New developments in large-value payment systems

May 2005

Foreword

Large-value payment systems (LVPS) play a key role in the financial infrastructure, by discharging payment obligations between banks. The 1990s experienced a major transformation in the design of these systems: from deferred net settlement (DNS) systems, which settled only at the end of the day, to real-time gross settlement (RTGS) systems, which settle on a continuous basis. This revolution was largely due to the possibilities offered by information and communication technology and to the measures taken by central banks to reduce systemic risks in these systems. The Committee on Payment and Settlement Systems (CPSS) of the central banks of the Group of Ten countries reflected these changes by publishing in 1997 the report Real-time gross settlement systems.

The purpose of this report is to present the state-of-the-art in LVPS, taking stock of the developments which have taken place since the 1997 report. It is written so as to be free-standing and not require reference to previous reports. The central message of the report is that interbank payments today settle faster, with a lower amount of liquidity (mainly central bank money), and at a lower cost. Indeed, whereas the key achievements in the 1990s were speed and safety of payments, the focus since the turn of the century has been to reduce liquidity costs and to provide users with more flexible intraday liquidity management.

In parallel, new systems have emerged to meet an expanding demand for cross-border payments. The primary example is CLS (Continuous Linked Settlement), which was established to reduce credit risk in the settlement of foreign exchange transactions. Another example is the emergence of new infrastructures in countries where a foreign currency plays an important role. Standardised arrangements have been established that enable financial institutions to settle foreign currency transactions through a correspondent bank while using the same system design as the local RTGS system.

While certain trade-offs exist between achieving lower risks and achieving lower costs, recent developments in LVPS design allow more flexibility in addressing various risk and cost trade-offs than previously available in traditional architectures. Central banks on their side have continued to seek a balance between more stringent risk controls and the need for systems to be cost-efficient.

The analysis in this report shows that the complexity of trade-offs between risks and costs implies a wide range of possibilities for the design of an LVPS. There is therefore no single solution fitting all markets and all participants' preferences. Hence, the report does not prescribe the adoption of any specific feature or design element introduced in a given LVPS in the CPSS countries. It is the responsibility of the owner of each LVPS to come up with the design that best fits the users' needs and achieve an optimal balance of risks and costs, while still meeting the relevant policy objectives.

The Committee set up a working group to analyse the new developments in LVPS and their implications for risks and costs. The CPSS is very grateful to the members of the working group, its chairman, Daniel Heller of the Swiss National Bank, and the CPSS secretariat at the BIS for their excellent work in preparing this report.

Tommaso Padoa-Schioppa, Chairman
Committee on Payment and Settlement Systems