February 6, 2009OENB, Wien

Global Trends in Large Value Payment System

Morten L. Bech1, Christine Preisig1 and Kimmo Soramäki2

1 Money and Payment Studies, FRBNY 2 Helsinki Univ. of Technology, www.soramaki.net

The views expressed in this presentation do not necessarily reflect those of the European Central Bank the Federal Reserve Bank of New York or the Federal Reserve System.

Ten Trends

1. Diffusion of Real Time Gross Settlement2. Take Off of Hybrid Systems3. Emergence of Cross Border and Offshore

Payment Systems4. The Rise of CLS5. Increasing Settlement Values and Volumes6. Shrinking Average Payment Size7. Falling Number of System Participants8. Extended Operating Hours9. Declining Transaction Fess10. Adoption of Common Standards for LVPS

Key Drivers

1. Diffusion of Real Time Gross Settlement

2. Take Off of Hybrid Systems

3. Emergence of Cross Border and Offshore

4. The Rise of CLS

5. Increasing Settlement Values and Volumes

6. Shrinking Average Payment Size

7. Falling Number of System Participants

8. Extended Operating Hours

9. Declining Transaction Fess

10. Adoption of Common Standards for LVPS

Technological change

Structural Changes

in Banking

Changes in

Central Bank Policies

Trend #1

1. Diffusion of Real Time Gross Settlement2. Take Off of Hybrid Systems3. Emergence of Cross Border and Offshore

Payment Systems4. The Rise of CLS5. Increasing Settlement Values and Volumes6. Shrinking Average Payment Size7. Falling Number of System Participants8. Extended Operating Hours9. Declining Transaction Fees10. Adoption of Common Standards for LVPS

The Diffusion of RTGS

• Historically, Deferred Net Settlement

• Values Concern about settlement risk (unwinding) Real Time Gross Settlement (RTGS)

• RTGS Liquidity needs Hybrid system: elements of DNS and RTGS

RTGS 2006RTGS 2006

S-curve

Trend #2

1. Diffusion of Real Time Gross Settlement2. Take Off of Hybrid Systems3. Emergence of Cross Border and Offshore

Payment Systems4. The Rise of CLS5. Increasing Settlement Values and Volumes6. Shrinking Average Payment Size7. Falling Number of System Participants8. Extended Operating Hours9. Declining Transaction Fees10. Adoption of Common Standards for LVPS

Mixing RTGS and Netting Features

• DNS systems adopt RTGS features → NewCHIPS, PNS

• RTGS systems adopt DNS features → RTGSplus, T2

Liquidity available/required

Lower bound Upper bound

De

lay

DNS (eod)

Pure RTGS

DNS, RTGS & Hybrid

We consider the following systems: Fedwire, CHIPS, CHAPS, SIC, TARGET, MEPS, K-RIX, LVTS, PNS, Euro1 and HKD CHATS. DNS in 1999: Euro1 and BoJ-NET. Hybrids in 1999: PNS and LVTS. RTGS. Hybrids in 2005: PNS, LVTS, CHIPS and RTGSplus. The value for RTGSplus was subtracted from the value of TARGET in computing the value settled via RTGS.

Trend #3

1. Diffusion of Real Time Gross Settlement2. Take Off of Hybrid Systems3. Emergence of Cross Border and Offshore

Payment Systems4. The Rise of CLS5. Increasing Settlement Values and Volumes6. Shrinking Average Payment Size7. Falling Number of System Participants8. Extended Operating Hours9. Declining Transaction Fees10. Adoption of Common Standards for LVPS

A LVPS Taxonomy

Settlement CurrenciesSettlement Currencies

LocalLocal ForeignForeign Multiple (PvP in FX Multiple (PvP in FX settlement)settlement)

Particip

ant T

ype

Particip

ant T

ype

DomesticDomestic

Fedwire, Fedwire, CHIPSCHIPS CHAPS, CHAPS, LVTSLVTS, ,

RIX, RIX, PNS, PNS, BoJNETBoJNET

USD CHATS USD CHATS EUR CHATSEUR CHATS

HKD, USD, EUR HKD, USD, EUR CHATS (PvP in CHATS (PvP in

CHATS)CHATS)

RemoteRemote SICSIC Euro-SICEuro-SIC

Cross BorderCross Border TARGET, EURO1TARGET, EURO1 Euro CHAPSEuro CHAPSCLS,CLS,

Rentas-CHATS Rentas-CHATS linklink

Cross Border Flows in TARGET1999 - 2002

Offshore USD

Offshore EUR

Trend #4

1. Diffusion of Real Time Gross Settlement2. Take Off of Hybrid Systems3. Emergence of Cross Border and Offshore

Payment Systems4. The Rise of CLS5. Increasing Settlement Values and Volumes6. Shrinking Average Payment Size7. Falling Number of System Participants8. Extended Operating Hours9. Declining Transaction Fees10. Adoption of Common Standards for LVPS

Has remote access to accounts with 15 Central Banks

Holds a multi currency account for each Settlement Member

CLS Bank is a CLS Bank is a multicurrency bankmulticurrency bank

Reserve Bank of Australia

European Central Bank

Swiss National BankUS Federal ReserveBank of Japan

Bank of England Bank of Canada

Monetary Authorityof Singapore

DanmarksNationalbank

Norges Bank Sveriges Riksbank

South African Reserve Bank

Hong Kong Monetary Authority

Reserve Bank of New Zealand

Bank of Korea

Overlapping RTGS systemsOverlapping RTGS systems

Asia/Pacific

EuropeEurope

North America

Europe

The Rise of CLS

CPSS surveys on FX settlement risk

Settlement Method Value 1998 (% of total Value)

2006 (% of total Value)

CLS (PvP) 2,091 0% 55%

Traditional correspondent banking 1,224 85% 32%

Bilateral netting 304

15%

8%

Other settlement methods 203 5%

Total 3,821 100% 100%

Trend #5

1. Diffusion of Real Time Gross Settlement2. Take Off of Hybrid Systems3. Emergence of Cross Border and Offshore

Payment Systems4. The Rise of CLS5. Increasing Settlement Values and Volumes6. Shrinking Average Payment Size7. Falling Number of System Participants8. Extended Operating Hours9. Declining Transaction Fees10. Adoption of Common Standards for LVPS

Slower Growth after 2000

US flows at par with GDP

Share of systems

Number of Transactions

0 50 100 150 200 250 300

K-RIX

MEPS

HKD CHATS

LVTS

BOJ-NET

PNS

CHAPS Sterling

EURO1

CHIPS

TARGET

Fedwire

SIC

Millions per year

Number of transactions 1999 Number of transactions 2005

Trend #6

1. Diffusion of Real Time Gross Settlement2. Take Off of Hybrid Systems3. Emergence of Cross Border and Offshore

Payment Systems4. The Rise of CLS5. Increasing Settlement Values and Volumes6. Shrinking Average Payment Size7. Falling Number of System Participants8. Extended Operating Hours9. Declining Transaction Fees10. Adoption of Common Standards for LVPS

Average Payment

0 10 20 30 40 50 60 70

SIC

EURO1

PNS

MEPS

CHAPS Sterling

HKD CHATS

Fedwire

CHIPS

LVTS

TARGET

K-RIX

BOJ-NET

1999 2005

Change in Average Payment Size

-100 -80 -60 -40 -20 0 20 40

HKD CHATS

TARGET

Fedwire

MEPS

LVTS

CHIPS

CHAPS Sterling

BOJ-NET

SIC

PNS

EURO1

K-RIX

Inflation adjusted change in payment size

Trend #7

1. Diffusion of Real Time Gross Settlement2. Take Off of Hybrid Systems3. Emergence of Cross Border and Offshore

Payment Systems4. The Rise of CLS5. Increasing Settlement Values and Volumes6. Shrinking Average Payment Size7. Falling Number of System Participants8. Extended Operating Hours9. Declining Transaction Fees10. Adoption of Common Standards for LVPS

Number of Participants

Fedwire 1 9,994 1 6,819 -32%TARGET 2 5,144 2 2,628 -49%BOJ-NET 3 409 3 357 -13%SIC 5 291 4 325 12%CHAPS 4 404 5 241 -40%HKD CHATS 6 151 6 129 -15%MEPS 7 136 7 111 -18%EURO1 9 72 8 75 4%CHIPS 8 77 9 48 -38%PNS 10 25 10 45 80%K-RIX 11 23 11 21 -9%LVTS 12 14 12 15 7%

Total Participants

2005Percentage

Change

Source: Bank for International Settlements

Note: For PNS the increase in the total number of participants is due to an increase in the number of indirect participants and can by and large be explained by a reclassification of their status that took place over the period.

System Rank

Total Participants

1999 Rank

Trend #8

1. Diffusion of Real Time Gross Settlement2. Take Off of Hybrid Systems3. Emergence of Cross Border and Offshore

Payment Systems4. The Rise of CLS5. Increasing Settlement Values and Volumes6. Shrinking Average Payment Size7. Falling Number of System Participants8. Extended Operating Hours9. Declining Transaction Fees10. Adoption of Common Standards for LVPS

LVPS Business Hours

LVPS Business Hours

0:00 3:00 6:00 9:00 12:00 15:00 18:00 21:00 0:00

PNS

EURO1

CHATS

MEPS

BOJ-NET

K-RIX

TARGET

CHAPS Sterling

LVTS

CHIPS

Fedwire

SIC

1997 2007

Trend #9

1. Diffusion of Real Time Gross Settlement2. Take Off of Hybrid Systems3. Emergence of Cross Border and Offshore

Payment Systems4. The Rise of CLS5. Increasing Settlement Values and Volumes6. Shrinking Average Payment Size7. Falling Number of System Participants8. Extended Operating Hours9. Declining Transaction Fees10. Adoption of Common Standards for LVPS

LVPS Pricing Schedules

Volume Value Time of Mode of based Based Day delivery Sender Total Sender Total

Fedwire Y N N Y 0.1 0.2 0.3 0.6TARGET Y N N N 1.1 1.1 2.4 2.4SIC N Y Y N 0.01 0.03 3.7 3.7Note: Total = Sender + Receiver, Exchange rate of May 25, 2007

Highest

USD Equivalent

Transaction feeLowest

0

0.5

1

1.5

2

2.5

3

3.5

Before 8am 8 am - 11 am 11 am - 2 pm After 2pm

CH

F p

er p

aym

ent

Sender ( under 100,000 CHF) Sender ( above 100,000 CHF) Receiver

Fedwire vs. CHIPS

Trend #10

1. Diffusion of Real Time Gross Settlement2. Take Off of Hybrid Systems3. Emergence of Cross Border and Offshore

Payment Systems4. The Rise of CLS5. Increasing Settlement Values and Volumes6. Shrinking Average Payment Size7. Falling Number of System Participants8. Extended Operating Hours9. Declining Transaction Fees10. Adoption of Common Standards for LVPS

Core Principles

No AssessmentSelf AssesmentFSAPSelf & FSAP

The Future

1. Diffusion of RTGS: Well under way – 93/174 CBs

2. Age of Hybrids: More to come, investment cycle

3. Cross Border and Offshore: Unique events, niche players

4. The Rise of CLS: Growing importance, Share ~ 50%, New markets

5. Increasing Values and Volumes: At the rate of GDP

6. Smaller Large Value Payments: Fees RTGS more attractive

7. Diminishing Membership: Consolidation is continuing

8. Approaching 24/7 payments: True 24/7 ?

9. Declining Transaction Fess: ITC cost

10. The Triumph of Common Standards: White collar welfare

A New Path?

• Check clearing, …

• Deferred Net Settlement

• Real Time Gross Settlement

• Hybrid System

Traditional Path

Canada

Emerging

Markets