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Canadian Cheque Clearing

Return & Adjustment Issues

May 7, 2015

Evolution of Image Exchange - US

• ECP with Paper to Follow

• Pre - 9/11 Activities to foster improvements in US Payment System

• The Check Clearing for the 21st Century Act (Check 21 Act)- Introduced the Image Replacement Document (IRD)- Facilitated migration to check image exchange- Not mandatory

• Rules – Reg CC, Reg J, OC3, ECCHO

• Standards – X9.37DSTU, X9.100-187, Companion Documents

• Bilateral Agreements

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Image Exchange - US

• FRB Services – FedForward, FedReceipt, FedReturn, FedReceipt Returns

• Exchange Networks – Endpoint Exchange, SVPCO, Viewpointe, OnWe

• Correspondent – Bankers Banks, Commercial Banks, Fiserv Clearing Network

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Banking in Canada Banking in Canada is under Federal Jurisdiction

• A variety of legislation and statutes manage national banking

- Bank Act: Defines ‘bank’- Bills of Exchange Act: Defines ‘cheque’ and other

payment instruments Extended in 2007 to add image of a cheque as a Bill of Exchange

- Canadian Payments Act - Establishes the Canadian Payments Association

• Canadian Payments Association- IS - The operating body that governs payments clearing

and settlement in Canada at a national level Manages the central settlement system (ACSS) for cheque and EFT. Manages the network for exchange of EFT Will make the existing network available for exchange of Image Captured Payment (ICP) files

- IS NOT - A standards development organization Provides standards specific to its mandate, supporting its members in participating in the national

payments process and owns the standards

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• Canadian banks and financial institutions are divided into - ‘Direct Clearers’ (DC) and ‘Indirect Clearers’ (IC)

˗ Direct Clearers (DC) – Participate directly in interbank exchange and settlement

˗ Indirect Clearer (IC) - contracts the services of a DC to represent it for the exchange of other bank items that the IC has taken on deposit

- There are 12 Direct Clearers :

- There are approximately 120 Indirect Clearers5

001: Bank of Montreal002: Scotiabank

003: Royal Bank 004: TD Canada Trust 006: National Bank 010: CIBC 016: HSBC

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)

Banking in Canada

Bank of First DepositIDC #2

DC - RBCCUSTOMER

IDC #1

Canadian Check

DC - TD Canadian Paying Bank

IDC #1

Canadian Law and Canadian Payment

Rules

Canadian $ Image

Exchange

Banking in Canada

U.S. $ Image

Exchange *

Canadian $ Image

Exchange

Canadian Law and Canadian Payment

Rules

Canadian Law and Canadian Payment

Rules

Relationship Between IDC and DC is for

Deposited, Inclearing and Return Items

Relationship Between IDC and DC is for

Deposited, Inclearing and Return Items

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Canadian $ Image

Exchange

Source: ECCHO

U.S. $ Image

Exchange *

U.S. $ Image

Exchange *

* Separate US ABA and CDN RT

Evolution of Image Exchange• Truncation and Electronic Cheque Presentment (TECP) Project

2002 – 2008- Mandated exchange AMONG ALL BANKS AND FINANCIAL INSTITUTIONS- Complex integration among and between banks (direct clearers and indirect clearers)

• Canadian Payments Association Image Rule Project

- Phase I – December 2009 – approved Rule A10 images of cheques and

rule A12 image security standard both effective June 1, 2010.

- Phase II – December 2010 – approved amendments to rule A10 related to

the creation and use of Return Replacement Documents (RRD) effective June 1, 2011.

- Phase III – March 2012 – approved amendments to rule A10 related to the

creation and use of Clearing Replacement Documents (CRD) effective October 1, 2012.

- Phase IV – June 2013 – approved final rule amendments to allow Direct

Clearers to exchange electronic payment files containing Image Captured Payments (ICP) with a partner that has agreed to participate in ICP Exchange, effective August 12, 2013.

• ICP Standard 015 – Companion Document to X9.100-187

• Bilateral Agreements

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Migration - Current• Direct Clearer to Direct Clearer

• Separate Cash Letters for:

- Canadian Dollar Funded Accounts - US Dollar Funded Accounts- US ABA

• Regional Clearing – Traditional Paper Method

Halifax WinnipegMontreal CalgaryToronto Vancouver

• Settlement

˗ ACSS/USBE - Systems managed by CPA˗ Regional based settlement˗ Net Settlement

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Migration - Future

• CRD and RRD Print Capability • Infrastructure Changes• Single Electronic Processing Site• Preparing for All Source Channel Capture• Preparing for Image Exchange• National Clearing (Optional)

- Cash letter per region included in one ICP (x9)

• Preparing for Day 2• Movement Away from Outsourcing

- 3 of largest moving to in-house- 1 of largest moving to a new outsourcing provider- Technical and, more importantly, Operational Impact

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Source: Tramore Group STRICTLY CONFIDENTIAL 10

Migration - StatusChannel Status

Commercial RDC Several banks in production (with CRD print), others are in pilot & proof-of-concept

Mobile RDC Three banks are in production (with CRD print), most other major banks have projects underway

Branch Three Major banks have plans to start teller capture rollout in 2015, others have projects in place, including both teller and back counter solutions.

Image ATM One bank is currently in rollout, others will begin rolling out in late 2015, early 2016. A few banks will keep current paper processing in place for now

Image Exchange Four banks plan to have at least one exchange agreement in place by end of 2015, most plan to be exchanging some volume in 2016

Northbound ICL Several are accepting X9 and printing CRDs

Southbound ICL Some will continue clearing southbound cheques using commercial RDC products through US banks or print IRDs

Image Exchange – Cross Border• ICL Deposit vs. Exchange• Depositary Agreements – Cross Border• Exchange Rules / Depositary Agreements – within US

ECCHO Developing Rules for clearing of Canadian Cheques

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ECCHO Member Bank

ASending Bank

Returnee Member

Image Exchange

ECCHO Rules

Canadian Correspondent

Bank“Point of

Entry”

Correspondent Agreement

CUSTOMER

Canadian Check

ECCHO MemberBank B

Receiving BankGateway Receiving

BankReturning Member

Canadian Paying Bank

Canadian Law and Canadian Payment

Rules

Canadian $ Image

Exchange

One or Two Streams ??

Source: ECCHO

U.S. $ Image

Exchange *

U.S. $ Image

Exchange *

Canadian $ Image

Exchange

* CDN RT

Image Exchange – Cross Border• Standards

˗ Northbound – Receiver Companion Document to follow Standard 015

˗ Southbound – Receiver Companion document to follow x9.100-187˗ BiTonal image – 200 dpi in tiff - standard to both countries

• R/T Format

- Retain “dash” in RT Field ex. 12345-010o Populate X9 Record 25 Field 4 - 12345-01o Populate X9 Record 25 Field 5 - 0

• US Dollar vs Canadian Dollar Funded Accounts

- Both have XXXXX-YYY RT format- US Dollar Funded Accounts – “45” in tran code field- US Dollar Funded Accounts – see appendix A & B for list of other

characteristics- Canadian Funded Accounts – “Hand-written” – US FUNDS- Canadian Cheques without TC 45 will likely require operator review

for proper designation 12

Image Exchange – Cross Border• Forward Presentment - Northbound

- Canadian Cheques (CDN $ and US $) deposited in a US Bank- Separate ICL for each currency type- US Correspondent Bank will have a Depositary Agreement with Canadian Correspondent Bank –

potentially will define specific rules- Canadian Correspondent Bank has to identify themselves as “Point of Entry” - Return Location Identifier

to Paying Bank

• Item Acceptance

- Some discussion exists that Canadian Correspondent Bank will only accept cheques where the US Correspondent Bank is in physical position of the itemo Impact on bank’s RDC channelso Impact on bank’s downstream correspondent program

- Does not appear to be the KYC issue with all Canadian Banks – point of discussion if entertaining Canadian Cheque Clearing

- Some US Banks have indicated unwilling to accept Southbound items from an Indirect Clearer 13

Image Exchange – Cross Border• Return Item Collection

˗ Canadian Bank Return Item Reason Codes to NOT map directly with US Return Item Codes – see appendix C for details

˗ US BOFD bank cannot represent a returned Canadian cheque

˗ Exceptions to the representment rule:o the US Correspondent Bank specifically instructs the Depositary Bank to send the Electronic Image to

the Receiving Bank, oro the Canadian Item (or an Image of a Canadian Item) was returned due to

o incorrect currency. or o incorrect settlement amount, or

o the Canadian Item (or an Image of a Canadian Item) was returned due to a missing or non-usable item in the original forward exchange of the item.

- In addition to the next day return deadline for most cheques, Canada allows 90-days and 6 years for some cheques. See appendix D for details.

o This will cause items to be considered a “late” return by US practiceo Most of the extended delay items exist in current paper exchange

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Image Exchange – Cross Border

• Adjustments

˗ An adjustment, as known in the US, is not used in Canada

˗ Canadian Banks enforce the use of the Return process

˗ ECCHO rules will permit debit or credit adjustments to respective depositary account

˗ ECCHO Adjustment code to be created for adjustments within US

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Image Exchange – Cross Border• Northbound Workflow Forward

• US BOFD US Correspondent Bank Canadian Correspondent Bank (POE) DC or IDC (Paying Bank)

• Northbound Workflow Return

• IDC DC Canadian Correspondent Bank (POE) US Correspondent Bank US BOFD

• Southbound Workflow Forward

• IDC DC (Canadian Correspondent Bank) US Correspondent Bank (POE) FRB or Paying Bank

• Southbound Workflow Return

• US Paying Bank FRB US Correspondent Bank (POE) Canadian Correspondent Bank DC or IDC

• US Paying Bank US Correspondent Bank (POE) Canadian Correspondent Bank DC or IDC

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Image Exchange – Cross Border

* - C PA W ebsite

** - 2013 FR B Paym ents S tudy

* - CPA Website** - 2013 FRB Payments Study

2014 – 715.3 M cheques *

2012 – 18.3 B Paid as checks **

WHEN

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Questions?

Bill SafficiManaging Director Saffici Payment Consulting

Bill@SafficiConsulting.com610-494-3630

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Appendix A – Currency DesignationStandard 006 – page 53 http://www.cdnpay.ca/imis15/pdf/pdfs_rules/standard_006.pdf

Transaction Code Section

Subject to the exceptions listed below, the Transaction Code Section may be blank or consist of a maximum of four (4) digits located between the closing symbol of the amount field and the opening symbol of the Account Number Section. Where applicable, spaces should be provided to accommodate combinations of pre-encoded and post-encoded information. Exceptions:

• Transaction code 96 shall be encoded on bill payment remittances; • Transaction code 28 shall be encoded on Returned Item Carrier Envelopes, in accordance with CPA Rule A4; • Transaction code 45 shall be encoded on all U.S. Dollar Items2 except items having an ABA routing

number in the Transit Number Field, paper pre-authorized debits, and certain other items that may use a different transaction code in this field.

2 The following Institutions are temporarily exempt from the requirement to encode transaction code 45 on U.S. Dollar items: La Caisse centrale Desjardins du Québec (currently using transaction code 11) and its members, the Credit Union Central of Nova Scotia (currently using transaction code 90) and its members, and the Central 1 Credit Union (currently using transaction codes 644 and 6404) and its members. These institutions will work towards migrating to the new transaction code on a best efforts basis as soon as possible.

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Appendix B – Currency Designation

Standard 006 – page 29 http://www.cdnpay.ca/imis15/pdf/pdfs_rules/standard_006.pdf

Currency designation (e.g. CDN Funds, U.S. Funds or U.S. Dollars). A currency designation is required on all US Dollar cheques drawn on a domestic branch of a CPA member and encoded with a Canadian transit number. The currency designation is to appear to the right of or below the word “Dollars”, not interfering with any areas of interest. On cheques where the word “Dollars” is integrated into the machine-printed Amount in Words, the currency identifier (e.g. U.S. Funds) may be printed below the Convenience Amount Rectangle, leaving a minimum 0.64 cm (1/4”) of clear space between the bottom of the Convenience Amount Rectangle and the currency identifier. A currency identifier is not permitted to be printed beside the Amount in Figures.

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Appendix C – Return Reason Codes Standard 015 – page 162http://www.cdnpay.ca/imis15/pdf/pdfs_rules/standard_015.pdf

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1 of multiple pages

United States Canadian   Presented Electronically

Description Code Code Description DefinitionTime Limit for Return

1

Return as

Image Printout or CRD in RICE

2

Return as RRD 3

Return as ICP File 4

Re-Exchanged Items 5

NSF - Not Sufficient Funds ‘A’ A Insufficient Funds       Y Y  Stop Payment ‘C’ B Payment Stopped       Y Y  

Stale Dated ‘G’ C Post Dated

  up to and including the due

date

Y Y Y  

Post Dated ‘H’ D Stale Dated       Y Y  Closed Account ‘D’ J Account Closed       Y Y  

Altered/Fictitious Item/Suspected Counterfeit/Counterfeit

‘N’ E Counterfeit Item

means a paper Item that appears to be original or genuine, but has been fraudulently made and, for the purposes of this Rule, shall be considered an Item with a Forged or Unauthorized Signature;

 

  Y Y  

Refer to Maker ‘S’ U Refer to Maker       Y Y  

Not Authorized (Includes Drafts)–Unauthorized item such as a draft

‘Q’ KNot Eligible for Clearing - Telecheque

  90 calendar days Y Y Y  

    KNot Eligible for Clearing - Other

   Y Y Y  

Duplicate Presentment (Supporting documentation shall be readily available)

‘Y’ N Duplicate Payment

means an authorized Item that has been paid more than once. This may occur in situations where both an original and either an Image, Image Printout or a photocopy have been paid; an original item has been paid more than once; or where either an Image, Image Printout or a photocopy has been paid more than once.

90 calendar days

Y Y Y  

Signature(s) Irregular, Suspected Forgery ‘L’ GForged/Unauthorized Signature

means (i) a signature on the face of an Item that isnot the signature of the person (the drawer) that it purports to be, or (ii) a signature that is written on or applied to an Item without the drawer’s authority

 

  Y Y  

Unable to Process (e.g. Unable to process physical item/Mutilated such that critical payment information is missing). This code shall not be used for unusable images or system problems (see Administrative code ‘U’)

‘O’ 1 ICP Item Unable to Process

   

  Y Y  

Full contentIn embeddedExcel file

Microsoft Excel Worksheet

Appendix D – Return Time LimitationsExtracted from Rule A4https://www.cdnpay.ca/imis15/pdf/pdfs_rules/rule_a4.pdf

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Microsoft Word Document

Return TimeLimitations

Three FormsOf Returns

Return Reason Time Limitation

Items may be returned for the reason “Forged Endorsement”, as per section 15,

up to and including six (6) years after being received by the Drawee;

An Item that is being returned for the reason “Intended Payee(s) Not Paid”, as per section14, may be returned

up to and including six (6) years after being received by the Drawee;

An Item may be returned for the reason “post-dated”

up to and including the day prior to the due date;

An Item that is being returned for the reason that it has been cleared in the wrong currency or incorrectly amount-encoded, as per sections 19 and 20 respectively, may be returned;

up to and including ninety (90) calendar days after being received by the Drawee

An Item may be returned for the reason “Material Alteration”, as per section 15, whether itis apparent or not,

up to and including ninety (90) calendar days after being received by the Drawee;

A Telecheque may be returned for the reason “Not Eligible for Clearing”

up to and including ninety (90) calendar days after being received by the Drawee.

Introduced with Image

An Item that is being returned for the reason “Duplicate Payment” may be returned

up to and including ninety (90) calendar days after being received by the Drawee;

A Clearing Replacement Document or ICP Item that is being returned for the reason “CRD or Image MICR Mismatch” may be returned;

up to and including ninety (90) calendar daysafter being received by the Drawee

A Clearing Replacement Document or ICP Item that is being returned for the reason“Image Missing or Not Usable” may be returned

up to and including ninety (90) calendar daysafter being received by the Drawee; and

Microsoft Word Document

Appendix E – Return Items Eligible for Presentment as a New Item

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• The embedded file represents the author’s thoughts on how the depositary bank can:

• Provide the depositing customer with a “picture” of the deposited cheque when a chargeback condition occurs

• Provide an eligible return item to be presented as a “new” (first-time) cheque

Microsoft Excel Worksheet

Appendix F – Canadian Rules & Standards

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

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A4 – Return and Redirected A10 – Image Rule (also contains Return component)