Basic concepts

Objectives for the day

How cash settles? What is Clearing and settlement? How cash settles internationally? How securities settle? What are custodians, CSDs, ICSDs and Global Custodians? Overview of Securities Trade Lifecycle Significance of Static Data Management (Reference Data)

Cash Transfer - Basics

Bank X

Bank Y

Cust A

Cust B

Cust C

When Customer A wants to transfer to Customer B when is this transaction effective? What is the process? When Customer B wants to transfer to Customer C when and what is the process?
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Clearing and Settlement

Clearing

Process of defining settlement obligation Assigning responsibility for settlement Who is to pay or receive a specified cash amount Operated by clearing centers or clearing houses Typically the process involves netting all incoming cash versus all outgoing cash across all the participants Multilateral netting

Settlement

Process of actual payment or receipt of net settlement obligation To conclude a contractual commitment

Clearing - example
1. Rs. 17,000 on HDFC Bank 2. Rs. 6,000 on Citibank 1. Rs. 5,000 on SBI 2. Rs. 10,000 on Vijaya Bank

CLEARING HOUSE SBI SBI -5+37-13= 19 - 5+37 SBI -5+37-13 - 5,000 Vijaya Bank Vijaya -10-22+23= -9 Vijaya - 10-22 10,000 Vijaya
Citibank + 15 +15-20 Citibank +15-20-6= -11 Citibank + 15,000 1. Rs. 13,000 on SBI 2. Rs. 20,000 on Citibank HDFC -15+33-17= 1 - - 15 15+33 HDFC 1. Rs. 15,000 on HDFC Bank 2. Rs. 22,000 on Vijaya Bank

Citibank

HDFC Bank

SBI
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Overseas payments - Example

RIL, Mumbai instructs its bank HDFC to transfer $ 1M to GE towards payment of Invoice No.2314 from its INR Account

CITI, Newyork

Through US payment system

JPM Newyork

GE Newyork

HDFC, Mumbai

RIL Mumbai

Overseas Cash settlement

Need to have a correspondent banking relationship in the country of currency Nostro account Our account with them Vostro account Their account with us Most country have an effective wholesale payment systems Typically for large value and for same day settlement Different types

RTGS Real Time Gross settlement E.g. Fedwire (USD), TARGET (EUR), CHAPS (GBP), BOJ-NET (JPY) Less settlement risk but more liquidity needed NSS Net settlement system E.g. CHIPS (USD RTNS system), EBA (EUR) Less liquidity required in comparison to RTGS but high settlement risk

Example of Payment system usage

CITI London with HSBC London Sell GBP1 Million against USD. Rate 1.7 CITI, New York
Settles USD1.7 Million through CHIPS, US LVPS

Chase, New York

Correspondent Bank
Settles GBP 1 million through CHAPS Sterling, UK LVPS

Correspondent Bank

CITI, London

HSBC, London

SWIFT An Introduction

SWIFT - Society for Worldwide Interbank Financial Telecommunication Industry owned co-operative supplying messaging services for the financial community worldwide. Secure and standard messages promoting STP is a stated objective of SWIFT

Over 7800 financial institutions in over 200 countries

Messages are represented by a 3 digit number e.g. MT 103 Supports messages for most business needs of Banks

Payments, Confirmations, Acknowledgements, Trade finance, Account services etc.

SWIFT Bank Identifier Code (BIC)

Financial institutions are identified by a unique Bank Identifier Code (BIC).

These are published in the BIC Directory

The first 8 characters of the BIC, when used for addressing purposes, are called the destination, comprises of the following

Bank Code (4) Country Code (2) Location Code (2)

In addition, an optional 3 digit branch code can be used to identify a specific branch of the user institution.

If no branch code is used then a default XXX is used for addressing purposes.

When BICs are used in the message (Header as well as texts) are validated against an online directory and rejected if invalid.

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SWIFT a Customer Payment

Let us take the following example:

Franz Holzapfel G.m.b.H orders Bank Austria, Vienna to pay USD 1121.50, value 20 Dec 2005 to C.Klein, Bloemengracht 15, Amsterdam whose account number 72 34 91 524 is with ABN AMRO, Amsterdam.
Bank Austria uses a Reference number of 394882. Bank Austria has correspondent banking relationship with Chase Manhattan, New York for USD In this case, Bank Austria would send across MT103 to ABN AMRO, Amsterdam and a cover message (MT 202) to Chase Manhattan Bank for payment to ABN AMRO, New York.

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SWIFT MT103
Message text
Sender's reference Bank Operation Code Instruction Code VD / CCY/ Amount Ordering Customer Sender's Correspondent Receiver's Correspondent 20: 394882 23B: SSTD 23E: PHOB/20.527.19.60 32A: 051220USD1121.50 50K: FRANZ HOLZAPFEL GMBH VIENNA 53A: CHASUS33 54A: ABNAUS33 59:/ 723491524 C.KLEIN BLOEMENGRACHT 15 AMSTERDAM

Beneficiary Customer

Remittance Information
Details of Charges

70: / RFB/BET072
71A: SHA

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