Analysis of the International Forex Clearing System

Clearing and clearing systems are words that investors often hear, so what exactly are international Forex clearing and systems? Let’s introduce them to you below.

So what is liquidation? There are different explanations in different places, and various schools and documents have different interpretations of liquidation. Generally speaking, liquidation in the retail market will be understood as looking for liquidity, that is, looking for quotation sources and transmitting orders.

01 Sorting, clearing and settlement

So, what is the difference between clearing and settlement?

According to the "China UnionPay Bank Card Network Joint Technical Specifications V2.1 Part 0 Terms and Definitions":

Clearing: The process of classifying and summarizing transaction data according to institutions and transaction types, and calculating the settlement amount.

Settlement: The process of netting and submitting the transaction data based on the clearing results and completing the fund transfer.

Settlement of Accounts: refers to the entire process of completing fund transfers between customer accounts.

02 What is a clearing system?

Clearing System, also known as Payment System System) is a financial arrangement that is composed of a termination institution that provides payment and settlement services and professional technical means to realize the transmission of payment instructions and fund settlement, and is used to realize the settlement of claims and debts and the transfer of funds.

Since the claims and debts generated by economic activities must be paid off through the transfer of currency ownership, the task of the payment system is to quickly and safely transfer currency ownership among participants in economic activities. The payment system is of special importance to a country.

03 Classification of clearing systems

1. Classification according to different identities of operators:

There are three main types of clearing systems divided according to the identity of the operator:

a. Owned and operated by central banks, such as the U.S. Federal Reserve System, Bank of Japan, Deutsche Bundesbank, etc.

b. Owned and operated by private clearing institutions, such as the CHIPS system of the New York Clearing House Association, the CHAPS system of the United Kingdom, the all-bank data communication system of the Tokyo Bankers Association of Japan, etc.

c. In-bank payment systems owned and operated by each bank. For example, my country's four major state-owned commercial banks have all opened their own electronic fund transfer systems.

2. According to service objects and single business payment finance, it can be divided into: large-amount payment system and small-amount payment system

a. The large-value payment system mainly handles the repayment of claims and debts and fund transfers caused by inter-bank transactions, securities and financial derivatives, gold and Forex transactions, money market transactions and cross-border transactions.

b. The micropayment system is mainly a payment system that is closely integrated with social economy and consumer activities, is widely distributed, and has many types.

3. Divided according to the regional scope of system services: domestic payment system and international payment system

a. The domestic payment system handles the payment and settlement of local currency funds caused by claims and debts generated by various economic and consumer activities within a country.

b. International payment system, which handles the settlement of claims and debts and fund transfers arising from various international transactions, such as CHIPS and CHAPS.

04 Electronic payment and clearing system

Electronic payment (Electronic Payment) is a system for conducting financial transactions through computers and electronic communication devices. It does not require any physical form of mark and is a purely electronic form of currency.

The most important electronic payment innovation at present is the application of point-in-point funds transfer system, that is, EFT system. The EFT system was created in the 1960s. It is an electronic system for data communication between banks and customers. Banks use their own networks to convert electronic funds. They are used to transmit electronic funds and related data and information related to financial transactions, and provide payment services to customers.

The development of electronic payment systems is mainly divided into five stages: the first stage, the internal electronic management system of the bank is connected with the electronic systems of other financial institutions, such as using computers to process currency transfers, settlements and other services between banks; the second stage, the fund transfer between bank computers and computers of other institutions; the third stage, through network terminals. Provide various self-service banking services to customers, such as ATM systems; the fourth stage, use network technology to provide automatic deduction services for the general public when making purchases at merchants, such as POS systems; the fifth stage, the development of online payment methods, electronic money can be directly transferred and settled through the Internet anytime and anywhere, forming an e-commerce form.

05 International liquidation organization

1.Society for Worldwide Interbank Financial Telecommunication.

Society for Worldwide Interbank Financial Telecommunication (Society for Worldwide International Financial Telecommunications (SWIFT) was established in May 1973 and is a non-profit cooperative organization among international banks. It is headquartered in Brussels, Belgium, and has established exchange centers in Amsterdam, the Netherlands, and New York, the United States, to provide fast, accurate and excellent services for international financial business.

The Global Banking and Finance Association is owned by members. The prerequisite for becoming a member is to hold a banking license. Members own shares of the association and have the right to vote. All members must pay initial membership fees and annual fees.

Its founding members were 239 major banks in 15 countries in Europe and North America. By June 2007, SWIFT's services had spread to 200 countries and connected to more than 11, 000 financial institutions.

SWIFT's goal is to provide its members with low-cost and efficient customs clearance services in all financial markets to meet the needs of member financial institutions and their end customers.

2. Bank for International Settlements

Bank for International Settlements (BIS) ) was incorporated in Basel, Switzerland in 1930 and is the oldest international financial institution in the world.

There are 29 representative institutions participating in the BIS General Assembly, of which 24 are central banks of European countries and the other 5 are members from other continents. So far, there are more than 80 central banks with deposits in BIS. my country’s central bank established business ties with BIS in 1984 and has Forex and gold deposits in the bank.

As an international organization, the main role of the Bank for International Settlements is to promote international monetary and financial cooperation and provide banking services to central banks.

3. New York Clearing House Interbank Payment System (CHIPS)

In 1970, the New York Clearing House Association (NYCHA) established CHIPS to replace the original paper payment settlement method and provide clearing and settlement services for U.S. dollar payments between enterprises and banks.

In 2001, CHIPS adopted a new system and began the transition to a real-time netting system.

In 2007, it was known as one of the world's largest private payment and clearing systems. It mainly clears cross-border U.S. dollar transactions. It has a safe, reliable, and efficient payment system and handles about 95% of the world's international U.S. dollar transactions. The average daily transaction volume exceeds 340, 000 transactions, with an amount of approximately 1.9 trillion U.S. dollars.

At present, more than 90% of the world's Forex transactions are completed through CHIPS, which can be locked. CHIPS is a bridge for the settlement of international trade funds and a channel for European dollar suppliers to conduct transactions.