SWIFT

The Society for Worldwide Interbank Financial Telecommunication was established in 1973 in Belgium as an industry-owned co-operative. SWIFT provides secure and reliable messaging between financial institutions worldwide. Set up to provide a global and highly secure telecommunications network to exchange messages between financial institutions, it has offices in 15 countries. In 2001, it had over 7,455 live users in 196 countries and carried 1,534,000,000 messages.

SWIFT is made up of three categories of users members, submembers, and participants. Full-fledged members must also become shareholders. Banks, eligible broker/dealers, and regulated investment managers may qualify as members. Member-owned financial organizations (ownership or control must be more than 50 percent) can qualify as submembers. Other recognized and regulated financial organizations may become participants.

SWIFT is governed by a board of directors elected from the membership. SWIFT is solely a carrier of messages between financial institutions. The information in these messages is issued and controlled exclusively by the sending and receiving institutions. SWIFT does not hold assets or manage accounts on behalf of customers. Given its importance in the financial community, SWIFT plays an important role in the global fight against money laundering.

SWIFT messaging serves four main markets:

1. Payments: In 2001 this constituted over 60 percent of the SWIFT message traffic

2. Securities: 29 percent of the message traffic (this is the fastest growing)

3. Treasury: 7 percent of the message traffic

4. Trade Finance: 3 percent of the traffic

Messages emanating from Europe make up 58 percent of the total traffic, with North America at 19 percent, Asia Pacific 12 percent, and the rest of the world 11 percent.

The SWIFT network offers a standardized form of exchanging messages in a highly secure environment. Messages can be exchanged either as a single transaction or in bulk. It has over 230 different message types with a standardized format. It also provides standardized bank identifier codes (BICs) and cross-referenced clearing codes of financial institutions. Third-party service providers (such as GSTPA, CLS, and Crest) use SWIFT's network to conduct their own business.

Traditionally, SWIFT has served the financial community through FIN, its store-and-forward messaging service. FIN is accessed over an X.25 connection. It provides message-processing facilities, including validation to ensure messages are formatted according to SWIFT message standards, delivery monitoring and prioritization, and message storage and retrieval.

As the financial industry evolves, so do its messaging needs. Access to FIN is to be replaced by an IP-based protocol SIPN (Secure IP Network) called SWIFTNet.

SWIFTNet has interactive capabilities. Customers will be able to access SWIFTNet via a number of interfaces:

• SWIFTAlliance Gateway (SAG). SAG offers a single window to access all SWIFTNet services that provide centralized automated integration with different in-house applications, and service-specific interfaces such as Axion4 gateway and CLS gateway. SAG handles connectivity of customer applications to the SIPN. Typically, a customer application (client) exchanges messages via SAG with a central application (server). The design of SAG embeds SWIFTNet Link and SWIFTNet PKI (Public Key Infrastructure).

• SWIFTAlliance Access (SAA). This is a multiplatform, multinetwork interface designed to connect single or multiple destinations to SWIFT, telex, fax, and private networks. SAA is designed for high-volume users.

• SWIFTAlliance Entry (SAE). Designed for low-volume users, this is a low-cost, easy-to-install SWIFT interface.

• SWIFTAlliance Webstation. This is a browser facility to access SWIFT services available over SWIFTNet.

• SWIFTNet Link. This mandatory software product provides access to all SWIFTNet services.

• SWIFTNet PKI. This is mandatory security software and hardware installed alongside SWIFTNet Link.

• TrustAct. This is SWIFT's new Internet-based messaging service for securing B2B e-commerce.

• e-paymentsPlus. This builds on TrustAct and allows banks to offer secure end-to-end online payment service to their corporate clients.

• SWIFT Messages & Services. Messages use the SWIFT FIN standard, which defines syntax and validation criteria. It has adopted the IS015022 standard for some of its messages.

SWIFT provides over 230 different messages split into three main message types. These are

1. User to User Messages, exchanged between financial institutions; further split into more than nine categories covering a variety of markets (e.g., securities, trade finance, and treasury markets). Some of the most widely used messages are in category MT100s and MT500s.

2. System Messages, sent from SWIFT to user and vice versa.

3. Service Messages, exchanged between SWIFT and users, mainly for communication purposes.

For every message that is sent to SWIFT, it will send a message back to the user acknowledging successful acceptance (or otherwise) of the sent message. These messages are known as ACK (successful) or NAK (unsuccessful) messages. For a NAK, it will inform the user of the reason for failure by an error code.

ACK/NAK messages are "pushed" to the users; i.e., they are mandatory. There is no charge for ACK, but NAK attracts a tariff to discipline senders to send properly formatted messages.

In addition to ACK/NAK (for messages coming into SWIFT), there is another level of outgoing messages (from SWIFT). UAK (positive user acknowledgment) is sent by the user on successful acceptance of the message sent by SWIFT, and UNK (negative user acknowledgment) is sent when the user has not successfully accepted the output from SWIFT. UAK/UNK are optional and chargeable. Messages are uniquely referenced for traceability and searchability.

An important facet of SWIFT's service is security; responsibility and liability surround the security issue, which focuses on three areas: network and connectivity, terminals security at the client end, and messages. Once the message enters the SWIFT network, SWIFT guarantees delivery of the message in a predefined time. If it fails to do so, it will make good any losses incurred by the user. SWIFT guarantees 24x7 availability. In turn, users must abide by the agreed-upon terms and conditions in order to use SWIFT services. For example, a user must be able to receive (i.e., be logged on to the SWIFT network) for at least seven hours each working day between 8 a.m. and 6 p.m. local time to receive delivery of messages.

Additional services SWIFT provides include the BIC database, an integrated database of banks, and cross-referenced financial institutions' clearing codes. It also provides a facility for users to copy messages to third parties.

So how does SWIFT differ from other STP machines, such as GSTPA or Omgeo? SWIFT is solely a carrier of messages between financial institutions. It provides a trusted mechanism to exchange high-value payment messages between financial institutions. It validates, authenticates, stores, and forwards. The decryption of messages only happens in memory. SWIFT does not hold assets or manage accounts on behalf of customers. It does not clear or settle transactions. It is purely a secure pipe to transport messages from source to destination.

Unlike GSTPA or Omgeo, SWIFT does no additional processing. What one party sends, the counter party receives without SWIFT altering anything. Securities transactions matched in GSTPA or Omgeo would most probably use SWIFT messages to convey settlement instructions. SWIFT does have a matching machine Accord but this is limited to providing matching services for Treasury products.