Lesson 3 -summer 2014
Methods of the international settlement through banks I.
i. Nostro, vostro accounts
ii. SWIFT
Methods of international settlement through banks II.
iii. Value dating
iv. Back office – tasks, activities
Nostro and vostro
(from Italian, nostro and vostro; English, 'ours' and 'yours') are accounting terms
used to distinguish an account held for another entity from an account another
entity holds. The entities in question are almost always, but need not be, banks.
It helps to recall that the term account refers to a record of transactions, whether
current, past or future, and whether in money, or shares, or other countable
commodities. Originally a bank account just meant the record kept by a banker of the
money they were holding on behalf of a customer, and how that changed as the
customer made deposits and withdrawals (the money itself probably being in the form
of specie, such as gold and silver coin).
The terms nostro and vostro remove the potential ambiguity when referring to these
two separate accounts of the same balance and set of transactions. Speaking from the
bank's point-of-view:
A nostro is our account of our money, held by you
A vostro is your account of your money, held by us
A bank counts a nostro account with a debit balance as a cash asset in its balance
sheet. Conversely, a vostro account with a credit balance (i.e. a deposit) is a liability,
and a vostro with a debit balance (a loan) is an asset. Thus in many banks a credit
entry on an account ("CR") is regarded as negative movement, and a debit ("DR") is
positive - the reverse of usual commercial accounting conventions.
With the advent of computerised accounting, nostros and vostros just need to have
opposite signs within any one bank's accounting system; that is, if a nostro in credit
has a positive sign, then a vostro in credit must have a negative sign. This allows for a
reconciliation by summing all accounts to zero (a trial balance) - the basic premise of
double-entry bookkeeping.
Typical usage
Nostro accounts are mostly commonly used for currency settlement, where a bank or
other financial institution needs to hold balances in a currency other than its home
accounting unit.
There is also the notion of a loro account ("theirs"), which is a record of an account
held by a second bank on behalf of a third party; that is, my record of their account
with you. In practice this is rarely used, the main exception being complex syndicated
financing.
In the same style as above:
A loro is our account of their money, held by you
SWIFT
The Society for Worldwide Interbank Financial Telecommunication (SWIFT)
provides a network that enables financial institutions worldwide to send and receive
information about financial transactions in a secure, standardized and reliable
environment. Swift also sells software and services to financial institutions, much of it
for use on the SWIFTNet Network, and ISO 9362. Business Identifier Codes (BICs)
are popularly known as "SWIFT codes".
The majority of international interbank messages use the SWIFT network. As of
September 2010, SWIFT linked more than 9,000 financial institutions in 209
countries and territories, who were exchanging an average of over 15 million
messages per day (compared to an average of 2.4 million daily messages in 1995).
SWIFT transports financial messages in a highly secure way but does not hold
accounts for its members and does not perform any form of clearing or settlement.
SWIFT does not facilitate funds transfer; rather, it sends payment orders, which must
be settled by correspondent accounts that the institutions have with each other. Each
financial institution, to exchange banking transactions, must have a banking
relationship by either being a bank or affiliating itself with one (or more) so as to
enjoy those particular business features.
SWIFT is a cooperative society under Belgian law and it is owned by its member
financial institutions. It has offices around the world. SWIFT headquarters, designed
by Ricardo Bofill Taller de Arquitectura are in La Hulpe, Belgium, near Brussels.
SWIFT has become the industry standard for syntax in financial messages. Messages
formatted to SWIFT standards can be read by, and processed by, many well-known
financial processing systems, whether or not the message traveled over the SWIFT
network. SWIFT cooperates with international organizations for defining standards
for message format and content. SWIFT is also Registration authority (RA) for the
following ISO standards:
ISO 9362: 1994 Banking—Banking telecommunication messages—Bank
identifier codes
ISO 10383: 2003 Securities and related financial instruments—Codes for
exchanges and market identification (MIC)
ISO 13616: 2003 IBAN Registry
ISO 15022: 1999 Securities—Scheme for messages (Data Field
Dictionary) (replaces ISO 7775)
ISO 20022-1: 2004 and ISO 20022-2:2007 Financial services—UNIversal
Financial Industry message scheme
Architecture
SWIFT provides a centralized store-and-forward mechanism, with some transaction
management. For bank A to send a message to bank B with a copy or authorization
with institution C, it formats the message according to standard and securely sends it
to SWIFT. SWIFT guarantees its secure and reliable delivery to B after the
appropriate action by C. SWIFT guarantees are based primarily on high redundancy
of hardware, software, and people.
Products and interfaces
SWIFT means several things in the financial world:
1. a secure network for transmitting messages between financial
institutions;
2. a set of syntax standards for financial messages (for transmission over
SWIFTNet or any other network)
3. a set of connection software and services, allowing financial institutions
to transmit messages over SWIFT network.
US control over transactions within the European Union
On 26 February 2012 the Danish newspaper Berlingske reported that US authorities
evidently have sufficient control over SWIFT to seize money being transferred
between two EU countries (Denmark and Germany), since they have seized around
US$26,000 which were being transferred from a Danish businessman to a German
bank. The money was a payment for a batch of Cuban cigars previously imported to
Germany by a German supplier. As justification for the seizure, the U.S. Treasury has
stated that the Danish businessman had violated the United States embargo against
Cuba
VALUE DATE
Value date in finance is the date when the value of an asset that fluctuates in price is
determined. The value date is used when there is a possibility for discrepancies due to
differences in the timing of asset valuation. It usually applies to forward currency
contracts, options and other derivatives, interest payable or receivable.
In accounting, value date is the date when the entry to an account is considered
effective.
In banking, value date is the delivery date of funds traded. For spot transactions it is
the future date on which the trade is settled. In the case of a spot foreign exchange
trade it is normally two days after a transaction is agreed upon.
Settlement Date is a securities industry term describing the date on which a trade
(bonds, equities, foreign exchange, commodities, etc.) settles. That is, the actual day
on which transfer of cash or assets is completed.
It is not necessarily the same as value date (when the settlement amount is calculated).
For instance, the back office may require a few days to make payment. This gap
(between valuation and settlement) is often written into the financial contract,
although the actual settlement date can also differ from that originally specified
because of problems or errors.
It is occasionally referred to as Contractual Settlement Date.
Settlement risk
is the risk that a counterparty does not deliver a security or its value in cash as per
agreement when the security was traded after the other counterparty or counterparties
have already delivered security or cash value as per the trade agreement.
BACK OFFICE
A back office is a part of most corporations where tasks dedicated to running the
company itself take place. The term "back office" comes from the building layout of
early companies where the front office would contain the sales and other customerfacing staff and the back office would be those manufacturing or developing the
products or involved in administration but without being seen by customers. Although
the operations of a back office are seldom prominent, they are a major contributor to a
business.
Back offices may be located somewhere other than company headquarters. Many are
in areas and countries with cheaper rent and lower labor costs. Some office parks such
as MetroTech Center provide back offices for tenants whose front offices are in more
expensive neighborhoods. Back office functions can be outsourced to consultants and
contractors, including ones in other countries.
Investment firms
In investment firms, the back office includes the administrative functions that support
the trading of securities, including record keeping, trade confirmation, trade
settlement, and regulatory compliance.
Sales
In sales, the back office typically plays a key role internally, providing support to the
sales force for administrative duties such as legal, finance, marketing, order
management, operations support, as well as customer facing roles typically positioned
to include functions that support customer order fulfillment and duties involved with
readying customer-support call centers.
Case study
- company has domicil in CZ /accounting in CZK/
- company just got the capital in amount 26 mio USD
- your monthly cash flow is :
- income in 0,5 mio USD
- costs are mainly in CZK /20 mio CZK/
- monthly you need 200k GBP
- with 80% probability you will acquire another
company in 2 years /costs +- 5 mio USD/
- for first year the stability of exchange rate
USD/CZK at level 20 CZK is expected
- 3 months depo rate on USD is 0,2, CZK is 1,5%
- position has to hedged at min. for 6 months
ahead
- your credit line with bank is "unlimited"
- other market data are "real-ones"