Dealing Position

Foreign exchange is such a sensitive commodity and subject to wide fluctuations in price that the bank
which deals in it would like to keep the balance always near zero, The bank would endeavour to find a
suitable buyer wherever it purchase so as to dispose of the foreign exchange acquired and be free from
exchange risk. Likewise, whenever it sells it tries to cover its position by a corresponding purchase. But,
in practice, it is not possible to march purchase and sale for each transaction. So the bank tries to match
the total purchases of the day to the day’s total sales. This is done for each foreign currency separately.

If the amount of sales and purchases of a particular foreign currency is equal, the position of the bank in
that currency is said to be ‘square’. If the purchases exceed sales, then the bank is said to be in
‘overbought’ or ‘long’ position. If the sales exceed purchases, then the bank is said to be in ‘oversold’ of
‘short’ position. The bank’s endeavour would be to keep its position square. If it is in overbought or
oversold position, it is exposing itself to exchange risk.

There are tow aspects of maintenance of dealing positions. One is the total of purchase or sale or
commitment of the bank to purchase or sell, irrespective of the fact whether actual delivery has taken
place or not. This is known as the exchange position. The other is the actual balance in the bank’s
account with its correspondent abroad, as a result of the purchase or sale made by the bank. This is
known as the cash position.

Exchange Position and Cash Position

Exchange Position

Exchange position is the new balance of the aggregate purchases and sales made by the bank in
particular currency. This is thus an overall position of the bank in a particular currency. All purchases and
sales whether spot or forward are included in computing the exchange position. All transactions for,
which the bank has agreed for a firm rate with the counterparty are entered into the exchange position
when this commitment is made. Therefore, in the case of forward contracts, they will enter into the
exchange position on the date the contract with the customer is concluded. The actual date of delivery is
not considered here. All purchases add to the balance and all sales reduce the balance.

The exchange position is worked out every day so as to ascertain the position of the bank in that
particular currency. Based on the position arrived at, remedial measures as are needed may be taken.
For example, if the bank finds that it is oversold to the extent of USD 25,000. It may arrange to buy this
amount from the interbank market. Whether this purchase will be spot or forward will depend upon the
cash position. If the bank has commitment of deliver foreign exchange soon, but it has no sufficient
balance in the nostro account abroad, it may purchase spot. If the bank has no immediate requirement
of foreign exchange, it may buy it forward.
Examples of sources for the bank for purchase of foreign currency are:

• Payment of DD, MT, TT, travellers’ cheques, etc.

• Purchase of bills,
• Purchase of other instruments like cheques.
• Forward purchase contracts (entered to the postion of the date of contracts).
• Realisation of bills sent for collection.
• Purchase in interbank/international markets.

Cash Position

Cash position is the balance outstanding in the bank’s nostro account abroad. The stock of foreign
currency is held by the bank in the form of balances with correspondent bank in the foreign centre
concerned. All foreign exchange dealings of the bank are routed through these nostro accounts. For
example, an Indian bank will have an account with Bank of America in New York. If the bank is requested
to issue a demand draft in Us dollars. It will issue the draft on Bank of America, New York. On
presentation at New York the bank’s account with Bank of America will be debited. Likewise, when the
bank purchase a bill in US dollars, it will be sent for collection to Bank of America. Alternatively, the bill
may be sent to another bank in the USA, with instructions to remit proceeds of the bill are credited, on
realisation, to the bank’s account with Bank of America. The purchase of foreign exchange by the bank in
India increases the balance and sale of foreign exchange reduces the balance in the bank’s account with
its correspondent bank abroad.

The exchange position and cash position may now be compared. The exchange position is concerned
with the overall position of the bank with respect to a particular foreign currency. Transactions enter into
the exchange position on the date of purchase/sale or on the date the bank commits itself to purchase
or sell. The cash position is concerned with the exact date on which the bank’s overseas account is
debited/credited.

For example, a bill purchased by the bank will enter into the exchange position on the date of purchase,
but will be taken into account in the cash position only on the date it is realized and credited by the
correspondent bank. Likewise, a forward sale contract enters into the exchange position on the date of
contract itself, but will find a place in the cash position only on the date it is debited by the
correspondent bank.
While the exchange position enables the bank to remain square and avoid exchange risk, the cash
position enables it to keep just adequate funds at the foreign center to meet its commitments as and
when they arise without running into deficits or keeping excess funds unnecessarily and suffering
consequent loss.

Accounting and Reporting: Mirror account, Value date, Exchange profit and loss, R returns

A business uses their accounting records to compile financial reports called Accounting Reports. Reports
can be as brief or comprehensive as needed for custom-made reports intended for specific purposes
such as profitability of a product line or sales by region. Accounting reports are equivalent financial
statements.

The most common accounting reports are:

Income statements: shows the revenues earned during a period, minus the expenses, to arrive at a profit
or loss. Since this judge the performance of a business, this is the most commonly used accounting
report.

Balance sheet: shows the ending asset, liability and equity balances as of the balance sheet date. This
report is used to judge the liquidity and financial reserves of a business.

Statement of cash flows: details the sources and uses of cash related to operations, financing, and
investments. It is the most accurate source of information regarding a business’ ability to generate cash.

Mirror account

Mirror Account is the reflection of NOSTRO Account in the books of the principal bank. This is
maintained for reconciliation purpose and is maintained in both foreign currency and rupees.

Value date

When there is a possibility for discrepancies due to differences in the timing of asset valuation, the value
date is used. In Forex trading, the value date is regarded as the delivery date on which counterparties to
a transaction agree to settle their respective obligations by making payments and transferring
ownership. Due to differences in time zones and bank processing delays, the value date for spot trades in
foreign currencies is usually set two days after a transaction is agreed on. The value date is the day that
the currencies are traded, not the date on which the traders agree to the exchange rate.

The value date is also used in the bond market to calculate accrued interest on a bond. Calculation of
accrued interest takes into account three key dates trade date, settlement date, and value date. The
trade date is the date on which a transaction was executed. The settlement date is the date on which a
transaction is completed. The value date is usually, but not always, the settlement date. The settlement
date can only fall on a business day if a bond was traded on Friday (trade date), the transaction will be
deemed complete on Monday, not Saturday. The value date can fall on any day as seen when calculating
accrued interest, which takes into account every day of a given month.

The value date is also used when evaluating coupon bonds that make semi-annual interest payments.
For example, in the case of savings bonds, the interest is compounded semi-annually, so the value date is
every six months. This removes any uncertainty for investors since their calculations of interest payments
will be the same as the governments.

Exchange profit and loss

A foreign exchange gain/loss occurs when a company buys and/or sells goods and services in a foreign
currency, and that currency fluctuates relative to their home currency. It can create differences in value
in the monetary assets and liabilities, which must be recognized periodically until they are ultimately
settled.

The difference in the value of the foreign currency, when converted to the local currency of the seller, is
called the exchange rate. If the value of the home currency increases after the conversion, the seller of
the goods will have made a foreign currency gain.

However, if the value of the home currency declines after the conversion, the seller will have incurred a
foreign exchange loss. If it is impossible to calculate the current exchange rate at the exact time when
the transaction is recognized, the next available exchange rate can be used to calculate the conversion.

Realized Gains/Losses

Realized gains or losses are the gains or losses on transactions that have been completed. It means that
the customer has already settled the invoice prior to the close of the accounting period.

For example, assume that a customer purchased items worth €1,000 from a US seller, and the invoice is
valued at $1,100 at the invoice date. The customer settles the invoice 15 days after the date the invoice
was sent, and the invoice is valued at $1,200 when converted to US dollars at the current exchange rate.

It means that the seller will have a realized foreign exchange gain of $100 ($1,200–$1,100). The foreign
currency gain is recorded in the income section of the income statement.

Unrealized Gains/Losses

Unrealized gains or losses are the gains or losses that the seller expects to earn when the invoice is
settled, but the customer has failed to pay the invoice by the close of the accounting period. The seller
calculates the gain or loss that would have been sustained if the customer paid the invoice at the end of
the accounting period.
R returns

A return, also known as a financial return, in its simplest terms, is the money made or lost on an
investment over some period of time.

A return can be expressed nominally as the change in dollar value of an investment over time. A return
can also be expressed as a percentage derived from the ratio of profit to investment. Returns can also be
presented as net results (after fees, taxes, and inflation) or gross returns that do not account for anything
but the price change.

A nominal return is the net profit or loss of an investment expressed in the amount of dollars (or other
applicable currency) before any adjustments for taxes, fees, dividends, inflation, or any other influence
on the amount. It can be calculated by figuring the change in the value of the investment over a stated
time period plus any distributions minus any outlays.

Investors purchase assets as a way of saving for the future. Anytime an asset is purchased, the purchaser
is forgoing current consumption for future consumption. To make such a transaction worthwhile the
investors hope (sometimes expect) to have more money for future consumption than the amount they
give up in the present. Thus investors would like to have as high a rate of return on their investments as
possible.

Forex Risk Management: Risk in Forex Dealing, Measure of Value at Risk

Trading is the exchange of goods or services between two or more parties. So, if you need gasoline for
your car, then you would trade your dollars for gasoline. In the old days, and still in some societies,
trading was done by barter, where one commodity was swapped for another.

A trade may have gone like this: Person A will fix Person B’s broken window in exchange for a basket of
apples from Person B’s tree. This is a practical, easy to manage, day-to-day example of making a trade,
with relatively easy management of risk. In order to lessen the risk, Person A might ask Person B to show
his apples, to make sure they are good to eat, before fixing the window. This is how trading has been for
millennia: a practical, thoughtful human process.

Making money off the difference between the values of currencies “foreign exchange” or “forex” trading
isn’t for the faint of heart. For one thing, there are no centralized markets like the stock exchanges to
facilitate your trades. For another, the risks go well beyond an individual companies, or an entire
industry’s, performance. However, if you understand the risks, and trade conservatively, you can
effectively trade currencies.
Risk in Forex Dealing

Foreign exchange risk, also known as exchange rate risk, is the risk of financial impact due to exchange
rate fluctuations. In simpler terms, foreign exchange risk is the risk that a business’ financial performance
or financial position will be impacted by changes in the exchange rates between currencies.

Types of Foreign Exchange Risk

The three types of foreign exchange risk include:

Economic risk

Economic risk, also known as forecast risk, is the risk that a company’s market value is impacted by
unavoidable exposure to exchange rate fluctuations. Such a type of risk is usually created by
macroeconomic conditions such as geopolitical instability and/or government regulations.

For example, a Canadian furniture company that sells locally will face economic risk from furniture
importers, especially if the Canadian currency unexpectedly strengthens.

Transaction risk

Transaction risk is the risk faced by a company when making financial transactions between jurisdictions.
The risk is the change in the exchange rate before transaction settlement. Essentially, the time delay
between transaction and settlement is the source of transaction risk. Transaction risk can be mitigated
using forward contracts and options.

Translation risk

Translation risk, also known as translation exposure, refers to the risk faced by a company headquartered
domestically but conducting business in a foreign jurisdiction, and of which the company’s financial
performance is denoted in its domestic currency. Translation risk is higher when a company holds a
greater portion of its assets, liabilities, or equities in a foreign currency.

For example, a parent company that reports in Canadian dollars but oversees a subsidiary based in China
faces translation risk, as the subsidiary’s financial performance which is in Chinese yuan is translated into
Canadian dollar for reporting purposes.

Margin Risk

Using leverage in forex trading isn’t all that different from using it with stocks and options. When you
trade on margin, you borrow money from your broker to finance trades that require funds in excess of
your actual cash balance. If your trade goes south, you might face a margin call, requiring cash in excess
of your original investment to come back into compliance.

While leverage can exponentially increase profits, it can do the same with losses. Currency markets can
be volatile even small price shifts can trigger margin calls. If you’re heavily leveraged, you might face
substantial losses. If you’re a novice trader, consider the major risks of trading on margin before
borrowing from your broker.

Measure of Value at Risk

Value at risk (VaR) is a statistic that quantifies the extent of possible financial losses within a firm,
portfolio, or position over a specific time frame. This metric is most commonly used by investment and
commercial banks to determine the extent and probabilities of potential losses in their institutional
portfolios.

Risk managers use VaR to measure and control the level of risk exposure. One can apply VaR calculations
to specific positions or whole portfolios or use them to measure firm-wide risk exposure.

VaR modelling determines the potential for loss in the entity being assessed and the probability that the
defined loss will occur. One measures VaR by assessing the amount of potential loss, the probability of
occurrence for the amount of loss, and the timeframe.

A financial firm, for example, may determine an asset has a 3% one-month VaR of 2%, representing a 3%
chance of the asset declining in value by 2% during the one-month time frame. The conversion of the 3%
chance of occurrence to a daily ratio places the odds of a 2% loss at one day per month.

Using a firm-wide VaR assessment allows for the determination of the cumulative risks from aggregated
positions held by different trading desks and departments within the institution. Using the data provided
by VaR modelling, financial institutions can determine whether they have sufficient capital reserves in
place to cover losses or whether higher-than-acceptable risks require them to reduce concentrated
holdings.

VaR Methodologies

There are three main ways of computing VaR. The first is the historical method, which looks at one’s
prior returns history and orders them from worst losses to greatest gains following from the premise
that past returns experience will inform future outcomes.

The second is the variance-covariance method. Rather than assuming the past will inform the future, this
method instead assumes that gains and losses are normally distributed. This way, potential losses can be
framed in terms of standard deviation events from the mean.

Despite being widely used, VAR suffers from a number of drawbacks. Firstly, while quantifying the
potential loss within that level, it gives no indication of the size of the loss associated with the tail of the
probability distribution out of the confidence level. Secondly, it is not additive, so VAR figures of
components of a portfolio do not add to the VAR of the overall portfolio, because this measure does not
take correlations into account and a simple addition could lead to double counting. Lastly, different
calculation methods give different results.
Foreign Exchange Market: Nature, Structure, Types of Transactions

The Foreign Exchange Market is a market where the buyers and sellers are involved in the sale and
purchase of foreign currencies. In other words, a market where the currencies of different countries are
bought and sold is called a foreign exchange market.

The structure of the foreign exchange market constitutes central banks, commercial banks, brokers,
exporters and importers, immigrants, investors, tourists. These are the main players of the foreign
market, their position and place are shown in the figure below.

At the bottom of a pyramid are the actual buyers and sellers of the foreign currencies- exporters,
importers, tourist, investors, and immigrants. They are actual users of the currencies and approach
commercial banks to buy it.

The commercial banks are the second most important organ of the foreign exchange market. The banks
dealing in foreign exchange play a role of “market makers”, in the sense that they quote on a daily basis
the foreign exchange rates for buying and selling of the foreign currencies. Also, they function as clearing
houses, thereby helping in wiping out the difference between the demand for and the supply of
currencies. These banks buy the currencies from the brokers and sell it to the buyers.

The third layer of a pyramid constitutes the foreign exchange brokers. These brokers function as a link
between the central bank and the commercial banks and also between the actual buyers and
commercial banks. They are the major source of market information. These are the persons who do not
themselves buy the foreign currency, but rather strike a deal between the buyer and the seller on a
commission basis.

The central bank of any country is the apex body in the organization of the exchange market. They work
as the lender of the last resort and the custodian of foreign exchange of the country. The central bank
has the power to regulate and control the foreign exchange market so as to assure that it works in the
orderly fashion. One of the major functions of the central bank is to prevent the aggressive fluctuations
in the foreign exchange market, if necessary, by direct intervention. Intervention in the form of selling
the currency when it is overvalued and buying it when it tends to be undervalued.

Functions of Foreign Exchange Market

Foreign Exchange Market is the market where the buyers and sellers are involved in the buying and
selling of foreign currencies. Simply, the market in which the currencies of different countries are bought
and sold is called as a foreign exchange market.

The foreign exchange market is commonly known as FOREX, a worldwide network, that enables the
exchanges around the globe. The following are the main functions of foreign exchange market, which are
actually the outcome of its working:
Transfer Function: The basic and the most visible function of foreign exchange market is the transfer of
funds (foreign currency) from one country to another for the settlement of payments. It basically
includes the conversion of one currency to another,wherein the role of FOREX is to transfer the
purchasing power from one country to another.

For example, If the exporter of India import goods from the USA and the payment is to be made in
dollars, then the conversion of the rupee to the dollar will be facilitated by FOREX. The transfer function
is performed through a use of credit instruments, such as bank drafts, bills of foreign exchange, and
telephone transfers.

Credit Function: FOREX provides a short-term credit to the importers so as to facilitate the smooth flow
of goods and services from country to country. An importer can use credit to finance the foreign
purchases. Such as an Indian company wants to purchase the machinery from the USA, can pay for the
purchase by issuing a bill of exchange in the foreign exchange market, essentially with a three-month
maturity.

Hedging Function: The third function of a foreign exchange market is to hedge foreign exchange risks.
The parties to the foreign exchange are often afraid of the fluctuations in the exchange rates, i.e., the
price of one currency in terms of another. The change in the exchange rate may result in a gain or loss to
the party concerned.

Thus, due to this reason the FOREX provides the services for hedging the anticipated or actual
claims/liabilities in exchange for the forward contracts. A forward contract is usually a three month
contract to buy or sell the foreign exchange for another currency at a fixed date in the future at a price
agreed upon today. Thus, no money is exchanged at the time of the contract.

There are several dealers in the foreign exchange markets, the most important amongst them are the
banks. The banks have their branches in different countries through which the foreign exchange is
facilitated, such service of a bank are called as Exchange Banks.

Types of Foreign Exchange Transactions

The Foreign Exchange Transactions refers to the sale and purchase of foreign currencies. Simply, the
foreign exchange transaction is an agreement of exchange of currencies of one country for another at an
agreed exchange rate on a definite date.

Spot Transaction: The spot transaction is when the buyer and seller of different currencies settle their
payments within the two days of the deal. It is the fastest way to exchange the currencies. Here, the
currencies are exchanged over a two-day period, which means no contractis signed between the
countries. The exchange rate at which the currencies are exchanged is called the Spot Exchange Rate.
This rate is often the prevailing exchange rate. The market in which the spot sale and purchase of
currencies is facilitated is called as a Spot Market.
Forward Transaction: A forward transaction is a future transaction where the buyer and seller enter into
an agreement of sale and purchase of currency after 90 days of the dealat a fixed exchange rate on a
definite date in the future. The rate at which the currency is exchanged is called a Forward Exchange
Rate. The market in which the deals for the sale and purchase of currency at some future date is made is
called a Forward Market.

Future Transaction: The future transactions are also the forward transactionsand deals with the contracts
in the same manner as that of normal forward transactions. But however, the transactions made in a
future contract differs from the transaction made in the forward contract on the following grounds:

The forward contracts can be customizedon the client’s request, while the future contracts are
standardized such as the features, date, and the size of the contracts is standardized.

The future contracts can only be traded on the organized exchanges,while the forward contracts can be
traded anywhere depending on the client’s convenience.

No marginis required in case of the forward contracts, while the margins are required of all the
participants and an initial margin is kept as collateral so as to establish the future position.

Swap Transactions: The Swap Transactions involve a simultaneous borrowing and lending of two different
currencies between two investors. Here one investor borrows the currency and lends another currency
to the second investor. The obligation to repay the currencies is used as collateral, and the amount is
repaid at a forward rate. The swap contracts allow the investors to utilize the funds in the currency held
by him/her to pay off the obligations denominated in a different currency without suffering a foreign
exchange risk.

Option Transactions: The foreign exchange option gives an investor theright, but not the obligation to
exchange the currency in one denomination to another at an agreed exchange rate on a pre-defined
date. An option to buy the currency is called as a Call Option, while the option to sell the currency is
called as a Put Option.

Thus, the Foreign exchange transaction involves the conversion of a currency of one country into the
currency of another country for the settlement of payments.

Settlement of Transactions: Swift, Chips, Chaps, Fed wire

Transaction settlement is the process of moving funds from the cardholder’s account to the merchant’s
account following a credit or debit card purchase.

The issuer will route funds to the acquirer via the card network. For debit card payments, the funds will
be withdrawn directly from the cardholder’s bank account. For credit card payments, the issuer will
forward funds to the acquirer and the cardholder will reimburse the issuer at a later date. When the
acquirer receives the funds, the amount of the transaction minus fees will be deposited into the
merchant’s account.

Swift

The Society for Worldwide Interbank Financial Telecommunication (SWIFT), legally S.W.I.F.T. SCRL, is a
Belgian cooperative society that serves as an intermediary and executor of financial transactions
between banks worldwide. It also sells software and services to financial institutions, mostly for use on
its proprietary “SWIFTNet”, and ISO 9362 Business Identifier Codes (BICs), popularly known as “SWIFT
codes”.

SWIFT does not facilitate funds transfer: rather, it sends payment orders, which must be settled by
correspondent accounts that the institutions have with each other. To exchange banking transactions,
each financial institution must have a banking relationship by either being legally organized as a bank or
through its affiliation with at least one bank. While SWIFT transports financial messages in a secure
manner, it does not hold accounts for its members nor performs any form of clearing or settlement.

As of 2018, around half of all high-value cross-border payments worldwide used the SWIFT network, and
in 2015, SWIFT linked more than 11,000 financial institutions in over 200 countries and territories, who
were exchanging an average of over 32 million messages per day (compared to an average of 2.4 million
daily messages in 1995).

Though widely utilized, SWIFT has been criticized for its inefficiency. In 2018, the London-based Financial
Times noted that transfers frequently “pass through multiple banks before reaching their final
destination, making them time-consuming, costly and lacking transparency on how much money will
arrive at the other end”. SWIFT has since introduced an improved service called “Global Payments
Innovation” (GPI), claiming it was adopted by 165 banks and was completing half its payments within 30
minutes. SWIFT has also attracted controversy for enabling the United States government to monitor,
and in some cases interfere with, intra-European transactions.

As a cooperative society under Belgian law, SWIFT is owned by its member financial institutions. It is
headquartered in La Hulpe, Belgium, near Brussels; its main building was designed by Ricardo Bofill
Taller de Arquitectura and completed in 1989. The chairman of SWIFT is Yawar Shah of Pakistan, and its
CEO is Javier Pérez-Tasso of Spain. SWIFT hosts an annual conference, called Sibos, specifically aimed at
the financial services industry.

SWIFT has become the industry standard for syntax in financial messages. Messages formatted to SWIFT
standards can be read and processed by many well-known financial processing systems, whether or not
the message traveled over the SWIFT network. SWIFT cooperates with international organizations for
defining standards for message format and content. SWIFT is also Registration authority (RA) for the
following ISO standards:

ISO 9362: 1994 Banking: Banking telecommunication messages; Bank identifier codes

ISO 10383: 2003 Securities and related financial instruments; Codes for exchanges and market
identification (MIC)

ISO 13616: 2003 IBAN Registry

ISO 15022: 1999 Securities; Scheme for messages (Data Field Dictionary) (replaces ISO 7775)

ISO 20022-1: 2004 and ISO 20022-2:2007 Financial services; Universal Financial Industry message
scheme

Chips

The Clearing House Interbank Payments System (CHIPS) is a United States private clearing house for
large-value transactions. By 2015, it was settling well over US$1.5 trillion a day in around 250,000
interbank payments in cross border and domestic transactions. Together with the Fedwire Funds Service
(which is operated by the Federal Reserve Banks), CHIPS forms the primary U.S. network for large-value
domestic and international USD payments where it has a market share of around 96%. CHIPS transfers
are governed by Article 4A of Uniform Commercial Code.

Unlike the Fedwire system which is part of a regulatory body, CHIPS is owned by the financial institutions
that use it. For payments that are less time-sensitive in nature, banks typically prefer to use CHIPS
instead of Fedwire, as CHIPS is less expensive (both by charges and by funds required). One of the
reasons is that Fedwire is a real-time gross settlement system, while CHIPS allows payments to be
netted.

There are two steps to processing funds transfers: clearing and settlement. Clearing is the transfer and
confirmation of information between the payer (sending financial institution) and payee (receiving
financial institution). Settlement is the actual transfer of funds between the payer’s financial institution
and the payee’s financial institution. Settlement discharges the obligation of the payer financial
institution to the payee financial institution with respect to the payment order. Final settlement is
irrevocable and unconditional. The finality of the payment is determined by that system’s rules and
applicable law.

In general, payment messages may be credit transfers or debit transfers. Most large-value funds transfer
systems are credit transfer systems in which both payment messages and funds move from the payer
financial institution to the payee financial institution. An institution transmits a payment order (a
message that requests the transfer of funds to the payee) to initiate a funds transfer. Typically, largevalue
payment system operating procedures include identification, reconciliation, and confirmation
procedures necessary to process the payment orders. In some systems, financial institutions may
contract with one or more third parties to help perform clearing and settlement activities.

The legal framework for institutions offering payment services is complex. There are rules for largevalue
payments that are distinct from retail payments. Large-value funds transfer systems differ from retail
electronic funds transfer (EFT) systems, which generally handle a large volume of low-value payments
including automated clearing house (ACH) and debit and credit card transactions at the point of sale.

Chaps

The Clearing House Automated Payments System (CHAPS) is a company that facilitates large money
transfers denominated in British pounds (GBP). CHAPS is administered by the Bank of England (BoE) and
is used by 30 participating financial institutions. Approximately 5,500 additional institutions also engage
with the system by way of partnership agreements with the 30 primary members.

CHAPS is used by large financial institutions that need to transfer billions of dollars’ worth of currency
each day. To assist in these transfers, CHAPS enables real-time fund transfers and can accommodate
frequent large transfers with virtually no delay. The speed of CHAPS also substantially eliminates the risk
that senders will cancel their transfers before they are accepted by the recipient.

The primary members of CHAPS are large financial firms with business interests worldwide. Examples of
current CHAPS members include American firms such as Bank of America (BAC), Citibank (C), and
JPMorgan Chase (JPM); British firms such as Barclays (BARC), Lloyds Bank (LLOY), and Standard Chartered
(STAN); and European firms such as Deutsche Bank (DBK), UBS (UBSG), and BNP Paribas (BNP).

Fedwire

Fedwire (formerly known as the Federal Reserve Wire Network) is a real-time gross settlement funds
transfer system operated by the United States Federal Reserve Banks that allows financial institutions to
electronically transfer funds between its more than 9,289 participants (as of March 19, 2009). Transfers
can only be initiated by the sending bank once they receive the proper wiring instructions for the
receiving bank. These instructions include: the receiving bank’s routing number, account number, name
and dollar amount being transferred. This information is submitted to the Federal Reserve via the
Fedwire system. Once the instructions are received and processed, the Fed will debit the funds from the
sending bank’s reserve account and credit the receiving bank’s account. Wire transfers sent via Fedwire
are completed the same business day, with many being completed instantly.
In conjunction with Clearing House Interbank Payments System (CHIPS), operated by The Clearing House
Payments Company, a private company, Fedwire is the primary U.S. network for large-value or
timecritical domestic and international payments, and it is designed to be highly resilient. In 2012, CHIPS
was designated a systemically important financial market utility (SIFMU) under Title VIII of the Dodd–
Frank
Act, which means that CHIPS is subject to heightened regulatory scrutiny by the Federal Reserve Board.

The Fedwire system, along with the other two wholesale payment systems operated by the Fed, goes
back more than 100 years. It is considered to be very robust and reliable.

The Fed began to transfer funds between parties as early as 1915. In 1918, the central bank established
its own proprietary system, which processed the transfers.

Until 1981, the Fedwire system was only available to member banks and services were free of charge.
The Fed began charging fees after the Depository Institutions Deregulation and Monetary Control Act of
1980 (the Monetary Control Act) was signed into law.