What are the main challenges faced by capital markets institutions?
Institutions in capital markets face numerous challenges including regulatory compliance, the rising cost of capital, the tightening squeeze on fees and margins, in tandem with demands from customers for greater transparency and real-time data. Investment banks, brokers, custodians, asset managers and CSDs all need to find new sources of profitable growth while reducing costs and risks.
One of the major sources of inefficiency and unnecessary cost and risk is the post-trade process. Historically, market participants have had no insight into the status of a payment once released. They haven’t known where payments are in the journey between payer and payee, what fees have been deducted, or whether the payment has been altered along the way, until it arrives – or fails to arrive.
What are institutions doing to meet this challenge?
Many realise that early resolution of problems likely to cause a payment to fail – through real-time sharing of information – cuts post-trade costs and risks. Thus, there has been growing interest in technology and services, such as SWIFT gpi, that help them adapt to and solve these issues.
For example, cash payments that cannot be reconciled are a major source of unnecessary costs for intermediaries and clients. Cash breaks often occur for a number of reasons. For instance, instructions contain inaccurate or inadequate information or unexpected charges or fees along the payments chain cause a mismatch in the amounts.
The solution lies in getting complete visibility so potential problems can be detected and resolved earlier in the process. In addition, pre-validation minimises the risks of inbound and outbound payments containing inaccurate information in the first place.
What is SWIFT doing to help market players?
SWIFT gpi addresses excessive post-trade costs. By sharing data simultaneously between correspondent banks, investment banks, custodian banks, brokers, asset managers and financial market infrastructures, gpi enables all parties to a payment to repair any errors or omissions early enough to avoid reconciliation breaks and consequent settlement failures.
More than 3,500 financial institutions have signed up for gpi, including all of the largest global custodian banks and investment banks. They and their customers are already able to track and trace payments made in the capital markets.
What are the key features of SWIFT gpi which benefit capital markets firms?
gpi helps capital markets firms in a number of ways by improving transparency and speeding up payment times. The gpi tracker enables users to trace a payment from origination, while beneficiaries get notified that a payment is on its way even before it has been processed through intermediaries. The tracker also details the exact amounts deducted by each intermediary as a payment passes from initiator to the end beneficiary, providing complete transparency on fees and charges.
Pre-validation reduces the risk of errors by confirming payment instructions up front while case resolution speeds up resolution of operational, compliance and regulatory-related issues that can arise along the payments chain.
Finally, the stop and recall service allows users to halt erroneous or fraudulent payments immediately, reducing the risk of mistaken transfers of value and the cost of repairing them after they are made.
How does gpi compare to other efforts to solve excessive post-trade costs?
Despite collaborative efforts and new technology such as distributed ledger technology, the post-trade problem has not been fully solved. Pilots have shown potential for DLT to facilitate efficient transfer of assets but the simultaneous delivery of payments remains challenging.
To help overcome this challenge, earlier this year we launched a proof of concept (PoC) to trial a new gateway – gpi-link - to interlink trade and e-commerce platforms with gpi.
The first stage of the PoC has worked on R3’s leading blockchain platform, Corda, to bring the benefits of gpi payments - speed, ubiquity and certainty - to distributed ledger technology (DLT)-enabled trade.
It aims to connect seamlessly multiple trade platforms to gpi members, enabling gpi payment initiation, end-to-end payment tracking, payer authentication and credit confirmation.
This has huge potential given that SWIFT gpi is already carrying over $300bn a day in more than 150 currencies across more than 1,200 country corridors. On average, 40% of SWIFT gpi payments are credited to end beneficiaries within five minutes and almost 100% within 24 hours.
It does not require revolutionary changes to technologies and processes. It instead upgrades existing systems, making it much easier for intermediaries to adopt.
Looking ahead what plans do you have for extending the scope and coverage of SWIFT gpi?
Currently, gpi’s scope is cash payments. However, as adoption grows, we anticipate that gpi will evolve to encompass securities, derivatives and FX transactions as well.
More gpi service enhancements will come as capital market participants exploit the benefits of real-time payments tracking, faster fund transfers and the increased transparency on fees and costs.
And, as gpi becomes the norm, we will explore evolving the service from its origins in payments to other asset classes.