Cross Border/Offshore Payment and Settlement Systems

Cross Border/Offshore Payment and Settlement Systems

 

There are several ways by which international payment transactions are done around the globe.

Main mechanisms for payment and settlements are as follows:

  • Correspondent Banks Network – loosely coupled network of private banks.
  • Clearing Bank Model -using international clearing banks – China’s RMB Clearing Banks
  • Cross border RTGS – used mainly in regional economic and monetary blocs such as EMU – TARGET2.
  • Clearing House model – Offshore Payment, Clearing, and settlements through systems such CHIPS in USA and CIPS in China.

 

Central Banks also have created a Currency Swap network for providing liquidity in international financial markets.

Recently, there has been a decline in correspondent banks network transactions.  Many global banks have withdrawn correspondent relationships with other banks due to increased regulations.

There is also a newer trend in using ACH networks for international transactions.  SEPA in Europe and FedGlobal ACH in USA are two examples.

SWIFT and CLS bank also play a critical role in international payments.

There is also very large OTC FX market in which 5.1 trillion USD per day are traded.  I am not yet sure about the clearing and settlements of these transactions.

There are some newer technology platforms which have started providing Global payment services.  Earthport in UK and Ripple Labs are two such examples.

 

Large Value Transfer Methods (B2B Transfers)

  • Cross border, Same Currency – TARGET2, SEPA, EURO1
  • Offshore, currency specific – CHIPS for USD, CIPS for RMB
  • Cross border, multiple currencies – SWIFT, CLS
  • Offshore Clearing Houses – Hong Kong, Singapore, London, Japan, Frankfurt, USA
  • OTC FX markets (FX SWAPS, FX SPOT, FX Forward, FX Futures)
  • Network of Correspondent Banks
  • Network of Clearing Houses
  • CB FX Swap Network
  • Intra bank payment networks: Multinational Banks (Branch or subsidiary in a foreign country)
  • FEDGlobal ACH
  • Hawala System

 

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Regional Blocs (where new RTGS are being developed)

  • East Africa Community (EAC)
  • West African Monetary Zone (WAMZ)
  • Common Market for East and South Africa (COMESA)
  • South African Development Community (SADC) – SIRESS RTGS
  • Automated Clearing House in Common Monetary Area (CMA)
  • ASEAN  AEC ?
  • South Asian (Asian Clearing Union) ?

 

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LVPS used for International Payments

  • EURO1 ( Pan Europe)
  • euroSIC (Frankfurt) used for Euro transactions between countries in EU but not in EMU.
  • FXYCS (Japan)
  • EAF (Germany)
  • SIC (Switzerland)
  • CHIPS ( USA)
  • CHAPS (UK)
  • LVTS (Canada)
  • CIPS (China)

 

 

I am not sure how many of these networks are currently operational since countries in EU have migrated to TARGET2 since 2008.

G-LVTN (Global Large Value Transfer Networks)

  • ELLIPS (Belgium)
  • IIPS (Canada)
  • SNP (France)
  • EAF2 (Germany)
  • Ingrosso (Italy)
  • Top (Netherland)
  • RIX (Sweden)
  • SIC (Switzerland)
  • CHAPS (UK)
  • CHIPS (USA)
  • FXYCS (Japan)

 

There are several newer solutions for international payment and money remittances at retail level.  B2C and C2C international money transfers.  They are listed here along with old solutions but are not discussed in this post.

New and Old Solutions (Retail B2C, C2C)

  • Block chain
  • Ripple
  • Earthport
  • Transferwise
  • Xoom (A Paypal service)
  • Paypal
  • Bitcoins
  • Western Union (Old)
  • MoneyGram (Old)
  • Money2India/ICICI Bank
  • State Bank of India
  • Global ACH with FX Conversion
  • International ACH Transactions

 

 

China CIPS

One of the main reasons for this discrepancy is the inadequacy of the infrastructure for cross-border renminbi payments. Cross-border payments are currently made via a patchwork of clearing hubs and correspondent banks. These payments are hindered by complicated routing procedures, the need to maintain multiple foreign correspondent accounts, liquidity shortages in some offshore RMB centers, different hours of operations between clearing centers, a lack of common standards between international and Chinese domestic payment systems, and China’s capital controls.

Despite these hurdles, the use of the renminbi as an international payments currency has continued to grow rapidly. In the first half of 2015, there were more than RMB 5.7 trillion (USD 866.7 billion) worth of payments made to and from China using the renminbi. Currently, around a third of payments between China and the Asia Pacific region are conducted using renminbi. These numbers are projected to increase substantially over the coming years due to the desirability for Chinese businesses to use their own currency for trade transactions.

The increased use of the renminbi has led to around RMB1.5 trillion (USD 231 billion) in offshore renminbi deposits, with the largest amounts in Hong Kong, Taiwan and Singapore, respectively. As more renminbi accumulate outside of China, investors will increase their demands for channels to repatriate funds back onshore.

China’s Cross-border Inter-bank Payment System (CIPS) seeks to address many of the existing problems facing cross-border renminbi payments. CIPS provides one-point entry by participants and a central location for clearing renminbi payments It allows participation by both onshore and offshore banks and provides direct access to China National Advanced Payment System (CNAPS). These features reduce the need for banks to navigate complicated payment pathways via offshore clearing hubs or through correspondent banks. This should result in faster payment processing and reduced costs for cross-border payments.

CIPS is a real time gross settlement system, meaning that banks settle payments immediately between each other on a gross rather than a net basis. This reduces credit risks that can arise in systems where payments are netted before settlement.

Payment messages sent within CIPS are written in both English and Chinese. This eliminates the necessity of translating messages into Chinese before they can be transmitted to CNAPS. CIPS utilizes the ISO20022 messaging standard, a widely used international messaging scheme for cash, securities, trade and foreign exchange transactions. CIPS will also utilize SWIFT bank identifier codes, rather than CNAPS clearing codes. These factors will allow CIPS to smoothly process payments flowing between offshore banks using SWIFT and mainland banks using CNAPS. As a result, cross-border payments made through CIPS should be able to achieve straight through processing.

CIPS operating hours will extend from 9:00am to 8:00pm Shanghai-time. This allows the system to overlap with business hours in Europe, Africa, Oceania, and Asia. Banks within these jurisdictions will be able to settle renminbi transactions during their business day. Though North and South America are not currently covered, the People’s Bank of China (PBoC) has stated that an expansion of CIPS’ operating hours is possible.

As of the launch in October 2015, CIPS had 19 direct participants and 176 indirect participants. The initial direct members of CIPS include 11 Chinese banks and the Chinese subsidiaries of 8 foreign banks. There is currently only one American bank that is a direct participant in the system, Citibank. Of the indirect participants, 38 were Chinese banks and 138 are foreign banks.

Details on plans for the future development of CIPS are sparse. Chinese officials have spoken of a Phase II for CIPS that will improve liquidity management and the efficiency of cross-border clearing and settlement. PBoC officials have also stated that Phase II will include longer operating hours, support for securities settlement and central counterparties.

The creation of CIPS is an important milestone on the renminbi’s road to becoming a major global currency. It has the potential to significantly improve the efficiency of cross-border payment transactions and increase liquidity in the offshore market. CIPS provides a more direct pathway for processing transactions, improving speed and lowering fees. Liquidity in the offshore renminbi market will be improved due to the large number of participating financial institutions and the direct link the system has with CNAPS.

The fact that the renminbi has progressed so quickly despite the underlying deficiencies in the payments infrastructure is a testament to the global demand for the currency. CIPS seeks to rectify these deficiencies and is likely to play a critical role in the renminbi’s future growth as an international payments currency.

 

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USA  CHIPS

The Clearing House Interbank Payments System (CHIPS) is a bank-owned, privately operated electronic payments system.

CHIPS is both a customer and a competitor of the Federal Reserve’s Fedwire service.

The average daily value of CHIPS transactions is about $1.2 trillion a day.

The Clearing House Interbank Payments System (CHIPS) is an electronic payments system that transfers funds and settles transactions in U.S. dollars. CHIPS enables banks to transfer and settle international payments more quickly by replacing official bank checks with electronic bookkeeping entries. As of January 2002, CHIPS had 59 members, including large U.S. banks and U.S. branches of foreign banks.

History

The New York Clearing House Association, a group of the largest New York City commercial banks, organized CHIPS in 1970 for eight of its members with Federal Reserve System membership. Participation in CHIPS expanded gradually in the 1970s and 1980s to include other commercial banks, Edge corporations, United States agencies and branches of foreign banks, and other financial institutions.
Until 1981, final settlement, or the actual movement of balances at the Federal Reserve, occurred on the morning after a transfer. Sharply rising settlement volumes raised concerns that next-day settlement exposed funds unduly to various overnight and over-weekend risks. In August 1981, the Federal Reserve agreed to provide same-day settlement to CHIPS participants through Fedwire, the Fed’s electronic funds and securities transfer network.

The number of CHIPS members has fallen from about 140 in the late 1980s, mainly because of consolidations in the banking industry. Membership might have fallen even more sharply if CHIPS had not acted in 1998 to eliminate a requirement that members maintain an office in New York City.

CHIPS is governed by a ten-member board consisting of senior officers of large banks that establishes rules and fees and admits and reevaluates participants. CHIPS handles about 240,000 transactions a day with a total dollar value of about $1.2 trillion. Historically, CHIPS specialized in settling the dollar portion of foreign exchange transactions, and CHIPS estimates that it handles 95 percent of all U.S. dollar payments moving between countries. However, the CHIPS focus has shifted to domestic business since CHIPS introduced intraday settlement in January 2001.

Intraday Settlement

Until January 2001, CHIPS conducted all of its settling at the end of the business day. Now, however, CHIPS provides intraday payment finality through a real-time system. CHIPS settles small payments, which can be accommodated by the banks’ available balances, individually. Other payments are netted bilaterally (e.g., when Bank A has to pay $500 million to Bank B, and Bank B has to pay $500 million to Bank A), without any actual movement of funds between CHIPS participants.

Other payments are netted multilaterally. Suppose Bank A must pay $500 million to Bank B, and Bank A is also expecting to receive $500 million from Bank C. Without netting, Bank A would send $500 million to Bank B, and it would thus experience a decline in its available cash while it was awaiting the payment from Bank C.

Using the CHIPS netting system, however, Bank A submits its $500 million payment for Bank B to a payments queue, where it waits until Bank C’s offsetting payment is received. The effect of matching and netting these payments is that Bank A’s cash position is simultaneously reduced by its payment to Bank B and increased by receipt of its payment from Bank C. The overall effect on Bank A’s cash position is thus zero.
Payments for which no match can be found are not made until the end of the day, but each payment is final as soon as it is made. To facilitate the working of the intraday netting system, each participant pre-funds its CHIPS account by depositing a certain amount between 12:30 and 9:00 a.m. The size of this “security deposit,” which is recalculated weekly, is set by CHIPS based on the number and size of the bank’s recent CHIPS transactions, and none of it can be withdrawn during the day. At the end of the day, CHIPS uses these deposits to settle any still-unsettled transactions. Any participant that has a negative closing position at the end of the day (that is, it owes more than what it has in its security deposit) has 30 minutes to make up the difference. The 30-minute period is referred to as the final prefunding period. If any banks do not meet their final prefunding requirement, CHIPS settles as many of the remaining payments as possible with funds that are in the system, and any payments still unsettled must be settled outside of CHIPS.

Banks that have positive closing positions at the end of the day receive the amounts that they are due in the form of Fedwire payments. Because the ultimate CHIPS settlements are provided by Fedwire, CHIPS is a customer, as well as a competitor, of Fedwire. The vast majority of CHIPS members are also Fedwire participants, and the daily value of CHIPS transfers is about 80 percent of Fedwire’s non-securities transfers.

CHIPS has recently added electronic data interchange (EDI) capability to its payment message format. EDI allows participants to transmit business information (such as the purpose of a payment) along with their electronic funds transfers.

 

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USA FedGlobal ACH Payments

To facilitate this mapping process, the Federal Reserve Bank of Atlanta joined with U.S. and foreign depository institutions, international clearing and settlement service providers, and other interested parties to form the International Payments Framework Association (IPFA). The IPFA is a nonprofit membership association comprising 29 members representing Brazil, Canada, Europe, Japan, South Africa, the United Kingdom, and the United States whose purpose is to create a framework for bridging national formats for non-urgent international credit transfers. IPFA establishes rules, standards, and operating procedures for the exchange of these payments. The first effort by IPFA was to create rules that would facilitate a bridge between the IAT format for ACH credit transfers and the payment format, ISO 20022, which supports the several retail networks within the single euro payments area (also known as SEPA), under the SEPA credit transfer scheme. The next step underway is to leverage the framework created for the United States and SEPA in order to add other countries—such as Brazil, Canada, and South Africa—that want to exchange payments with the United States or SEPA ACH networks.

The Reserve Banks, through FedGlobal, launched their first commercial international ACH service with Canada in 1999.43 The service began as a pilot program for outbound commercial ACH transfers from the United States to Canada and became a production service in December 2001. Subsequent to the Canadian service, the Reserve Banks launched individual services to Europe,Mexico, Panama, and Latin America, covering 34 countries in total.44 In 2010, the Reserve Banks processed 1.3 million international ACH transfers—accounting for about 20 percent of the total volume of international payments being cleared and settled through the U.S. ACH network.45

The Reserve Banks offer FedGlobal account-to-account services to Canada, Mexico, Panama, and 22 countries in Europe. The Reserve Banks offer FedGlobal A2R services to Argentina, Brazil, Colombia, Costa Rica, El Salvador, Guatemala, Honduras, Mexico, Nicaragua, Peru, and Uruguay.

 

 

Europe Cross Border LVPS

  • Target 2
  • Euro1
  • SEPA
  • CLS/SWIFT
  • STEP 2
  • STEP 1

 

EU EBA Clearing – EURO1, STEP1, STEP2, MyBank

EBA Clearing is a provider of pan-European payment infrastructure with headquarters in Paris. It is wholly owned by its shareholders.

Its initial mission consisted in the operation of the clearing and settlement system for single euro transactions of high value EURO1, which the Euro Banking Association (EBA) had transferred to EBA Clearing for the launch of the system in 1999. Besides EURO1, EBA Clearing also owns and operates STEP1, a payment system for single euro payments for small and medium-sized banks, and STEP2, a Pan-European Automated Clearing House (PE-ACH) for euro retail payments. In March 2013, EBA CLEARING launched MyBank, an e-authorisation solution for online payments, which is geared at facilitating the growth of e-commerce across Europe.[1]

Both EURO1 and STEP2 have been identified as Systemically Important Payment Systems (SIPS) by the European Central Bank (ECB). EBA CLEARING is also planning to deliver a pan-European instant payments infrastructure solution in the course of 2017.

The organisation is based in Paris and has representative offices in Brussels, Frankfurt and Milan.

EURO1
EURO1 is a RTGS-equivalent large-value payment system on a multilateral net basis, for single euro transactions of high priority and urgency, and primarily of large amount. EURO1 is owned and operated by EBA CLEARING. It is open to banks that have a registered address or branch in the European Union and fulfil a number of additional requirements. EURO1 is subject to German law (current account principle/single obligation structure) and is based on a messaging and IT infrastructure provided by SWIFT.

STEP1
Since 2000, EBA CLEARING has been offering a payment service named STEP1 for small and medium-sized banks for single euro payments of high priority and urgency. The technical infrastructure is the same as that of the EURO1 system, both use the messaging and IT infrastructure of SWIFT.

STEP2
STEP2 was put into operation in 2003 with Italian payment system provider SIA S.p.A. It processes mass payments in euro. STEP2 is a Pan-European Automated Clearing House (PE-ACH). This means that it complies with the principles set by the European Payments Council (EPC) for a PE-ACH Compliant Clearing and Settlement System.

From the beginning of Single Euro Payments Area (SEPA) on 28 January 2008, STEP2 has been offering SEPA Credit Transfer processing services across all SEPA countries through its SEPA Credit Transfer (SCT) Service. Since 2 November 2009, the transposition date of the Payment Services Directive, EBA CLEARING has been processing SEPA Direct Debits with its STEP2 SDD Core and STEP2 SEPA Direct Debit (“Business to Business”) Services. Through its SEPA Credit Transfer and Direct Debit offerings, STEP2 provides banks across Europe with one channel through which they can send and receive their SEPA Credit Transfers and SEPA Direct Debits. The STEP2 platform reaches nearly 100 percent of all banks that have signed the SCT and SDD Scheme Adherence Agreements of the European Payments Council (EPC).

MyBank
MyBank is a pan-European e-authorisation solution for online payments that was launched in March 2013 by EBA CLEARING. The solution enables customers across Europe to pay for their online purchases via their regular online or mobile banking environment without having to disclose confidential data to the merchant or other third parties. The solution can be used for authorising SEPA Credit Transfers as well as the creation of SDD mandates. At a later stage, MyBank may also be used for transactions in currencies other than euro or for e-identity services.

Today, MyBank is owned and managed by PRETA S.A.S., a wholly owned subsidiary of EBA CLEARING.[2]

 

From ECB website

ECB identifies systemically important payments systems

21 August 2014

Four systems were identified: TARGET2, EURO1, STEP2-T and CORE(FR);

Goal is to ensure efficient management of risks and sound governance arrangements
The European Central Bank (ECB) has identified four key payment systems that are now under the new ECB Regulation on oversight requirements for systemically important payment systems (SIPS), which entered into force on 12 August 2014. The regulation covers large-value and retail payment systems in the euro area operated by both central banks and private entities, and aims at ensuring efficient management of legal, credit, liquidity, operational, general business, custody, investment and other risks as well as sound governance arrangements, namely with a view towards promoting the smooth operation of safe and efficient payment systems in the euro area.

The four systems identified today are: TARGET2, operated by the Eurosystem; EURO1 and STEP2-T, operated by EBA CLEARING; and CORE(FR), operated by STET, a joint initiative of six major French banks. They were identified according to the combination of at least two of four main criteria, i.e. the value of payments settled, market share, cross-border relevance and provision of services to other infrastructures. The Eurosystem will review this list annually on the basis of updated statistical data.

 

 

From CLS Bank & the World of FX Settlement

 

Starting my career as a trader on Wall Street, one of the big mysteries I had, was just how all these trades on the NYSE got executed and reported. Within the maze of specialist booths and flying paper, trades were being crossed and buyers and sellers were recognized. While the occasional errors occur, the wild system is highly efficient at reporting and settling trades.

In the world of OTC, settlement represents a larger factor, as participants are not bound by a central exchange system that insures against counterparty risk. As such, companies are on their own to ensure that trades are settled correctly with their counterparties, and an exchange of funds takes place.

In Forex Magnates’s Q1 2013 Industry Report, we took a look at the world of FX settlement and post-trade flow and researched CLS Bank and Traiana. We wanted to know just what they did, and how their products help FX players handle their settlement needs, create efficient markets, and lower overall transaction costs. In this first part, we focus on CLS Bank.

CLS Bank

Launched in 2002, CLS Bank was created as a private sector initiative, to deliver and operate services to mitigate settlement risk in the FX market. Owned and operated by member institutions and working alongside central banks, CLS offers members the ability to settle trades within a central location, thus, providing efficiencies to FX markets.

To understand what CLS does, it is first important to know how settlement works. Settlement is the process in which the payment and securities of a transaction are delivered. Within the securities world, this occurs in a three day window. For example, if a trader buys 100 shares of IBM stock at $100/share, the broker has three days to collect the $10,000 from the client, transfer it to the seller, and collect the shares back for the client.

Within FX, settlement does not involve securities, but instead different currencies. Therefore, in a EUR/USD trade, the seller sends dollars while receiving euros. For OTC participants, one of the greatest worries is settlement risk, which occurs when a counterparty is unable or unwilling to provide either the payment or transfer of securities.

While a deal between two parties can easily be voided, thus limiting impact of a problematic counterparty, the greater concern is the systemic risk. As traders are simultaneously trading with multiple parties, if one party fails to honor a transaction, it can affect counterparties and could prevent them from having the funds and/or securities to settle other trades.

Jake Smith, Head of Communications at CLS, explained that “FX settlement risk is also known as ‘Herstatt Risk’ ”. The name is derived from the failure of a privately owned German bank in 1974. At the time, Bankhaus Herstatt had received delivery of Deutsche marks from US counterparty banks, but had been put into receivership before the corresponding dollars were sent, due to the time zone difference.” Smith explained that, while this occurred nearly 40 years ago, “due to volumes growing substantially since that time, settlement risk has grown significantly.”

To mitigate this risk, CLS was created. Currently, there are over 60 members, who represent some of the largest financial institutions from around the world. CLS provides a central settlement network for FX transactions between its members and their customers. To facilitate settlement, all members are required to have a single multi-currency account with CLS, supporting the 17 currencies that are settled by its system.

Settlement

After conducting a trade, members send transactional details to CLS Bank, including trade details, counterparties, and settlement data. On the day of settlement, CLS Bank multilaterally nets all the instructions between the settlement members, calculating each institution’s pay-in obligations for the day, to ensure settlement of all their instructions on a payment-versus- payment basis. As settlement completes, pay-out of multi-laterally netted long balances will occur.

Example: GBP/USD = 1.50, EUR/USD = 1.25
Member 1: Buys 1,000,000 GBP/USD from Member 2
Member 2: Buys 1,000,000 EUR/USD from Member 3
Member 3: Buys 1,000,000 GBP/USD from Member 1

Member 1: Owes 1.5M USD & 1M GBP, collects 1.5M USD & 1M GBP
Member 2: Owes 1.25M USD & 1M GBP, collects 1M EUR & 1.5 USD
Member 3: Owes 1.5M USD & 1M EUR, collects 1.25M USD & 1M GBP

CLS then multi-laterally nets the total obligations:
Member 1: Pays 0.0
Member 2: Pays 1M GBP
Member 3: Pays 0.25M USD & 1M EUR

These obligations are funded into each member’s respective multi-currency account.

Settlement occurs
CLS then redistributes the obligations to the corresponding members
Member 1: Receives 0.0
Member 2: Receives 1M EUR & 0.25M USD
Member 3: Receives 1M GBP

By multi-laterally netting (also known as trade compression) payment obligations for each currency, CLS eliminates the need to fund trades on an individual basis per currency, resulting in approximately 96% netting efficiency. This increases to 99% with In/Out Swaps (an In/Out Swap is an intraday swap consisting of two equal and opposite FX transactions.)

That means, that for every $1 trillion of In/Out swaps settled, members need to provide funding for less than $10 billion, and $40 million for spot FX. With CLS handling nearly $5 trillion worth of daily settlements, the netting rates are a key element in allowing firms to grow their transactional volumes, while substantially reducing the amount of funding required. According to Smith, “CLS believes this safer and efficient process is one of the factors that led to the increase in FX volumes over the last 10 years.”

Smith explained that CLS provides a number of benefits to the FX industry, including, settlement risk mitigation, multi-lateral netting, operational and IT efficiencies, business growth opportunities, and the ability to develop industry solutions best practices, common standards and rules that benefit the FX market.

Within settlement risk mitigation also comes credit recognition. By being CLS members, credit departments have a greater understanding of each other and the counterparty risk. This allows firms to allocate less risk between trades to other members. For example, while a bank may decide to trade up to $10 billion with another member, they are more likely to limit their trade exposure to non-members.

In terms of operational efficiencies, a key factor is with regard to CLS’s one rule and oversight committee. Having one set of guidelines for members and central banks, provides all participants with a clearer understanding of their counterparties. When adding a new currency, the corresponding central bank needs to follow the standardized guidelines. These rules provide protection for members who benefit from the increased transparency a participating central bank will need to follow.

Regulatory Recognition

In July 2012, the critical role that CLS plays in global financial markets was recognised by the US Department of the Treasury’s Financial Stability Oversight Council, when it designated CLS as a systemically important Financial Market Utility (FMU). CLS’s importance was highlighted further in November 2012, with the announcement of the US Treasury Department’s exemption of FX swaps and forwards from the clearing requirements required for many financial products under the Dodd-Frank legislation. The role that CLS plays in the mitigation of FX settlement risk was believed to be a contributing factor towards that decision.

Technology

CLS’s increased investment in technology, has enabled it to materially expand peak capacity as it updated core technologies, to meet the elevated standards required of a systemically important FMU. The result is that CLS can now accommodate trade matching volumes of up to five times the average daily volume, and process 20 per cent of a peak day’s volume in a one hour period.

Furthermore, CLS has put in place a flexible technology infrastructure, which enables “capacity on demand”, supporting future software upgrades to be delivered to increase capacity in a matter of days and weeks. This structure, allows CLS to pay for technology only when required, while fulfilling obligations to the market to settle all eligible FX settlement instructions.

The need to build capacity was demonstrated on January 22, 2013, when CLS settled more than 2.6 million instructions, 18 per cent more than the previous high, recorded on 19 September, 2012.

Future

Looking to the future, as emerging markets grow, CLS has received interest from settlement members to include additional currencies. As such, CLS has been evaluating the addition of the Brazilian real, Chilean peso, Chinese renminbi, Russian ruble and Thai baht, amongst others.

Another area where CLS is extending its services is in same day settlement. A significant percentage of USD/CAD trades are intra-day and are not currently included in CLS settlement, due to the time of day. CLS is developing a same day settlement service between US and Canadian dollars to address this settlement risk, which has a proposed launch date in late 2013.

 

 

From The complexity of correspondent banking

Correspondent Banking Network

Correspondent banking, which can be broadly defined as the provision of banking services by one bank (the “correspondent bank”) to another bank (the “respondent bank”), is essential for customer payments, especially across borders, and for the access of banks themselves to foreign financial systems. The ability to make and receive international payments via correspondent banking is vital for businesses and individuals, and for the G20’s goal of strong, sustainable, balanced growth. At the extreme, if an individual bank loses access to correspondent banking services, this may affect its viability and if a country’s banks more generally face restricted access then it may affect the functioning of the local banking system. In addition, loss of correspondent banking services can create financial exclusion, particularly where it affects flows such as remittances which are a key source of funds for people in many developing countries.

Banks have traditionally maintained broad networks of correspondent banking relationships, but there are growing indications that this situation might be changing. In particular, some banks providing these services are reducing the number of relationships they maintain and are establishing few new ones. The impact of this trend is uneven across jurisdictions and banks. As a result, some respondent banks are likely to maintain relationships, whereas others might risk being cut off from international payment networks. This implies a threat that cross-border payment networks might fragment and that the range of available options for these transactions could narrow.

Rising costs and uncertainty about how far customer due diligence should go in order to ensure regulatory compliance (ie to what extent banks need to know their customers’ customers – the so-called “KYCC”-) are cited by banks as among the main reasons for cutting back their correspondent relationships. To avoid penalties and the related reputational damage correspondent banks have developed an increased sensitivity to the risks associated with correspondent banking. As a consequence, they have cut back services for respondent banks that (i) do not generate sufficient volumes to overcome compliance costs; (ii) are located in jurisdictions perceived as very risky; or (iii) provide payment services to customers about which the necessary information for an adequate risk assessment is not available.

The regulatory framework, and in particular the AML/CFT (Anti-Money Laundering/Counter Financing of Terrorism) requirements and the related implementing legislation and regulations in different jurisdictions, are taken as given in this report. It is acknowledged that these requirements, as agreed by the competent authorities, along with strict implementation, are necessary to prevent and detect criminal activities and ensure a healthy financial system.

 

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From Redefining the Landscape of Payment Systems

Regional Integration of Payment Systems

Cross-border and cross-currency commercial and financial payments have traditionally been made through regional and global correspondent banking networks. Correspondent banking networks typically involve multiple levels of intermediation to link national payment systems. Similar arrangements exist for cross-border securities and other market-based transactions. Such decentralized, highly-tiered cross-border arrangements for payment and securities transfer, clearing and settlement involve substantial liquidity, operating and user costs. Moreover, the services provided are often too slow and unreliable for the rising volume of payments associated with closer regional commercial and financial ties. Consequently, more tightly organized and integrated regional and even inter-regional payment and securities infrastructures are developing as a result of integration initiatives in the African, Asian and Latin American regions, among others. The discussions around the theme of regional integration of systems extended even further to the need for harmonized development of central bank payment system and monetary policies.

 

Integration in Wholesale Systems

The regional integration of national payment systems directly links the large-value payment systems of the participating countries. The link-up is through a distributed payment communications network involving either bilateral connectivity and system-to-system intra-regional payment settlement or connectivity to a central hub operating an intra-regional clearing and settlement facility. With large-value payment systems typically operated by national central banks, the distributed connectivity model of a regional payment system can substitute for the private correspondent banking network. The correspondent central banking arrangement concentrates intra-regional payments into a single central bank correspondent that participates in a network having more standardized service levels and agreements than the private system (i.e. correspondent banking). Over the medium-term, relative liquidity, operating and user costs should generally be lower and intra-regional payment settlement faster and more predictable than in the private system. A centralized model with a regional settlement bank can facilitate even greater standardization and more effective settlement risk control and, given a common settlement currency, permits multilateral netting that can lower liquidity costs even more as payment values and volumes rise.

The successful regional integration of national large-value payment systems does, however, require several pre-conditions. In addition to the obvious business case, the most critical pre-conditions are the harmonization of key institutional and structural elements in the national systems of the member countries and a sustainable commitment to the regional payment system, and the regional commercial and financial initiatives that underpin it. Experiences cited in a number of regional payment system initiatives indicate that unreasonable expectations of immediate pay-offs from integration and inadequate harmonization of key institutional elements during network expansion, such as those involving sound legal and oversight requirements, cause commitment to the project to waver and can sometimes cause the initiative to collapse. Organized and focused collaboration among all the key stakeholders and cooperation among the overseers of the national payment systems of the member countries is considered critical to sustaining commitment to the regional integration program.

Although several national securities depositories and securities settlement systems have developed bilateral system-to-system links in recent years, only a few have begun to integrate regionally or inter-regionally into an organized multilateral system. While the most developed cross-border systems are within the Eurozone, others have begun to develop elsewhere, as in the South African Development Community. The discussion concerning the role of CCPs in securities and derivatives settlement extended to consideration of regional, and even global, developments.

 

 

Integration of Retail Payment Systems

Aside from the major global card payment systems, which are expanding their products and services into new payment applications for cross-border retail payments, there are only a few bilateral and multilateral system-to-system links that facilitate the clearing and settling of cross-border payments. Correspondent banking arrangements, even for the ultimate settlement of cross-border card payments, are still the primary network arrangements for the ultimate settlement of cross-border retail payments. The regional integration of large-value payment systems, in conjunction with the integration of retail and large-value payment systems at the national level, has spawned some initiatives for the regional integration of national retail payment systems. The SEPA (Single European Payment Area) initiative is perhaps the most ambitious of these integration initiatives. Triggered by policy action and driven by industry initiatives, SEPA is aimed at creating a single integrated market for retail payment instruments and services throughout the Eurozone. The most critical challenges faced by the SEPA initiative have been the set-up of public and private sector collaboration mechanisms for decision-making, user support from public sector administrations, and the harmonization of national legal barriers. SEPA-compliant credit and debit transfers are now in place and work is proceeding on the introduction of SEPA-compliant card payments and on the development of SEPA-based online and mobile payment channels.

 

Transnational Payment Systems

While once there were only domestic payment channels in each country, we have witnessed the emergence of transnational systems such as TARGET, CLS (Continuous Linked Settlement), the Federal Reserve’s International ACH Project, known as FedACH International and the proposed pan-European automated clearinghouse known as PE-ACH. On the other end of the spectrum, card systems such as those operated by Visa and MasterCard are truly global in scope and have been expanding from consumer based transactions into commercial payments for more than a decade. Transnational systems have traditionally focused on providing payments within a region or to a small number of countries and usually support a single currency. Although none of these systems are yet global in scope, it is likely they will continue to expand their coverage to additional countries and currencies. Networks such as Visa and MasterCard are examples of global payment systems that also support multiple currencies, though they are primarily used for retail payments and ad hoc/T&E commercial transactions. Recently, in countries like Switzerland and Hong Kong13, new arrangements have been developed for the settlement of local payments in foreign currency. These arrangements neither fit perfectly in the traditional category of “correspondent banking” or in that of “payment systems”. The main common characteristic of these arrangements or systems is that they do not settle in central bank money but across accounts held with a commercial bank and that they are based on clearly defined and transparent rules for payment activities. Compared to traditional correspondent banking, these new solutions are standardized and settle payments in real time with continuous finality. In 1999, Swiss financial institutions established a cross-border solution in order to facilitate their cash management in euros. This solution involves a fully licensed bank in Germany, Swiss Euro Clearing Bank (SECB). To process euro transactions, SECB uses the euroSIC platform in Switzerland, which is often referred to as the euro payment system of Switzerland. EuroSIC is a replication of the Swiss franc RTGS system, Swiss Interbank Clearing (SIC). SIC and euroSIC are operated by Swiss Interbank Clearing AG. SECB is the settlement institution and shares the role of settlement agent with the operator SIC AG. SECB is also the liquidity provider in euroSIC. It extends intraday and overnight credit to the participants of euroSIC against collateral. SECB provides a link to the euro area, as it is a direct participant in RTGSPLUS through which access to TARGET is established. In Hong Kong, the U.S. dollar and euro clearing systems, USD CHATS (Clearing House Automated Transfer System) and Euro CHATS, were introduced in 2000 and 2003, respectively. They enhance the safety and efficiency of settling these foreign currencies in the local time zone. These systems are almost exact replicas of the Hong Kong dollar RTGS system (HKD CHATS). The key functions of both systems are to enable settlement of foreign exchange transactions between HK dollars, US dollars and euros in their respective currencies through a linkage with the Central Moneymarkets Unit (CMU) in Hong Kong.

The Hong Kong Monetary Authority has appointed the Hong Kong and Shanghai Banking Corporation as the settlement institution for USD CHATS and Standard Chartered Bank (Hong Kong) Limited as the settlement institution for Euro CHATS. Both institutions provide intraday liquidity to the direct participating banks by means of repos as well as overdraft facilities. One of the key benefits of both the US dollar and euro systems is the same day clearing of transactions. Also driving transnational systems is the implementation of “straight through processing (STP)” standards for transfers between banks as well as between banks and customers. To ensure simultaneous and dependable deliveries, payment-versus-payment (PVP), delivery-versus-payment (DVP), and delivery-versus-delivery (DVD) processes have also been established. The growth in transnational systems can improve the efficiency of cross-border payments by reducing clearing and settlement times, minimizing float. Better visibility of funds flows supports improved cash forecasting. Finally, standardized formats will reduce costly errors and repairs.

 

Intra bank Payments Networks – Multinational Banks

Mergers and acquisitions have been the single biggest force reshaping the global payments landscape over the past two decades. The most recent round of consolidation has left a disparity between large and small never before seen. For example, we have witnessed the emergence of mega banks such as the combining of Bank of America and Nations Bank, as well as JP Morgan Chase combining Chase Manhattan Bank, Manufacturers Hanover Bank, Morgan Guaranty Trust and Bank One. In a scale-driven, technology-intensive business like payments, the emergence of true mega-players may lead to markedly different competitive dynamics. Acting as their own transnational systems, large international banks such as JP Morgan Chase, Citibank, Bank of America, and Hongkong Shanghai Banking Corporation operate their own internal global payments networks. Through these, they can route payments to destinations in different countries. Such internal networks do not necessarily differentiate between domestic and cross-border payments as these flows are all within the bank. The trend toward consolidation in the banking sector, both globally and in domestic markets, exerts influence on payment systems. Increased concentration of payment flows may have important credit, liquidity and operational risk implications. For example, the credit exposures that arise within a payments system that does not achieve intraday finality are likely to become concentrated on a smaller number of banks. Operational problems experienced by a single large bank could have significant repercussions for other participants in the system. A concentration of payment flows in commercial banks has emerged to reflect the increasing role that modern commercial banks, especially large global banks, have played in the payment systems around the world. The volumes and values settling across their books are, in some countries, quite substantial. Such traffic has often been accompanied by increased formalization of the correspondent relations within, as well as across, national boundaries. Banks that achieve global economies of scale can further drive down per transaction costs and derive higher revenues by keeping payments within their own networks. For global corporations, it has allowed them to match their global needs with a handful of banks rather than managing a large number of local relationships.

 

From The Inefficiencies of Cross-Border Payments: How Current Forces Are Shaping the Future

A survey of major systems facilitating cross-border payments

American Express: is a publicly traded company that issues charge and credit card products both directly and through nearly 100 financial institutions around the world. American Express had $484 billion in global sales in 2005.15

CHAPS (Clearing House Automated Payment System): CHAPS, established in 1984, is the United Kingdom’s high-value payment system, consisting of two systems: CHAPS Sterling and CHAPS Euro, which provide settlement facilities for sterling and euro payments, respectively. Over a dozen large banks and building societies are “direct” or settlement members, while there are also over 400 “indirect” members – typically smaller banks and building societies – who have access to the system through a settlement member.

CHIPS (Clearing House Interbank Payment System): CHIPS is a bank-owned, privately operated, real-time, multilateral electronic payments system that transfers funds and settles transactions in U.S. dollars. CHIPS began operations in 1970 with 9 participating banks and, as of mid 2006, it processes about 300,000 payments a day with an average daily amount of $1.5 trillion. It currently has 46 participants from 19 countries around the world, including large U.S. banks and U.S. branches of foreign banks. The payments transferred over CHIPS are often related to international interbank transactions, including the payments resulting from foreign currency transactions (such as spot and currency swap contracts) and Euro placements and returns.

CLS (Continuous Linked Settlement): The CLS system is the private sector response to a G-10 strategy to reduce foreign exchange settlement risk. CLS was founded in 1997 to create the first global settlement system, eliminating settlement risk in the foreign exchange market. Formed in response to regulatory concern related to the temporal and systemic risks (Herstatt risk) associated with foreign exchange transactions, CLS simultaneously settles both sides of foreign exchange trades using a multi-currency payment-versus-payment (PVP) mechanism. CLS is a unique real-time process enabling simultaneous foreign exchange settlement across the globe, eliminating the settlement risk caused by delays arising from time-zone differences. CLS settles well over $1 trillion per day, accounting for a substantial majority of cross-currency transactions across the globe.

Eurogiro: owned by 16 banks/postal financial service companies, is an electronic payment network for postal and giro (postbank) organizations that exchange cross-border credit transfers and cash-on-delivery orders. Established in 1989, Eurogiro has more than 40 participants from 37 countries in Europe, Asia, Africa, South America and the U.S. Members act as correspondents for one another and hold reciprocal accounts with each other to execute payments.

EURO1: a private sector-owned high-value payment system, operated by the EBA Clearing Company for cross-border and domestic transactions in euro between banks operating in the European Union, and it is the largest of Europe’s four large-value, net settlement systems, processing on average 170,000 payments a day with a total value of about €170 billion. Launched in 1998, EURO1 was developed to provide an efficient, secure and cost-effective infrastructure for large-value payments in the new single currency environment of the EU. EURO1 is based on state-of-art messaging infrastructure and computing facilities supplied by SWIFT.

FedACH International Services: This international gateway arrangement service is owned and operated by the Federal Reserve System. Currently, the Federal Reserve Banks offer a suite of FedACH International Services as part of FedACH Services and provide U.S.- originating depository financial institutions with the ability to send international non-time-critical payments via the same process used to send domestic transactions for many decades. FedACH International Services offer an integrated, uncomplicated method to ensure straight-through processing (STP) of cross-border transactions, using NACHA formats that are supported by most software vendors.

Fedwire (Federal Reserve Wire Network): This is a high-speed electronic network through which the U.S. Federal Reserve provides the Fedwire Funds Service, the Fedwire Securities Service, and the National Settlement Service. The Fedwire Funds Service provides an RTGS system in which more than 9,500 participants initiate funds transfers that are immediate, final, and irrevocable when processed.

LVTS (Large Value Transfer System): The fully electronic LVTS, Canada’s real-time gross settlement system, became operational in early 1999. As Canada’s wire payment mechanism, it facilitates the electronic transfer of Canadian dollar payments across the country in real-time. Canada’s national payments system has been operated by the Canadian Payments Association (CPA) since 1980.

MasterCard: is a publicly-traded company that operates a global payment system. In addition to the MasterCard brand, the Maestro and Cirrus brands are also part of the company. MasterCard branded cards generated $1.7 trillion in global sales in 2005.16

RTGSPLUS: is the German Bundesbank’s new liquidity-saving RTGS, which became operational in November 2001. It combines the risk-reducing benefits of gross settlement of the former German RTGS system known as the Euro Link System (ELS) with the advantages of liquidity-saving processing of the former hybrid system known as Euro Access Frankfurt (EAF).

SWIFT (Society for Worldwide Interbank Financial Telecommunications): SWIFT is an industry-owned limited liability cooperative that supplies secure messaging services and interface software for financial transactions to more than 7,650 banks, securities brokers and investment managers in more than 200 countries.

SWIFT payment messages are processed by the Financial Information Network (FIN), which operates on a secure IP network called SWIFTNet. SWIFT is integrating into the ACH market segment as a payment service provider via its FileAct messaging service. ACH networks such as the EBA Clearing Company and the South African Automated Clearing Bureau are already using SWIFT’s messaging platform.

STEPS (Straight Through Euro Payment System): The STEPS program was launched by the Euro Banking Association (EBA) to offer a full range of euro payments across Europe. STEPS has evolved into two systems aimed at accommodating a broad base of processing needs within the European Union: STEP1 (a pan-European system designed to process single cross-border, low-value retail payments) and STEP2 (a pan-European ACH for bulk/high volume, low-value, cross-border and domestic interbank payments).

STEP2: a pan-European ACH solution, is a joint venture between the EBA and Italy’s ACH operator SIA. STEP2 processes high-volume, commercial and retail payment orders sent to the system via files through a secure network. Characteristics of payment orders that are processed via STEP2 are commercial and retail transfers in euro that are formatted to agreed technical standards. Accessible through SWIFTNet, STEP2 offers payment processing and settlement in euro.

TARGET (Trans-European Automated Real-time Gross Settlement Express Transfer): The Eurosystem, which comprises the European Central Bank (ECB) and the national central banks (NCBs) of the 12 EU member states which have adopted the euro, has created TARGET for large-value payments in euro. The TARGET system is a “system of systems” composed of the national payment systems of 16 of 25 countries that are currently members of the EU, the ECB payment mechanism (EPM) and an interlinking mechanism that enables the processing of payments between the linked systems.

TARGET2: The current structure of TARGET was decided on in 1994 and was based on the principles of minimum harmonization and interconnection of existing infrastructures. This was the best way of ensuring that the system would be operational from the very start of the European Economic and Monetary Union (EMU) in 1999. TARGET2 is an enhanced version of the current TARGET incorporating technical consolidation, a single system-wide pricing structure for domestic and cross-border payments, a harmonized service level, and the system-wide pooling of available intraday liquidity. The go-live date for TARGET2 is set for November 19, 2007, with gradual migration to the new system by the member states in four waves. All central banks participating in TARGET2, together with their national banking communities, are expected to be using the new system by May 2008.

Visa: is a private, membership association jointly owned by more than 20,000 member financial institutions around the world. Visa develops common standards and specifications to facilitate commerce and provide member financial institutions with the global payment platform to support transactions on 1.46 billion cards that generate more than $4.3 trillion in global transactions in over 160 countries.17

Voca: was formed in 1968 and was known as the “Bankers Automated Clearing System” or BACS which is similar to ACH in the US. BACS changed its name to Voca in 2004. Voca is one of a number of domestic ACH-type systems in Europe and owns the BACS infrastructure that processes the majority of non-RTGS, non-card, electronic credit and debit payments for B2C, C2B and B2B in the UK. VOCA performed 5 billion transactions in 2005. 28

 

China’s Central Bank RMB Currency Swap Lines

 

crossbor7

 

China’s Offshore RMB Clearing Centers

 

crossbor8

 

 

Key Sources of Research:

 

Explaining cross-border large-value payment flows: Evidence from TARGET and EURO1 data

Simonetta Rosati, Stefania Secola

 

 

The Inefficiencies of Cross-Border Payments: How Current Forces Are Shaping the Future

Written by Yoon S. Park, PHD & DBA, George Washington University

 

Click to access crossborder.pdf

 

 

 

There Is No Such Thing As An International Wire

by ERIN MCCUNE on MAY 15, 2014

http://paymentsviews.com/2014/05/15/there-is-no-such-thing-as-an-international-wire/

 

 

 

The Elements of the Global Network for Large-Value Funds Transfers

James F. Dingle

2001

 

Click to access wp01-1.pdf

 

 

 

The Payment System

ECB

 

Click to access paymentsystem201009en.pdf

 

 

 

Cross-border RMB Settlements

 

Click to access cross_border.pdf

 

 

 

China launch of renminbi payments system reflects Swift spying concerns

https://www.ft.com/content/84241292-66a1-11e5-a155-02b6f8af6a62

 

 

 

Possible RMB – Clearing model for the city of Frankfurt

RMB Initiative Frankfurt Frankfurt, December 2013

Working Group on the establishment of an RMB clearing house

 

 

 

CIPS and the International Role of the Renminbi

 

 

 

CHIPS

https://www.newyorkfed.org/aboutthefed/fedpoint/fed36.html

 

 

 

Correspondent banking July 2016

BIS

Click to access d147.pdf

 

 

 

Rethinking correspondent banking

2016

mckinsey

 

 

 

The complexity of correspondent banking

http://thefinanser.com/2015/11/the-complexity-of-correspondent-banking.html/

 

 

 

CLS Bank & the World of FX Settlement

Ron Finberg

2013

http://www.financemagnates.com/institutional-forex/execution/cls-bank-the-world-of-fx-settlement/

 

 

 

Foreign exchange trading and settlement: Past and present

by John W. McPartland, financial markets consultant

Chicago Fed Letter 2006

 

 

Settlement risk in foreign exchange markets and CLS Bank

Click to access r_qt0212f.pdf

 

 

 

 

Cross-Border Payments Perspectives

September 2011

Research conducted by Glenbrook Partners

 

Click to access Cross-Border-Payments-Perspectives-A-Glenbrook-Earthport-Research-Brief.pdf

 

 

 

Redefining the Landscape of Payment Systems

Summary of Proceedings of the World Bank Conference

 

Click to access 705740ESW0P1100Cape0Town0April02009.pdf

 

 

 

Report to the Congress on the Use of the Automated Clearinghouse System for Remittance Transfers to Foreign Countries

July 2011

 

Click to access ACH_report_201107.pdf

 

 

 

ESTABLISHING AN INTEGRATED PAYMENT SYSTEM

(REAL-TIME GROSS SETTLEMENT) IN ASEAN

A Proposal for a Cross-Border Mechanism to Support the AEC 2015

 

Click to access Complete_dissertation.pdf

http://www.rug.nl/research/portal/en/publications/establishing-an-integrated-payment-system-realtime-gross-settlement-in-asean(59f7f186-51c5-47e3-8e1a-2745e19fd998).html

 

 

 

PAYMENT SYSTEMS TO FACILITATE SOUTH ASIAN INTRA- REGIONAL TRADE

Ashima Goyal

September 2014

 

Click to access Development%20Paper_1403.pdf

 

 

 

Implementing Cross-border Payment, Clearing and Settlement Systems: Lessons from the Southern African Development Community

Albert Mutonga Matongela

 

 

 

The emerging single market in South-East Asia 

SWIFT

 

 

 

 

 

 

Regional Monetary Co-operation in the Developing World Taking Stock

Barbara Fritz / Laurissa Mühlich

Click to access Paper-Stocktaking-Regional-Monetary-Cooperation-Fritz-Muehlich-22-07-14-end.pdf

 

 

 

ASIA FINANCE 2020

FRAMING A NEW ASIAN FINANCIAL ARCHITECTURE

 

Click to access Asia_Finance_2020.pdf

 

 

 

 

Creating an Association of Southeast Asian Nations Payment System: Policy and Regulatory Issues

Tanai Khiaonarong

2013

 

Click to access adbi-wp422.pdf

 

 

 

Payments in ASEAN post AEC

 

Click to access 5-Payments-in-ASEAN-post-AEC.pdf

 

 

 

Regional Integration and Economic Development in South Asia

Sultan Hafeez Rahman

Sridhar Khatri

Hans-Peter Brunner

Click to access regional-integration-economic-development-south-asia.pdf

 

 

 

Towards South Asia Economic Union

 

Proceedings of the
7th South Asia Economic Summit (SAES)

5-7 November 2014 New Delhi, India

 

Click to access Towards%20South%20Asia%20Economic%20Union.pdf

Understanding Global Value Chains – G20/OECD/WB Initiative

Understanding Global Value Chains – G20/OECD/WB Initiative

 

There is lot of opacity in understanding of GVCs.  Efforts are underway since last few years to get better analytical and statistical tools to understand International Trade and Global Value Chains.

Globalization in Trade and Finance encouraged by International organizations such as IMF/WB/OECD/WTO/UNCTAD/UNIDO and others has changed the landscape of Trade.

There is still a long way to go to make better sense of issues and concerns for policy makers.

OECD/WB/WTO along with G20 Trade Ministers have initiated efforts since 2012.

 

From Global Value Chains 

Introduction to GVCs

International production, trade and investments are increasingly organised within so-called global value chains (GVCs) where the different stages of the production process are located across different countries. Globalisation motivates companies to restructure their operations internationally through outsourcing and offshoring of activities.

Firms try to optimise their production processes by locating the various stages across different sites. The past decades have witnessed a strong trend towards the international dispersion of value chain activities such as design, production, marketing, distribution, etc.

This emergence of GVCs challenges conventional wisdom on how we look at economic globalisation and in particular, the policies that we develop around it.

 

Trade in Value Added

The goods and services we buy are composed of inputs from various countries around the world. However, the flows of goods and services within these global production chains are not always reflected in conventional measures of international trade. The joint OECD – WTO Trade in Value-Added (TiVA) initiative addresses this issue by considering the value added by each country in the production of goods and services that are consumed worldwide. TiVA indicators are designed to better inform policy makers by providing new insights into the commercial relations between nations.

 

GVCs and Trade Policy

Global value chains (GVCs) have become a dominant feature of world trade, encompassing developing, emerging, and developed economies. The whole process of producing goods, from raw materials to finished products, is increasingly carried out wherever the necessary skills and materials are available at competitive cost and quality. Similarly, trade in services is essential for the efficient functioning of GVCs, not only because services link activities across countries but also because they help companies to increase the value of their products. This fragmentation highlights the importance of an ambitious complementary policy agenda to leverage engagement in GVCs into more inclusive growth and employment and the OECD is currently undertaking comprehensive statistical and analytical work that aims to shed light on the scale, nature and consequences of international production sharing.

 

From Global Value Chains/Global Production Networks: Organizing the Global Economy

The key organizational feature of the global economy?

  • “Global Value Chains are defined by fragmented supply chains, with internationally dispersed tasks and activities coordinated by a lead firm (a TNC)” (UNCTAD, 2013, p.125; original italics).
  • Data gathering exercises:UNCTAD,OECD,WTO,JETRO…
  • Now firmly on the agenda among leading international economic organizations
  • The international division of labour:imperial/colonialsystems and exchanges of raw materials and finished goods
  • The new international division of labour(NIDL):establishment of overseas production bases of core country TNCs
  • The global division of labour:much more complex global networks lying behind the production of different goods and services

The phenomenon

  • About 60% of global trade, which today amounts to more than $20 trillion, consists of trade in intermediate goods and services that are incorporated at various stages in the production process of goods and services for final consumption” (UNCTAD, 2013, p. 122)
  • Not new, but since 2000 trade and FDI have increased exponentially, and ahead of GDP growth, highlighting a growth in TNC coordinated global value chains
  • Double counting – approx. 25-30% of value of world trade, e.g. the iPhone example. Not just trade from China to US, but incorporates high value components from Japan, South Korea etc.
  • Beyond national economies and basic trade data, and beyond TNCs and FDI, to more complex organizational structures involving intra-firm trade, arm’s length trade and non-equity modes e.g. subcontracting

 

 

From GLOBAL VALUE CHAIN ANALYSIS: A PRIMER

gvc5

 

From Global Capitalism and Commodity Chains: Looking Back, Going Forward

gvc4

 

From Global Value Chains/Global Production Networks: Organizing the Global Economy

gvc1gvc-2gvc3

 

Key Terms

  • Global Commodities Chains (GCCs)
  • Global Production Networks (GPNs)
  • Global Value Chains (GVCs)
  • Strategic Coupling
  • Economic Deepening
  • Trans National Corporation (TNC)
  • Multi National Corporation (MNC)
  • Multi National Enterprises (MNE)
  • SMILE curve
  • Economic Clusters
  • UNIDO (United Nations Industrial Development Organization)
  • OECD (Organization for Economic Cooperation and Development)
  • WTO (World Trade Organization)
  • WB (World Bank)
  • UNESCAP (Economic and Social Commission for Asia and Pacific)
  • UNCTAD ( United Nations Commission for Trade and Development)
  • ILO ( International Labor Organization)
  • G20 ( Group of 20 Nations)
  • TIVA ( Trade in Value Added)
  • On shoring
  • Off shoring
  • Outsourcing

 

 

Key People

  • Gary Gereffi
  • Neil M Coe
  • Jennifer Bair
  • Henry Wai-chung Yeung
  • Timothy Sturgeon

 

 

Key Sources of Research:

 

Measuring Trade in Value Added: An OECD-WTO joint initiative

https://www.oecd.org/tad/measuringtradeinvalue-addedanoecd-wtojointinitiative.htm

 

 

Global Value Chains

https://www.oecd.org/about/g20-oecd-global-value-chains.htm

https://www.oecd.org/sti/ind/global-value-chains.htm

 

 

OECD Stocktaking Seminar on Global Value Chains 2014

https://www.oecd.org/g20/topics/trade-and-investment/g20-oecd-global-value-chains-2014.htm

 

 

IMPLICATIONS OF GLOBAL VALUE CHAINS
FOR TRADE, INVESTMENT, DEVELOPMENT AND JOBS

OECD, WTO, UNCTAD 6 August 2013

Prepared for the
G-20 Leaders Summit
Saint Petersburg (Russian Federation) September 2013

 

Click to access G20-Global-Value-Chains-2013.pdf

 

 

Inclusive Global Value Chains

Policy options in trade and complementary areas for GVC Integration by small and medium enterprises and low-income developing countries

OECD and World Bank Group

Report prepared for submission to G20 Trade Ministers Meeting Istanbul, Turkey, 6 October 2015

 

Click to access Participation-Developing-Countries-GVCs-Summary-Paper-April-2015.pdf

 

 

GLOBAL VALUE CHAINS: CHALLENGES, OPPORTUNITIES, AND IMPLICATIONS FOR POLICY

OECD, WTO and World Bank Group

Report prepared for submission to the G20 Trade Ministers Meeting Sydney, Australia, 19 July 2014

 

Click to access gvc_report_g20_july_2014.pdf

 

 

Making Global Value Chains (GVCs) Accessible to All

Progress Report
Meeting of the Council at Ministerial Level

6-7 May 2014

 

Click to access MCM-GVC-Progress-Report-May-2014.pdf

 

 

Inclusive Global Value Chains

Policy Options for Small and Medium Enterprises and Low-Income Countries

Ana Paula Cusolito, Raed Safadi, and Daria Taglioni

2016

Click to access 9781464808425.pdf

 

 

Global value chains in a changing world

Edited by Deborah K. Elms and Patrick Low

2013

 

Click to access aid4tradeglobalvalue13_e.pdf

 

 

The rise of global value chains

WORLD TRADE REPORT 2014

 

Click to access wtr14-2c_e.pdf

 

 

Who Captures the Value in the Global Value Chain? High Level Implications for the World Trade Organization

Peter Draper and Andreas Freytag

July 2014

 

Click to access E15-Global-Value-Chains-DraperFreytag-FINAL.pdf

 

 

Joining, Upgrading and Being Competitive in Global Value Chains: 

A Strategic Framework

 

O. Cattaneo G. Gereffi S. Miroudot D. Taglioni

 

Click to access 2013-04_WorldBank_wps6406_Cattaneo_Gereffi_Miroudot_Taglioni_Competitiveness_GVCs.pdf

 

 

Global value chains, development and emerging economies

Gary Gereffi

2015

Click to access WP_18.pdf

 

 

GLOBAL VALUE CHAINS IN A POSTCRISIS WORLD A DEVELOPMENT PERSPECTIVE

Olivier Cattaneo, Gary Gereffi, and Cornelia Staritz

2010

Click to access Gereffi_GVCs_in_the_Postcrisis_World_Book.pdf

 

 

 

Global value chains and global production networks in the changing international political economy: An introduction

Jeffrey Neilson1, Bill Pritchard1 and Henry Wai-chung Yeung

2014

http://www.tandfonline.com/doi/pdf/10.1080/09692290.2013.873369

 

 

Combining the Global Value Chain and global I-O approaches

 

 

 

Global value chains and world trade : Prospects and challenges for Latin America

René A. Hernández
Jorge Mario Martínez-Piva Nanno Mulder

 

http://repositorio.cepal.org/bitstream/handle/11362/37176/S2014061_en.pdf?sequence=1

 

 

 

Global value chains in a post-Washington Consensus world

Gary Gereffi

2014

 

https://dukespace.lib.duke.edu/dspace/bitstream/handle/10161/10696/2014%20Feb_RIPE_Gereffi,%20Gary_GVCs%20in%20a%20post-Washington%20Consensus%20world.pdf?sequence=1

 

 

GLOBAL VALUE CHAINS AND DEVELOPMENT: Governance, Upgrading & Emerging Economies

Gary Gereffi

Director, Duke CGGC Duke University

2016

Click to access 697_10587.pdf

 

 

 

MaPPing gLoBaL VaLUe CHainS

Koen De Backer and Sébastien Miroudot

2014

Click to access ecbwp1677.pdf

 

 

 

Global Value Chains/Global Production Networks: Organizing the Global Economy

Neil M. Coe

2013

Click to access DrCoe.pdf

 

 

 

GLOBAL VALUE CHAIN ANALYSIS: A PRIMER

Gary Gereffi
Karina Fernandez-Stark

July 2016

 

http://dukespace.lib.duke.edu/dspace/bitstream/handle/10161/12488/2016-07-28_GVC%20Primer%202016_2nd%20edition.pdf?sequence=1

 

 

 

WHY THE WORLD SUDDENLY CARES ABOUT GLOBAL SUPPLY CHAINS

GARY GEREFFI AND JOONKOO LEE

Duke University

http://dukespace.lib.duke.edu/dspace/bitstream/handle/10161/10699/2012-07_JSCM_Gereffi%20&%20Lee_Why%20the%20world%20suddenly%20cares%20about%20global%20supply%20chains.pdf?sequence=1

 

 

 

The Economic Crisis: A Global Value Chain Perspective

 

Gary Gereffi

 

Click to access a-global-value-chain-perspective.pdf

 

 

The governance of global value chains

Gary Gereffi John Humphrey Timothy Sturgeon

2005

 

Click to access sturgeon2005.pdf

 

 

Global production networks and the analysis of economic development

Jeffrey Henderson, Peter Dicken, Martin Hess, Neil Coe and Henry Wai-Chung Yeung

2002

Click to access 2002_RIPE.pdf

 

 

GLOBAL VALUE CHAINS: INVESTMENT AND TRADE FOR DEVELOPMENT

UNCTAD 2013

Click to access wir2013_en.pdf

 

 

Asia and Global Production Networks

Implications for Trade, Incomes and Economic Vulnerability

Benno Ferrarini David Hummels

2014

Click to access asia-and-global-production-networks.pdf

 

 

 

Global Production Networks: Theorizing Economic Development in an Interconnected World

By Neil M. Coe, Henry Wai-Chung Yeung

2015

 

 

Toward a Dynamic Theory of Global Production Networks

Henry Wai-chung Yeung

Neil M. Coe

 

Click to access 2015_GPN_theory_paper_EG%20Vol91(1)_29-58.pdf

 

 

Global Value Chains and deVelopment

unido’s support towards inclusive and sustainable industrial development

2015

Click to access GVC_REPORT_FINAL.PDF

 

 

Global Value Chains: The New Reality of International Trade

Sherry Stephenson

December 2013

Click to access E15_GVCs_BP_Stephenson_FINAL.pdf

 

 

GLOBAL VALUE CHAINS SURVEYING DRIVERS AND MEASURES

João Amador and Sónia Cabral

2014

Click to access ecbwp1739.en.pdf

 

 

GLOBAL VALUE CHAINS AND INTERCONNECTEDNESS OF ASIA-PACIFIC ECONOMIES

Asia Pacific Trade and Investment Report

2015

 

Click to access Chapter%207%20-%20GVCs%20in%20the%20Asia-Pacific.pdf

Click to access Full%20Report%20%20-%20APTIR%202015.pdf

 

 

Global Capitalism and Commodity Chains: Looking Back, Going Forward

JENNIFER BAIR

2005

COMPETITION & CHANGE, Vol. 9, No. 2, June 2005 153–180

 

 

Global Value Chains: Development Challenges and Policy Options

Proposals and Analysis

December 2013

Click to access E15-Global-Value-Chains-Compliation-Report-FINAL.pdf

 

 

Globalizing’ regional development: a global production networks perspective

Neil M Coe, Martin Hess, Henry Wai-chung Yeung, Peter Dicken and Jeffrey Henderson

Click to access 2004_TIBG.pdf

 

 

Multilateral approaches to Global Supply Chains

 

International Labour Office

2014

 

Click to access wcms_485351.pdf