RELATIONSHIP BANKING

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2 RELATIONSHIP BANKING Correspondent banking is an important segment of every international bank's business portfolio. The correspondent banks depute their representatives to visit their counterparts periodically, generally once or twice a year. The representatives' visits serve a number of purposes, including: Relationship management; Review of operations; Review of the services and fee structure; Resolution of problems or areas of discord; Evaluation of the status of any reciprocity arrangement; Examining scope for expansion of business, including new requirements and demands from their correspondent banks.

3 The correspondent bankers can be of immense help in obtaining credit information, tapping business opportunities abroad, directing enquiries to the proper departments/sections for disposal, following up with their counterparts, and helping a bank to resolve urgent outstanding issues.

4 CREDIT LINES Apart from the facilities to open Nostro accounts and collect clean and/or documentary Instruments, a facility that is of great importance is the availability of 'credit lines'. These credit lines specially include a) Overdraft facilities in Nostro accounts for treasury operations. b) Confirmation of letters of credit c) Bankers' acceptances and bill rediscounting.

5 BENEFITS FROM CREDIT LINES Overdraft Facilities in Nostro Accounts for Treasury Operations Banks try to keep the bare minimum required to maintain these accounts - whether in local currency or in any foreign currency. The logic is simple: cash in the vaults does not earn anything for a bank. Idle cash is a losing proposition. Secondly, like all Nostro balances, cash balances are also exposed to exchange risks by way of depreciation or devaluation. Treasury departments track their Nostro balances on an ongoing basis, and leave in their Nostro accounts only the amount that would go to meet their immediate operational needs (e.g. LC reimbursement, payment against cheques, outward remittances). The balance of funds is deployed in other areas including shoring up balances in other accounts or for overnight investments

6 However, sudden, unplanned, unforeseen drawings on these accounts may occur from time to time. The probable reasons could include any or some of the following: Retirement of import bills High value outward remittance (at short notice) Cheques drawn on the account being bunched and presented all at once Reimbursement payments on account of letters of credit Delayed receipt or non-receipt of scheduled credits into the account Error, mismatch, miscalculation or plain mismanagement in fund-flow projections or projected balance requirements.

7 Confirmation of Letter of Credit Banks issuing Letters of Credit (LCs) often request another bank to 'confirm' their LCs. The seller may then ask that the letter of credit from his intended buyer or the opener be 'confirmed' by a bank in the seller's country. The letter of credit may also be confirmed by an internationally reputed bank. The facility to get a letter of credit confirmed is usually available to the issuer only through prior arrangement with the advising bank. Adding 'confirmation' entails additional risk exposures for the confirming bank. Banks from under-developed and developing countries or those banks not well-known globally, often take recourse to the confirmation route to make their LCs acceptable to the beneficiaries' banks, meet their own customers' requirements, and tap businesses that would otherwise have been out of their reach?

8 Bankers' Acceptance, Bill Rediscounting These are direct financial facilities offered by correspondent banks to their counterparts. Bankers' Acceptances, bill discounting and rediscounting of financial instruments drawn by merchants ease cash flow and facilitate international trade. Similarly, correspondent banks also offer structured finance, including buyer's credit or seller's credit.

9 TELECOMMUNICATION (S.W.I.F.T) A Basle based organisation, it is owned by the banks and financial institutions themselves, dedicated to managing a global financial messaging and fund transfer system. It is extremely cost-effective, said to be very secure, and very efficient indeed - with an unparalleled failsafe system working round the clock. Almost all the banks around the world are hooked on to this system.

10 S.W.I.F.T was formed when seven major international banks who met in 1974 to discuss the limitations of telex as a means of secure delivery of payment and confirmation information, primarily in the treasury and correspondent banking areas. Until then, all inter-bank communications were by telephone, telex, courier, or mail. Telex suffered from a number of limitations due to its speed, its free format that made automation at the receiving end almost impossible, and the lack of security, with test keys only being calculated on a subset of the message content.

11 S.W.I.F.T is a messaging service. Each type of message is a condition of wire transfer. Its headquarters are situated in La Hulpe, on the outskirts of Brussels. S.W.I.F.T also acts as a United Nations sanctioned International Standards Body (ISO) for the creation and maintenance of financial messaging standards.

12 USERS OF S.W.I.F.T Originally the network was designed to support the requirements of treasury and correspondent banking operations. Over the years others have been allowed access to the services, in some cases only to a limited degree. Currently the following categories of organization can access the service: Banks Trading Institutions Money Brokers Securities Broker Dealers Investment Management Institutions Clearing Systems and Central Depositories Recognized Exchanges Trust and Fiduciary Service Companies Subsidiary Providers of Custody and Nominees Treasury Counter-parties Treasury ETC Service Providers

13 S.W.I.F.T Services S.W.I.F.T operates a number of services, primarily: GPA : General Purpose Application, which only allows system messages, i.e. messages from a user to S.W.I.F.T and vice versa, not from one user to another; FIN Financial Application, which is the user to user service comprising: System Message; (MT0nn), User to User Messages IK1Tlnn through 9nn) and Service Messages such as acknowledgements.

14 S.W.I.F.T Addresses S.W.I.F.T addresses are used to not only indicate the final destination of the message but to also indicate parties within the individual message. The term 'S.W.I.F.T address' actually only relates to a subset of Bank Identifier Codes (BICs). In other words, you do not have to be a user of the S.W.LET. network to have a BIC and these can, therefore, be used over other networks such as Telex. The first four characters represent the bank code, for example NWBK (NatWest), DE (Deutsche Bank). The next two characters represent the ISO Country code, for example GB (United Kingdom), DE (Germany). The next two characters are the location code with some larger financial centres such as London and New York. These characters, the first 8, represent the mandatory portions and commonly within the body of a message this will be the normal format, for example NWBKGB2L (NatWest London). DEUTDEFF (Deutsche Bank Frankfurt).

15 SWIFT MESSAGES S.W.I.F.T messages are identified by a structured configuration. They all start with the letters 'MT' (Message Type). This is followed by a 3-digit number. The first of these three digits represents the category relating to a particular financial instruments or services. The significance of the first of the three numerals ('0', '1', '2', '3', etc., as shown below) is best demonstrated by the following list: MTOnn System Messages MT1nn Customer Payments MT2nn Financial Institution Transfers MT3nn FX, Money Market and Derivatives MT4nn Collections and cash letters MT5nn Securities Markets MT6nn Precious Metals and Syndications MT7nn Documentary Credits and Guarantees MT8nn Travellers Cheques MT9nn Cash Management and Customer Status

16 The second of the three numerals represents the group denoting that the messages are related to similar parts of a transaction's life cycle. For example: MT200 Financial Institution Transfer, Own Account MT202 Financial Institution Transfer, Third Party MT521 Receive (Securities) Against Payment MT523 Deliver (Securities) Against Payment The last digit is the type and denotes the individual message. There are several hundred message types across the categories in total.

17 Each message is assigned unique identifiers. A 4-digit session number is assigned each time the CBT logs in. Each message is then assigned a 6-digit sequence number. These are then combined to form an ISN (Input Sequence Number) from the CBT to S.W.I.F.T or an OSN (Output Sequence Number) from S.W.I.F.T to the CBT. It is important to remember that terminology is always from the perspective of S.W.I.F.T and not the user

18 CLEARING HOUSE INTERBANK PAYMENTS SYSTEM (CHIPS) CHIPS (Clearing House Interbank Payments System) is the premier bank-owned payments system for clearing and settling large value payments in the US. It is a payments platform serving the largest banks from around the world, and processes over 95 per cent of the US$ cross-border payments. CHIPS is used by both Fedwire and S.W.I.F.T. CHIPS is comprised 84 financial institutions representing 27 countries. CHIPS UID (CHIPS Universal Identifier) is an unique sixdigit number given to each member bank of the New York Clearing House system.

19 CHIPS processes over 267,000 payments a day with a gross value of over $1.37 trillion. Key benefits include: Most efficient use of liquidity in the business No overdraft fees Eliminates settlement risk CHIPS has processed 772 million payments since its inception in 1975 with a total value of US$ 3.7 quadrillion. CHIPS payment system delivers per cent reliability and per cent system uptime, and around a 94 per cent straight through processing rate.

20 CHIPS business profile: Transfers an average total value of $1.4 trillion a day. Clears over 270,000 transactions on an average day. Handles 95% of all US dollar cross-border payments. Types of payments include: Large and small payment transactions US dollar foreign exchange settlements Financial settlements (ex. Loan and interest payments) Commercial payments Off shore investments

21 CLEARING HOUSE AUTOMATED PAYMENTS SYSTEM (CHAPS) Clearing House Automated Payment System (CHAPS), run by the CHAPS Clearing Company, is one of the largest realtime gross settlement (RTGS) systems in the world. It offers members and around 400 financial institutions utilizing agency arrangements an efficient, risk free and reliable same-day payments mechanism for both sterling and euro RTGS payment requirements. CHAPS Euro is an efficient means of accessing European RTGS services and is the second largest cross-border element of the European RTGS mechanism - TARGET.

22 Many of the world's major global payments banks are included in the CHAPS membership. Currently ( ) there are 20 direct members and circa 400 financial institutions utilizing agency arrangements through direct Members. The single Company membership fee has been set at 100,000. This covers access to either one or both of CHAPS Sterling and CHAPS Euro RTGS clearings.

23 THE FEDERAL RESERVE WIRE NETWORK (FEDWIRE) It is a high-speed electronic communications network that links the Federal Reserve Board of Governors, the 12 Federal Reserve Banks and the 24 branches, the US Treasury Department, and other federal agencies in the USA Fedwire Funds Transfers The Fedwire funds transfer system is a real-time gross settlement system in which more than 9,000 depository institutions initiate funds transfers that are immediate, final, and irrevocable when processed. Depository institutions that maintain a reserve or clearing account with a Federal Reserve Bank may use Fedwire to send payments to, or receive payments from, other account holders directly. Depository institutions use Fedwire to handle large-value, time-critical payments, such as payments for the settlement of inter-bank purchases and sales of federal funds; the purchase, sale, and financing of securities transactions; the disbursement or repayment of loans;

24 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 US Government securities Collection of tax and loan accounts in commercial banks Funds disbursement