Until recently, interbank cheque clearing in Bangkok and the metropolitan area was a fully manual paper-based operation. The method was subject to errors and there were delays in the clearing process effecting the financial market operations. Moreover, the increased daily cheque volume commensurate with economic growth and the worsened Bangkok traffic commensurate with urban growth. These problems associated with the manual operations were addressed by BOT with the introduction of the Electronic Cheque Clearing System (ECS).
ECS relies on the electronic data read off the cheques, rather than on the physical cheques themselves, for purposes of calculating net clearing positions and customer account posting.
The Electronic Clearing House (ECH) was established by BOT to operate the ECS, act as a center for exchanging cheques between member banks, and set regulations concerning inter bank electronic cheque clearing. ECH became operational on July 16, 1996.
|2. Regulations, Guidelines, and Policies|
The Royal Decree Regulating the Affairs of the Bank of Thailand (1942) stipulates that operating an interbank clearing system constitutes a central banking responsibility, to be undertaken by BOT. As such, the Regulation of the Bank of Thailand Re: The Inter - bank Electronic Clearing in Bangkok (1996) was issued to ensure smooth ECS operations among member banks. This regulation specifies roles and responsibilities of member banks, operational procedures and other related operations. The regulation also stipulates that any problem relating to the interpretation of the rules should be resolved by BOT.
|3. Participants in the ECS|
ECS members must legally constitute a commercial bank under the commercial banking law and a specialized bank established under a specific law and the Bank of Thailand. There were covering all member bank branches in Bangkok, Nonthaburi, Pathumthani, and Samutprakarn, as well as a number of branches in Samutsakorn, Ayutthaya, and Nakornprathom.However, BOT plans to expand the scope of ECS operation to include other provinces in the near future.
The ECS system can handle both on-line and off-line ECS member banks. On-line members send cheque data to ECH via computer and communication networks; whereas, off-line members deliver physical cheques to ECH, who then read the cheque data and input the information into system on their behalf. At present, all ECS members are on-line members.
|4. Types of Payment Instruments Handled through ECH|
Payment instruments that are processed through ECS include cheques, drafts, bills of exchange, and promissory notes denominated in Thai Baht. However, these instruments must be issued by ECH member banks or have their payments guaranteed by ECH member banks.
|5. Operational Procedures|
Normal Round Clearing
With ECS, customers can deposit their cheques at member banks almost any time during the banking hours. Each member bank determines its own cut-off time (approximately between 1:00 p.m. and 2:00 p.m.) within which cheque depositing customers will have their accounts credited and cheques sent for collection on the same day, and can withdraw against the deposits on the next business day.
Once on-line member banks received the cheques from their customers, they will read and transmit the cheque data on the code line, encoded with Magnetic Ink Character Recognition (MICR) printing, to ECH electronically within the time limit. On the other hand, off-line member banks would have to send physical cheques to ECH for data capture. Both sources of cheque data will be combined to determine the preliminary net clearing positions, with the generated report or on-line data sent to member banks.
After that, ECS will extract and send information on high-value cheques (with amount from Baht 10 million upward) to member banks, who will then verify and possibly reject these cheques. Information on rejected high-value cheques will be removed from the new net clearing positions, while information on those not rejected will be used by paying bank to debit the paying customer accounts. The net clearing balances will be settled through the BAHTNET system.
In the evening of the same day, on-line member banks must send the physical cheques to ECH for reading, sorting, and verification against the electronic information received during the day. The physical cheques are sorted by paying banks, bank branches, and account numbers, and used for verification purposes by the paying banks. Cheques sorted by banks or branches and accounts will be ready for pick up early the next morning.
Return Round Clearing
On the morning of the next business day, member banks would send information on returned cheques, including reasons explaining why the cheques were returned, on-line or off-line to ECH for return-round net clearing position calculation and settlement via the BAHTNET system. The information on cheques not returned would be sent to the receiving banks, which, in turn, would release hold on their paid customers’ accounts. The returned cheques are physically delivered to ECH, who would have them distributed to the sending banks later on.
|6. Processing and Equipment|
ECS relies on cheque data sent by member banks to ECH, who must have the necessary equipment and computers to read, receive, send, and process the data.
Each on-line member bank is required to have a reader/encoder in order to be able to read the data printed on the code line of each cheque as well as encode the cash amount on each cheque with MICR ink type E-13B. These encoded cheques are then sent to ECH in the evening. Each member bank must have a centralized information system that processes information from its branches and sends it to ECH electronically via an Electronic Clearing House Front End Processor (ECHFEP).
ECH uses a router, connected to member banks’ ECHFEP machines, and a host machine, which processes cheque data sent by member banks to ECH and controls the operations of 6 reader/sorter machines. Each reader/sorter can read data stored in the code line at a rate of 1,700 cheques per minute, sorting them according to bank branches and account numbers. The data read is verified against the information sent electronically by on-line member banks.
ECS calculates net clearing positions and prepares the electronic data for settlement via BAHTNET, using its multilateral funds transfer function. The member banks’ accounts at BOT will be debited/credited according to their net clearing positions. Credited banks will not be able to use the transferred funds for further transactions until after the return round of settlement in the next day.
Member banks can begin to accurately manage their funds as soon as they received the preliminary net clearing positions (by about 3:45 p.m.). If a debited bank found its BOT account balance to be insufficient for meeting settlement, then it could begin borrowing from another bank or from the money market. If the required amount could not be deposited in the debited bank’s BOT account within the time limit then that round of settlement will be deemed void. A new net clearing position calculation will be made, but with all items transacting with that particular bank excluded from the new calculation. The settlement will proceed as normal with respect to the remaining banks. The same settlement failure rule applies to the return round, except the normal round settlement will be re-calculated as well.
ECH is a non-profit operation. For ECS settlement and cheque sorting by banks, the sending banks are charged Baht 0.20 per cheque, while the paying banks are charged Baht 0.40 per cheque. For sorting by bank branches and account numbers, the paying bank would be changed Baht 0.60 per cheque. At the same time, commercial banks charge their current account customers Baht 12 per cheque, and the customers are subjected to a further Baht 3 per cheque for a duty stamp. BOT supervises the setting of fees charged to bank customers to ensure that the overall fee structure is appropriate.
|9. Security and Risk Management|
For data security measures, the system employs secret codes in the data transmission. The Message Authentication Code (MAC) calculated from the incoming data for each item will be sent together with each data transmission to a paying bank. The paying bank debits its client account and prepares the return cheque data, which is sent back to ECH the next day. The system has to determine that the MAC value on the incoming message is identical to the one sent out by ECH.
Moreover, should a member bank be unable to send information on-line, and has to rely on recording media, the system also provides secret codes for such a situation as well. Because cheque information received electronically is used to calculate net clearing positions, the system minimizes operational risk from data transmission by separating out high-value cheques that can significantly effect the net clearing positions, and allowing the paying banks to examine and possibly reject these high-value cheques by 4:00 p.m., before the daily settlement commences around 5:00 p.m. Finally, there are operational procedures and contingency plans have been set up to handle emergency situations that may prohibit normal settlement procedures.
As for policies aimed at preventing settlement risks, BOT notes that commercial banks generally write high-value cheques to pay for foreign exchange transactions and that interbank borrowing accounts for over 80 percent of daily cheque values. As a result, BOT plans to have commercial banks begin using BAHTNET funds transfers instead of high-value cheques by March 2000.
BOT has set up a backup ECH site at the BOT head office (Bangkhunprom) to handle any emergency situation that should prevent ECH from operating. The backup ECH can operate the entire cheque clearing process, from receiving and sending cheque data, to reading and sorting cheques with its 4 reader/sorter machines.
In addition, BOT has outlined operational procedures for handling varying degrees of emergency effecting member banks or ECH itself. For example, should a member bank be unable to send cheque information to ECH via a leased line, a dial-up line is to be used. Should an on-line operation fail, recording media can be used. And should a member bank be unable to prepare cheque data, the physical cheques can be delivered to ECH for processing.