SWIFT, a financial nuclear bomb, can fix Russia?

On February 26, 2022, the United States, the European Union, the United Kingdom, Canada and other Western powers issued a joint statement to punish Russia for its invasion of Ukraine, announcing that they would ban several major Russian banks from using the SWIFT international settlement system.

Let’s take a look at how SWIFT came into being and what functions it plays in the global economy and financial system.

The Society for Worldwide Interbank Financial Telecommunications (SWIFT) was established in May 1973, which was originally initiated by 6 European banks operating international business. Agreed on a set of information rules for international transfer transactions

If you have any experience transferring money from overseas accounts, you should remember that whether you send or send money, the bank will ask you to fill in the SWIFT code of the target bank.

Neither too early nor too late why was SWIFT founded in May 1973?

This is because in March 1973, there was a trend of selling US dollars and buying gold and mark in Europe, which increased the volatility of the entire exchange rate system. Later, 9 countries of the European Community decided to abandon the original fixed exchange rate system with the US dollar, which represented the complete collapse of the Bretton Woods system.

The floating exchange rate system needs more efficient, convenient and low-cost inter-bank information transmission and the SWIFT system come into being. Later, with the development of international trade and international business between banks, many banks in the United States, Canada and 15 European countries joined SWIFT successively.

Due to SWIFT’s low and rapid cost, international capital flow became easier, and global trade developed rapidly. Thanks to mutual achievements, SWIFT became a set of information standards for international transactions. As long as any financial structure involves a large number of foreign trade businesses, joining the SWIFT system can be said to be a necessity.

With the rapid development of global trade, SWIFT has expanded its membership from banks to other financial institutions, financial exchanges and large enterprise groups, covering more than 200 countries and regions around the world, with more than 11,000 members. Among them, the Bank of China joined SWIFT in 1983 as its 1,034th member. Since then, more Chinese institutions have joined, and China has become an increasingly important source of business for SWIFT.

Headquartered and registered in Brussels, Belgium, SWIFT has set up Sifting Center in Amsterdam, Netherlands (mainly covering Europe and Africa), New York (mainly covering the Americas) and Hong Kong (mainly covering Asia Pacific). Thus, a global financial telecommunications network system with one exchange center connected every 8 hours and running continuously for 24 hours will be formed to provide message transmission and conversion services for all member units engaged in cross-border receipt, payment and clearing business.

In addition to the call centers, SWIFT have four data centers — a data backup center in Amsterdam, the Netherlands, the U.S. state of Virginia, Switzerland, and an undisclosed disaster recovery center.

It should be noted that SWIFT is not the only interbank transfer information system in the world. Its competitors include TELEX, CABLE, etc., but the cost of SWIFT is much lower than them. Similarly, there is the International Bank Account Number (IBAN) system, which is commonly used within the EU. Although IBAN is currently used for remittances within the EU, it is also used globally. If you want to send money from China to Europe, you can use the SWIFT system or IBAN system as long as your bank supports it.

Someone asked who owns SWIFT?

SWIFT system is a set of rules agreed by all parties. Its management is composed of 25 directors. The top 6 countries in the number of shares can elect 2 directors respectively, totaling 12 directors. Countries ranking 7th to 16th in the number of shares may elect one director each, for a total of 10 directors; the remaining three directors are jointly nominated by member States.

Currently, the United States, Belgium, France, Germany, the United Kingdom and Switzerland each have two seats on the board. Other member states have only one board seat at most, with mainland China gaining one board seat in 2018 for the first time since joining SWIFT in 1983 — a Western institution on the whole whose rules are determined by Europe and the United States.

Please note that SWIFT only agrees on the code and rules of transfer and only involves the transfer of information, not the real settlement and capital flow, which also needs to connect with the clearing systems of major economies.

For example, the real clearing of dollars depends on CHIPS (clearing house interbank payment system) in New York, which is the largest US dollar clearing and payment system in the world. In 2019, US $417.5 trillion was cleared across borders, mainly in US dollars.

CHIPS are a private institution, equivalent to the agreed clearing institution among banks in the United States. In the United States, there is another official clearing institution, Fedwire, which is mainly used to deal with large funds transfers and transfer and clearing of official institutions. For example, the transfer of bank reserve accounts, various securities trading, bill processing, securities bookkeeping and other functions of the US government and federal agencies, but most of the international dollar clearing still relies on CHIPS.

International payment clearing in the euro area is mainly based on the Trans-European Automated Real-time Gross settlement Express Transfer (TARGET), but mainly clears euro positions. It handled 650 trillion euros in transfers in 2019.

For cross-border Payment settlement in China, the framework of CIPS is mainly adopted. CIPS System realizes real-time payment settlement (with a payment settlement scale of 34 trillion Yuan in 2019), and HVPS (large real-time payment system, High Value Payment System) is used for final settlement. SWIFT system can be directly replaced by CIPS special line in China. In addition, China’s inter-bank Payment settlement also has CNAPS (China National Advanced Payment System), which is a technical project assisted by the World Bank and also a fund settlement system of the electronic exchange system of commercial banks, connecting domestic and foreign banks.

Above is the background of SWIFT system and its relationship with clearing systems of major economies. Up to now, 40.5%, 36.7%, 5.9%, 2.7% and 2.6% of yen have been used in the payment business of SWIFT system.

From the previous introduction, you should basically understand that SWIFT is a set of payment information rules initiated by European financial institutions with the participation of global financial institutions. The US is just an ordinary member. It can always point fingers in this matter. Why?

Just because the dollar is the world’s currency



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