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.
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
|
||
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.
10.
References
2.
en.wikipedia.org
Bangladesh bank is now dealing with more efficient Automated Clearing House (ACH). Can you please post more detail about the latest clearing house techniques and procedures. Because it will be very mush helpful for me......
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