Swift Dialogue

This might be an era of unprecedented growth and opportunity for the economies of Latin America, but the banking and financial markets professionals gathered for SWIFT’s inaugural Latin American Regional Conference (LARC) were under no illusions as to the challenges on the path to sustained prosperity. Across two days, speakers and delegates alike were determined to learn from past mistakes and benefit from the experiences of global peers.

As Jairo Namur, head of Latin America, SWIFT Americas, noted in his welcome address, the speed of economic growth and regulatory reform in the region made it a “perfect time” to hold a conference on regional integration and global interoperability of Latin America’s financial infrastructure.

Chris Church, chief executive, SWIFT Americas, kicked off the first-ever LARC with the last-ever public appearance by outgoing SWIFT chief executive Lazaro Campos, who handed over the cooperative’s reins to Gottfried Leibbrandt, previously head of marketing, on July 2. In an ‘in conversation’ seminar, Church asked Campos to sum up his message to banks, market infrastructures and other SWIFT users in Latin America. Noting that SWIFT had grown from being a bank-owned utility to a provider of manifold services to multiple actors across the financial sector, Campos asserted that users needed to continue to push for more. “Make sure we serve you,” he said. “The more we do what you want us to do, the more you’ll ask us to do.” Campos also pointed out that the SWIFT 2015 strategy had emphasised using SWIFT’s global expertise and experience to address challenges in local markets. Two pieces of news released during the conference – Bank Itau becoming the first Latin American bank to sign up for high-volume fixed pricing and three banks, J.P. Morgan, BBVA and Santander, agreeing to use SWIFT’s 3SKey digital identity solution in the region – underlined his point on the importance of customer-centricity to SWIFT’s strategy in Latin America and beyond. “Tell us what we can do to meet the needs fo the Latin American community,” added Church. “We want to be part of the fabric,” he added noting SWIFT’s readiness to facilitate both cross-border and domestic initiatives.

Delivering on potential

There were plenty of both in evidence in the following panel discussion on ‘Market Infrastructures in Latin America’s Emerging Markets’, moderated by Eileen Dignen, managing director, LatAm and Corporates, SWIFT Americas, in which speakers highlighted the role of market infrastructures in underpinning economic growth. Joaquim Kavakama, CEO of Camara Interbancaria de Pagamentos (CIP), Brazil’s industry-owned interbank payment network operator, noted payment system reform had contributed to the decision of rating agencies to award Brazilian sovereign debt investment grade status in 2008 by providing the central bank with more up-to-the-minute data. However, he asserted that further change was needed if the region was to “deliver on its potential”, adding that innovations such as mobile payments needed to be harnessed to increase financial inclusion.

A more cross-border perspective was offered by Gustavo Vega, CEO of ACH Colombia, the country’s bank-owned payment infrastructure provider, who explained that Colombia is migrating to ISO 20022-based payments messages in anticipation of greater international transaction flows. “We know it will be hard work, but it will help us to support cross-border transactions into the future,” he said. International considerations were also front of mind for Felipe Ledermann, CEO of ComBanc, the high-value clearing house operator for Chile that is building a central counterparty for OTC derivatives to ensure the country is in line with the Group of 20 mandate to reduce systemic risk in the derivatives market. Ledermann added that the role of SWIFT in the project was still under discussions, but he hoped SWIFT’s global expertise would help ComBanc to exceed standards set by the Bank for International Settlement.

Following a coffee break, Andre Boico, head of pricing and business analysis, demonstrated how data collated by SWIFT could provide critical business intelligence, with reference to both global GDP growth trends and more regional indicators. SWIFT traffic figures for Latin America reflected not only the growth of overall economic activity but also SWIFT's strategy of focusing on key markets in the region. In the year to May 2012, overall SWIFT transaction volumes for Latin America increased 16.4%, with payments and securities traffic rising 13.2% and 45% respectively. With 69% of SWIFT traffic in the region emanating from Brazil, Chile and Mexico, the overall picture was highly influenced by trends in large markets. Brazil for example recorded a 29% rise in total SWIFT traffic in the 12 months to May 2012, including a 25.4% leap in payments volumes and a 34.1% surge in securities.

Boico then introduced the concept of the SWIFT Index, which had been germinating for some time before the shock of the financial crisis provided the catalyst for proving that SWIFT volumes could prove an effective proxy for economic activity. Taking as his starting point the parallel falls in SWIFT payment traffic and GDP growth levels in Q4 2008, Boico explained how the SWIFT Index used MT103 payment message volumes as the basis for predicting total GDP growth for OECD member countries in the current and next quarters. Describing the SWIFT Index as a barometer that could reliably predict economic performance well ahead of official data, Boico said that the SWIFT Index 'nowcast' for OECD GDP growth in Q2 2012 stood at 1.1%, while the forecast for Q3 was 1.0%.

New flows, new structures

For the three periods before and immediately after lunch, delegates were invited to choose from five hour-long work sessions, some of which were repeated and / or translated to help ensure maximum access. In a session on the growing offshore use of the renminbi, Kwok-Leung Ching, chief relationship manager for financial institutions at Bank of China (Hong Kong), first emphasised the importance of the topic to his audience. As the third and eighth most-used currency for trade finance and treasury transactions respectively, the renminbi is currently used in eight Latin American countries. Trade between China and Latin America increased 47% in 2011, while Chinese-Brazilian trade doubled between 2009 and 2011. As the first bank authorised by China's central bank to clear offshore renminbi in Hong Kong (since 2004), Bank of China (HK) has witnessed a huge expansion of external usageHong Kong's clearing infrastructure is being updated to handle the growing use of RMB. Perhaps China's major trading partners around the world should think about doing the same.

A more directly local flavour was provided by Nelson Pereira, head of depository services at Cetip, Brazil’s central depository for securities and derivatives, who explained how regulatory changes in the country’s post-trade arena mirrored international developments, notably the updated principles of the Committee on Payment and Settlement Systems and International Organisation of Securities Commissions (CPSS-IOSCO). Existing legislation had become outdated, said Pereira, noting in particular the lack of a clear definition between the roles of custodian and central securities depository. Reforms currently being considered would establish more separate regulatory environments for issuers, investors and the depository, while also clarifying minimum requirements for different service providers and taking into account the continued use of physical certificates. Other work sessions covered the new generation of trade finance tools such as SWIFT’s Bank Payment Obligation, cross-border market infrastructure regulation and use of SWIFT products and services to boost performance.

The afternoon of the first day ended with a presentation by new SWIFT CEO Gottfried Leibbrandt on SWIFT strategy and a panel discussion, ‘Key Challenge for Brazil: Sustainable Growth’, conducted in Portuguese and translated into English and Spanish. To explain what SWIFT can bring to banks and other financial sector organisations in Latin America, Leibbrandt offered words and numbers: five billion messages delivered a year, US$15 trillion moved daily, 10,000+ customers globally; in other words, “secure messaging, a common language, and a community of interest”. He also offered a vision of an evolving service offering. Banks could already reach market infrastructures as well as correspondents and clients through the single window SWIFT provides. And market infrastructures were increasingly using SWIFT to reach both domestic and global counterparts. The next logical step was to use cloud technology to make available a wider range of services, “not just SWIFT’s core services but a set of services – from banks, market infrastructures and other partners – that allow our users to serve their clients better at a lower cost of ownership”. To an extent, the integration of services to improve the user experience is what SWIFT has always been about, asserted Leibbrandt, “the only difference is that we’re doing it in hyper-drive, via the cloud”.

Opportunities and challenges

Ricardo Mariz, commercial manager, SWIFT Americas, opened the discussion on Brazil’s future challenges by asking whether the country was immune from the fallout from global economic risks, such as declining trade with China.

No country is isolated, asserted Alejandro Stein, head of treasury services for Latin America at J.P.Morgan. Brazil is well prepared, but needs to reform too, he accepted. An unprecedented period of growth and stability, it seems, has left Brazil with as many questions as answers. How to reduce bureaucracy? How to invest in infrastructure without fuelling inflation? How to adapt to immigration? Above all, how to take advantage of economic and fiscal strength to build sustained prosperity for the wider population? There are of course no easy answers. Indignant at Brazil’s 126^th ranking in the World Bank’s latest ‘Doing Business’ survey, Paulo Oliveira, CEO of Brazil Investments and Business, nevertheless admitted that four months to set up a business in Sao Paolo was unacceptable.

J.P.Morgan’s Stein said the problem was one of execution. The base is stable, the funding available, but the tax structure, for example, remains too complex and infrastructure too limited. Dino Sani, head of treasury services, Latin America BNY Mellon, identified low domestic savings and investment rates as demanding urgent attention, calling also for the removal of barriers to foreign investment. While proud of Brazil’s recent achievements, particularly given the contrast with more established markets, panellists shared a sense of urgency; the desire to get the country’s house in order from a position of strength intensified by the deadlines provided by the arrival of the football World Cup in 2014 and the summer Olympic Games in 2016. Having asserted the strength and stability of Brazil’s financial sector, Rodrigo Collares Arantes, head of banking operations and payments systems at the Banco Central do Brasil, said two large banks would be making their ATM networks more accessible before the end of the year to help the Brazilian banking system handle the expected influx of visitors. Oliveira said not only Brazil but Latin America as a whole had, not only an opportunity – but a need to attract foreign investments and consider having presence both in Brazil as well as China. . Greater economic and financial integration could be a win-win for the region, Oliveira said, but – with 85% of Latin America’s market cap – “Brazil has to take a leading role sooner rather than later.”

Looking ahead

Tuesday morning started with the big question: ‘What economic trends will shape Latin America through 2020?’ The twin challenges would appear to be: can the region take advantage of recent strong growth to build a sustainable manufacturing base; and will global trends knock Latin America’s puma and jaguar economies off-course?

Juan Pablo Cuevas, head of Latin America and Caribbean for Bank of America Merrill Lynch’s global treasury solutions business, suggested that the region’s recent growth owed a great deal to political maturity and stability across most countries. Mineral and resource exports to China too had played a key role but – while Latin America’s banks were relatively well-managed and capitalised – evolution of the continent’s capital markets was required to drive future growth. “The Latin American region as a whole is well positioned to absorb external shocks,” he said, ”but not immune.”

Fernando Iraola, regional head, Latin America and Mexico, CTS, Citi, agreed that risk factors were almost exclusively external and that the time was ripe for Latin America to put in place long-term market-friendly reforms and infrastructures to further enhance the attractiveness of the region to investors and take advantage of the long term growth opportunities that Latin America presents. “The transformation from a commodity- to a manufacturing-based economy needs to happen now while we have such strong financial conditions in most of the countries in the region vis-à-vis the rest of the world, particularly the developed economies,” he said. Both speakers agreed that minerals and soft commodities would continue to play an important role in Latin America’s growth story up to and beyond 2020 but insisted that economic transformation was the key challenge for the region over the next 10-15 years.

Risks of the operational rather than the investment variety were on the menu for the second session of the day. Mike Fish, SWIFT’s CIO, performed what he described as the riskiest maneuver of his year when he nimbly negotiated the narrow route across the front of the stage. A much less risky enterprise for Fish was to convince his audience that SWIFT’s reputation for operational excellence was in good hands. He achieved this with presentational aplomb and a detailed account of the framework and culture put in place by SWIFT to ensure 99.999% availability, described to his Latin American audience as the ‘Aztec temple of operational excellence’. The ever-changing nature of the risks to the systems that support international financial message transfer require constant vigilance and anticipation of new threats. And a lot of money. SWIFT has invested substantial sums in a global improvement programme that includes a complete overhaul of its US data centre and a new underground facility located in Switzerland, which will become the global operating centre for SWIFT when it goes live next year.

Efficiency through automation

Either side of lunch on the second day, delegates again had a choice of work sessions. This time they could chose from six topics spanning sanctions, securities, corporates, corporate action, FX settlement and SWIFT products and services. In ‘Implementing ISO 20022 for Corporate Actions – A practical case study’, Dan Thieke, vice president, asset services at the DTCC, and Malene McMahon, senior business manager for initiatives, SWIFT Americas, highlighted to a large audience the challenges of automating processes and information flows. ‘Issuer to Investor: Corporate actions initiative’ was launched three years ago by the DTCC, SWIFT and XBRL to capture more corporate actions information automatically, in part by replacing MT messages with ISO 20022. With four pilot participants, a sufficiently wide range and large volume of ISO 20022-based messages have been trialled for the project to move confidently to its next stage.

A permanent fixture at the top of the regulatory agenda for over a decade has been sanctions that prevent terrorists from using the international banking system to transfer funds. The elusive and ever-changing nature of the terrorist threat means that the number and constituents of blacklists change on a daily basis. In a globalised economy almost all banks are international, which means a lot of small banks have been trying – and often failing – to maintain compliance via largely manual means. John Taboada, director of north Latin America for SWIFT Americas, likened sanctions compliance with anti-virus software: “You’re only as good as your last update.” SWIFT’s response has been to team up with specialist software provider FircoSoft to provide its automated Sanctions Screening service. The tool searches the whole of the SWIFT message and employs fuzzy logic to ensure that blacklisted organisations are identified but also minimises the number of false positives by reducing overlap between lists.

After a packed one-and-a-half days, if you had appetite left for in-depth sessions on standards, technology or innovation, the Latin American Regional Conference still had much to offer. To read an account of the how innovation and collaboration can take root in the Latin American banking sector click here. Optimism, customer focus and an awareness of the challenges at hand: SWIFT has much in common with its Latin American clients.