Payment Settlement Methods


 

What is Settlement?

 

  • Payment of the interbank obligations arising from the respective debit and credit positions resulting from the clearing.
  • The completion of a transaction or of processing with the aim of discharging participants’ obligations through the transfer of funds.
  • Net settlement: settlement of transfer orders on a net basis.
  • Gross settlement: settlement of transfer orders one by one.
  • Internal settlement: settlement that is effected through transfers of funds on the books of a bank, as opposed to settlement via an interbank funds transfer system or a central system.
  • Domestic settlement: settlement which takes place in the country (or currency area) in which both parties to the transaction are located.
  • Cross-border settlement: settlement that takes place in a country (or currency area) in which one or both parties to the transaction are not located.

Settlement Methods:

  • Book Transfer
  • Correspondent Banking (Nostro / Vostro)
  • Cover Method
  • Clearing and Settlement Method (CSM)
  • Serial Method

Settlement Method – Book Transfer:

  • This is an example of Internal Settlement.
  • When Debit Party and Credit Party have accounts in the same financial institution.
  • There is no payment message going out of the bank.
  • Only accounting entries are made to move money from Debit Party account to Credit Party account.

Book_Transfer

Settlement Method – Correspondent Banking (Nostro/Vostro):

  • A bank holds accounts at one (or more) other correspondent banks for each (main) currency it settles payments in.
  • The bank that owns a correspondent account at another bank refers to such account as a Nostro account (“our account at your bank”). The correspondent bank will refer to the same account as a Vostro account (“your account with us”).
  • These correspondent banks handle payments for the banks they service an account for.
  • Relationships are typically reciprocal.

Correspondent_Banking_(NostroVostro) Book_Transfer

Settlement Method – CSM (Clearing and Settlement Method):

  • Banks hold NOSTRO account with the Clearing house.
  • Clearing System/house does the settlement by debiting one bank’s account and crediting other’s.
  • Mostly used for domestic clearing and settlement e.g. SEPA.

CSM_(Clearing and Settlement Method)

Settlement Method – Cover:

  • “Typical” European method.
  • Used for scenarios where debit party agent and credit party agent do not have Nostro/Vostro relationship but they can be reached over SWIFT network.
  • A Cover (typically MT202-COV/MT910) is sent via OPF Bank’s correspondents towards the credit party agent to settle the payment.
  • An Announcement (typically MT103) is sent as close as possible, to the credit party agent, to inform the credit party agent that funds will arrive.

Settlement_Method_Cover

Settlement Method – Serial:

  • “Typical” US method.
  • Mostly used for scenarios where debit party and credit party agent do not have Nostro/Vostro relationship and they are NOT connected via SWIFT network.
  • Payment (typically MT103) sent via the OPF Bank’s correspondents towards the credit party agent and settled based on the message.
  • No announcement is sent in this case.

Settlement_Method_Serial


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