International Clearing Systems
From Supply Chain Management Encyclopedia
Russian: Международные клиринговые системы
International clearing systems could be considered as an important for international commodities trade part of the financial market infrastructures (FMIs) that facilitate the clearing, settlement, and recording of monetary and other financial transactions can strengthen the markets they serve and play a critical role in fostering financial stability . On the way to switch from bilateral to multilateral payment arrangements European countries created the European Payments Union in 1950 under the aegis of the Organization for European Economic Cooperation with the Bank for International Settlement or “the agent” acting as the settlement agent. Driven by the success of the European Payments Union, developing countries had set up their own Clearing Unions: the Central American Clearing House in 1961, the Latin American free trade association payment system in 1965, which was subsequently converted into the Associação Latino-Americana de Integração, the Asian Clearing Union in 1974, the West African Clearing house in 1975, the Caribbean Common Market Multilateral Clearing facility in 1977, the Great lakes Economic Community’s Monetary Arrangement in 1978 and the Central African Clearing house in 1979, which was subsumed into Economic and Monetary Community of Central African States. However, only two of them, the Asian Clearing union and the West African Clearing House, have remained in operation with clearing operations at their core.
The FMI is defined as a multilateral system among participating institutions, including the operator of the system, used for the purposes of clearing, settling, or recording payments, securities, derivatives, or other financial transactions. FMIs provide participants with centralized clearing, settlement, and recording of financial transactions among themselves or between each of them and a central party to allow for greater efficiency and reduced costs and risks. Through the centralization of specific activities, FMIs also allow participants to manage their risks more efficiently and effectively, and, in some instances, eliminate certain risks. An FMI should use, or at a minimum accommodate, relevant internationally accepted communication procedures and standards in order to facilitate efficient payment, clearing, settlement, and recording .
From the viewpoint of classifying international clearing systems devoted to arrange countertrading transactions, there are two main options of central actor for such systems:
- 1) Clearing House as a counterpart of Commodity Exchange, and
- 2) International Clearing House as the main actor of multilateral clearing arrangements.
Clearing House in Connection with Commodity Exchange
One of the main roles that an exchange can play, irrespective of its level of development, is to provide a disciplined market-place, thus reducing the risk in trading. There are several ways in which it can do this. For instance, it could organize the dispute settlement (arbitration) functions for all the trade that takes place through the exchange, and if a buyer or seller is awarded financial compensation, guarantee that it will be paid. In the case of warehouse receipts, the exchange could guarantee the presence of the commodities represented on these receipts (backed, of course, by a proper system to accredit warehouses, appropriate insurance held by the warehousing companies, and regular monitoring of the continuing solidity of warehouses' operations).
There are different ways to structure clearing operations. The main ones are as follows:
- Organization of a clearing department within the exchange. The financial soundness of this clearing arrangement would be ensured through the financial soundness of the clearing members of the exchange, and the earmarked capital they may have set aside as a specific guarantee. This system has the advantage that all the earnings of clearing operations (which can be significant) remain within the exchange. On the other hand, it would provide sufficient security only if the clearing members are very sound, large corporations (as in the Singapore Commodity Exchange, where they comprise several triple-A companies), or when a very large capital guarantee fund has been accumulated over the years (the case, for example, of the Chicago Board of Trade). This arrangement is unlikely to provide sufficient comfort in the case of new, developing-country exchanges, although it may be sufficient in cases where exchanges provide only limited financial functions.
- Organization of an independent clearing house outside the exchange. Members of this clearing house, which would normally consist mostly of banks, will undertake the clearing functions and ensure the financial soundness of the market, in return for a fee. This arrangement has the major advantage that the involvement of well-capitalized institutions, with good credit ratings, will assure potential users that the market is indeed sound. In order not to lose all the financial benefits of the clearing operations, it would be advisable for the exchange, or its members, also to take an ownership share in the clearing-house. In the case of developing countries, consideration could be given to the creation of a clearing house in which all exchanges in a country or region participate (together with some banks).
- Using the services of an established clearing house. The advantages of this are that such a clearing house has a good reputation, and that it already has all the systems needed for efficient clearing. The disadvantage is that the earnings from clearing are forgone.
- ↑ CPSS-IOSCO – Principles for financial market infrastructures – April 2012 - Bank for International Settlements and International Organization of Securities Commissions - http://www.bis.org/publ/cpss101a.pdf
- ↑ The European Payments Union and root causes of the economic crisis -http://www.eui.eu/Research/HistoricalArchivesOfEU/News/2013/12-18-TheEuropeanPaymentsUnionandrootcausesoftheeconomiccrisis.aspx
- ↑ CPSS-IOSCO, Op. cit., p.118
- ↑ Emerging Commodity Exchanges: From Potential to Success / Report by the UNCTAD - UNCTAD/ITCD/COM/4 - 17 June 1997 secretariat - p.19. - http://unctad.org/en/Docs/poitcdcomd4.pdf
- ↑ ibid
- ↑ ibid - p.21
- ↑ ibid