anb 1
Clearing Systems
anb 2
Clearing Systems
• End of Day Net Settlement Systems (NSS)
• Real Time Gross Settlement Systems (RTGS)
• Intra Day Net Settlement (Hybrid) Systems
• Continuous Linked Settlement
anb 3
Clearing SystemsNSS
• Traditional Approach• Amounts are netted and• One amount is paid or received across settlement
accounts with CB at end of day/period• Creates intra-day exposures• Finality at end of ‘period’• Risk – position built up with a member during the day
will not be settled• So – Collateral, Guarantees, Bilateral debit/credit
caps
Clearing SystemsNSS
• Helps preserve participants liquidity
• Usually used for low value payments and paper based instruments
• Lower cost
Examples:
UK cheque clearing, BACS, ACH in USAanb 4
anb 5
Clearing SystemsNSS
Cheque and Credit Clearing Company process
anb 6
Clearing SystemsNSS
Clearing cheques with cheque truncation
anb 7
Clearing SystemsRTGS
• Each payment settles singly and bilaterally across accounts at the settlement bank, usually the Central Bank e.g. Bank of England
• Eliminates settlement risk• Herstatt Risk• Designed to eliminate Herstatt risk (but
does it?)
Clearing SystemsRTGS
• Payments should arrive with value, availability and finality
• Used for high value/urgent payments
• More expensive than NSS
Examples: UK CHAPS, Fedwire in the USA, CHATS in Hong Kong
anb 8
anb 9
Clearing SystemsRTGS
Hong Kong Clearing House Automated Transfer System process (CHATS)
Faster Payments Service
anb 10
anb 11
Clearing SystemsHybrid
• Intra-day settlement at pre-defined periods
• Intra-day finality
• Most located in Europe and handle clearing of euro payments
• Examples
- CHIPS (USA)
- CLS
anb 12
Clearing SystemsContinuous Linked Settlement
(CLS)
• Payment versus payment system• 71 full members• CLS Services owns CLS Bank Inc, USA an
Edge Act Bank• Main operations in London/USA• Some 5 Trillion USD settled daily (95% of daily
traded volumes)• Eliminates 4 trillion of settlement risk
anb 13
Clearing SystemsBenefits of CLS
• Used to settle FX transactions between banks real time
• Reduces number of bank to bank payments• CLS is a common counter-party, payment
versus payment• Reduces risk and costs of high volumes of
large value funds transfers• Banks will obtain real-time information on
intra-day liquidity
anb 14
Clearing SystemsCard Payments
anb 15
Clearing Systems
• There are some ‘oddballs’
• London US Dollar Clearing
• London Currency Settlement Scheme
• Euro Clearing
• Hong Kong Currency Clearing
anb 16
Clearing SystemsSome Domestic Payment Methods
• Paper-based– Cash
– Cheques
– Bank transfers or giros
– Postal giros
– Bills of exchange
– Promissory notes
– Banker’s drafts
anb 17
Clearing SystemsSome Domestic Payment Methods
• Electronic– Funds transfer
• Urgent wires• Standard EFT
– Automated clearing house payments– Standing order– Direct debit– Electronic bills of exchange– Plastic (credit, charge, cheque guarantee, cash dispenser,
debit)– Financial EDI
International PaymentsCover Method
anb 18
Serial Method
19
COMPANY ABC (SINGAPORE) COMPANY XYZ (HONG KONG)
BANK ABC (SINGAPORE) BANK XYZ (HONGKONG)
BANK DEF (USA) BANK UVW (USA)
PAYMENT INSTRUCTION
INVOICE
CREDIT ADVICE
ADVICE OF RECEIPT
Debit Co. ABC account
Debit Bank ABC account Debit Bank
DEF account
Debit Bank UVW
account
Credit Bank ABC account at Bank DEF
Credit Bank DEF account at Bank UVW
Credit Bank XYZ account at Bank UVW
Credit Co. XYZ account
MT103Payment Order
MT103Payment Order
MT210ADVICE TO
RECEIVE