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Payments System - Swift Network - Messages

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Payments system- #3

Swift Network &


Messages

WAQUAR AHMAD
Now that we understand correspondent banking, account relationships and how accounts are used,

But the question is how do banks communicate with other bank (Cross border)???

The time has come to look at SWIFT and SWIFTNet. Why is the SWIFT Network so crucial and why are
standards needed?  

The Society for Worldwide Interbank Financial Telecommunication


Situation before SWIFT

As customers, banks have the following basic needs:


• Instruct their correspondents to transfer funds from their account(s) to beneficiaries
• Receive funds on their accounts
• Receive reporting about payment execution
• Receive account statements
• And so on.

Banks and their correspondents must therefore exchange a lot of information. Various means were
used in the past for that purpose: Phone, Fax and Telex. These were fairly handy at the start. But with
the time, two major problems arose and they were worsened with the fast growing international trade.

1. Security
2. Manual work

 
The major role of SWIFT

SWIFT was created to address these two problems in correspondent banking relationships: 


security of the message transport and automation for the message processing.

Problem Solution
Security of the message transport Through SwiftNet network
Manual work Automation through standardization

 
SWIFTNet

SWIFTNet carries financial messages in a highly secure way from one party to another over the
network. 

SWIFT has set up a Public Key Infrastructure (or PKI) and digital certificates to enable secure
communication among its participants. All communication going through SWIFTNet is highly
encrypted, so that an external party cannot spy on the message or forge it.

At the beginning, SWIFTNet was used to transport financial messages. Nowadays, SWIFT also provides
services for the transfer of high value documents, such as commercial contracts, in a safe and efficient
manner around the globe

 
SWIFT makes automation possible through Standardization

Before SWIFT, Communication was really difficult. Standards were therefore needed to enhance the
communication among banks. A standard is a widely accepted, agreed upon, or established definition
of what something should be. 

SWIFT MT is a Financial Messaging standard, a common language that financial institutions use for
the exchanges of financial information with their customers and among themselves.

Automation can allow to process payments messages STP (Straight-Through Processing) without
human intervention at all. It is faster because the receiver quickly receives the funds, but cheaper as
well since no human intervention means less error and less rework.

 
In conclusion,

 
SWIFT transports financial messages, but does not hold accounts for its members and does not perform
payment clearing or settlement.

In fact, SWIFT stands for Society for Worldwide Interbank Financial Telecommunication. The messaging service


is supported by SWIFTNet, the SWIFT global IP-based network for secure and reliable communication.

SWIFT developed a message standard (SWIFT MT) which has been adopted as international standard to help
financial institutions to automate messages processing and streamline their processes.

 
Foreign Exchange markets.

The foreign exchange market, simply called FOREX, is the place where supply and demand of currencies meet.
A transaction in the FOREX market always involve the buying of one currency and the simultaneous selling of
another currency. That is why currencies are always quoted in pairs. An FX rate quotation (e.g. EUR/USD or
USD/EUR) expresses the amount of money that can be bought of a certain currency in terms of another
currency.

In the quotation EUR/USD = 1.1635

EUR is Base currency. The currency that is actually traded in exchange of Quote currency (USD).
USD is the Quote currency or Price currency. The currency that is used to determine the base currency value.

If you buy EUR/USD, you get USD and give EUR.


If you sell EUR/USD, You give USD and receive EUR.

To trade currencies, banks need to access the foreign currency market.


Banks and the FX markets

The banks in the different countries belong to the main players of the FX market. They access the market to
trade the currencies on behalf of their customer or for themselves.

 
Banks make money on the FX markets by “playing” with the exchange rates. They buy at bid rate and
sell at ask rate. There are always bid price and ask price for a currency pair. The difference between ask
and bid price is called the spread.

Bid rates and ask rates


A currency pair has two rates (or prices): the bid or buy rate and the ask or sell rate. A bank or any
dealer always buys at a lower rate and sells at a higher rate. Otherwise, it will soon be out of
business!!!

When you look at rates, it is always important to understand from whose perspective you are looking at.

 
When do banks go to the FX market?

Banks do not send orders to the FOREX Market every time a customer instructs them to perform a
transaction in foreign currency. That would be too costly and inefficient. Instead of that, Banks collect all
the FX instructions until a point in time and then look at the FX account position to determine if they need
to buy the foreign currency (In case there is too little on the account) or if they need to sell it (In case
there is too much on the account).

Exception to the above stated rule

In some cases, a bank may immediately access the market and trade a currency. It will not wait until the
time where the treasury looks at the currency account positions. That is the case generally for unusually
high amount transactions.
What are the Swift MT messages ???
SWIFT MT Messages
It allows all business and financial institutions to connect their network to exchange their financial messages.
Each network member is identified bi the BIC CODE also known as swift code.

Does BIC stand for “Bank Identifier Code” or "Business Identifier Code”

SWIFT BIC Codes can be used for the identification of financial and non-financial institutions. Companies and
similar entities like Non Governmental Organizations, can therefore be assigned a BIC code. 

It is SWIFT (Society for Worldwide Interbank Financial Telecommunication) which manages the registration of


BIC codes and the BIC code repository. This explains why the BIC code is also called SWIFT code/ ID/ BIC.

• LAFAFRPP is the BIC of Lafarge (LAFA) / in France (FR) / Main office of Paris (PP)
• LAFAFRPP446 is the BIC of Lafarge (LAFA) / in France (FR) / Main office of Paris (PP)/446 branch located in
that HQ Area
SWIFT MT Messages

No Description Space
MT 101 Request for Transfer Customer-to-Bank and Interbank
MT 103 Single Customer Credit Transfer Interbank
MT 202 General Financial Institution Transfer Interbank

MT 202 COV General Financial Institution Transfer Interbank


MT 900 Confirmation of Debit Customer-to-Bank and Interbank
MT 910 Confirmation of Credit Customer-to-Bank and Interbank
Customer Statement Message
MT 940 Customer-to-Bank and Interbank

MT 950 Statement Message Customer-to-Bank and Interbank


MT101 - Request for transfer (Customer to Bank)
MT103 - Single customer credit transfer(Bank to Bank)
SWIFT MT Messages

MT202 - General Financial Institution Transfer (Interbank bank space)


MT910 - Conformation of credit (Bank to customer)
MT950 - Statement message (Bank to customer)
MT900 - Conformation of Debit (Customer to Bank)
MT940 - Statement message (Bank to financial institution)
What are SEPA Messages ???

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