Central Banks: Promoting Stability and Confidence in Financial Markets

Central banks have a unique role in stabilizing financial markets and promoting confidence, growth and opportunity in their respective markets. To take full advantage of this role, central banks require a banking partner with the skills, solutions and geographic reach to support their changing needs. At Citi, we respect and support the role of central banks in promoting stability and confidence in the financial markets of the future, and we are committed to developing and delivering flexible solutions across the wide spectrum of their financial activities.

Complex challenges through changing times The role of central banks has expanded significantly as a result of the financial crisis. While central banks were formerly engaged in regulation and monetary policy, and acted as financial advisors and fiscal agents for national governments, these institutions now have a broader mandate to ensure financial stability. This often requires a combination of conventional and unconventional approaches.

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Central banks are taking a lead in investment policy definition, counterparty and financial risk management, compliance monitoring and efficient transaction execution, requiring effective, integrated investment solutions.

For example, in the past, central banks were engaged in regulating market prices, providing financial advice to the government and taken a largely indirect approach to maintaining market stability. Today, however, this role has extended to the quantity as well as pricing of liquidity, including quantitative easing, and direct market intervention. To fulfil their traditional and extended role, central banks have a broad and complex set of banking requirements. With the country’s economy dependent on central banks’ ability to act quickly, decisively and with full access to information, they need a banking partner with the comprehensive range of functionality from cash management, payments and collections through to investment of foreign exchange reserves and full securities servicing.

Balance sheet expansion The past few years has witnessed explosive growth in central banks’ foreign exchange reserves, particularly in Asia, allowing central banks to extend their focus from liquidity and preservation of capital to total returns. To achieve an appropriate balance of security and diversification, liquidity and return requires a disciplined approach to policy definition, the right selection of instruments and a robust, transparent and efficient investment process.

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Optimize securities management Central banks’ long term investments in equity and debt instruments need to be managed responsibly and efficiently to increase market confidence and transparency over the country’s financial position. The increased focus on effective securities management is fuelling demand for robust, integrated securities and fund services, with flexible, transparent reporting.

Focus on risk management The general opinion before the financial crisis that overall market risk was declining, and that financial systems could withstand major shocks, was proved dramatically wrong in 2008. Not only has the global financial crisis and subsequent recession resulted in central banks taking a more direct role in maintaining stability and liquidity in the financial markets, but awareness of the need to manage risk actively has also been greatly accentuated. Central banks are taking a lead in investment policy definition, counterparty and financial risk management, compliance monitoring and efficient transaction execution, requiring effective, integrated investment solutions.

Controlling costs, maximizing revenues Like every public sector organization, central banks have an obligation to citizens, businesses and employees to demonstrate efficiency and cost control

The increased focus on effective securities management is fuelling demand for robust, integrated securities and fund services, with flexible, transparent reporting.

in their administrative and operational processes, maximizing the amount of cash available to conduct their external role. The Central bank manages their own operational flows as well as the public sector entities operational flows, acting as an agrigator and paying agent for these flows in the market. Conversely, central banks are striving to collect tax and other payments promptly and cost-effectively to maximize liquidity. This is particularly challenging in markets where cash and manual payment methods such as cash predominate.

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Mitigating risk, creating opportunities While there is no single solution to the complex challenges experienced by central banks globally, working with a trusted banking provider can be a major factor in enhancing state, citizen and business confidence whilst enabling central bank resources to be dedicated to promoting a stable financial environment. At Citi, we have considerable experience in working with central banks globally, providing local knowledge across the 100+ countries that comprise our network, and expertise on financial best practices delivered through pragmatic, pioneering solutions.

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Fundamental to the way that we operate is a strong partnership approach. We take the time to understand every central bank customer’s aims and objectives, and adopt a holistic approach to identifying, prioritizing and addressing financial challenges and opportunities. Central banks have a wide range of responsibilities which differ by country, so we focus on delivering automated solutions that reduce the administrative workload, mitigate risk, maximize return and reduce the need for borrowing.

From cash positioning to cash investment Central banks have highly complex cash and liquidity management requirements for both working capital and foreign exchange reserves, from cash positioning through to cash concentration and efficient investment. We provide central banks with a fully integrated infrastructure that provides straight through processing of transactions and information from daily cash position through to settlement and confirmation of investment transactions. Front end tools such as TreasuryVision® and CitiDirect® support cash and treasury management processes and allow full visibility over the daily cash position. These tools are integrated with a variety of channels, according to each central bank’s needs:

Automatic investment enables surplus cash to be invested in a range of instruments, including deposits, money market funds (MMFs) and high-yield accounts, according to the central bank’s specific investment policy, including automated sweeps from multiple accounts to maximize investment returns and mitigate counterparty risk.

Citibank® Online Investments (OLI) portal provides online dealing capability for time deposits in 22 countries and 18 countries, more than 125 money market funds, US commercial paper and repos, and money market deposit accounts. With real-time quotes, online dealing and automatic settlement

and confirmation, OLI provides an exceptional degree of auditability over cash investment decisions, approvals and back office processes, with full reporting and oversight of transactions and automatic update of the cash position.

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Citi’s liquidity desks are located in all parts of the world, providing central bank treasury professionals with a single, expert point of contact for investing cash across all instruments and currencies. We can execute transactions on our clients’ behalf through our directed agent investment service (DAIS), enabling central banks to comply with investment and counterparty risk guidelines whilst maintaining a trusted relationship with a bank that understands their needs.

Maximizing intraday liquidity Central banks need to maximize intraday liquidity to respond promptly to market events and reduce extraneous borrowing. Citi’s intraday liquidity solution automatically redeems a central bank’s MMF units at the start of each day and credits its operating account. At the end of each day, credit balances above an agreed target balance are invested automatically back into the MMF. Central banks therefore benefit from full access to cash whilst supporting risk and return objectives.

Lowering FX risk, maximizing payments efficiency Central banks need to make foreign currency payments for a variety of reasons, including pension payments, overseas suppliers, foreign loan payments and insurance. Maintaining accounts in multiple currencies results in fragmented cash balances, reduces the amount of cash available

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for investment, increases costs and administration. In addition, foreign exchange risks are created which then need to be managed. Citi’s WorldLink® Payment Services is a robust, flexible global currency payment platform that allows central banks to make and receive payments in 137 currencies through one account. This avoids the need to maintain multiple currency accounts, enables greater control over cash and eliminates foreign currency risk. The WorldLink solution is highly suited to a shared services environment, facilitating centralized, standardized processes for foreign currency payments and collections across the spectrum of central banks’ activities. It is delivered as an integral element of our electronic banking system, CitiDirect, and supports ERP and SWIFT integration, as well as automatic file transfer to other systems.

Rapid, cost effective collections Large-scale collections, such as tax payments, need to be handled efficiently and promptly so that amounts can be posted to the ledger quickly and cash made available for government purposes. Rapid, automated reconciliation also avoids erroneous penalty notices and unnecessary administration. Every central bank has diverse collection needs according to the scope of its remit and the payment methods that apply in each country. In some regions, particularly Africa, Latin America and parts of Asia,

cash predominates, which requires widespread availability of collection points. For manual payment methods too, such as checks, proximity to local communities may be an essential requirement, while in countries where electronic payment methods are more common, the primary challenge may be how to ensure referential integrity for posting and reconciliation purposes. Citi’s Speed Collect® enables cash and checks to be deposited at any Citi branch or those of our partner banks, making it convenient for citizens and businesses to make payments. Depositors are provided with pre-printed deposit slips to accompany payments with data such as invoice number, payer ID, date and amount, therefore making it easier to reconcile collections promptly. In addition, our bespoke tax collection solutions are adapted to each central bank’s needs for billing and collecting all types of taxes across every payment method.

Citi’s WorldLink® Payment Services is a robust, flexible global currency payment platform that allows central banks to make and receive payments in 137 currencies through one account.

Comprehensive securities and fund services Central banks are amongst the world’s largest players in the capital markets, with an obligation to governments and citizens to make responsible decisions, safeguard the country’s cash, maximize efficiency and reduce costs. Consequently, central banks are seeking integrated securities and fund services across a wide range of traditional and alternative investments from

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front office through to middle office, custody and administration, supported with comprehensive reporting and analytic capabilities. For example: Front Office Analytics. CitiDirect, Citi’s electronic banking system, is an open architecture solution that enables information to be collated from multiple custodians, providing central banks with a single repository of data. The solution includes analytical reporting such as daily balance sheet and P&L reporting, compliance monitoring, based on user-defined investment policies, and performance measurement, supported by graphical tools, drill-down and comprehensive transaction information. Custody. With the largest proprietary network in the world, Citi offers central banks the international scope they require, combined with depth of expert capabilities and a consistent level of service globally. Through CitiDirect, we provide central banks with a single platform for facilitating an efficient, end-to-end settlement flow, consolidated reporting, detailed position reporting and contractual settlement in 55 markets. Our global servicing capabilities include corporate actions, an assured income program in 53 markets, bespoke tax services and proxy services through partner Broadridge. While central banks have traditionally held reserves in currencies such as USD and EUR, a growing number are including RMB assets in their reserve portfolios. This is likely to continue

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Case Study Shared Services at a Central Bank in Asia Challenge The client needed to distribute pension payments each month to around 56,000 pensioners in 100 countries by check. Pensioners had to exchange the check into local currency, incurring foreign exchange costs and lifting fees as well as experiencing significant delays in receiving value.

Solution Citi was well positioned to provide a solution to meet the client’s cross-border payment requirement through WorldLink® Payment Services. Payments are made either electronically or by check as required by each individual. WorldLink enables the client to print checks remotely in more than 30 currencies and mails it directly to the pensioner or to an embassy in the respective country for collection. As most WorldLink checks draw on local banks, the beneficiary receives near or full value of the funds much more quickly. WorldLink’s cross-border Automated Clearing House (ACH) and fund transfer capabilities allow electronic payments to pensioners through local electronic payment methods using the domestic clearing systems in 20 countries globally (and therefore are generally not subject to lifting fees) without the need to maintain local currency accounts.”

Outcomes With Citi’s WorldLink Payment Services, the client now has a flexible and robust solution for making regular payments to more than 70,000 pensioners living across the globe. Payments are made electronically into pensioners’ overseas bank accounts or mailed to the pensioners, making payments faster, more convenient and with minimal costs. The client was able to simplify payment processing by using a single, host-to-host communication channel for multiple payment types across all relevant countries and currencies. Payment processing costs have been reduced and pensioners receive maximum value. Since first implementing WorldLink, the client has expanded its use by providing international payments capabilities to other government agencies for making social security and supplier payments.

as deregulation continues, RMB crossborder trade settlement continues to grow and institutional investors leverage the RMB equity and fixed income markets both onshore and through offshore centres in Hong Kong and London. As a key player in global capital markets across a wide range of currencies, including RMB, Citi is ideally positioned to support central banks’ reserve management requirements.

Securities lending for added value Securities lending offers central banks with the ability to generate incremental income at very low risk. Citi offers securities lending services across a wide range of assets, including treasury bills, bonds and notes for all large central bank portfolios of over $1bn, irrespective of whether we act as a custodian. Our open-architecture Securities Lending solution, OpenLendSM, offers central banks an unmatched combination of extensive industry experience, global presence and market leadership to help central banks meet their specific risk/reward objectives within their individual program parameters.

Case Study Collateral Management at the European Investment Bank Challenge As one of the most important issuers in Europe, the European Investment Bank (EIB) is a counterparty to most of the major broker dealers in the region, and conducts a large numbers of OTC derivatives transactions. EIB requires absolute confidence in its collateral management processes to accurately mark to market its derivatives portfolio every day and efficiently carry out the daily margin movements to manage its counterparty risk. EIB had used separate service providers for collateral management and custody, but sought a single solution provider to deliver improved risk systems, greater technology capability and coherence through more responsive and automated processes.

Solution EIB selected Citi to provide a collateral management solution and to take responsibility for all of its derivatives collateral management functions. Citi implemented its global OpenCollateral service for marking to market the individual values of the underlying derivatives and the collateral held and delivered as margin, carrying out margin calls on a daily basis, and settling securities used in the margin process. EIB was confident that Citi would be able to provide the technical prowess and knowledgeable staff to undertake the management and custody of its derivatives collateral. This was vital because in making and receiving margin calls, Citi acts on EIB’s behalf to ensure that collateral in the form of securities and cash is sufficient and complies with the ISDA Credit Support Annex (CSA) documentation requirements. As OpenCollateral is fully integrated with Citi’s custody reporting, EIB has full visibility of its collateral positions and a single point of contact for its entire derivatives collateral management needs.

Outcomes By providing an end-to-end, streamlined collateral management solution and eliminating manual processes, Citi has enabled EIB to make more efficient use
of the collateral it receives.

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A Trusted Partner for Central Banks Central banks globally have an obligation to governments, citizens, businesses and the wider financial marketplace to conduct their operations according to industry best practices, and to pioneer new initiatives in efficiency, transparency and control. To achieve this requires a credible banking partner with demonstrable capabilities, robust processing platforms and the geographic reach to support a wide spectrum of requirements. Citi delivers secure, efficient, practical solutions to over 120 central banks globally, enabling them to optimize liquidity, diversify and mitigate risk, and minimize costs and administration.

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»» Flexible services and support. Central banks require different levels of support according to the degree of financial market efficiency and automation, and local regulatory and cultural requirements. We offer bespoke services to our central bank customers including flexible communication options, marketspecific expertise and knowledge of globally recognized best practices, user training, and local support through our service hubs located throughout the world. »» Geographic coverage. With a direct presence in over 100 countries globally, including 15 in Africa, 14 in Asia and 22 in Latin America, Citi is committed to working with central banks to provide the tools they need to optimize their financial operations globally, including management of FX reserves, cash and liquidity management, collections and securities services. Within each country, we aim to provide an unrivalled depth of service and consistency of approach: in Africa, for example, we have 190 proprietary branches and 3,800 collection points, while in Latin America we have around 15,000 collection points. The extent of our network, and proximity to citizens and businesses countrywide, enables our central bank customers to pay and receive cash conveniently and cost-effectively. In countries in which we do not have a direct presence, we provide integrated banking services through partner and correspondent banking relationships, leveraging

Key Points

CitiDirect to provide central banks with the depth and consistency of service that they require. »» Custody network. With the largest proprietary custody network in the world, and the greatest number of industry awards for our custody series, our focus is on delivering unrivalled custody services to our central bank customers. We have structured our business to provide favorable cut-off times, end-to-end operational control, rapid issue resolution and deep market expertise. With leading straight through processing of 96.4%, we ensure that trades are settled with minimal manual intervention. »» Breadth of solutions. With every central bank facing a different range of market challenges, we design solutions across the full spectrum of financial activities that meet each central bank customer’s specific needs, from securities and funds services through to cash and liquidity management solutions. Central banks need to react promptly to market events and changing economic trends. In this environment, a banking partner who can flex and extend solutions to meet these changing needs can be a significant attribute when seeking to create the stable, transparent financial marketplace of the future. »» Risk mitigation. At no time since the 1930’s has the awareness of financial and counterparty risk been more immediate, and central banks have

»» Central banks have increased their foreign exchange reserves considerably in recent years, necessitating more robust investment management policies, processes and reporting. Citi’s integrated investment management tools support different investment procedures whilst maintaining a high degree of diversification, processing and reporting integrity.

a leading role to play in securing and diversifying assets on behalf of the state. We partner with central banks globally to ensure that internationally recognized best practices in financial management are in place, with transparency over cash, control over how funds are used and transacted, and rigorous reporting and accounting. »» Long term commitment. We engage with our central bank customers for the long term, anticipating and addressing changing needs, and delivering the services they require to meet their primary objectives. With a strong commitment to expanding our services and depth of presence in both developed and emerging markets, and with a global heritage spanning more than 200 years, we have the capability and credibility to meet the cash and liquidity, banking and securities servicing needs of central banks globally.

»» Risk management, including financial, counterparty and operational risks, has never been more closely scrutinized. Central banks have an obligation to the state, citizens, businesses and the wider financial community to demonstrate best in class processes for the investment of cash, both for long term securities and short term cash. Citi’s securities and fund servicing capabilities support the front and middle office, custody and detailed, flexible reporting needs of central banks globally.

»» Every organization is tasked to reduce operational costs to maximize cash available to support their external objectives. Establishing centralized financial processes, with efficient bank communication, customized payment and collection mechanisms and streamlined FX risk mitigation through Citi’s WorldLink make a valuable contribution to reducing costs whilst maximizing efficiency and control.

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With the country’s economy dependent on central banks’ ability to act quickly, decisively and with full access to information, they need a banking partner with the comprehensive range of functionality from cash management, payments and collections through to investment of foreign exchange reserves and full securities servicing.

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