TYPES OF CLEARING RELATIONSHIP

Owing to differences in the traditions, financial culture and the structure of the banking system in each country, different clearing models have evolved. Normally, these are rather stable en vironments t hat ch ange o nly sl owly. Th e cl earing m ethods involved ca n be distinguished on the basis of the topography and content of counterparty relationships, and on the counterparty relationships themselves.

In-house transactions

In essence, the settlement of customers’ credit transfer and direct debit orders within the same bank is a single accounting transaction. If payment simply requires a transfer between two acco unts, th en, fro m t he bank’s perspective, a tran saction between two liab ility accounts will be neutral with respect t o the balance sheet total, whe reas a tra nsaction between an asset account and a liability account will either increase or decrease the balance sheet total. T he larger a bank, the greate r the nu mber of p ayment tran sactions for its customers it can keep in-house.

Correspondent banking relationships

Payments can also be cleared between commercial banks through a d irect relationship. As part of thi s, one of the commercial banks holds a n account wit h the ot her. T he two banks c orrespond, a nd t he procedures of t his co rrespondence a re determined by t heir relationship, which i s based on eac h bank’s way s o f w orking. In i nternational ba nking relations, the relationship can be e qual and mutual, wherein one bank, which is located in one of the c urrency area s, manage s an acc ount in that c urrency for the othe r ba nk. The other bank, in turn, provides the same service in the currency of th e country where it is located.

Other case s i nvolve a u nilateral co rrespondent banking relationship. He re a l arger, internationally better-known bank acts as the p ayment service provider, mainly to smaller banks. I t ch annels th e payments of sm all banks t o other b anks thr ough its own clear ing relationships.

Standard bilateral clearing relationships

The clearing of payments between two banks does not necessarily require an account to be opened. The banks may refrain from doing so in order to prevent the fragmentation of their own liquidity, or because the m anagement of the m ultilateral relat ionship i nvolves difficult op erational work, or b ecause th ey do no t t rust the coun terparty b ank en ough to

become exposed to it through an account balance. In such a case, the banks can clear their own customers’ payment transactions bilaterally, with cash p ayments taking place on the account of a t hird party bank (usually the central bank). If this system of relationships is based on the generally accepted standards and rules of a country, then bilateral clearing can also be ca rried out efficiently without a central orga nization enga ged in operat ional activities. As a rule, central banks perform interbank settlement based on matching bilateral position reports, which are requested from both parties.

Decentralized multilateral clearing

In addition to the bilateral exchange of messages to be cleared, arran gements can also be made for multilateral settlement in the books of a third party (typically a central bank). If the bilateral clearing positions which exist between the clearing participants are con verted by the settlement counterparty (central bank) into multilateral clearing positions, then the requirement of settlement for coverage will be reduced significantly.

Intra-group clearing

With intra-group clearing, the procedures of data exchange between participating banks, as well as the settlement of their mutual claims and liabilities, are normally arranged by the parent bank. Bank groups can al so b e as sociations f ormed by banks of t he same rank. Generally, such banks enhance t heir cooperation to provide fast pay ment ser vices which meet in ternational stan dards, co mmunicating th e im age of a con solidated bank to customers.

Clearing in clearing systems

With a large number of participants, clearing works the most efficiently on t he basis of multilateral arrangements and consolidated rules. In most cases, a m ultilateral arrangement also requires a central clearing house and its infrastructure. The clearing house can perform a number of functions including message forwarding, the establishment of operating rules for p ayment in struments, th e clearin g of orders, preparations for fi nancial settle ment, activities related to financial risk management, etc. There is no standard definition for the range of clearing house activities, as the functions performed vary according to the clearing house.

Clearing house networks

Clearing houses can ac hieve great er ge ographical c overage by l inking their sy stems. This i s e ntirely ob vious wi thin one c ountry. The nee d for co nnections bet ween cl earing houses in d ifferent coun tries em erged in the 1980s an d 1990s. Such i nitiatives were undertaken, for example, to bridge the clearing systems of t he US and Canada as well as those of the US and Mexico. Recently, European clearing houses set up a network to settle SEPA payments.

Global multicurrency clearing houses

Only a few of the banks in th e world (e.g. the US-headquartered Citibank) have been able to grow large enough to settle b ank transfers for their customers globally in a variety of c urrencies. M ost of t he w orld’s l arge ba nks operate in major fi nancial centres and in select regions. Banks have been facing strong competition from money transfer networks like Western Union, Money gram, etc., and most recentl y from online paym ent syste ms such as PayPal. This has urged banks to voice their need periodically for the development of a m ulticurrency clearing system th at cov ers a larg e area. In the first years of th e new millennium, an attempt was made to creat e such a system, but the WATCH (Worldwide Automated Transact ion C learing H ouse) project p roved to be e xcessive i n sc ope a nd eventually failed to be implemented.