Optimizing Liquidity Usage and Settlement Speed in Payment Systems

The operating speed of a payment system depends on the stage of technology of the system's communication and information processing environment. Frequent intraday processing cycles and real-time processing have introduced new means of speeding up the processing and settlement of payments. In a real-time environment banks face new challenges in liquidity management. They need to plan for intraday as well as interday fluctuations in liquidity. By employing various types of hybrid settlement structures, banks may be able to even out intraday fluctuations in liquidity demand. The aim of this study is to develop a framework for analysing fluctuations in liquidity demand and assessing the efficiency of different settlement systems in terms of speed and liquidity needs. In this study we quantify the relationship between liquidity usage and settlement delay in net settlement systems, real-time gross settlement systems and hybrid systems, as well as the combined costs of liquidity and delay in these systems. We analyse ways of reducing costs via optimization features such as netting of queues, offsetting of payments and splitting of payments. We employ a payment system simulator developed at the Bank of Finland, which enables us to evaluate the impact of changes in system parameters and thus to compare the effects of alternative settlement schemes with given payment flows. The data used covers 100 days of actual payments processed in the Finnish BoF-RTGS system. Our major findings relate to risk reduction via real-time settlement, effects of optimization routines in hybrid systems, and the effects of liquidity costs on banks' choice of settlement speed. A system where settlement takes place continuously in real-time and with queuing features is more efficient from the perspective of liquidity and risks than a net settlement system with batch processing. Real-time processing enables a reduction in payment delay and risks without necessarily increasing liquidity needs. Participants will operate under immediate payment/settlement if liquidity costs are low enough relative to delay costs and if the liquidity arrangements are sufficiently flexible. The central bank can therefore support risk reduction and payment speed objectives by providing low cost intraday liquidity as well as more flexible ways for participants to add or withdraw liquidity from the system. Optimizing and gridlock solving features were found to be effective at very low levels of liquidity. The efficiency of the different optimization methods for settlement systems are affected by the actual flow of payments processed. Gains from netting schemes with multiple daily netting cycles were found to be somewhat more limited.payment systems; clearing/settlement; liquidity; efficiency; gridlock

Simulating interbank payment and securities settlement mechanisms with the BoF-PSS2 simulator

The simulation technique provides a new means for analysing complex interdependencies in payment and securities settlement processing. The Bank of Finland has developed a payment and settlement system simulator (BoF-PSS2) that can be used for constructing simulation models of payment and securities settlement systems. This paper describes the main elements of payment and settlement systems (system structures, interdependencies, processing steps, liquidity consumption, cost and risk dimensions) and how these can be treated in simulation studies. It gives also examples on how these elements have been incorporated in the simulator, as well as an overview of the structure and the features of the BoF-PSS2 simulator.simulations; simulator; payment systems; clearing/settlement; liquidity

Global trends in large-value payments

Globalization and technological innovation are two major forces affecting the financial system and its infrastructure. Perhaps nowhere are these trends more apparent than in the internationalization and automation of payments. While the effects of globalization and technological innovation are most obvious on retail payments, the influence is equally impressive on wholesale, or interbank, payments. Given the importance of payments and settlement systems to the smooth operation and resiliency of the financial system, it is important to understand the potential consequences of these developments. This article presents ten major long-range trends in the settlement of large-value payments worldwide. The trends are driven by technological innovation, structural changes in banking, and the evolution of central bank policies. The authors observe that banks, to balance risks and costs more effectively, are increasingly making large-value payments in real-time systems with advanced liquidity-management and liquidity-saving mechanisms. Moreover, banks are settling a larger number of foreign currencies directly in their home country by using offshore systems and settling a greater number of foreign exchange transactions in Continuous Linked Settlement Bank or through payment-versus-payment mechanisms in other systems. The study also shows that the service level of systems is improving, through enhancements such as longer operating hours and standardized risk management practices that adhere to common standards, while transaction fees are decreasing. Payments settled in large-value payments systems are more numerous, but on average of smaller value. Furthermore, the overall nominal total value of large-value payments is increasing, although the real value is declining.Payment systems ; Electronic funds transfers ; Banks and banking - Automation ; Interbank market ; Globalization

Pankkien välisten maksujärjestelmien verkostotopologia, toimintamekaniikka ja käyttäytymisdynamiikka

The financial crisis of 2007-09 showed that financial institutions are highly interconnected and that the dynamic behavior of complex financial systems is hard to foresee. This Dissertation applies and develops new quantitative methods that describe the interbank payment functions of the financial system, both during normal circumstances and during times of crisis. First, it describes the topology of interactions among financial institutions using methods developed in network theory. Using empirical analysis of transaction data from the Fedwire interbank payment system of the Federal Reserve, it finds that the payment networks are complex with scale-free degree distributions and contain core banks that process a very high proportion of the total value. Second, it develops simulation models of the interbank payment systems and provides approximations of their liquidity flow mechanics. The simulation models are used to evaluate the efficiency and safety of alternative system designs. Third, it proposes an agent-based model of the interbank payment system and derives a liquidity demand function for it. The model is also used to forecast the collective behavior of banks when mechanisms that allow them to save liquidity are introduced to the system.Vuosien 2007-2009 finanssikriisi osoitti, että rahoituslaitokset ovat tiiviisti kytköksissä toisiinsa ja että kompleksisen rahoitusjärjestelmän dynaamista käyttäytymistä on vaikea ennustaa. Väitöskirjassa sovelletaan ja kehitetään uusia matemaattisen mallintamisen menetelmiä, jotka kuvaavat rahoitusjärjestelmän maksuliiketoimintoja sekä normaaliolosuhteissa että kriisiaikana. Ensiksi väitöskirjassa kuvataan rahoituslaitosten vuorovaikutussuhteita verkostoteorian avulla. Empiirinen analyysi Yhdysvaltain keskuspankin Fedwire -järjestelmän maksuliikeaineistolla osoittaa verkkojen olevan kompleksisia ja mittakaavasta riippumattomia. Verkkojen ytimenä toimivien pankkien havaittiin suorittavan suurimman osan maksuliikkeestä. Toiseksi väitöskirja kehittää maksujärjestelmien simulointimalleja ja approksimaatioita niiden likviditeettivirtojen mekaniikasta. Malleja käytetään erityyppisten maksujärjestelmien tehokkuuden ja turvallisuuden arvioimiseen. Kolmanneksi väitöskirjassa esitetään agenttipohjainen malli maksujärjestelmistä ja johdetaan sen avulla likviditeetin kysyntäfunktio. Mallia käytetäänlisäksi pankkien kollektiivisen käyttäytymisen ennustamiseen, kun järjestelmään lisätään likviditeettiä säästäviä toimintamekaniikkoja