Learning Objectives:

  • Distinguish between clearing and settlement.

  • Understand the transaction lifecycle.

  • Explain the role of central banks in settlement.

2.1 Clearing and Settlement Defined

The BSA course covers the “Global payments landscape, including clearing and settlement” . Key concepts include:

  • Clearing: The process of transmitting, reconciling, and confirming payment instructions prior to settlement.

  • Settlement: The actual transfer of funds between financial institutions.

2.2 Settlement Models

Different settlement models have different risk profiles:

  • Real-Time Gross Settlement (RTGS): Transactions settled individually in real time.

  • Deferred Net Settlement (DNS): Transactions are accumulated and netted, with settlement occurring periodically.

2.3 The Role of Central Banks

Central banks play a central role in settlement:

  • Settlement Accounts: Providing accounts for commercial banks to settle payments.

  • Lender of Last Resort: Providing emergency liquidity.

  • Oversight: Ensuring the safety and efficiency of payment systems.

 

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