O'Reilly logo

Foreign Exchange Operations: Master Trading Agreements, Settlement, and Collateral by David F. DeRosa

Stay ahead with the world's most comprehensive technology and business learning platform.

With Safari, you learn the way you learn best. Get unlimited access to videos, live online training, learning paths, books, tutorials, and more.

Start Free Trial

No credit card required

CHAPTER 4

Foreign Exchange Settlement

The topic of this chapter is settlement of foreign exchange transactions. For our purpose, settlement is the process of transferring funds to discharge the obligations of a foreign exchange transaction.

I begin with the settlement instructions for the spot foreign exchange deal that was illustrated in the previous chapter. Then I shift attention to how banks accomplish foreign exchange settlements. I also discuss the historical development of the current arrangements for foreign exchange settlement, leading to the development of payment systems that operate on real-time gross settlements principles. After reviewing some of the most important payment systems, I turn attention to CLS Bank.

SETTLEMENT INSTRUCTIONS FOR AN INDIVIDUAL SPOT FOREIGN EXCHANGE DEAL

In the example of a spot trade in the previous chapter, Bantamweight Bank sold 50 million euros against dollars to Heavyweight Bank, a foreign exchange dealer:

Trade date: 01 August
Value date: 03 August
Party A: Bantamweight Bank
Party B: Heavyweight Bank
Face in EUR: EUR 50,000,000
Face in USD: USD 61,750,000
Exchange rate: 1.2350
Buyer of EUR: Party B
Buyer of USD: Party A
Receiving agent (USD): Allstar Bank NY
Receiving agent (EUR): Striker Bank London

Refer back to Exhibit 3.14 (types of SWIFT messages) to examine the flow of messages shown in Exhibit 4.1.

Exhibit 4.1 SWIFT Messaging Diagram

This text contains information extracted from publicly available sources that may be subject ...

With Safari, you learn the way you learn best. Get unlimited access to videos, live online training, learning paths, books, interactive tutorials, and more.

Start Free Trial

No credit card required