Cognizant White Paper
Thinking Through Exotic Currency Payments
Executive Summary Big banks with wide global footprints have
realized this and have started wooing small FI’s
One result of globalization is that financial to meet this requirement. Citibank and
institutions (FI) have clients with business Deutsche Bank, for example, have already rolled
interests spread across the globe. FI’s need to out their products; other banks are
support these clients’ banking requirements, contemplating rolling out similar offerings.
primarily by settling trades by making final
payments. The most common method for the FI
How it Works
to do this is to either have a branch in the said
country or identify a correspondent bank with Top-tier banks have already made big
which it can have a banking relationship and investments in infrastructure to address most
maintain a nostro account. global banking requirements of their clients.
Apart from using this infrastructure to support
In many cases, these payments tend to be ad hoc their clients, these banks can now leverage the
in nature and few and far between. Also, when same infrastructure to support smaller FIs. This
the customer’s operating footprint is spread works as a win-win solution for both the parties.
across the globe, the operation and maintenance
The FI uses the bank’s platform to place a request
of these Nostro accounts create operational
for funds transfer to a beneficiary in a country
issues for FIs related to cost and efficiencies.
where the FI does not have a banking facility.
Given the degree to which FIs worldwide are
Based on the amount of transfer requested and
still seeking cost-cutting measures and
the current market rates, the bank provides the FI
simultaneously increasing revenue to contend with the exchange rate. The FI agrees to the same
with the global financial meltdown, this is a and arranges to pay the equivalent funds in its
significant issue that must be addressed. base currency. Once the deal is booked, the
bank’s treasury then executes a Forex deal in the
FIs require an efficient, cost-effective and market and arranges to send the funds to its own
uniform platform to support the “exotic” branch or correspondent bank in the said
currency payment requirements of their clients country. The money is transferred to the
that eliminates the need to maintain multiple, beneficiary, and an acknowledgement is sent
expensive Nostro accounts. This allows them to back to the bank. The bank then informs the FI
respond swiftly to the changing needs of their regarding the funds transfer, and the deal is
client base while keeping costs under control. completed in the system (see Figures 1 and 2).
Customer A holds account with the FI
Customer A wants the FI to transfer RUB 10000 to
Customer F who holds an account with Bank E
Bank B offers the FI to take care of the RUB 10000
transfer. The FI needs to settle the total cost of the
Customer A transfer in his base currency, e.g. EUR
FI Customer F
Transfer EUR 250,
to cover the RUB 10000 Bank B Transfer
transfer (Providing the solution) RUB 10000
Transfer RUB 10000
Bank C Bank D Bank E
(Sender’s (Receiver’s (Receiver’s Bank)
Correspondent Bank) Correspondent Bank)
FI sends EUR 250 to Bank B, including the credentials of the beneficiary (Customer F),
Bank B buys RUB 10000 in the market (RUB 10000=EUR 250). Through its correspondents,
Bank B transfers the amount to Bank E holding the account for Customer F
Major Process Flow
Transaction entry, file I Payment details available and valid (2)
upload, SWIFT message I Cover from FI received (3)
I FX trade executed (4)
I Input base/cover currency
I Input target amount & CCY
2 SWIFT or the direct
back office connections
to global hub
Secure Execute FX Trade Payment to
Forex Deal Beneficiary
Get Cover from FI
Direct debits, SWIFT messages
or annual cover receipts
FI accepts the rate offered by the bank.
Deal Authorized (4 eye principle).
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The solution described above revolves around I Direct debit using MT101 to corporate
orchestration of the following five major accounts held in other banks.
processes. I Payment is initiated by the FI and received
by the bank in any other mode.
1. Secure Forex Deal: FIs access the application
to enter details for the Forex trade. They: Note: The method to be selected would depend
I Select base currency, target currency and on the Standing Settlement Instructions (SSIs)
target amount. configured for the FI in the given base currency
I View and accept FX rates (confirm the during client on-boarding.
transfer to be performed).
4. Execute FX Trade: Once a Forex deal is
I View deal reference. approved/confirmed by the FI within the sys-
I Confirm and authorize FX deal (4 eye prin- tem (refer to first bullet point), a correspon-
ciple). Authorization must be finalized ding Forex trade is executed by the bank. If
within the stated expiration period. the validity period, set by the bank, has
expired, the deal is off.
After completing the secure Forex deal, the deal
Note: After, and only after, steps 2, 3 and 4
is confirmed and authorized. The system then
have been completed successfully, step 5 will
provides a reference number (for reference and
reconciliation purposes). The bank accepts the
legal obligation to transfer the exotic currency 5. Process Beneficiary Payments: Once the
amount. The FI accepts the legal obligation to corresponding cover amount in the preferred
provide the cover in the agreed upon currency. currency is secured within the system, the
Forex trade is successfully executed, and a
The system then starts processing “payment
valid/correct payment instruction for the
instructions,” “deal execution” and “cover
required payment is available, the final
processing” in parallel.
payment toward the beneficiary is processed.
The payment is sent in MT103 format using
2. Send Payment Details: Once the deal is
the existing payment system(s).
accepted by the FI, the FI needs to provide
payment instructions. The payment informa-
tion should contain originating customer Benefits
information, beneficiary information, corre- I A simple, interactive Web-based system, with
spondent bank details, etc. The details should
enhanced user experience to execute Forex
be sent along with the deal reference by one
trades in exotic currencies.
of the following mechanisms:
I Customers can view Forex rates online before
I Online entry
executing the deal. It allows the FI’s client to
I File upload accept the Forex rate and determine the
I SWIFT counter value in the base currency before
executing the payment. The FI can inform its
3. Receive Cover from FI: Once the Forex deal is client about the exact cost of the transfer in
approved by the FI, the system starts process- the base currency and debit the firm’s
ing to receive the cover. It must be noted that account immediately.
the cover amount for the authorized deal I FIs can make payments in “n” number of cur-
would be processed in the base currency as rencies without maintaining any Nostro
selected in the deal. accounts, resulting in reduced cost and
The banks usually look at processing the administration.
cover amount in the following ways: I Customer can select the mode of sending pay-
I Direct debit to an account, owned by the FI ment instructions, mode of sending cover, etc.
within the bank. I An option to cancel/reverse the trade.
I Direct debit using MT202 (Reverse) or
MT204 to an FI’s Nostro account held in
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