How to Implement
Guidance
Minimize settlement time.
Instant, gross (per individual transaction) settlement is the ideal settlement model. Where it is not currently an option (i.e., the existing national payment infrastructure does not support it), evaluate the business case for updating existing infrastructure. Efforts toward instant settlement can also be taken by increasing the number of settlement windows during the day.
Allow all DFSPs to be direct settlement participants.
The Scheme should work with the regulator to ensure that all DFSPs can directly access and manage their own funding and balances. Typically, this ability is enabled by the financial regulator and/or the central bank, but Scheme rules should also ensure it.
Lower payment system risk with pre-funded DFSP balances.
By only allowing pre-funded balances, the Scheme can eliminate the possibility of settlement risk and ensure that payees have immediate funds availability from the transfer.
Provide tools to support liquidity management.
The Scheme should provide DFSPs with a mechanism, such as a dashboard or portal, to view the real-time balance in their settlement account at the designated settlement bank, and provide proactive notifications to DFSPs alerting them to the need to inject funds. Options should include automated transfers from other accounts and availability on a 24/7 basis and, ideally, also during the weekend.
Settle Cross-Currency transactions using Payment versus Payment.
Only settle an obligation in one currency if the settlement of the other currency also takes place. Scheme rules should minimize FX settlement risk in the system by requiring that the FX conversions are not unbalanced.
Avoid third currency conversions.
Avoid the additional cost introduced by foreign exchange conversions into a “third” or intermediary currency.
Why It Matters
This lowers costs by improving liquidity balances and minimizing the need for intra-day credit. The potential for systemic risk and costly failures are also minimized when outstanding obligations between DFSPs are low.
Seeing More Clearly
Select a lens to learn the “why” this practice.
Cross-Border
Cross-border transfers due to transactions are more complex and settlement needs are more expansive due to the cross-currency conversion and cross-jurisdiction operations. These complexities introduce potential time delays, costs and risks and are further exacerbated when currencies involved are illiquid. Intentional design choices is needed to address these potential challenges and increase the speed, reduce the cost, and lower the risks associated with settling cross-border payments.
Related Resources
Explore more practices
Review other L1P practices and learn more about how to apply them to your IPS.
