LARGE PAYMENT SYSTEMS

[Tomcat]

Types of systems and trends in their development​

Over the past quarter century, there has been an intense process of formation and evolution of settlement systems designed to carry out large and time-critical remittances. They are called large value payment systems (LVPS). Such systems are designed to settle settlements between banks and other financial institutions, arising on the basis of mutual monetary obligations, as well as the implementation of transactions in the money and stock markets, monetary policy of central banks and other operations of this kind.

The peculiarities of LVPS work are primarily associated with the huge scale of their daily payment transactions, which many times exceed the annual GDP of the respective countries, as well as with systemic risks that threaten the stable and efficient operation of the financial mechanism of modern economic systems. In this regard, all over the world, increased requirements are imposed on LVPS systems in terms of speed and smoothness of operations, ensuring the security of settlements, reducing transaction costs, etc. It is this role that explains the fact that their organization and operations are under the control of central banks and international financial institutions.

Depending on the characteristics of the processing of payment orders, their cost and risk characteristics are two types of LVPS: gross settlement system in real time (real time gross settlement systems - RTGS ) and systems based on a deferred net settlement (deferred net settlement systems - DNS) ...

The beginning of the mass introduction of LVPS systems in economically developed countries dates back to the 1980s. In the early stages of this process, DNS systems prevailed. They were mainly associated with the service of international settlements - CHIPS (USA), SAGITTAIRE (France), etc. As already mentioned (see Chapter 1), a distinctive feature of this type of settlement mechanism is that the financial claims of settlement participants are accumulated and registered by the system during the specified billing period (business day or part thereof). At the end of the day, the received claims are offset, the net position of each participant is determined and, in accordance with the final result, funds from the accounts of net debtors are transferred to the accounts of net creditors.

Such a settlement procedure can significantly increase the liquidity characteristics of these systems, i.e. to increase the ability of settlement participants to carry out transactions without hindrance during the working day. The need for cash for settlements is reduced, since money is really only required for final payments that are left unchecked at the end of the day. Accordingly, this leads to a reduction in the cost of calculations.

At the same time, the postponement of the final payment to the end of the settlement period enhances the role of another important parameter - the risk of non-settlement of obligations by participants due to a lack of free liquidity at the time of the final settlement. This jeopardizes the solvency of other settlement participants and can lead to large financial losses.

At the end of the 20th century, an important turn in the policy of creating the LVPS was outlined. Many countries, mainly from the Group of 10, with the support and direct participation of national central banks, began to develop and accelerate the implementation of wholesale systems of the second type - RTGS, which were assigned the role of the basic platform of the payment mechanism of these countries. They were intended to serve both domestic payments and international transactions.

Unlike net systems, processing and final settlement of settlements in systems is performed on each

operations separately. Transactions follow each other ("deal by deal") in a continuous mode throughout the entire working day. Funds are credited to recipients' accounts in real time, i.e. almost immediately after sending the payment instruction to the computer center of the system. An indispensable condition for carrying out a payment transaction is the presence on the payer's account of a sufficient amount of money to make the payment, or the possibility of obtaining an overdraft loan from the system operator. In the absence of coverage, payment instructions will not be executed, and in most modern payment systems they are placed in a queue and executed automatically when the necessary funds are received on the payer's account.

The settlement scheme in the NLGS5 systems allows one to significantly minimize the settlement risks inherent in net systems, since the payment finality here occurs at the time of each specific transaction, and not at the end of the settlement period. However, the flip side of this approach is the deterioration of the liquidity characteristics of the settlement process and their rise in price, associated with the need to have large amounts of free cash to carry out transactions during the day. The cost / risk ratio serves as an important criterion when choosing a payment system and developing components of its technological design.

Shown in Fig. 5.1 the diagram illustrates the fact of a significant decrease in the need for liquid resources and, accordingly, savings in transaction costs during the transition from gross settlements to net systems. In this example, three banks are involved - X, Y, b. payments between these banks during the business day are made according to the following scheme (amounts in thousand US dollars).

135

The costs are 1% of the amount of liquid funds required by banks to make settlements.

Costs: Bank X - 8 Bank X - 1 Bank X - O

Bank Y - 9 Bank Y - 2 Bank Y - 1

Bank Z - 9 Bank Z - 1 Bank Z - O

Total - 26 Total - 4 Total - 1

In our conditional example, the transition from gross settlements to a bilateral clearing scheme cuts the costs of acquiring and using liquid assets by banks by more than 4 times, and in the case of multilateral clearing, by 26 times!

Thus, as we can see, the two types of wholesale systems - real-time gross settlement and net deferred settlement - differ significantly in the nature of processing and the degree of compromise between two important characteristics of settlement systems - liquidity and risk. Since DNS systems do not require payments to be made in a strictly defined sequence, they have an increased degree of liquidity and, therefore, less need for free funds on the accounts of participants in the payment process at certain points of the trading day. But the degree of risk of non-payment of obligations at the end of the settlement period increases [1].

In contrast, real-time RTGS systems ensure instant payment finality and minimize risk. But the strict sequence of individual payments inherent in these systems imposes more stringent requirements on liquidity, since the required amounts of money must be on the accounts of settlement participants at certain points in the settlement period.

The tendency of the transition to RTGS systems, which has intensified in recent years, with a reduction in the use of a "pure" DNS mechanism, indicates the main vector of evolutionary changes in LVPS - the desire to minimize settlement risks due to fear of serious losses in the context of a significant increase and complication of cash flows in domestic and international economic turnover ...

One of the oldest RTGS systems in operation today is Fedwire, operated by the US Federal Reserve System (see Appendix 4). Fedwire was established in 1918 as a wire transfer system between Federal Reserve Banks, and has functioned that way for half a century. In 1970 it was transformed into a fully computerized high speed electronic communications and processing system. In addition to improving the technical and communication capabilities of Fedwire, a number of measures were implemented to strengthen risk control, including changes in the rules for providing participants with a daylight overdraft and a number of other innovations.

In other industrialized countries, there was also an intensive process of creating new and reorganizing old wholesale systems. In Western Europe, these actions were accelerated by economic integration. In 1992, the European Monetary Union (EMU) was created. The central banks of the countries that make up this organization have agreed that a prerequisite for participation in EMU is the presence in the country of RTGS as the central element of the national payment system.

In 1995, it was decided to create the TARGET (Trans-European Automated Real-Time Gross Settlement Express Transfer System) system, which connects the national central banks of the EU member states, as well as the ECB to carry out settlement operations in euros. The ECB has developed general standards that define both the technical characteristics of the systems connected to the network, and the rules according to which the regime of admission to the system, the provision of overdrafts, the opening of accounts, the size of the commission, etc., take place. These measures have accelerated the transition to new, more sophisticated wholesale systems.

In Canada, the LVTS entered into force in 1997, and in France, TBF and PNS. In Germany in 2001, the EIL-ZV was replaced by the latest electronic system RTGS plus... In Switzerland and Japan, the existing SIC and BOJ-NET systems have been significantly rebuilt and updated. In the UK and Sweden, in addition to the electronic payment systems in the national currencies of these countries - CHAPS and K-RIX, respectively - special centers for settlements in euros were introduced. In the United States, significant design changes were made to the CHIPS settlement scheme, which was transformed from a net-net settlement system to a hybrid system with elements of gross settlement and netting. Similar changes took place in the payment systems of Latin America, Africa, and Southeast Asia. By the beginning of 2007, various RTGS modifications were in operation in 93 countries around the world. In Russia, the real-time gross settlement system was introduced in 2007.

An important stage in the development and reconstruction of payment systems in the segment of large payments is the creation of so-called "hybrid" systems(hybrid systems) that combine real-time cash transfers with a netting mechanism to save liquidity. There are several design options for such systems. In some cases, special settlement algorithms are used that allow making large and urgent payments on an individual basis in a continuous mode, and for other transfers use the offsetting procedure for counter payment orders of two or more settlement participants. Other options are based on the principle of continuous (bilateral or multilateral) offsetting of counter payments throughout the entire operating day (the so-called continuous net system). Various versions of this approach have been used in the systems of a number of countries - RTGS plus (Germany), PNS (France), CHIPS (USA), LVTS (Canada).

As a result, "hybrid" LVPS systems have taken an important place in the payment mechanism of developed countries. In 1999, they accounted for only 3% of the payment turnover of large systems (51% - for RTGS and 46% - for DNS). In 2005, the picture changed dramatically: “hybrid” systems served 32% of payments in the wholesale sector, another 65% - on RTGS and only 3% - on DNS | Bech, Preisig, Soramiki, 20081 [2].

The proliferation of large payment systems in the world has been accompanied by a rapid increase in the number of transfers and the amount of money that passes through them. In the United States, for example, the number of transfers via FedWire and CHIPS grew in 1985-2000. at a rate of 5-7%, respectively. The total annual amount of transfers passing through these two systems amounted to 750 trillion US dollars in 2006 (in 1995 - 100 trillion, an increase of 7.5 times). In addition, the sphere of large payments is distinguished by a high level of concentration of payment turnovers: the three largest wholesale systems (TARGET, FedWire, CHIPS) in 2006 accounted for 75% of the total amount of payments, and 6 large ones - 95% [3].

Another interesting phenomenon that has clearly manifested itself in the work of wholesale payment systems in recent years is the growth in the number and share of small transfers passing through the mechanism of these systems. For example, in FedWire, more than 2/3 of all payments are in the amount of USD 100,000 or less. The initiators of small transfers are attracted by such properties of wholesale PS as speed, reliability, instant finality of settlements. As a result, the border between large and small payments is gradually blurring when using different types of payment systems.

Apart from the United States, this trend is also observed in other countries. For example, in the Canadian LVTS, the average transfer is CAD 8 million and the median payment is CAD 50,000. In English CHAPS, the average transfer amount is £ 1.9 million, and the median payment is £ 25,000 [Bech, Preisig, Soramaki, 2008].

Despite these changes, large payments continue to dominate the total turnover of wholesale systems. So, in the FedWire system, 5% of large transfers account for 95% of the total amount of payments | Bech, Preisig, Soramaki, 2008, p. 70 |.

An important factor in the development of wholesale payments is the emergence and rapid growth of cross-border transfer systems. Until the early 1990s, wholesale PSs were used primarily to conduct transactions in local currencies within the national borders of individual countries. However, the growth of economic activity in the foreign economic sphere, the introduction of the euro and the transition to the conclusion of conversion currency transactions on the principle of payment versus payment (PvP) were a powerful incentive for the creation of systems of cross-border transfers [4].

According to the participants , these systems can be divided into local (local), when participants settlements are located within the same country, remote (remote is), when participants (banks) have a presence in the country where the payment system and cross-border (cross-border), where both the payer and the recipient of funds are located in different countries [Bech, Preisig, Soramiki, 2008]. Moreover, these systems can serve both homogeneous groups of participants and their different types simultaneously (for example, cross-border systems can also serve local participants).

Another sign for classification is the settlement currency. The systems can settle settlements in local currency , in one of the foreign currencies or in a multicurrency mode. For example, a number of large RTGS (FedWire, CHAPS, BOJ-NET) conduct payment transactions exclusively in local currency and for residents of their country. The Swiss SIC system has been making settlements for remote participants since 1998, i.e. banks located outside the country, if they meet the established criteria. In 2006, out of 331 settlement participants in SIC, 74 were classified as remote (Heller, Nellen, Sturm, 2000].

The introduction of the euro led to the emergence of systems that settle in one of the foreign currencies. Countries that have not joined the EM U, but wishing to carry out transactions using the euro, have established special settlement centers for such settlements (respectively CHAPS euro (Great Britain), E-RIX (Sweden) and DEBES (Denmark)). These systems were connected to TARGET, but with the introduction of TARGET-2 their status changed [5].

Another important institution in the era of cross-border settlements is the international system of conversion currency transactions CLS (Continuous Linked Settlement). It is operated by CLS Bank, which began operations in September 2002. Multicurrency transactions in this system are carried out on the basis of PvP, which dramatically reduces the risk of foreign exchange transactions. The Bank is an American lending institution with a special status, under the joint supervision of the Federal Reserve and the central banks of other countries, whose currencies participate in CLS settlements.

So, let's summarize some of the results of the current stage in the development of wholesale settlement systems. First, these systems have become central to the payment infrastructure of modern national economies.

Second, there is a process of accelerated proliferation and reorganization of gross real-time systems, with a sharp decline in the use of "clean" netting settlement systems. This reflects the desire to reduce the risk of settlement risks inherent in payment transactions.

Thirdly, one of the important design features of the modern evolution of LURB is the desire to combine the principle of instant payment finality with a liquidity saving mechanism. To this end, the so-called "hybrid" systems are gaining more and more popularity, where the principle of gross settlement is combined with various options for netting.

Fourth, the strengthening of integration processes in the world economy contributes to the rapid development of cross-border money transfer systems used for settlements in foreign currencies on a bilateral and multilateral basis.

• [1] At the same time, it should be avenged that practice has developed special mechanisms to protect nstto-systems from settlement risk, for example, depositing funds of participants or creating guarantee funds in case of shortage of funds for final settlement.
• [2] When calculating the specific gravity, data on the following systems were used: TARGET, FedWire, CHIPS, CHAPS, EUROl, SIC, LVTS, PNS, HKD-CHATS, K-RIX, MEPS, USD CHATS. The initial data are contained in the "Red Book" of the Committee on Payment and Settlement Systems.
• [3] The calculation was made on the basis of data from the "Red Book" of the Committee for Payment and Settlement Systems.
• [4] A similar settlement principle for conversion transactions provides for the final transfer of one foreign currency only if the final transfer of another foreign currency or currencies is made.
• [5] 3 E-RIX ceased to exist on January 1, 2007, and CHAPS euro will not be connected to TARGET-2.