A payment settlement system is a mechanism for settling a payment transaction. It can be made in money, security, a commodity, or any other obligation. This settlement is determined by the participants of the payment system. The types of payment instruments used in a payment settlement system are defined by the parties involved.
Real-time gross settlement
Real-time gross settlement (RTGS) systems are a type of payment settlement system that processes payment transactions instantly. They can reduce the risk of settlements by eliminating the time lag between payments. The benefit of RTGS systems is that they can handle a wider range of transactions, including time-sensitive and high-value payments. With RTGS, transactions can also take place across the East African Community (EAC) using multiple currencies. This feature of the payment settlement system makes it possible to transfer value between EAC countries and the Common Market for East and Southern Africa (COMESA).
RTGS allows payment settlements to occur immediately, reducing the risk of contracts being breached. Unlike DNS, RTGS payments happen throughout the day without the need to wait for a particular timeframe. Furthermore, because RTGS settlements are real-time, they can’t be canceled or delayed. This feature is one of the safest forms of payment settlement systems in the world.
RTGS has seen significant growth since it was first introduced. The number of transactions has increased by 7 percent on average every year. However, the amount and value of settlements have been more volatile, reflecting fluctuations in overall financial and economic activity. In 2008/09, RTGS experienced a significant downturn, associated with the global financial crisis. However, the system has recovered, with a record day of 52,120 transactions on 15 June 2010.
RTGS allows for immediate transfers of money and securities. Unlike traditional bank-to-bank transfers, RTGS requires no waiting period before a transaction settles. It also makes transactions irrevocable, which makes it suitable for high-value interbank transactions. Most RTGS systems are run by central banks.
Deferred net settlement
Deferred net settlement is a form of payment settlement that enables participants to settle interbank obligations without the need for final payment. This type of settlement system facilitates faster payments and mitigates risks associated with the settlement, such as credit and liquidity risks. The Bank for International Settlements defines faster payments as those that are available in real-time or near-real-time.
The process of net settlement occurs daily, and most financial institutions take part in it. It involves settling outstanding debits and credits. A more advanced method of settlement involves DNS, or Deferred Net Settlement, which is commonly referred to as a deferred net settlement. The system also provides the option to delay financial obligations or payments.
Deferred net settlement in the payment settlement process enables a grace period of up to two months after the date of settlement. Using this method, a clearinghouse processes the transactions and confirms the net settlement amounts for each participant at the end of the day. For example, if Bank A owes Bank B $600,000, the settlement would delay the payment by 60 days. This type of payment settlement system is used for many domestic and cross-border transactions and is responsible for nearly half of the domestic wire transactions.
Another method for payment settlement is called RTGS. It uses multilateral net settlements to settle some settlement obligations periodically. In Australia, the RTGS system was introduced on 22 June 1998 to reduce the settlement risk associated with high-value interbank payments and improve the efficiency of the payment settlement system. It is managed by the central bank of most countries.
Iberpay, a payment settlement system in Spain, offers a single interface for banks and enables them to manage liquidity and process payments instantly. It has 93 banking members and represents more than 97% of the Spanish payments market. The system is linked to Eurosystem and EBA Clearing services, ensuring reachability to over 2,500 banks in the SEPA region. The system’s maximum interbank execution time is 10 seconds, and the Spanish banking community has agreed on a 1.5-second limit.
Iberpay’s interbank instant payment services process more than a million instant credit transfers per day, with a total value of EUR480 million. In the past year, it has processed over 256 million instant credit transfers through its interbank service. It serves innovative payment services, including Bizum, and is responsible for processing more than 110 billion euros.
The Iberpay payment system provides a single interface for credit transfers. The company has agreements with most major European banks and is developing intense strategic activity across Latin America. In addition to its domestic services, Iberpay also supports cross-border activity through its TIPS connection. This makes it an integral part of a country’s payment infrastructure.
Iberpay and EBA CLEARING have partnered to provide the infrastructure necessary for PSPs to make instant payments across Europe. These two companies have created a new service called SRTP, which enables PSPs to exchange real-time messages with one another in split seconds. This technology will help banks to provide an easy and convenient way to settle payments.
The Iberclear payment settlement system consists of a web application that is shared by issuers and participants. It provides technical support for connectivity across the internet and manages access and permissions for users and administrators. Participants who are indirectly connected to T2S will use the ISO15022 standards to send messages to IBERCLEAR, which in turn will transform these messages into ISO20022 format and re-send them.
IBERCLEAR also maintains a book entry register of tradable securities. It processes the transfer of securities and cash in a systematic way. It also performs matching transactions between investors and issuers. IBERCLEAR also establishes links with other Central Securities Depositories to provide a range of services. In addition, it provides services for new issues, order routing, fee collection, and tax services.
The IBERCLEAR payment settlement system promotes auto-collateralisation functionality, which optimizes settlement. This function enables participants to generate intraday credit and liquidity through their DCA. Each DCA is linked to a securities account specifically opened for the supply of collateral. This liquidity is then used to settle the transaction. The participant can also delegate the selection of securities to be used as collateral.
IBERCLEAR has signed a contract with the Eurosystem to facilitate settlement in central bank money through TARGET2-Securities. This partnership was established in September 2017. It provides a variety of technical and operational services related to securities registration and settlement. It has also signed agreements with other CSDs to provide access to their securities.
The CLS Bank payment settlement system enables payment settlement of foreign exchange (FX) deals between two participating CLS banks. To process a CLS payment, the participating bank must be a CLS Participant, a CLS Directory, or a CLS Settlement Member. Each participant has a BIC that they use to identify themselves. It is important to note that the BIC for a CLS Participant is different from the BIC for the counterparty.
The CLS payment settlement system has a unique feature that enables it to aggregate and consolidates smaller transactions. It works by calculating the funding requirements of each settlement member on a multilateral netted basis. This reduces the cash required to settle all payment instructions. The process also reduces the number of settlements for each settlement member by allowing participants to transfer only their net payment obligations.
The CLS payment settlement system operates from London and can react quickly to changes in global financial markets. The system utilizes a five-hour settlement window that overlaps the operating hours of major financial institutions. The settlement window starts at 7:00 am Central European Time and ends at noon. It settles more than half of all foreign exchange transactions worldwide.
The CLS payment settlement system has become a popular choice for international banks that use it to settle FX trades. It enables international banks to eliminate the risk of non-payment. International banks that use this system have been among the first to adopt it. CLS is a unique payment settlement system that has helped international banks reduce their FX settlement risk. Specifically, the CLS system eliminates the “Herstatt risk,” which was created by the bankruptcy of the German bank Herstatt. Herstatt’s American counterparties had unsecured claims due to the time difference between the two banks.
To use the CLS system, users must specify the type of deal and currency, as well as the counterparty. The system also checks whether the transaction is in a CLS currency. If it is not, the transaction will be processed as an FX transaction.