Risk control methods in net systems and RTGS

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Unlike RTGS, net systems do not provide instant payment finality, i.e. final completion of the operation with minimal lag. In addition, the net system operator does not provide overdraft. During the day, participants in net settlements lend to each other, but this does not require them to actually transfer money, since their operations (and net positions) at various times of the day are considered conditional.

If the debtor bank is unable to repay its debt by the time the day is summed up, then in DNS systems that do not have special protection, the payments of this bank for the day will be canceled, and the operations of other banks will be recalculated. Such a procedure, called unwinding, can create a domino effect and cause the insolvency of other participants in the settlements.

To mitigate risks in net systems, a number of measures are used in settlement practice:

• 1. Introduction of financial soundness standards for banking institutions wishing to join the payment system.
• 2. Establishment of bilateral credit limits (net credit caps) by each settlement participant in relation to each other participant. This limit limits the possible gap between received and sent payments for each pair of settlement participants. This measure reduces possible losses in the final settlement of transactions.
• 3. Conclusion of agreements on the distribution of losses in the event of default of one or more settlement participants. Typically, the amounts contributed by individual banks to cover outstanding debt are proportional to the credit limits set by those banks in relation to bankruptcy [1].
• 4. Establishing a net debit cap for each participant, limiting the amount of his possible intraday overdraft in relation to other participants in the system.
• 5. The Federal Reserve's current settlement risk control program, set out in a special regulation | see: The Federal Reserve System, 20051, contains a number of recommendations for large multilateral cash and securities settlement systems. These rules also apply to electronic settlement and check clearing systems in the retail sector (ACS, credit and debit card settlement systems, check clearing houses, etc.).

In recent years, many central banks have adopted special programs that formulate principles for organizing effective risk control in large payment systems. It was already mentioned above about the document KP PC "Basic principles for systemically important payment systems" "(2001). Based on this report, the US Federal Reserve System has recommended the following measures to protect payment systems:

• 1. A clear identification of all potential risks arising in the course of the operation of the system or the settlement of payments. At the same time, it is necessary to identify and assess both the risks of the system operator and its participants, and the risks of other operational links (settlement agents, providers, depositories, etc.). An important task is to prevent the accumulation and transformation of risks that threaten the stability of the system.
• 2. Creation of reliable mechanisms of internal control over risks. The responsibility of the management of the payment system is to ensure the transparency of the objectives and methods of control, a clear distribution of responsibility between the various hierarchical levels of management structures. Information about risks received by the internal and external audit services should be received in a timely manner and used in making management decisions.
• 3. Establishing the rules and procedures required to control risks. In this regard, it is necessary to determine the key parameters of those mechanisms that are responsible for suppressing risks and preventing them from escalating into systemic risk (for example, developing criteria for admission to the system, taking into account the financial situation and operational readiness of the participant, determining the conditions for the final settlement of settlements, applying collateral, etc.).
• 4. Allocation of financial and material resources necessary for the successful implementation of the planned activities. The systems must be staffed by qualified personnel, have all the necessary technological and informational structures.

The specific mechanisms used in national and international large payment systems to organize settlements and maintain an acceptable balance between liquidity and risk will be discussed in the next section.

• [1] In some payment systems, a special insurance fund will be created to cover losses in case of default of one of the settlement participants. In this case, all payments of the bankrupt bank will not be canceled. For example, in 1990 CHIPS established a $ 4 billion insurance fund for this purpose.