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Opening account balance + money received today - money paid
out today + DOL = Payment amount
Wire transfer systems typically receive a balance update at the start of the business day from the bank’s overnight demand deposit accounting (DDA) system. The DOL information is maintained as part of the funds-transfer system’s static database, the monies in and out are the sum of the transfers in and the transfers out maintained by the transfer system, and the requested payment amount is the amount to be transferred.
In addition to the balance-oriented DOL, banks establish a transaction limit for each customer. The transaction limit reflects the “typical maximum” transfer amount made by the customer. Although customers occasionally exceed this transfer amount limit, it does provide another level of risk protection. The check here is simple:
Payment amount limit = Payment amount
These two checks represent the most basic risk management controls and are found in every wire transfer system.
Coping with Corporate Groups
Wire transfer customers are often members of larger groups that have their own risks. For example, all the customers in a partic-
Bank’s Perspective of Funds-Transfer Risk Managment
ular country or region, or all the “accounts” associated with a particular corporation, bank, or government can constitute a group. Softer associations, such as an industry, can also be defined as groups worthy of daylight overdraft risk management. Typically, only the most sophisticated or custom-built wire transfer systems have the capability to deal with the risks inherent in groups.
Defining a “Customer.” The first difficultly in addressing groups is to accurately define a “customer.” Customers are really parties that play certain roles. In the fund-transfer process, these roles can be those of “instructor,” “sender,” “order party,” “beneficiary,” “pay through bank,” and so forth. For risk management purposes, the most important roles are those in which the party has legal rights and responsibilities. For example, the entity that opens an account and signs the account agreement must be a legal entity. Such legal entities establish a legal relationship with the bank, which is also a legal entity that is defined by specific terms and conditions.
In comparison, an “office” of a corporation being advised about the receipt of funds does not have to be a legal entity. It does, however, need an address for receiving advising notices. The “instructor” of the funds transfer also does not have to be a legal entity. Such a person does, however, need to be empowered with the appropriate permissions by a legal entity.
Because of this special legal relationship, legal entities are the focus of risk management and, in effect, are the “customers” for this purpose. For the same reason, even though they are not legal entities themselves, groups must be composed of legal entities for risk management purposes. Accordingly, banks issue DOLs for individual legal entities (account owners) and for groups of legal entities.
Examples. Suppose Corporation X has five Divisions (X1 through X5). Each Division is itself a legal entity and each opens an account with Bank Y. To facilitate the large number of payments that will flow through each Division’s account, the bank
sets up for each Division an overdraft limit of $1 billion. It wants to ensure, however, that the total daylight overdraft for Corporation X does not exceed $3 billion.
Bank Y also sets a transaction limit of $5 million to $10 million for each Division and a transaction limit of $10 million for Corporation X as a whole. This arrangement can be seen in Exhibit 4.1.
The algorithms necessary to control transfers are illustrated in Exhibit 4.2.
A variation on this example is that the DOL desired for Corporation X is the sum of the DOLs assigned to each Division (the $5 billion). This can be seen in Exhibit 4.3.
It is important to note that in both examples, Corporation X does not itself have an account with Bank Y; instead, it simply designates the group. If there were an account for Corporation X, and if that account were specifically designated as part of this group, it would appear as it does in Exhibit 4.4.
The purpose of all of these arrangements is to provide another level of risk management control over the funds-transfer process. Requested funds transfers that exceed these limits are not automatically returned, but are instead earmarked for further scrutiny and approval.
Exhibit 4.1 Daylight Overdraft Limits (DOL) and Transaction Limits for Divisions That Are Legal Entities and Account Holders of a Corporation; DOL Corporation Total Is Less Than
Sum of Entities’ DOL
Legal Entity/ DOL Transaction
Account Holder Limit
Division X1 Yes/Yes 1,000,000,000 5,000,000
Division X1 Yes/Yes 1,000,000,000 10,000,000