Download pdf - Funds Transfer-Lsn 6

8/3/2019 Funds Transfer-Lsn 6

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RELATIONSHIP BANKING

Correspondent banking is an important segment of everyinternational bank's business portfolio.

The correspondent banks depute their representatives to visit

their counterparts periodically, generally once or twice a year.The representatives' visits serve a number of purposes, including:

Relationship management;

Review of operations;

Review of the services and fee structure;

Resolution of problems or areas of discord;

Evaluation of the status of any reciprocity arrangement;

Examining scope for expansion of business, including newrequirements and demands from their correspondent banks.


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The correspondent bankers can be of immense help inobtaining credit information, tapping businessopportunities abroad, directing enquiries to the properdepartments/sections for disposal, following up withtheir counterparts, and helping a bank to resolveurgent outstanding issues.


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CREDIT LINES Apart from the facilities to open Nostro accounts and

collect clean and/or documentary Instruments, afacility that is of great importance is the availability of'credit lines'.

These credit lines specially include

a) Overdraft facilities in Nostro accounts for treasury

operations.b) Confirmation of letters of credit

c) Bankers' acceptances and bill rediscounting.


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BENEFITS FROM CREDIT LINESOverdraft Facilities in Nostro Accounts for Treasury Operations Banks try to keep the bare minimum required to maintain these

accounts - whether in local currency or in any foreign currency. The logic is simple: cash in the vaults does not earn anything for a

bank. Idle cash is a losing proposition. Secondly, like all Nostro balances, cash balances are also exposed to

exchange risks by way of depreciation or devaluation. Treasury departments track their Nostro balances on an ongoing basis,

and leave in their Nostro accounts only the amount that would go tomeet their immediate operational needs (e.g. LC reimbursement,

payment against cheques, outward remittances). The balance of funds is deployed in other areas including shoring up

balances in other accounts or for overnight investments


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However, sudden, unplanned, unforeseen drawings on theseaccounts may occur from time to time. The probablereasons could include any or some of the following:

Retirement of import bills High value outward remittance (at short notice) Cheques drawn on the account being bunched and

presented all at once Reimbursement payments on account of letters of credit

Delayed receipt or non-receipt of scheduled credits into theaccount Error, mismatch, miscalculation or plain mismanagement

in fund-flow projections or projected balancerequirements.


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Confirmation of Letter of Credit Banks issuing Letters of Credit (LCs) often request another bank to

'confirm' their LCs. The seller may then ask that the letter of credit from his intended

buyer or the opener be 'confirmed' by a bank in the seller's country. Theletter of credit may also be confirmed by an internationally reputedbank.

The facility to get a letter of credit confirmed is usually available to theissuer only through prior arrangement with the advising bank.

Adding 'confirmation' entails additional risk exposures for the

confirming bank. Banks from under-developed and developing countries or those banks

not well-known globally, often take recourse to the confirmation routeto make their LCs acceptable to the beneficiaries' banks, meet theirown customers' requirements, and tap businesses that would otherwisehave been out of their reach?


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an ers ccep ance,Rediscounting

These are direct financial facilities offered bycorrespondent banks to their counterparts.

Bankers' Acceptances, bill discounting andrediscounting of financial instruments drawn bymerchants ease cash flow and facilitate internationaltrade.

Similarly, correspondent banks also offer structuredfinance, including buyer's credit or seller's credit.


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. . . .

A Basle based organisation, it is owned by the banksand financial institutions themselves, dedicated tomanaging a global financial messaging and fundtransfer system.

It is extremely cost-effective, said to be very secure,and very efficient indeed - with an unparalleled fail-safe system working round the clock.

Almost all the banks around the world are hooked onto this system.


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S.W.I.F.T was formed when seven major internationalbanks who met in 1974 to discuss the limitations of telex asa means of secure delivery of payment and confirmation

information, primarily in the treasury and correspondentbanking areas.

Until then, all inter-bank communications were bytelephone, telex, courier, or mail.

Telex suffered from a number of limitations due to itsspeed, its free format that made automation at thereceiving end almost impossible, and the lack of security,

with test keys only being calculated on a subset of themessage content.


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S.W.I.F.T is a messaging service.

Each type of message is a condition of wire transfer.

Its headquarters are situated in La Hulpe, on theoutskirts of Brussels.

S.W.I.F.T also acts as a United Nations sanctionedInternational Standards Body (ISO) for the creation

and maintenance of financial messaging standards.


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USERS OF S.W.I.F.T Originally the network was designed to support the requirements of treasury

and correspondent banking operations. Over the years others have beenallowed access to the services, in some cases only to a limited degree. Currentlythe following categories of organization can access the service:

Banks Trading Institutions Money Brokers Securities Broker Dealers Investment Management Institutions Clearing Systems and Central Depositories Recognized Exchanges Trust and Fiduciary Service Companies Subsidiary Providers of Custody and Nominees Treasury Counter-parties Treasury ETC Service Providers


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S.W.I.F.T Services

S.W.I.F.T operates a number of services, primarily:

GPA : General Purpose Application, which only allowssystem messages, i.e. messages from a user to S.W.I.F.Tand vice versa, not from one user to another;

FIN Financial Application, which is the user to userservice comprising: System Message; (MT0nn), User toUser Messages IK1Tlnn through 9nn) and ServiceMessages such as acknowledgements.


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S.W.I.F.T Addresses

S.W.I.F.T addresses are used to not only indicate the final destination of themessage but to also indicate parties within the individual message.

The term 'S.W.I.F.T address' actually only relates to a subset of Bank IdentifierCodes (BICs). In other words, you do not have to be a user of the S.W.LET.network to have a BIC and these can, therefore, be used over other networkssuch as Telex.

The first four characters represent the bank code, for example NWBK(NatWest), DE (Deutsche Bank). The next two characters represent the ISOCountry code, for example GB (United Kingdom), DE (Germany). The next twocharacters are the location code with some larger financial centres such asLondon and New York .

These characters, the first 8, represent the mandatory portions and commonlywithin the body of a message this will be the normal format, for exampleNWBKGB2L (NatWest London). DEUTDEFF (Deutsche Bank Frankfurt).


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SWIFT MESSAGES S.W.I.F.T messages are identified by a structured configuration. They all start

with the letters 'MT' (Message Type). This is followed by a 3-digit number. Thefirst of these three digits represents the category relating to a particularfinancial instruments or services. The significance of the first of the threenumerals ('0', '1', '2', '3', etc., as shown below) is best demonstrated by the

following list: MTOnn System Messages MT1nn Customer Payments MT2nn Financial Institution Transfers MT3nn FX, Money Market and Derivatives MT4nn Collections and cash letters

MT5nn Securities Markets MT6nn Precious Metals and Syndications MT7nn Documentary Credits and Guarantees MT8nn Travellers Cheques MT9nn Cash Management and Customer Status


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The secondof the three numerals represents thegroupdenoting that the messages are related to similar parts of atransaction's life cycle. For example:

MT200 Financial Institution Transfer, OwnAccount

MT202 Financial Institution Transfer, ThirdParty

MT521 Receive (Securities) Against Payment

MT523 Deliver (Securities) Against Payment The last digit is the type and denotes the individual

message. There are several hundred message types acrossthe categories in total.


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Each message is assigned unique identifiers.

A 4-digit session number is assigned each time theCBT logs in.

Each message is then assigned a 6-digit sequencenumber.

These are then combined to form an ISN (InputSequence Number) from the CBT to S.W.I.F.T or an

OSN (Output Sequence Number) from S.W.I.F.T to theCBT.

It is important to remember that terminology is alwaysfrom the perspective of S.W.I.F.T and not the user


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PAYMENTS SYSTEM (CHIPS)

CHIPS (Clearing House Interbank Payments System) is thepremier bank-owned payments system for clearing andsettling large value payments in the US.

It is a payments platform serving the largest banks fromaround the world, and processes over 95 per cent of theUS$ cross-border payments.

CHIPS is used by both Fedwire and S.W.I.F.T. CHIPS iscomprised 84 financial institutions representing 27

countries. CHIPS UID (CHIPS Universal Identifier) is an unique six-

digit number given to each member bank of the New YorkClearing House system.


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CHIPS processes over 267,000 payments a day with a grossvalue of over $1.37 trillion.

Key benefits include:

Most efficient use of liquidity in the business No overdraft fees

Eliminates settlement risk

CHIPS has processed 772 million payments since its

inception in 1975 with a total value of US$ 3.7 quadrillion. CHIPS payment system delivers 99.99 per cent reliability

and 99.99 per cent system uptime, and around a 94 percent straight through processing rate.


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CHIPS business profile:

Transfers an average total value of $1.4 trillion a day.

Clears over 270,000 transactions on an average day.

Handles 95% of all US dollar cross-border payments.Types of payments include:

Large and small payment transactions

US dollar foreign exchange settlements

Financial settlements (ex. Loan and interest payments) Commercial payments

Off shore investments


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PAYMENTS SYSTEM (CHAPS)

Clearing House Automated Payment System (CHAPS), runby the CHAPS Clearing Company, is one of the largest real-time gross settlement (RTGS) systems in the world.

It offers members and around 400 financial institutionsutilizing agency arrangements an efficient, riskfree andreliable same-day payments mechanism for both sterlingand euro RTGS payment requirements.

CHAPS Euro is an efficient means of accessing EuropeanRTGS services and is the second largest cross-borderelement of the European RTGS mechanism - TARGET.


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Many of the world's major global payments banks areincluded in the CHAPS membership.

Currently (2003-04) there are 20 direct members andcirca 400 financial institutions utilizing agencyarrangements through direct Members.

The single Company membership fee has been set at

100,000. This covers access to either one or both ofCHAPS Sterling and CHAPS Euro RTGS clearings.


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NETWORK (FEDWIRE)

It is a high-speed electronic communications network that links theFederal Reserve Board of Governors, the 12 Federal Reserve Banks andthe 24 branches, the US Treasury Department, and other federalagencies in the USA

Fedwire Funds Transfers The Fedwire funds transfer system is a real-time gross settlementsystem in which more than 9,000 depository institutions initiate fundstransfers that are immediate, final, and irrevocable when processed.

Depository institutions that maintain a reserve or clearing account witha Federal Reserve Bank may use Fedwire to send payments to, orreceive payments from, other account holders directly.

Depository institutions use Fedwire to handle large-value, time-criticalpayments, such as payments for the settlement of inter-bank purchasesand sales of federal funds; the purchase, sale, and financing ofsecurities transactions; the disbursement or repayment of loans;


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Fedwire is used for

Large dollar time-sensitive payments

Funds transfers between reserve banks Purchases or sales of Federal Funds transfers between

correspondent banks

Sales of book-entry US Government securities

Collection of tax and loan accounts in commercialbanks

Funds disbursement