Fund transfers through clearing houses
If Citicorp does not hold a correspondent account in Danish krone, it will have to buy the krone and have them transferred to Barclays.This implies the necessity for some kind of clearing system whereby banks can settle accounts among themselves.Let’s see how an international clearing system works.
Suppose that Citicorp buys DKK 5 million from NatWest, which has no correspondent agreement with Citicorp but which is a member of CHIPS (Clearing House Interbank Payments System).CHIPS is a computerized network for international transfers of dollar funds that links depository institutions with offices in New York City.The system is owned and operated by the New York Clearing House Association whose members comprise 12 New York money center banks.It currently handles around 90% of international interbank transfers involving US dollars.
As soon as Citicorp buys Danish krone from NatWest, it instructs NatWest to transfer the krone to its account at Barclays.The transfer will be effected two business days later on Friday 30 August.Payment to NatWest for the krone will be made through CHIPS and Citicorp immediately enters its identity code, NatWest’s identity code, and the amount to be transferred into its CHIPS terminal where the message is stored in the CHIPS central computer.NatWest does the same.
On 30 August, when the CHIPS network closes down at 4:30 p.m.(16:30)Eastern Standard Time, the CHIPS computer sends out a settlement report for the net amounts to be paid or received that day.If Citicorp had no other transactions with CHIPS on 30 August, it has to settle for the dollar value of the DKK 5,000,000.Remember that the inter-bank rate was 5.0100-5.0120, so the ask rate for Danish krone was 1/5.0100 = 0.1996.Thus Citicorp owes 0.1996×5,000,000 = USD 998,000 and has until 5:45 p.m.(17:45)to settle this.It does by sending a message via Fedwire to the Federal Reserve Bank of New York to debit its account there by the Federal Reserve (the Fed)for domestic money transfers between institutions that have accounts at the Federal Reserve banks.CHIPS will then send the messages via Fedwire instructing the Fed to credit the accounts of the net credit out of the CHIPS settlement account.If NatWest is a creditor as a result of its transaction with Citicorp, its account with the Fed will increase by USD 998,004.The whole process is usually completed by 6:00 p.m.(18:00).
Other clearing systems for international payments also exist.CHAPS (Clearing House Automated Payments System), for example, is a computerized clearing system for sterling funds that began operations on 9 February, 1984.It includes 14 member banks and nearly 450 participating banks, and is one of the clearing companies within the Association for Payment Clearing Services (APACS)structure.
Whereas CHIPS is a centralized system, CHAPS is a two-tiered system whereby the member clearing banks operate the core clearing system but offer agency agreement with a wide variety of other financial institutions that allow them access to it.Consider a bank in Hong Kong Special Administrative Region of China that has been instructed to make a payment of GBP 1 million to a non-clearing UK bank.The Hong Kong bank sends the payment instruction, including the identification of the clearing bank where its non-clearing UK customer holds its account, via SWIFT or some other mutually acceptable medium, to the UK clearing bank where it holds its own account.After verification, this clearing bank then creates the payment message in the CHAPS format and sends it through its access to the central CHAPS system, called a Gateway.The Gateway, having accepted and acknowledged the payment message, delivers it via British Telecom Packet Switching Service (PSS)to the Gateway of the correct receiving clearing bank for onward transmission to the non-clearing JK bank that is the beneficiary.After verification, the receiving clearing bank acknowledges receipt of the payment, which is passed on to the CHAPS payment process within its own network.At the close of the day’s normal business (3:10 p.m.), the clearing bank calculate the net difference that has arisen between them as a result of the day’s transactions.The debtor clearing banks then send CHAPS payment messages to the Bank of England, which is itself a clearing bank and which holds the settlement accounts, in favor of the clearing banks that are owed money.If, for instance, the day’s only transaction between the two clearing banks was the USD 1 million in our example, the clearing bank for the Hong Kong bank would instruct the Bank of England to debit its account by USD 1 million in favor of the receiving clearing bank.