Booklet: Wholesale Payment Systems
Section: Interbank Payment and Messaging Systems
Subsection: Other Clearinghouse, Settlement,
and Messaging Systems
 

 

 

 

 

 

 

NATIONAL SETTLEMENT SERVICE (NSS)
NSS is a multilateral settlement service owned and operated by the Federal Reserve Banks. It allows participants in private clearing arrangements to settle their net obligations with same-day finality using participant’s reserve or clearing account balances maintained at the Federal Reserve Banks. NSS participants include local check clearinghouse associations, automated clearinghouse (ACH) networks, credit card processors, and automated teller machine (ATM) networks.

To use NSS, a settlement agent transmits a settlement file electronically to a Federal Reserve Bank. The file contains a listing of the participants, the settlers (either the participant itself or the participant’s correspondent), and the dollar amount of the debit or credit to be posted to the settler’s account. If validity checks are satisfied, the Federal Reserve Bank accepts the file for processing and sends an acknowledgment to the agent. The Federal Reserve Bank accepts NSS files for processing and settlement between 8:30 a.m. and 5:30 p.m. Eastern Time. If an institution submits files earlier than 8:30 a.m. Eastern Time, they enter a queue for processing beginning at 8:30 a.m. Eastern Time. The NSS checks each debit balance on the settlement file against the account balance and intraday credit available to the settlers. The system may reject debit balances if a settler does not have a sufficient balance or sufficient intraday credit to cover the debit. Once it has posted all debit entries on the settlement file, NSS posts the credit balances. All transactions are final and irrevocable once the NSS posts them. The settlement for a file is complete when all credits have been posted. The NSS then sends an acknowledgment message to the settlement agent.

NSS offers payment finality similar to that of the Fedwire Funds Service and provides an automated mechanism for submitting settlement files to the Federal Reserve Banks. NSS improves operational efficiency and reduces settlement risk to participants by providing settlement finality on settlement day. It also enables the Federal Reserve Banks to manage and limit risk by incorporating risk controls similar to those used in the Fedwire Funds Service. NSS can settle transactions across Federal Reserve Districts or within a single Federal Reserve District.

SOCIETY FOR WORLDWIDE INTERBANK FINANCIAL TELECOMMUNICATION (SWIFT)
International funds transfer operates differently from domestic large-value funds transfer. While the SWIFT operates as a messaging system, transmitting instructions to move funds, the domestic systems discussed above accomplish the actual funds movement.
SWIFT is an industry-owned cooperative, which supplies secure, standardized messaging services and interface software to 7,500 financial institutions in 199 countries. The SWIFT community includes a variety of financial services firms, including banks, broker/dealers, and investment managers, as well as their market infrastructures in payments, securities, treasury, and trade. The SWIFT core application is the FIN (Financial Transaction) application, which provides a store and forward financial messaging service accessed over X.25 network connections.additional information. The system now uses bilateral key security and provides message validation to ensure messages are formatted according to SWIFT standards.

SWIFT messages may be used to transmit payment instructions for both domestic and international financial transactions. Financial institutions generating a high volume of funds transfer activity typically establish direct SWIFT connectivity with their internal, intrabank funds transfer system. The SWIFT network controls the integrity of the messages once properly entered at the point of origination. Thus there is no requirement for the receiver to re-verify payment orders. As a result, payment instructions pass through the system without human intervention unless programmed conditions (e.g., overdraft limit excesses) or error messages occur.

In 2002, SWIFT began migrating its core FIN application from an X.25 network to SWIFTNet, an IP-based network using the Secure Internet Protocol Network (SIPN). The introduction of IP-based technologies, that uses both bilateral keys and public keys, will allow SWIFT to expand its services. Payment-related business solutions currently being developed include cash reporting, bulk payments processing, and securities reporting. To promote the use of SWIFTNet and XML (Extensible Markup Language) based cash reporting tools among major cash clearing institutions and their correspondents, a working group has been set up to design the industry solution, including query/response standards and a rule book. In bulk payments, SWIFT developed a new XML-based message standard that was introduced in 2002.

TELEX-BASED MESSAGING SYSTEMS
Several private telecommunications companies offer worldwide or interconnected services that provide a printed record of each transmitted message. Financial institutions that do not have access to SWIFT use Telex-based proprietary systems. Financial institutions access Telex-based systems via a dial-up or a dedicated line with dedicated printers. Some systems are computer monitored 24 hours a day, seven days a week and are fully redundant with automatic switch over and recovery capability.

Telex systems do not include built-in security features. Financial institutions that use Telex must exchange security codes. Typically, senders number messages sent to another institution to provide better audit controls. The sending institution is responsible for incorporating a test key in all instructions to a receiver to execute a payment order. The receiver is responsible for safekeeping the unique test code keys of each sender and decoding each test message. This function should be clearly separated from the Telex operating area and funds payment function. Presently, only a few institutions employ fully automated interface of Telex with their funds payment systems.

CONTINUOUS LINKED SETTLEMENT (CLS) BANK
CLS Bank is a private sector special purpose bank that uses the CLS system to settle payments associated with a foreign exchange (FX) transaction simultaneously.

CLS is designed to eliminate the risk occurring when each leg of certain FX transactions is settled separately, i.e., the payment is made and the corresponding payment is not received. CLS Bank settles payment instructions in the following currencies: Australian Dollar, Canadian Dollar, Danish Krone, Euro, Japanese Yen, Norwegian Krone, Singapore Dollar, Swedish Krona, Swiss Franc, GB Pound, and U.S. Dollar, and is expected to add more currencies over time.

Customers may join CLS Bank as either a Settlement Member or User Member. Settlement members have accounts with CLS Bank and must sponsor User members that do not have such accounts. Any Settlement member or User member may submit payment instructions for settlement processing, but the sponsoring Settlement member must authorize each instruction a User member submits. Non-members may settle their FX payments through private arrangements with members who will submit the settlement processing instructions to the service. Such members are responsible to CLS Bank as principals with respect to such payment instructions.

Payment instructions are settled under the CLS Bank rules when it debits and credits the relevant Settlement members’ accounts for the amounts involved. This final settlement will only occur within the context of several risk management tests.additional information. If any of these tests are not satisfied, no debits or credits will be made, and the pair of Settlement Eligible Instructions will remain on the settlement processing queue and be retested each time the queue is cycled through. The risk management tests will continue to be applied to all Settlement Eligible Instructions on the settlement processing queue until the applicable currency closing time has passed or all Settlement Eligible Instructions on the settlement processing queue have been settled. CLS Bank does not (i) guarantee the settlement of every payment instruction that is submitted for settlement or (ii) become a counterparty to any FX transaction referenced in a payment instruction that is submitted for settlement. In the event that a member is unable to provide its expected pay-in, other CLS members may be obligated to provide revised pay-in requirements.