Payments, Cash Management and Foreign Exchange in Securities Operations
What this domain tests
The exam tests payment systems and message flows, correspondent banking and nostro funding, value dates and cut-offs, FX instruments and settlement risk, and how FX mismatches create funding and settlement failures.
Payment infrastructure and messaging
- RTGS systems (CHAPS, Fedwire, T2) settle high-value, time-critical payments in central bank money; ACH/SEPA handle high-volume, low-value credit transfers.
- SWIFT is a messaging network, not a payment system - it carries instructions such as MT103 (customer payment) and MT202 (bank-to-bank cover), migrating to ISO 20022 pacs.008/pacs.009, with MT coexistence for cross-border payments ending in November 2025.
- Correspondent banking uses nostro accounts (our account with them) and vostro accounts (their account with us).
Cash management and FX
- Value date, cut-off time and currency must be right; late funding causes overdrafts, interest charges or failed settlement.
- FX instruments: spot (normally T+2), tom/next, forward and swap. Settlement risk (Herstatt risk) arises when one leg pays away before the other arrives; CLS mitigates it through payment-versus-payment.
- Dual-currency settlement occurs when the securities settle in one currency and cash in another, requiring coordinated funding.
Worked example
A USD-based fund buys USD 5 million of US equities settling T+1, but its cash sits in GBP. Reasoning: the FX spot market convention is T+2, which is too late for a T+1 settlement. Operations must use a tom/next or spot-with-value-date-adjustment trade, or pre-fund the USD nostro from an existing balance, so the USD arrives before the CSD's cut-off. The FX trade is booked with correct value date, confirmed, and reconciled to the settlement instruction; otherwise the trade fails and incurs CSDR penalties.
Traps that cost marks
- Calling SWIFT a payment system.
- Confusing nostro and vostro from the wrong party's perspective.
- Ignoring FX value-date mismatch against the settlement cycle.
- Overlooking CLS as the PvP mitigation for FX settlement risk.