Cross Border Payments User Guide

Cross Border Payments User Guide Table of Contents Preface Chapter 1 – Introduction Section 1. Purpose of the User Guide Benefits of Cross-Border Payments Description of Typical Transactions Section 2. Roles and Responsibilities of Participants Originating Depository Financial Institutions (ODFI’s) Originating Gateway Operators (OGO’s) Receiving Gateway Operators (RGO’s) Receiving Depository Financial Institutions Originators and Receivers Section 3. Cross-Border Payments Environment An Overview of the Current Environment Agreements Transmission of Cross-Border Payments Settlement Foreign Exchange Cross Border Payment Technical Standards Risk Management Section 4. Section 5. Legal and Regulatory Framework Operational Considerations Chapter 2 – Developing the Business Case for Cross-Border Payments Origination Section 1. Section 2. Section 3. Major Drivers of Decision Economic Considerations Benefits of ACH Cross-Border Payments Chapter 3 – Overview of National Payments Systems Section 1. Section 2. National Payments System in the U.S. National Payments System in Canada Chapter 4 – Cross-Border Payments Models Section 1. Section 2. Section 3. Origination Model Receiving Model Process Flow Diagrams Chapter 5 – Case Studies Appendices Appendix 1. Appendix 2. Appendix 3. Appendix 4. Appendix 5. Appendix 6. Glossary of Terms ODFI Selection Guide OGO Selection Guide Foreign Clearing System Contact Information Cross Border Reference Information & Resources Cross Border Payment Operating Rules Preface This Cross Border Payments User Guide was developed by the Cross Border Council of NACHA – The Electronic Payments Association as a tool to assist financial institutions and their customers in deciding whether to utilize cross-border payments and how to implement solutions once the decision has been made. This publication gives an overview of the operating environment for these payments, explores important legal and regulatory concerns and provides decision-making tools for the user. About the Cross Border Council The Cross Border Council was established in 1993 to create the framework for the efficient exchange of cross-border, batch-oriented electronic corporate and consumer payment transactions. The mission statement was revised in 1999, and the new goal of the Council is to facilitate the efficient and economic exchange and settlement of cross-border payment transactions and related information on a global basis. The Council has 45 members from 13 countries participating in the development of cross-border payments. Cross-border payments between the United States and Canada utilizing the Cross Border Payment Operating Rules began in 1996. The objectives of the Cross Border Council include:    Creation of educational products to assist stakeholders in implementing cross-border payments, analyzing potential risk, and marketing the cross-border concept. Serving as a forum for the banking industry to express its opinions on international payments issues. Development of transatlantic cross-border payments between North America and Europe. Chapter 1 – Introduction to Cross-Border Payments Section 1. – Purpose of the User Guide The purpose of this guide is to provide the user with an understanding of the environment for the use of batch-oriented automated clearing house (ACH) payments between the United States and Canada. The guide will provide: 1) An overview of the differences and similarities between the national payments systems in Canada and the U.S. 2) An in-depth review of the legal and regulatory framework surrounding these types of payments. 3) Assistance to financial institutions with making a business case to begin offering crossborder payment origination to their customers. 4) A glossary of terms and other documents for use by financial institutions to use as guides for creation of the necessary contractual agreement between the various participants in these payments. Benefits of Cross-Border Payments ACH payments tend to be high-volume, lower-value payments – such as direct deposits of payroll, dividends, annuities, vendor and tax payments, and direct payment of utilities, loans and insurance premiums. These types of payments are supported by the national payment systems in many countries as a safe, reliable, efficient and cost-effective alternative to paper-based payments. For many years, financial institutions have offered cross-border payment services to their customers, typically utilizing proprietary correspondent banking relationships. Over the last several years, there has been a marked increase in the amount of international trade due in part to the emergence of trading zones such as NAFTA, as well as the impact of the Internet, which has increased the need for a cost-effective, highly automated method for moving lower value payments across national borders. Additionally, the recipients of these payments are becoming increasing mobile - working, traveling and retiring internationally. The Internet has also fueled the need for payments to travel across borders due to the increase in investment activities and the purchase of goods and services without respect to national boundaries. Without a cost-effective and efficient payments mechanism, these types of activities may not reach their full potential. A Typical Cross-Border Transaction An example of a typical cross-border consumer transaction would be a pension or annuity payment from an employer in the United States to a beneficiary who has relocated to the Canada. The US employer would originate a credit transaction denominated in US dollars. This transaction would in turn be sent to the employer’s financial institution in the United States, which would then forward the transaction to a financial intermediary (referred to as an Originating Gateway Operator or OGO). The OGO processes the transaction and forwards it to a Receiving Gateway Operator (RGO) in Canada. The foreign exchange is performed at this point by either the OGO or the RGO, depending upon their agreement, and the file is converted to the format of the receiving country. The RGO then forwards the transaction to the beneficiary’s financial institution, which gives final credit to the beneficiary in Canadian dollars. If the transaction is going from Canada to the U.S. the cycle is reversed. Payments can also be sent to Canada in US dollars for credit to a Canadian US dollar account (a fixed-to-fixed transaction, see below). A typical corporate cross-border transaction would be payment for goods or services purchased by a company in the U.S. from a company in Canada, or vice versa. The corporate cross-border transaction would follow the same flow as a consumer transaction. A diagram of this transaction flow is shown below: Section 2. – Roles and Responsibilities of Participants The Originator is a company or individual with the need to make payments to or collect money from another company or individual. A contractual agreement or authorization is established between the payer and the payee prior to the first payment being made, as required by the NACHA Rules. The Originator also establishes a contract for sending payment instructions with an Originating Depository Financial Institution. An Originating Depository Financial Institution (“ODFI”) is the financial institution that initiates the payment instructions between financial institutions. Depending upon the rules and regulations in the ODFI’s national payments system, the ODFI may incur liability for the origination of the payment instructions. We will discuss these liabilities in a later chapter. The next party in the transaction flow is the Originating Gateway Operator or OGO. The OGO is responsible for receiving payment instructions from the ODFI - with whom the OGO has an existing relationship - and forwarding the instructions in a timely fashion to the next participant in the payment flow, the Receiving Gateway Operator or RGO. The format mapping and translation, foreign exchange conversion and inter-gateway settlement for the entry occur in accordance with the agreement between the OGO and RGO. A Receiving Depository Financial Institution (“RDFI”) is the financial institution that receives the payment instructions from the RGO. The RDFI is responsible for settlement and posting of the transaction to the Receiver. Its liability is the same for a cross-border transaction as it is for any other automated clearing house transaction processed within its national payment systems rules. The Receiver is a company or individual to whom a transaction has been sent. The Receiver is bound by the rules and regulations of its national payment system as they apply to any domestic transaction. Section 3 – Cross Border Payments Environment Overview Since the inception of cross-border payments, growth has been steadily increasing on a limited basis - limited in the sense that payments are currently being exchanged only between the United States and Canada under the Cross Border Payment Operating Rules, although the system is designed to be used between any pair of countries. The system is intended for recurring low-value payments that will be handled as value-dated transactions (as opposed to real-time transactions). The development of the rules for the system has been an evolutionary process. For example, as of September 2000 cross-border payments are clearly identified in the US ACH system with a unique Standard Entry Class (SEC) code – resulting in more efficient processing by financial institutions. There are initiatives underway to develop a worldwide cross-border payments system with the same low-cost, electronic, batch-oriented processing of the current system. This solution would provide a bridge between existing country-specific proprietary systems using an efficient and effective means of payment processing. Features of any such system would include ease of use, global coverage and the ability to handle multiple currencies. Agreements There must be an agreement in place between the gateway operators covering: 1) Adherence to the Cross Border Payment Operating Rules 2) Foreign exchange conversion 3) Technical and operational responsibilities 4) Settlement 5) Definition of a commercially reasonable time frame Agreements are also required between the Originator and ODFI and the ODFI and the OGO. For US Originators and ODFIs, the rights and responsibilities of the various parties are covered under Article Ten of the NACHA Operating Rules. Transmission of Payments When payments are transmitted from the Originator to the ODFI, and from the ODFI to the OGO, they are subject to the requirements, rules and regulations of that country’s national payment system. The foreign exchange conversion, format conversion and settlement that take place between the OGO and RGO are subject to the Cross Border Payment Operating Rules and the agreement in place between the two Gateway Operators. The RDFI and Receiver are subject to the requirements, rules and regulations of that country’s national payment system. Settlement Settlement takes place between each of the participants in the cross-border payment transaction and is governed by the national payments system rules of the participating countries. The Cross Border Payment Operating Rules place additional responsibility on the gateway operators. The OGO warrants to the RGO that settlement is final and the RGO warrants to the RDFI (in the receiving country) that settlement from the OGO is final. Gateway Operators assume additional risk if they transfer payments prior to settlement finality, as they will be liable for those payments in the event that settlement is revoked. Settlement is irrevocable between Gateway Operators once funding has occurred. Foreign Exchange The foreign exchange component of cross-border payments is stipulated in the agreements that are established between the various participants. Three foreign exchange scenarios exist: Fixed to Variable Fixed origination currency amount to variable receiving currency amount – The Originator initiates a payment in their country’s currency, the payment undergoes a foreign exchange conversion, and the Receiver’s payment is in its country’s currency. Variable to Fixed Variable origination currency amount to fixed receiving currency amount – The Originator initiates a payment based on a specific foreign exchange rate for payment to the Receiver’s account in their country’s currency. Fixed to Fixed Fixed origination currency amount to fixed receiving currency amount – Both the payment from the Originator and the payment to the Receiver are in the same currency. Cross Border Payment Technical Standards Within the US, cross-border payments are transmitted using the Consumer Cross Border Payment (PBR) and Corporate Cross Border Payment (CBR) Standard Entry Class (SEC) codes. These SEC codes allow cross-border transactions to be readily identified by financial institutions so that they may apply special handling requirements for cross-border payments, as appropriate. These formats also enable ACH participants to transmit and receive detailed information that is unique to crossborder payments, such as: 1) Information relating to foreign exchange 2) Origination and destination currencies 3) Destination country 4) Identifiers for consumer and corporate payments 5) Identification of foreign receiving DFI 6) Foreign payment amount 7) Foreign trace number 8) Foreign Receiver’s account number Please refer to Appendix Two (ACH Record Format Specifications) of the NACHA Operating Rules for the ACH record format specifications for CBR and PBR entries. Risk Management Originators and ODFI’s should be aware that the rights and privileges of the RDFI and Receiver in the receiving (foreign) country are applicable to the transaction. This may have an impact on authorizations, time frames allowed for returning items and other handling of exception items such as incorrect account numbers, payments made in error, etc. The Originator and the ODFI should fully understand the payment system rules environment of the countries to which they will be sending payments. Foreign exchange on cross-border payments creates an area of risk not present in domestic payments. There may be foreign exchange fluctuation on return items, leading to a return amount that differs from the amount input. There may be items that are processed in error or duplicate items. The ODFI needs to understand the foreign exchange risks and should address how they will be handled in its agreement with the Originator. The role of Gateway Operator brings a new participant to the typical flow of payments that stay within a country’s domestic payment system. The Gateway Operator needs to be aware of the same foreign exchange impacts as the ODFI and should cover the handling of the associated risk in their agreements with each other and with the financial institutions for which they are processing. Section 4 – Legal and Regulatory Framework The Cross Border Payment Operating Rules constitute the legal and operational framework for the exchange of cross-border ACH payments between Gateway Operators. US Originators are bound to Article Ten of the NACHA Operating Rules through their agreement with their ODFI; non-US Originators would be bound as per their agreement with their ODFI. Gateway Operators agree to 1) Be bound by the Cross Border Payment Operating Rules and warrant that they are legally able to comply with all applicable requirements. 2) Comply with all additional laws, rules regulations and court orders to which they are subject governing the exchange or effecting of transactions. 3) Have in place an agreement covering those items listed in Section 3 of this guide. The national payment system rules of the receiving country govern the rights, obligations and procedures of payments that are returned. An OGO may request an RGO to return or adjust an erroneous transaction initiated by the OGO, but the RGO is not obligated to comply with the request. Participants originating cross-border payments in the United States must take precautions to avoid Office of Foreign Assets Control (OFAC) violations. OFAC maintains and publishes a listing of “Specially Designated Nationals and Blocked Persons” with whom American nationals and organizations may not engage in commercial activity under penalty of fine and or/imprisonment. For additional information on OFAC, visit its web site at www.treas.gov/ofac. Section 5 - Operational Considerations The ODFI has operational considerations with cross-border payments that they do not have with domestic ACH payments. The ODFI must: 1) Have the technical capability to process cross-border payments. Cross-border entries must be batched separately from other ACH transactions and identified with a unique Standard Entry Class code. 2) Have staff trained to recognize cross-border transactions that have been returned and know what special handing may be required with respect to the foreign exchange agreement in place with the Originator. 3) Be familiar with the ACH cross-border rules and exceptions for processing in a specific country. 4) Become knowledgeable about the national payments systems of the countries to which they will be sending payments. 5) Establish a relationship with an Originating Gateway Operator or become one themselves. Chapter 2 –Developing the Business Case for Cross-Border Payments Origination Section 1 – Major Drivers of Decision The business case for origination of cross-border payments is driven by the market demand for the application. On the corporate side the globalization of the economy is leading to greater foreign trade activity and increasing the need for companies to make more - or to begin to make international corporate payments. On the consumer side, as more employees and pensioners are located in (or retire to) foreign countries, they are expecting to receive their payments in an efficient manner and with certainty of payment. The primary features a cross-border payment system must have to be an attractive option to the Originator are: 1) It needs to be less costly than their current method or other methods available. 2) There needs to be certainty and finality of payment. 3) It must be easy to use. 4) It must be timely. Section 2 – Economic Considerations The following table illustrates the cost of current marketplace options with respect to International payments: Payment Type Check/Cheque Wire (SWIFT) International ACH Average Cost $3 - $15 $15 - $30 $1.25 - $3.00 Clearing Time 3 – 15 days Up to 6 days 1 – 3 days The use of ACH cross-border payments not only provides the Originator with a lower cost alternative to check and wire transfer, but the transactions are processed in a consistent and efficient manner under the Cross Border Payment Operating Rules. In summary, increased trade activity between the U.S. and Canada, the need for a more efficient processing and payments that provide certainty of delivery are all critical factors when looking at cross-border payments origination. Section 3 – Benefits of ACH cross-border payments 1) Payments are made through established and reliable national payment systems. 2) Payments are originated and received in the formats of the financial institutions’ national payments system resulting in minimal system modifications. 3) It provides a mechanism for originating recurring payments. 4) There is predictability in payment timing and reduced payment cycle time as compared to other international payment alternatives. 5) The cost effectiveness of ACH cross-border payments should translate into savings for the Originator. 6) Provides one easy process for Originators making both domestic and cross-border ACH payments. Chapter 3 – Overview of National Payments Systems Section 1 – National Payments System in the U.S. Congress created the Federal Reserve System in 1913 to serve as the central bank of the United States. Over the years, its role in banking and the economy has expanded, but its focus has remained the same: 1. To conduct the nation’s monetary policy. 2. To provide and maintain an effective and efficient payments system. 3. To supervise and regulate banking operations. The Federal Reserve System is a decentralized central bank, with Reserve Banks and branches in 12 districts across the country, coordinated by a Board of Governors in Washington, D.C. The Board of Governors appointed by the President of the United States and confirmed by the Senate, represents the public sector, or governmental side. The Reserve Banks and the local citizens on their boards of directors represent the private sector. This structure provides accountability while avoiding centralized, governmental control of banking and monetary policy. The seven-member Board of Governors is the main governing body of the Federal Reserve System. The Board is charged with overseeing the 12 District Reserve Banks and with helping implement national monetary policy. Governors are appointed by the president of the United States, one on January 31 of every even-numbered year, for staggered 14-year terms. The chairman and vice chairman of the Board of Governors are also appointed by the president and confirmed by the Senate to serve a four-year term. The nominees of these posts are selected from the Board membership. Each Federal Reserve Bank office has a board of directors. These boards are drawn from the general public and the banking community and oversee the activities of the organization. Federal Reserve Head Offices have nine-member boards. The Federal Reserve branch offices have five- or sevenmember boards that provide vital information concerning regional economies. Banks that hold stock in the Federal Reserve System are called member banks. All nationally chartered banks hold stock in the Federal Reserve. State-chartered banks may choose to be members, upon meeting certain standards. Banks do not control the Fed as a result of owning this stock. They do, however, elect six of the nine members of the Reserve Banks’ Head Office boards of directors. The Automated Clearing House Network (ACH) is an electronic funds transfer system developed jointly by the private sector and the Federal Reserve in the early 1970s as a more efficient alternative to checks. Twenty-one regional payment associations and twelve direct financial institution members of the National Automated Clearing House Association (NACHA) form the foundation for the ACH system, which is actually operated by the four ACH Operators. The regional associations established NACHA in 1974 to administer the rule making process for this joint effort and to promote the growth of electronic payments. Since then, the ACH has evolved into a nationwide mechanism that processes electronically originated credit and debit transfers. The 20,000 commercial banks, thrifts and credit unions in the U.S. settle their ACH transactions either directly through an account they maintain with the Federal Reserve or through a correspondent that has an account with the Federal Reserve. The Federal Reserve, VISA USA, the Electronic Payments Network and the American Clearing House all act as ACH Operators and provide clearing of ACH transactions for their member financial institutions. Section 2 – National Payments System in Canada Canada has nine domestic banks, 50 active foreign bank subsidiaries and 37 foreign bank representative offices. The major banks have significant international operations in the United States and most other parts of the world. The major banks have a branch network of approximately 8,000 branches and an automated banking machine (ABM) network with more than 12,500 ABMs. Since the financial reforms of 1987 and 1992, there has been some consolidation of the Canadian financial system, with the banks acquiring or starting securities and trust businesses Canada's banks are federally regulated and chartered pursuant to the Bank Act. However, some subsidiary activities are provincially regulated, including trustee services and many securities market activities. The Office of the Superintendent of Financial Institutions (OSFI) supervises Canada’s banks at the federal level. Banks in Canada are distinguished with regard to whether they are domestic-owned or foreign-owned, and whether their shares are widely held (known as Schedule I banks) or closely held (Schedule II banks). The major chartered banks (the "Big Six") are the heart of Canada's banking system, due to their size and scope of activities, as well as their central role in activities such as payments, clearing and settlement. These banks account for nearly 90 per cent of bank assets in Canada. Another part of the Canadian banking picture is the foreign bank sector, consisting of subsidiaries and representative offices of many of the world's most prominent banks. Foreign banks account for nearly 10 per cent of the assets of Canada's bank sector. The third part of Canada's banking system (2.5 per cent of assets) consists of a relatively small group of profitable and growing domestic banks. Payment items are cleared through one of several Regional Settlement Points across Canada, in Vancouver, Calgary, Regina, Winnipeg, Toronto, Montreal and Halifax. At each Regional Settlement Point, balances owing to and by each institution in the region are calculated. The information is transmitted to the Automated Clearing Settlement System (ACSS) operated by the Canadian Payments Association (CPA). By the next business day, each financial institution’s settlement account is adjusted at the Bank of Canada. In this way, the Canadian environment provides for payment items received during the day to be exchanged and settled using an overnight process. Canadian Payments Association An important dimension to access to the payments system in Canada is membership in the Canadian Payments Association (CPA). Incorporated by an Act of Parliament in 1980, the CPA’s mandate, as recently amended, is to: (a) establish and operate national systems for the clearing and settlement of payments and other arrangements for the making or exchange of payments; (b) facilitate the interaction of its clearing and settlement systems and related arrangements with other systems or arrangements involved in the exchange, clearing or settlement of payments; and (c) facilitate the development of new payment methods and technologies. In pursuing its objects, the CPA is expected to promote the efficiency, safety and soundness of its clearing and settlement systems and take into account the interests of users. Historically, membership in the CPA has been limited to federally and provincially regulated deposit-taking institutions. However, the new Canadian Payments Act expands access to the payments system to allow life insurance companies, money market mutual funds and securities dealers. The CPA owns and operates three payment systems in Canada, namely the Automated Clearing Settlement Systems (ACSS), the Large Value Transfer System (LVTS) and the United States Bulk Exchange (USBE) System. The CPA is currently in the process of developing a fourth system, which is a Public Key Infrastructure, to facilitate Internet payments. In addition to operating these systems, the CPA and its members develop and implement the rules that govern the clearing and settlement of payments between financial institutions. The legal framework that underlies the CPA, along with its rules and procedures, ensure that the systems are safe and sound and that payments are exchanged efficiently. ACSS Operations The ACSS is the system by which cheques, direct deposits, pre-authorized debits, electronic data interchange (EDI), direct debit and shared automated banking machine (ABM) transactions are cleared and settled. This is the system most analogous to the US ACH. Twelve financial institutions, referred to as Direct Clearers, handle the clearing and settlement of these payment items for their customers, as well as for items destined to customers’ accounts held at any one of Canada’s approximately 120 other members (referred to as Indirect Clearers). Canada has a very efficient clearing system in that, with few exceptions, an item that is negotiated on any given business day is cleared (or delivered) overnight to the processing centre of the institution on which it is drawn or to the Clearing Agent of that FI. Settlement for these exchanges takes place through ACSS accounts that the Direct Clearers maintain at the Bank of Canada. While settlement actually takes place on the morning following the clearing exchanges, the settlement entry is back-dated to the previous day, thereby virtually eliminating float. LVTS Operations LVTS is Canada’s electronic wire transfer system. It moves payments quickly and securely in a real-time environment, and guarantees finality of payment to the beneficiary. There are 14 direct participants who initiate and receive all LVTS payments in Canada on behalf of other FIs and corporate clients. LVTS is a hybrid system, incorporating the most desirable attributes of a Real Time Gross Settlement (RTGS) system and a netting system. These real-time payments are supported by collateral such that, in the unlikely event of a default, settlement is guaranteed at the end of the day. Settlement takes place through LVTS accounts that direct participants maintain at the Bank of Canada on the same day that the payments are initiated. USBE Operations The USBE is a system for the exchange and settlement of U.S. dollar paper (e.g., cheques), automated funds transfer (e.g., direct deposit and pre-authorized debits) and EDI transactions drawn on U.S. dollar accounts held at Canadian financial institutions. Settlement for such items occurs on a bilateral basis in the city of New York through accounts held by Direct Clearers at corresponding U.S. banks. National ABM/POS Network Operating outside the CPA, Interac, a private organization, operates Canada’s only national shared Automated Bank Machine (ABM) and Point-of-Service (POS) network. At present, Interac supports over 30,000 ABMs and 430,000 POS devices at 311,000 retailing locations across Canada. In 2000, Interac processed a record breaking 1.96 billion POS transactions. The CPA is a non-profit organization created by an Act of Parliament in 1980. Its members are deposit-taking institutions of which 40% are banks. The other 60% include trust companies, credit unions, caisses populaires and provincial savings offices. The CPA was given two mandates: (i) to develop and operate the national clearing and settlement system; and (ii) to plan the evolution of the national payments system. In addition to operating the system, the CPA develops and implements the rules and procedures that govern clearing and settlement of payments. These rules and procedures ensure that the system is safe and sound and that payments are exchanged efficiently. Chapter 4 – Cross Border Payments Models Section 1 – Origination Model The Originator must utilize an ODFI for origination of cross-border payments. The ODFI may also be acting as the OGO. In the processing flow diagrams that follow, the ODFI and the OGO are shown as two separate entities. In the cases where the ODFI is also the OGO items may be transferred cross-border with a reduced cycle time because the payments need not be submitted through the national payments system of the Originator’s country. It is assumed that all items are processed according to the rules, requirements and timing criteria as dictated by the originating country’s national payments system and are formatted according to the specifications of the NACHA Operating Rules for CBR and PBR. Corporate payments are processed with the Standard Entry Class Code of CBR and consumer payments with the Standard Entry Class Code of PBR. Settlement finality for the entries in the originating country’s payments system is warranted by the OGO to the RGO upon funding of the entries to the RGO. Section 2 – Receiving Model Cross-border entries destined to a Receiver’s account with an RDFI that is not also acting as the RGO flow through the receiving country’s national payments system as depicted in the process flow diagrams. The entries are processed according to the rules, requirements and timing as dictated by the national payments system of the receiving country. When the RDFI is also functioning as the RGO, the cycle time for the processing of the payment may be reduced due to the entries not being submitted through the receiving country’s national payments system. Section 3 – Process Flow Diagrams Chapter 5 – Case Studies Case Study 1 – Credit Origination with Variable Amount and Return (Variable to Fixed transaction) In this case study, a US company is sending weekly payroll entries to its salaried employees in Canada. The payment amount must always be the same Canadian dollar value every week, so the US dollar amount will vary depending on the foreign exchange rate. The company has decided to move to cross-border ACH to: 1) achieve a better foreign exchange rate for their employees by leveraging multiple payments rather than having each employee cash their checks individually, 2) reduce the delivery timeframe, and 3) eliminate the need for their employees to visit their financial institutions to cash their paychecks. The payroll entry is originated as a variable-to-fixed PBR credit transaction of CAD 1000 and the payment passes through the system. The employee’s Canadian account is credited with CAD 1000 and the employer’s USD account is debited for USD 670 based on a 0.67 CAD-USD exchange rate. In this instance, the Canadian employee’s bank account has been closed, and the RDFI returns the CAD 1000 payment to the Gateway Operator (in this case, Toronto Dominion). Toronto Dominion then converts back to the PBR format, performs the foreign exchange, and forwards the returned payment to the US Gateway Operator as USD 680 (because of exchange rate fluctuations, the amount actually credited back to the employer’s account may be different than the original amount). Normally, two transactions will be originated back to the employer’s account, one for the exact original dollar amount (for easier reconciliation with the original payment), and a second entry to offset the foreign exchange fluctuation (whether credit or debit). Case Study 2 – Debit Origination for Collections (Fixed to Variable transaction) In this example, a US insurance company collecting insurance premiums from Canada needs to have the funds credited to its US account without the hassle of managing paper check collections. As the Canadian customers will be paying their premiums in CAD, this will mean that a variable amount of USD will be credited to the insurance company’s account. A fixed-to-variable PBR debit entry is initiated for CAD 120 and passes through the system. Upon receipt, Toronto Dominion (as the RGO) issues a domestic Canadian debit for CAD 120 to the customer’s account, and the insurance company is credited with USD 80.40 – with the timing of that credit (i.e. before or after the debit is finalized in Canada) dependent upon the agreements between the various parties. Appendix 1 – Glossary of Terms ACSS is the Automated Clearing Settlement System operated by the Canadian Payments Association for the settlement of payments exchanged between Direct Clearers in Canada. ACH Network is a funds transfer system that provides for the interbank clearing of electronic entries for Participating DFIs and that is governed by the rules of the National Automated Clearing House Association. ACH Operator or Automated Clearing House Operator means a person that operates an Automated Clearing House pursuant to an agreement with an Association. An ACH Operator may act as an Originating ACH Operator, a Receiving ACH Operator, or both. In the case of an Association that operates its own clearing house for entries through one or more facilities, the term means such Association. An ACH Operator of a Participating DFI means an ACH Operator to which such Participating DFI transmits entries or from which it receives entries pursuant to the authorization of or agreement with such ACH Operator. Alphameric means any character 0 - 9, A - Z, blank, and printable special characters that have an EBCDIC value greater than hexadecimal 3F. Fields defined in the NACHA Operating Rules as alphameric may contain any of these allowable characters. CBR is the Standard Entry Class Code used for a corporate cross-border payment. CPA means the Canadian Payments Association. CPA Rules and By-Laws are the national payments system rules of Canada. CPA Standard 005 is the Canadian standard that addresses the exchange of financial data. Cross-Border Indicator means a code used to distinguish a cross-border entry from a domestic entry; used in conjunction with the Foreign Exchange Indicator. Date Funds to be Available in the U.S. means the effective entry date as defined in the ACH Operating Rules. In the CPA Rules and By-Laws of Canada, this is the date on which funds are to be available to the payee. Direct Clearer means each Member, as defined in the CPA Rules and By-Laws, that (1) meets the requirements of Section 10.01 or 10.02 of the CPA Clearing By-Law, (2) settles for items drawn on or payable by it through a settlement account at the Bank of Canada, and (3) is a participant at one or more Regional Settlement Points, as defined in the CPA Rules and By-Laws; Direct Clearer includes a Group Clearer, as defined in the CPA Rules and By-Laws, unless the context otherwise requires. Effective Entry Date is the date specified by the Originator on which it intends a batch of entries to be settled in the ACH Network. Foreign Exchange Indicator is a code used to indicate the foreign exchange conversion methodology applied to a cross-border entry. Foreign Exchange Reference is the foreign exchange rate used to execute the foreign exchange conversion of a cross-border entry or another reference to the foreign exchange transaction. Foreign Exchange Reference Indicator is a code used to indicate the content of the Foreign Exchange Reference field. Foreign Payment Amount means the foreign currency denomination payment amount equivalent of a cross-border entry before the execution of the foreign exchange conversion. Foreign Receiving DFI Identification is the identification number used to denote the foreign Receiving Depository Financial Institution (RDFI) in a cross-border transaction. Foreign Receiver’s Account Number is the account number of the account held by the beneficiary of a cross-border entry to which a cross-border entry is posted. Foreign Trace Number is the number assigned by the Originating Depository Financial Institution (ODFI) of a cross-border entry in a foreign payments system to identify and trace that entry. Indirect Clearer means each institution, other than a member of a Group, that (1) is a Member or is eligible to be a Member in accordance with the Canadian Payments Association Act, and (2) settles for items drawn on or payable by it through a settlement account of a Direct Clearer which acts as its clearing agent. ISO Destination Country Code is the two-character alpha code as approved by the International Organization for Standardization to identify the country of the Receiver to whom a cross-border entry is originated. ISO Destination Currency Code is the three-character alpha code as approved by the International Organization for Standardization to identify the currency denomination in which the Receiver of a cross-border entry will receive funds. ISO Originating Currency Code is the three-character alpha code as approved by the International Organization for Standardization to identify the currency denomination in which the entry was first originated. NACHA is the National Automated Clearing House Association. NACHA Operating Rules are the national payments system rules of the ACH Network which provide the legal foundation for Participants of that system. OGO Identification is the routing number of the Originating Gateway Operator in an outbound cross-border entry. Original Forward Entry Payment Amount means the payment amount in the originating currency denomination of a cross-border entry that was subsequently returned. PBR is the Standard Entry Class Code used for consumer cross-border payments. Settlement Date means, under the NACHA Operating Rules, the date an exchange of funds with respect to an entry is reflected on the books of the Federal Reserve Bank(s). Standard Entry Class Code is a mnemonic used in the NACHA Operating Rules to distinguish various kinds of entries. Appendix 2 – ODFI Selection Guide Suggested criteria for a Request for Information (RFI) to potential ODFI’s A. General Information 1. Do they offer cross-border services? 2. Are they sending payments under the Cross-border Payment Operating Rules? 3. What Originating Gateway Operator (OGO) do they use? 4. What is the experience of the OGO in cross-border transactions? 5. What is their level of familiarity with the national payments system of the country to which they are sending cross-border transactions? B. Operational Process 1. What is the transaction flow? 2. How are returns handled? 3. How does settlement take place? 4. What are the contingency arrangements for emergencies? 5. What are the security features of the system? C. Foreign Exchange 1. Who does the foreign exchange? 2. Who determines the rates? 3. How is the rate information made available? 4. Do they offer payments in all three foreign exchange scenarios? 5. How is the foreign exchange rate on return items handled? D. Service Levels 1. What are the timeframes for sending files to the ODFI? 2. What are the settlement timeframes for payments sent to different countries? 3. When are the funds debited/credited to/from the Originator’s account? 4. What penalties are there for late payments or delayed availability? 5. What is the implementation process and timing, and what notification and assistance are available? 6. What are the customer service telephone numbers and hours? E. Contract Terms/Agreements 1. What is contained in the ODFI/Originator Agreement? 2. What are the fees for originating cross-border payments? 3. Can these fees be included in the Account Analysis? 4. For how long are the fees guaranteed? Appendix 3 – OGO Selection Guide Suggested criteria for a Request for Information (RFI) to potential OGO’s A. Operations Process 1. What is the transaction flow? 2. How are return items processed? 3. What are the settlement terms? Do they vary by transaction type? 4. How does settlement take place? 5. What contingency arrangements are in place? B. General Information 1. May you have customer references? 2. What is their experience in ACH cross-border payments? 3. What is their financial condition? 4. What ODFI’s are they servicing? 5. Staffing levels? Hours of operation? After hours emergency assistance? C. Service Levels 1. What are the timeframes for sending files? 2. What is the implementation process? Timeframe? 3. Are reports available on current service level statistics? D. Contract Terms 1. What agreements are required? 2. What is the fee structure and how long is it guaranteed? 3. How are we billed? 4. What are the payment terms? E. Foreign Exchange 1. Who does the foreign exchange processing? 2. What is the fee to the ODFI for the foreign exchange conversion? 3. How is the rate information communicated to the ODFI? 4. How is the foreign exchange rate on returned items handled? F. Access to Endpoints 1. What endpoints are available? 2. How will the addition of endpoints be communicated to the ODFI? Appendix 4 – Foreign Clearing System Contact Information Aruba Centrale Bank von Arube Havenstraat #2 Oranjestad, Aruba +297-822-509 www.cbaruba.org Australia Australian Payments Clearing Association (APCA) Level 24, 25 Bligh Street Sydney NSW 2000Australia +61-02-9221 8944 www.apca.com.au Canada Canadian Payments Association (CPA) 1212-50 O’Connor St. Ottawa, ON K1P6L2 Canada +1-613-238-4173 www.cdnpay.ca Chile Redbanc S.A. Huerfanos 770, Piso 12 Santiago, 6500556 Chile +56-2-674-6700 www.redbanc.cl Colombia ACH Colombia (Private ACH) Carrera 17, #93A-02, Piso 5 Bogota, Colombia Banco de la Republica (Public ACH) Carrera 7, #14-78 Bogota, Colombia www.banrep.org Denmark PBS Holding A/S Lautrupbjerg 10 P.O. Box 500 2750 Ballerup, Denmark +45-4468-4468 www.pbs.dk France Groupement pour un Systéme Interbancaire de Télécompensation (GSIT) 31 Rue de Berri Cedex 08 Paris 75408 France www.gsit.fr Japan Japanese Bankers Association/Zengin www.zenginkyo.or.jp Korea Korean Financial Telecommunications & Clearing Institute www.kftc.or.kr Mexico Cecoban S.A. de C.V. Fernando Alba Ixtlixóchitl No. 210 Col Esperanza C.P. 06828, Mexico D.F., Mexico +52-5726-5900 www.cecoban.org.mx Netherlands Interpay Nederland B.V. Eendrachtlaan 315 3526 LB Utrecht, Netherlands +30-283-5111 www.interpay.nl Norway Bankenes Betalingssentral AS BBS Haavard Martinsens vei 54 Postal Address N-0045 Oslo Norway +47-2289-8989 www.bbsas.no Panama Centro de Cambio Automatizado www.sclave.com Poland KIR S.A. National Clearing House Company 02-761 Warsaw ul. Cypryjska 72, Poland +48-022-651-6383 www.kir.com.pl Portugal Sociedade Interbancario de Servicios www.sibs.pt Singapore Monetary Authority of Singapore/Banking Computer Services Pte Ltd. 10 Shenton Way, MAS Building Singapore 079117 +65-225-5577 www.mas.gov.sg Slovak Republic Slovak National Clearing Centre Zrinskeho 13 Bratislava 1, Slovak Republic South Africa Bankserv 26 Ameshoff Street, Braamfontein P.O. Box 62443 Marshalltown 2107, Johannesburg, South Africa +11-406-6400 www.bankserv.co.za Sweden Bankgirocentralen BGC AB Palmfeltsvagen 5 A Stockholm 10519 Sweden +46-8-725 60 90 www.bgc.nu Switzerland Swiss Interbank Clearing AG Hardturmstrasse 201 Zurich CH 8021Switzerland www.sic.ch United Kingdom BACS, Ltd. De Havilland Road Edgware Middlesex HA8 5QA United Kingdom +44 (0870) 1650019 www.bacs.co.uk Appendix 5 – Cross Border Reference Information & Resources ISO Codes: ISO Country and Currency code lists are available for purchase from the International Organization for Standardization (ISO). The web address for the ISO is www.iso.ch. Currently cross-border payments are being processed between the US and Canada. Appropriate ISO codes for Canada are: Currency: CAD Country: CA Appropriate ISO codes for the United States are: Currency: USD Country: US National Automated Clearing House Association (NACHA) 13665 Dulles Technology Dr., Suite 300 Herndon, VA 20171 USA (703) 561-1100 www.nacha.org Publications available from NACHA: ACH Operating Rules & Technical Specifications Ticket to Cross-Border Payment Services Passport to Cross-border Payment Services Cross-Border Council Jeffrey D. Borenstein Phone: 703-561-3945, Email: jborenstein@nacha.org www.cbc@nacha.org Appendix 6 – Cross Border Payment Operating Rules Article I -- Scope of the Rules The Cross-Border Payment Operating Rules apply to certain electronic Automated Clearing House (ACH) Transactions and transaction data exchanged between Gateway Operators subscribing to these rules. Article II -- Gateway Operators Originating Gateway Operator (OGO) An Originating Gateway Operator shall be a participant of a national payment system or an entity acting as an agent for that participant, that (1) is capable of clearing and settling payments in that system, and (2) transfers transactions to a Receiving Gateway Operator of a foreign payment system, in accordance with the Cross-Border Payment Operating Rules. Receiving Gateway Operator (RGO) A Receiving Gateway Operator shall be a participant of a national payment system or an entity acting as an agent for that participant, that (1) is capable of clearing and settling payments in that system, and (2) receives transactions from an Originating Gateway Operator of a foreign payment system, in accordance with the Cross-Border Payment Operating Rules. Article III -- Compliance With Rules Each participating Gateway Operator agrees to be bound by these rules and warrants that it is legally able to comply with all applicable requirements thereof. Article IV -- Additional Bodies of Law Gateway Operators shall comply with all additional laws, rules, regulations and court orders to which they are subject governing the exchange or effecting of transactions. Article V -- OGO/RGO Agreement An OGO and RGO shall have in place an agreement under which the parties agree to (1) be bound by the Cross-Border Payment Operating Rules, (2) the terms and conditions for the time-value of execution, allocation of gains, losses and the assumption of risk for foreign exchange conversion, (3) the technical and operational responsibilities of each party, (4) the procedures for settlement between the parties, and (5) define what constitutes a commercially reasonable timeframe with a clear definition of force majeure provisions. Unless otherwise agreed to, the relationship between the OGO and RGO shall be governed by the law of the State (country) of the RGO. Article VI -- Transaction Returns The rights, obligations, and procedures associated with returning a cross-border transaction are determined by the national payment system operating rules of the receiving country of the original transaction. Article VII -- Erroneous Transactions by Gateway Operators An OGO may request an RGO to return or adjust an Erroneous Transaction initiated by the OGO. The RGO may, but is not obligated to, comply with such request. Article VIII -- Irrevocability of Cross-Border Settlement Upon funding of a transaction between Gateway Operators settlement is irrevocable. Article IX -- Processing, Scheduling & Timing A Gateway Operator shall process and transfer a transaction to the appropriate subsequent party within a commercially reasonable timeframe. Article X -- Record Retention A Gateway Operator shall retain record of each transaction it processes for a period of one-year from the date that the transaction was transmitted or received. Article XI -- Contingency Notification In the event of a delay that affects its ability to process a transaction, the RGO shall duly notify the OGO of the transaction within a commercially reasonable timeframe. Article XII -- Arbitration & Compensation Unless otherwise agreed to, disputes arising out of or in connection with these rules and underlying agreements shall be resolved under the Rules of Arbitration of the International Chamber of Commerce. Article XIII -- Gateway Operator Technical Capabilities A Gateway Operator is responsible for the exchange of transactions in accordance with applicable national payment system rules, and the exchange of transactions with other Gateway Operators in accordance with the OGO/RGO agreements. Article XIV -- Gateway Operator Warranty A Gateway Operator warrants to all other Gateway Operators that such transaction received from its national payment system or another Gateway Operator will be processed in compliance with these rules. Article XV -- Liability for Breaching Gateway Operator Warranty Each Gateway Operator breaching the warranty prescribed in Section XIV of these rules shall be limited to (1) transaction charges and fees charged by the Gateway Operator, which shall indemnify another participant in connection with the transaction, (2) interest (at the short-term offer money market rate of the originating country for the originated currency) for the period during which the relevant Gateway Operator failed to perform its obligations under the terms of its OGO/RGO agreement, and (3) reimbursement of the original principal amount which the Gateway Operator failed to transfer in accordance with its OGO/RGO agreement regardless of any foreign exchange fluctuation, to the exclusion always of indirect or consequential damages. Article XVI -- Amendment of Cross-Border Payment Operating Rules Any amendment (including any addition to or repeal) of these rules may be made as follows: by the vote at a meeting or by the written consent of the members of the Cross-Border Council in accordance with the Charter of the Cross-Border Council. Article XVII -- Definition of Terms "ACH Transactions" or "Automated Clearing House Transactions" An electronic batch-oriented transaction. "Charter" or "Cross-Border Council Charter" A document which defines the nature, structure, procedures and policies governing the CrossBorder Council adopted August 1995, as amended from time to time. "Cross-Border Council" or "Council" The Cross-Border Council is an emancipated entity of the National Automated Clearing House Association (NACHA). "Erroneous Transaction" An erroneous transaction is a transaction that (1) is a duplicate of a transaction previously initiated by the OGO, (2) orders payment not intended to be credited or debited by the originator, or (3) orders payment in an amount different than was intended by the originator. "Gateway Operator" Gateway Operator means either an Originating Gateway Operator or a Receiving Gateway Operator. "Originating Gateway Operator" or "OGO" An Originating Gateway Operator shall be a participant of a national payment system or an entity acting as an agent for that participant, that (1) is capable of clearing and settling payments in that system, and (2) transfers transactions to a Receiving Gateway Operator of a foreign payment system, in accordance with the Cross-Border Payment Operating Rules. "Receiving Gateway Operator" or "RGO" A Receiving Gateway Operator shall be a participant of a national payment system or an entity acting as an agent for that participant, that (1) is capable of clearing and settling payments in that system, and (2) receives transactions from an Originating Gateway Operator of a foreign payment system, in accordance with the Cross-Border Payment Operating Rules. "State" State refers to a defined territory of governmental jurisdiction. "Transaction(s)" Transaction means an order or request for the (1) credit of money to an account, (2) the debit of money from an account, or (3) a zero value entry.