real-time gross settlement and hybrid payment systems: a comparison
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Real-Time Gross Settlement and Hybrid Payment Systems: A Comparison. Matthew Willison Bank of England The views expressed in this paper are those of the author, and do not necessarily reflect those of the Bank of England. Background. DNS versus RTGS credit risk versus liquidity demands. - PowerPoint PPT PresentationTRANSCRIPT
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Real-Time Gross Settlement and Hybrid Payment Systems: A
ComparisonMatthew WillisonBank of England
The views expressed in this paper are those of the author, and do not necessarily reflect those of the Bank of England.
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Background
• DNS versus RTGS
credit risk versus liquidity demands.
• Hybrids
no credit and settlement risk but more liquidity efficient (?).
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Literature Review
• BIS Report (1997)
• McAndrews and Trundle (2001)
• Roberds (1999)
• Simulations; e.g., Johnston et al. (2003)
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Aim of the paper
• Assess the welfare properties of RTGS and hybrid payment systems.
• But while allowing bank behaviour to fully depend on the payment system design in place.
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Criteria
• Liquidity demands (≡ Collateral posted)
• Speed of settlement ( system’s exposure to operational risk)
• First-best: - Total collateral posted is
minimised.
- All payments are settled early
in the day.
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The Model
• n (settlement) banks; n>2
• All payments have a value = 1
• Each bank has a single payment to send
to each other bank
• A payment between bank i and bank j;
i→j
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The Model
• Two periods: morning and afternoon
• Collateral costs:
- ¹ per unit in the morning
- ² per unit in the afternoon
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The Model
¹ ² a bank only posts collateral in
the morning that it uses in the morning.
• Morning payments can be used to make
afternoon payments.
• Afternoon payments can be used to repay
the CB at the end of the day.
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The Model
• Delay cost; incurred when a payment is
not settled in the morning.
• Delay cost, (i→j)
(i→j) takes one of n-1 possible values.
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The Model
(i→j)=(i→k) iff j=k
• Highest (i→j)>¹
• Lowest (i→j) ¹- ²
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The Model
• Delay costs are bank’s private information;
I.e., only i knows (i→j)
• A bank forms internal queue Qi
• Position of payment in Qi is inversely related to its delay cost.
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The Model
• Cancellation cost,
• Incurred when a payment is not settled in the afternoon, given that it is not settled in the morning.
> ²
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RTGS
Banks borrow liquidity from the CB
Banks makepayments
Banks borrow liquidity from the CB
Banks makepayments
Banks repaythe CB
Morning Afternoon
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RTGS
• Morning action:
• Morning action set:
• Afternoon action:
• Afternoon action set:
}},1{\},...,2,1{},1{{ ii QnQ
1ia
2ia
)\( 1ii aQ
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Afternoon
> ²; optimal for a bank to settle all remaining payments in the afternoon, for any
• Value of i’s afternoon payments is
},...,{ 111 naa
1)1( ian
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Morning
• A bank is affected by other banks’ morning
actions through effect on afternoon
collateral needs.
• Internal queue ordering is private
information a bank is uncertain about
the value of its incoming payments in the
morning.
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Morning
• Bank chooses morning action to minimise
expected total cost.
• Expected total cost = Morning collateral
cost + Delay cost + Expected afternoon
cost
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Morning collateral cost
Delay cost
Morning collateral cost + Delay cost
Total cost
Cost
Value of morning payments
0 1 n-1
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Equilibrium
• Equilibrium (in pure strategies)
*)(* 11iii aBRa
i*\* 12iii aQa
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Equilibrium
• Each bank settles at least one payment in the morning because (1)>¹
• {Q1,…,Qn} is not an eqm. because expected afternoon collateral costs = 0 and (n-1)<¹
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Hybrids
• Two ways of settling a payment: RTGS and offset.
• Offset: a payment has to be submitted to the central queue.
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Hybrids
• H1: Offset in the afternoon
• H2: Offset in the morning
• H3: Offset in both periods
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Hybrids
• Central queue transparency: - Opaque; a bank cannot see other banks’ payments in the central queue. - Visible; a bank can see payments to it in the central queue.
• May effect how well banks co-ordinate use of the central queue.
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Hybrids
• Split each period into two sub-periods.
• Sub-periods, 1a, 1b, 2a, 2b.
• Results for RTGS with four sub-periods are the same as those with two periods.
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Hybrids
• Placing a payment in the central queue in one sub-period is not ≡ a commitment to keep the payment in the central queue in subsequent sub-periods.
• Submission behaviour depends on what a bank expects other banks to do.
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Hybrids
there is the potential for co-ordination problems.
• Not guaranteed that visibility will overcome problems.
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H1
• If j→i is received in the morning, i→j is settled by RTGS in the afternoon.
• All RTGS payments settled in 2b.
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H1
• If j→i is not received in the morning, a bank submits i→j to the central queue in 2a if each other bank submits at least one payment.
• Because each payment should be offset with a positive probability.
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H1
• So all payments that can be offset will be
offset in 2a.
• If a payment is offset, needs no liquidity.
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H1
• If a payment is settled by RTGS in 2b, the
offsetting payment arrived in the morning.
So need no liquidity.
• Expected afternoon collateral = 0
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Morning collateral cost
Delay cost
Morning collateral cost + Delay cost
Total cost
Cost
Value of morning payments
0 1 n-1RTGS
H1
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H1
• Bank’s cost minimisation problems are disentangled from each other.
• Each bank settles the same value of payments in the morning (have the same cost structure).
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H1
• Value of morning payment in H1 value of morning payments under RTGS.
• Liquidity in H1 liquidity in RTGS
• H1 is not necessarily better than RTGS.
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H2
• In 2a, a bank submits all payments if each other bank submits at least one payment.
• Because each payment could be settled with positive probability.
• All payments offset in 1a.
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H3
• In 2a, a bank submits all payments if each other bank submits at least one payment.
• Because each payment could be settled with positive probability.
• All payments offset in 1a.
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H2 and H3
• First-best since all payments are offset ( no liquidity required) in sub-period 1a.
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Delay costs are private information
• Under H2 and H3 there exist ‘bad’ equilibria where the central queue is not used at all in 1a.
• But no intermediate cases because each payment could be settled with positive probability if each other bank submits 1 payment.
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Delay costs are private information
• If delay costs are public information we
can show there exist intermediate cases,
where some but not all payments are
submitted to the central queue in 2a.
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Conclusion
• The first-best is attained under Hybrid payment systems if offset is available in the morning.
• Offering offset in the afternoon can only be as good than RTGS.
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Conclusion
• Central queue transparency is unimportant.
• Maybe because of the information structure and that the cost of using the central queue = 0