[sbinews] What is RTGS? Real Time Gross Settlement - basics

  • From: "Rajendra S. Pai" <rajendra.pai@xxxxxxxxx>
  • To: <sbinews@xxxxxxxxxxxxx>
  • Date: Fri, 23 Jan 2004 09:43:33 +0530

What is RTGS?
Real Time Gross Settlement - basics
(Source: PNB Staff College, CBD Belapur)

The current payment system involves settlement of payments on a "settlement
day" and interest is invariably computed to accrue on a daily basis. Even in
the wholesale markets for foreign exchange and money markets contracts,
'spot' transactions mean two-business days. Settlement for clearing cheques
presented to the clearing houses takes place on a netting basis at a
particular time either same day or on the next day. These conventions made
sense, when book-keeping was done manually.
This system gives rise to risks such as credit risk, liquidity risk, legal
risk, operational risk and systemic risk. A systemic risk is the risk that
the inability of one of the participants to meet its obligations, or a
disruption in the system itself, could result in the inability of other
system participants or of financial institutions in other parts of the
financial system to meet their obligation, as they become due. Such a
failure could cause widespread liquidity or credit problems and as a result
threaten the stability of the system or of financial markets.
The above apply to payment systems which would trigger or transmit systemic
disruptions in the financial area because of the size or nature of
individual payments, which they handle because of the aggregate value of the
payments processed.

What is RTGS?

RTGS is a software package which provides online settlement of payments
between financial institutions.
In this system payment instructions between banks are processed and settled
individually and continuously throughout the day. This is in contrast to net
settlements where payment instructions are processed throughout the day but
inter-bank settlement takes place only afterwards typically at the end of
the day.
Payee banks and their customers receive funds with certaintly, or so-called
finality, during the day, enabling them to use the funds immediately without
exposing themselves to risk. A lag between the time at which information is
made available to receiving banks and the time at which settlement takes
place may have important risk implications in large fund transfer systems.
To initiate a funds transfer, the sending bank dispatches a payment message
which is subsequently routed to the central bank and to the receiving bank
as the system processs and settles the transfer.
RTGS system settles payments on a transaction-by-transaction basis as soon
as they are accepted by the system.
RTGS systems do not create credit risk for the receiving participant because
they settle each payment individually, as soon as it is accepted by the
system for settlement.
RTGS system can require relatively large amounts of intraday liquidity
because participants need sufficient liquidity to cover their outgoing
payments. The cost of intraday liquidy depends on variables such as amount
required, the opportunity cost of maintaining liquid balances and the cost
of intraday credit.

RTGS - Salient features

It will use the INFINIT network of RBI. SFMS will be used as the secured
messaging systems. Banks having a core banking systems can use their systems
for messaging purpose but will have to develop an interface between their
core banking systems and the RTGS application.
Participants will have to maintain a dedicated RTGS settlement account with
RBI for outward and inward RTGS payments. This account will be an intra day
account. The account will be funded at the start of day from a current
account held with RBI, Mumbai. The balance in this account at the end of day
are swept back to the current account and thereby zeroing the RTGS
settlement account.
Payment transactions emanating from a participant are processed by the RTGS
strictly in FIFO basis. However to enable the participants to take care of
urgent or time critical payments and to enable more effective fund
management, the system allows the participants to assign priorities to their
payment messages and thereby enabling aj particular transactions to be
processed before another transactions, which was submitted earlier to the
Payment transactions emanating from a participant are ordinarily expected to
be settled immediately after it is received. However the possibility of some
transactions not being immediately settled cannot be completed ruled out. To
meet such exigencies, the proposed RTGS system provides for maintenance of
payment queues in which payment transactions will be held in FIFO order
within priority pending settlement.
In order to meet intra day liquidity, Rbi at its discretions and under terms
and conditions to be specified from time to time will provide liquidity
against fully collateralized assets (Govt Secs) at a charge per
transactions. This will have to be repaid before the end of the day.
Resolutions mechanisms are inbuilt in the system to resolve grid locks.
The Multilateral Net Settlement(clearing) will also be settled in the RTGS

Hardware/Software requirements for the participants

Each participant must have a payment interface gateway server. This will be
the interface to the IFTP/RTGS system of RBI. The PI software will be
supplied by RBI. The banks should procure the hardware which will be
specified by RBI. Since the INFINIT network is not provided adequate
bandwidth presently, participants are advised to get a dedicated lease line
link between their PI gateway and the local RBI Hub.

Security Features:

It is a highly secured system using PKI. This includes Signing and
encryption of hash. Decryption and verification of hash Signing of message
Verification of message
Each participant will be a RA and the CA(IDRBT, RBI) will issue the digital
certificates. An online backup (mirror) system will be set up in Mumbai and
the DRS will be at Hyderabad office of RBI.

Road Map

May 2003 Preparation for participation
June 2003 Demonstrable RTGS system will be set up at RBI BTC. This system
will be available for participant banks to test and practise on the RTGS
October 2003 Stand Alone RTGS systems will be installed at RBI Mumbai
January 2004 Fully Integrated RTGS system will be installed

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