Real Time Gross Settlement

Real Time Gross Settlement
Name	Real Time Gross Settlement
Type	Payment system
Introduced	1960s–1990s
Area served	Worldwide
Currency	Multiple currencies
Founder	Central banks and clearinghouses

Real Time Gross Settlement Real Time Gross Settlement systems are specialized high-value payment infrastructures used by central banks and financial institutions for immediate transfer of funds, finality, and irrevocability. They underpin wholesale transactions among Federal Reserve Bank of New York, European Central Bank, Bank of England, Bank of Japan, and Reserve Bank of India, and interact with securities depositories such as Depository Trust Company, Euroclear, and Clearstream. These systems evolved alongside innovations by organizations like the Bank for International Settlements, Society for Worldwide Interbank Financial Telecommunication, World Bank, International Monetary Fund, and national authorities including the U.S. Treasury and Ministry of Finance (United Kingdom).

Overview

RTGS systems process individual payments on a gross basis in real time, providing immediate final settlement without netting. Central banks such as the Federal Reserve System, European System of Central Banks, Bank of Canada, Reserve Bank of Australia, and People's Bank of China operate or oversee RTGS systems alongside private operators like SWIFT and Clearing House Interbank Payments System. The architecture connects participants including commercial banks like JPMorgan Chase, HSBC, Deutsche Bank, Bank of America, and Barclays, and links to market infrastructures such as Chicago Mercantile Exchange, NASDAQ, London Stock Exchange, and Japan Exchange Group.

History and Development

Early concepts trace to high-value payment reforms after crises such as the Panic of 1907 and regulatory responses like the Glass–Steagall Act. The first operational RTGS-style services appeared in the late 20th century with implementations by central banks including the Bank of Japan and the Bank of England. Influential reports from the Basil Committee at the Bank for International Settlements and publications by the Committee on Payment and Settlement Systems guided adoption through the 1990s and 2000s. Modern drivers include post-crisis reforms following the Global Financial Crisis of 2007–2008, recommendations from the Financial Stability Board, and technological advances promoted by firms like IBM, Microsoft, Oracle Corporation, and SWIFT.

System Design and Operation

RTGS platforms use messaging standards and protocols often aligned with ISO 20022 and legacy SWIFT MT formats, and may integrate distributed ledger pilots by companies such as R3 and initiatives involving Hyperledger. Core components include queue management, liquidity-saving mechanisms, and payment-versus-payment links to central securities depositories like Euroclear UK & International. Settlement finality is enforced under legal frameworks influenced by statutes like the Payment System and Netting Act in various jurisdictions and court decisions in systems such as New York State and England and Wales. Operators deploy resilient infrastructure inspired by standards from International Organization for Standardization, National Institute of Standards and Technology, and cloud providers like Amazon Web Services, balancing availability, throughput, and message integrity.

Participants and Governance

Participants range from global banks (Citigroup, Societe Generale, Mitsubishi UFJ Financial Group) to nonbank entities authorized by regulators such as the Monetary Authority of Singapore, Hong Kong Monetary Authority, Banco de México, and Swiss National Bank. Governance involves central banks, supervisory authorities such as the European Banking Authority, and industry groups including The Clearing House, Global Financial Markets Association, and International Swaps and Derivatives Association. Legal oversight can involve ministries like the U.S. Department of the Treasury, tribunals, and legislative bodies such as the U.S. Congress or national parliaments when system rules, access, fees, and resilience are set.

Benefits and Risks

Benefits include reduced settlement risk, support for monetary policy operations by institutions such as the Federal Open Market Committee, and facilitation of market liquidity for venues like Intercontinental Exchange and London Metal Exchange. Risks encompass operational outages, cyber threats targeting entities like SWIFT, liquidity pressures during stress events exemplified by episodes at Long-Term Capital Management, and legal uncertainty in cross-border settlements involving jurisdictions like China and Russia. Risk mitigation involves intraday credit facilities, collateral frameworks linked to central bank balance sheets, recovery plans, and oversight by bodies like the Financial Stability Board and Basel Committee on Banking Supervision.

Global Implementations and Examples

Notable RTGS systems include Fedwire Funds Service in the United States, TARGET2 in the Eurozone, CHAPS in the United Kingdom, BOJ-NET in Japan, RITS in Australia, SIC in Switzerland, SADAD in Saudi Arabia, and RTGS.in operated by the Reserve Bank of India. Regional projects and links involve initiatives like SEPA for euro payments, cross-border links such as Linking of TARGET2 and CLS efforts, and market infrastructure collaborations exemplified by Multilateral Netting experiments in the Caribbean and Africa with institutions like the African Development Bank.

Regulatory and Policy Considerations

Regulators balance access, competition, and stability; policy instruments include settlement finality legislation, oversight frameworks by the Bank for International Settlements and Financial Stability Board, and interoperability guidelines from the Committee on Payments and Market Infrastructures. Cross-border coordination involves treaties, memoranda among central banks (for example, between the Federal Reserve Bank of New York and European Central Bank), and cooperation with supranational entities such as the World Bank and International Monetary Fund to address FX settlement risk and correspondent banking trends following guidance from the Basel Committee.

Category:Payment systems