Report on real-time gross settlement systems
22 April 1997
The Committee on Payment and Settlement Systems of the Group of Ten central banks (the CPSS) will publish today, under the aegis of the Bank for International Settlements, a report on real-time gross settlement (RTGS) payment systems. The report will be of interest to those involved in the process of reforming large-value payment systems - a process that is currently taking place in many countries around the world in an attempt to reduce the systemic risks that can be created by such systems. The report explains some of the different forms that RTGS systems can take and the issues that can arise in designing and operating such systems. However, because the best way to tackle payment system risk will vary from country to country, the report intentionally does not make specific recommendations.
The report is a continuation of the CPSS's earlier work on the payment and settlement infrastructures that underpin financial markets, including netting systems (on which reports were published in 1989 and 1990) and systems for the settlement of securities transactions (reports in 1992, 1995 and 1997) and foreign exchange trades (reports in 1993 and 1996).
What is the RTGS report about?
The world's interbank payment systems handle large amounts of money. It is estimated that in the G-10 countries alone the turnover of the main systems is more than the equivalent of US$ 5 trillion each day. Many of these payments are for the settlement of financial market transactions between the banks themselves, such as interbank loans or foreign exchange deals; other payments are made by banks on behalf of their customers. In either case, the payment systems are essential to the smooth functioning of financial markets and the economy as a whole. However, in recent years it has been increasingly realised that the way in which many of the systems traditionally worked exposed the participating banks to substantial interbank risks - resulting in the systemic risk that, if one bank were to fail for any reason, other banks in the system could fail as a consequence of these interbank exposures. Because of these concerns, countries around the world have been taking action to make their payment systems more robust. One method of doing this, and one that has been adopted in an increasing number of cases, is to introduce an RTGS system.
What is an RTGS system?
An RTGS payment system is one in which payment instructions between banks are processed and settled individually and continuously throughout the day. This is in contrast to more traditional net settlement systems (such as paper-based clearing houses and their more modern electronic equivalents), where payment instructions are processed ("cleared") throughout the day but interbank settlement (i.e. the movement of the funds between the banks) takes place only afterwards, typically at the end of the day. The attraction of RTGS systems is that payee banks and their customers receive funds with certainty, or so-called finality, during the day, enabling them to use the funds immediately without exposing themselves to risk.
What is the purpose of the report?
The purpose of the report is to help those who are considering developing, adapting, operating or using an RTGS system to understand the main issues involved. There are, in fact, many different possible forms of RTGS system. What is best for a particular country depends very much on its circumstances - there is no unique solution. The report explains the potential attractions of RTGS systems and describes some of the key differences in the possible system designs, explaining why these differences may matter.
Why is the report being published now?
Although a few countries have had RTGS systems for many years, for most they are a relatively new development - indeed, many countries are still at the planning stage or are in the process of introducing such systems. Because of this, relatively little has been written about the different ways in which the systems operate. The G-10 central banks therefore felt that it would be useful to pool their own experiences and set out some of the issues that arise. Moreover, risk management in the settlement arrangements for financial market transactions, particularly those relating to securities, foreign exchange and derivatives, is also in the process of being improved, often taking advantage of the benefits of RTGS systems.
Which countries have RTGS systems?
Most G-10 countries either already have a large-value RTGS system or are planning to introduce one soon. Moreover, the central banks of the European Union have collectively decided that every EU member state should have an RTGS system and that these domestic systems should be linked together to form a pan-EU RTGS system (the TARGET system) in order to support the introduction of the single currency, the euro. The use of RTGS is also growing in other countries. For example, RTGS systems are already in operation in the Czech Republic, Hong Kong, Korea and Thailand and it is reported that, among others, Australia, China, New Zealand and Saudi Arabia will introduce RTGS systems in the near future.
What issues does the report cover?
Having explained some of the key concepts in payment systems, the report looks at the different types and sources of payment system risk. The bulk of the report is then devoted to the main RTGS design features - liquidity, queuing and message flow structures. There are also some more general considerations concerning the development of RTGS systems, including a discussion of the similarities and differences between RTGS and other ways of tackling payment system risk which involve making net settlement systems more secure. The report also includes factual information on the features of G-10 RTGS and selected net settlement systems.
Notes to editors
- The Committee on Payment and Settlement Systems (the CPSS), based at the Bank for International Settlements (the BIS), serves as a forum for the central banks of the G-10 countries to monitor and analyse developments in payment and settlement arrangements and to consider related policy issues. The Chairman of the CPSS is William J. McDonough, President of the Federal Reserve Bank of New York.
- The Chairman of the Study Group that prepared the report was Yvon Lucas, Directeur des Moyens de Paiements Scripturaux et des Systèmes d'Echanges at the Bank of France. A list of the members of the Study Group is contained in the report.
- The RTGS report is available on the BIS World Wide Web site (http://www.bis.org) and copies can be obtained from the individual G-10 central banks and the BIS. The Web site also contains a list of the other publications by the CPSS as well as the full text of a number of recent reports.