Real-time Gross Settlement Systems Research Articles

From LVTS to Lynx: Quantitative assessment of payment system transition in Canada

Modernising Canada’s wholesale payments system from the legacy large-value transfer system (LVTS) to Lynx brings two key changes: (1) the settlement model shifts from a hybrid system that combined components of both real-time gross settlement (RTGS) and deferred net settlement to an RTGS system; and (2) the policy regarding queue usage changes from discouraging it to encouraging the adoption of the new liquidity-saving mechanism. This paper quantitatively assesses the effects of these changes on the behaviour of participants in the payments system. The analysis reveals that most system-level payments in Lynx are settled in a single stream via the liquidity-saving mechanism, thus facilitating liquidity pooling and leading to higher efficiency than with LVTS, where payments were distributed in two streams. Moreover, due to Lynx’s liquidity-saving mechanism, many payments arrive earlier than those settled in LVTS, providing more opportunities for liquidity saving at the cost of slightly increased payment delay. At the participant level, meanwhile, the analysis suggests that liquidity efficiency is improved for various participants, with most experiencing slightly longer payment delays in Lynx than in LVTS.

High-Speed Internet, Financial Technology, and Banking

Exploiting the staggered arrival of fiber-optic submarine cables, we show that high-speed internet promotes the role of banks and credit in Africa. Variation within country and across multicountry bank networks indicates that high-speed internet induced a 22% expansion in credit supply. We investigate the role of plummeting telecommunication costs in promoting the bank adoption of new financial technologies and study a specific technology used in the interbank market, the real-time gross settlement system (RTGS). We find that upon connecting to high-speed internet, banks adopt the RTGS more extensively, reduce inside liquidity, and increase interbank transactions and lending. We also observe that high-speed internet particularly strengthens firms in countries with weak preexisting interbank markets. This paper was accepted by David Sraer, finance. Funding: This work was supported by a Private Enterprise Development in Low Income Countries (PEDL) of the Centre for Economic Policy Research (CEPR) grant and Università Bocconi. Supplemental Material: The data files and online appendix are available at https://doi.org/10.1287/mnsc.2023.4703 .

Monitoring intraday liquidity risks in a real-time gross settlement system

We propose an intraday liquidity risk indicator (LRI) for each participant in a realtime gross settlement system (RTGS). The LRI is constructed by comparing the evolution of the expected intraday liquidity sources used by a participant for settling payments with the evolution of that participant’s expected intraday liquidity requirements in the remainder of the payment day. Using the data from Canada’s RTGS-equivalent payment system, the large-value transfer system (LVTS), to evaluate the forecasting performance of the LRI, we find that it performs reasonably well. Further, based on the LRI, we propose an early warning indicator (EWI) that can predict the likelihood of an intraday liquidity risk event occurring in the remainder of the payment day. Both the LRI and EWI are applied to monitor intraday liquidity risks for participants in the LVTS. The empirical results suggest that the participants manage their intraday liquidity positions well, allowing them to meet payment and settlement obligations on a timely basis, which contributes to the smooth functioning of the LVTS.

How much liquidity would a liquidity-saving mechanism save if a liquidity-saving mechanism could save liquidity? A simulation approach for Canada’s large-value payment system

Canada’s Large Value Transfer System (LVTS) is in the process of being replaced by a real-time gross settlement (RTGS) system. A pure RTGS system typically requires participants to hold substantial amounts of intraday liquidity in order to settle their payment obligations. Implementing one or more liquidity-saving mechanisms (LSMs) can reduce the amount of liquidity that participants need to hold. This paper investigates how much liquidity requirements can be reduced with the implementation of different LSMs in the Financial Network Analytics simulation engine using LVTS transaction data from 2018. These LSMs include (1) bilateral offsetting, (2) FIFO–bypass, (3) multilateral offsetting and (4) a combination of all LSMs. We simulate two different scenarios at varying levels of the upper bound of liquidity. In the first scenario, all payments from Tranche 1, which are considered time critical, are settled in a pure RTGS payment stream, while less time-critical Tranche 2 payments are settled in a payment stream with LSMs. In the second scenario, we settle all payments (Tranches 1 and 2) in the LSM stream. Our results show that when there is ample liquidity available in the system, there is minimal benefit from LSMs, as payments are settled without much delay: the effectiveness of LSMs increases as the amount of intraday liquidity decreases. A combination of LSMs shows a reduction in liquidity requirements that is larger than any one individual LSM.

Granting access to real-time gross settlement systems in the FinTech era

In light of the fast-growing role of non-bank financial institutions in national payment systems worldwide, this paper explores the experience and practice of central banks with regard to the granting of access to real-time gross settlement (RTGS) systems and considers the related policy issues. Specifically, in their capacity as settlement agencies and operators of their national RTGS systems, many central banks are today considering the merits of extending RTGS access to retail payment service providers (PSPs) other than commercial banks, to include emerging companies that apply technology to the provision of payment or payment-related services. This paper frames the issue within the broader context of whether, and to what extent, access to RTGS systems should be extended to non-bank PSPs. Decades of experience with RTGS systems across countries in different stages of financial sector development, in an increasingly globalised marketplace, have revealed a number of practical problems for central banks, the direct users of RTGS systems, and other beneficiaries of their services. This paper draws on such experience and practice. The paper ends by submitting a few considerations on how RTGS access issues relate to central bank digital currencies.

Systemic risk in the Angolan interbank payment system – a network approach

ABSTRACT In this work, we analyse the topology of the network of interbank payment flows settled via the real-time gross settlement system (RTGS) of the Angolan payment system (APS) during the fourth quarter of 2016, with the aim of discussing the APS resilience to systemic risk, focusing on its vulnerability in case of failures in the settlement of any bank payments. We conclude that (i) the Angolan RTGS payment network is sparse, characterized by low connectivity, (ii) it is a scale-free network with five banks with high connectivity, representing the main origin and destination of the settled transactions and concentrating about 47% of the total volume and amount of payments settled, which adds to contagion risk. However (iii) the systemic risk arising from the removal of a single participant from the network is low, since the largest bank in the system, with the greatest transacted volume and amount, accounts only for about 11% of the total transacted amounts. In addition, (iv) the adequate risk-mitigating operational processes of each of the RTGS subsystems safeguard the APS from systemic risk.

How Much Liquidity Would a Liquidity-saving Mechanism Save if a Liquidity-saving Mechanism could Save Liquidity? A Simulation Approach for Canada’s Large-value Payment System

Canada’s Large Value Transfer System (LVTS) is in the process of being replaced by a real-time gross settlement (RTGS) system. A pure RTGS system typically requires participants to hold substantial amounts of intraday liquidity in order to settle their payment obligations. Implementing one or more liquidity-saving mechanisms (LSMs) can reduce the amount of liquidity that participants need to hold. This paper investigates how much liquidity requirements can be reduced with the implementation of different LSMs in the Financial Network Analytics simulation engine using LVTS transaction data from 2018. These LSMs include (1) bilateral offsetting, (2) FIFO–bypass, (3) multilateral offsetting and (4) a combination of all LSMs. We simulate two different scenarios at varying levels of the upper bound of liquidity. In the first scenario, all payments from Tranche 1, which are considered time critical, are settled in a pure RTGS payment stream, while less time-critical Tranche 2 payments are settled in a payment stream with LSMs. In the second scenario, we settle all payments (Tranches 1 and 2) in the LSM stream. Our results show that when there is ample liquidity available in the system, there is minimal benefit from LSMs, as payments are settled without much delay: the effectiveness of LSMs increases as the amount of intraday liquidity decreases. A combination of LSMs shows a reduction in liquidity requirements that is larger than any one individual LSM.

The Gridlock-Proof Functionality in Real Time Gross Settlement Systems

The last two decades of the XX century marked the starting point for the central banks across the globe to move their payment and settlement systems into Real Time Gross Settlement (RTGS) mode. Despite the fact that RTGS systems can effectively eliminate the credit exposure between the paying bank and the receiving bank at the interbank level by means of fast final and irrevocable money transfer, there is another serious problem associated with these systems. RTGS systems turned out to be liquidity-demanding arrangements, as opposed to deferred net settlement systems. Thus, the efficiency of liquidity management arrangements is the precondition of smooth RTGS operation, especially in tough times when liquidity is a systemic shortage. If liquidity management is inefficient, the RTGS system may stop operating properly by terminating in the grid-lock state brining chaos to the national economy. In this research we suggest the practical approach to solve the problem of seeking the maximization of aggregate value of payment instructions under liquidity shortage, including the most severe scenarios. The classification of the RTGS queue statuses is suggested and discussed. Some complementary results are articulated, including: (a) the statement that the formal mathematical optimization problem lies in the NP class of the computational complexity (the class of problems solved in polynomial time by nondeterministic Turing machine); (b) the equivalence between MaxFlow-MinCost problem (from the network flow theory) and the dual linear problem of the linear program relaxation of the initial optimization problem; (c) the illustration that no optimization strategy, other than the suggested one, can deliver substantially better optimization results. Despite enormous efforts, there were no previous research results reasonably claiming the near optimality of liquidity optimization strategy in RTGS systems under severe liquidity shortages. The results of this research may help the central banks and other RTGS system operators to ensure the protection of their payment systems from future liquidity crises and bring the resilience of respective national economies to the next level of sustainability.

High-Speed Internet, Financial Technology and Banking in Africa

This paper provides empirical evidence on the effect of high-speed internet on financial technology and banking in Africa. Our test combines data on 551 banks and 28,171 firms with the staggered arrival of bre-optic submarine cables in Africa. High-speed internet promoted private-sector lending by banks, and credit and sales by firms. These results are consistent with an extensive adoption of financial technologies, like real-time gross settlement systems (RTGS), lowering transaction costs in African interbank markets. We find that liquidity management considerably changed for banks being weak interbank users prior to high-speed internet. In fact, such banks lowered their internal liquidity hoarding by 10%, increased interbank transactions by 40% and expanded lending by 37%. Analogously, firms in countries with weak pre-existing interbank markets presented stronger effects at the cable arrival. These results are consistent with high-speed internet promoting financial technology adoption, liquidity and credit.

Le temps (réel), c’est de l’argent

À l’âge du trading haute fréquence sur les marchés financiers et de la mise en place de services de paiements instantanés dans le commerce de détail, on peut trouver étrange que l’échéance la plus courte négociée sur le marché monétaire soit le « au jour le jour ». Cette situation est le reflet de politiques menées par les banques centrales qui fournissent gratuitement la liquidité intra-journalière au système bancaire. De telles politiques sont difficiles à fonder en théorie et comportent des limites auxquelles les banques centrales pourraient remédier en conduisant des politiques monétaires en temps réel. L’article détaille comment, à la suite de cette décision, les banques centrales pourraient adapter certaines caractéristiques de leur cadre opérationnel de politique monétaire et de leurs systèmes de réglement brut en temps réel. En tout état de cause, les avantages potentiels d’un tel choix devraient être soigneusement pesés en contrepartie des coûts pour les banques centrales, les intermédiaires financiers et la société.

Effects of Key Financial Markets’ Infrastructure on Cash and Liquidity Management of Banks in India

The article examined the effect of introduction of the Real Time Gross Settlement System (RTGS) on banks' cash requirements (viz. cash with banks) and liquidity requirements of banks (banker deposits) with the RBI. The empirical results indicated that the introduction of the RTGS system reduced cash requirements of banks significantly due to adoption of centralized processing systems, which facilitated better cash management for banks. However, at the same time, liquidity requirements of banks with the RBI increased on introduction of the RTGS, which did not grow with time, though more amount was settled in the RTGS. Demonetization resulted in huge cash requirements for banks, but it did not impact liquidity requirements of banks with the RBI.

Liquidity Saving Mechanisms in Payment Systems and Settlement Liquidity

Payment systems are one of the key Financial Market Infrastructures (FMIs) and have showed remarkable progress over the past two decades. The first half of this paper focuses on the evolutionary process of payment systems, starting with the Deferred Net Settlement (DNS) system and progressing to the Real-Time Gross Settlement (RTGS) system. Subsequently, much more sophisticated payment systems have been put in place, which include the “Hybrid System,” and the “RTGS system with Liquidity Saving Mechanism (LSM).” In the latter half of this paper, experience from the “Next-Generation Real-Time Gross Settlement” (RTGS-XG) project of BOJ-NET is discussed. BOJ-NET is the large-value payment system operated by Bank of Japan (BOJ). BOJ-NET, a pure RTGS system, added an LSM in 2008 and became an RTGS system with LSM. The impact of the LSM's introduction is analyzed, which includes the participants' settlement liquidity, the liquidity-saving effect, the average settlement time, the average waiting time in the queue, the turnover ratio, and the volume of idle liquidity. These analyses would be useful for any nations considering the introduction of the same kind of enhanced payment system.

An Effective Implementation of E-Banking-Issues in Indian Commercial Banks

The onset of banking in India has resulted in some major changes in the commercial banking sector. The Indian banking industry has also leveraged technology for achieving operational efficiency and for making financial inclusion a reality. The RBI has setup an advisory group for IT enabled financial inclusion to facilitate development of information technology solutions for delivery of banking services. Leading banks have been prompt in providing efficient customer services and offering a variety of hi-tech banking services like Automatic Teller Machines (ATM's) Electronic Fund Services (EFT) and Real Time Gross Settlement system (RTGS). The study focused on how e-banking has impact on reality for large percentage of Indians.

The fountainhead: analyzing the impact of intraday liquidity on payment behavior

This paper explores the effect of central banks' intraday liquidity provisions on the timing of payments in a real-time gross settlement (RTGS) system and how dependent they are on incoming payments. This is especially important in cases such as Mexico, where only a subset of participants has direct access to the central bank's intraday liquidity facilities. Using unique microdata from the Interbank Electronic Payment System (Mexico's RTGS system) transaction log, we estimate how the responsiveness of outgoing payments to incoming payments and account balances changes with access to central bank liquidity. Then we estimate a model in which the intraday distribution of payments depends on their access to the central bank's liquidity, their importance as a funding source and payment recipients of other participants on the RTGS network (visibility) and the shape of the distribution of incoming payments. The main finding of this paper is that access to the Bank of Mexico's intraday liquidity translates into prompter payments and a lower dependency on incoming payments and account balances.

Dollars to Donuts

Dollars to Donuts

Liquidity Saving Mechanism Under Interconnected Payment Network

This paper studies the intraday payment behavior of banks under the real time gross settlement (RTGS) system. Our game structure is based on Bech and Garratt (2003), with additional stages for recycling reserve. This gives us a variant of the hawk-dove structure, which enables efficient reserve recycling in an equilibrium. Based on this structure, we analyze the welfare effects of introducing a liquidity saving mechanism(LSM) to the RTGS system. We focus on situations where the LSM works only locally, that is, it serves to offset only a part of the whole obligation. Such partial offsetting effectively works to separate a connected payments network into mutually disconnected subnetworks. It is apparent that disconnection of the network itself will prevent efficient recycling throughout the network. We further find that there possibly exists a strategic indirect effect which prevents efficient recycling even within each subnetwork. Specifically, we devise a theoretical class of core-periphery structures for underlying payment networks, and show that the density of the network could have a nonlinear impact on the effects of the LSM. Our analysis suggests a policy mix wherein the utilization of the LSM should be examined in combination with other policies promoting efficient liquidity recycling.

Comparative analysis of payment system and suggesting solutions for data security issues in Pakistan

The payment system has been the back bone of financial systems of a country. The stability and growth of an economy is directly related to the strength, reliability, scalability and efficiency of payment system. There are various kinds of instruments and channels in payment system; some are slow like paper cheques and some electronic transfers. And after the introduction of Electronic payment methods and their wide spread acceptance in many developed countries has played an important roles in stabilizing and growing their economies. But the use of electronic payment methods is still in infancy in Pakistan due to various incidents of frauds and identity thefts. In Pakistan only 12% of population has access to Bank branches but internet is available in almost every small town and mobile penetration is almost 80-90% of population. Currently there are two major systems payment systems i.e. one is using clearance of amount based on settlement of Physical cheques drawn between difference banks and second is using online interbank fund transfer . The second one is also divided into two segments. i.e. large and small amounts of transaction. Larger transactions having no limit of amount are conducted between Banks using Real Time Gross settlement Systems (RTGS ) managed by Stat bank of Pakistan and the other is using Online Interbank fund transfer for small payments having limitation of 250,000 (Two lacs fifty thousand rupees) categorized as retail payment systems. The cost of transfer for large amount is only 50 Rupees per transaction regardless of amount, but an ordinary customer has to be a good business client of bank to carry out transfer of amount online.

Payment system design and participant operational disruptions

Real-time gross settlement (RTGS) systems often incorporate features designed to economise on liquidity. Such 'hybrid features' have the potential to mitigate the systemic impact of operational disruptions of participants. This paper simulates operational disruptions of participants, using data from Australia's RTGS system – the Reserve Bank Information and Transfer System (RITS) – to analyse the effect of these hybrid features on the systemic impact of such disruptions. The results suggest that the bilateral-offset algorithm and sub-limit feature in RITS generally mitigate the impact of a participant's operational disruption, even if there is less liquidity committed to the RTGS system. The hybrid features of the Australian RTGS system also mean that the size of the participant with the operational disruption has less effect on the systemic impact of that disruption than otherwise. While a central queue, in and of itself, would tend to mitigate the impact of a participant's operational disruption, methodological issues make it difficult to draw any conclusions regarding this hybrid feature in this paper.

The effects of settlement methods on liquidity needs in Japan: an empirical study based on funds-transfer data from BOJ-NET

The level of intraday liquidity needed for settlement varies according to settlement methods. This paper analyzes the effects of the shift from deferred net settlement to real-time gross settlement (RTGS) with liquidity-saving features on the liquidity for settlements in the Japanese RTGS system. The study has revealed how the liquidity available for settlement has increased due to the shift to RTGS, the level of the liquidity not used for settlements and the liquidity-saving effects of the liquidity-saving features.

Liquidity saving in real-time gross settlement systems: An overview

During the past two decades, Large Value Payment Systems (LVPSs) in many countries have been redesigned so that the payments which they process are settled on a Real-Time Gross Settlement (RTGS) basis. Such systems eliminate inter-bank credit risk in the payment system — which, from the perspective of the Bank of England, is a key feature of the UK’s LVPS, CHAPS, and one which cannot be compromised by any future design changes. But such RTGS systems can require relatively large amounts of liquidity to be available. So some of the more recent RTGS system designs — for instance, TARGET2 (for euro payments) or Japan’s BOJ-Net — have incorporated sophisticated ‘liquidity-saving mechanisms’. These mechanisms have allowed participants in the payment system to save on liquidity needs without reintroducing inter-bank credit risk. To support discussions among participants in CHAPS on possible liquidity-saving mech­anisms, this paper sets out a conceptual framework for thinking about the drivers of liquidity needs in RTGS systems. It then discusses a number of practical liquidity-saving measures, which can meet the good of greater liquidity efficiency without reintroducing credit risk.