Category: RTGS

(Real-Time) Gross Settlement (RTGS) are settlement systems that facilitate the transfer of funds instantly. They are used for inter-bank high-value payments that needed to be cleared immediately.

Examples of RTGS settlement systems are TARGET2, used in the Eurozone area, FedWire Funds Service, used in the United States and CHAPs, used in the UK. RTGS systems are run by central banks, i.e. CHAPS is run by Bank of England, Target2 by the European Central Bank and FedWire by the Federal Reserve.

An RTGS transaction means that:

• Each transaction gets settled in real-time by the central bank. An RTGS transaction is not subject to any wait time.
• Gross settlement means that the transaction is settled on a one-to-one basis and is not bundled with any other transactions.

Advantages of an (Real-Time) Gross Settlement (RTGS)

• Accurate Cash Flow – As an RTGS transaction is settled immediately, customers know when exactly their accounts are debited/credited, thereby ensuring more predictable cash flows.
• Reduced risk – RTGS transactions are settled immediately meaning that there is less risk for the receiving party. Funds will already have been credited to the receiving party by the time the payment instruction arrives.

CHAPS is acronym for Clearing House Automated Payment System. It is a high-value payment systems, operated by the Bank of England, providing efficient, settlement risk-free and irrevocable payments in Sterling. It was first introduced in 1984.

CHAPS is an RTGS where settlement is risk-free, i.e. because each payment is settled individually, in real-time. It is primarily used for the same-day settlement of high-value wholesale payments as well as time-critical, high value retail payments like house purchases.

In 2019 it processed over 35 millions high value payments with a total monetary value on 75 trillion GBP.

Who uses CHAPS?

There are over 35 financial institutions, known as direct participants, who make payments over CHAPS. Direct participants include high street banks, financial market infrastructures and challenger banks.

Several thousand other banks make payments through direct participants (correspondent banking).

How does CHAPS work?

What are the benefits?

• Supports secure high value, same day payments from payment service providers to their customers.
• Payments are highly secure using the SWIFT payment infrastructure together with the Bank Of England’s RTGS system. There is no upper/lower payment limits.
• Among direct participants, the liquidity requirements eliminate settlement risk.
• The system processes and settles transactions on the same day, thus ensuring that the beneficiary receives payments on the same day as the payment initiation.
• Allows the direct transfers between direct participants and financial institutions eliminating the need for intermediaries.

TARGET2 (Trans-European Automated Real-time Gross Settlement Express Transfer System) is the RTGS owned and operated by the Eurosystem. The Eurosystem is the monetary authority of the Eurozone; it consists of the European Central Bank (ECB) and the national central banks of the Eurozone countries.

TARGET2 is used by central banks and commercial banks to process euro payments in real-time enabling the free flow of money across the Eurozone. It is a payment system that enables EU banks to transfer money between each other in real time.

It’s mandatory to use TARGET2 when settling euro payments that involve the Eurosystem. It was introduced in 2007 replacing the older TARGET (Trans-European Automated Real-time Gross Settlement System) system. In 2020, it processed over 92 billion transactions with a total value of approximately €152 trillion

How does it work?

Who uses TARGET2?

It is used by central banks and commercial banks.

• Central banks will use it to manage liquidity and facilitate the flow of funds between financial institutions.
• Commercial banks within the eurozone will use it to settle large value transactions. A full list of participants can be found here

FedWire (Fedwire Funds Service) is a RTGS high value payment system run by federal reserve banks in the United States.

As Fedwire is an RTGS, payments are settled immediately and are irrevocable. Fedwrite transfers trillions of dollars daily. This is advantage over its nearest competitor, CHIPS, which uses an end-of-day net settlement process.

Fedwire is used banks, businesses, and government agencies for large, same-day transactions. It is a credit transfer service, so transfers are always a payment from a sender to a receiver. It does not have a direct debit facility so a financial institution cannot pull funds from another financial institution.

In order to be eligible to participate in Fedwire a financial institution must have an account with one of the 12 federal reserve banks. If a financial institution does not have an account with the federal reserve, it must partner with one that does. This is known as a correspondent relationship.

How does Fedwire work?

A sender bank initiates a funds transfer by instructing its Federal Reserve Bank, to debit funds from its own master account and credit funds to the master account of another recipient bank.

The federal reserve bank will holds account for both sender and recipient and settles transactions individually and immediately.