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Which Options Are There When It Comes To Bank Connectivity?
15-09-2021 | treasuryXL | Nomentia |
In this blog, we want to give an overview of the different options for bank connections from host-to host, direct connections through regional standards and SWIFT. On top of that we’ll also take a look at open banking APIs and what possibilities they might hold for the future.
Bank connections enable corporate customers to exchange messages with their banking partners. Companies need to have a relationship with at least one bank, in practice there are typically several banks involved, for example to exchange account information and sending payments. Bank connections are so to speak the backbone of your treasury department because they ensure the uninterrupted flow of information between your business process tools and banks, allowing you to create accurate cash forecasts, manage liquidity and the likes. Bank connectivity will remain a topic that corporate treasury departments need to decide how to approach. Now, let’s look at the different options for creating bank connections.
Direct host-to-host connections
One of our webinar polls showed there are still 30% of our respondents who maintain host-to-host connections with their banks. This means that typically the IT department sets up bank connections to specific banks. How those work in specific then depends on the bank. With some banks a host-to-host connection is needed for each country where the company is operating. Luckily many banks offer single point of entry connectivity which means that once you’re connected, you can use it to operate cash management messages in all or multiple countries where the bank has branches.
Since the bank is hosting the service, it also means that the bank is dictating all technical requirements and corporate customers need to adapt to changes the banks might make.
And change is imminent, especially when it comes to messaging formats, communication protocols and security requirements. There are for example client certificate renewals that come up usually every two years. Root certificates expire more infrequently but cause more maintenance work.
Another quite timely example is the Transport Layer Security (TLS) protocol version upgrade. TLS certificates not only have to be renewed from time to time, but older TLS protocol versions have known vulnerabilities and the banks are enforcing their clients to use newer versions all the time.
Maintaining direct host-to-host connection requires you and especially your IT department to make a commitment to maintain these connections day in and day out. Which requires special technical expertise from the IT department and a lot of resources, especially when you employ many host-to-host connections in your ecosystem.
Direct connections through regional standard protocols
The EBICS (Electronic Banking Internet Communication Standard) is a standard protocol that is used in Germany, Switzerland, and France. Also, banks in other countries are testing this standard.
The challenge with EBICS has been that different countries have their own versions of the standard. In 2018 EBICS 3.0 was launched with the goal to harmonize the differences and to make it easier to communicate across borders. In practice Germany and Switzerland are still using EBICS 2.5 and it will take until November 2021 until EBICS 3.0 becomes mandatory for banks in Germany.
Some international banks have adopted EBICS into wider use. Which means that corporations familiar with EBICS may use it for message exchange and authorization in other countries as well. Only the future will show if EBICS fulfils its vision of becoming the pan-European standard protocol for bank communication.
Connections through SWIFT
Companies can connect directly to the SWIFT network and with that get connected with over 11 000 financial institutions in more than 200 countries. SWIFT is hosting and maintaining the global network for that. It’s highly secure and reliable. It’s a single gateway that almost sounds like it opens the door to paradise for you, at least in the mind of someone who spends his time building host-to-host bank connections for single banks. You are empowered to change banking partners based on your business needs without having to worry about establishing new connections.
SWIFT has a sort of do-it-yourself approach by providing Alliance Lite2 to companies. And here comes the other side of the coin. A direct connection to SWIFT is costly and requires time and resource-demanding integration. In addition, you need to comply in full scope with the SWIFT Customer Security Programme (CSP) that requires all their members to protect their endpoint, because naturally, they need to protect their network.
Most corporate customers use a SWIFT Alliance Lite2 Business Application (L2BA) provider or a Service Bureau for the connection. In the L2BA model, a service provider takes care of handling all necessary requirements to connect to the Swift network and you buy your bank connections pretty much as a service. Often this is packaged with other products and solutions you might use.
Open banking APIs
Open banking APIs are one of the most interesting developments. We already see banks all across Europe offering premium APIs for corporates that go beyond what is possible today.
Open banking APIs are set to bring a real-time component to the game that hasn’t been there so far. In the past there was no way for external systems to fetch for example real time balances from banks, but this is about to change. While as previously, corporations would execute batch payments, with open banking APIs this will be possible whenever a payment is needed with instant effect. Looking at balances and payments is the beginning of new solutions that will be available to corporate treasury.
Open banking APIs is something that companies and providers such as Nomentia will need to take into account for their roadmap because this is clearly where we will be able to provide innovative solutions for our customers in the future.
What’s the verdict?
It would be great to give an easy answer to this question. But it’s just not that simple. As I outlined above, all connection methods have pros and cons It really depends on your needs and internal structures what you need.
WATCH OUR WEBINAR ABOUT BANK CONNECTIVITY
Transitioning from LIBOR: Explaining the cash fallback rates
14-09-2021 | treasuryXL | Refinitiv | Jacob Rank-Broadley
The LIBOR transition: We explain what fallback rates for the USD cash markets are and provide practical insights on how these rates can be used.
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During my previous blog on fallbacks in April 2021, I outlined the importance of introducing robust fallback rates into the USD cash markets.
There is a substantial exposure of cash instruments that have no effective means to easily transition away from LIBOR upon its cessation. New LIBOR legislation signed into State of New York law reduces the adverse economic outcomes associated with the instruments by requiring them to use the Alternative Reference Rates Committee’s (ARRC) recommended fallback language.
In March, the ARRC announced Refinitiv as publisher of its fallback rates for cash products. Since then, Refinitiv has been working with the Federal Reserve and the ARRC to finalise the design of the USD IBOR Cash Fallbacks.
Refinitiv is committed to supporting you through the LIBOR transition with LIBOR Transition and Replacement Rate solutions
Fallback rate economically equivalent to USD LIBOR
The Refinitiv USD IBOR Cash Fallbacks provide the rates described in the ARRC’s recommended fallback language.
These are composed of two components: the adjusted Secured Overnight Financing Rate (SOFR) part measures the average SOFR rate for the relevant tenor. Added to this is a spread adjustment, which measures the difference between the USD LIBOR for each tenor and SOFR compounded in arrears for that tenor.
Adding these two components together gives an all-in fallback rate that is economically equivalent to USD LIBOR.
There are two version of the Refinitiv USD IBOR Cash Fallbacks: those for consumer products and those for institutional products. Both are published to five decimal places and include the adjusted SOFR rate, the spread adjustment and the all-in rate.
Watch: Refinitiv Perspectives LIVE – The LIBOR Transition: Risk-Free Term Rates
Consumer cash fallbacks
Refinitiv USD IBOR Consumer Cash Fallbacks are designed to ensure existing USD LIBOR referencing consumer cash products such as mortgages and student loans can continue to operate post-USD LIBOR cessation.
These rates are based upon compound SOFR in advance, which means the rate is known at the start of the interest period, plus the spread adjustment.
Prior to 1 July 2023, the spread adjustment will be calculated as the median difference between USD LIBOR and SOFR compound in arrears for the previous 10 working days, resulting in the spread adjustment changing on a daily basis.
This is an indicative rate, and while it should not be used as a reference rate in financial products, it is designed to aid familiarity with the USD IBOR Consumer Cash Fallbacks prior to adoption in July 2023.
Following 30 June 2024, the spread adjustment will be calculated as the median of the historical differences between USD LIBOR for each tenor and the compounded in arrears SOFR for that tenor over a five-year period prior to 5 March 2021.
For the period between 1 July 2023 and 30 June 2024, the spread adjustment will be calculated as the linear interpolation between the two rates outlined above.
A floored version of the consumer cash fallbacks is also available, meaning that if the average SOFR across all days in the tenor is below zero, then the all-in published fallback rate will be solely the corresponding spread adjustment.
Refinitiv USD IBOR Consumer Cash Fallbacks will be published in 1-month, 3-month and 6-month tenors.
Institutional cash fallbacks
Refinitiv USD IBOR Institutional Cash Fallbacks are designed to ensure existing USD LIBOR referencing commercial cash products such as bilateral business loans, floating rate notes, securitisations and syndicated loans can continue to operate post USD LIBOR cessation.
In order to account for different conventions in different markets, there are a number of different versions of the Refinitiv USD IBOR Institutional Cash Fallbacks. There are three different ways of capturing the average SOFR rate: SOFR compound in arrears, Simple SOFR in arrears and SOFR compound in advance.
Added to this is the spread adjustment, which is calculated as the median of the historical differences between USD LIBOR for each tenor and the compounded in arrears SOFR for that tenor over a five-year period prior to 5 March 2021.
Unlike Refinitiv USD IBOR Consumer Cash Fallbacks, there is no transition period. This means that the spread adjustment remains fixed for perpetuity.
Each of the SOFR compound in arrears and Daily Simple SOFR rates will be available in up to seven tenors in a variety of different forms in order to conform to convention in different markets.
The 3-, 5- and 10-day lookback without observation shift versions give counterparties more notice by applying the SOFR rate from three, five and ten business days prior to the rate publication date.
The 2-, 3- and 5-days lookback with an observation shift versions also give counterparties more notice by applying the SOFR rate from two, three and five business days prior to the publication date, but in contrast to a lookback without observation shift, it applies that rate for the number of calendar days associated with the rate two, three and five business days prior.
The 2- and 3-day lockout versions fix the SOFR rate for the last two and three days prior to publication.
The plain version has no lookback, observation shift, or lockout.
The SOFR compound in advance rates for institutional products will be available in 1-month, 3-month and 6-month tenors.
What’s the next step?
Initially, market participants can use the prototype USD IBOR Cash Fallbacks to become more familiar with the rates and test technical connectivity.
Following the ARRC’s recent endorsement of Term SOFR, Refinitiv plans to supplement the initial prototype with a forward-looking term rate version in due course.
During the prototype phase, we anticipate changes to the methodology based on user feedback to ensure full alignment with industry standards prior to publication of the production rates.
Production rates for the institutional cash fallbacks should be available from autumn 2021, and for the consumer cash fallbacks they will be available from July 2023.
How to access the rates
Prototype rates are now available from the Refinitiv website and through Refinitiv products including Refinitiv® Eikon, Refinitiv Real-Time and Refinitiv® DataScope.
For more information on these rates, including the methodology and identifiers (RICs), please visit our Refinitiv USD IBOR Cash Fallbacks page.
Refinitiv is committed to supporting you through the LIBOR transition with LIBOR Transition and Replacement Rate solutions
Our (interim) treasury labour market is extremely international
13-09-2021 | treasuryXL | Pieter de Kiewit Just before starting my vacation I created a small overview of the recent successes of Team Treasurer Search. Next to the fact that we see the speed of placements picking up, I think it is striking how international our treasury labour market is. This is not only for […]