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watumull sadhubella girls college

Project on International Payment System


Submitted To:- Prof. Kiran Submitted By:01 14 23 Balani poonam Jhamnani neha Sahitya Neha

Acknowledgement

I would like to acknowledge Prof Kiran for giving this project to us as it helps us to understand what international banks are. It is the great opportunity for us to put effort on this project. I would also like to thank the Watumull Sadhubella college for giving such lively projects which boosts the confidence of the students.

Introduction:-

Payments are an essential part of everyday life, which underpin all forms of economic activity, and affect everyone as individuals and businesses. We all make a variety of payments every day with the expectation that these payments are secure and reliable. Most consumers are unaware of what happens behind the scenes, but, by their very nature, payment systems require a high degree of co-operation by numerous different stakeholders for a payment system to function.

Payment Terms Generally Adopted in Foreign Trade


As delivery is the essence of the contract for the importer (overseas buyer), timely and sure receipt of payment is the matter that is of prime interest to the exporter. In a contract for export of goods, it is natural that there are a number of clauses defining in exact terms how the payment is to be made to the exporter. There are different modes of making payment to the exporter. Some of the payment terms generally adapted in foreign trade are:

Clean payments:
This is the direct form of settlement between the Exporter and Overseas buyer, without the intermediation of a Commercial Bank. The merchandise is shipped by the exporter and the shipping documents and invoice are directly forwarded to the overseas buyer. The buyer then remits the payment. This mode of transacting carries an element of risk for the exporter, if the foreign buyer defaults to make payment. If the payment is remitted in advance, there is An element of risk for the buyer. Hence this form of settlement can be resorted to only in exceptional cases, where the transaction is for a small value, or that the exporter and overseas buyer belong to a same group of concerns. Or the two parties have long-standing satisfactory dealings.

Documentary Bills on D/A terms:


Under this system, the goods are consigned by ship, the shipping documents and commercial invoice are attached to a Demand Draft and send to the overseas banker of the Buyer for collection. The documents are delivered to the buyer against payment at the overseas centre. These are called D/P

Bills. When a L/C cannot be established this is the ideal mode of payment. The exporter can also attach the after sight bill for a specified No. of days and advise the Banker to deliver the Bill of Loading and other documents against acceptance of the after sight draft. The banker will deliver the documents and on the due date of the Draft he will collect the amount and remit to the exporter. This is called D.A. Bill. The exporters bank may also purchase both DP or DA export bills and make the funds available to the exporter immediately less their discount and charges and reimburse itself eventually when the bills are paid by the overseas buyer. Normally Indian Banks allow packing credit facilities to the exporters to procure and export the goods. The packing credit advance is adjusted by purchasing the export bills. It cannot be adjusted by any other mode. This is called a FOBP (Foreign outward bills Purchased) facility. When the Bills are not purchased, the Banker renders a collection service, when presents the bill to the overseas buyer, collects the amount and places to the credit the exporters account after collection.

Bankers Documentary Letter of credit:


A Letter of credit is established by the Banker of the Overseas buyer, in favor of Exporter. The Letter of credit is advised and generally confirmed by a local Bank in the country of the exporter. This enables the exporter to deal with the advising Bank in his country for all purposes. In terms of the Letter of Credit, the Bank establishing the L/C irrevocably undertakers to negotiate bills tendered by the exporter confirming to the terms of the L/C up to a specified amount and within a period. Normally the Letter of credit is made available by the overseas buyer, while sending is order initially or within a short time thereafter, and based on the Letter of credit, the Exporters Bank may allow packing credit to the Exporter to procure and export the goods. The Letter of credit safeguards the interests of both the exporter and the overseas buyer and offers the best mode of transacting for both. Normally the exporter should insist on a confirmed irrevocable credit. The terms of an irrevocable credit cannot be modified by the issuing bank without the consent of the beneficiary i.e. the exporter. When the domestic Bank representing the foreign Bank opening the L/C adds its own conformation to the credit, it is called confirmed credit.

Consignment terms:
Under consignment terms the goods are not sold to the buyer, but sent to the agent of the exporter in the foreign country. The exporter continues to own the goods even if the agent in the overseas country remits an advance payment. The consignment agent arranges to sell the goods at the foreign country on behalf of the exporter and remit the amount of sales from time with an account current. He is paid only commission on the sales for his margin. The exporters bank can only allow packing credit against the stocks remaining at the overseas centre on consignment basis and no bill can be purchased.

Export Factoring Introduction


Due to the increase in world trade competition, exporters are increasingly forced to provide flexible open account terms to overseas buyers. When domestic banks are not willing to finance your export receivables, International Export Factoring may be an alternative and possibly better solution. International traders are increasingly using factoring to finance their international short-term credit sales. According to the World Factoring Yearbook there were over 60 countries reporting a domestic and export factoring industry in the year 2003. The volume of factored/discounted receivables has been growing at a substantial rate. From 1997 up to 2002 the world volume has increased by approximately 80%, and the trends would indicate continued growth in 2003. International export factoring is the sale of your short-term foreign accounts receivable at a discount to a US based export factor company for immediate cash. The US Factor partners with a selected Overseas Factor company operating in your target market to assume the full credit risk of your overseas buyers. By selling your receivables to a factoring firm, you can receive most of your cash within days of your sale. The rest of your funds are received after the final collection from your buyer. International export factoring transactions differ from import factoring in that an additional factoring company the Overseas Factor - is included in your financial services team.

How It Works
1. The seller will sign a factoring agreement with the US factor (export factor). Under this agreement, the seller's accounts receivable are assigned to the US factor and the seller is covered against credit losses, up to 100 percent of the approved credit. The export factor selects an appropriate import factor to act on the seller's behalf overseas with the export factor's supervision. In the meantime, the import factor overseas investigates the credit standing of any local customer to whom the seller wishes to sell goods.

2. When approved, credit lines are established so the seller's foreign customer can place orders for goods on open account trading terms. Once authorized sales take place, the seller becomes eligible for funding. The import factor handles the local collection and payment of the accounts receivable. 3. During all stages of the transaction, records are kept for the seller and reports are made to give the seller important, timely information on such details as delayed deliveries, the wrong merchandise sent to the wrong place, or any other discrepancy causing delays in payment.

Services Offered There are basically three elements of service offered by international factoring companies: 4. Managing the receivable, where an accounts receivable manager handles collections and provides reporting and bookkeeping services. Typically, the seller "assigns" orders to the factor and the buyer pays the import factor. The export factor guarantees the payment for the order (minus charge-backs, defects, and other things that may go wrong that are beyond the factor's control). 5. Furnishing credit protection on the receivable and establishing credit lines. Usually, if the order is not approved for factoring, the seller can still sell to the buyer, but collection is no longer guaranteed by the export factor. For approved orders, the factor collects the payment for the order and then pays the seller, minus the factor's fees, which can include an annual fee plus a commission on each sale. 6. Lending against receivables. Interest rates vary and the most common loan is no greater than 90% of the value of the receivables. The seller must usually have a minimum of working capital and other qualifying criteria.

Factoring Process
Factoring is a simple extension of your current accounts receivable process.

1. Following your normal course of business, you sell your product or service to a customer, and issue an invoice for the value of the goods or service. 2. To factor the invoice, you follow the sale by sending the factor a copy of the invoice. 3. The factor processes the invoice, and within 24-28 hours, the factor gives you a percentage of the invoice amount, called an advance payment. This is the first of two payments you receive when factoring an invoice. 4. The customer, when ready to make payment, directs payment to the factor. 5. When payment is received, the factor withholds a small factoring service fee, and returns the difference, or reserve back to you. 6. The reserve is the second payment you receive from the factor for the invoice.

Forfeiting
Introduction Forfeiting and factoring are services in international market given to an exporter or seller. Its main objective is to provide smooth cash flow to the sellers. The basic difference between the forfeiting and factoring is that forfeiting is a long term receivables (over 90 days up to 5 years) while factoring is a short termed receivables (within 90 days) and is more related to receivables against commodity sales. Definition of Forfeiting The terms forfeiting is originated from a old French word forfait, which means to surrender ones right on something to someone else. In international trade, forfeiting may be defined as the purchasing of an exporters receivables at a discount price by paying cash. By buying these

receivables, the forfeiter frees the exporter from credit and the risk of not receiving the payment from the importer. How forfeiting Works in International Trade The exporter and importer negotiate according to the proposed export sales contract. Then the exporter approaches the forfeiter to ascertain the terms of forfeiting. After collecting the details about the importer, and other necessary documents, forfeiter estimates risk involved in it and then quotes the discount rate. The exporter then quotes a contract price to the overseas buyer by loading the discount rate and commitment fee on the sales price of the goods to be exported and sign a contract with the forfeiter. Export takes place against documents guaranteed by the importers bank and discounts the bill with the forfeiter and presents the same to the importer for payment on due date. Documentary Requirements In case of Indian exporters availing forfeiting facility, the forfeiting transaction is to be reflected in the following documents associated with an export transaction in the manner suggested below:

Invoice : Forfeiting discount, commitment fees, etc. needs not be shown separately instead, these could be built into the FOB price, stated on the invoice. Shipping Bill and GR form : Details of the forfeiting costs are to be included along with the other details, such FOB price, commission insurance, normally included in the "Analysis of Export Value "on the shipping bill. The claim for duty drawback, if any is to be certified only with reference to the FOB value of the exports stated on the shipping bill.

Forfeiting The forfeiting typically involves the following cost elements: 1. Commitment fee, payable by the exporter to the forfeiter for latters commitment to execute a specific forfeiting transaction at a firm discount rate with in a specified time. 2. Discount fee, interest payable by the exporter for the entire period of credit involved and deducted by the forfaiter from the amount paid to the exporter against the availised promissory notes or bills of exchange.

Benefits to Exporter

100 per cent financing : Without recourse and not occupying exporter's credit line That is to say once the exporter obtains the financed fund, he will be exempted from the responsibility to repay the debt. Improved cash flow : Receivables become current cash in flow and its is beneficial to the exporters to improve financial status and liquidation ability so as to heighten further the funds raising capability. Reduced administration cost : By using forfeiting , the exporter will spare from the management of the receivables. The relative costs, as a result, are reduced greatly. Advance tax refund: Through forfeiting the exporter can make the verification of export and get tax refund in advance just after financing. Risk reduction : forfeiting business enables the exporter to transfer various risk resulted from deferred payments, such as interest rate risk, currency risk, credit risk, and political risk to the forfeiting bank. Increased trade opportunity : With forfeiting, the export is able to grant credit to his buyers freely, and thus, be more competitive in the market.

Bank Guarantee
A Bank Guarantee (BG) is a certification from a lending institution which ensures that the liabilities of a buyer will be met; in the event that the buyer cannot settle the balance due, the bank will be responsible for covering. With bank guarantees, you and your company have the ability to securely fund your needs during important transactions and effectively increase your investment potential. With a bank guarantee, funds are secured and only paid if the other party in the contract fulfills the stipulated commitments agreed upon. Thus, you and your company can be insured during international transactions/trades should loss or damage occur due to an uncooperative party. BG Benefits: Reduces risk of private transactions in emerging countries.

Mitigates risks that the private sector does not control. Opens new markets and increases investment potential. Improves your companys project sustainability.

There are many common problematic risks clients come across when dealing with international exports/imports: jumbled lines of communication; cash flow difficulties from the buyer; damaged/lost goods from the seller. BGs ensure that your company can avoid any of the following possible risks:

Credit and/or settlement risk Foreign countries, political, currency and/or border policies Faulty manufacturing, delivery and/or poor performance A bank guarantee can mitigate these risks and function as a safeguard for both parties of a transaction, providing insurance in the event that one cannot carry out the conditions established under a contract. With 100% cash-backed BGs and relationships with only top world banks, FastBankGuarantee.com can advise and assist you in acquiring your next bank guarantee.

Distinction between L.C and Guarantee


A letter of credit is a written undertaking issued by buyers bank to pay a certain sum of money within a stipulated period against a specified set of documents. It is a conditional undertaking. It undertakes to pay a certain amount of money on presentation of stipulated documents and the fulfillment by the exporter of all the terms and conditions incorporated in the L/C. The Letter of credit is a separate and distinct contract from the underlying sale contract, and the bank is not responsible for the fulfillment of the terms of the sale contract. The essential and basic provisions of the sale contract must be incorporated in the letter of credit. In addition, the amount of credit, its expiry date, the tenor of the draft to be drawn, party on whom the draft is to be drawn, the documents to be presented, brief description of the goods, must be precisely stated in the letter of credit. A guarantee is understood as a supplementary contract. A (designated as debtor) and B (designated as creditor) enter into a main contract in terms of which A promises to do something to B. Now B wants safeguards in case A fails to perform what he has promised and demands from

A to provide him a guarantor. In this contract C at the request of A comes forward and enters into a Contract of Guarantee with B. This is thus a supplementary contract entered by C with B. In terms of this contract of guarantee C promises to B that in case A fails to perform his obligations under the main contract to B, C will perform the same or compensate the loss of B, as may be provided in the contract of Guarantee. A contract of guarantee is called a contingent guarantee. The differences between the two i.e. L/C and guarantee are given below. 1. In a letter of credit there are only two contracting parties, i.e. the Banker and the beneficiary. The Banker opens the L/C on behalf of the buyer, but the buyer is not a contracting party, AS THE Letter of credit is a distinct and independent contract. In a Guarantee there are always three parties, 1. The Debtor 2. The Creditor (beneficiary of the guarantee) and 3.the Guarantor. 2. The guarantee is a supplementary contract based on an already existing original contract between the Debtor and Creditor (beneficiary of the guarantee. The Letter of credit however is a distinct contract (original contract) and it is not in any way linked with any supply contract excising between the seller (beneficiary of the guarantee) and the buyer (on whose behalf the Bank issues the Guarantee to the beneficiary 3. In a letter of credit the Banker accepts accept certain obligations distinctly and directly, upon the beneficiary fulfilling the terms and conditions of the L/C. In a guarantee however, the agreement is between the Debtor and the beneficiary (i.e. seller and buyer). In a guarantor however the rights of the beneficiary on the guarantor is of a contingency right. The beneficiary can have recourse to the guarantor, only in case of failure of the principal debtor to perform the contact. 4. Cancellation of the original sale/purchase agreement between the seller and buyer will not automatically affect the Letter of credit, since it is an independent contract. However cancellation of the original contract between the Debtor and the beneficiary will have the effect to nullify the guarantee and the beneficiary will not be Able to claim the benefits of the guarantee, when he has no valid claim on the debtor. 5. L/C creates two way obligations. The beneficiary of the L/C can claim payment for his bills only after consigning the goods and presenting the documents drawn strictly in terms of the L/C to the Banker. This sort of enforcement of dual discipline is not possible, in case of a Guarantee. 6. In a guarantee only one Branch of the Bank will be normally be involved with the beneficiary. But in a L/C the L/C is established by the overseas Bank and it is advised by a local correspondent normally, who adds his confirmation. This is the established convention and sellers will only accept such an L/C 7. A documentary L/C covering merchandise provides a ready security (or collateral) to the Banker, as the Banker gets a general lien on the goods covered by the consignment. No such security accrues to the Bank in a guarantee transaction in the normal course, and hence the Banker will seek in addition to Margin deposit, mortgage of immovable properties as collateral security. In

view of this a L/C is deemed a self-liquidating credit, while a Guarantee is deemed as an unsecured commitment. 8. Letter of credit can be negotiated in parts stretched over a period. A guarantee cannot be invoked more than once. 9. In view of several limitations of Guarantee it is not normally availed of a facility in export or Inland Trade. Letters of credit either Foreign or Inland is considered as the convenient tool. It is possible to issue a single revolving Letter of credit and cover all sales/purchases done periodically during a course of a year. Such flexibility and ease are not available under a guarantee. However a Guarantee from a Bank is considered appropriate in case deferred payment sale of equipment. The seller supplies (sells) a costly equipment on deferred payment (quarterly/half year or annual payments) over 3 to 5 years. As the seller has no security in case of default by the buyer, he insists of a Bank guarantee. Such a guarantee called Deferred Payment Guarantee is normally issued by the Bank. 10. . A Letter of credit initiates a new line of operations and serves as an integral part thereto. On the other hand a Guarantee being a provision for a specific contingency comes into focus only when there is a break in the regular transactions and an exception development (i.e. default by the guarantee giver) takes place. If there is no such default by the guarantee giver, the guarantee never comes into focus and gets automatically discharged on the completion of the transaction. Based on this criterion we may say that the L/C is a driving force, while the guarantee is an exception handler.

Banks payment systems


Banks are the entities that pay and receive for and on behalf of the client. This is because customers maintain an account with banks. customers may be paying by cheques or demand drafts or any of the payment mechanisms mentioned above. Bankers have to effect the credit-debit entries to finally transfer credit from one party to the other party. Banks perform this task by either passing credit-debit messages to its own branch this is done when the bank has branches in both (paying& receiving) locations. if the bank does not have branches then , correspondent banks help in completing the transaction.

Correspondent banking
Nostro and vostro are correspondent banking account. If a UCO bank customer has to get USD 1m in Chicago, then UCO bank will use its own account with Amex bank (nostro account) to effect remittances.

Type of account nostro

meaning our

vostro

your

loro

their

description Domestic banks account held with foreign bank foreign banks account held with Domestic bank Third party account

example Induslnd banks account with city bank, USA Scotia bank account with SBI London bank paying an amount(to French bank) by crediting French banks account held with US bank.

Definition of correspondent banking


'Correspondent banking relationship' is defined in section 5 of the AML/CTF Act and involves the provision of banking services by one financial institution (first institution) to another (second institution), where the financial institutions carry on activities or business at or through permanent establishments in different countries and the banking services are of a kind described in the AML/CTF Rules. The second institution may be a subsidiary or related company of the first institution. A company is taken to be related to another company as described in section 50 of the Corporations Act 2001 (Corporations Act) where a company is a holding company, subsidiary, or holding company subsidiary, of another company. The term 'subsidiary' is defined in section 46 of the Corporations Act. Chapter 2 of Anti-Money Laundering and Counter-Terrorism Financing Rules Instrument 2007 (No. 1) provides that the correspondent banking relationship definition relates only to banking services involving nostro or vostro accounts. The terms 'nostro' and 'vostro' are not defined in the AML/CTF Act or AML/CTF Rules, but it is commonly held that:

a nostro (Latin for 'ours') account is an account a financial institution holds with a foreign financial institution, usually in the currency of the foreign country a vostro (Latin for 'yours') account is the account a financial institution holds on behalf of a foreign financial institution.

Vostro, Nostro, And Loro Accounts


Vostro Account: Account held by a foreign bank in a domestic bank is called vostroaccount. For example UBS of Switzerland opening an account in SBI in India, this isvostro account for SBI India. Nostro Account: Account held by a particular domestic bank in a foreign bank is calledNostro account. Here in the above example given in Vostro account the same account isa nostro account for UBS Switzerland, or if SBI India opens an account in UBSSwitzerland then that account is a Nostro account for SBI India. Nostro accounts areusually in the currency of the foreign country. This allows for easy cash managementbecause currency doesn't need to be converted. Loro Account: An account held by a domestic bank in itself on behalf of a foreign bank.The latter in turn would view this account as a nostro account.

RTGS
The inter-bank funds transfer system in India can be classified into the Batch Mode (Net) and Real Time (Gross) System. In a Batch Mode, the transmission, processing and settlement is done for a set of transactions (say cheque clearing or sale or purchase of securities) at a particular point of time and the settlement on a pre-fixed interval of time (say at the end of the day). In the Real Time Gross System on the other hand, the transmission, processing and settlement of instructions is done on a continuous basis. World over, it is used for high-value clearing involving inter-bank fund transfers and treasury related transactions, helping in reducing settlement and systemic risk. In India, it has been implemented w.e.f March 26, 2004 and its implementation places India at par with the best practices in the world in terms of payment systems. What is RTGS : RTGS is a centralized payment system in which, inter-bank payment instructions are processed and settled, transaction by transaction (one by one) and continuously (online) throughout the day, as and when the instructions are received and finally accepted by the system. Need for RTGS : Under the existing system, the settlement of the all individual payments takes

place on a net basis (i.e. difference of payment to be received and payment to be made) and that too at a designated time. This causes the system participants to be exposed to financial risks for the period during which settlement is deferred. Due to such delays in settlement, a no. of capital market and money market frauds have taken place in India in the recent years. Further, the existing payment system is capable to meet the requirement of the 80s or 90 when the no. and volume of financial transactions was limited. But, due to change in the economic perspective, its linkage with the global economies and the role of information technology, need has been felt for a more accurate, risk free, efficient and effective system. RTGS is an internationally compatible and transparentsystem which could be used to the full advantage of the existing client base without dispensing with the benefits already available to customers. Who manages RTGS ? World over, the central banks manage RTGS systems because the all banks in a country maintain a current account with the central bank. Accordingly, in India, it is being managed by RBI. Process of RTGS In India, the RTGS has been implemented by RBI. It has decided to use Y shaped structure out of the four message flow structures (V,Y,L,T). In this structure the following flow of instructions (it is not actual and is only for understanding the process) takes place: 1 Sending of payment instruction/authority by the issuing /paying bank to technical operator of the Central Processor. 2 On receipt of such message, stripping of the message by the Central Processor (Contd.. from page 1) and sending of sub-set of instructions (by retaining the original message with itself) to the Central bank alongwith relevant information (which may include amount, identity of issuing and receiving bank etc.) for settlement of the transaction. 3 Irrevocable settlement of the transaction by the Central Bank in its records i.e. debit of issuing banks account and credit to receiving banks account and passing this confirmation to Central Processor 4 Re-building of payment message by adding the stripped information (say details of beneficiary) by the Central Processor and sending the message with proper details to the receiving bank. Advantages accruing from RTGS *Since the funds transfer instructions are processed and settled in real time, the credit and liquidity risks are eliminated. *This will lead to a seamless movement of funds from one end to another using the IT platform and would reduce the systematic risks in the settlement system. *As the funds are received instantly online, in the RTGS system, the collecting banks and their

customers can use the funds immediately without exposing themselves to settlement risk. Impact of RTGS It is expected that some traditional products like cash management for corporate customers and traditional money transfer systems among branches, may lose their significance with the RTGS in place and banks may have to design other innovating products for their customers. While a demand draft takes about 7 days, it takes about 1-2 days under EFT which is available in 134 cities. Present status of RTGS in India (April 2004) The system was launched on March 26, 2004 (on pilot basis by involving 4 banks) by RBI for large value transactions for banks and their clients. RBI expects 120 scheduled commercial banks and primary dealers to become part of the real time gross settlement system by June 2004. Nearly 3000 bank branches across 275 cities/towns in India are expected to go live on this online funds transfer system. Procedure for a customer and charges Where a customer, instead of using cheque or bank draft, wants to use the RTGS, he will have to go to an RTGS-enabled bank branch where he maintains his account and give an online instructions for the funds to be credited to the beneficiarys account, maintained in a bank branch having RTGS linkage. The funds would be transferred instantaneously. RBI would recover Rs.25 for each transactions but banks will have their own charges to vary from bank to bank. For a bank branch to be part of RTGS, it has to be fully computerised and networked. Presently, about 3000 branches at 275 locations in India meet this criterion. RBI expects about 2000025000 cheques which involve high value customer transactions to migrate to RTGS.

Chips
Definition clearing house interbank payment system: an electronic system for making international payments in dollars and for changing money from one currency to another Clearing House Interbank Payments System The Clearing House Interbank Payments System (CHIPS) is the main privately held clearing house for large-value transactions in the United States, settling well over US$1 trillion a day in around 250,000 interbank payments. Together with the Fedwire Funds Service (which is operated by the Federal Reserve Banks), CHIPS forms the primary U.S. network for large-value

domestic and international USD payments (where it has a market share of around 96%). CHIPS transfers are governed by Article 4A of Uniform Commercial Code. CHIPS is owned by financial institutions. According to the Federal Financial Institutions Examination Council (FFIEC), an interagency office of the United States government, "any banking organization with a regulated U.S. presence may become an owner and participate in the network."[1] CHIPS participants may be commercial banks, Edge Act corporations or investment companies. Until 1998, to be a CHIPS participant, a financial institution was required to maintain a branch or an agency in New York City. A non-participant wishing to make international payments using CHIPS was required to employ one of the CHIPS participants to act as its correspondent or agent. Banks typically prefer to make payments of higher value and of a less time-sensitive nature by CHIPS instead of Fedwire, as CHIPS is less expensive (both by charges and by funds required). CHIPS differs from the Fedwire payment system in three key ways. First, it is privately owned, whereas the Fed is part of a regulatory body. Second, it has 47 member participants (with some merged banks constituting separate participants), compared with 9,289 banking institutions (as of March 19, 2009) eligible to make and receive funds via Fedwire. Third, it is a netting engine (and hence, not real-time). A netting engine consolidates all of the pending payments into fewer single transactions. For example, if Bank of America is to pay American Express US$1.2 million, and American Express is to pay Bank of America $800,000, the CHIPS system aggregates this to a single payment of $400,000 from Bank of America to American Express only 20% of the $2 million to be transferred actually changes hands. The Fedwire system would require two separate payments for the full amounts ($1.2 million to American Express and $800,000 to Bank of America). Only the largest banks dealing in U.S. dollars participate in CHIPS; about 70% of these are non-U.S. banks. Smaller banks have not found it cost effective to participate in CHIPS but many have accounts at CHIPS-participating banks to send and receive payments.

SWIFT
The Society for Worldwide Interbank Financial Telecommunication ("SWIFT") operates a worldwide financial messaging network which exchanges messages between banksand other financial institutions. SWIFT also markets software and services to financial institutions, much of it for

use on the SWIFTNet Network, and ISO 9362 bank identifier codes (BICs) are popularly known as "SWIFT codes". The majority of international interbank messages use the SWIFT network. As of September 2010, SWIFT linked more than 9,000 financial institutions in 209 countries and territories, who were exchanging an average of over 15 million messages per day.[1] SWIFT transports financial messages in a highly secure way, but does not hold accounts for its members and does not perform any form of clearing or settlement. SWIFT does not facilitate funds transfer, rather, it sends payment orders, which must be settled via correspondent accounts that the institutions have with each other. Each financial institution, to exchange banking transactions, must have a banking relationship by either being a bank or affiliating itself with one (or more) so as to enjoy those particular business features. SWIFT is a cooperative society under Belgian law and it is owned by its member financial institutions. SWIFT has offices around the world. SWIFT headquarters are located in La Hulpe, Belgium, near Brussels. An average of 2.4 million messages, with aggregate value of $2 trillion, were processed by SWIFT per day in 1995.

What Does Fedwire Mean?


A real-time gross settlement system (RTGS) of central bank money used in the United States by its Federal Reserve Banks to settle final payments in U.S. dollars electronically between its member institutions. Owned and operated by the 12 Federal Reserve Banks, the Fedwire is a networked system for payment processing between the member banks themselves, or other Fedwire member participants. Members can consist of depository financial institutions in the United States, as well as U.S. branches of certain foreign banks or government groups, provided that they maintain an account with a Federal Reserve Bank. What does a Fedwire look like? A Fedwire is an electronic transmission. One can only look at a print-out of the actual transmission. The transmission contains inter-bank codes that are changed continually, a reference number, the names of the sending and receiving banks, the transfer amount, and the name and account number of the sending account holder and the receiving account holder. And that's all. The crediting and debiting of Federal Reserve accounts is understood. It is not a required part of the transmission. There are no instructions, no conditions, no words at all that are not part of an account name or bank address. Unless you are on the sending or receiving end of Fedwire funds and want to verify the transmission for some reason, the printout is not very interesting.

What Fedwire is used for Fedwire is used for > Large dollar time-sensitive payments > Funds transfers between reserve banks > Purchases or sales of Federal Funds transfers between correspondent banks > Sales of book-entry U.S. Government securities > Collection of tax and loan accounts in commercial banks > Funds disbursement Who has access to Fedwire? > Federal Reserve Member banks > Financial institutions that have depository accounts with the Federal Reserve > Foreign banks located in the U.S. Fedwire Fedwire: an electronic transfer system developed and maintained by the Federal Reserve System. Depository institutions use Fedwire mainly to move balances to correspondent banks and to send funds to other institutions on behalf of customers. Transfers on behalf of bank customers include funds used in the purchase or sale of government securities, deposits, and other large, time-sensitive payments. The Treasury and other federal agencies use Fedwire extensively to disburse and collect funds. All Fedwire transfers are completed on the day they are initiated, generally in a matter of minutes. They are guaranteed to be final by the Fed as soon as the receiving institution is notified of the credit to its account. The Fedwire Funds Transfer Service operates from 12:30a.m to 6:30p.m. ET. These hours of operation overlap with both the European and Asia/Pacific markets. The Fedwire Securities Transfer Service Operates from 8:30a.m to 3:30p.m ET, Monday through Friday. How Fedwire Works In a typical funds transfer, an individual or a business instructs its bank to send a funds transfer. The sending bank debits the sender's account and initiates a fedwire funds transfer. The Federal Reserve, in turn, debits the account of the sending bank and credits the account of the receiving bank; the Fed notifies the receiving bank about the transfer. The receiving bank credits the recipient's account and notifies the recipient of the receipt of the funds. The transfer is final when the funds are received. Funds can be used by the recipient immediately thereafter.

CHAPS Co

CHAPS Co processes and settles systemically important and time-dependent payments. Key drivers for the Company are the provision of a robust and resilient infrastructure, innovation through responding to members' and market needs and the ability to do so in an efficient and cost-effective manner. On 9th February 1984 the CHAPS Sterling system commenced operations. At the end of 1984 the average daily volume and value transmitted was around 7,000 payments with an aggregate value of around 5 billion. Now, 25 years on, comparative numbers are around 130,000 payments with an aggregate value of around 300 billion. CHAPS continues to be one of the largest real-time gross settlement systems (RTGS) in the world offering Members, and around 400 financial institutions utilising agency arrangements through direct Members, an efficient, risk free and reliable same-day payments mechanism for their Sterling RTGS payment requirements. CHAPS is a Member focused Company with strategic direction, leadership and ownership vested in an active Board of Directors. It is the Company's strategy to promote operational efficiency;

Internally, by (i) removing duplication and, (ii) through outsourcing functions where appropriate, and In Members by (i) providing feedback on performance and, (ii) providing operational support in contingency situations. This and the overall robustness of the system is ensured by the proactive involvement of five standing committees, Operational, Technical, Security, Audit and Legal all reporting in to the Board.

Conclusion:An enterprise engaged in foreign trade should carefully select a method of payment best suitable for each transaction at the offer stage. Foreign trade may involve risks not present in domestic trade. The choice of payment method is a way of avoiding these risks. The choice of payment method is affected by several factors:

requirements of the seller and buyer relationships between the trading partners the operating environment and associated risks object of transaction market conditions

Payment methods for foreign trade include clean payment, collection and documentary credit. In direct foreign payment, the seller sends an invoice to the buyer and trusts that it will receive payment on the due date. If there is no trust and the buyer's operating environment involves economic and political risks, you should choose a documentary credit or collection item. In these methods of payment, the bank supervises the release of documents and payment.

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