UNIT 1

INTERNATIONAL MONETARY SYSTEM

International monetary system refers to a system that forms rules and standards for facilitating international trade
among the nations. It helps in reallocating the capital and investment from one nation to another. It is the global
network of the government and financial institutions that determine the exchange rate of different currencies for
international trade. It is a governing body that sets rules and regulations by which different nations exchange currencies
with each other.

International monetary system motivates and encourages the nations to participate in the international trade to
improve their BOP and minimize the trade deficit. It has grown over the years as a single architectural body with a vision
to integrate the global economy. Some of the important achievements of the international monetary system over the
years have been the establishment of World Bank and International Monetary Fund in the year 1944. An international
monetary system is a set of internationally agreed rules, conventions and supporting institutions that
facilitate international trade, cross border investment and generally the reallocation of capital between nation states. It
should provide means of payment acceptable to buyers and sellers of different nationalities, including deferred
payment. To operate successfully, it needs to inspire confidence, to provide sufficient liquidity for fluctuating levels of
trade, and to provide means by which global imbalances can be corrected.

The international monetary system consists of (i) exchange rate arrangements; (ii) capital flows; and (iii) a collection of
institutions, rules, and conventions that govern its operation. Domestic monetary policy frameworks dovetail, and are
essential to, the global system. A well-functioning system promotes economic growth and prosperity through the
efficient allocation of resources, increased specialization in production based on comparative advantage, and the
diversification of risk. It also encourages macroeconomic and financial stability by adjusting real exchange rates to shifts
in trade and capital flows.

To be effective, the international monetary system must deliver both sufficient nominal stability in exchange rates and
domestic prices, and timely adjustment to shocks and structural changes. Attaining this balance can be very difficult.
Changes in the geographic distribution of economic and political power, the global integration of goods and asset
markets, wars, and inconsistent monetary and fiscal policies all have the potential to undermine a monetary system.
Past systems could not incent systemic countries to adjust policies in a timely manner. The question is whether the
current shock of integrating one-third of humanity into the global economy – positive as it is – will overwhelm the
adjustment mechanisms of the current system.

The Evolution of the International Monetary System

THE GOLD STANDARD

Under the classical gold standard, from 1870 to 1914, the international monetary system was largely decentralized and
market-based. There was minimal institutional support, apart from the joint commitment of the major economies to
maintain the gold price of their currencies.
The gold standard is a monetary system where a country's currency or paper money has a value directly linked to gold.
With the gold standard, countries agreed to convert paper money into a fixed amount of gold. A country that uses the gold
standard sets a fixed price for gold and buys and sells gold at that price. That fixed price is used to determine the value of
the currency. For example, if the U.S. sets the price of gold at $500 an ounce, the value of the dollar would be 1/500th of
an ounce of gold. As its name suggests, the term gold standard refers to a monetary system in which the value
of currency is based on gold.
A fiat system, by contrast, is a monetary system in which the value of currency is not based on any
physical commodity but is instead allowed to fluctuate dynamically against other currencies on the foreign-exchange
markets.

In the decades prior to the First World War, international trade was conducted on the basis of what has come to be known
as the classical gold standard. In this system, trade between nations was settled using physical gold. Nations with trade
surpluses accumulated gold as payment for their exports. Conversely, nations with trade deficits saw their gold
reserves decline, as gold flowed out of those nations as payment for their imports.

The Advantages and disadvantages of the Gold Standard

The gold standard dramatically reduced the risk in exchange rates because it established fixed exchange rates between
currencies. Any fluctuations were relatively small. This made it easier for global companies to manage costs and pricing.
International trade grew throughout the world, although economists are not always in agreement as to whether the
gold standard was an essential part of that trend.

The second advantage is that countries were forced to observe strict monetary policies. They could not just print money to
combat economic downturns. One of the key features of the gold standard was that a currency had to actually have in
reserve enough gold to convert all of its currency being held by anyone into gold. Therefore, the volume of paper currency
could not exceed the gold reserves. Gold standard provided stable exchange rates, which were conducive for trade policy
because this eliminates another source of price instability.
An efficient operating gold standard exchange rate system ensures
automatic adjustment of balance payment problem through price changes. This system imposes orthodoxy on fiscal
policies and restricts governments from resorting to indiscriminate spending

The third major advantage was that gold standard would help a country correct its trade imbalance. For example, if a
country was importing more than it is exporting, (called a trade deficit), then under the gold standard the country had to
pay for the imports with gold. The government of the country would have to reduce the amount of paper currency,
because there could not be more currency in circulation than its gold reserves. With less money floating around, people
would have less money to spend (thus causing a decrease in demand) and prices would also eventually decrease. As a
result, with cheaper goods and services to offer, companies from the country could export more, changing the
international trade balance gradually back to being in balance. For these three primary reasons, and as a result of the
2008 global financial crises, some modern economists are calling for the return of the gold standard or a similar system.

The disadvantages are that (1) it may not provide sufficient flexibility in the supply of money, because the supply of
newly mined gold is not closely related to the growing needs of the world economy for commensurate supply of money,
(2) a country may not be able to isolate its economy from depression or inflation in the rest of the world, and (3) the
process of adjustment for a country with a payments deficit can be long and painful whenever an increase
in unemployment or a decline in the rate of economic expansion occur. The burden of BOP adjustment shifts to domestic
variables which subordinate the domestic economy to external economic factors.
There is always a problem of selecting an appropriate par value which
reflects the external and internal equilibria.
Emergence of misaligned values might have encouraged speculations of
sufficient magnitude to effect exchange rate realignment.
The gold standard was dependent on an adequate supply and not excess
supply of new gold. The mining process of gold involves huge cost and is used as a reserve
only. The same purpose can be served by some other asset that has no
cost.There is unequal geographic distribution of gold throughout the world.
The countries which had greater gold reserves enjoyed greater strength

From the ancient times, gold has been used as a medium of exchange as it is durable, portable and easily tradable.
Increase in the trade activity during the free-trade period in the 19th century led to the need for a more formalized system
for settling business transactions. This made gold desirable to be used as a standard to determine the value of currency.
The rules of the game under the gold standard were that each country would establish the rate at which its currency could
be converted to the weight of gold. Each country's government
agreed to buy or sell gold at its own fixed rate of demand. This served as a mechanism to preserve the value of each
individual currency in terms of gold.
Each country had to maintain adequate reserves of gold in order to back its currency's value. There was a limit to the rate
at which any individual country could expand its supply of money. The growth in the money was limited to the rate at
which additional gold could be acquired by official authorities.

Collapse of the Gold Standard

 The gold standard eventually collapsed from the impact of World War I. During the war, nations on both sides had to
finance their huge military expenses and did so by printing more paper currency. As the currency in circulation exceeded
each country’s gold reserves, many countries were forced to abandon the gold standard. In the 1920s, most countries,
including the United Kingdom, the United States, Russia, and France, returned to the gold standard at the same price
level, despite the political instability, high unemployment, and inflation that were spread throughout Europe.

However, the revival of the gold standard was short-lived due to the Great Depression, which began in the late 1920s.
The Great Depression was a worldwide phenomenon. By 1928, Germany, Brazil, and the economies of Southeast Asia
were depressed. By early 1929, the economies of Poland, Argentina, and Canada were contracting, and the United
States economy followed in the middle of 1929. Some economists have suggested that the larger factor tying these
countries together was the international gold standard, which they believe prolonged the Great Depression. The gold
standard limited the flexibility of the monetary policy of each country’s central banks by limiting their ability to expand
the money supply. Under the gold standard, countries could not expand their money supply beyond what was allowed
by the gold reserves held in their vaults.

Too much money had been created during World War I to allow a return to the gold standard without either large
currency devaluations or price deflations. In addition, the U.S. gold stock had doubled to about 40 percent of the world’s
monetary gold. There simply was not enough monetary gold in the rest of the world to support the countries’ currencies
at the existing exchange rates.

BRETTON WOODS

The Bretton Woods system of pegged, but adjustable, exchange rates was a direct response to the instability of the
interwar period. Bretton Woods was very different from the gold standard: it was more administered than market-
based; adjustment was coordinated through the International Monetary Fund (IMF); there were rules rather than
conventions and capital controls were widespread.

In view of an unstable exchange regime, leading nations made several attempts to foster an orderly international monetary
system. Established in 1944 and named after the New Hampshire town where the agreements were drawn up, the Bretton
Woods system created an international basis for exchanging one currency for another. It also led to the creation t the
International Monetary Fund (IMF) and the International Bank for Reconstruction and Development, now known as the
World Bank. The former was designed to monitor exchange rates and lend reserve currencies to nations with trade
deficits, the latter to provide underdeveloped nations with needed capital—although each institution’s role has changed
over time. Each of the 44 nations who joined the discussions at Bretton Woods contributed a membership fee, of sorts, to
fund these institutions; the amount of each contribution designated a country’s economic ability and dictated its number of
votes.
The Bretton Woods system was history’s first example of a fully negotiated monetary order intended to govern currency
relations among sovereign states. In principle, it was designed to combine binding legal obligations with multilateral
decision making conducted through an international organisation, the IMF. In practice, the initial scheme, as well as its
subsequent development and ultimate demise, were directly dependent on the preferences and policies of its most
powerful member, the United States. The conference that gave birth to the system was the culmination of some two and a
half years of planning for postwar monetary reconstruction by the Treasuries of the United Kingdom and the United
States.
Although attended by all the 44 allied nations, plus one neutral government of Argentina, the conference discussion was
dominated by two rival plans developed, respectively, by Harry Dexter White of the U.S. Treasury and by John Maynard
Keynes of Britain. The compromise that ultimately emerged was much closer to White’s plan than to that of Keynes,
reflecting the overwhelming power of the United States as World War II was drawing to a close. The participating nations
agreed that as far as they were concerned, the interwar period had conclusively demonstrated the fundamental
disadvantages of unrestrained flexibility of exchange rates. The floating rates of the 1930s were seen as having
discouraged trade and investment and to have encouraged destabilising speculation and competitive depreciations. All
governments agreed that if exchange rates were not to float freely, states would also require assurance of an adequate
supply of monetary reserves. Negotiators did not think it necessary to alter in any fundamental way the gold exchange
standard that had been inherited from the interwar years.
Bretton woods was a semi-fixed exchange rates set up in the post-war period. The Bretton Woods exchange rate system
had a system of pegged exchange rates with currencies pegged to the dollar.
The dollar was fixed to the price of gold ($35 an ounce) – giving the US Dollar a fixed value.
The currencies in Bretton Woods were only to be revalued in the event of fundamental disequilibrium. The system ended
in 1971.
The idea of the Bretton Woods was
Provide stable exchange rates to encourage investment and economic growth
Encourage countries to maintain low inflation / competitiveness – in order to maintain value of exchange rate.
Try to prevent competitive devaluation – where countries seek to gain a short-term advantage by reducing value of the
currency.
Limit free movement of foreign exchange on the capital account of balance of payments
The Policy trilemma states that a government can only choose two monetary objectives out of three possible choices.

Fixed exchange rates

Capital mobility
Independent monetary policy
Under Bretton Woods, the government was effectively choosing to prioritise, semi-fixed exchange rates and independent
monetary policy. This meant the necessity of capital controls.
Collapse of the Bretton Woods System

In the late 1960s, there was a run on the Pound Sterling and later the dollar. It was partly caused by a booming US trade
deficit. With the US unwilling to use protectionism as a measure to reduce imports – the link between the dollar and
gold was broken in 1968. There was a short period of a floating Bretton woods exchange rate, but it was effectively
ended by 1971.

Some of the structural changes which undermined the Bretton Woods system included:

Rise of global trade

Growth of international currency markets with hedging and speculation causing fluctuations in the exchange rate
Decline of US economic and monetary hegemony. After the Second World War the US economy was dominant but it
declined in relative importance by 1970s.
Long-term Decline of the Dollar
Increase in free market ideology and belief that capital controls are either harmful or difficult to implement.
Oil price shocks of 1970s saw cost-push inflation and greater economic instability.
1973-74 US, Canada and Germany removed capital controls.

INTERNATIONAL MONETARY FUND

A successful exchange rate system is needed to stabilize the international
payment system. An exchange rate system needs to fulfill three conditions:
Balance of payments (BOP) deficits or surpluses by individual countries should not be large.
These deficits should be corrected in such a way that it does not cause inflation on trade and payments for either the
individual country or whole of the world.
(iii) The maximum sustainable expansion of trade and other international economic activities should be facilitated.
BOP is an accounting system that measures all economic transactions
between residents (including government) of one country and residents of all other countries. Economic transactions
include exports and imports of goods and services, capital inflows and outflows, gifts and other transfer payments, and
changes in a country's international reserves.

Since its establishment in 1944, the International Monetary Fund has been the centerpiece of the world monetary order
though its supervisory role in exchange rate arrangements has been considerably weakened after the advent of floating
rates in 1973. The IMF was given the responsibility for collecting and allocating reserves. The role of supervising the
adjustable peg system, offering advice to the member countries on their international monetary affairs, promoting research
in different areas of monetary and international economics were also given to the IMF. It also offers the member countries
a forum for consultation and discussion.
Funding Facilities
As we have seen above, operation of the peg requires a country to intervene in the foreign exchange markets to support its
exchange rate when it threatens to move out of the permissible band. If a country faces a BOP deficit, reserves are needed
for carrying out the intervention and for this; it must take the step of selling foreign currencies and buying its own
currency. In case its own reserves are inadequate, it must borrow from other countries or from the IMF. (Note that
the country which has a surplus does not face this problem.)
International Liquidity and International Reserves
The stock of means of international payments are referred to as international liquidity refers to the. On the other hand, the
assets that the country can make use of when settlement of payment imbalances arises in its transactions with
other countries are known as international reserves. The monetary authority of the company takes care of the reserves and
uses them while carrying out interventions on the foreign exchange markets. In addition, liquidity can be provided by the
private markets by lending to deficit countries out of funds that are deposited with them by the surplus countries. This sort
of private financing of BOP deficits took place on a large scale during the post oil-crisis years and has come to be known
as recycling of petrodollars.
The International Monetary Fund (IMF) is an organization of 190 countries, working to foster global monetary
cooperation, secure financial stability, facilitate international trade, promote high employment and sustainable
economic growth, and reduce poverty around the world. Created in 1945, the IMF is governed by and accountable to
the 190 countries that make up its near-global membership. The IMF was originally created in 1945 as part of
the Bretton Woods Agreement, which attempted to encourage international financial cooperation by introducing a
system of convertible currencies at fixed exchange rates.

The International Monetary Fund (IMF) is an international organization that promotes global economic growth and
financial stability, encourages international trade, and reduces poverty. Quotas of member countries are a key
determinant of the voting power in IMF decisions. Votes comprise one vote per 100,000 special drawing right (SDR) of
quota plus basic votes. SDRS are an international type of monetary reserve currency created by the IMF as a supplement
to the existing money reserves of member countries.

The IMF's primary purpose is to ensure the stability of the international monetary system—the system of exchange rates
and international payments that enables countries (and their citizens) to transact with each other. The Fund's mandate
was updated in 2012 to include all macroeconomic and financial sector issues that bear on global stability.

The IMF’s fundamental mission is to ensure the stability of the international monetary system. It does so in three ways:
keeping track of the global economy and the economies of member countries; lending to countries with balance of
payments difficulties; and giving practical help to members.

FUNCTIONS OF THE IMF

The IMF employs three main functions – surveillance, financial assistance, and technical assistance – to promote the
stability of the international monetary and financial system.

Surveillance :  The IMF closely monitors each member country's economic and financial developments and holds a policy
dialogue with a member country on a regular basis (also known as Article IV Consultation), usually once each year, to
assess its economic conditions with a view to providing policy recommendations.  The IMF also reviews global and
regional developments and outlook based on information from individual consultations.  The IMF publishes such
assessment on the multilateral surveillance through the World Economic Outlook and the Global Financial Stability
Report on a semi-annual basis.

Financial Assistance : The IMF lends to its member countries facing balance of payments problems in order to facilitate
the adjustment process and restore member countries' economic growth and stability through various loan instruments
or "facilities".  An IMF loan is usually provided under an "arrangement," requiring a borrowing country to undertake the
specific policies and measures to resolve its balance of payments problem as specified in a "Letter of Intent."  Most IMF
loans are primarily financed by its member countries through payments of quotas.  Thus, the IMF's lending capacity is
mainly determined by the total amount of quotas.  Nevertheless, if necessary, the IMF may borrow from a number of its
financially strongest member countries through the New Arrangements to Borrow (NAB) or the General Arrangements
to Borrow (GAB)

Technical Assistance : The IMF provides technical assistance to help member countries strengthen their capacity to
design and implement effective policies in four areas, namely, 1) monetary and financial policies, 2) fiscal policy and
management, 3) statistics and
4) economic and financial legislation.  In addition to technical assistance, the IMF also offers training courses and
seminars to member countries at the IMF Institute in Washington D.C., and other regional training institutes (Austria,
Brazil, China, India, Singapore, Tunisia and United Arab Emirates).

Economic Surveillance

The IMF oversees the international monetary system and monitors the economic and financial policies of its 190
member countries. As part of this process, which takes place both at the global level and in individual countries, the IMF
highlights possible risks to stability and advises on needed policy adjustments.
Lending

The IMF provides loans to member countries experiencing actual or potential balance of payments problems to help
them rebuild their international reserves, stabilize their currencies, continue paying for imports, and restore conditions
for strong economic growth, while correcting underlying problems.

Capacity Development

The IMF works with governments around the world to modernize their economic policies and institutions, and train their
people. This helps countries strengthen their economy, improve growth and create jobs.

IMF AND LIQUIDITY MANAGEMENT

Liquidity Management The focus here is on assessing the adequacy of a country’s level of foreign exchange reserves as a
means of determining the country’s ability to withstand shocks. Measures of reserve adequacy currently used for this
purpose include the ratio of reserves to short-term debt by remaining maturity, and to imports of goods and services. They
are complemented by an analysis of, and careful judgments about, a country’s macroeconomic conditions and its
structural and institutional characteristics, including its exchange rate regime. Measures have also been designed to
broaden the analysis of reserve adequacy so as to capture the country’s ability to withstand a liquidity crisis stemming
from certain kinds of imbalances in the balance sheets of residents. In addition, attention is being given to assessing the
role of public debt management and private sector liability management in improving a country’s public and private sector
balance sheets and reducing the risk of liquidity crises.

WORLD BANK

The World Bank is an international financial institution that provides loans and grants to the governments of low and
middle income countries for the purpose of pursuing capital projects. It comprises two institutions: the International
Bank for Reconstruction and Development (IBRD), and the International Development Association (IDA). The World Bank
is a component of the World Bank Group. The World Bank's most recently stated goal is the reduction of poverty

The World Bank Group is an extended family of five international organizations, and the parent organization of the World
Bank, the collective name given to the first two listed organizations, the IBRD and the IDA:
International Bank for Reconstruction and Development (IBRD)
International Development Association (IDA)
International Finance Corporation (IFC)
Multilateral Investment Guarantee Agency (MIGA)
International Centre for Settlement of Investment Disputes (ICSID)

The World Bank was established in 1944 to help rebuild Europe and Japan after World War II. Its official name was the
International Bank for Reconstruction and Development (IBRD). When it first began operations in 1946, it had 38
members. Today, most of the countries in the world are members. Without a place like the World Bank from which to
borrow money, the world’s poorest countries would have few, if any, ways to finance much-needed development projects.
The projects are essential to helping people become educated, live healthy lives, get jobs, and contribute as active citizens.

DECISSION MAKING IN THE WORLD BANK

The Bank is run like a giant cooperative, where its members are shareholders and is operated for the benefit of those using
its services. The number of shares a country has is based roughly on the size of its economy. The United States is the
largest single shareholder, followed by Japan, Germany, the United Kingdom, and France. The rest of the shares are
divided among the other member countries.

A Board of Governors represents the Bank's government shareholders. Generally, these governors are country ministers,
such as Ministers of Finance or Ministers of Development. The governors are the ultimate policymakers in the World
Bank. They meet once a year at the Bank's Annual Meetings.

At the Annual Meetings, all of the Bank's and International Monetary Fund ‘s (IMF) governors decide how best to address
global development issues and decide what the world should focus on in the upcoming year (and near future) to help
reduce poverty in the world.

Since the governors meet only once a year, they give specific duties to their Executive Directors, who work on-site at the
Bank. Every member government is represented by an Executive Director. The five largest shareholders (France,
Germany, Japan, the United Kingdom and the United States) appoint an executive director each, while other member
countries are represented by 19 Executive Directors.

The Bank's 24 Executive Directors oversee the Bank's business, including approving loans and guarantees, new policies,
the administrative budget, country assistance strategies, and borrowing and financial decisions.

Loans and the World Bank

The Bank lends money to middle-income countries at interest rates lower than the rates on loans from commercial
banks. In addition, the Bank lends money at no interest to the poorest developing countries, those that often cannot
find other sources of loans. Countries that borrow from the Bank also have a much longer period to repay their loans
than commercial banks allow and don't have to start repaying for several years.

Source of money

The Bank borrows the money it lends. It has good credit because it has large, well-managed financial reserves. This
means it can borrow money at low interest rates from capital markets all over the world to then lend money to
developing countries on very favorable terms.

The Bank's financial reserves come from several sources - from funds raised in the financial markets, from earnings on its
investments, from fees paid in by member countries, from contributions made by members (particularly the wealthier
ones) and from borrowing countries themselves when they pay back their loans.

The Bank lends only a portion of the money needed for a project. The borrowing country must get the rest from other
sources or use its own funds. Eventually, since the country has to pay back its loans, it ends up paying for most, if not all,
of the project itself.

World Bank loans help countries:

• Supply safe drinking water

• Build schools and train teachers
• Increase agricultural productivity
• Manage forests and other natural resources
• Build and maintain roads, railways, and ports
• Extend telecommunications networks
• Generate and distribute energy
• Expand health care
• Modernize

The Bank also tries to encourage investment and lending by countries, companies, and private investors. It also lends
money to hire industry experts to help countries to reshape their economies to make them more efficient and
productive.
Money isn’t the only type of support that the Bank provides.  Often, it is the advice and experience the Bank's staff
brings to a project or the environmental and social standards it applies that are also important.

SOCIETY FOR WORLDWIDE INTERBANK FINANCIAL TELECOMMUNICATIONS  (SWIFT)

SWIFT is an acronym for Society for Worldwide Interbank Financial Telecommunication, while BIC stands for ‘Bank
Identification Code’ and is interchangeable with the SWIFT code. The SWIFT/BIC is an alphanumeric code with a specific
combination of letters and numbers that allows banks making a transfer to identify the bank receiving a transfer. It
provides security in the process of transferring funds. SWIFT codes can be from 8 to 11 characters in length. It's
structured as follows:

The first four characters identify the particular institution or bank to which the transfer will be made.
The next two characters specify the country.
The following two identify the location - usually the city.
The final three characters are usually numerical and indicate a particular branch or office.
When the final three characters are not included, the transfer goes to the head office or branch.
Whenever an international transfer is made, a SWIFT code is necessary. It is usually paired with an IBAN (International
Bank Account Number). Once the transfer is completed, the bank that receives the money issues a ‘SWIFT message’, a
confirmation that funds were received and contains the full information about the transfer. f you need to transfer funds to
pay a supplier abroad, for example, you will need to include a SWIFT code. Conversely, if a customer from abroad needs
to send you payment, they will request your SWIFT. It is therefore an important piece of information to include in
an invoice if you have customers abroad. It makes payment faster because the customer will not need to request the
information, and ensure that your transfer is secure.
SWIFT is a vast messaging network used by banks and other financial institutions to quickly, accurately, and securely
send and receive information, such as money transfer instructions. Society for Worldwide Interbank Financial
Telecommunications (SWIFT) is a member-owned cooperative that provides safe and secure financial transactions for its
members. 
SWIFT also charges users for each message based on message type and length. These charges also vary depending upon
the bank’s usage volume; different charge tiers exist for banks that generate different volumes of messages. SWIFT has
retained its dominant position in the global processing of transactional messages. It has recently forayed into other areas,
such as offering reporting utilities and data for business intelligence, which indicates its willingness to remain innovative.
In the short- to mid-term, SWIFT seems poised to continue dominating the market.
This payment network allows individuals and businesses to take electronic or card payments even if the customer or
vendor uses a different bank than the payee.SWIFT works by assigning each member institution a unique ID code that
identifies not only the bank name but country, city, and branch.

Services Offered by SWIFT

The SWIFT system offers many services that assist businesses and individuals to complete seamless and accurate
business transactions. Some of the services offered include:

Applications
SWIFT connections enable access to a variety of applications, which include real-time instruction matching for treasury
and forex transactions, banking market infrastructure for processing payment instructions between banks, and securities
market infrastructure for processing clearing and settlement instructions for payments, securities, forex,
and derivatives transactions.13

Business Intelligence

SWIFT has recently introduced dashboards and reporting utilities which enable the clients to get a dynamic, real-time
view of monitoring the messages, activity, trade flow, and reporting.14

The reports enable filtering based on region, country, message types, and related parameters.
Compliance Services

Aimed at services around financial crime compliance, SWIFT offers reporting and utilities like Know Your Customer (KYC),
Sanctions, and Anti-Money Laundering (AML).13

Messaging, Connectivity, and Software Solutions

The core of the SWIFT business resides in providing a secure, reliable, and scalable network for the smooth movement of
messages. Through its various messaging hubs, software, and network connections, SWIFT offers multiple products and
services which enable its end clients to send and receive transactional messages.

CLEARING HOUSE INTERBANK PAYMENTS SYSTEM (CHIPS)

The Clearing House Interbank Payments System (CHIPS) is a bank-owned, privately operated electronic payments
system.CHIPS is both a customer and a competitor of the Federal Reserve’s Fedwire service.The average daily value of
CHIPS transactions is about $1.2 trillion a day.

The Clearing House Interbank Payments System (CHIPS) is an electronic payments system that transfers funds and
settles transactions in U.S. dollars. CHIPS enables banks to transfer and settle international payments more quickly by
replacing official bank checks with electronic bookkeeping entries.T here 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.

CHIPS (Clearing House Inter-bank Payments System) is a privately operated, real-time, multilateral, payments system
typically used for large dollar payments. CHIPS is owned by financial institutions, and any banking organization with a
regulated U.S. presence may become an owner and participate in the network. The payments transferred over CHIPS are
often related to international interbank transactions, including the dollar payments resulting from foreign currency
transactions (such as spot and currency swap contracts) and Euro placements and returns. Payment orders are also sent
over CHIPS for the purpose of adjusting correspondent balances and making payments associated with commercial
transactions, bank loans, and securities transactions.

How The Clearing House Interbank Payments System Works

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, large-value 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 large-value 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.