Payments and Settlements Systems

Antoine Martin and James McAndrews

An Economic Analysis of Liquidity-Saving Mechanisms
• Liquidity-saving mechanisms (LSMs) are queuing arrangements for payments that operate alongside traditional real-time gross settlement (RTGS) systems.

1. Introduction

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• LSMs allow banks to condition the release of queued payments on the receipt of offsetting or partially offsetting payments; as a result, banks are less inclined to delay the sending of payments.

• An analysis of LSMs finds that these mechanisms typically perform better than pure RTGS systems when it comes to settling payments early.

• RTGS systems can sometimes be preferable to LSMs, such as when many banks that send payments early in RTGS choose to queue their payments when an LSM is available.

arge-value payments systems, used by banks to settle financial and commercial transactions, play a key role in the financial system. The importance of these payments systems can be illustrated by the large amounts they settle. Every year in the United States, the systems process value equal to approximately 100 times GDP. Innovations in the design of large-value payments systems have led to many improvements in their operations. For example, over the last twenty years, many countries have adopted real-time gross settlement (RTGS) systems for their large-value payments. In an RTGS system, each payment is settled individually, on a gross basis, at the time the payment is sent. RTGS systems offer many advantages—for instance, they limit the risk exposure of payments system participants and allow for rapid final settlement of payments during the day. However, RTGS systems require large amounts of central bank balances to function smoothly. More recent innovations have occurred in the design and implementation of various liquidity-saving mechanisms (LSMs) that are used in conjunction with RTGS systems.1 An LSM gives participants in the payments system an additional option not offered by RTGS alone:

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