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Chapter 1 Introduction to International Settlement
International political, economic and cultural exchange inevitably leads to credits and debts owed by one country to another.
The international settlement involves both tangible and intangible trades, foreign investments, funds borrowed from or lent to other countries and so forth. To be more specific, international payments and settlements can also be necessary financial activities rendered from commercial payments, payments for the services rendered, payments between governments, and the transfer of funds among countries.
Definition
International payments and settlements are financial activities conducted among different countries in which either payments are effected or funds are transferred from one country to another for the purpose of settling accounts, debts, claims, etc.
Types of International Settlement
Usually international settlement is divided into three broad categories: remittance, collection and letter of credit. Negotiable instruments, however, ways of international settlement and documents used in the international settlement sometimes constitute the framework of international settlement.
History and Development of International Settlement
Tracing back the history of international settlement, the medium of exchange originated from coins. Later on, commercial drafts and other credit instruments emerged and became popular to meet the needs of the constantly increasing business activities in both geographical regions and volume of the international trade.
Depending on the creditability of financial institutions, both buyers and sellers are usually willing to complete their settlement through banks respectively, and a financial arrangement could be reached then. Therefore, many banks have focused on their business of international settlement and trade finance.
Most of the international payments originate from transactions in the world trade. With the enormous amount of international trade activities, the volume of the international settlement has reached trillions of US dollars nowadays. Banks, as a result, are focusing more and more on the development of the business because it is a major resource of profit.
International Customs and Practices
The International Chamber of Commerce is the world business organization. It is the only representative body that speaks with authority on behalf of enterprises from all services in every part of the world.
(1) International Practices concerning Bills: Bill of Exchange Act, 1882, Jeva Uniform Bill Act.
(2) International Practices concerning Settlement : (Uniform Rules for Collection, ICC Publication No. 522), Uniform Customs and Practice for Commercial Documentary Credits, 1993 Revision, ICC Publication No. 500).
(3) International Practices concerning Documents: Hague Rules, Hamburg Rules, International Convention Concerning the Transport of Goods by Rail, Agreement on International Rail-Road through Transport of Goods, Uniform Rules for a Combined Transport Documents, Institute Cargo Clauses, ICC, International Rules for Interpretation of Trade Terms, Incoterms and UNCITRAL Arbitration Rule.
US Dollar Clearing Systems and Banking Network
General Introduction
Since the 1950s, the US dollar(USD) has been the primary currency for the settlement of international payments. It is therefore important for modern day bankers to understand the US dollar clearing environment and its latest developments. USD payment systems are the means by which the payments are processed and settled among banks.
US Dollar Funds Transfer Payment Methods
(1) CHIPS—The Clearing House Interbank Payment System is a computerized, interbank funds transfer payment system operated by the New York Clearing House Association (NYCHA). CHIPS is used primarily for high-value, international payments, often for further credit to the participants’ customers and branches.
(2) FEDWIRE—FEDWIRE is an electronic payment system operated by the US Federal Reserve. It is used to make US dollar payments to banks and their customers throughout the United States.
(3) Book Transfer—Book Transfer is a payment made between parties that maintain accounts at the same bank.
(4) Check—In cases when one is unable to locate a US bank with which a US beneficiary has an account relationship, he may instruct the bank to pay by check.
(5) ACH (Automated Clearing House) was created in early 1970s in an attempt to offer an alternative to continued check volume growth.
Table Comparison between FEDWIRE and CHIPS
Table Comparison between FEDWIRE and CHIPS
FEDWIRE
CHIPS
Primary US dollar settlement mechanism
Primary international US dollar interbank settlement mechanism
Used by over 10,000 depository institutions
Approximate 82 participants in New York City and with over 20,000 users in the world
Settlement on a transaction by transaction basis
Settlement on a “net-net” basis via FEDWIRE at end of day
Risk control through Sender Net Debit Caps
Risk control through Bilateral Credit Limits and Sender Net Debit Caps
Banking Network
(1) Sense of correspondent
International banking is effected through the cooperation of commercial banks all over the world. In a sense, banks themselves are the best customers for each other. Their activities assist each other and thereby assist each other’s customers. This cooperation comes from the establishment of correspondent relationship between banks.
(2) Accounts
Well known banks with first-class services, strong funding resources, high quality of telecommunication equipments are the priority to be considered when choosing an account with a bank. Also, its business volume, location and account conditions should be taken into consideration. In short the principle for selecting a bank with nostro account is based on its safety, flexibility, efficiency, profitability and convenience.