Working group issues guidance on new message standard for cover payments

Working group issues guidance on new message standard for cover payments

Banks have been warned that they may face disruption and delays to payments STP following the introduction of new messaging standards for cover payments as demanded by regulatory agencies.

The warning has come from the Payments Market Practice Group (PMPG), an industry body that addressed an audience of payments professionals at the Sibos conference, convened to discuss the implications of the new messaging standard.

Cover payments are used for cross-border transactions where the originating and beneficiary banks do not have a direct relationship or specific correspondent bank and instead rely upon a chain of intermediate banks to facilitate payment.

This process has come under scrutiny from international regulators for its lack of transparency and propensity for facilitating money laundering. Legislation demanding more disclosure is currently being discussed with the international watchdog the Financial Action Task Force (FATF) due to meet in October to discuss the issue.

In order to improve the transparency of the cover payments process, Swift has issued a new messaging standard, MT 202 COV, that will go live in November 2009. The new format will include originator and beneficiary details and will make it possible for an originating bank to send a single aggregate cover payment containing payment instructions for multiple underlying individual transactions.

"It is not just a standards initiative," says Christian Westerhaus, managing director, Deutsche Bank. "Banks will have to think about the whole process - the business, legal and compliance elements as well as the technical and operational details."

Westerhaus says that the PMPG has analysed the changes to the process that will result from MT 202 COV and concluded that they could lead to a one day delay in payments. "Right now we have STP and we want to keep that STP but if there are going to be delays then we think it is better for banks to be prepared for this and to warn the beneficiary banks," says Westerhaus.

Originating banks will face a greater level of repsonsibility in the new process says fellow PMPG member, Michael Knorr, managing director, Citi. "They are the banks that can guarantee all the information is correct, all the other banks must react to that information. It is only the originating bank that can ensure STP."

The PMPG stressed that its issued guidance should be treated as a "living document where new points can be added". "It is a very important industry topic and we have to keep the dialogue open so that we can preserve STP and ensure that payments are completed and are in line with transparency requirments," says Knorr.

Also in the audience was Bank for International Settlements (BIS) member Eduardo Fernandez-Bollo. The BIS issued a consultative document on cover payments back in July and the closing date for comment coincided with the Sibos session. "The guidance from Swift and the PMPG has been very useful. We set the deadline for comments so that it would occur before the FATF meeting in Ocotber and I encourage everyone to give their input."

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