canadian clearings and check image evolution in canada

Canadian Clearings

and Check Image Evolution

in Canada

Brian Salway, Symcor Inc.

March 13 2013

Notice

2

The material presented is for information purposes only. It is not intended for detailed technical

implementation planning.

The information on Canadian banking and clearings is intended for a general understanding of the

process. The detail and accuracy is sufficient for that purpose.

The information on Canadian Payments Association (CPA) image processes that are currently in

place, as of the date of this presentation, reflects information available on the CPA public website.

The information on the CPA image processes that are planned or pending implementation, as of the

date of this presentation, is intended to facilitate a general understanding of those services. It is a

summarization by the presenter, and contains assumptions that are subject to change at the

discretion of the CPA.

The presenter does not represent the CPA or its member institutions. The presenter does not speak

on their behalf.

The information on the existing US/Canada ‘north/south’ exchange is intended as a general

summary of the process. The detail and accuracy is sufficient for that purpose.

The information on the future US/Canada ‘north/south’ exchange is intended as an example to

facilitate an understanding of future service implications. It contains certain suppositions.

Brian Salway (March 13, 2013)

What We Will Cover

1) An overview of The Canadian Clearings process

– Objective: Understand how check payments exchange is done in

Canada, to appreciate how image aspects would be applied

2) The CPA four-phase initiative

– Objective: Understand the evolution in Canada, from paper-only,

through truncation and substitute presented items, and finally to

industry image exchange

3) Northbound and southbound cross-border exchange

– Objective: Understand how imaging options can affect the process

3

Canadian Clearings

Part 1:

‘Canada 101’ : The Clearings Principles

4

How Canada works ...

Canadian Banking Regulation

And

The Canadian Payments Association

5

Canadian Banking Regulation

A variety of legislation and statutes manage banking

• Examples of some core legislation:

– Constitution Act, 1867 s 91.15 (“Legislative Authority of Parliament of Canada”; “Banking, Incorporation of Banks and Issuing of Paper Money”)

• Categorizes banking as under federal jurisdiction

– Bank Act

• Defines banks and banking practices

– Office of the Superintendant of Financial Institutions Act

• OSFI overlooks the proper regulation and soundness of financial institutions, to maintain public confidence

– Bills of Exchange Act

• Defines ‘check’ and other payment instruments – Extended in 2007 to add image of a check as a Bill of Exchange

– Canada Evidence Act

• Acceptability of electronic documents (imaged) as best evidence

• Of note: Canadian Payments Act

– Establishes the Canadian Payments Association (CPA)

6

The Canadian Payments Association (CPA)

• CPA Mandate

– Promote, develop and manage the efficiency and security of the

payments processes at a national level in Canada

• Includes both check and electronic (EFT, EDI)

• CPA Mechanisms to Meet Objectives

– Rules and standards that provide operational guidelines

– Systems that facilitate exchange, reporting and settlement

• CPA Structure

– Executive management; business support; technical support

– Membership consisting of all Canadian financial institutions

– Committees and boards

• Make decisions on payments development, regulation/management and

adjudication

• Consist of representatives from member institutions

• Responsible to the federal Minister of Finance

7


What the CPA Is and Is Not

• Is:

– The federal regulatory body that governs payments activities and

practices in Canada at a national level

• Is Not:

– A public standards development or standards accreditation organization

• But, provides rules and standards specific to its mandate, supporting its

members in participating in the national payments process

8

How Canada Works ….

The Principles of

Canadian

Direct Clearers and Indirect Clearers

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Direct and Indirect Clearers

Canadian banks and financial institutions are divided into ‘Direct

Clearers’ (DC) and ‘Indirect Clearers’ (IC)

• Simple difference:

– Only Direct Clearers (DC) participate directly in interbank exchange and

settlement

– Indirect Clearers (IC) do not participate directly in interbank exchange and

settlement

10

Canadian Direct Clearers

There are 12 Direct Clearers :

• 001: Bank of Montreal

• 002: Scotiabank

• 003: Royal Bank

• 004: TD Canada Trust

• 006: National Bank

• 010: CIBC

• 016: HSBC Canada

• 039: Laurentian Bank (regional)

• 117: Bank of Canada (check issuer, no deposit taking, bonds)

• 219: Alberta Treasury Branches (regional)

• 815: Caisse centrale Desjardins du Quebec (CU central, Quebec)

• 869: Central One (CU central, outside Quebec)

11

Canadian Indirect Clearers

There are approximately 120 Indirect Clearers

• ICs are members of the CPA (as are DCs)

– Governed by Rights and Responsibilities (CPA Rules), as are DCs

• ICs are: deposit takers; check issuers; loan issuers

• ICs comprise a variety of financial institution types:

– Individual credit unions

– Trust companies

– Subsidiary banks of foreign national banks, operating in Canada

• Eastern, European, American, etc.

• Includes prominent US banks (eg. Bank of America, Wells Fargo, JPMC, Citi)

– Special purpose banks (eg. Capital One Bank, Amex Bank)

12

Direct Clearing Services

to Indirect Clearers

• Indirect Clearers (ICs) do not participate directly in interbank

exchange and settlement

– Each IC contracts the services of a DC to represent it for exchange

• The DC assumes full national inter-DC exchange and settlement

responsibility for its ICs, including:

– Collection: Delivery of ‘other bank’ items that the IC has taken on deposit

– Payment: Receipt of the IC’s items taken on deposit at other financial

institutions

– Outbound Return: delivery of the IC’s items that it is dishonoring

– Inbound Return: Receipt of ‘other bank’ items returned to the IC as BOFD

• Also, receipt of ‘other bank’ items returned to the IC as 3rd party bank

13

Direct Clearing Services

to Indirect Clearers

• The ICs assigned to each DC are known to all the DCs

– Each IC has its uniquely assigned 3-digit Bank Number in the MICR

Routing Field of its items

• “nnnnn – BBB” [more on this format later ...]

– Financial Institutions File (FIF) issued regularly by the CPA

• Identifies the affiliation between each IC and its DC clearing agent

• Note: Changes in existing affiliations do not frequently occur

• The IC has a ‘corporate client’ relationship with its DC agent

– The IC’s items are considered ‘On-Us’ to its DC agent

• DC delivers/receives as ‘On-Us’:

– Items between itself as DC and any of its own ICs

– Items between any pair of its own ICs

– These items do not pass through interbank exchange and settlement

processes

14


The Principles of

Exchange and Settlement

By Canadian Direct Clearers

15

Exchange:

Checks and Paper Sourced Payments

• Each DC exchanges (delivers) separately to each other DC, the items belonging to the other DC that it has taken on deposit

– Includes delivering and receiving for their respective ICs

• Six regional exchange points

– Vancouver, Calgary, Winnipeg, Toronto, Montreal, Halifax • In the past, this once included Regina, Quebec City and others

– Some provisions for ‘regionals’ with limited / no presence: • Collection: a DC with a small presence in a particular region may opt to ‘sell’ its deposits to another DC

– No longer widely practiced

• Inclearing: A DC with no presence in a particular region may opt to have its ‘out-of-region’ inclearing items picked up by an agent (could be another DC)

• Multiple exchange ‘streams’

– Two separate currencies: US and Canadian

– Five categories of items: ‘encoded’ (LT $50M); ‘large value’ (GE $50M); ‘unqualified’ (the ‘goo’); ‘rejects’ (computer); ‘remittance’ (credits, i.e. bill payment vouchers)

• Some items not acceptable for exchange, examples:

– Checks GT $25MM can’t be presented for clearing via ACSS (use LVTS) [next slide ...]

– Checks with future dates (postdates) are not negotiable before inscribed date

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Reporting and Settlement:

Paper Sourced and Electronic Payments

• The delivering DC reports the value of the items it is presenting to each of the other DCs, in two distinct currencies, and for six regions

– Canadian Currency:

• Via the CPA “Automated Clearing Settlement System” (ACSS)

– US Currency:

• Via the CPA “US Dollar Bulk Exchange” (USBE)

• At the end of the process (next morning) each DC-to-DC pair does a single high-value settlement to net out their positions

– Includes check and electronic payment settlement

– Canadian Currency:

• Via the CPA “Large Value Transfer System” (LVTS)

• Through Direct Clearer settlement accounts at the Bank of Canada – Irrevocable payment

– US Currency:

• In New York via wire transfers

• Each DC settles directly with each other DC – Does not involve the Bank of Canada

17

View of Direct Clearer and Indirect Clearer

Exchange Relationships

18

Scenarios - From BOFD to Paying Bank:

• Any variation among (A, A1 and A2) is ‘On-Us’, managed by A – there is NO interbank exchange or settlement

• Any variation from (A, A1 or A2) to (B, B1 or B2) is transit – A clears to B and settles with B


Compare and Contrast ...

United States

And

Canada

19

Canadian Clearings - Summary

What the Canadian Clearings has:

• Point-to-point exchange

– All are bilateral pairs: DC-to-DC

• Two fully recognized and supported distinct currency streams

– Canadian and US

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What the Canadian Clearings does not have:

• No US-style domestic Correspondent Bank services

– Definition: Check collection for one-way outbound delivery to exchange

– Note: Not to be confused with:

• The Canadian DC-to-IC relationship for clearings

• Northbound / southbound delivery between a US bank and a Canadian bank

– [Discussed later ....]

• No Exchange Channels

– Definition: An Intermediary that collects, disperses, delivers and arranges

settlement

• Federal Reserve Bank, SVPCo, Viewpoint, Endpoint Exchange

21


What the Canadian Clearings does not have: (continued)

• No Opt-in / Opt-out industry private membership rules

– Eg. ECCHO

• No check “conversion”

– Whereby original check MICR data is transposed to an EFT transaction

• Example: ACH ‘ARC’, ‘BOC’, ‘XTC’, ‘RCK’

– Canadian transactions begin and stay in the same stream

• EFT is EFT

• Check is original paper, or CRD or image (following truncation)

• No check re-presentment / re-deposit

– As traditionally used in the US

22

A Simple Canadian View of

the US Exchange Process

23 Logos are trademarks of respective organizations

A Simple Canadian View of

the Canadian Exchange Process

24

• For each DC-to-DC pair, the pattern is repeated in each region, for each currency, and in each ‘stream’

• Bank of Canada only receives checks for payment and delivers returns (eg. Fraud, bond interest errors)

• Paper exchange includes forward (check) items intermixed with return items – not exchanged separately.

Logos are trademarks of respective financial institutions

Representative Canadian Check Clearing

Volumes (CPA Stats Oct 2012)

• Values are for illustrative purposes

– Includes only check clearings

» No ‘On-Us’ (‘On-Us’ payments are about 20% to 40% of all daily payment types)

– Item volumes include Canadian currency with US currency, and all streams

» ‘Unmachineable’ and ineligible items (the ‘goo’) are 0.75% of total volume

» US currency items are 0.75% of total volume

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Canadian Inter-DC Exchange 2011 2010 2009 2008 2007

Total Annual Check Volume (MM) Canadian plus US currency streams

877.3 922.5 950.5 1,019.7 1,077.7

Average Daily Volume (MM) Canadian plus US currency streams

3.37 3.55 3.66 3.92 4.15

Year-over-Year Total Decline Canadian plus US currency streams

-4.9% -2.9% -6.8% -5.4%

5-Year Total Decline Canadian plus US currency streams

-18.6%

Total Annual Value Canadian streams only

$3.01B $2.94B $2.88B $3.30B $3.42B

Average Value per item Canadian streams only

$3,370. $3,128. $2,980. $3,170. $3,117.

Canadian Clearings - Useful links

CPA Website

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• CPA home page:

http://www.cdnpay.ca/

• Section for Canadian Clearings Rules and Standards:

http://www.cdnpay.ca/imis15/eng/Act_Rules/Automated_Clearing_Settlement_System_ACSS_Rules/eng/rul/Automated_Clearing_Settlement_System_ACSS_Rules.aspx (always up to date)

• Section for Financial Institution Member List: • Note: Direct Clearers are marked as ‘DC’

http://www.cdnpay.ca/imis15/eng/Membership/Member_List/eng/mem/Member_List.aspx?hkey=aa6503c9-2385-442f-b06b-065816362f78 (always up to date)

http://www.cdnpay.ca/

http://www.cdnpay.ca/imis15/eng/Act_Rules/Automated_Clearing_Settlement_System_ACSS_Rules/eng/rul/Automated_Clearing_Settlement_System_ACSS_Rules.aspx



http://www.cdnpay.ca/imis15/eng/Membership/Member_List/eng/mem/Member_List.aspx?hkey=aa6503c9-2385-442f-b06b-065816362f78










Before we go further …

De-Mystifying the

Canadian MICR ‘Routing Transit’ Field

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Canadian MICR Routing Transit Field:

The Format

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US ABA Number format ----->

MICR character position ----->

MICR character position ----->

Canadian Routing Transit format ----->

DDOP BBBB C

1234 5678 9

12345 6 789

TTTTT - FFF

US “Routing” Field > > Fed district, office, presentment point Accuity bank number check digit

Canadian “Routing Transit” Field >> Bank Transit number dash ‘-’ Canadian bank number

Canadian MICR Routing Transit Field:

The Meaning

Format: TTTTT – FFF

1)TTTTT

• Bank’s proprietary numeric transit number – Meaningful to the owning bank

» Can represent physical branch, operations location, division, financial cost center

» Value is of no interest or consequence to other banks

» Value is proprietary, “On-Us”: validated only by owning bank

– There is no industry-wide centralized assignment of values

2)‘-’

• Fixed character ‘dash’

3)FFF

• Canadian Bank Number

• Unique to each bank, assigned by CPA

• Note: • Often referred to as “CBA format”

• For visual distinction, in this presentation the ‘Canadian Format’ is referred to as …

5 d 3

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The Canadian Industry Image Direction

Part 2:


Four Phase Image Initiative

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CPA Four-Phase Industry Initiative

(2010 – 2013)

• Phase I (2010): Recognize Image

– Permit certain check returns without returning the actual check

• Phase II (2011): Introduce the Return Replacement Document (RRD)

– A formal MICR document for returning items

• Phase III (2012): Introduce the Clearing Replacement Document

(CRD)

– A formal MICR document for presenting items

• Phase IV (2013): Introduce industry image exchange

– A formal process to allow presentment and return by image

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CPA Phase I: Recognize Image

(the precursor – image recognition)

In effect since 2010

• Based on change to enabling legislation to legitimize images

– Essentially, the first industry-wide formal application of image, in accordance with the Bills of Exchange Act

• An “Official Image” is “created by or for a bank according to CPA rules”

• The returning bank has the option to place a printed substitution of a presented item in a Return envelope

– Referred to as an “Image printout”, complies with “Official Image”

• Can be a check image archive print, other similar format

• Does not imply a formal or structured MICR document

• This was already permitted before under certain circumstances but the use of this process was given wider latitude:

– Examples: forged, post-dated, wrong currency, incorrect amount, material alteration, intended payee not paid

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CPA Phase II: Introduce RRD

(the 1st step of item exchange - returns)

In effect since 2011

• An RRD is a formalized MICR document that can be used in place of returning the original check inside a MICR envelope

• The option is with the dishonoring DC delivering the return

a) Return the original check in an envelope

b) Return an “image printout” in an envelope

c) Return an RRD (no envelope needed)

• The onus is with the receiving (return-to) DC to accept whatever arrives

• With the RRD introduction, all reclearing of the original check is no longer allowed

– Previously, the payee could certify at the payor’s bank then reclear

– Now, the payee must get another check or use bank-to-bank collection

33

CPA Phase II: The RRD

• The RRD is similar in use and in generic form to the US ‘Return-IRD’

• Commonalities:

– Front and back image segments

– Information about the returned item (e.g. reason for return)

– Dual MICR lines: Upper - Original check; Lower - Return-to location

– MICR EPC Field “5” (some exceptions)

• Divergences:

– Images are anchored at top of the RRD

• Not at the bottom above the codeline area, as with the IRD

– Front image is likely Bitonal or Grayscale, while back is Grayscale

• Not mandated: reflects current Canadian industry capture convention

– MICR codeline: Routing Field is 5d3 format; Mandatory On-Us Field

Process Control value ‘28’; Mandatory Aux On-Us Field value ‘28’

• Mimics the traditional MICR return envelope

– More verbose elements on front (reason, bank name, amount)

34

CPA Phase II: The RRD – Front View

35

Aux On-Us

(mandatory)

EPC On-Us Process Control

(mandatory)

Descriptive

Elements

Anchor

CPA Phase II: The RRD – Back View

36

Anchor

CPA Phase III: Introduce the CRD

(the 2nd step of item exchange - forwards)

In effect since October 2012

• A CRD is a formalized MICR document that can be used in place of

the original check (like the US IRD)

– For deposit

– For presentment

– To give to account holders who want checks back

• Statements, commercial accounts, Indirect Clearers

37


Implications for Negotiation / Deposit of CRDs:

• The option is with the depositor that negotiates the item with the

delivering DC:

a) Provide the original check for deposit

b) Provide a CRD for deposit

• Typical option for ‘bulk deposit’ such as items from an IC or a US bank

• The onus is on the DC to accept whatever is deposited

38


Implications for Presentment (Exchange) of CRDs:

• The option is with the collecting DC that delivers the transit item for

payment

a) Deliver the original check for payment

b) Deliver a CRD for payment

• Delivering DC may choose to present a CRD in place of the originally

deposited check

• May be no choice, if a CRD was deposited

• The onus is on the paying DC to accept whatever is presented

39


Implications of CRDs after Payment is made:

• The option is with the paying DC that accepts the item

a) Give back to the account holder the original check

• If original was presented

b) Give back to the account holder a CRD

• The paying DC may give back a CRD even if the original check was

presented

• May be no choice, if a CRD was presented

• The onus is on the account holder to accept what is given

• A note on Returns:

– This adds another option for dishonored items:

• The returning DC may place a CRD in a return envelope

40


The CRD is similar in use and almost identical in form to the US ‘IRD’

• Commonalities:

– Front and back image segments, with the same anchor points

– Surface ‘regions’ for Truncator, Creator, BOFD Overlay and Subsequent Endorsement Overlay:

• Same location, format, content, font, orientation

– MICR line represents original check

• And includes EPC Field “4”

• Divergences - Front:

– There is no Legal Legend (“This is a LEGAL COPY of ...”)

– MICR codeline contents:

• Routing Field is 5d3 format

• On-Us Field – no dashes; may also be absent (e.g. transit item with MICR read errors)

• Aux On-Us Field - may be absent (e.g. transit item with MICR read errors)

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• Divergences – Back:

– No ‘Text and Line Overlay’ in Region 1B

• Do not endorse or write below this line. instruction is not used

– Reason: A captured CRD may have a transport stamp / endorsement descending into

Region 2B ‘Back of MICR’

– Limited ‘Subsequent Endorsement Overlay’ in Region 1B:

• Fewer subsequent endorsers, fewer handlers of the item

• Divergences – General:

– The CRD size is variable:

• Height: 2.75 to 4.25 inches Width: 6.25 to 8.75 inches

• Accommodates the fixed IRD dimensions

– Height: 3.667 Inches Width: 8.50 Inches (plus tolerances)

– ‘Subsequent-IRD’ is not proposed for use in Canada

• Once a CRD is created, the payment item remains in this paper format

42

CPA Phase III: The CRD – Front View

43

EPC No Legal Legend On-Us:

no dashes;

could be absent

5d3 RT

Aux On-Us:

could be absent

CPA Phase III: The CRD – Back View

44

Endorsement spray from transport capture of CRD 5d3 RT


Exchange Usage of the CRD:

• Between collecting/paying Direct Clearers in Canada

1. All Canadian currency items are CRD eligible

• Exceptions: Government of Canada bonds, Treasury bills, remittances

2. Most US currency items are CRD eligible

1. All US items with 5d3 Routing Number

2. Certain US items With ABA Routing Number

– Items complying with CPA Rule K1 s 9.(c) “drawn on a U.S. office of a [Canadian] Direct

Clearer or Indirect Clearer”

» BNS (061002746, 011001749, 026002532, 123006130, 121026921)

» RBC (026004093)

» TD (026003243)

» CIBC (026002558)

Note: All US currency ABA items other than CPA “Rule K1” items are

rendered as IRDs

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CPA Phase IV: Industry Image Exchange

(the final stage)

Plan: Approval - June 2013

In Effect - August/September 2013

• Industry-supported DC-to-DC image exchange

– Standard image files

• Four separate files a) Forward (check) or Return, together with

b) Canadian currency or US currency

– File standard specifications based on ANS X9.100-187-2008

• Complemented by industry ‘Canadian Companion Documents’ (CCDs) – CCDs were developed by Symcor and offered to the industry for general use

– One CCD for Forward presentment, one CCD for Returns

» Each respective CCD covers both currencies

– CCDs are supplemented with separate CPA ‘Image Rules’

» The ‘business rules’ for item content on the file, file delivery and receipt, notification, etc.

– File format and content specifications (‘the standards’) are now finalized

• Will be made publicly available in due course

– This approach essentially parallels the US industry

• US has: ANS X9.100-187 plus ‘UCD’

• Canada has: ANS X9.100-187 plus ‘CCD’

46


Sample - Main File Differences: Canadian content versus US content

– ‘Destination’ and ‘Origin’ routing identifier fields (Types 01,10,20 and Type

52) have a special structured format

• Identifies:

– Delivering DC and Receiving DC; Currency of items on file (Canadian or US); Type of items

on file (forwards or returns)

– 5d3 Routing Field format is used in various records

• In payment records (Check Detail Type 25, Return Type 31)

• In addendum records (Endorsement addenda Types 26,28,32,35)

• In image view detail record (Type 50)

– More limited use of subsequent endorser Addendum records (Types 28,35)

• Canadian exchange process is simpler than US

– Fewer handling points, no re-presentment

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The Image Exchange Process:

• Participation is optional, not mandatory

– However, the expectation is that the market will cause acceleration to

image away from paper, including CRDs

• Each Delivering and Receiving DC pair must mutually consent to

image exchange, and set a start date

– This is to ensure readiness on both sides

• Consenting DC pairs may optionally exchange without images

– Assumes a shared archive or a common external archive

• Two new CPA exchange / reporting ‘streams’ have been created

– Image forwards, image returns

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Pending Final CPA Decision:

• Image segments

– Originally contemplated:

• Should this be: Bitonal? Grayscale? Both? Either? Sender’s choice? Mandated?

– Current recommendation: Front plus Back bitonal is Mandatory

• However, other additional segments permitted via bilateral agreement

• National Settlement for check image exchanged items

– For consideration as truncation volumes grow

• Promotes expediency, simplification

• Rationale: Already in place today for EFT

– Caveat: All physical paper exchange and settlement remains within six

national regions

• Includes: checks, CRDs, ineligibles, unmachinables, RRDs, envelope returns

49


Pending Final CPA Decision: (continued)

• Under Consideration: When does “Presentment” occur?

– Current thinking:

• When the image of the item is accessible to the Drawee (payor)

• Under Consideration: Timeline to “Return” an image presentment?

– Current thinking:

• Similar to the paper process

– When the responsible / owning organizational unit has access to the item (i.e. its image)

to make a pay/no-pay decision

– Then, to be returned within two days from the time access is available

• Anticipate some streamlining to be applied once image exchange settles in

50

CPA Rules and Standards

for Image Exchange

• Currently Available

– [Refer to the CPA web site]

– ACSS Standards

• 012 – “Image Security Standard”

• 013 – “Return Replacement Document Design Standard” (RRD)

• 014 – “Clearing Replacement Document Design Standard” (CRD)

– ACSS Rules

• A10 – “Images, Image Printouts, Clearing Replacement Documents and Return

Replacement Documents”

• Pending

– [Planned for availability on the CPA web site]

– ACSS Standards

• New: Canadian Companion Documents to the ANS X9.100-187-2008 (CCDs)

– For Forwards and for Returns

– ACSS Rules

• Updates: Rule A10 and others, as needed for image exchange

51

Delivery Between Canada and US

Part 3:

The Canadian Image Initiative

and

‘North/South’ Considerations

52

Delivery Between Canada and US:

US Currency ‘ABA’ Formatted Items

Basically, This is today’s status quo

• Northbound Items: With US ABA Format Routing Field

– Scenario: Negotiator / BOFD is in US; check account is in Canada

– Forward presented to Canada:

• Traditional options: Original check, IRD, image file

– Returns back to US:

• Traditional options: Original check, IRD, ‘Return-IRD’ image returns file

• Southbound Items: With US ABA Format Routing Field

– Scenario: Negotiator / BOFD is in Canada; check account is in US

– Forward presented to US:

• Traditional options: original check, IRD, image file

– Returns back to Canada:

• Traditional options: ‘Return-IRD’, image returns file

53

Delivery Between Canada and US:

US & Canadian Currency ‘5d3’ Formatted Items

• Northbound Items: With Canadian 5d3 Format Routing Field

– Scenario: Negotiator / BOFD is in US; check account is in Canada

• Can be US currency or Canadian currency

• Note: US and Canadian currency streams must remain segregated

• Forward presented to Canada:

– Traditional option: Original check only

• On arrival, the original check items pass through the Canadian clearings via the

Canadian correspondent bank

– New options for delivery:

• CPA Image Phase III - CRD (today): The items delivered on an image file can be

printed as CRDs and passed through the Canadian clearings via the Canadian

correspondent bank

• CPA Image Phase IV – image file (2013): The items delivered on an image file

can be image-exchanged through the Canadian clearings via the Canadian

correspondent bank

54

Delivery Between Canada and US – 5d3


(continued …)

• Returns back to US (traditional options):

– Depends on the procedure in place between the returning Canadian bank

and the US correspondent receiving the returns

– Common practice:

• The Canadian bank gives the paper returns to the US correspondent for paper

delivery to various BOFDs in the US

• Options:

– Original check (with 5d3 Routing Field) accompanied by a return envelope (with 5d3

Routing Field), and an advice

– The original check (with 5d3 Routing Field) by itself, and an advice

55

Delivery Between Canada and US - 5d3


(continued …)

• Returns back to US (new possibilities):

– Again, depends on the procedure in place between the returning Canadian

bank and the US correspondent receiving the returns

– New options for delivery:

• CPA Phase II – RRD (today):

– RRD (has 5d3 Routing Field), with/without an advice

» The returning information is on the RRD

• CPA Image Phase III – CRD (today):

– CRD (has 5d3 Routing Field), accompanied by a return envelope (has 5d3 Routing Field), and

an advice

– The CRD (has 5d3 Routing Field) by itself, and an advice

56

In Conclusion:

Rules, Regulations, Arrangements, Agreements ...

What applies when?

57

CPA, Direct Clearers and Client Banks:

Rules versus Decisions and Agreements

• The CPA imposes national exchange and settlement rules and

standards for the Canadian payments industry

• CPA members (financial institutions) develop operational procedures

and customer agreements

58



• Within the CPA jurisdiction (“Rules and Standards”)

– The rules for using the RRD or the CRD

• For exchange purposes between Direct Clearers

• For account holder services by a Direct Clearer

– The format and content of the RRD and the CRD

– The rules for exchanging image files between Direct Clearers

– The format and content of the image exchange file used between Direct

Clearers

59



• Outside the CPA concern (Individual decisions, proprietary practices and arrangements)

– Direct Clearer business decisions:

• To use RRDs or CRDs in place of original items – For DC-to-DC exchange purposes

– For account holder purposes

• To use image files for DC-to-DC exchange, in place of paper – Checks, CRDs, RRDs, return envelopes

– Direct Clearer customer agreements:

• Bank-to-bank customer service agreements outside of the exchange: – Northbound / Southbound service between a US bank and a Canadian bank

– Service between a Direct Clearer and an Indirect Clearer (proviso: must abide by CPA rules)

– Direct Clearer operating procedures:

• The internal and customer procedures around the use of image based services

• The choice of application software and platforms: – To truncate items, to create (print) CRDs or RRDs

– To create image files

– To capture CRDs and RRDs

– To receive image files

• The format and content of image files used outside the exchange

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Moving towards

greater interoperability

between the US and Canada !

Thank you. Questions?

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canadian clearings and check image evolution in canada

Documents

canadian payments act

canada banking

check payments exchange

canadian clearingspart

canadian direct clearersthere

canada works

payments development

bank of canada check