Granularity Ltd

1. Granularity Ltd Kathleen Tyson-Quah ktq@granularityltd.com April 2001

2. Granular Payment Control Compelling Need An Elegant Solution Sensible Technology Model Validation Payment Risk Reduction Next Steps

3. Compelling Need • The Payments Business • Problems in Payments

4. The Payments Business 14% 50% 36%

5. Payment System Bank A Bank B Client A Client B The Payments Business • $4 trillion in daily payments • 2000 banks dominate payment flows • Wide variety of internal hierarchies • Wide variety of technical and management processes • 40 currencies actively traded • Each currency has different payment systems • different platforms, • different data formats, • different language characters • Multicurrency systems very complex A B

6. Payment System Bank A Bank B Problems in Payments A B • Liquidity “Hoarding” • Liquidity gridlock • Liquidity uncertainty • Credit uncertainty • Periodic major crises • operational failures (Bank of New York) • defaults (Barings, Drexel) • Poor system controls and integration • Fragmented management hierarchies

7. An Elegant Solution • The Granularity Solution • Advantages of Granular Payments Control • Payment Banks & Users • Granularity Network Overview • Payment Bank Filter Integration • The Filter Process • Improved Information • Backward Compatibility

8. The Granularity Solution • Addresses risk on two-way flows in a currency with the same counterparty on the same day (e.g. pay $1 billion and expect $800 million) • Real-time controls on risk of paying but not receiving • Real-time window on payment flows during the day • Suspend & Reinstate capability

9. Advantages of GPC • Each bank controls its payment risk and liquidity risk independently • Effective for all counterparties • Effective for all currencies • Comprehensive for all payments • Simple • Unilateral • Low Cost ($250,000 or less basic fee) • Complementary to netting and CLS

10. Payment Banks & Users • Payment Banks buy Filter Module • implements Clean Payment Limits • improves payments transparency • powerful correspondent service • Users buy User Interface • comprehensive tool for risk reduction • Clean Payment Limits • Suspend & Reinstate • Overrides • periodic and real-time reporting • flexible account & counterparty structures

11. Network Overview USD Fedwire User Interface Payment Bank Filter Module CHIPS Reuters USD Routers EUR Target ATT VPN EUR EBA JPY BOJ-NET S.W.I.F.T. IP Network Router FEYCS JPY Routers Granularity Core System CHF SIC CAD LVTS CHAPS GBP Domestic Payment Systems

12. Payment Bank Filter Integration Liquidity/Payments Manager Queue ClearingFunds? NO YES AccountFunds? NO YES OK Gateway to Payment System

13. Payment Bank Filter Integration Liquidity/Payments Manager Application Programming Interface Payment Bank Host Application Queue ClearingFunds? NO YES Filter Process Module AccountFunds? NO FAIL YES PASS OK Gateway to Payment System

14. REJECT& Notify& CACHE FOR EACH YES IDENTIFY Account Holder Is Counterparty Suspended? IDENTIFY Payee & Intermediaries YES Is Payee or Intermediary a Counterparty? Override forTRN or Counterparty? YES Account Holder a User or 3rdParty? NO NO NO NO YES PASS YES NO Is Payment Amount less than Available Balance? YES IDENTIFY Payment Type CALCULATE Available Balance IDENTIFY Payment Amount Is Payment Type listed? NO GPC Filter Process (REVISE) & STORE Available Balance & CACHETransaction

15. Improved Information • Payment Banks gain • real-time information on liquidity allocation and usage • much finer detail on payments behaviour • metrics for liquidity pricing • Users gain • on-demand and periodic reports • alerts to intraday problems and shortfalls

16. Backward Compatibility NO CHANGES TO LEGACY PROCESS FOR • Trading • Confirmations • Matching • Payment Instruction & Pre-Advice • Payment Confirmations • Payment Reconciliations • Domestic Payment Systems • Netting (and CLS)

17. Sensible Technology • Low risk as a design objective • Web Technology Components

18. Low Risk as a Design Objective • Pre-existing, proven components selected for basic architecture • Applications will use pre-existing standards: SWIFT and ISO data elements, data formats and objects as available in repositories • Solution design minimises integration task and project risk for Users and Payment Banks

19. Technology Components • Internet protocol network with VPN/PKI security • Browser Interface for ease of use and low integration costs • Platform independent languages • XML data format protocol and ebXML compliance • Application to application data interchange (XML/EDI)

20. Model Validation • Banks and Central Banks • Software & Technology Vendors • The Granularity Advisory Board

21. Banks and Central Banks • Opinion-leaders at major banks targeted first • 4 central banks offer “no objection” • 30 banks consulted for product validation • Follow-up meetings with senior department executives and operations teams

22. Software & Technology Vendors • 4 vendors of Payment/Liquidity Management Software consulted • All are interested in adapting their solutions to integrate to the Payment Bank API as an upgrade feature • Minimises integration task for Payment Banks using vendor solutions

23. The Advisory Board • Chaired by Richard Goulding • Top ranking individual experts on risk management, payments and operations from leading banks • Comfort factor for banking industry • Best practice, marketing and product development guidance

24. Payment Risk Reduction • Credit Risk • Liquidity Risk • Systemic Risk • Operations Risk • Multicurrency Impact

25. GPC and Credit Risk • Credit risk is capped at the Clean Payment Limit in each currency • Intraday notification of payment failure enables rapid remedial action • Real-time suspension of payments in all currencies cuts forward risk from 3 days (Allsopp) to less than one day

26. GPC and Liquidity Risk • Liquidity risk is capped at the CPL • Fixed, knowable risk can be covered by liquidity or credit facilities • Intraday notification of shortfall • Shortfall can be funded while the money market and payment system are still operating • Contingent payment failures should become extremely rare

27. GPC and Systemic Risk • Default losses should be survivable to financial counterparties • Operations failure impact limited • Intraday remedial measures should prevent contingent payment failures • Fixed, knowable loss avoids effects of uncertainty, rumour and speculation on trading markets • Local liquidity and credit problems should not spread as rapidly through global markets

28. GPC and Operations Risk • GPC System • hot-offsite back-up and full resiliency • worst case failure results in status quo payments processing • GPC compatible with multiple nostros in each currency • GPC limits impact of operations failure on payment processing

29. Multicurrency Risk Reduction Values are illustrative only

30. Next Steps • First Round Funding • Requirements & Prototype Development • Beta Bank Selection • Applications Development & Testing • Live Operations • Controlled Scaling

31. Granular Payment Control Compelling Need An Elegant Solution Sensible Technology Model Validation Payment Risk Reduction Next Steps

32. Questions ktq@granularityltd.com or peter.davey@granularityltd.com