Clearing House Techniques & Operations

1. History of Bangladesh Bank

After the liberation war, and the eventual independence of Bangladesh, the Government of Bangladesh reorganized the Dhaka branch of the State Bank of Pakistan as the central bank of the country, and named it Bangladesh Bank. This reorganization was done pursuant to Bangladesh Bank Order, 1972, and the Bangladesh Bank came into existence with retrospective effect from 16 December 1971.

2. What is Clearing House?

Clearinghouses have been around a long time and have been used for many types of transactions, yet virtually all clearinghouses perform certain basic functions. Notably, by centralizing and standardizing specific classes of financial transactions, clearinghouses reduce the costs and operational risks of clearing and settlement among multiple market participants. In many cases they also act as a guarantor of transactions–the counterparty to every trade–thereby helping to reduce counterparty credit and liquidity risks. However, the flip side of the centralization of clearing and settlement activities in clearinghouses is the concentration of substantial financial and operational risk in a small number of organizations, a development with potentially important systemic implications. Because the failure of, or loss of confidence in, a major clearinghouse would create enormous uncertainty about the status of initiated transactions and, consequently, about the financial positions of clearinghouse participants and their customers, strong risk management at these organizations as well as effective prudential oversight is essential.

3. History of Clearing House

There is a nice history attached to their development:

A historical perspective is helpful for understanding the economics of clearinghouses and the implications of their operations for financial stability. The first important clearinghouse in the United States, the New York Clearing House, was founded by New York City’s commercial banks in 1853 to streamline the clearing and settling of checks. By one account, before the New York Clearing House was set up, the clearing and settlement process involved employees from 60 banks crisscrossing each other’s paths through the city streets to present checks, a time-consuming process filled with “confusion, disputes and unavoidable blunders.The establishment of the clearinghouse improved the situation almost immediately, resulting in significant savings in time, effort, and financial costs. By the late 19th century, check clearinghouses had been established across the United States.

In the securities and derivatives markets, the story unfolded a bit later and was more complex than in the case of checks. Nevertheless, many of the essential themes are the same. In 1892, on the centennial of the famous Buttonwood Agreement, the New York Stock Exchange took its first steps to improve clearing and settlement by creating a clearinghouse for limited types of brokers’ trades. Faced with growing volumes of trading and the associated clearing costs after World War I, the New York Stock Exchange took a further step in 1920 by establishing the Stock Clearing Corporation; this new clearinghouse reduced the number of checks needed for settlements by up to 90 percent and the volume of funds and credit needed by 70 percent or more.

4. Objectives of Clearing House

The objectives of clearing house can be mentioned as follows-
a. To take economic policy.
b. Quick settlement of transaction.
c. To save time.
d. To accelerate the advantages of transaction.
e. Influences on the cash deposit of bank.
f. Assistance in realizing economic condition.
g. Helpful in transfer of money.
h. To supervise the clearing works of the banks from time to time.

5. Payment and Settlement Systems of BB Clearing House

The BB has launched a project for automation of check clearing and electronic credit and direct debit transfers that is in an advanced stage of implementation. The BB board also approved new payment and settlement systems regulations, and a new Payment Systems Division has been established at BB. The BB leads a high-level National Payment System Council, which was established to support the development of payment, clearing, and settlement systems in Bangladesh and to serve as a forum for cooperation in domestic and international payment matters.

There are four payment and settlement systems operating in Bangladesh. They are: (a) Bangladesh Bank's Clearing Houses in Dhaka and its branches in seven other cities; (b) Sonali Bank's Clearing Houses in 31 cities where there are no BB branch (c) the BB large value cheque settlement system; and (d) the Bangladesh Bank Foreign Currency Clearing System in Dhaka which clears and settle foreign currency cheques and pay orders. There are two clearings each day at 9:30 a.m. and 5:30 p.m. at the BB's clearing house in each branch at which cheques, bank drafts, payorders etc.

5.1. Components of Automated Clearing House

Bangladesh Automated Clearing House (BACH), the Electronic Clearing House, has two components - the Automated Cheque Processing System and the Electronic Funds Transfer. Both the systems will operate in batch processing mode – transactions received from the banks during the day will be processed at a pre-fixed time and be settled through a single multilateral netting figure on each individual bank’s respective books maintained with Bangladesh Bank.

5.1.1. Automated Cheque Processing System

Bangladesh Automated Cheque Processing Systems (BACPS), the electronic cheque processing of paper item, will use Cheque Imaging and Truncation (CIT) technology. In this system, cheque-leaves submitted for clearing will not be carried physically to the clearing house as it is done recently. Instead, banks will capture images and corresponding information of the submitted cheque leaves and will send them to the BACPS using a secured communication link. BACPS participants, i.e. commercial banks, financial institutions, money & capital market agencies and related Government offices have been sensitised. All the clearing instruments, i.e. cheques, drafts, payment orders, dividend and refund warrants, etc. have been standardised. The new cheques will contain Magnetic Ink Character Recognition (MICR) line which includes information on the amount, transaction code; clients account information, routing number and the cheque leaf’s serial number. Specially schemed routing numbers have been assigned to the bank branches for easy identification of origin and destination of instruments. The system will support both intraregional and inter-regional clearings and is based on a centralised processing centre located in Dhaka and in designated clearing regions. The proposed processes and systems will conform to the international best practices and also will represent the most cost effective solution for cheque processing.

5.1.1.1. Point of Truncation:

All scheduled banks who are members of the Dhaka Clearing House will be required to submit their list of selected branches and to finalize their "point of truncation" for submission of their outward cheque images and data to BACPS and be prepared to handle cheque image and data as part of their inward clearing operations. Banks can choose to truncate and process their cheques at individual branch level or at a consolidation point in line with their business needs. However, it must be noted that each bank will have only one Point of Truncation for BACPS.

5.1.1.2. Scanning Standard:

Images must be captured for both the sides (front and back) of each instrument in the format prescribed below:

	Image Type	DPI range	Format	Compression
01.	Front : Black and White	200-300 DPI	TIFF	CCITT G4
02.	Back : Black and White	200-300 DPI	TIFF	CCITT G4

5.1.1.3. Software/Integration:

All banks will receive images and data, not paper cheques, from the BACPS for all of the items for which they are the paying bank. Therefore, all banks must acquire the capability to accept as well as to send the image files and data from and to the BACPS. However, those banks who will not be able to equip themselves for processing out clearing items electronically within the stipulated time, will be allowed to process their ‘out-clearings’ by using the Bangladesh Bank’s own facility at Motijheel for a limited time. However, banks availing of ‘out-clearing’ facilities will have to acquire the capability to receive their ‘In-clearing’ items electronically. Once in-clearing data and images are delivered to a bank by BACPS, the subsequent verification and processing of that information becomes the responsibility of the respective paying bank. Bangladesh Bank will supply a gateway software module, known as the Participating Bank Module (PBM) which will act as a gateway, amongst other functions, enabling the receipt or transmission of images and transaction data from and to the BACPS. Currently Bangladesh Bank is receiving the information of Cheques/instruments on diskettes from all member banks of clearing house and processes the same using a software 'NIKASH' developed in-house

5.1.1.4. Communication Links:

All scheduled banks are required to put in place two secure communication links, one with BACH Headquarter at Motijheel and another with the BACH Disaster Recovery Site (DRS) at Mirpur. The size and scalability of these links will depend on each bank’s mode of operation and daily volumes. It is preferred that banks acquire fibre optic link and another redundant communication link with BACH at Motijheel and DRS at Mirpur, Dhaka.

5.1.2. Electronic Funds Transfer System

Bangladesh Electronic Funds Transfer Network (BEFTN) is the processing and delivery centre for the distribution and settlement of electronic debit and credit transactions among its participants. The BEFTN is envisaged as a system of participating banks connected with the EFT Operator via communication lines. This network will facilitate the transmission of payments between the banks electronically, which will make faster and efficient means of inter-bank clearing than the existing paper based system. The Network will start with credit transactions and gradually progress to debit transactions. This will dramatically bring down the operational cost, reduce risk and will increase the efficiency of the payments process.

5.2. Automated Clearing House Timing:

The operating hours of the Automated Clearing House is an important factor as far as better service is concerned. So, to enhance banks’ ability to serve their customers better, the following operating timeframe for BACPS has been set:

	Clearing Window	Cut Offs
	Clearing Window	Presentment	Return	Settlement
01.	Regular Clearing	12:00 Hrs	17:00 Hrs	17:01 Hrs
02.	High Value Clearing	11:00 Hrs	13:00 Hrs	13:01 Hrs

5.3. Manual Paper-based same-day settlement of large-value payments

Interbank payments arising from transactions in the money market, government securities market, reputation, operations, the Taka leg of foreign exchange transactions, and the debit positions from BB check clearing are settled manually in the Deposit Accounts Department (DAD) of BB. The settlement involves several BB departments, is cumbersome, and sometimes results in errors and settlement delays. The number of large value payments daily can exceed 2,000 (large-value payments processed through both the Clearing House and the DAD) and is likely to increase with the development of the financial markets. The BB also provides a foreign exchange clearing system.

5.4. The inter-bank check clearing system

Interbank checks are cleared in the Bangladesh Bank Check Clearing House. The system is based on physical exchange of checks: all of the processes, including the collection and submission of checks by banks, are manual and paper-based. Calculated multilateral net debit positions of participants in the BB check clearing are settled in accounts that they maintain with the Bangladesh Bank. Both retail checks and customer large-value checks are processed through the system.

Check clearing is decentralized: the BB Dhaka City Clearing House and the seven BB branches across the country process clearings separately. Each commercial bank branch operating in the BB’s seven branches is required to maintain a current account in each BB branch for clearing and settlement purposes. In addition, the BB has authorized state-owned Sonali Bank to act as a check clearing and settlement institution in areas without BB branches. In 2008, 16.44 million instruments (checks, drafts, and pay orders) with a value of Tk. 4,300 billion were cleared through the Dhaka Clearing House, about 75 percent of the total volume of checks. The BB branches and Sonali Bank processed 15 percent and 10 percent, respectively.

6.
Implementing the Bangladesh Automatic Clearing House (BACH)

Automated clearing house is centralized automated system for processing and clearing of electronic payment instruments that will reduce settlement and operational risk. In the first phase, the current manual, paper-based check clearing will be replaced by the Bangladesh Automated Check Processing Service, an electronic clearing service based on check imaging and truncation for the Dhaka region. This system will allow for automated, same day settlement of high-value checks and next day (T+1) settlement for other checks. In the second stage, the system will offer clearing of electronic credit and direct debit instruments in a Bangladesh Electronic Funds Transfer Network, which will further reduce settlement risk and promote modern payment instruments.

7. Advantage of Clearing House

Reduced Costs

Reliable decrease in operating cost
Reduce, even eliminate, postage and express delivery charges

Immediate Confirmation

Email notification when we receive your claims and begin processing
Claims are validated and transmitted to payer prior to their daily cut-off points

Increased Productivity

Up-to-date payer specific audit system
Notification of rejected claims within minutes rather than weeks

Streamlined Process

Electronic process allows you to no longer file and track paper claims
Audit and payer reports eliminate worry

Faster Reimbursement

Claim lifecycle is drastically reduced
Eliminate the time wasted on mail float

8. Disadvantage of Clearing House

· Provided Software Requires Training and Additional Time for a Learning Curve.

· Limited by the Standard EDI Templates of the Clearinghouse.

· Dependant on Data Entry Services of Clearinghouse, for Paper to Fax Submissions.

· Free Software Provided May Not Be Accepted by All Your Trading Partners.

· Claim Information Sometimes Must Be Entered a Second Time to Use Carrier-supplied Software.

· Claims Are Edited and Validated to Insure They Are Error Free. This Is Done Manually and Requires an Additional Point of Entry .

· Risk Management May Be Increased.

9. Recommendations

Full implementation of the BACH automated system is a priority; in addition the legal framework and payments oversight may need strengthening, and settlements of large value payments and government bills and bonds trades could be enhanced. A legal risk may exist that the use of electronic facsimiles of the checks will be challenged in the courts: for example, under the Negotiable Instruments Act. The new Payment and Settlement Systems Regulations may not prevent this. Settlement risks in large-value payments need to be reduced by additional system changes, such as real-time gross settlement. Settlement of government bills and bonds trades would be enhanced by implementing a DVP mechanism. The BB’s role in payment and settlement systems would be improved by formalizing its oversight, policies, and tools. Strengthening the dialogue with stakeholders would contribute to the success of the reforms.