Central Bank Digital Currency. From the World Economic Forum. Drew Propson 2024

Modernizing Financial Markets with Wholesale Central Bank Digital Currency.
From the World Economic Forum.
Drew Propson, Head, Technology and Innovation in Financial Services, World Economic Forum, and David Treat, Senior Managing Director, Innovation Incubation Group Lead, Accenture.

This document is published by the World Economic Forum as a contribution to a project, insight area or interaction.
The findings, interpretations and conclusions expressed herein are a result of a collaborative process facilitated and endorsed by the World Economic Forum, but whose results do not necessarily represent the views of the World Economic Forum, nor the entirety of its Members, Partners or other stakeholders.

Foreword.

Over 98 percent of the global economy’s central banks are researching, experimenting, piloting or deploying central bank digital currency (CBDC) to determine how to modernize the capabilities of and improve access to central bank money (CeBM). An opportunity exists to make use of ongoing innovations in CeBM to modernize wholesale financial markets by enhancing systemically important payments between institutions. These markets demand secure and efficient settlement infrastructure from participants to promote financial stability, enable domestic and international trade, and create economic opportunities.

Central banks are modernizing real-time gross settlement (RTGS) systems, the predominant wholesale funds transfer system, and wholesale CBDC (wCBDC) represents an opportunity to address existing and emerging industry challenges across interbank payments and securities transactions. Meanwhile, non-CBDC payment instruments are arriving on the scene reserves-backed digital currencies, RBDC’s, deposit tokens, DT’s and fiat-backed stablecoins, FBS’s. These instruments are continually challenging our collective view of digital money. With this backdrop and a recent survey finding that there could be 24 live CBDC’s by 20 30, the importance of clarifying the role of CeBM and wCBDC in the next generation of wholesale financial markets is underscored, and this report intends to deliver upon that goal. Central banks, commercial banks and financial market infrastructures (FMIs) like custodians, depository institutions, exchanges, clearinghouses and settlement agents seek to better understand wCBDC’s value proposition. In this context, the World Economic Forum has collaborated with Accenture to articulate how a wCBDC might provide differentiated value. We took a holistic view of the relevant industry challenges to produce practical insights for policy-makers and the private sector’s planning efforts to realize the full potential of wCBDC, if pursued. Importantly, deep public private sector collaboration is necessary to modernize wholesale financial markets securely and efficiently.

Preface.

The financial sector is on the precipice of the next phase of wholesale central bank digital currency (wCBDC). In late 2023, Switzerland saw the first-ever live wCBDC issued to settle a digital bond transaction as part of a limited phase pilot. In Asia and the Middle East, Project mBridge is redefining cross-border payments using wCBDC by expanding its observing members to 25 central banks and institutions ahead of its minimum viable product launch this year. The European Central Bank (ECB) has also begun testing wCBDC on distributed ledger technology for securities and foreign exchange transactions. The Bank for International Settlements (BIS) general manager, Agustin Carstens, stated that wCBDC should be “taken for granted”, noting its expected broad adoption. With more than 200 central banks, over 130 regulated financial market infrastructures (FMIs) and a large proportion of economic activity that relies on wholesale financial markets, the question of wCBDC’s value proposition comes to the forefront.

While wCBDC’s are already being used in limited cases, wCBDC systems are still a new concept. The broad availability of wCBDC systems will depend on policy choices focused on financial stability and safe and sound market practices. The legal and regulatory elements that will govern the possibility of widespread use of wCBDC have an unknown timeframe. Thus, private-sector solutions may grow alongside wCBDC development, and the outcome of regulations will influence the future mix of payment instruments.

Executive summary.

This report explores the potential of wholesale central bank digital currency to address challenges in financial markets through a global multi-stakeholder approach.
Central bank money (CeBM) is crucial for interbank payments and securities transactions because it is virtually free of credit and liquidity risk, enables institutions to reach settlement finality and promotes financial stability. CeBM is ideal for systemically important transactions despite the emergence of alternative payment instruments. Wholesale central bank digital currency (wCBDC) is a form of CeBM that could unlock new economic models and integration points that are not possible today. wCBDC’s promise to preserve the role of CeBM as a credit risk-free payment instrument by providing a foundational layer for digital payments in the next generation of financial markets.
Four areas of differentiated value for wCBDC’s are highlighted:
Realizing a global settlement window by harmonizing foreign exchange (FX) and securities markets settlement times to overcome operational hour disparities among key trading corridors.
Expanding payment-versus-payment arrangements through cost-effective solutions that can support a diversity of currencies to enhance currency liquidity.
Mutualizing data across parties by securely transmitting settlement data across parties and jurisdictions to support automation, reduce settlement risk, and enhance trade and post-trade activities.
Tokenizing credit risk-free settlement media for settling tokenized securities and supporting emerging tokenized payment instruments.

These findings suggest wCBDC systems are well-positioned to modernize cross-border transactions, especially those involving multiple parties and assets like FX or securities. There is a set of persistent industry challenges that require modernization beyond introducing a new payment innovation. Further evidence is needed to conclude whether wCBDC can effectively address: liquidity management optimization, CeBM accessibility, compliance by design and new and existing system interoperability. This report offers a set of calls to action for the industry to consider and continue advancing the global dialogue in these areas. Real-time gross settlement (RTGS) systems and legacy infrastructure are being modernized to meet evolving demands, and these systems will exist in parallel with wCBDC. Likewise, privately issued reserves-backed digital currencies, RBDC’s, deposit tokens DT’s and fiat-backed stable coins FBS’s are examined to distinguish their potential role with wCBDC’s and envision a digital payments ecosystem where a diverse set of payment options coexist. Policy-makers, financial market infrastructures and private sector leaders should apply these insights to their respective jurisdictions to ensure a more efficient, responsible and secure financial future.

Introduction.

Through a global multistakeholder approach, this report explores how wholesale central bank digital currency could address challenges in financial markets.

Scope: This report proposes areas where wholesale central bank digital currency (wCBDC) could uniquely generate differentiated value and considers what role other emerging payment systems may play
This report will:
Examine, Advise, Outline and Consider.

Research methods:
Desk research: that analysed 200 plus industry reports to establish a baseline of findings.
Expert interviews with more than 50 experts representing public and private sector stakeholders.
Steering committee of ten leaders from leading institutions to advise on strategic direction.
Community of over 100 expert members representing more than 60 institutions.

Foundational key concepts.

This report mentions a wide range of industry terms that are summarized here in alphabetical order.

Atomic settlement.
The Bank for International Settlements (BIS) defines atomic settlement as the “use of a smart contract to link two assets to ensure that the transfer of one asset occurs if and only if the transfer of the other asset also occurs.” It is important to note that atomic settlement includes both the instant and simultaneous transfer of assets. Atomic settlement can also be achieved without distributed ledger technology (DLT) through programmatic functions and codified rules.
The two types of atomic settlement relevant for this report are:
Delivery versus payment (DvP): the exchange or concurrent transfer of an asset like a security (delivery) for a cash leg (payment).
Payment versus payment (PvP): the exchange or concurrent transfer of two cash legs, typically foreign exchange (FX).
Central bank money.
The BIS states, “A central bank issues public money via banknotes and central bank reserves.” Central bank money (CeBM), in the wholesale context, exists in the form of reserves held at a central bank on behalf of institutions and is accessed through an electronic system that manages participant obligations. M0 money includes CeBM and is the ultimate and final form of settlement because it is virtually free of credit risk, except for sovereign credit risk, for example, a government could be unable or unwilling to meet its credit obligations, which impacts the value of its currency. With the proper legal backing to govern the transactions, commercial banks and other financial institutions use CeBM to facilitate settlement finality.

Commercial bank money.
A commercial bank liability in the form of deposits held at the commercial bank, which can be used for settlement purposes. This money constitutes a significant portion of the global money supply and is a form of private money created when banks extend loans.
Deposit tokens.
For this report, deposit tokens are defined as a form of money that is a commercial bank liability and represented as a token that operates within the know-your-customer (KYC) boundaries of the issuing banks. This instrument is reserved for commercial and retail use, intra-bank payments, such as a bank making internal book entries, and payments between two or more banks.

Fiat-backed stable coins.
A form of privately issued money representing fiat currency values commonly found on block chains, distributed ledgers. They maintain 1 to 1 convertibility with the underlying currency through the issuer. This instrument is backed 1 to 1 by reserves of high quality and liquid cash-like assets such as short-term treasury bills (T-bills), treasury repurchase agreements (repos) and balances at commercial bank deposits. The total supply of the tokens will at least match how much they have backed by cash and cash equivalents (backing can have an additional capital buffer).
Reserves-backed digital currencies.
A privately issued payment instrument backed 1 to 1 by central bank reserves, and a bankruptcy-remote digital currency secure from other creditors in the case of operator and participant default. Sometimes colloquially known as a “synthetic CBDC”, which is a misleading term because it implies central bank backing. RBDC is not CeBM. Per its community, this report proposes a more accurate designation: reserves-backed digital currency.
Real-time gross settlement, RTGS, system.
The predominant central bank-supervised or operated settlement system type that achieves settlement in CeBM in real-time and transaction-by-transaction.
Wholesale CBDC.
There are multiple definitions of wCBDC, but for this report, a wCBDC is defined as a tokenized CBDC designed for interbank payments and securities transactions between commercial banks, financial institutions and possibly certain global corporations.

Wholesale financial markets use cases.

To examine opportunities to modernize financial markets, this report focuses on interbank payments and securities transactions.
While there are many relevant use cases, this report focuses on two wCBDC use case areas: interbank payments and securities transactions because these represent fundamental areas of wholesale financial markets.
Interbank payments.
Interbank payments involve payments in CeBM made between FI’s.
One: Domestic payments.
Settle payment obligations between banks and other FI’s within a jurisdiction, whether a single payment leg (P) or two payment legs, Payment versus payment.
Two: Cross-border payments via nostro accounts.
Note the words “Nostro” and “Vostro” come from the Italian Meaning Ours and yours, respectively.
An example of an American Nostro Account would be a New York Citycorp account with the bank of Italy holding Euro’s.
Settle cross-border payments between central banks, banks and other FI’s located in different jurisdictions (P, Payment versus payment).
Three: Cross-border payments via central bank accounts
Provide currency liquidity across jurisdictions using central bank infrastructure arranged by a market maker or dealer to fund crossborder payments, Payment versus payment.
Securities transactions.
Securities transactions represent payments in CeBM as the “cash leg” in transactions.

One: Delivery versus payment for securities settlement.
Settle securities trade activities involving equities and fixed-income instruments domestically and cross-border, including tokenized securities, Delivery versus payment.
Two: Collateral and liquidity management.
Serve as a payment instrument to be posted as collateral or used to purchase or acquire intraday liquidity, Payment versus payment, Delivery versus payment.
Three: Post-trade operations.
Facilitate post-trade settlement and operations for securities, which is a core subsequent process to DvP for securities settlement, either Payment versus payment, or Delivery versus payment.

The digital money continuum.

Money takes many forms, and the ongoing digitization of cash is creating alternative payment instruments that are increasingly challenging the status quo.

Money is often considered a payment instrument issued by a sovereign entity, like a central bank issuing public money. However, money can also be private, including when commercial banks take customer deposits and extend credit for loans, thus creating commercial bank money. Further, non bank money is another form of private money whereby licenced FI’s, like money transmitters, can issue money.
CeBM is most suitable for interbank payments and securities transactions because it:

Carries no credit or liquidity risk: The Principles for Financial Market Infrastructures (PFMI) advises CeBM for systemically important transactions where practical and available to avoid credit and liquidity risks.
Facilitates settlement finality: A bankruptcy-remote payment instrument with the proper legal backing governs the transactions to facilitate settlement finality, which is the irrevocable and unconditional transfer of an asset or financial instrument.
Maintains financial stability: CeBM promotes the relevance and role of a virtually credit-risk-free payment instrument in financial transactions and supports existing credit creation processes.

Note: The table in the report represents an aspirational classification of digital monies that are pegged to fiat currencies. The exact designation of digital monies will vary depending on the relevant rules and regulations in a given jurisdiction. Many instruments, such as crypto-assets, are intentionally excluded.

Considering a tokenized wholesale CBDC.

While there are still several views on this topic, this report proposes that tokenization differentiates wCBDC from conventional systems. Tokenization generally refers to using technology to create digital tokens representing an asset or an underlying asset that can then be issued, traded and managed on compatible platforms. DLT and blockchain are often conflated with tokenization. However, tokenization is also possible through centralized techniques. The desired business outcomes driven by tokenization are:

Proof of value: Provides evidence or verification that an asset has a certain value or uniqueness.

Proof of ownership: Establishes unambiguous ownership and assigns agency of the asset to the rightful owner.

Proof of transaction: Produces a verifiable record to provide transaction history and evidence of settlement.

TABLE Two. Conventional vs tokenized transactions.
Conventional compared to Tokenized.
Proof of value. For a Conventional Transaction, Value is proven through the transfer of physical assets or electronic book entries facilitated by trusted intermediaries.
For a Tokenized Transaction, is established by ownership and transfer of digital tokens, which are validated programmatically.
Proof of ownership.
For a Conventional Transaction, Ownership is evidenced by legal documents or centralized databases maintained by trusted intermediaries.
For a Tokenized Transaction, Ownership is encoded in digital tokens, ensuring permissioned access to the transfer records.
Proof of transaction.
For a Conventional Transaction, Transaction proof is generated through receipts or records by centralized entities like banks or payment processors.
For a Tokenized Transaction, Transactions are recorded on a shared system, providing evidence of occurrence to the involved parties.

Conventional versus tokenized wholesale payment and settlement.
Note: This stylized diagram simplifies the comparison between conventional and tokenized by comparing the two in a domestic context. Also, the distinction between central bank-operated and supervised infrastructure is jurisdiction-dependent.

For a conventional Wholesale payment and settlement.
The Central Bank has a two way interaction with the Commercial banks.
The RTGS system has a two way interaction with the FMI’s “A” and B.
For a Tokenized Wholesale payment and settlement.
Users of a book-entry-based RTGS system with designated accounts can initiate and submit transactions to the central bank-operated settlement infrastructure for validation.
The central bank validates the transactions and updates respective participant balances in the RTGS system, resulting in each participant updating their internal books and core banking systems.

For a tokenized Wholesale payment and settlement.

The Central Bank operates the infrastructure, within which:
Commercial banks have two way interactions, and two way interactions with FIM’s, sending and receiving tokens.

Node operators of a token-based system can initiate and complete transactions among each other and these are validated natively by the network.
The central bank-operated infrastructure authorizes transactions based on the balances in the participant’s institutional wallets or vaults, resulting in the transfer of value.

wCBDC initiatives.

From 20 17 to today, wholesale CBDC programmes are continuing to redefine financial markets.
Innovations in how CeBM is delivered are driven by a need to keep pace with the diversity of modern payment technology, address problems with current infrastructures and meet international standards, for example, Committee on Payments and Market Infrastructures, CPMI, International Organization of Securities Commissions (IOSCO) PFMI) for using CeBM in systemically important systems.

Global wCBDC efforts.
All over the world, for example:
Bank Of Canada:
Project Jasper, phases one,m two, three and four 20 17 to 20 19 Bank of Canada.
In the USA:
Project Hamilton 20 22. Federal Reserve Bank of New York.
Project Lithium 20 22. Digital Dollar Project, Depository Trust and Clearing Corporation.
Project Cedar (P2) times Ubin 2023. Federal Reserve Bank of New York, Monetary Authority of Singapore.
Bank of France:
Project Jura 20 21. Swiss National Bank, and the Bank of France.
Project Mariana 20 22. Bank of France, Swiss National Bank, Monetary Authority of Singapore.
Liquid-Share Consortium 20 21.
Euroclear Consortium 20 21.
HSBC Partnership 20 21.
Iznes Partnership 20 21.
SEBA Bank 20 21 Bank of France.

An a completely internatrional Project Agora, 20 24.
Banque de France, Bank of Japan, Bank of Korea, Banco de Mexico, Swiss National Bank, Bank of England, and the Federal Reserve Bank of New York.

A 20 22 BIS survey found that there will likely be at least nine wCBDC’s circulating by 20 30, and the Swiss National Bank (SNB) issued a live Swiss Franc wCBDC to settle digital securities transactions as part of a limited time pilot in December 20 23. In November 20 23, the Monetary Authority of Singapore announced that they would pilot the live issuance and use of a wCBDC in 20 24 to facilitate domestic interbank payments. Another notable initiative is Project mBridge, BIS Innovation Hub et al, which has begun its MVP phase, and has transacted with real value wCBDC across the four jurisdictions in scope.
Most wCBDC experiments have focused on cross-border payments, for example, Jura, mBridge, Dunbar, Mariana), as cross-border use cases are believed to be the strongest for transformation, including elements like governance, KYC anti-money laundering, AML, countering the financing of terrorism (CFT), data privacy, capital flows, monetary policies, cybersecurity and financial stability. According to the 20 22 BIS survey of 86 central banks, advanced economies AE’s and emerging market and developing economies, EMDE’s, reported cross-border payments efficiencies as the primary motivation for pursuing wCBDC.

Figure Three illustrates the: Motivations for issuing a wholesale CBDC And Cross border frictions that a wholesale CBDC could address.

Industry challenges.

Eight industry challenges were analysed to determine corresponding opportunities for wCBDC to address key pain points in financial markets.
Taking a holistic approach, this report analyses the relevant challenges for wCBDC systems to derive insights into where and how differentiated value can be activated.

Identified financial markets industry challenges.
1. Disparate settlement cycles. While designed to eliminate risk, reducing global settlement times could inadvertently increase settlement, counterparty and technology risk.
2. Operational risk and settlement failures. An amalgam of data quality challenges, limited interoperability and manual processes lead to settlement failures in securities markets.
3. Growing FX settlement risk. Limited affordability and accessibility of Payment versus payment arrangements and a rise in the usage of non-CLS-eligible currencies are driving growing FX settlement risk.
4. No tokenized credit risk-free settlement medium. The growth in the tokenization of assets underscores the need for commensurate tokenized cash to promote the role of CeBM.
5. Instant settlement could increase liquidity risk. Instant and atomic settlement may increase liquidity demands and risks already raised by the shift to gross settlement.
6. Disjointed regulatory interoperability. A divergence in policy, rules and regulations creates inconsistencies between jurisdictions, resulting in friction for cross-border use cases.
7. Slow cross-border payments in high-risk regions. De-risking and cost-cutting measures are reducing the number of correspondent banks globally, limiting accessibility to cross-border payments for users worldwide.
8. Lack of secure technical interoperability. A flurry of new systems could lead to a disconnection between DLT and conventional systems, resulting in increased risk and liquidity fragmentation.

Summary of findings.
Each of these industry challenges were evaluated and a commensurate area for modernization was identified. Table 3 captures a summary of the findings for each area for modernization and discerns the persistent challenges from the areas of differentiated value.
An area of differentiated value is an identified challenge that wCBDC could uniquely address given its generally understood core capabilities.
A persistent challenge is a barrier resulting from a challenge rooted in more than just the payment instrument but can include elements like regulation, compliance, geopolitics and long-standing trade offs.
Table three is a Summary of areas of differentiated value and persistent challenges.
With Industry challenges, Areas for modernization, and the Findings.
The Industry challenge is a Disparate settlement cycle. The Area for modernization is Realizing a global settlement window. And the finding is an Area of differentiated value.
Other Industry challenges are: Operational risk and settlement failures, Growing FX settlement risk, and No tokenized credit risk-free settlement medium.
Other areas for modernization are: Mutualizing data sharing, Expanding Payment versus payment arrangements and Tokenizing credit risk-free settlement media.
Additional Industry challenges are: Instant settlement could increase liquidity risk, Disjointed regulatory interoperability, Slow cross-border payments in high-risk regions and Lack of secure technical interoperability.
The corresponding areas for modernization which are persistent industry challenges are: Optimizing liquidity management, Ensuring compliance-by-design, Accessing central bank money and Interoperating with new and existing systems.

Areas of differentiated value.

Areas of differentiated value were identified as ripe for modernization using wCBDC and should be considered as near-term focus area.

Disparate settlement cycles.
While designed to eliminate risk, reducing global settlement times could inadvertently increase settlement, counterparty and technology risk.

Lack of a “global settlement window.”

The global nature of capital markets has resulted in a need for harmonized settlement cycles across regions. “Settlement cycle” refers to the time elapsed between the date a trade is made (or executed) and the settlement date (when participants receive cash or the security that was purchased), at which point the transaction is deemed final. For example, when a trade occurs in Europe and aims to settle in Asia, there is a limited time zone overlap (2 to 4 hours) during RTGS sytem operating hours, complicating trade and post-trade processes. This disparity across regions can be attributed to operating-hour gaps due to policy objectives, time-zone differences, operational constraints and cultural differences in working hours. For example, some Islamic countries observe working days between Sunday and Thursday.

Extending RTGS systems’ hours globally could help meet the G20’s ambition of enhancing cross-border payments. However, just four of the 82 CPMI jurisdictions surveyed reported having RTGS operating hours 24 7 or near 24 7. This gap impacts securities settlement and FX transactions; the former could benefit from wider settlement windows, while the latter calls into question the ability to hold overnight wCBDC (without any access to intraday overdrafts) to address the transmission of cash around the clock. The BIS proposed the concept of a “global settlement window” to address this disparity.
Figure 6 illustrates the limited overlap in RTGS operating hours between jurisdictions and the global window under discussion six to eleven GMT, which is a five-hour period where the highest number of RTGS systems operate concurrently across all jurisdictions in the survey. While not an explicit target, extending hours comes with personnel, system feasibility and challenges related to policy restrictions. While some technology limitations are at play, market norms are the predominant reason for limited 24 7 operations.

Figure 6 displays the RTGS system operating hours on working days for CPMI jurisdictions.

APAC, Asia Pacific area, EMEA, Europe, Middle East, Africa, AM, Americas.

The race to T plus one.

T plus is a convention used to denote a duration of time from T, trading day or the day a transaction took place, until settlement, where all parties’ obligations are met. Conventional securities transactions follow a T plus 2 settlement cycle, settling two days after the trading day. This is primarily due to standard market practices and operational constraints.
Challenges today include delayed pretrade information, limited operational hours, counterparty risk and manual processing. Efforts to reduce market risk by shortening the settlement cycle have led to India adopting T plus 1 in 20 23 and Mexico, the United States and Canada preparing for T plus 1 by May 2024. The UK and the Eurozone are also exploring T plus 1 and T plus 0.
Reducing the settlement cycle from T plus 2 to T plus 1 promises to:
Increase the availability of liquidity and the efficiency of deployed capital.
Decrease the length of exposure to counterparties and reduce counterparty risk.
Reduce daily margin requirements for clearing participants, T plus 1 could reduce this by 41 percent.
Lower market and liquidity risk.

FIGURE 7 displays the Timeline of the implementation of compressed global settlement cycles.

For example, India T plus 2 to T plus 1 on 27 January 20 23.
USA T plus 2 to T plus 1 28 May 20 24, and Australia T plus 2 to T plus 1 Ongoing market consultations, subject to Dingo’s, Kangaroo’s, shrimps on the barbeque and so on.

However, shortening settlement windows strains post-trade operations and legacy systems attempting to meet the newfound demands for speed. Compressing the settlement window is also a risk-reward-based decision for each jurisdiction. Factoring in time zones relative to the sources of capital inflows for a jurisdiction could dictate to what degree settlement windows should be shortened. This would be to not unduly constrain or limit inflows by creating frictions on the time allowed to settle or locate liquidity, which can strain foreign investors. The Securities and Exchange Commission estimates US industry investments of 3.5 to 4.95 billion dollars to achieve T plus 1, with compliance costs at 5.5 million dollars per institution. Citibank found that accelerated settlements and updating legacy technology platforms are top priorities for FMI’s.

T plus 0 as the likely next step Many market participants anticipate T plus 0 as a possible industry standard for settlement windows once global markets have harmonized towards T plus 1. Broadly, there are three variations of T plus 0: gross, intraday and end-of-day, as illustrated in Figure 8. T plus 0 intraday and end-ofday are both forms of netted T plus 0.

FIGURE 8, T plus zero considerations.
Accelerated securities settlement: T plus zero considerations.
T plus 0 gross Like instant settlement, T plus 0 gross achieves settlement immediately on the trading day and relies on pre-funded accounts and securities to be on hand.
T plus 0 intraday, netted.
A form of netted T plus 0 intraday settlement refers to setting transactions within the same trading day, but in predefined intervals or cycles.
T plus 0 end-of-day (netted) Involves a batch processing approach where transactions are bundled and settled at the end of the day using bulk settlement and netting.

T plus 0 gross settlement would theoretically demand the most pre-funding and liquidity, representing a major business model shift for stakeholders, especially with today’s legacy infrastructure.
While instantaneous settlement is possible at the central securities depository (CSD) level, according to State Street, instantaneous settlement is not possible down the custodial chain, and to achieve T plus 0, new technologies like DLT may be required to support features like atomic settlement. Additionally, pre-trade, trade and post-trade activities must be combined, and manual processes like trade matching must be automated. RTGS services would need to operate around the clock to support this degree of compression. Additionally, a fundamental overhaul of global clearing, payment, and settlement systems would be required to handle the increased pressure on liquidity and systems. Therefore, implementing T plus 0 is likely not a near-term phenomenon but a trend worth considering in the spirit of future proofing systems.
Realizing a global settlement window using wCBDC.
wCBDC could enable the aspirational Six to eleven GMT global settlement window.
Settlement windows globally pertain to three general areas: FX and Payment versus payment, also covered in detail later in this report, securities transactions and Delivery versus payment, jurisdiction-specific, and derivative-related transactions. wCBDC systems could represent a liquidity storage mechanism that runs 24 7 and addresses use cases without a limitation related to time zones or jurisdictional boundaries.
For example, Project Jura demonstrated that wCBDC could be used to settle tokenized securities transactions across borders. In addition to around-the-clock operations, wCBDC could also support programmable payments and be designed to upgrade while operational. For example, Fedwire cannot upgrade while operational, a key constraint when discussing expanding from the current 22 hours five days per week to operations on a 24 7 basis. In contrast, the new retail and commercial real-time fast payment system (FPS) FedNow can be upgraded online because of its modern architecture and capabilities.
Enabling 24 7 operations, programmable payments and upgradeability could provide several areas of benefits, including:
Reducing liquidity and credit risk by eliminating the need for overnight credit extensions.
Maximizing the availability of settlement windows to meet variable requirements.
Allowing system upgrades to occur while the system is operational, around the clock.
Maintaining liquidity bridges for inter-regional trade to optimize collateral deployment.
Orchestrating multi-asset and multi-party transactions across jurisdictions.
Differentiated value.
While efforts are under way to enable RTGS systems to run at or near 24 7, wCBDC represents an opportunity to reach settlement finality at any time of day as a supplement to RTGS systems, if designed with this feature of automatic operations at its core, much like how many retail and commercial FPS’s operate. It is worth noting that FPS’s are generally intended for retail and commercial use cases only. Thus, enabling 24 7 operations via FPS’s has benefits limited to the jurisdiction in which it is deployed, for example, FedNow in the United States and Unified Payments Interface in India. A key requirement to realize this value is the need for overnight wCBDC to support the around-the clock settlement windows. Enabling a 24 7 or near 24 7 wCBDC system will also support jurisdictional policy objectives of shortening settlement cycles, like T plus 1 and eventually T plus 0. Certain regions may benefit from 24 7 operations, including major economic centres facilitating cross-border transactions or serving as bridge currencies in FX markets.
Operational risk and settlement failures.
An amalgam of data quality challenges, limited interoperability and manual processes lead to settlement failures in securities markets.
Settlement delays, failures and costs.
While there have been improvements in the straight-through processing of securities transactions, challenges remain. Based on data from the Swift network covering cross-border settlement, about one out of every ten securities transactions requires correcting or will fail: 4.9 percent of settlement instructions are cancelled before or on the settlement date, and 4.8 percent of settlements are delayed. These incidents are increasing, with a 9 percent growth in cancelled instruction rate and a 16 percent increase in late settlements from 20 20 to 20 22. There are four causes of settlement failures:
Information asymmetry and poor-quality data related to incomplete standing settlement instructions, SSI,s, whereby counterparties to a transaction do not have shared visibility into errors encountered.
Market volatility in times of increased trading volumes creates strain for exception-based trades, trades requiring manual intervention, and can drive counterparty and credit risks to rise substantially, challenging the securing of cash in time to settle on time. Liquidity constraints where cash or securities are unavailable, especially in transactions involving FX.
Legacy systems focused on post-trade operations that suffer from many manual processes. Some systems require downtime for end-of-day or end-of-period batch processing. Settlement window closures like this could cause transactions to get “caught” waiting for the relevant RTGS system to open.
According to Swift, settlement failures and delays are on the rise because of unstable market conditions, heightened geopolitical tensions, cross-border transactions with long intermediary chains, more points of failure, multiple regulatory jurisdictions, covered later in this report, and incongruent messaging formats and data standards. Lastly, human error is another reason for increased failures or delays, for example, keying in the wrong data for an SSI.
Less time to reconcile errors.
Transitioning from T plus 2 to T plus 1 may not simply result in a 50 percent reduction in post-trade process time to mitigate settlement failures. It could yield an 83 percent reduction, 12 hours today compared to under T plus 1, which significantly reduces time to reconcile errors, locate funding and match trades. Settlement costs are also rising in the form of funding and capital costs. Estimates suggest that settlement costs are rising approximately 14 percent each year, and 5 to 10 percent of trades fail each day, driven by human error and the seven non-interoperable systems for which the average trade is routed.

These costs lead to operational risks for FI’s, like penalties and manual reconciliation, and regulatory risks, like costly mandatory buy-ins.
RTGS system outages.

RTGS system outages stem from software glitches and infrastructural or operational constraints. These disruptions lead to transaction delays, financial losses and increased vulnerabilities. Maintenance activities, hardware failures, transaction volume constraints and other external factors are often the leading contributors to such disruptions. Consequences include compromised integrity, participant confidence erosion and possible economic repercussions. Mitigating risks through cybersecurity measures, contingency planning, system reviews, stress testing, intraday monitoring and regulatory compliance is crucial for RTGS system reliability.

Key RTGS system outages, from 19 90 to 20 23 are displayed in figure 9.

Some of there were: The 19 99 European Central Bank (EU), 6 hours.
The two thousand and three Bank of England (UK), 6 hours.
The 20 20 European Central Bank (EU), 10 hours.
And the 20 20 Reserve Bank of Australia (AUS), 2 hours, due to an emu catching fire on the barbeque.

Mutualizing data sharing using wCBDC.

Market participants could benefit from a trusted, operationally resilient platform that mutualizes, makes available across multiple parties, data to achieve settlement finality. As observed, a fundamental barrier to ensuring more effective settlement of securities is the information asymmetry of SSI’s between counterparties, particularly when reconciliations are needed to rectify errors in the data. In today’s systems, high-quality SSI data is imperative to correctly transmit payment instructions and other important parameters generated during a trade and used during post-trade. It is often difficult to access when multiple parties are involved, as each party can only access their respective aspect of the instructions. A single source of truth has the potential to remove inefficiencies and reconciliation and ultimately accelerate the settlement cycle. Trusted, neutral FMIs interacting with wCBDC could address operational and settlement risk by:
Mutualizing necessary data to facilitate compatibility of trade and post-trade across institutions.
Combining and automating trade and post trade process automation techniques.
Ensuring access to necessary SSI data by applying robust permissions.
Mitigating the need for manual reconciliation caused by errors or data discrepancies.
Preserving privacy at all levels of a transaction to regulate and control access.
The BdF announced the lessons learned from its wCBDC experimentation involving using a cash DLT system to settle tokenized transactions. It found that DLT could enhance the straight-through processing of trade and post-trade activities and strengthen financial stability. The Depository Trust and Clearing Corporation (DTCC), the Digital Dollar Project and Accenture found, as part of a CBDC pilot, that DLT offers the potential to achieve operational efficiencies and enhance transparency and reporting capabilities for securities transactions by facilitating orchestration between two networks: securities and cash. This research also found that DLT could be uniquely positioned to bolster system recovery by “sharding” data across multiple nodes in the network. Sharding is a technique in data storage where large databases are partitioned into smaller, more manageable pieces (shards) distributed across multiple nodes or storage locations to improve scalability and performance. To preserve privacy, Project Tourbillon showed that central banks can monitor the aggregate use of CBDC’s in real time without seeing any personal information. Other elements, such as operational resilience and scalable performance in an outage, are foundational to addressing operational and settlement risks, ensuring smoother data-sharing processes and applying permissions.
Differentiated value.
Given the propensity of settlement risk and failures in securities markets and reliance on M0 settlement infrastructure by banks and FMIs, wCBDC could provide a differentiated solution for addressing errors driven by data quality issues. Using a central bank-operated or supervised infrastructure trusted among its participants, wCBDC could enhance trade and post-trade operations by permissioning access to necessary parties through trusted rails.

Growing FX settlement risk.
Limited affordability and accessibility of Payment versus payment arrangements and a rise in the usage of non-continuous linked settlement-eligible, non-CLS eligible, currencies are driving growing FX settlement risk.
CASE STUDY 1. Herstatt and FX settlement risk.
The bankruptcy of Bankhaus Herstatt in 19 74 marks a seminal event in the history of FX settlement risk and its importance. According to the International Monetary Fund, FX settlement risk equals the purchase currency’s full amount. It lasts from when a payment instruction for the currency sold can only be cancelled if the currency purchased is received with finality. When it closed, Bankhaus Herstatt had already received payments in Deutsche mark but not yet sent US dollar payments, this unsynchronized FX activity led counterparties to incur losses. The failure highlighted FX settlement risk, also known as Herstatt risk. The event caused panic in the market and was one of many bank failures that led to the formation of The Basel Committee on Bank Supervision. The public sector called to mitigate FX settlement risk globally, and the industry established CLS in two thousand and two to provide PvP arrangements and allow the payment legs of FX trades to settle simultaneously.
CLS’s settlement service provides settlement risk mitigation through PvP for 18 of the leading currencies. It offers multilateral netting and liquidity-saving features enabled by the daily settlement window. In December 20 23, CLS announced that it settled a record value of 16.3 trillion dollars of FX payment instructions with 99.5 percent net funding efficiency, less than 1 percent liquidity cost. However, nearly 50 years after Herstatt, and as of 20 22, nearly a third of FX turnover, 2.2 trillion dollars, remains subject to settlement risk. The total FX turnover in 2022 was an estimated 7.5 trillion dollars, up from 6.6 trillion three years earlier.
This is an increase from an estimated 1.9 trillion dollars at risk calculated in April 2019. FX settlement risk occurs because:
A lack of affordable Payment versus payment, PvP, arrangements, and market participants make cost-benefit decisions as to the risk exposure versus the value of the transaction.
Limited accessibility to Payment versus payment arrangements based on time zone, peak liquidity hours and currency pairing. This point materializes from an increased demand for emerging market economy (EME) currencies, which are largely not CLS-eligible.

Increased EME currency turnover.

Between 20 16 and 20 19, the average daily turnover of EME currencies, particularly in Asia-Pacific, surged by nearly 60 percent to nearly 1.6 trillion dollars. The trading in currencies like the Chinese renminbi, Indian rupee, Indonesian rupiah and Philippine peso more than doubled. Yet, EME currencies face limited access to Payment versus payment arrangements, high volatility, low liquidity, due to limited availability, and dependence on bridge currencies, like dollars, to facilitate trades, creating reliance on another currency. This challenge is further exacerbated by de-risking, which is discussed later. Some currencies have capital, regulatory, controls applied to them, which hinder their ability to be traded freely in markets. Some jurisdictions are exploring CBDC’s to improve speed and efficiency, reduce settlement risk, via Payment versus payment, and use local currencies for trade, for example, Project mBridge.

FIGURE 10 displays the growth in the Total FX turnover in EME currencies, from two thousand and one to 22.
The Total FX turnover in EME currencies grew from around seven percent in two thousand and one to 25 percent in 20 25.

The importance and declining use of PvP.

The proportion of FX transactions settled on a Payment versus payment, PvP basis has steadily fallen from 50 percent in 20 13 to 40 percent in 20 19, increasing FX settlement risk. Expert opinion indicates that it is plausible that many FX transactions occur “on-us” and are not captured in the global FX settlement risk statistics. These on-us orders include inter-affiliate book entries, clearing house book transfers and other methods. While the total number of FX transactions in both Payment versus payment and non-PvP is growing year-on-year, the percentage using Payment versus payment is declining. This can be attributed to an increased turnover in non CLS-eligible and EME currencies, which settle a higher proportion of trades on a non-PvP basis. Countries with non CLS eligible currencies, around 10 percent of FX market value, report higher rates of FX settlement risk.
Market participants have several options to reduce and mitigate FX settlement risk, such as:
Pre-settlement netting and bilaterally offsets payment obligations between participants.
On-us settlement to settle payment obligations across the books of the same legal entity or banking group.
Payment versus payment arrangements where the final payment of currency A occurs if the corresponding payment in currency B is fulfilled. Payment versus payment eliminates settlement risk because of atomic settlement.
While these options exist, the principal reason for a desire to conduct FX transactions on a PvP basis is the reduction of counterparty and credit risk. Due to its ability to be applied to a wider set of trading scenarios than pre settlement netting and on-us, it is more attractive to scale.
40 percent of FX transactions were settled via PvP in 20 19, a decrease from 50 percent in 20 13.
10 percent of the FX market involves non-CLS eligible currencies, which involve higher settlement risk.
FX transactions grow annually, but Payment versus payment settlement use is declining.

FIGURE 11. Settlement risk of FX turnover. Settlement of foreign exchange turnover As a percentage of deliverable turnover.

Expanding Payment versus payment arrangements using wCBDC.

FX settlement risk is growing because of the limited accessibility and affordability of PvP arrangements globally in the face of increased turnover of EME or less liquid currencies not supported on highly efficient platforms. Despite this efficient model, EME regions often take on settlement risk when they use EME currencies. A wCBDC could help optimize FX markets by:
Facilitating affordable and accessible multilateral Payment versus payment arrangement mechanisms, if done cost-effectively.
Reducing the barrier to entry for central banks and their respective banking communities.
Supporting flexible currency conversion arrangements for EME currencies.
Expanding access to non-domestic and non bank institutions to trade currencies.
Facilitating simple onboarding and integrations with existing systems to manage liquidity.
Supporting variable settlement windows to expand access to various regions.

While CLSNet supports more than 120 currencies, there are opportunities to gain additional efficiencies for EME currencies. Project mBridge shows that wCBDC could increase accessibility to PvP arrangements by facilitating direct bilateral connectivity between banks, supporting local currencies by allowing central banks to easily issue redeem tokens and create liquidity pools, interoperating with conventional infrastructure, and reducing settlement risk. Project Mariana was a proof-of concept to uncover the benefits of automated market makers, AMM, for currency liquidity. Using a transnational network to integrate domestic platforms, Mariana found AMM’s can:
Combine FX trading and settlement into one step, atomic, to lower settlement risk.
Establish a common shared platform to optimize wCBDC liquidity.
Reduce reliance on settlement intermediaries to access currency liquidity.
Enable multi-token liquidity pools to expand currency liquidity.
Further, in the stable coin context, Circle and Uni swap jointly found that AMMs can enhance currency liquidity and price discovery by enabling passive asset owners to act as liquidity providers. However, AMMs typically carry front-running trading strategies, smart contract risks and high slippage costs, which is the difference between the expected and actual trade prices due to limited liquidity. Considering relevant policies and regulations is paramount. In many scenarios, the use of a bridge currency, like dollars or euros, might still be necessary for compliance reasons. This requirement can lead to increased costs. The regional scope of solutions may lead to liquidity fragmentation, require pre-funding and do not offer optimal liquidity-saving features. A central intermediary may still be necessary for dispute resolution. Lastly, intermediaries’ regulatory status impacts the degree to which they can onboard new currencies, such as banks under stricter supervisory rules than non-bank entities.
Differentiated value.
wCBDC could offer a unique value model for accelerating the diversification of currencies if the costs to implement and adopt such PvP arrangements remain low.

No tokenized credit risk free settlement medium.

The growth in the tokenization of assets underscores the need for commensurate tokenized cash to promote the role of CeBM.

Dematerialization and tokenization of assets.
Before the advent of computer-based systems, the ownership of securities was indicated by who held its physical certificate. Dematerialization is an ongoing trend but can be traced back to the nineteen sixties when industry participants recognized the benefits of electronically recording security ownership on a computerized ledger. By dematerializing securities, the industry saw efficiencies and improved security for investors. Different jurisdictions have adopted different models and paces for dematerialization.
In 2024, His Majesty’s Treasury’s Digitization Taskforce will report on using full dematerialization to further wider policy goals, including improving access to shareholder rights. The City of London Law Society noted that dematerialization proposes to replace the legal function of signed stock transfer form and paper certificates, but that other interactions between companies and shareholders, like dividend payments and proxy appointments, must also be improved. In assessing the means for affecting dematerialization, some have regarded DLT as too dramatic of a change to garner widespread market adoption, informed by the experience in Australia of its rebuilding of the CHESS settlement system.
As with the Bank of England’s (BOE) RTGS modernization programme, the intention is to introduce a fully digitized securities system that is future-proofed for incremental adoption of DLT.
The tokenization of assets involves creating digital tokens representing underlying assets like real estate, equities, digital art, intellectual property and even cash. Tokenization is a key use case for blockchain, with some estimates pointing towards 4 to 5 trillion dollars in tokenized securities on DLT by 2030.
The primary drivers are the 24 7 accessibility of tokenized systems and the ability to democratize financial services by fractionalizing assets into more affordable units. The BIS proposed two models for bringing tokenization into the monetary system:
1) Bring CBDC’s, DT’s and tokenized assets on to a common unified ledger, and
2) Pursue incremental progress by creating interlinking systems. They determined the latter option was more feasible given that the former requires a re imagination of financial systems. Experimentation with the unified ledger concept is ongoing.

FIGURE 12. Tokenization total addressable market.
Opportunity.
Tokenization total addressable market, in trillion dollars.

Tokenized assets gain traction.
The bond market has seen an uptick in adoption, with tokenized bonds reaching 3.9 billion dollars globally, with nine-tenths of them issued between 2021 and 2023. A leading example is Project Genesis 1.0, led by the Hong Kong Monetary Authority (HKMA) and BIS Innovation Hub (BISIH). These are two prototype digital platforms that aimed to enable investment in Hong Kong green bonds with higher transparency and greater access to retail investors were successfully developed.
In Project Genesis 2.0, the HKMA and BISIH explored using blockchain, smart contracts and other related technologies to demonstrate the technical feasibility of tracking, delivering and transferring digitized carbon forwards, also known as mitigation outcome interests. Building on the success of Project Genesis 1.0, the HKMA commenced Project Evergreen in 20 22, which used DLT to settle securities tokens on a DvP basis. These transactions represented the green bond issued by the government (security token) and cash tokens representing a claim for Hong Kong dollars (HKD). Additional examples in other regions include IDB Group’s bond issuances in Colombia and Spain.
There are more global examples of regulators clarifying the role of tokenization. In February 20 23, the Korean Financial Services Commission announced its plan to authorize issuing and circulating security tokens with strong private sector interest in capitalizing on this nascent space. In Indonesia, a new regulation was signed into law in early 20 23, which transferred crypto regulatory powers from the commodities watchdog to the Financial Services Authority (Otoritas Jasa Keuangan), the country’s securities regulator. This indicated an acknowledgement that these digital assets could be treated as securities. Money market funds (MMFs) are also seeing growth in tokenization, with Franklin Templeton’s tokenized MMF surpassing 270 million dollars in assets under management in April 2023. The asset manager is pursuing a strategy to tokenize MMFs on multiple block chains, including Polygon. Further, the Bank of New York Mellon reported that 97 percent of institutional investors believe tokenization will revolutionize asset management by increasing efficiencies, reducing costs, fractionalizing ownership and broadening access.
In 20 21, Euroclear led a consortium of banks to successfully deliver an experiment with the BdF involving the DvP settlement of a sovereign bond against a CBDC and POC, which laid the groundwork for the 20 23 launch of a Digital Securities Issuance (D-SI) service, inaugurated with the issuance of a 100 million Euro World Bank sustainable bond. Such initiatives have confirmed the potential of DLT to deliver some efficiencies to capital markets by, for example, removing part of the reconciliation workload, helping the identification of end investors and reducing the settlement cycle. A core attribute of the D-SI is its full adherence to the EU’s Central Securities Depositories (CSD) regulation. To mitigate liquidity fragmentation caused by DLT systems, a D-SI issuance is fully integrated into conventional systems to support secondary trading. In the case of the World Bank’s issuance, trading was helped in secondary markets within minutes of primary distribution, and the bonds entered the collateral management systems that form the backbone of fixed-income flows. International CSD’s Clearstream, DTCC and Euroclear are working towards production-grade interoperable systems that facilitate cross-border capital flows based on DLT. Observing that “individual and private explorations of DLT’s potential now need to become an industry-wide effort to consolidate and connect liquidity, based on common standards and processes,” these infrastructures have committed to tackling:
Driving open market feedback around the required characteristics of DLT networks, data access, privacy and smart contracts.
Enabling greater interoperability across DLT protocols through the adoption of standards.
Enhancing operational resilience.
Accelerating production scale.

CASE STUDY 2. SDX’s tCHF token.
SIX Digital Exchange AG (SDX) offers a robust platform for primary and secondary digital securities markets as a digital central securities depository and exchange regulated by the Swiss Financial Market Supervisory Authority (FINMA). Since its launch in November 20 21, SDX has issued almost a billion CHF worth of digital securities, including UBS’s tokenized bond issuance on the SDX platform in November 20 22, valued at CHF 375 million (Swiss francs). To enable the settlement of digital securities transactions on chain, SDX issues its Swiss franc token called “tCHF” (tokenized CHF), which is created based on deposits SDX holds in a central bank account at the SNB. While tCHF acts like an RBDC, being backed by central bank reserves, it is different in that it is not fully bankruptcy remote.

SDX tCHF is a tokenized claim against SIX Digital Exchange AG, fully backed by central bank reserves and allows participants to deposit tCHF tokens and use them to trade intermediated securities within the SDX network. SDX participants can acquire tCHF tokens by transferring funds from their account in the Swiss Interbank Clearing (SIC) RTGS system to SDX’s SIC omnibus account, RTGS system transfer, and receive that amount of tCHF tokens on the network to trade and settle tokenized securities. All participant funds are held collectively and frozen until participants detokenize their tCHF tokens, upon which the equivalent funds are transferred to the participant’s SIC account.
While the SDX tCHF model is cutting-edge and offers customers a proxy to CeBM, the collateral paid into SDX’s SIC account is a risk-exposed position and must be risk-weighted accordingly. This results in capital charges imposed by regulations, which are costs associated with banks needing a buffer to absorb potential losses. This configuration results in a limitation observed by corporate treasuries as the funds are not completely riskless.
While still beneficial, a challenge persists: no credit risk-free cash is available to settle tokenized asset transactions. To address this, the Swiss National Bank, with SDX, is undergoing phase three of Project Helvetia, where for a limited time, intraday wCBDC CHF is being used for selected primary market transactions on the SDX platform. The first transactions were completed in December 20 23, and the project will continue through mid 20 24. This is an intraday, not an overnight wCBDC. Intraday implies the wCBDC would be converted back to traditional reserves held at the central bank at the end of the day. Meanwhile, overnight implies the token would remain intact and carry over to the next day in the same format, remaining a central bank liability.

Tokenizing credit risk-free settlement media.
Tokenized CeBM could derive value by traversing between regulated settlement platforms. wCBDC allows participants, including digital CSD’s and digital asset exchanges, to deliver composable and programmable credit risk-free cash to eliminate counterparty risk. wCBDC could realize value by:

Complying with the PFMI principle to use CeBM for tokenized transactions.
Settling large-value tokenized securities transactions natively and credit risk-free
Promoting the singleness of money by expanding the role of CeBM.
Ensuring financial stability by serving credit risk-free composable money for transactions.
Interoperating with private DLT platforms natively, including reading writing cryptographic proofs.
Providing evidence of transaction completeness to counterparties and possible intermediaries.
Reducing capital charges and bankruptcy risks associated with commercial bank money.

Project Helvetia has proven the feasibility of settling tokenized securities using a real, limited-phase wCBDC to eliminate credit risk and support system stability. The BdF experimented with the full interoperability solution to enable securities transactions with wCBDC, representing an innovative approach to interoperating with conventional systems.
For cross-border securities settlement, Project Jura in 20 21 demonstrated the feasibility of clearing foreign currency as part of cross-border payments and securities transactions, signifying a transformative use of CeBM across jurisdictions. Additionally, Project Jura found that subnetworks and dual notaries can enable the safe issuance of wCBDC on private DLT platforms.
Differentiated value.
As tokenized CeBM, wCBDC could offer immediate benefits for the growing tokenized securities market. wCBDC could provide M0 settlement for tokenized securities transactions to improve financial stability and reduce costs for market players who rely on privately issued monies, which are not bankruptcy-remote and carry capital charges.

Persistent industry challenges.

Persistent industry challenges were identified as areas that require more than a digital payment instrument enhancement because they are dependent on elements like regulation, compliance and geopolitics.
Instant settlement could increase liquidity risk.
Instant and atomic settlement may increase liquidity demands and risks already raised by the shift to gross settlement.
RTGS systems background.
Before the nineteen nineties, deferred net settlement systems boosted liquidity efficiency but introduced credit and counterparty risk if a party could not meet its obligations. To address these credit concerns, central banks transitioned to RTGS systems to ensure the settlement of each transaction individually (gross settlement) and minimize the risks associated with netting. Since their introduction in the nineteen nineties, RTGS systems have grown to support payments in over 160 countries. This approach reduced counterparty risk but heightened liquidity risk, meaning insufficient funds to settle payments, necessitating increased pre-funding for intraday transactions, incurring additional bank costs.
Liquidity saving mechanisms.
Effectively managing intraday liquidity prompted the development of liquidity-saving mechanisms LSM’s to augment RTGS systems and help banks reduce their liquidity risks and costs. LSM’s are financial tools that provide payment queuing facilities. LSM’s allow banks to condition the release of queued payments upon receipt of offsetting payments, thus significantly reducing liquidity costs for participating banks. LSM’s addressed growing liquidity needs through transaction netting, queuing and offsetting. Despite LSM’s, banks still hold excess liquidity for unforeseen events, resulting in idle funds that could prove costly in high-interest-rate environments with elevated borrowing costs. The industry continues to minimize intraday liquidity costs and risks while balancing settlement finality with liquidity optimization, like the provisioning of intraday liquidity by central banks in response to the needs of RTGS systems.
Exacerbating liquidity risk.
Innovative settlement systems reinforce the valu