Learning Objectives:

  • Understand the design and operation of Real-Time Gross Settlement (RTGS) systems.

  • Identify major RTGS systems in the US, Europe, and globally.

  • Analyse risk and liquidity management in large-value payment systems.

  • Apply PFMI-based assessments to systemically important payment systems.

2.1 What is Real-Time Gross Settlement (RTGS)?

RTGS is a gross settlement system in which both processing and final settlement of funds transfer instructions take place continuously (i.e., in real time). The RUDN University syllabus covers “Specific features of large-value payment systems in selected countries: United States, European Banking Union” . The Uphilos Consultancy course covers “Large-Value Payment Systems and RTGS Platforms” as a core topic .

Key Features of RTGS:

  • Real-Time: Transactions are processed as they occur.

  • Gross Settlement: Each transaction is settled individually, without netting.

  • Finality: Settlement is final and irrevocable once completed.

  • Central Bank Money: Settlement occurs in accounts at the central bank, the ultimate risk-free settlement asset.

2.2 Major RTGS Systems

Fedwire (United States): The US Federal Reserve’s RTGS system, used for interbank and large-value commercial transactions. It is a systemically important payment system (SIPS).

TARGET2 / T2 (Europe): The European system for the settlement of central bank operations and large-value interbank payments. It is operated by the Eurosystem.

CHAPS (United Kingdom): The UK’s high-value clearing system, operated by the Bank of England.

CHIPS (United States): A private clearing system that processes large-value payments, often using a hybrid settlement model combining netting with real-time finality.

2.3 Risk and Liquidity Management

The Uphilos Consultancy course covers “RTGS design and operation: architecture, queuing, liquidity saving mechanisms, and settlement finality” .

Risk Management:

  • Credit Risk: Eliminated because settlement is final and irrevocable.

  • Liquidity Risk: Participants must have sufficient balances in their settlement accounts, leading to potential liquidity pressures.

  • Intraday Credit: Central banks often provide intraday credit to facilitate smooth settlement.

Liquidity Saving Mechanisms:

  • Queuing: Holding transactions until sufficient funds are available.

  • Liquidity Saving Mechanisms (LSMs): Algorithms that optimize the timing of settlement to reduce liquidity requirements while maintaining settlement finality.

2.4 PFMI-Based Assessments

The Uphilos Consultancy course covers “Apply PFMI-based assessments to large-value payment systems” . The Principles for Financial Market Infrastructures (PFMI), developed by the CPMI-IOSCO, provide international standards for systemically important payment systems.

Key PFMI Principles:

  • Legal Basis: Sound legal basis for each material aspect of the system.

  • Governance: Clear and transparent governance arrangements.

  • Risk Management: Comprehensive risk management framework.

  • Credit and Liquidity Risk: Management of credit and liquidity risks.

  • Settlement Finality: Definitive settlement at the end of the day.

  • Operational Risk: Robust operational risk management.

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