White Modern Geometric Business Marketing Strategy Presentation

[Audio] Clearing and Settlement Systems This chapter contains descriptions of a number of clearing and settlement systems that are used for both electronic and check payments..

[Audio] 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..

[Audio] CHARACTERISTICS OF CLEARING AND SETTLEMENT SYSTEMS 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..

[Audio] OVERVIEW OF THE CLEARING AND SETTLEMENT PROCESS The general concept of clearing and settlement is for the banks of the paying party (the payer) and the receiving party (the beneficiary) to exchange information regarding monetary transfers, resulting in the transfer of funds between the two banks. The banks, in turn, 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..

[Audio] Settlement Types Payments can be on a gross basis, where each bank pays the total amount owed. Payments handled through a gross settlement system are more likely to have a requirement for immediate execution, where payment instructions are processed separately for each individual transaction. The cost of gross settlement transactions is high, so individual transactions running through these systems tend to involve larger amounts of funds or be very time sensitive. Payments can also be on a net basis, where a large number of transactions are accumulated and offset against each other, with only the net differential being transferred between banks. Payments handled through a net settlement system usually wait until the end of the day, when all transactions between the banks are summarized and offset against each other by a clearing institution; the clearing institution then sends the net transfer information to the settlement institution, which executes the transfer of funds between banks. Banks prefer to use net settlement systems because payments processed through them require greatly reduced funds transfers (and therefore considerably less liquidity) than gross settlement systems..

[Audio] Transaction Types Each clearing and settlement system is primarily designed to handle a certain type of transaction. 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. 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..

[Audio] 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..

[Audio] 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 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..

[Audio] The ACH process flow is for a company to submit an electronic file to its bank (also known as the originating depository financial institution), containing payment information; the bank lets these submissions accumulate until the end of the day. At that time, it directly pays any of the authorized items with a book transfer if the recipient has an account with the bank. If not, the bank batches and forwards the remaining payment authorizations to its designated ACH operator (usually a regional branch of the Federal Reserve, or the Electronic Payments Network). The ACH operator collects the ACH submissions from all of the banks in its region and calculates the net settlement amounts that they must pay to each other. The ACH operator then aggregates the remaining transactions involving banks outside of its region, subdivides them by ACH region, and transmits them to the ACH operators responsible for conducting similar processing for their regions. Payments are made to the beneficiary's banks (also known as receiving depository financial institutions), which in turn pay the beneficiaries. Payments between banks associated with different ACH operators are settled on a gross basis..

[Audio] 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 and euro dollar trades. 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..