Strengthening Interbank Payment Systems

1. Strengthening Interbank Payment Systems David Mazza, VP Payments Systems Risk Managment November 4, 2003 Citibank N.A.

2. Citibank Payment Services • Largest processor of cash flows (payments) globally • Global payment network spanning 90 countries • $92 billion in liability balances • Connection to over 270 payment systems globally • Process more than US $1 trillion in funds daily • Regular adviser on industry issues such as: settlement risk, receivables and payment processes, payments systems development • 100 years operating in Asia, Latin American and Europe • Operator of US dollar clearinghouses and FX clearinghouses in local markets • Maintains dedicated Payments Systems Risk Managment Group 1

3. Strengthening Interbank Payments • Capabilities • Efficiency • Technology • Governance Business/Services • Credit • Legal • Operational • Liquidity Risk Management 2

4. Cash (Payment) Products Payables Liquidity Receivables Capabilities Parameters 3

5. Payables Suite Paylink Mass Payments Multibank Payments Direct Debit Payments Citibank Worldlink Receivables Suite Pick-up Services Branch/Network Collection Incoming Transfers Automatic Tellers Direct Debit Receivables Management CitiConnect eBilling Payable/Receivable Products 4

6. Cash Management Products Liquidity Suite • Current Account • Sweep Balancing • Notional Pooling • Investments 5

7. Country Capabilities/Parameters • Electronic versus manual clearing • Manual, semi-automated, automated, RTGS • Cash clearing for securities/derivatives • LCY Cheque • GIRO/ACH • Direct Debits • X-Border Electronic Funds Transfers • All banks are member of the clearing house vs. bilateral agreements • Timing of clearing process (D, D+1, D+2, etc) • Introduction of “hybrid” systems • Euro Access Frankfurt (EAF), Paris Net Settlement Systems, CHIPS • Allow third-party payments in interbank funds transfer systems 6

8. Business Issues • Allow payers to pay directly into a Citibank account at our branches or via electronic transfer (local or from abroad) (Multibank Payments) • Regulations impacting file delivery contracts to allow files containing payments for various countries and currencies • Direct Debits • Clearinghouse requires an initial mandate for all direct debits • Limit set up by clearinghouses to process direct debits • Consumer and corporate direct debits • All banks in country or certain banks (bilateral agreements) • Can collections be made at automated tellers at branches or third-parties • Accepts cash, cheques, cards? • Requires information to be sent in advance? 7

9. Business Issues • Cheques/Collections • Same cut-off time for same-day deposit of cash/cheque pick up • Coverage and quality of armored car/courier companies • Cheque discounting (manual or automatic) • Ability for branches to print cheques • Validity period of cheques • Allow payers to visualize invoices to pay (finance) on the Web (CitiConnect); customers monitor receivables via Web/phone/email • Digital signature law • Notional pooling is available in foreign currency (USD, Euros) • Different legal entities allowed for sweep balancing • Tariffs/fees on LCY and FCY accounts 8

10. SWIFTNetTM Market Infrastructures • SWIFTTM is now making its services available to market infrastructures (MIs) in the securities and cash payment industries • Advantages • The elimination of more than 100 proprietary machines and lines currently used by banking community • More efficient communications • Real-time, interactive exchange of messages • Automated exchange of files (bulk payments) • Particularly suited for central bank reporting and intra-institution reporting • Secure browser-based access to MIs Web servers • Improves straight-through-processing rates on both infrastructure and client sides • Can be used where not all participants are eligible for direct SWIFT participation (Closed User Groups) 9

11. Risk Management • Citigroup endorses BIS Core Principles for Systemically Important Payment Systems • Multilateral net settlement systems • Losses should be shared based on bilateral credit (or transaction volume) vis-à-vis defaulting participant • Cap on losses to non-defaulting banks • Diversified selection of private-sector settlement banks for securities/ derivatives cash settlement • Wider adoption of CLS for FX payments • Development of USD/local currency (FX) clearinghouses • Settlement finality in payment and securities settlement • Structural limitations on legal liability to participants 10

12. Risk Management • Provision of central bank intraday (RTGS) liquidity • Introduction of payment optimization procedures • Elimination of unwind provisions • Largest participants should not be sole liquidity providers • Broader acceptance of foreign-currency denominated collateral for RTGS intraday liquidity (G-10 central banks) • Operational reliability/redundancy • Concentration of critical market infrastructure • Risk Management and Audit Functions in positions of authority • Regular external audits • Transparent and accountable governance structure • Involve participants in planning strategic objectives and plans for achieving them • Central Banks are adopting “product” offices 11