1. 4/27/2017
FUNDS TRANSFER

2. 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

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

4. 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.

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

6. Electronic Funds Transfer
Remitters Bank
Beneficiary Bank
Remitter
Beneficiary

7. Messaging

8. 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

9. 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 SB Cr
9000
State Bank’s A/c
5678 Cr
Beneficiary

10. NOSTRO & MIRROR

11. 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)

12. 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

13. 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)

14. Common Parties to Electronic Payment.

15. Naming Payment Participants
Remitting Bank
Account with Institution
Remitter
Beneficiary

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

17. 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

18. ACCOUNT WITH INSTITUTION
Bank where the ultimate Beneficiary holds account

19. BENEFICIARY
The Party that ultimately receives the funds.

20. 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

21. 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 Bank B
Bank C Bank B Dr Cr
0009
1234
Customer
Bank A Mirror Dr
0005
Bank C Mirror Cr
9876
Beneficiary

22. 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.

23. 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.

24. 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.

25. Clearing Systems

26. 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

27. 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.

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

29. 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

30. 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).

31. 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)

32. 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.

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

34. Identification Codes.

35. 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.: – 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.

36. 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 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.

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

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

39. Correspondent Banking

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

41. 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

42. 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.

43. Types of Funds Transfer

44. 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

45. 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.

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

47. 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.

48. Example of a MT202
CITIUS33AXXX00000
GCNNYLCCAXXX00000
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
//BEING BILL PROCEEDS
//CORR CHARGES 200 USD

49. Messaging Methods

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

51. Cover Payments FORD Clearing MT202 MT202 ABN Amro Amsterdam ABN AmroNY
HSBC NY
MT103

52. 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

53. 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.

54. Serial Payments FORD Clearing MT103 MT103 ABN Amro Amsterdam ABN AmroNY
HSBC NY

55. 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.

56. 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.

57. 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.

58. Practical Examples of Funds Transfers

59. PRACTICAL EXAMPLE 1
Research and Dev Comp ltd , Chase bank, Houston Account No , ABA
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 //FW  
CITIUS33 /

60. 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)
//FW
CHASE BANK OF TEXAS
:59:(Beneficiary) /
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

61. 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 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 /

62. MT202 Ordering Bank Senders Correspondent Receivers Bank Receiver
CITIUS33AXXX00000
GCNNYLCCAXXX00000
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) /
CHINA CONSTRUCTION BANK
GUANGXI BRANCH
CHINA
:72:(Bank to Bank Information)
/BNF/ABC
Ordering Bank
Senders Correspondent
Receivers Bank
Receiver

63. 4/27/2017
THAT’S ALL FOLKS