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. 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.

"The Federal Reserve Banks and The Clearing House have been working collaboratively with banks and other high value payment system operators around the world to create specifications for Fedwire and Chips that improve transparency, maintain Swift compatibility, and minimise system changes for financial institutions," said Lauren Hargraves, senior vice president of the Federal Reserve Banks' Wholesale Product Office. "Even though the changes take effect a year from now, it's prudent for banks to begin plans to adapt their internal systems."

Banks are expected to start testing the new format in the May/June 2009 timeframe in anticipation of the November 2009 deadline.

"We have worked very successfully with banks and other payment system operators to develop specifications for each system," said Hank Farrar, Senior Vice President of The Clearing House, responsible for Chips. "The implementation of the new cover payment message format is the first of two planned enhancements for US dollar wire transfer systems. After cover payments, we will focus on enabling our systems to carry remittance information with wire payments."

Both the Federal Reserve Banks and The Clearing House have been working with banks and operators to develop specifications to permit business remittance information to be included with Fedwire and Chips payments by the fourth quarter of 2010.

At Sibos in Vienna last month the Payments Market Practice Group (PMPG) warned that changes required in processes at banks as a result of MT 202 COV could mean a one-day delay in payments.

"It is not just a standards initiative," said 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."