4/27/2017 FUNDS TRANSFER

4/27/2017 Introduction to Funds Transfer. Messaging Nostro & Mirror Common Parties to Electronic Payment Clearing Systems Identification Codes Correspondent Banking Types of Funds Transfer Messaging Methods Practical Examples of Funds Transfers Question & Answers

INTRODUCTION TO FUNDS TRANSFER 4/27/2017 INTRODUCTION TO FUNDS TRANSFER

What is Funds Transfer? Movement of Funds from one person to another. The person who receives the funds is called the Beneficiary. The person who remits the funds is called the Remitter. Funds Transfer happens when initiated by the Remitter.

Traditional transfer of funds in trade Remitters Bank Beneficiary Bank Cheque/Cash Beneficiary Remitter

Electronic Funds Transfer Remitters Bank Beneficiary Bank Remitter Beneficiary

Messaging

Messaging Is the mechanisms by which funds transfers are effected. Messages can be unstructured or structured. Messages are electronic in nature. Information in structured messages falls into clearly defined fields or codes. Computers can automatically read structured messages. TELEX, SWIFT, GCN are messaging systems Messages are life blood of cash management

Messaging- Communicating Instructions 4/27/2017 Messaging- Communicating Instructions Message HSBC, New York State Bank, New York Hello State Bank NY, this is HSBC NY, our customer has asked us to pay your customer $25000, on today’s date. We have credited your account with us for that amount Dr 1234 Remitter 0009 Dr Mirror A/c @ SB Cr 9000 State Bank’s A/c 5678 Cr Beneficiary

NOSTRO & MIRROR

What is Nostro A/c ? A dollar account maintained by HSBC India with HSBC New York is called a Nostro account of HSBC India with HSBC New York. HSBC, India HSBC, New York A/c No 4321: Mirror A/C (In books of HSBC, India) A/c No 1234: HSBC India (In books of HSBC, New York)

What is Mirror A/c ? Mirror A/C BANK A BANK B If Bank A maintains a direct account relationship with Bank B , Bank A maintains a mirror account in its own books . Balances on the mirror account are the inverse of those held on the account to which it is related. This is used to facilitate reconcilement. Dr A/C9000 Dr A/C1234 Remitter Bank A Nostro Cr A/C5678 Cr A/C0009 Bank A Mirror Beneficiary

What is Vostro A/c ? A Rupee account maintained by HSBC New York with HSBC India is called a Vostro account by HSBC India Vostro A/c HSBC, India HSBC New York A/c No 6789: Mirror (In books of HSBC New York) A/c No 9876: HSBC NY (In books of HSBC India)

Common Parties to Electronic Payment.

Naming Payment Participants Remitting Bank Account with Institution Remitter Beneficiary

REMITTER Original Source of the Payment order/instruction Known as Ordering Customer Also referred to as Originating Customer

REMITTING BANK Bank which has ordered the payment on behalf of itself or its customer Also referred to as Ordering Bank, Ordering Institution or as Originating Bank

ACCOUNT WITH INSTITUTION Bank where the ultimate Beneficiary holds account

BENEFICIARY The Party that ultimately receives the funds.

DIRECT ACCOUNT RELATIONSHIP. Bank B has an account with Bank A. Bank A Bank B For a Bank A to transfer funds to Bank B directly, it is necessary that Bank B holds an account with Bank A A/C1234 Dr A/C9000 Bank B mirror Dr Bank A Cr A/C0009 Bank B Cr A/C4567 Beneficiary

Fund Transfer without Direct Relationship If banks involved in funds transfer do not have a direct account relationship, they can use the services of another bank with whom they both have an account. BANK B BANK C BANK A Dr Cr 5000 9000 Bank A Nostro @ Bank B Bank C Nostro @ Bank B Dr Cr 0009 1234 Customer Bank A Mirror Dr 0005 Bank C Mirror Cr 9876 Beneficiary

Fund Transfer without Direct Relationship Banks can link together in chains to facilitate funds transfer between banks that do not have direct account relationships. In a series of debits and credits, funds can work their way around a group of banks until such time as the target bank has them credited to beneficiary.

Parties to Funds Transfer (L/c) Beneficiary : The person in whose favor a letter of credit is issued. The remitter is a person or organization that submit documents for payment and the one that will receive the funds or proceeds on an export LC. Applicant : The party that arranges for a letter of credit to be issued, typically the buyer in a commercial transaction or the borrower in a financial transaction. Confirming Bank : The bank, which, at the request or with the consent of the issuing bank, adds its own irrevocable undertaking in addition to that of the issuing bank. Issuing Bank : The bank that establishes (issues) a letter of credit. Reimbursing Bank : A bank nominated by the issuing bank to honor reimbursement claims.

Parties to Funds Transfer (Collection) Principal : Also referred to as Drawer, is the party entrusting the handling of a collection to a bank. Remitting Bank : The bank to which the principal has entrusted the handling of a Collection. Collecting Bank : Any bank, other than the remitting bank, involved in processing the collection. Presenting Bank : The collecting bank making presentation to the drawee. Drawee / Drawn on : The one to whom presentation is to be made in accordance with the collection instruction. Drawer / Drawn by : A person who signs a Bill of Exchange ordering the drawee to pay a specified sum at the specified time.

Clearing Systems

Requirements of Direct Account Relationships ING Bank ANZ Midland Bank Deutsche Bank HSBC Midland Bank ABN AMRO Standard Chartered Merrill Lynch Lloyds Bank Chase Bank

Challenges with Direct Account Relationships Keeping accounts open costs money, and the volume of transactions across an account might be too low to justify the cost. The number of banks in modern economies present impossible logistical problems. Maintaining so many accounts make managing treasury and liquidity positions difficult. Direct account relationships can be prone to ops error.

Solution ? CLEARING SYSTEM Clearing Systems are the primary method that banks use to make payments to any bank in any country

Clearing Systems ING Bank ANZ Midland Bank HSBC Midland Bank Deutsche Bank HSBC Midland Bank ABN AMRO Standard Chartered Merrill Lynch Lloyds Bank Chase Bank

What are Clearing Systems? Clearing systems act like the hub of a wheel. To Transfer funds to one another the banks must first pass through the clearing system. Each bank now only needs one external account, an account with the clearing system. Clearing systems are also known as Clearing Houses (Central Banks). Clearing systems are usually owned and controlled by Central Banks (regulatory/monetary functions).

Clearing Systems and Currencies Clearing Systems are country specific and currency specific. Every Clearing system supports only one currency. Every Central Bank is responsible for only one currency. Every funds transfer of a currency, that is not transacted across direct account relationships, must pass through the currency’s home clearing system. E.g. : India - Rs (Rupees) USA - USD (US Dollars) Japan - JPY (Japanese Yen)

Fx Payments Foreign currency payments must pass through the local clearing system for that currency. A bank needs to have a correspondent bank for each foreign currency in which it makes payments. Almost all banks in a Country are members of a Clearing House in their home country.

Clearing Systems Federal Reserve, CHIPS USA CHAPS UNITED KINGDOM TARGET USA UNITED KINGDOM EUROPE(EURO)

Identification Codes.

FedWire Identification Codes (US DOLLAR PAYMENTS) The Federal Reserve System is made up of 12 regional reserve banks together with a Board of Governors. Fedwire is an electronic funds and securities transfer system. All member banks have a Federal Reserve account with a district Federal Reserve Bank. Fed Wire routing codes are made of nine digits. E.g.: 021000089 – HSBC NY account with Federal Reserve Bank. The Fedwire is a Real Time Gross Settlement (RTGS) system. It is Real Time in the sense that it processes each transaction as it is initiated rather than handling the transactions in batches at intervals/net basis.

Chips Identification Code (US DOLLAR PAYMENTS) The New York Clearing House Association uses Chips Identification Code to identify most banks which hold a USD account in US. The Participants in CHIPS has a 4 digit CHIPS Routing number, that is used in addressing messages over the CHIPS system. The CHIPS ID can be used to identify these banks in payments messages. Example: 0008 – HSBC NY CHIPS CODE CHIPS assigns 6 digit identification numbers to all banks reported by its participants to have accounts with them. These numbers are known as CHIPS Universal Identifiers or UIDs. Example 001251 is UID for ING BANK (FRANCE) S.A. The payments made over CHIPS are not final when sent, but only become final once the participants have settled with each other after the close. At the end of the day CHIPS calculates each participants net position, that is the sum of all the payments it sent out and all the payments it received. Each participant will either owe or be owed its net position. CHIPS is thus a multilateral Netting system.

SORT CODES Codes used in CHAPS ( The Local Clearing system for Pounds Sterling ) 6 Character Long Example : 182008 – HSBC LONDON To be used only for pound sterling payments

TARGET Stands for Trans European Automated Real Time Gross Settlement Express Transfer Clearing System for EURO in which all the EMU countries participate.

Correspondent Banking

Correspondent Banking Clearing System(USD) HSBC NY Chase NY HSBC India

What is a Correspondent Bank? When a bank needs to make a foreign currency payment, it routes the payments through a Correspondent bank with which it maintains a direct account relationship. Correspondent banks are members of clearing systems who for a fee will make payments into the clearing system for non-member banks. Payments made via correspondents are called Cross Border payments. E.g. : HSBC New York is the USD correspondent for HSBC India

Flow of FT in Correspondent Banking US Clearing Dr. Clg House A/c Cr. Nostro A/c DR Nostro A/C CR Clg House A/C HSBC New York Chase Bank NY Dr. Customer A/c Cr. Mirror A/c Dr. Mirror A/c Cr. Customer A/c HSBC Bombay Chase Bank London Dollar funds to be moved between HSBC Bombay and a Bank in London.

Types of Funds Transfer

FUNDS TRANSFER MT202 – Originator is a Bank and the final beneficiary is also a Bank. MT 103 –Originator of the FT is a Bank and final beneficiary is a non banking entity. Bank Bank TO TO Bank Corporate entity/individual

TYPES OF FUNDS TRANSFER MT103 FORD HSBC NY CHASE NY BANK BANK PERSON This is a structured Fund Transfer Message used to transfer funds from a FI/Institution to a non-banking corporate entity. The correspondent bank involved collect their charges in the process of funds transfer. MT103 was previously known as MT100.

Example of a MT103 :57D:(Account with Institution)/12345 Big Bank :59:(Beneficiary) /10203010 AMERICAN COMPANY. USA :70:(Payment details) /RFB/INVXXX BEING BILL PROCEEDS 25.00 USD 78.00 USD PAYMENT COMM. 164.77 USD :71A:(Charge details) BEN :71F:(Sender Charges) USD0, 0000 00CITIUS33AXXX00000 0154 23GCNNYLCCAXXX00000 103 02 :20:(Our Ref Num) 172415 :23B:(Bank Operation Code) CRED :32A:(Value Date Amount) 040921USD10000,75 :33B:(Currency/Instructed Amount) USD10000,75 :50K:(Ordering Customer) HSBC NA NEW YORK 172415 :53B:(Senders Correspdt) /nostro123 HSBC N.A. :56D://FW021000089 HSBC, N.A...

TYPES OF FUNDS TRANSFER contd.. MT202 WACHOVIA BANK CHASE NY HSBC NY BANK BANK BANK This is a structured Fund Transfer Message used to transfer funds from a FI/Institution to another FI/Institution. There are no correspondent bank charges in the process of funds transfer.

Example of a MT202 0000 00CITIUS33AXXX00000 1123 23GCNNYLCCAXXX00000 202 02 :20:(Transaction Reference Number) 987456 :21:(Related Reference) abc123 :32A:(Value Date, Currency, Amount) 040923USD10000 :52D:(Issuing bank) HSBC NA NEW YORK :53B:(Reimbursing bank) /Nostro123 HSBC N.A. :57D:(Advise through bank) //CP0326 BANK OF CHINA, :58D:(Beneficiary bank) //124545 BANK OF CHINA :72:(Bank to Bank Information) /BNF/ILC 20167797 //BEING BILL PROCEEDS //CORR CHARGES 200 USD

Messaging Methods

Messaging Methods There are two different messaging methods They are: 1. Cover method 2. Serial method

Cover Payments FORD Clearing MT202 MT202 ABN Amro Amsterdam ABN Amro NY HSBC NY MT103

Cover Payments Cover payments consist of two messages An MT103 message directly to the account-with institution A series of MT202 messages passed via correspondent banks (the cover) When the account with institution receives the MT103 it gives two essential pieces of information: 1. Who to credit (the account-with institution’s customer) 2. Where they should expect to receive the funds

Cover Payments (continued) The MT103 message includes all the customer information. It does not need to include any information about the intermediary banks in the chain The MT202 is a bank to bank message that does not include any information about the ultimate beneficiary. It simply indicates the institution to which the payment should be passed on. The account-with institution needs to match up the two messages for the payment to be completed.

Serial Payments FORD Clearing MT103 MT103 ABN Amro Amsterdam ABN Amro NY HSBC NY

Serial Payments The serial method involves sending an MT103 (with all the information necessary to make the funds transfer) to the first correspondent in the chain not the last (as in cover payments). The correspondent then forwards the customer instruction to the next bank and so on until the final account-with institution receives it to credit the beneficiary.

Serial Payments Advantages : Disadvantages Serial payments are simpler. The remitting bank sends only one message Less reconciliation is required by the bank. Disadvantages Time issues Potentially, each bank in the chain can take charges.

Who can choose the messaging method ? The Originating bank can choose the most suitable method. The other banks in the chain have no choice but to follow the method chosen by the Originating bank. When do we choose to use cover payments ? Direct and Cover is the preferred method when there are more than 2 banks in the payment chain. When not to use Cover payments ? Paying USD into the United States Paying EUR into Euroland.

Practical Examples of Funds Transfers

PRACTICAL EXAMPLE 1 Research and Dev Comp ltd , Chase bank, Houston Account No 123654789, ABA 113000609 Assumption - Ordering bank is HSBC Mumbai and the US Correspondent is HSBC New York Senders Correspondent Intermediary Receiver’s Bank Receiver Research and Dev Comp ltd CHASE BANK //FW113000609  CITIUS33 /123654789

Senders Correspondent MT103 103 02 :20:(Our Ref Num) xyz123 :23B:(Bank Operation Code) CRED :32A:(Value Date Amount) 041004USD10000 :33B:(Currency/Instructed Amount) USD10000 :50K:(Ordering Customer) HSBC NA MUMBAI :53B:(Senders Correspdt) /Nostro 123 HSBC N.A. :57D:(Account with Institution) //FW113000609 CHASE BANK OF TEXAS :59:(Beneficiary) / 123654789 Research and dev comp ltd TX U.S.A. :70:(Payment details) /RFB/INV123 BEING BILL PROCEEDS :71A:(Charge details) BEN :71F:(Sender Charges) USD0, - Senders Correspondent Receiver’s Bank Receiver Sender to receiver info

PRACTICAL EXAMPLE 2 Pls remit proceeds by teletransmission quoting our ref above under advice to us for credit account of China construction Bank Guangxi Branch With JP Morgan Chase, New York, A/c 01239876 Swift Code : CHASUS33 Assumption - Ordering bank is HSBC Mumbai and the US Correspondent is HSBC New York Senders Correspondent Intermediary Receiver’s Bank Receiver CHASUS33 //CP0002  CHINA CONSTRUCTION BANK CITIUS33 / 01239876

MT202 Ordering Bank Senders Correspondent Receivers Bank Receiver 0000 00CITIUS33AXXX00000 0056 07GCNNYLCCAXXX00000 202 02 :20:(Transaction Reference Number) XYZ456 :21:(Related Reference) GX456 :32A:(Value Date, Currency, Amount) 041007USD10000 :52D:(Issuing bank) HSBC NA NEW YORK :53B:(Reimbursing bank) /NOSTRO123 HSBC N.A. :57D:(Advise through bank) //CP0002 JP MORGAN CHASE BANK :58D:(Beneficiary bank) /1239876 CHINA CONSTRUCTION BANK GUANGXI BRANCH CHINA :72:(Bank to Bank Information) /BNF/ABC Ordering Bank Senders Correspondent Receivers Bank Receiver

4/27/2017 THAT’S ALL FOLKS