1
Q
There are implications of different methods of transferring cash to or from a company that a treasurer should understand, since there are significant differences in the costs and cash flow speed of each one. The level of manual processing
and related controls is significantly different for each kind of transfer, which has a major impact on the long - term efficiency of the finance and accounting functions
A
Cash transfer method
2
Q
- Inbound cash payments tend to be for very small transactions, though possibly in very high volume, especially in retail situations. However, business - to - business cash payments are not common.
- Cash is bulky, requires significant controls to maintain on -site, and does not earn interest income until deposited. Given the extra cost of counting it at the bank, it is also expensive to deposit. Consequently, companies have a strong incentive to avoid both paying with or accepting cash.
A
Cash payments
3
Q
- A ___ is a negotiable instrument drawn against deposited funds, to pay the recipient a specific amount of funds on demand.
- A check has traditionally been physically routed from the payer to the payee, then to the payee’s bank, which issues funds to the payee, and then by the payee’s bank to the payer’s bank.
- The vast majority of checks are issued directly by companies.
- However, they may also be issued directly by a bank, which is called a bank check or bank draft. The bank check is a payment on behalf of the payer, which is guaranteed by the bank (and therefore of value to the payee).
A
Check payments
4
Q
THE CHECK PAYMENT PROCESS:
- A drawer writes a check from their bank account.
A
Check creation
5
Q
THE CHECK PAYMENT PROCESS:
- The person who receives the check becomes the holder.
- Payee accepts the check.
A
Holder acceptance
6
Q
THE CHECK PAYMENT PROCESS:
- Individuals, businesses, and banks can accept checks without liability if they are holders in due course.
A
Holder’s liability
7
Q
THE CHECK PAYMENT PROCESS:
- Payee endorses the check as either blank, special, or restrictive.
A
Endorsement
8
Q
THE CHECK PAYMENT PROCESS:
- The bank is required to honor properly payable checks.
- Failure to do so could make the bank liable for wrongful dishonor.
A
Bank’s obligation
8
Q
THE CHECK PAYMENT PROCESS:
- Drawee receives checks for in-clearing capture.
- Full MICR line is captured in preparation.
A
Drawee’s Action
9
Q
THE CHECK PAYMENT PROCESS:
- Checks sorted daily into bundles by statement cycle and filed.
A
Sorting and filing
9
Q
THE CHECK PAYMENT PROCESS:
- Check is proofed, encoded, captured, and sorted (on-us, local, nonlocal).
- Batched and presented to the drawee through clearing arrangements (direct presentment, correspondent bank, clearing house, Federal Reserve bank).
A
Processing for collection
9
Q
THE CHECK PAYMENT PROCESS:
- Endorsed check is ___ a ___, which also endorses it.
A
Acceptance by depositary bank
10
Q
THE CHECK PAYMENT PROCESS:
- Data from capture runs stored and posted to accounts at the close of business.
- Exception items (rejected checks) require special handling
A
Data storage and posting
11
Q
THE CHECK PAYMENT PROCESS:
- Customers receive monthly account statements with either paper checks or check images.
A
Customer statements
12
Q
- This type of endorsement involves simply signing the back of the check. It turns the check into a bearer instrument, meaning it can be redeemed by whoever holds it. ___ are the most flexible but also the riskiest, as anyone who possesses the check can cash it.
A
Black endorsement
13
Q
- Also known as an “endorsement in full,” a ____ endorsement specifies the person to whom the check is payable. It involves signing the back of the check and writing “Pay to the order of [Name]” above the signature. This restricts the check’s negotiation to the specified person or entity.
A
Special endorsement
14
Q
- This type of endorsement limits how the check can be used. Common restrictions include “For Deposit Only” or “For [specific purpose] only.” For example, if a check is endorsed with “For Deposit Only,” it can only be deposited into the payee’s bank account and cannot be cashed. It provides an additional layer of security by preventing unauthorized parties from cashing or negotiating the check.
A
Restrictive endorsement
15
Q
- If a company has significant cash holdings, then it may be worthwhile to spend time investing in float-related funds.
- However, maintaining an abnormally small cash balance requires active float monitoring on a daily basis. If there is a gap of even a single day in float monitoring, then the company will very likely not have sufficient funds for all presented checks and will incur expensive account overage fees.
A
Investing float - related funds
16
Q
- In banking, value dates refer to the date when account holders can use funds from deposited checks that already passed through the bank’s clearing cycle
- When an individual (payee) first deposits a check at their bank, the bank will credit the payee’s account with the amount indicated on the check.
- However, the money’s not actually been received by the bank since they still need to collect the funds from the bank of the other party (assuming that the parties involved use two separate financial institutions). The bank faces a risk of incurring a negative cash flow if the payee immediately uses the cash from the check.
A
Value dating
17
Q
____ is a service provided by banks to companies for the receipt of payment from customers. Under the service, the payments made by customers are directed to a special post office box instead of going to the company.
A
Lockbox banking
18
Q
- _____ is a technology-based method that lets banks accept checks or deposit using electronic images instead of the original, physical, paper versions. It let banking customers use their computers, tablets, or smartphones to conveniently deposit checks.
- _____ is not only more convenient for bank customers; it also benefits the banks themselves.
A
Remote deposit capture
19
Q
- ___ involves the use of check payments that are drawn on remote bank locations, thereby lengthening the duration of the disbursement float. At its most sophisticated level of usage, a company can have multiple remote bank locations set up around the country and pay suppliers using bank accounts located the furthest from them.
A
Remote disbursement
20
Q
- ___, which are also known as wire payments, allow money to be moved quickly and securely without the need to exchange cash. They allow two parties to transfer funds even if they’re in different (geographic) locations safely. A transfer is usually initiated from one bank or financial institution to another. Rather than cash, the participating institutions share information about the recipient, the bank receiving account number, and the amount transferred.
A
Wire transfers
21
Q
ACH (Automated Clearing House) ____ is a network used for electronically moving money between bank accounts across the United States. It’s run by an organization called Nacha.
A
ACH payments
22
A ____ is a type of company charge card used for smaller purchases to achieve greater cost efficiency, control and convenience. ____ are also known as purchasing cards, P-Cards or PCards.
____ can be tied to either a credit card or a bank account. The bank that manages a procurement card will issue payments to payees within days, while providing monthly invoicing to the client company.
Procurement cards
22
* In an ACH ___ transaction, one party agrees to pay another. To make that happen, the party receiving payment sends a message to the ACH network asking it to
collect said payment and move the funds into their account.
ACH debit
23
The ___ is usually called upon to either manage a company’ s existing debt or procure new debt. In either case, this calls for a knowledge of the broad variety of debt instruments available, as well as dealing with credit rating agencies. It may also be necessary to have a working knowledge of the accounting, controls, policies, and procedures used to manage debt.
Treasurer
24
* _____ – is a financial transaction in which a company sells its accounts receivable to a finance company that specializes in buying receivables at a discount (called a factor). Accounts receivable factoring is also known as invoice factoring or accounts receivable financing.
Factoring
25
* _____ – unsecured debt that is issued by a company and has a fixed maturity ranging from 1 to 270 days. A company uses commercial paper to meet its short- term working capital obligations. It is
commonly sold at a discount from face value, with the discount (and therefore the interest rate) being higher if the term is longer. A company can sell its commercial paper directly to investors, such as money market funds, or through a dealer in exchange for a small commission.
Commercial paper
26
* _____ – uses a company's inventory as collateral for a loan. The inventory to be used as collateral is segregated from the rest of the inventory by a fence, and all inventory movements into and out of this area are tightly controlled. Alternatively, the inventory may be stored in a public warehouse. State lien laws typically require that signs around the segregated area clearly state that there is a lien on the inventory stored inside. It is highly transaction intensive and recommended only for those companies that have exhausted all other less expensive forms of financing.
Field warehouse financing
27
* _____ – is a method of financing inventory purchases, where a lender pays for assets that have been ordered by a distributor or retailer and is paid back from the proceeds from the sale of these items.
The arrangement is most commonly used when large assets, such as automobiles or household appliances, are involved. The entity at risk in this arrangement is the lender, which is relying upon the sale of the underlying assets in order to be repaid. Accordingly, the lender may demand the
following:
* That all assets acquired under the ____ arrangement be sold at a price that is no lower than its original purchase price.
* That the inventory of assets in stock is regularly counted and matched against the records of the lender.
* That the inventory of assets in stock is regularly counted and matched against the records of the lender.
* That the loan be paid back no later than a certain date, thereby avoiding the risk of product obsolescence.
Floor planning
28
* ____ – is a lease in which the lessor only finances the lease, and all other rights of ownership transfer to the lessee, resulting in
the recording of the underlying asset as the lessee's property in its general ledger. The lessee can only record the interest portion of a
capital lease payment as expense, as opposed to the amount of the entire lease payment in the case of a normal lease.
Capital lease
29
* ____ – covers the purchase of a specific asset, which is paid for by the lease provider on the company’s behalf. In exchange, the company pays a fixed rate, which includes interest and principal, to the leasing company. It may also be charged for personal property taxes on the asset purchased.
Lease
30
* ____ – under the terms of which the lessor carries the asset on its books and records a depreciation expense, while the lessee records the lease payments as an expense on its books. This type of lease typically does not cover the full life of the asset, nor does the buyer have a small - dollar buyout option at the end of the lease.
Operating lease
31
* ____ – a commitment from a lender to pay a company whenever it needs cash, up to a preset maximum level. It is generally secured by company assets, and for that reason bears an interest rate not far above the prime rate. It is a flexible loan from a bank or financial institution and a defined amount of money that you can access as needed and then repay immediately or over a prespecified period of time. It will charge interest as soon as money is borrowed, and borrowers must be approved by the bank.
Line of credit
32
* Loans
* ____ – is a loan that uses fixed assets or inventory as its collateral is a common form of
financing by banks. Loans may also be issued that are based on other forms of collateral, such as the cash surrender value of life insurance, securities, or real estate.
Asset-based loans
33
* ____ – is a fixed-income instrument since bonds traditionally paid a fixed interest rate (coupon) to debtholders. Variable or floating interest rates are also now quite common. It is also referred to as a certificate of indebtedness.
Bonds
34
* ____ – a bond that uses as collateral a company’s security investments.
Collateral trust bond
35
* ____ – a bond that provides for either reduced or no interest in the beginning years of the bond term and compensates for it with increased interest later in the bond term. Since this type of bond is associated with firms having short – term cash flow problems, the full-term interest rate can be high.
Deferred interest bond
35
* ____ – a bond that can be converted to stock using a predetermined conversion ratio. The presence of conversion rights typically reduces the interest cost of these bonds, since investors assign some value to the conversion privilege.
Convertible bond
36
* ____ – a bond issued with no collateral. A subordinated debenture is one that specifies debt that is senior to it.
Debenture
36
* ____– a bond whose payments are guaranteed by another party. Corporate parents will sometimes issue this guarantee for bonds issued by subsidiaries in order to obtain a lower effective interest rate.
Guaranteed bond
36
* ____– a bond whose terms allow purchasers to convert them to common stock, as well as any accrued interest. The reason for its “death spiral” nickname is that bondholders can convert some shares and sell them on the open market, thereby supposedly driving down the price and allowing them to buy more shares, and so on.
Floorless bond
37
*____– a bond issuance where a portion of the total number of bonds are paid off each year, resulting in a gradual decline in the total amount of debt outstanding.
Serial bond
37
* ____– a bond offering can be backed by any real estate owned by the company (called a real property ____ bond), or by company - owned equipment (called an equipment bond), or by all assets (called a general ____ bond).
Mortgage bond
37
* ____– a bond that pays interest only if income has been earned. The income can be tied to total corporate earnings or to specific projects. If the bond terms indicate that interest is cumulative, then interest will accumulate during nonpayment periods and be paid at a later date when income is available for doing so.
Income bond
38
* ____– a bond whose stated interest rate varies as percentage of a baseline indicator, such as
the prime rate. Treasurers should be wary of this bond type because jumps in the baseline indicator can lead to substantial increases in interest costs.
Variable rate bond
39
* ____– a bond with no stated interest rate. Investors purchase these bonds at a considerable discount to their face value in order to earn an effective interest rate.
Zero coupon bond
40
* ____– a bond that offers no interest rate on its face but allows investors to convert to stock if the stock price reaches a level higher than its current price on the open market. The attraction to investors is that, even if the conversion price to stock is marked up to a substantial premium over the current market price of the stock, a high level of volatility in the stock price gives investors some hope of a profitable conversion to equity. The attraction to a company is that the expectation of conversion to stock presents enough value to investors that they require no interest rate on the bond at all, or at least will only purchase the bond at a slight discount from its face value, resulting in a small effective interest rate.
Zero coupon convertible bond
41
____– is a form of short - term loan that is granted by a lending institution on the condition that the company will obtain longer term financing shortly that will pay off the ____. This option is commonly used when a company is seeking to replace a construction loan with a long-term note that it expects to gradually pay down over many years. This type of loan is usually secured by facilities or fixtures in order to obtain a lower interest rate.
Bridge loans
42
* ____– usually extended by governments to guarantee bank loans to finance a company’s working capital needs in geographic areas to attain social improvement.
Economic development authority loans
43
* ____– are highly desirable form of financing, since a company can lock in a favorable interest rate for a long time and keeps it from having to repeatedly apply for shorter - term loans during the intervening years, when business conditions may result in less favorable debt terms.
Long-term loans
44
* ____– a well-established funding method whereby assets such as trade receivables, credit card receivables, or other financial assets are packaged, underwritten and sold in the capital markets in the form of asset-backed securities.
Receivables securitization
45
A ____ is a company that assigns credit ratings, which rate a debtor's ability to pay back debt by making timely principal and interest payments and the likelihood of default. An agency may rate the creditworthiness of issuers of debt obligations, of debt instruments, and in some cases, of the servicers of the underlying debt, but not of individual consumers.
If a publicly held company issues debt, it can elect to have that debt rated by either Moody’s, Standard & Poor’s, or Fitch. These are the three tops
Credit rating agency
46
* ____– an arrangement in which the company that sells an asset can lease back that same asset from the purchaser. With a leaseback—also called a sale leaseback—the details of the arrangement, such as the lease payments and lease duration, are made immediately after the sale of the asset. In a sale-leaseback transaction, the seller of the asset becomes the lessee, and the purchaser becomes the lessor.
Sale and leaseback
47
The recordation of debt - related transactions is somewhat technical, and therefore subject to some degree of calculation error. Several of the following controls are designed to verify that the correct interest rates and calculation dates are used. In addition, there is some possibility that the deliberate timing of gain and loss recognition related to debt transactions can be used to manipulate reported earnings. Several of the following controls are used to detect such issues. Finally, controls over the approval of debt terms, borrowings, and repayments are also described.
Debt-related controls
48
* Require approval of the terms of all new borrowing agreements
* Require supervisory approval of all borrowings and repayments
* Investigate the reasoning for revenue recognition related to attached rights that is not recognized ratably
General debt transaction controls
49
* Include in the debt procedure a line item to charge unamortized discounts or premiums to expense proportionate to the amount of any extinguished debt
* Report to the board of directors the repayment status of all debt
Extinguishment of debt
50
* Require written and approved justification for the interest rate used to value debt
* Include in the month - end closing procedure a task to record interest expense on any bonds for which interest payments do not correspond to the closing date
Interest rate calculations
51
* Verify the market value of equity on conversion dates when the market value method is used
* Verify the market value of equity on debt retirement dates when offsetting equity entries are being reversed
* Include a review of accrued interest expense on all recently converted debt
* Debt conversions to equity shall always be recorded using the book value method.
Convertible debt
51
The policies set forth in this section define the issuance and buyback of debt, control the timing of expense recognition, the setting of interest rates used for expense calculations, and similar issues. The
intent of the bulk of these policies is to issue and buy back debt only when it is in the best business interest of the company to do so, as well as to ensure that debt – related transactions are recorded fairly.
Debt-related policies
52
____ is the process of registering a company's stock for sale to the public. If a treasurer wants to sell stock to investors that in turn can be immediately traded by the investors,
then it is necessary to file a registration statement with the Securities and Exchange Commission (SEC).
Sock registration
53
The policies described below apply to a company’s use of the Regulation A or D exemptions,
All unregistered securities issued by the company must carry a restrictive legend, specifying that they cannot be traded. The following policy enumerates the precise restrictive language:
Equity policy
54
Securities can only be sold under ____ to an accredited investor.
Regulation D exemption
54
* ____– look for teams with
great entrepreneurial potential as shown by
prior business, academic or entrepreneurial ventures. Also, a team with passion for and commitment to the new business idea, and ability to inspire confidence among future stakeholders, including employees, potential customers, and investors.
Management team
54
Primary Registration of Stock Corporations:
BASIC requirements:
1. Cover Sheet
2. Reservation Payment Confirmation
3. Articles of Incorporation (AI)
4. By-laws (BL)
5. Treasurer`s Affidavit (for stock)
6. Joint Undertaking to Change Name
54
* ____– this includes significant executive experience in a variety of fields. A company should at least be composed of pool of professionals in allied fields.
Strategic fit
55
* ____– must demonstrate a strategy to claim significant market share or revenue.
Market opportunity
55
____ are the defined set of parameters used by financial and strategic buyers to assess an acquisition target. When considering various forms of cash investment, the treasurer should first consider the safety of the principal being invested. It would not do to invest company funds in a risky investment in order to earn extraordinarily high returns if there is a chance that any portion of the principal will be lost.
Investment criteria
55
* ____– funds must be used to accelerate company’s achievement of key milestones that increase the company’s value. Activities such as research and product development, building a sales and marketing infrastructure and hiring key executives.
Use of proceeds
56
* ____– must demonstrate a plan to generate significant profits beyond the initial product idea and can grow quickly and manage the scale necessary to succeed.
Growth potential
56
* ____– must have some proprietary features that distinguish you from potential competitors or provide barriers to entry that prevent other companies from capturing customers with a similar offering. Attributes that convey competitive advantage include intellectual property protection, key know-how, and scarce human resources (i.e., knowledge and skills).
Competitive advantage
57
* ____– a clearly articulated exit strategy is essential. It is not just interested in the strategy you select, but more importantly in the how – the operational strategy that shows specific steps you will take to achieve the exit.
Exit strategy
57
* ____– invest in first-of-a-kind new ideas, rather than incremental enhancements to common products and services.
Technology
58
Banks sometimes guarantee (or accept) corporate debt, usually when they issue a loan to a corporate customer, and then sell the debt to investors. Because of the bank guarantee, they are viewed as obligations of the bank.
Banker's acceptance
59
A corporate bond may not mature for many years, but one can always purchase a bond that is close to its maturity date. There tends to be a minimal risk of loss (or gain) on the principal amount of this investment, since there is a low risk that interest rates will change so much in the short time period left before the maturity date of the bond that it will impact its value.
Bond near maturity dates
60
These certificates are essentially term bank deposits, typically having durations of up to two years. They usually pay a fixed interest rate upon maturity, though some variable – rate CDs are available.
Certificate of deposit (CD)
61
Larger corporations’ issue short – term notes that carry higher yields than on government debt issuances. Most commercial paper matures in 30 days or less, and rarely matures in greater than 270 days, in order to avoid the registration requirements of the Securities and Exchange Commission (SEC). Commercial paper is issued at a discount, with the face value being paid at maturity.
Commercial paper
62
This is a package of government instruments, usually composed of Treasury bills, notes, and bonds, that is assembled by a fund management company. The investment is highly liquid, with many investors putting in funds for as little as a day.
Money market fund
63
This is a package of securities (frequently government debt) that an investor buys from a financial institution, under the agreement that the institution will buy it back at a specific price on a specific date.
Repurchase agreement
64
The United States government issues a variety of notes with maturity dates that range from less than a year (U.S. Treasury certificates) through several years (notes) to more than five years (bonds).
When any of the preceding investments are initially issued to an investor or dealer, this is considered a primary market transaction. It is quite likely that many of these investments will be subsequently resold to a series of investors and considered to be trading in the secondary market.
U.S. treasury issuances
65
* ____– the bank uses the earnings from idle balances to offset its service fees. If a company has minimal cash balances, then this is not an entirely bad strategy — the earnings credit can be the equivalent of a modest rate of return, and if there is not enough cash to plan for more substantive investments, leaving the cash alone is a reasonable alternative.
Earning credit strategy
66
* ____– matches the maturity date of an investment to the cash flow availability dates listed on the cash forecast. For example, ABC Company’s cash forecast indicates that $80,000 will be available for investment immediately but must be used in two months for a capital project. The treasurer can invest the funds in a two-month instrument, such that its maturity date is just prior to when the funds will be needed. This is a very simple investment strategy that is more concerned with short term liquidity than return on investment and is most commonly used by firms having minimal excess cash.
Matching strategy
67
* ____– involves creating a set of investments that have a series of consecutive maturity dates.
Laddering strategy
68
* ____– requires the treasurer to determine what cash is available for short, medium, and long – term investment, and to then adopt different
investment criteria for each of these investment tranches. The exact investment criteria will vary based on a company’s individual needs.
Trenched cash flow strategy
69
* ____– a strategy of buying longer – term securities and selling them prior to their maturity dates. This strategy works when interest rates on short – term securities are lower than the rates on longer – term securities.
Riding in the yield curve
70
* ____– the treasurer buys the debt of a company that may be on the verge of having its credit rating upgraded. By doing so, the investment ends up earning a higher interest rate than would other investments with a comparable credit rating. This strategy works best when the treasurer is very familiar with the debt issuer and has some confidence in his credit assessment.
Credit rating strategy
71
A ____ is a key part of the risk management lifecycle. After identifying risks and assessing the likelihood of them happening, as well as the impact they could have, you will need to decide how to treat them. The approach you decide to take is your risk management strategy. This is also sometimes referred to as risk treatment and one of which is risk reduction.
Risk management strategy
72
A ____ is to avoid investments in the securities of any single entity, in favor of investments solely in one or more money market funds. These funds provide instant diversification across a multitude of issuers, with the attendant risk being constantly reviewed by a staff of risk management professionals. The use of money market funds is especially cost – effective for smaller treasury departments that cannot afford the services of an in – house investment manager.
simple risk reduction strategy
73
____ is all of the steps involved in transferring funds ownership from one party to
another except for the final step, which is settlement.
Clearing
74
____ involves the finalization of a payment, so that a new party takes possession of transferred funds. The treasurer should be aware of these processes in order to understand the timing of payment transfers.
Settlement
75
SETTLEMENT TYPES
* ____– where each bank pays the total amount owed. Payments handled through a gross settlement system are more likely to have a requirement for immediate execution, where payment instructions are processed separately for each individual transaction. The cost of gross settlement transactions is high, so individual transactions running through these systems tend to involve larger amounts of funds or be very time sensitive.
Gross basis
76
SETTLEMENT TYPES
* ____– where a large number of transactions are accumulated and offset against each other, with only the net differential being transferred between banks. Payments handled through a net settlement system usually wait until the end of the day, when all transactions between the banks are summarized and offset against each other by a clearing institution; the clearing institution then sends the net transfer information to the settlement institution, which executes the transfer of funds between banks. The clearing institution normally completes its daily summarization process and transmits net transfer information to the settlement institution after the cut-off time of the settlement institution. This means that the transfer of funds to the account of the beneficiary bank will be delayed by one business day.
* Banks prefer to use net settlement systems because payments
processed through them require greatly reduced funds transfers (and therefore, considerably less liquidity) than gross settlement systems.
Net basis
77
TRANSACTION TYPES
* ____– transactions which must be executed immediately. Because of the time constraint, high – value payments cannot wait for end – of day netting, and so are settled on a gross basis, with an immediate cash transfer between banks.
High-value payment
78
TRANSACTION TYPES
* ____– transactions which does not require immediate execution and tends to be for smaller amounts. Because of the reduced need for immediate execution, these payments are handled through a net settlement system.
Low-value payment
79
The F___ system is a gross settlement system that is operated by the U.S. Federal Reserve and processes large – value items with same – day, real – time settlement. Nearly all U.S. banks and the agencies of foreign banks participate in the Fedwire system. If a bank is sending funds through the Fedwire system on behalf of a client company, then the deadline for initiating such transfers is 6 P. M. Eastern time. The fee for a Fedwire 0ayment is relatively inexpensive.
Fedwire
80
The ACH ___ is the net settlement system used for electronic payments in the United States and is used by most banks in the country. The ACH ___ is used for large volume, low – value payments, such as payroll direct deposits, business – to – business payments, dividends, tax payments, and Social Security Payments. The transfer of funds from the payer to the beneficiary can take several days, depending on the payer’s payment instructions. This system is significantly more complex than the Fedwire system, since it comprises a network of bank associations and privately owned processing entities. The cost of an ACH payment is quite low, usually just a few cents per transaction.
AUTOMATED CLEARING HOUSE (ACH) SYSTEM
81
Foreign exchange settlement presents a risk of one party’s defaulting before a transaction has been completed because settlement takes place through accounts in the correspondent banks in the countries where the relevant currencies are issued. Because the various national payment systems are located in different time zones around the world, one side of a foreign exchange transaction will likely be settled before the other side of the transaction.
THE CONTINUOUS LINK SETTLEMENT (CLS) SYSTEM
82
The system should never require the manual entry of a transaction into the system more than once, and preferably should involve automated data collection and posting, so that no manual entry is required at all.
Minimize data entry
83
If supervisory approval is required, the system should electronically route the pertinent transaction to the correct supervisor for approval.
Workflow processing
84
All treasury transactions should result in a clearly defined audit trail that identifies who made a transaction and the date, amount, and accounts impacted by the transaction.
Audit trail
85
The system should limit access to certain modules and require approval of key transactions.
Segregation of duties
86
Warning indicatorsThe system should automatically notify users if transaction confirmations have not been received, if hedging policies are being violated, if there are negative cash balances, and so on.
Warning indicators
87
A ____ is a software application which automates the process of managing a company's financial operations. It helps companies to manage their financial activities, such as cash flow, assets and investments, automatically. It also helps to automate the back office of a company’s business obligations and financial operations. This typically involves enterprise software that automates manual and repetitive financial transactions. A ___ is commonly used to maintain financial security and minimize reputational risk. It can be used by a company's internal management and may be purchased from a technical supplier.
treasury management system (TMS)
88
The ____ operates a worldwide network that banks use to exchange standardized electronic messages that are known as SWIFT MT codes. The SWIFT network is highly secure and is designed strictly to transport messages between participants — it does not provide a clearing or settlement service.
Society for Worldwide Interbank Financial Telecommunication (SWIFT)
89
Under this approach, a company can communicate with all member banks in a closed user group. Companies allowed to use this method must be listed on selected stock exchanges in specific countries, which include most of Western Europe, North America, and some countries in eastern Europe, Latin America, and Asia. SWIFT Invoices companies directly for their message traffic. This is the most efficient method, because users have direct access to nearly all banks.
Standardized corporate environment (SCORE)
90
A company can join a separate MA – CUG for each bank with which it wishes to communicate. Each MA CUG is administered by a bank, rather than SWIFT.
The bank running each CUG will invoice member companies for their message traffic. This approach may call for membership in multiple MA – CUGs, which is less convenient than the SCORE method. However, it is available to all types and sizes of companies.
Member – administered closed user group (MA – CUG)
91
SWIFT has made this method available to smaller companies having low transaction volumes. It allows them to use either a manual browser – based payment entry system or to integrate directly into their treasury management systems.
Alliance lite.
92
Third – party providers have set up their own access to the SWIFT network and allow companies access through their systems for a per – transaction fee. This approach avoids the need for any in – house systems maintenance, but connectivity to any in – house treasury management systems is likely to be limited.
SWIFT bureaus
Elec 4
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