Learning Objectives:

• Compare and contrast RTGS, DNS, and continuous settlement models.

• Explain the trade-offs between liquidity and credit risk in different models.

• Describe the evolution from batch processing to continuous settlement.

5.1 Real-Time Gross Settlement (RTGS)
As discussed, RTGS settles transactions individually and immediately . While it virtually eliminates credit risk between participants (as settlement occurs immediately), it places a high demand on liquidity. Participants must ensure they have sufficient funds in their settlement accounts at all times . To mitigate this liquidity risk, central banks often provide intraday credit .

5.2 Deferred Net Settlement (DNS)
In a deferred net settlement system, participants’ obligations are accumulated and netted throughout the day, with settlement occurring at the end of a predefined cycle (e.g., at the end of the day) . This model is more liquidity-efficient because participants only need to settle their net positions rather than the gross value of all transactions . However, it retains credit risk up to the point of settlement . If a participant fails to settle its net obligation, the other participants may be exposed to losses .

5.3 Continuous Settlement: A New Paradigm
The limitations of batch processing are driving a shift towards continuous settlement . The emergence of instant payment systems, such as The Clearing House’s RTP network in the U.S., the FedNow Service, and the European Union’s SEPA Instant Credit Transfer, represents a move to a 24/7/365 model that combines the speed of real-time clearing with final settlement, sometimes using innovative liquidity management tools . As highlighted by the Federal Reserve, only systems that operate with real-time gross settlement are classified as true “instant payment systems” .