Real-Time Gross Settlement: Why Resilient Systems are Vital

Since the failure of any RTGS platform could easily prove contagious, enhancing the resilience of each RTGS system is essential. Beginning in the 1980s, the central banks that operate payment market infrastructures (PMIs) around the world have gradually adopted RTGS of high-value payments (HVPs).

According to a study by the International Bank for Reconstruction and Development (IBRD, or World Bank) the volume of payments settled by major RTGS systems doubled between 2006 and 2009, while the average value of RTGS payments increased by 40%.

The main reason for this transfer of payment activity to RTGS systems is the reduction in counterparty credit risk, and the consequent mitigation of systemic risk. RTGS reduces counterparty credit risk in payments by settling transactions gross, one by one in real-time, instead of netting payments between counterparties and settling the net amount either at the end of the business day, or at regular intervals throughout the business day.

The shift to RTGS now has official sanction. Principles 8 and 9 of the 24 principles for the operation of financial market infrastructures published by the Committee on Payment and Settlement Systems (CPSS) and the Technical Committee of the International Organisation of Securities Commissions (IOSCO) in April 2012 set final settlement in central bank money, in real-time, as the global standard.

So it is no surprise that even automated clearing houses (ACHs) are now developing a variety of models designed to provide faster payment. Some are aiming at immediate clearing and settlement too, and are doing so with the encouragement of the central banks. ACHs, which process mainly low value payments (LVPs) nevertheless still net all payments they process, before settling them in the RTGS system.

Extending the Benefits

The securities markets are also benefiting from real-time settlement of transactions. Through services provided to custodian banks by central securities depositories (CSDs), the securities markets rely extensively on RTGS systems to provide final, irrevocable settlement in central bank money of the cash leg of securities transactions.

However, it is not only because they are vital to cash and securities settlement that RTGS systems are systemically important. They also play a vital role in the implementation of monetary policy. RTGSs are able to provide final, irrevocable settlement of transactions through the transfer of reserves held by banks at the central bank, which ensure they can always settle their obligations to each other.

In addition, the reserves are also a means by which central banks can inject and withdraw liquidity from the financial system.

Because RTGS systems are systemically important, the central banks that operate them must ensure they are resilient enough to withstand a variety of threats to their security and integrity. These include natural disasters, loss of essential services, data corruption, cyber-attacks, non-availability of staff, component malfunction, terrorism and war.

It is because RTGS systems face such a wide range of threats that the CPSS-IOSCO principles for financial market infrastructures emphasise not only real-time settlement in central bank money as the global standard, but also the need for operational contingency plans that guarantee continuity of service through both catastrophic and marginal disruptions.

Uninterrupted provision of RTGS services requires a high degree of resilience. In major markets, every RTGS system is supported by a complete back-up site, mostly run in so-called ‘hot standby mode’. This allows the back-up RTGS system to capture transaction information continuously, and so take over functions immediately in the event the primary site is disabled.

A second site is nevertheless vulnerable – particularly if it operates on the same technology as the primary site, or is not geographically remote from it. This is because these shortcomings mean it cannot cover the threat – however improbable or infrequent – of the total loss of both sites. For this reason some RTGS operators have built a third site, although this is an expensive option because it delivers additional resilience only if it is operated by separate staff on different technology in a remote location.

The characteristics of a truly effective resiliency plan therefore include:

  •  Affordability.
  •  Rapid cut-over to the new service.
  •  A geographically remote facility.
  •  Reduced reliance on local staff.
  •  Technical diversity.
  •  Independent data storage.
  •  Sufficient capacity to support existing volumes of business.
  •  Minimal impact on users.
  •  Availability of the service throughout the period of disruption, and
  •  (most important of all) The ability to capture a clear view of the intra-day balances at the point of failure, or to recreate it rapidly once the primary and secondary sites have failed.

A Five-year Initiative

Over the past five years, SWIFT has worked with a group of seven central banks to design a shared RTGS system back-up service which meets best practices, including the tests of affordability, capacity, rapid implementation, minimal impact on users, geographical remoteness and technical diversity.

Called the Market Infrastructure Resiliency Service (MIRS), it makes use of SWIFT technical platforms, storage facilities and messaging formats to capture transaction balances continuously, and so guarantee the ability of the operator to open the MIRS back-up service to the RTGS participants within no more than 2.5 hours by providing a clear view of the settlement position at the point of failure of the primary and secondary sites.

The service is easy to use and can operate for as long as a disruption persists, whether this is a matter of days, weeks or months. As a high proportion of RTGS systems in operation around the world already use SWIFT messaging over the SWIFT network, MIRS provides an innovative and cost effective back-up to existing contingency plans.

A white paper, which explores the need for greater resilience in RTGS systems and the capabilities of the MIRS service in greater detail, was published by SWIFT in July 2014.

Entitled ‘Reducing Risk and Increasing Resilience in RTGS Payment Systems’, the paper provides an overview of the payments systems landscape and the systemically important role of the RTGS. It describes the risk and resiliency issues that high-value payment market infrastructures face, the impact of the new regulatory benchmarks that are being set and the best practices currently being used in RTGS resiliency planning.

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