Module 4: trade finance Meaning of international bank International banking is the process in which financial institutions allow foreign

clients---both companies and individuals---to use their services. Perhaps the most talked-about international banks are located in Switzerland. However, many other countries have fully developed international banking infrastructures. Many individuals and companies participate in international banking to minimize (or evade) their tax liability. This strategy, however, has certain disadvantages. In addition, several international organizations have made recent efforts to curb the use of international banks as tax havens. Role
Foreign Exchange

One of the challenges of the import export business is dealing with multiple currencies. The exchange rates are constantly fluctuating. If your import export business partners prefer to be paid in a foreign currency, then consulting an international bank to obtain foreign exchange advice is advisable particular if the monetary value is large. International Banks can offer currency hedge as one of its services. The bank will offer to you the option of buying forward or futures contracts for a specified amount of a certain currency at a future date. Movement of Finances across Borders One of the obstacles to international trade is trust. It is understandable that an exporter is suspicious of an importer's willingness and ability to pay. Unless relationships have been established, it is unlikely that the exporter will allow the importer to pay by using an open account or credit basis. Under this situation, the seller simply bills the buyer after the delivery of the goods. A more secured form of payment will likely be required. This could take place in the form of prepayments where the importer pays the exporter prior to receipt of the goods. However, the importer bears all the risks in this situation. A more balanced approach is the use of Documentary Letters of Credit or Drafts. This involves the use of third parties or intermediaries to ensure that payments are made and received in a timely manner. The documents need to be submitted before payments can occur. Another approach called the Import Letter of Credit is a bank's written promise of paying the exporter once the importer receives the goods Source of Information and Connections Your International Bank has comprehensive information and connections services which will benefit you as the importer tremendously. The bank may have international connections for you to investigate. Minimally, the bank should be able to write you a letter of introduction for you to

establish a credible relationship with a foreign bank in the country of origin. The International Bank can also check your potential supplier's credit worthiness. Market reports both domestic and international should also be available through your bank. Other General Banking Services An International bank has the services to fulfill all your business needs. They range from providing short and long term credit, taking your deposits and executing payments and providing business credit cards. CHIPS There are two principal electronic Interbank payment systems in the United States; the Clearing House Interbank Payment System (CHIPS) and Fed wire. Both systems are effective means for making payments but they are not interchangeable. Each system has its own membership base; uses its own set of messages, formats and computer readable standard codes to identify system participants and beneficiaries and settles its own type of transactions. CHIPS is a net settlement payment system through which the majority of US Dollar payments between large New York Banks are settled. It was established in the year 1990 by the New York clearing house a private association of 11 member banks located in New York city to enable banks to substitute electronic payment for paper cheques. It is automated, computer based message system with net settlements. CHIPS is used for USD foreign exchange settlements, Euro dollar settlements and third currency commercial payments. Today there are 115 CHIPS participants: 11 CHIPS member banks and 104 affiliate members. CHIPS uses CHIPS participant codes to identify system participants and CHIPS Universal Identifiers (UIDS) to identify beneficiaries who frequently receive fund transfers.

Clearing House Automated Payment System (CHAPS) CHAPS is UK based fund transfer company. CHAPS Sterling is a same-day automated payment system for processing sterling payments made within the UK, between its member banks. The main benefit of CHAPS is that it is fast as the money is transferred the same day. Unlike other forms of payment such as cheques, CHAPS payments are irrevocable.

CHAPS Sterling is one of the largest real-time gross settlement (RTGS) systems in the world. Banks themselves use CHAPS to move money around the financial system, but it is also used regularly for other types of payments including: business-to-business payments; by solicitors/licensed conveyancers to transfer the purchase price of a house between the bank accounts of those involved; by individuals buying or selling a high-value item, such as a car, who need a secure, urgent, same-day guaranteed payment.

Correspondents banking
A financial institution that provides services on behalf of another, equal or unequal, financial institution. A correspondent bank can conduct business transactions, accept deposits and gather documents on behalf of the other financial institution. Correspondent banks are more likely to be used to conduct business in foreign countries, and act as a domestic bank's agent abroad. Correspondent accounts are commonly used by banks internationally to undertake financial transactions for themselves and their customers in jurisdictions where they generally have no physical presence. A wide range of services can be settled through a correspondent banking relationship, including: payments, including telegraphic or electronic transfers and drafts Foreign exchange, including wholesale note clearances Payable through and nested accounts Cash letters and collections Managed investments and mortgage schemes Custodian account arrangements Trade finance transactions Syndicated loans. Correspondent banking relationships are vulnerable to money laundering and terrorism financing because they involve a bank carrying out financial transactions on behalf of another bank's customers. This indirect relationship means that the correspondent bank provides services in a situation where it is unlikely to have either verified the identities or obtained first-hand knowledge of the respondent's customers.

If they do not undertake an appropriate level of initial and ongoing due diligence on such accounts, banks expose themselves to a range of risks associated with money laundering or terrorism financing and may find themselves transacting funds that originated from illegal activity. Correspondent accounts with shell banks are also associated with a very high risk of money laundering or terrorism financing. The AML/CTF Act defines a 'shell bank' generally as a corporation that is incorporated in a foreign country and authorized to carry on banking business in that country, but does not have a physical presence in its country of incorporation.

Bid ask rate A two-way price quotation that indicates the best price at which a security can be sold and bought at a given point in time. The bid price represents the maximum price that a buyer or buyers are willing to pay for a security. The ask price represents the minimum price that a seller or sellers are willing to receive for the security. A trade or transaction occurs when the buyer and seller agree on a price for the security. The difference between the bid and asked prices, or the spread, is a key indicator of the liquidity of the asset - generally speaking, the smaller the spread, the better the liquidity. Also known as bid and ask, bid-ask or bid-offer. the bid price and the ask price are never the same. The ask price is always a little higher than the bid price. What this means is if you are buying the stock you pay the ask price (the higher price) and if you are selling the stock you receive the bid price (the lower price).