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
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Clearing*
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Settling*
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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.
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
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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
Graphic Source :SWIFT
High Value Payments
Low Value Payments
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
devices
Automated Teller Machines & Point of Sale
 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
CARD
Processor
“A”
CARD
Processor
“B”
ATMs
Associations & Networks
MC / VISA/ NYCE/ etc
X Bank
`
Compromised Box
Customer
Crook
Some banks
All Other banks
Automated Clearing House (ACH)
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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)
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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
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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
Sample Securities Transactions
Settlement
Source: DTCC
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