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Settlement Bank
Settlement Bank
A settlement bank is a bank that temporarily holds funds on behalf of two parties involved in a transaction, typically a buyer and seller, until the settlement date.
Process:
- Funds Transfer: The buyer transfers funds to the settlement bank.
- Payment Instruction: The seller provides a payment instruction to the settlement bank.
- Payment Release: On the settlement date, the settlement bank releases the funds to the seller’s bank.
Typical Transactions:
- International payments
- Letters of credit
- Bonds
- Government securities
Benefits:
- Convenience: Simplifies the settlement process by centralizing funds.
- Security: Ensures timely and secure payment.
- Trust: Builds trust between parties.
- Reduced Costs: Can reduce transaction fees compared to traditional methods.
Examples:
- A company making payments for imports to a bank in a foreign country.
- A bank issuing a letter of credit for a buyer to secure payments.
Key Features:
- Temporary Custody: Funds are held in trust until settlement.
- Intermediary Bank: Provides a bridge between buyer and seller banks.
- Final Payment: Releases funds to the seller on settlement date.
- Transaction Management: Handles all aspects of the transaction.
- Security and Transparency: Ensures confidentiality and accountability.
Additional Notes:
- Settlement banks typically charge fees for their services.
- The settlement period may vary depending on the jurisdiction and agreement between parties.
- Settlement banks may offer additional services, such as foreign exchange and payment guarantees.
