The Next Generation RTGS: Liquidity Saving Mechanisms as an Overlay Service

Abstract

Between 1985 and 2006, a total of 96 central banks implemented Real-time Gross Settlement (RTGS) systems. The adoption of this technology was driven to reduce risks inherent in the then-predominant Deferred Net Settlement (DNS) systems. However, because RTGS systems consume large amounts of liquidity when each payment is settled individually, many RTGS systems (e.g., CHAPS and Target2) implemented Liquidity-Saving Mechanisms (LSMs) of varying complexity, with most deploying variations of the algorithm presented by Morten Bech and Kimmo Soramäki (the co-author) in 2001. Many of these systems are now at the end of their investment cycle, and a conversation has begun on what technology the next generation of RTGS systems should employ. In this paper, we argue that the concept of an LSM Overlay Service that separates the functioning of the core central bank ledger, the RTGS system, and the LSMs has several benefits over existing system architectures. An LSM Overlay Service will rearrange how interbank payments are processed. This service overlays the RTGS system with LSMs that resequence (and in case of PvP or DvP synchronise) payment orders before they reach a "thin" RTGS system with very basic operational processing functionality. Introducing the LSM Overlay Service unlocks many benefits for financial institutions while preserving the central bank's mandate to guarantee the safe and efficient functioning of the payment system with a more resilient service at a lower cost.