Chapter 04

Question 1

Types of payments: real-time gross settlement (RTGS)

Answer 1

• aka “large value electronic pmts” or “wire xfers”
• processed individually, continuously throughout the day
  *

Question 2

Types of payments: small-value electronic payments

Answer 2

• aka “automated clearinghouse” (ACH)
• value-dated and processed in batches
• typically 1-2 days to settle
• US has smae-day ACH, for domestic payments < $25K

Question 3

Transit ck clearing (other than “on us” or “on we” cks) process (1 steps)

Answer 3

1. bank of first deposit sorts cks into cash letters
2. transmits cash letters directly or via clearing channels (intermediary processors, like a central bank, clearing facility, or correspondent bank)

Question 4

List 4 major clearing channels in US for processing transit cks

Answer 4

1. Clearinghouses - formal/informal assoc. formed by banks in geographic areas that permit the xchange of items drawn on member participants/banks)
2. Correspondent bank - collecting bank sends cash letters to “correspondent bank” (i.e. items are presented to the paying bank through a local clearinghouse or the Fed); collecting bank’s account @ “correspondent bank” is credited for ck proceeds.
3. Direct Send/Direct Exchange (aka direct presentment) - collecting bank sends cash letters directly to paying banks or nonlocal Fed Reserve Bank (clears faster)
4. Fed Reserve System (the Fed) - depository banks send cash letters to Fed, which clears the cks and xfers value from paying bank to depository bank

Question 5

Define 3 deposit-related deadlines/concepts, for paper checks:

1. ledger cutoff time
2. deposit deadline
3. proof of deposit (POD) method

Answer 5

• ledger cutoff - time when deposit must be rcvd. in order to be posted to the ledger balance of the depositor’s acct.
• deposit deadline - time within the banking day an item must be ready for transit @ depository bank’s processing center to qualify for availability per the bank’s published schedule
• proof of deposit (POD) method - assign availability to each ck, as it is processed (based on the day and time of deposit and check drawee’s endpoint)

Question 6

Ledger balance

Answer 6

bank balances reflecting all entries to the acct, regardless of if the deposited items have been collected and are available for withdrawl

Question 7

Available balance

Answer 7

amt of funds available for withdrawl

Question 8

Collected balances

Answer 8

= avg. ledger balance - deposit float

(2 terms US banks use to determine EC on acct analysis stmts.)

Question 9

Remote deposit capture (RDC)/ image capture

Answer 9

• a form of image capture used for deposited items
• captures MICR and pmt info
• faster funds avail., later cutoff and deposit deadlines, and/or lower service charges

Question 10

“As-of adjustments”

Answer 10

ck takes longer to clear than the initial availability that was granted, bank may add add’nl time to collected-balance calculation

(ex: originally granted one-day avail., but ck actually cleared in 2 days, bank may add 1 more day of float when calculating “collected balances”)

Question 11

Less common paper-based payments: “govt. warrant”

Answer 11

in govt. finance, an order to pay that instructs a treasurer to pay the warrant holder on demand or after a maturity date (typically used for govt. payroll, AR, etc.)

Question 12

Less common paper-based payments: “payable through draft” (PTD)

Answer 12

• resembles a ck drawn against the payor (“drawee”)– not the bank
• payor has reponsibility for payment
• typically used by insurance companies, who can review the instrument (signatures, endorsement, etc.) and decide to honor/reject

Question 13

Less common paper-based payments: “remotely created check (RCC)”

Answer 13

• aka “pre-authorized draft”
• typically for one-time pmts. (a late bill, debt settlement)
• no signature required (subject to fraud)

Question 14

Less common paper-based payments: “sight draft/time draft”

Answer 14

sight draft - usually presented w/ other docs/evidence to verify terms of the transaction have been met

time draft - a sight draft that cannot be paid until a after a certain time.

Question 15

Large-value EFT or wire xfer systems

Answer 15

• 2 key elements:
  
  • clearing - xfer and confirmation of info btwn. banks
  • settlement - actual xfer of funds (irrevocable+unconditional)
• systems consist of either:
  
  • RTGS (gross settlement) - each transaction results in individual, real-time flows; processor = central bank/equivalent
  • net settlement - many transactions are combined, sorted by sending/rcving. bank, and net amts are processed/settled @ specific time/EOD (risk here = electronic debits may be reversible under certain, specified circumstances)

Question 16

Examples of RTGS systems used for large-value xfers throughout the world:

Answer 16

• Fedwire (US)
• CHAPS (UK)
• LTVS (Canada)
• TARGET2 (Europe)
• CNAPS (China)

Question 17

In a payment system model, define the “network”

(i.e. examples, what role does it play?)

Answer 17

add’nl parties/intermediaries that help facilitate the transaction; can include…

• central banks (e.g. the Fed, European Central Bank, Bank of England)
• commercial entities (e.g. Clearing House Interbank Payment Systems (CHIPS), Faster Payments, Visa)
• transaction facilitators (e.g. SWIFT) which transmit info but do not provide funds settlement.
• payment systems (Fedwire in US, BOJ-NET in Japan)

Question 18

Clearing House Interbank Payments Systems (CHIPS)

Answer 18

• US-based, privately owned wire xfer/RTGS system
• transfers both pmt. instructions and funds settlement (through the Fed)

Question 19

Trans-European Automated Real-Time Gross Settlement Express Transfer System (TARGET2)

Answer 19

• Europe’s RTGS system, as of Nov 2007
• central banks a way to move real-time gross settlements through the Eurosystem (i.e. pro-SEPA)
• treats x-border pmts. within SEPA boundaries as if they were in-country

Question 20

Continuous Linked Settlement (CLS)

Answer 20

• a multi-ccy FX settlement svc. that allows simultaneous pmt. xchange for both sides of an underlying transaction (e.g. FX contract)
• reduces “settlement risk” when dealing w/ multiple counterparties
• managed by CLS Group Holdings AG, includes the CLS Bank Int’nl (CLS Bank)
• regulated by central banks in countries of operation

Question 21

Society of WW Interbank Financial Telecommunication (SWIFT)

Answer 21

a communication syst. to transmit pmt instructions, etc. (not a pmt. settlement syst.)

• used by most banks in the world
• industry-owned cooperative, interbank telecomm. network
• enables banks to send authenticated electronic msgs. in standard format
• transmissions ultimately results in xchange of value, typically through correspondent banks
• SWIFT allows corps to use its multibank platform to xchange fin. info w/ corp’s banks through 1 standardized platform (may reduce transaction costs and expedite payment/settlement)

Question 22

Electronic small-value xfer systems

Answer 22

• electronic networks to xchange smaller pmt. instructions btwn FIs
• can be either a debit or a credit (but, not all systems allows pre-auth debits)
• parties to an electronic small-value transaction are originator and receiver
• examples: ACH (US), Bacs (UK), Electronic Clearing (ECG) (Hong Kong), SEPA debit and credit schemes
• growth/acceptance of internet svcs. and online banking created demand for small-value systs. that settle more quickly than traditional ACH systs.

Question 23

Facts unique to ACH transactions

Answer 23

Names for parties involved:

• originating depository FI (ODFI)– not “depository bank”
• receiving depository FI (RDFI)– not “paying bank”

x-border ACH - transactions btwn. countries, accomplished through a “gateway” bank or svc. provider that rcvs. transactions in one country and fwds. to ACH system of another country (e.g. the Fed’s FedGlobal ACH Pmts system)

acct-to-acct xfer - standard option to distribute x-border pmts.

Question 24

Pmt. Card Industry Data Security Standard (PCI DSS)

Answer 24

• WW info security standard; payment-processing orgs prevent fraud through enhanced controls/security
• defined by Pmt Card Industry Security Standards Council
• applies to all orgs that store, process, transmit cardholder info for major CC branded cards

Question 25

Electronic funds transfers (EFT)

Answer 25

pmt. system that involves xfer of value; usually occurs ONLY between FIs

Question 26

Check 21

Answer 26

US legislation that created a new negotiable instrument: Image Replacement Document (IRD)) - paper reproduction of original ck, w/ images of front and back; legal equivalent of original

Question 27

State Administration for Foreign Exchange (SAFE)

Answer 27

org. that manages China's central bank reporting requirements * Resident entities are permitted to hold foreign ccy. bank accts. in and out of China, but residents need SAFE's approval to hold foreign ccy accts. abroad. * Nonresident entities may hold foreign ccy bank acts. in China * Non-residents can hold fully convertible renminbi (RMB) trade settlement accts. in/out of China, but accts. are subject to restrictions and PBC approval * Govt. indirectly controls country's bank by maintaining majority share in each * Foreign banks, if inc. locally, may offer RMB retail products to Chinese residents and are subject to national treatment.

Question 28

Foreign Checks

Answer 28

cks deposited @ a bank in one country, drawn on a bank in another country; normally treated as "collection items" (processed outside normal ck-clearing systs) ## Footnote *Depository bank sends foreign ck to correspondent bank (or foreign branch of the depository bank, if it has one) in the country in which the foreign ck is payable. Correspondent bank processes the foreign ck locally and remits proceeds to the depository bank.*

Question 29

Breakdown of a ck routing number (RTN)

Answer 29

First 4 characters indicate Fed Reserve Bank info: * First 2 digits: Federal Reserve Bank code (00-12 for US banks) * Third and fourth digits: indicate Federal Reserve Office code (second digit indicates availability class, "0" = immediate) *Screenshot = example MICR line of ck image*

Question 30

MICR line: order of items

Answer 30

1. aux. on-us field (usually the ck #) 2. EPC (external proc. code) 3. ABA routing number (includes a Bank ID #) 4. On-us/acct. # 5. Encoded amt. of the ck