This month’s question
“I gather that from November 2009, SWIFT will be introducing a new message for bank cover payments – the MT 202 COV. How will this new message function – will it replace the MT 202 outright? What will the implications of this new message type be and do corporates need to take any action?”
Frank Van Driessche, Manager, Payments, Standards, SWIFT responded:
“The MT 202 COV is part of the 21st November 2009 SWIFT Standards Release. The message will be introduced as a variant of the MT 202 and will only be used when cover is provided for a customer credit transfer sent by the cover method. The MT 202 remains the message to use for all inter-bank transfers not related to underlying customer credit transfers.
The MT 202 COV will be a general usage message which means that all SWIFT users must be able to receive it. More information can be found on the Payments Market Practice Group website www.pmpg.info.”
The cover method, which Paul Nixon explains in more detail below, involves banks making payments to each other and getting other banks to settle the transaction.
Paul Nixon, Senior Product Manager, Financial Institutions, Global Payments and Cash Management, Europe HSBC, expanded on this:
“The first thing to note is that the MT 202 COV, like the MT 202, concerns bank-to-bank payment messages. As a consequence, any impact on corporates will be indirect. The MT 202 COV is designed to be used, in certain circumstances, instead of MT 202, but the MT 202 will still have its uses after the new message is launched.
In terms of background, the introduction of MT 202 COV stems from the need to provide greater transparency in the end-to-end payment chain and fits within the broad context of anti-money laundering/terrorist financing.
This applies to the scenario where a commercial payment message (MT 103) has been sent from one bank to another and there is no account relationship in place through which the payment can be settled. For example, Bank A in Germany sends an MT 103 to Bank B in France in respect of a payment in GBP but does not have an account with Bank B into which it can pay the GBP. Then the remitting bank, Bank A, needs to arrange to get funds to Bank B using an intermediary (correspondent) bank.
In the example, if both Bank A and Bank B hold a GBP account with Bank C, then Bank A will send a financial institution transfer (using an MT 202 message) to Bank C asking that bank to credit the account of Bank B. This is the traditional ‘cover payment’. If Bank A and Bank B hold their GBP settlement accounts with different banks, then the MT 202 from Bank A to Bank C will ask Bank C to pay funds to the bank that does have the GBP settlement account of Bank B, which we will call Bank D.
The MT 202 is a relatively simplified message and includes enough information to complete a financial transfer between banks. However, it does not carry sufficient information to identify the remitter and beneficiary parties in the underlying transaction, which is completed by the MT 103.
In the interests of ensuring maximum end-to-end transparency, the banking industry has agreed that information relating to these parties should also be carried in the cover payment. For this reason, the MT 202 COV has been created and will be part of the SWIFT Standards Release scheduled for 21st November 2009, meaning that all banks must be in a position to receive and process the new message from that time.
The MT 202 COV
The MT 202 COV is an extended version of the MT 202, with additional fields available to identify the remitter and beneficiary. This will allow the sending bank (in our example, Bank A) to copy the relevant party information into the cover payment message (to Bank C).
What this means is that Bank C (and Bank D) will be able to run the cover payment against its Anti-Money Laundering (AML) filters, to ensure that the whole transaction is subject to good practice. In so doing, there is a greater likelihood that these cover payments will be subject to ‘hits’, which could cause them to be delayed or even, in extreme cases, blocked pending further compliance checks.
And this is the area which could, indirectly, lead to an impact on corporates. If the bank receiving the original payment instruction by MT 103 (in our case, Bank B) waits until receipt of cover has been confirmed (ie they have received confirmation of credit from Bank C – or Bank D in the ‘four-corner’ case) before crediting the beneficiary, then there is a greater risk that the ultimate credit is also delayed, as a consequence of Bank C (and Bank D where relevant) having to review items that have caused hits against their AML filters.
The MT 202 will continue to support normal financial transactions between banks, for example in respect of foreign exchange or money market transactions. Apart from having a better understanding of the practice of its bank in connection with cover payment processing, there is no realistic action that a corporate can take in this area of bank-to-bank messaging.”
The question is whether banks will start to act on the MT 202 COV message rather than the MT 103 as this is, from their point of view, the safer option. This could cause delays to the receipt of funds.
Next month’s question
“There has been a lot of talk about Islamic finance recently and how it could play a central role in reviving certain economies. How does Islamic finance differ from other methods of finance and how can corporates use it?”
Do you have experience of Islamic finance practices? Could you share your knowledge with our readership? Please send your comments and responses to firstname.lastname@example.org