Clearing and Settlement (1) pptx important
- 1. Clearing and Settlement Systems
- 2. • Clearing is all of the steps involved in transferring funds ownership from one party to another except for the final step, which is settlement. • Settlement involves the finalization of a payment, so that a new party takes possession of transferred funds. • The treasurer should be aware of these processes in order to understand the timing of payment transfers.
- 3. Characteristics In clearing and settlement systems, the banks of the payer and beneficiary exchange information regarding monetary transfers; the result of this exchange is payments between the banks.
- 4. OVERVIEW OF THE CLEARING AND SETTLEMENT PROCESS • The banks debit the account of the payer and credit the account of the beneficiary. • Given the massive volume of such transactions, formal clearing and settlement systems have been installed to streamline the process. • Clearing and settlement systems are generally organized around individual countries or economic regions. • Banks located within these areas can have an account with the local clearing and settlement institution; settlement takes place between the accounts of the banks held at the clearing institution. • Banks located outside of these areas do not have such an account, and so must use a local bank as a correspondent bank that handles payment instructions on their behalf.
- 5. • Settlement Types • Transaction Types • FEDWIRE – The Fedwire system is a gross settlement system that is operated by the U.S.Federal Reserve and processes large - value items with same - day, real time settlement.
- 6. • Nearly all U.S. banks and the agencies of foreign banks participate in the Fedwire system. • The fee for a Fedwire payment is relatively inexpensive. • The process flow for a Fedwire payment is for a paying company to transmit payment instructions to its bank, which debits the paying company’ s account and forwards the payment instructions on to the Federal Reserve (Fed). • The Fed then debits the paying bank ’ s account at the Fed and credits the account of the beneficiary bank at the Fed. • Finally, the beneficiary’s bank credits the account of the beneficiary.
- 7. AUTOMATED CLEARING HOUSE ( ACH ) SYSTEM • The ACH system is the net settlement system used for electronic payments in the United States, and is used by most banks in the country. • The ACH system is used for large - volume, low - value payments, such as payroll direct deposits, business - to - business payments, dividends, tax payments, and Social Security payments. • The transfer of funds from the payer to the beneficiary can take several days, depending on the payer ’ s payment instructions. • This system is significantly more complex than the Fedwire system, since it comprises a network of bank associations and privately owned processing entities. • The cost of an ACH payment is quite low, usually just a few cents per transaction.
- 8. CLEARING HOUSE INTERBANK PAYMENTS SYSTEM ( CHIPS ) • CHIPS is a net settlement system that is operated by the Clearing House in New York, which in turn is owned by a group of banks. • It settles primarily foreign exchange with total daily volume exceeding $1 trillion. • CHIPS accumulates payment instructions throughout the day, and then calculates the net payment to be paid by each bank in the system. • The net payment is then made through the Fedwire system. • The CHIPS system is designed for high - value payments, and can also transmit remittance information along with payment instructions. • The CHIPS process flow is for a payer ’ s bank to send payment instructions to CHIPS, which calculates net positions at the end of the day and sends this information to the Fed.
- 9. • The Fed then debits the paying bank ’ s account at the Fed, and credits the account of the beneficiary ’ s bank at the Fed. • A separate instruction from CHIPS to the beneficiary ’s bank results in the beneficiary ’ s bank crediting the account of the beneficiary. • There is some risk for a bank using CHIPS because it is not being paid until the end of the day but could make funds available to its customers prior to the end of the day; if a bank owing it money were to fail, the bank would then have no means of recovering the funds already paid to its customers. • Banks control this risk by imposing intraday credit limits on their transactions with each other.
- 10. Check Clearing • Same Bank Settlement • Correspondent Bank Settlement • Check Clearing Institutions • Electronic Check Presentment
- 11. THE CONTINUOUS LINK SETTLEMENT ( CLS ) SYSTEM • Foreign exchange settlement presents a risk of one party ’ s defaulting before a transaction has been completed because settlement takes place through accounts in the correspondent banks in the countries where the relevant currencies are issued. • Because the various national payment systems are located in different time zones around the world, one side of a foreign exchange transaction will likely be settled before the other side of the transaction. • For example, dollar payments are settled later than euro payments, which in turn are settled later than yen payments. • Thus, someone buying in dollars and paying in euros will have settled the euro side of the payment before receiving any dollars.
- 12. • If the counterparty were to fail in the midst of this transaction, the transaction initiator would have paid dollars but lost the offsetting euros. • This risk is called settlement risk . • To avoid this settlement risk while also speeding up the settlement process, a number of major banks banded together to create the CLS system. • The system is operated by CLS Bank International, of which the founding banks are shareholders. • Other banks can submit their foreign exchange transactions through these member banks. • The CLS settlement process flow is for member banks to send their foreign exchange transaction information to CLS during the day, after which CLS creates a schedule of net payments that the member banks must pay to CLS.
- 13. • CLS then processes both sides of each individual foreign exchange transaction, so that the account of one member bank is debited, while the account of another member bank is credited. • CLS processes these transactions on a first - in,first - out basis. • If, during the processing sequence, a member bank ’ s cash position with CLS becomes too low, CLS will shunt aside and postpone its remaining transactions until additional funds are provided by the member bank.
- 14. • After CLS has completed this process, it transfers the updated balances of the settlements back to the accounts that the member banks hold at the central banks in their home countries. • Since these payments are the result of the aggregation of a multitude of smaller transactions, they are on a net basis.
- 15. Treasury Systems • The treasurer requires information that is not normally available through a company ’ s standard accounting systems, or even from its enterprise resources planning (ERP) systems. • Even though an ERP system is designed to aggregate all of the information used in a modern corporation, the treasurer also requires information from a variety of external sources regarding investments, foreign exchange positions, interest rates, and so forth. • Consequently, treasury systems are needed that integrate information from a variety of sources, yielding real - time information that the treasury staff can use to efficiently perform their tasks.
- 16. Treasurer’s Technology Needs • The treasurer is in the difficult position of requiring information from many sources, most of which are not required by any other company manager. • Since treasury is a relatively small department that may not command the resources of larger departments, it can be difficult to collect all of the required information. • Consequently, the treasurer must frequently prioritize information needs.
- 17. • Cash Position – Cash book balance tracking – Multibank reporting of balance information – Cash pooling management – Cash Forecasting – Funds Transfers Capability – Investment Management, including money market dealing – Interest income/expense calculation – Debt Management – Payment Processing – Intercompany transaction settlement
- 18. • Foreign exchange Transactions – Rate feeds from Bloomberg or Reuters – Intercompany netting capability – Foreign exchange forecasting and position analyst – Foreign exchange bid summarization – Foreign exchange deal making capability – Foreign exchange confirmation processing
- 19. • Hedging – Rate feeds from Bloomberg or Reuters – Exposure modeling capability – Hedge deal making capability – Hedge confirmation processing In all cases, transactions generated by the treasury system should automatically create accounting entries that are interfaced directly into the corporate general ledger.
- 20. The treasurer ’ s technology needs also extend to the effi ciency of and control over treasury activities. Thus, the following requirements should be considered • Efficiency Issues – Minimize data entry – Work Flow Processing
- 21. • Control Issues – Audit Trail – Segregation of duties – Warning Indicators
- 22. SWIFT • The Society for Worldwide Interbank Financial Telecommunication (SWIFT) operates a worldwide network that banks use to exchange standardized electronic messages that are known as SWIFT MT codes. • The SWIFT network is highly secure and is designed strictly to transport messages between participants — it does not provide a clearing or settlement service. • Companies are now able to access the SWIFT network by any one of four methods
- 23. Standardized corporate environment (SCORE). • Under this approach, a company can communicate with all member banks in a closed user group. • Companies allowed to use this method must be listed on selected stock exchanges in specific countries, which include most of western Europe, North America, and some countries in eastern Europe, Latin America, and Asia. • SWIFT invoices companies directly for their message traffic. • This is the most efficient method, because users have direct access to nearly all banks.
- 24. Member - administered closed user group (MA - CUG). • A company can join a separate MA - CUG for each bank with which it wishes to communicate. • Each MA - CUG is administered by a bank, rather than SWIFT. • The bank running each CUG will invoice member companies for their message traffic. • This approach may call for membership in multiple MA - CUGs, which is less convenient than the SCORE method. • However, it is available to all types and sizes of companies.
- 25. Alliance lite. • SWIFT has made this method available to smaller companies having low transaction volumes. • It allows them to use either a manual browser - based payment entry system or to integrate directly into their treasury management systems.
- 26. SWIFT bureaus. • Third - party providers have set up their own access to the SWIFT network and allow companies access through their systems for a per - transaction fee. • This approach avoids the need for any in - house systems maintenance, but connectivity to any in – house treasury management systems is likely to be limited.