BIS Outlines Plans For 24/7 Central Bank Settlement

November 29, 2021
A new consultation report from the Bank for International Settlements (BIS) seeks to increase opening hours for real-time gross settlement (RTGS) systems, but experts are split on just what the solutions proposed can do.

A new consultation report from the Bank for International Settlements (BIS) seeks to increase open hours for real-time gross settlement (RTGS) systems, but experts are split on just what the solutions proposed can do.

For the BIS, an extension of RTGS operating hours across jurisdictions could help address current obstacles, such as time and efficiency.

Longer opening hours could end up increasing the speed of cross-border payments and reducing liquidity costs and settlement risks, according to the BIS.

"The BIS is asking the right questions as cross-border payments are still the least efficient of all electronic payment types, despite some recent improvements with SWIFT gpi,” said Marcus Hughes, director of business development at Bottomline Technologies.

Cross-border B2B payments alone have a value of $150trn, according to EY, excluding small remittances and consumer payments between countries.

“What the BIS is doing is entirely consistent with G20 objectives to make cross-border payments faster, cheaper and more transparent, while ensuring they are secure and resilient,” he said.

Based on a survey of central banks from 82 jurisdictions, 62 RTGS systems around the world were analysed by the BIS, which has devised three potential end states for extending operating hours:

  • An increase in operating hours on current operating days. If undertaken by multiple jurisdictions, this would help to close daily gaps in RTGS operating hours, primarily on standard working days, as most jurisdictions' RTGS systems are closed on weekends and public holidays.
  • An extension of operations to additional days on which many RTGS systems do not currently operate. If undertaken by multiple jurisdictions, this would help to close the gaps created by holidays and weekends.
  • The extension of operating hours to 24/7. Very few RTGS systems currently provide near 24/7 service.

Doing so would likely require substantial operational changes; however, if broadly adopted, this would largely remove frictions for cross-border payments arising from gaps in opening times, the BIS argues.

“It is a bit presumptuous to think that cross-border payment issues will be solved by 24/7 operations globally,” noted one source in the real-time payments sector.

Others have also been underwhelmed by the prospect.

"Converting RTGS to 24/7 in multiple countries would be something of a quick fix to a longstanding problem,” cautioned Hughes.

For Hughes, such a proposal is very much based on legacy systems, albeit with significant operational changes being required. “The problem is that this approach is the default of commercial banks which continually defer the date when they will finally need to replace legacy systems, due to the high cost and risks of such change,” he said, adding that the BIS’ suggestions are “practical little steps”.

"It sounds wonderful being able to settle 24/7 but is RTGS the way to do it? It feels to me like this may not be the best solution,” agreed Peter Davey, senior advisor in risk and compliance at Transak.

When you try to work with central banks, you are under no illusion that they are not a service industry, and there is a risk that this could end up being something quite clunky, he said, pointing out that there are many banks and payments service providers in the private sector that can and do achieve cross-border payments more efficiently.

"You don't talk to people in retail payments who say 'Blimey, if only RTGS ran 24/7 and overlapped,’” he quipped.

Instead, other issues prompt a hold-up for settlement, according to Davey. Namely, anti-money laundering and counter-terrorism financing (AML/CTF) requirements.

“If a transaction includes a payee who has a similar name to a sanctioned person or fraudster, then there could a loss of transaction,” he pointed out, noting that every part in the transaction chain has a screening responsibility, which “becomes tedious pretty quickly”,

“Could it not be that you have one party at each end of the payments chain carrying out screening instead? And, more to the point, that the regulators endorse such an approach?” Davey suggested.

Yet, ISO 20022 standards, used for data interchanges between financial institutions, could help solve this issue. The richer data is more structured and machine-readable, so it will remove manual intervention, said Hughes

For example, sending money to a business with an address on a street in Madrid called la Habana, which translates as Havana, would be flagged under previous standards for breaching OFAC sanction rules against making payments to Havana in Cuba.

However, with ISO 20022, this would not be flagged as a false positive because it is a street, not a city, according to Hughes.

There are a growing number of countries with 24/7 RTGS, as well as the latest ISO 20022, as is the case in India and Australia.

By comparison, however, the Bank of England’s RTGS is embarking on its two-step migration to ISO 20022 between April 2022 and 2023. It also currently operates 22 hours per day, excluding weekends.

Yet, the central bank has not ruled out a switch to 24/7.

Could CBDCs Save The Day?

The acceleration of central bank digital currency projects among the world’s central banking community has also led to discussions about whether this may solve current cross-border woes.

Central banks have already begun considering this. For example, in July, the Monetary Authority of Singapore and Banque de France successfully completed a wholesale cross-border payment and settlement experiment using a CBDC.

The experiment, which was supported by J.P. Morgan’s Onyx, simulated cross-border transactions involving multiple CBDCs (m-CBDC) on a common network between the two jurisdictions.

Of the four outcomes achieved, the simulation of an experimental m-CBDC network concluded that the number of correspondent banking parties involved in the payment chain for cross-border transactions can be reduced.

Consequently, the number of contractual arrangements, the know your customer (KYC) burden as well as the associated costs can also be cut down.

"CBDCs, whether retail or wholesale, are a radical, yet also compelling option to solve cross-border payment problems,” said Hughes, suggesting that they are also very likely to be introduced in the near future. “Just look at China, they are keen for their e-CNY to be used internationally, which could have consequences for the US dollars’ dominant role today in global trade."

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