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Removal of the Unwinding Provisions in the Automated Clearing Settlement System: A Risk Assessment

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Listed:
  • Nicholas Labelle
  • Varya Taylor

Abstract

A default in the Automated Clearing Settlement System (ACSS) occurs when a Direct Clearer is unable to settle its final obligation. In August 2012, the Canadian Payments Association amended the ACSS by-law and rules to repeal the unwinding provisions from the ACSS default framework. Without unwinding, payment items are no longer returned by the defaulter to the other participants as a means of reducing the defaulter’s final obligation. Instead, the other Direct Clearers (survivors) pay only additional settlement obligations to cover the defaulter’s shortfall. To assess the potential exposures of an ACSS default without unwinding, we use simulations to estimate the value of additional settlement obligations for each survivor and compare these exposures to their capital and liquid assets. Results indicate that these exposures are indeed manageable by survivors and, therefore, that the ACSS does not pose systemic risk.

Suggested Citation

  • Nicholas Labelle & Varya Taylor, 2014. "Removal of the Unwinding Provisions in the Automated Clearing Settlement System: A Risk Assessment," Discussion Papers 14-4, Bank of Canada.
    • Handle: RePEc:bca:bocadp:14-4
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    References listed on IDEAS

    as
    1. Carol Ann Northcott, 2002. "Estimating Settlement Risk and the Potential for Contagion in Canada's Automated Clearing Settlement System," Staff Working Papers 02-41, Bank of Canada.
    2. Eric Tuer, 2003. "Technical Note: Elimination of Retroactive Settlement in the ACSS," Bank of Canada Review, Bank of Canada, vol. 2003(Autumn), pages 39-42.
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    More about this item

    Keywords

    Payment clearing and settlement systems; Financial stability;

    JEL classification:

    • C - Mathematical and Quantitative Methods
    • C15 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Statistical Simulation Methods: General
    • G - Financial Economics
    • G01 - Financial Economics - - General - - - Financial Crises
    • G2 - Financial Economics - - Financial Institutions and Services
    • G3 - Financial Economics - - Corporate Finance and Governance

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