Theories and Practices of

International Settlements

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Reference books

2009

2010

2007

Exercises in class
20%

Examination
Final tests In
English 80%

International Settlement
Chapter1: Introduction On
Fundamentals In International
Settlements

Overview
Chapter2: Banks Clearing System
In international Settlements

International Settlement
Chapter3: Financial Instruments
used in International Settlements

Core
part

Chapter4: Mercantile documents

used In International Settlements

Chapter5: International
Settlement Methods

International Settlement
Chapter6: L/G and Stand-by L/C

extension

Chapter7: Financing methods In

International Settlements.

Chapter8: Bank Letters in

International Settlement

Chapter 1 Introduction on
Fundamentals in International
Settlements

Definition

International payments or international settlements are

financial activities conducted among different countries
in which payments are effected or funds are transferred
from one country to another in order to settle accounts,
debts, etc., emerged in the course of political, economic
or cultural contacts among them.
spot payment payment between different
cities international payment.

International Settlement
International trade
visible trade and invisible trade

contents

Financial transactions

Payment between governments

International Settlement
Objectives
safe

quick

convenient

Characteristics of evolution:

cash settlement to transfer settlement and transaction of

documents;
Banks became the center in the international settlement at
the end of 18th century;
From payments under simple price terms to payments
under more complex price terms;

Chapter 1 Introductions on
Fundamentals in International
Settlements

computerization
SFNB,1996, USA;
Entrium Direct Bankers,1990,1998

International Settlement
Mail:
Letter, registered letter, express
delivery letter

Communication
means

Cable or Telex

Network: SWIFT

Chapter 1 Introductions on
Fundamentals in International
Settlements
SWIFT: society for worldwide interbank
financial telecommunications, a computerized
international telecommunications system that,
through standardized formatted messages,
rapidly processes and transmits financial
transactions and information among its
members around the world.

Chapter 1 Introductions on
Fundamentals in International
Settlements

Services provided by SWIFT:

FIN (Financial Application)
IFT (Interbank File Transfer)

Procedures of message flow:

An appropriate SWIFT message type is selected,

prepared, addressed and released by the sender to
the SWIFT network via the banks SWIFT
interface;
The message is then sent to the senders local
SWIFT Regional Processor;

Chapter 1 Introductions on
Fundamentals in International
Settlements

The input Regional Processor forwards the

SWIFT message to a Slice Processor;
If the message is properly formatted, it is sent to
the Receivers local SWIFT Regional Processor;
The output Regional Processor then sends the
message to the receiver.

Chapter 1 Introductions on
Fundamentals in International
Settlements

Types of messages: 10 types

Characteristics of SWIFT:
Quick and cheap;
Secure and reliable;
Standardized forms.

Signatures
Credit
instruments

Mercantile
documents

Chapter 1 Introductions on
Fundamentals in International
Settlements
Classification

of settlement methods

Settlement on
commercial credit
Remittance payment in advance
open account O/A Collection
Settlement on
bank credit letter of
credit L/C bank guarantee

Chapter 1 Introductions on
Fundamentals in International
Settlements

payment in advance: provides greatest security for

the seller and greatest risk for the buyer; requires
that the buyer have a high level of confidence in
the ability and willingness of the seller to deliver
the goods as ordered.
open account, O/A provides the least risk for
the buyer and the greatest risk for the seller.

Chapter 2 Banks Clearing System In

International Settlements

1. Reasons for the establishment of banks clearing

system
objective reasons
subjective reasons
2. components
(1) global business web system
branches
correspondent

bank: a bank having direct connection or friendly

service relations with another bank.

Chapter 2 Banks Clearing System In

International Settlements
Bank letter a sample
Agency agreements: a sample

control documents:
lists of specimen of authorized signatures: for
authentication of the messages, letters, remittances,
letters of credit, etc.
telegraphic test keys: code arrangements that enable the
banks to receive cables from other banks to verify the
authenticity of cables or telexes.
SWIFT authentic key: for authenticating messages
transmitted through SWIFT;
terms and conditions.

Chapter 2 Banks Clearing System In

International Settlements
Services provided by correspondents:
Collecting checks, drafts, and other credit
instruments;
Making loan or investments as agents for their
customer banks;
Making credit investigation of firms that borrow in
the open market;
Providing banks with foreign exchange facilities,
including commercial and travelers checks;
Providing banks with funds/loans in case of need.

Chapter 2 Banks Clearing System

In International Settlements
(2) global foreign exchange transferring
system
nostro account: due from account, the foreign
currency account of a major bank with the foreign
banks abroad to facilitate international payments and
settlements.
Vostro account: due to account, the account held by
a bank on behalf of a correspondent bank.

Chapter 2 Banks Clearing System

In International Settlements
From the point of view of a Chinese bank, a nostro
account is our banks account in the book of an overseas
bank denominated in foreign currency; and a vostro
account is an overseas banks account with our bank
denominated in RMB.

Chapter 2 Banks Clearing System In

International Settlements
funds transferring system in China
Intra-city transfer between different banks;
Intra-bank transfer between different cities;
Inter-bank transfers between different cities.
USD foreign exchange system:
FEDWIRE: a fund transfer system operated
nationwide in the USA by the Federal Reserve
System to transfer funds from one financial
institution to another with an account balance held
with the Fed.

Chapter 2 Banks Clearing System In

International Settlements
Real-time gross settlement system: usually
operated by central banks, in which each payment
order is settled immediately upon its entry into the
system in its entire (gross) amount.

Chapter 2 Banks Clearing System In

International Settlements
Procedures of Fed Wire:
A payer gives an instruction to a bank in which the
payer has an available balance;
The paying bank passes instructions on to the Fed to
move value from the banks reserve balance account
to the reserve balance account of another bank in
which the payee has an account;

Chapter 2 Banks Clearing System In

International Settlements
The Fed credits the reserve account of the payees bank
and debits the reserve account of the payers bank. The
Fed Wire provides a confirmation number to the payer
so that the transaction can be traced;
When a bank receives an incoming wire, the receiving
firm is given notification that value has been received.

Chapter 2 Banks Clearing System In

International Settlements

CHIPS( Clearing House Interbank Payment

System): a netting system operated by the New York
Clearing House Association.
A netting payment system: payment orders debiting
the accounts of participants are collected for a certain time
period, and then at the end of that time the net position is
calculated and cleared for each participant on the basis of the
payment orders sent and received.

Chapter 2 Banks Clearing System In

International Settlements
Advantages of netting payment system:
lower liquidity requirement that banks need in
order to settle payments of a specific value (only
the difference between the value of an individual
banks incoming and outgoing payments is
settled by transferring funds) ;
netting systems are more efficient from the point
of view of the communications and processing
capacity employed.

Chapter 2 Banks Clearing System In

International Settlements
Disadvantages of netting payment
system:
These systems expose participants to a
settlement risk, as they are implicitly giving each
other unsecured credit on the basis of payments
that are not immediately settled in final terms.
Components of CHIPS:
Chips participation (CP) and chips
universal identifier (CH)

Chapter 2 Banks Clearing System In

International Settlements
Procedures of CHIPS (P299):
member banks send instructions to CHIPS
regarding transfers that they wish to make to
other banks in New York City;
At the end of the business day CHIPS reports to
the Federal Reserve Bank of New York the net
amounts to debit and credit at each of CP.

Chapter 2 Banks Clearing System

In International Settlements
Euro foreign exchange system
TARGET: Trans-Europe Automated Real-time Gross

Settlement Express Transfer System, a real-time gross settlement

system for the Euro, which is composed of 15 national RTGS
systems, the ECB payment mechanism and interlinking.
National Real-time Gross Settlement, RTGS: Belgium
(ELLIPS), Germany (ELS), Greece (HERMES), Spain (SLBE),
France (TBF), Ireland (IRIS), Italy (BIREL), Luxembourg
(LIPS), Netherlands (TOP), Austria (ARTIS), Portugal (SPGT),
Finland (BOF); UK (CHAPS), Denmark (DEBES), Sweden
(RIX).

Chapter 2 Banks Clearing System

In International Settlements

EPM ( European Central Bank Payment

Mechanism)
Purposes of TARGET:
to provide the payment procedures necessary for
implementing the ECBs single monetary policy;
to promote sound and efficient payment mechanisms
in euro

Chapter 2 Banks Clearing System

In International Settlements

Foreign exchange accounts with domestic

institutions
Foreign exchange accounts for current account
transactions
(1) foreign exchange working capital of domestic
entities in executing overseas construction and
other services contracts;
(2) foreign exchange overseas receipts and
payments to be made by domestic entities on
behalf of clients involved in overseas business;

Chapter 2 Banks Clearing System In

International Settlements

(3) project funds of enterprises with exportimport license in business of export of

jumbo electronic equipment with total
project funds reaching a specified sum and
duration, or advanced and progress
payments for projects under international
bid;
(4) foreign exchange within an amount
verified by SAFE that is received by
international travel agencies and prepared
by foreign travel agencies;

Chapter 2 Banks Clearing System In

International Settlements

(5) foreign exchange of foreignfunded enterprises within a balance

ceiling verified by SAFE;
(6) foreign exchange expenses of
foreign establishments remitted
from abroad.

Chapter 2 Banks Clearing System In

International Settlements

foreign exchange account for capital account

transactions
(1) external borrowing by domestic entities
and foreign exchange loans of domestic
Chinese-funded financial institutions;
(2) foreign exchange of domestic entities for
repayment of principal of domestic and
external foreign exchange liabilities;

Chapter 2 Banks Clearing System In

International Settlements

(3) foreign exchange of domestic entities

from stock issuance;
(4) capital paid in foreign exchange by
Chinese investors of foreign-funded
enterprises;
(5) foreign exchange remitted by overseas
entities or individuals for establishing a
foreign-funded enterprise.

Chapter 2 Banks Clearing System In

International Settlements

The transactions on foreign exchange owned

by individuals:
(1) Foreign exchange owned by individuals
can be held, deposited in banks or sold to the
designated foreign exchange banks.
(2) Foreign exchange for private trip abroad
may be purchased up to an limit. Individuals
must apply to SAFE for the purchase of
foreign exchange exceeding the limit and
present to the customs office valid documents
for carrying foreign exchange exceeding a
limit.