Cross-border payments part 1: how foreign exchange (FX) works: clearing and settlements

Intro

What is Foreign Exchange

FX settlement: what are the players

Nostro and Vostro accounts

FX settlement risk:

Netting

FX settlement solution options
  1. reduces settlement, credit, and counterparty risks,
  2. reduce cost as there is less operation, and
  3. increase speed.
  1. direct bilateral relationship: like the BofA and BBVA example.
  2. Use netting network: networks developed for FX netting, such as FXNET, SWIFT Accord,
  1. CLS

SWIFT

  1. Identify counterparties that offer the best opportunity for netting and negotiate and sign appropriate documents,
  2. Agree with counterparties on the currencies to be netted, netting cutoff time and standard instructions for settlements,
  3. Ensure that each deal has been individually confirmed,
  4. At the netting cut-off time, identify all transactions to be netted for settlement,
  5. Compute net amounts by currency, or by currency pair based on the contractual arrangement with the counterparty,
  6. Confirm net amounts to be settled with the counterparty (by phone, fax, or S.W.I.F.T. ),
  7. Confirm any gross amounts to be settled (for example, for transactions done after the netting cutoff time),
  8. Generate payment and receipt (payment advice) messages for net amounts,
  9. Monitor net (and gross) payments and receipts and reconcile Nostro accounts. (This step could involve matching gross information from the FX system and net information generated manually.), and
  10. Generate accounting entries as needed.

Understand the pain points in cross-border payments

  1. Costly
  2. Slow
  3. And process not very transparent
  1. Cost. There is cost associated with maintaining many different accounts (nostros)
  2. Reduce the risk exposure. With so many bank accounts, bank increase its exposure to risks (default, credit, counterparty) by any of the banks it has nostros account with.

The solution

Visa B2B connect

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passion for #fintech #payments #RTP real time payment #Banking as a Service #digital strategy #blockchain

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Ming-Chieh Lee

Ming-Chieh Lee

passion for #fintech #payments #RTP real time payment #Banking as a Service #digital strategy #blockchain

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