Cognizant White Paper

Thinking Through Exotic Currency Payments

   Executive Summary                                ...
Business Flow
                                     Customer A holds account with the FI
The solution described above revolves around             I   Direct debit using MT101 to corporate
orchestration of the fo...
About the Author
            Shankar Ghosh is an associate consultant within the Cognizant Business Consulting, Wholesale ...
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Thinking Through Exotic Currency Payments


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When financial institutions work with global customers, they need a simple, interactive Web-based system to execute Forex trades in exotic currencies.

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Thinking Through Exotic Currency Payments

  1. 1. 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). white paper
  2. 2. Business Flow 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 Figure 1 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) Online process I Input base/cover currency Send Payment I Input target amount & CCY Information 2 SWIFT or the direct back office connections to global hub Send Secure Execute FX Trade Payment to Forex Deal Beneficiary 3 1 5 Get Cover from FI 4 Direct debits, SWIFT messages or annual cover receipts FI accepts the rate offered by the bank. Deal Authorized (4 eye principle). Figure 2 2 white paper
  3. 3. 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 be executed. 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 another bank. white paper 3
  4. 4. About the Author Shankar Ghosh is an associate consultant within the Cognizant Business Consulting, Wholesale Banking Group. His areas of expertise include Payments & Cash Management, Financial Messaging and Business Lending. Shankar has more than eight years of experience in IT and Banking. He is based in Amsterdam, where he works on an engagement in the payments area for a leading UK bank . He can be reached at About Cognizant Cognizant (Nasdaq: CTSH) is a leading provider of information technology, consulting, and business process outsourcing services. Cognizant’s single-minded passion is to dedicate our global technology and innovation know-how, our industry expertise and worldwide resources to working together with clients to make their businesses stronger. With over 50 global delivery centers and approximately 78,400 employees as of December 31, 2009, we combine a unique onsite/offshore delivery model infused by a distinct culture of customer satisfaction. A member of the NASDAQ-100 Index and S&P 500 Index, Cognizant is a Forbes Global 2000 company and a member of the Fortune 1000 and is ranked among the top information technology companies in BusinessWeek's Hot Growth and Top 50 Performers listings. Start Today For more information on how to drive your business results with Cognizant, contact us at or visit our website at World Headquarters European Headquarters India Operations Headquarters 500 Frank W. Burr Blvd. Haymarket House #5/535, Old Mahabalipuram Road Teaneck, NJ 07666 USA 28-29 Haymarket Okkiyam Pettai, Thoraipakkam Phone: +1 201 801 0233 London SW1Y 4SP UK Chennai, 600 096 India Fax: +1 201 801 0243 Phone: +44 (0) 20 7321 4888 Phone: +91 (0) 44 4209 6000 Toll Free: +1 888 937 3277 Fax: +44 (0) 20 7321 4890 Fax: +91 (0) 44 4209 6060 Email: Email: Email: © Copyright 2009, Cognizant. All rights reserved. No part of this document may be reproduced, stored in a retrieval system, transmitted in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the express written permission from Cognizant. The information contained herein is subject to change without notice. All other trademarks mentioned herein are the property of their respective owners.