190705_v3.pptSlide 38 The Network Layer: Element 9: Network Service  Is service a commercial differentiator between network providers?  Is a minimum level of service required? –Performance - inc. provisioning & implementation times, availability, restore time etc –Resilience - diversity, contingency etc (Fed, ECB, FSA guidelines already exist – Leverage) –Management – maintenance, fault identification & rectification etc

IAG_190705_v3.pptSlide 39 The Network Layer: Network Service - Consultation responses  49 responses in totalAgree –15 EU FI14 – 93% –11 FI EU rep orgs7 – 64% –9 EU C&S Infrastructures8 – 89% –Total (inc above) 39– 80%  Disagreement –7 respondents (14%) explicitly disagreed that network standards are required

IAG_190705_v3.pptSlide 40 The Network Layer: Network Service - Consultation responses  24x7Agree –EU FI6 – 40% –FI EU rep orgs3 – 27% –EU C&S Infrastructures2 – 22% –Total (inc above) 15– 31%  % availabilityAgree –EU FI5 – 33% –FI EU rep orgs2 – 18% –EU C&S Infrastructures2 – 22% –Total (inc above) 11– 22%

IAG_190705_v3.pptSlide 41 The Network Layer: Element 9: Proposed ratification  Service must satisfy business & regulatory requirements for performance, resilience and network management

IAG_190705_v3.pptSlide 42 Agenda  The Independent Advisory Group –What is it & why do we need one? –What is it going to do & when?  Barrier 1 –What progress has been made so far? –What is there still left to do?  Agreement of terms  Focus on the Network Layer –Standards –Security –Service  Any other business

IAG_190705_v3.pptSlide 43 The next meeting is…..  3 rd August at 11.00am  The subject will be the messaging or interface layer

IAG_190705_v3.pptSlide 44 AoB – Time permitting  Accreditation –Do we need accreditation of Messaging/Network suppliers? –If yes, who should provide the accreditation service?

IAG_190705_v3.pptSlide 45 Communication solution providers: Accreditation - Consultation responses  53 responses in totalAgree –14 EU FI13 – 93% –12 FI EU rep orgs9 – 75% –9 EU C&S Infrastructures6 – 67% –Total (inc above) 43– 81%  Disagreement –5 respondents (9%) explicitly disagreed that accreditation

IAG_190705_v3.pptSlide 46 Communication solution providers: Accreditation - Consultation responses  Who should accredit? –Independent organisation20 –SWIFT9 –Regulator2 –ECB 2 –ISO3 –EU2 –Self certification5 –Market forces10

IAG_190705_v3.pptSlide 47 Communication solution providers: Accreditation - Proposed ratification  Accreditation of messaging/network providers is required  This activity should be carried out by ______  _______ should determine the accreditation process based on the criteria laid out in the Giovannini protocol