MT202, bank to bank cover payments

The MT202 is a general financial institution transfer, and it is used for bank to bank payments where the originator and the beneficiary are both financial institutions. It is most commonly used as a cover payment. In a cover payment, the customer instruction travels directly from the debtor agent to the creditor agent as an MT103, while the funds travel separately through correspondent banks as an MT202. The MT202 instructs the intermediary bank to move funds to cover the MT103, and the two messages are linked by a reference so that the creditor agent can match the cover to the customer instruction. This separation allows the customer information to travel directly and quickly, while the funds move through the most efficient settlement path. The MT202 has a simpler structure than the MT103 because it does not need to carry customer remittance information or detailed party details. It carries the sending and receiving banks, the amount, the currency, the value date, and a reference to the underlying transaction. It can also be used for a bank own account transfer, for example when a bank moves its own funds between its nostro accounts for liquidity management. In that case, there is no underlying MT103, and the MT202 is a standalone bank to bank payment. The distinction between MT103 and MT202 is a common source of confusion, and it matters for compliance. In a cover payment, the intermediary bank that processes the MT202 does not see the full customer details that are in the MT103, which can create a transparency problem for sanctions screening. Regulators have therefore required banks to ensure that cover payments carry sufficient information about the originator and beneficiary, and the move to ISO 20022, where the pacs zero zero eight and pacs zero zero nine carry richer data, is partly intended to solve this problem. An analyst must be able to explain the cover method, draw the two message flows, and identify where the customer data is visible and where it is not. Walk through the cover method step by step. The debtor agent sends the MT103 directly to the creditor agent, so the full customer information arrives quickly and in full. Separately, the debtor agent sends an MT202 through the correspondent banking chain to move the funds. The MT202 carries a related reference in field 21, which matches the transaction reference in field 20 of the MT103. The creditor agent waits for the cover funds, matches the MT202 to the MT103 using that reference, and then credits the beneficiary. The instruction and the funds travel on different paths and meet again at the creditor agent. The serial method works differently. There is no separate cover message. A single MT103 is passed from bank to bank along the chain, and each bank debits the previous bank and credits the next one until the payment reaches the creditor agent. Every bank in the chain sees the full customer details, which is good for transparency but slow, because each bank must process the message in turn. The cover method is faster for the instruction, because the MT103 goes straight to the creditor agent, but the intermediary banks that handle the MT202 see only bank to bank data, which created the transparency problem that regulators later addressed. The MT202 has a simpler field set than the MT103 because it does not carry customer remittance information. Field 20 is the transaction reference, field 21 is the related reference that links it to the MT103, field 32A carries the value date, currency, and amount, field 52a identifies the ordering institution, and field 58a identifies the beneficiary institution. The MT202 COV variant adds field 50a for the ordering customer and field 59a for the beneficiary customer, so the intermediary banks can see who the payment is really for. Validation and exceptions in the cover flow are about matching. The intermediary bank validates fields 20, 21, and 32A, checks the BICs, and screens the parties it can see. If field 21 is missing or wrong, the creditor agent cannot match the cover to the MT103, and the funds sit unapplied while the beneficiary waits. If the MT103 arrives but the cover is late, the creditor agent may hold the payment or credit the beneficiary on trust, depending on the agreement between the banks. If the amounts do not match, the payment goes to investigation, usually with an MT195 query or an MT199 free format message, and the analyst must trace both messages to find where they diverged. Worked example with real numbers: a bank in Paris sends EUR 480,000 to a beneficiary in Tokyo, as a customer payment and a cover, and the cover is an MT202 COV for EUR 480,000, sent to the reimbursement institution, a bank in New York that holds the Paris bank account and the Tokyo bank account. The reimbursement institution is therefore the bank that settles the cover, named in field 54a of the MT202 COV, and it is different from the intermediary, which forwards the message, and from the account with institution, which holds the account. Source: SWIFT MT202 COV format specifications; Paiementor articles on reimbursement institutions. Failure and recovery: the cover fails when the reimbursement institution has insufficient funds, or when it does not hold an account for the creditor bank, so it cannot settle the cover, and it returns the MT202 COV, and the debtor bank must send the cover through a different reimbursement institution, or through a different correspondent. The recovery takes days, because the cover must be re-routed, and the beneficiary is paid late, and the bank must pay interest compensation for the delay. A cover that is sent to a reimbursement institution that has closed the account will be returned, and the sender must check the reimbursement institution before sending, not after the return, because a return costs a day and a resend costs another day. For a business analyst, product owner or subject matter expert, the MT202 COV requirement must name the reimbursement institution, field 54a, state who settles the cover, and state how reimbursement differs from the cover chain itself, because the cover chain is the route the message takes, while the reimbursement is the settlement of the funds. In ISO 20022 the cover is pacs.009 COV, and the reimbursement institution is carried in its agent fields, and the requirement must map field 54a to those fields, so the settlement survives migration. A cover whose reimbursement institution is lost in migration is a cover that cannot settle.