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Clearing Systems

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Clearing Systems

• End of Day Net Settlement Systems (NSS)

• Real Time Gross Settlement Systems (RTGS)

• Intra Day Net Settlement (Hybrid) Systems

• Continuous Linked Settlement

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Clearing SystemsNSS

• Traditional Approach• Amounts are netted and• One amount is paid or received across settlement

accounts with CB at end of day/period• Creates intra-day exposures• Finality at end of ‘period’• Risk – position built up with a member during the day

will not be settled• So – Collateral, Guarantees, Bilateral debit/credit

caps

Clearing SystemsNSS

• Helps preserve participants liquidity

• Usually used for low value payments and paper based instruments

• Lower cost

Examples:

UK cheque clearing, BACS, ACH in USAanb 4

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Clearing SystemsNSS

  Cheque and Credit Clearing Company process

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Clearing SystemsNSS

Clearing cheques with cheque truncation

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Clearing SystemsRTGS

• Each payment settles singly and bilaterally across accounts at the settlement bank, usually the Central Bank e.g. Bank of England

• Eliminates settlement risk• Herstatt Risk• Designed to eliminate Herstatt risk (but

does it?)

Clearing SystemsRTGS

• Payments should arrive with value, availability and finality

• Used for high value/urgent payments

• More expensive than NSS

Examples: UK CHAPS, Fedwire in the USA, CHATS in Hong Kong

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Clearing SystemsRTGS

Hong Kong Clearing House Automated Transfer System process (CHATS)

Faster Payments Service

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Clearing SystemsHybrid

• Intra-day settlement at pre-defined periods

• Intra-day finality

• Most located in Europe and handle clearing of euro payments

• Examples

- CHIPS (USA)

- CLS

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Clearing SystemsContinuous Linked Settlement

(CLS)

• Payment versus payment system• 71 full members• CLS Services owns CLS Bank Inc, USA an

Edge Act Bank• Main operations in London/USA• Some 5 Trillion USD settled daily (95% of daily

traded volumes)• Eliminates 4 trillion of settlement risk

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Clearing SystemsBenefits of CLS

• Used to settle FX transactions between banks real time

• Reduces number of bank to bank payments• CLS is a common counter-party, payment

versus payment• Reduces risk and costs of high volumes of

large value funds transfers• Banks will obtain real-time information on

intra-day liquidity

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Clearing SystemsCard Payments

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Clearing Systems

• There are some ‘oddballs’

• London US Dollar Clearing

• London Currency Settlement Scheme

• Euro Clearing

• Hong Kong Currency Clearing

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Clearing SystemsSome Domestic Payment Methods

• Paper-based– Cash

– Cheques

– Bank transfers or giros

– Postal giros

– Bills of exchange

– Promissory notes

– Banker’s drafts

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Clearing SystemsSome Domestic Payment Methods

• Electronic– Funds transfer

• Urgent wires• Standard EFT

– Automated clearing house payments– Standing order– Direct debit– Electronic bills of exchange– Plastic (credit, charge, cheque guarantee, cash dispenser,

debit)– Financial EDI

International PaymentsCover Method

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Serial Method

19

COMPANY ABC (SINGAPORE) COMPANY XYZ (HONG KONG)

BANK ABC (SINGAPORE) BANK XYZ (HONGKONG)

BANK DEF (USA) BANK UVW (USA)

PAYMENT INSTRUCTION

INVOICE

CREDIT ADVICE

ADVICE OF RECEIPT

Debit Co. ABC account

Debit Bank ABC account Debit Bank

DEF account

Debit Bank UVW

account

Credit Bank ABC account at Bank DEF

Credit Bank DEF account at Bank UVW

Credit Bank XYZ account at Bank UVW

Credit Co. XYZ account

MT103Payment Order

MT103Payment Order

MT210ADVICE TO

RECEIVE