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End of Day Net Settlement Systems (NSS) Real Time Gross Settlement Systems
(RTGS) Intra Day Net Settlement (Hybrid)
Systems Continuous Linked Settlement
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Traditional Approach Amounts are netted and One amount is paid or received across
settlement accounts with CB at end of day/period
Creates intra-day exposures Finality at end of ‘period’ Risk – position built up with a member
during the day will not be settled So – Collateral, Guarantees, Bilateral
debit/credit caps
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Helps preserve participants liquidity
Usually used for low value payments and paper based instruments
Lower cost Examples: UK cheque clearing, BACS, ACH in USA
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Cheque and Credit Clearing Company process
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Clearing cheques with cheque truncation
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Each payment settles singly and bilaterally across accounts at the settlement bank, usually the Central Bank e.g. Bank of England
Eliminates settlement risk
Designed to eliminate Herstatt risk (but does it?)
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Payments should arrive with value, availability and finality
Used for high value/urgent payments
More expensive than NSS
Examples: UK CHAPS, Fedwire in the USA, CHATS in Hong Kong
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Hong Kong Clearing House Automated Transfer System process (CHATS)
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Intra-day settlement at pre-defined periods
Intra-day finality Most located in Europe and handle
clearing of euro payments Examples - CHIPS (USA) - CLS
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Payment versus payment system CLS Services owns CLS Bank Inc, USA
an Edge Act Bank Main operations in London/USA Some 5 Trillion USD settled daily
(95% of daily traded volumes) Eliminates 4 trillion of settlement risk
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Used to settle FX transactions between banks real time
17 currencies 5 hour window (some exceptions) Reduces number of bank to bank
payments CLS is a common counter-party, payment
versus payment Reduces risk and costs of high volumes of
large value funds transfers Banks will obtain real-time information on
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There are some ‘oddballs’ London US Dollar Clearing London Currency Settlement Scheme Euro Clearing Hong Kong Currency Clearing
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Paper-based Cash Cheques Bank transfers or giros Postal giros Bills of exchange Promissory notes Banker’s drafts
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Electronic Funds transfer
Urgent wires Standard EFT
Automated clearing house payments Standing order Direct debit Electronic bills of exchange Plastic (credit, charge, cheque guarantee,
cash dispenser, debit) Financial EDI
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19
COMPANY ABC (SINGAPORE) COMPANY XYZ (HONG KONG)
BANK ABC (SINGAPORE) BANK XYZ (HONGKONG)
BANK DEF (USA) BANK UVW (USA)
PAYMENT INSTRUCTION
INVOICE
CREDIT ADVICE
ADVICE OF RECEIPT
Debit Co. ABC account
Debit Bank ABC account Debit Bank
DEF account
Debit Bank UVW
account
Credit Bank ABC account at Bank DEF
Credit Bank DEF account at Bank UVW
Credit Bank XYZ account at Bank UVW
Credit Co. XYZ account
MT103Payment Order
MT103Payment Order
MT210ADVICE TO
RECEIVE