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Examining the Trade-Off between Settlement Delay and Intraday Liquidity in Canada's LVTS: A Simulation Approach

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  • Neville Arjani
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    Abstract

    The author explores a fundamental trade-off that occurs between settlement delay and intraday liquidity in the daily operation of large-value payment systems (LVPS), with specific application to Canada's Large Value Transfer System (LVTS). To reduce settlement delay, participants generally must maintain greater intraday liquidity in the system. Intraday liquidity and settlement delay can be costly for LVPS participants, and improvements in the trade-off are desirable. The replacement of standard queuing arrangements with a complex queue-release algorithm represents one such improvement. These algorithms are expected to lower intraday liquidity needs and speed up payments processing in an LVPS. Simulation analysis is used to empirically test this proposition for the case of Canada's LVTS. The analysis is conducted using a payment system simulator developed by the Bank of Finland, called the BoF-PSS2. The author shows that increased use of the LVTS central queue (which contains a complex queue-release algorithm) reduces settlement delay associated with each level of intraday liquidity considered, relative to a standard queuing arrangement. Some important issues emerge from these results.

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    File URL: http://www.bankofcanada.ca/wp-content/uploads/2010/02/wp06-20.pdf
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    Bibliographic Info

    Paper provided by Bank of Canada in its series Working Papers with number 06-20.

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    Length: 43 pages
    Date of creation: 2006
    Date of revision:
    Handle: RePEc:bca:bocawp:06-20

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    Related research

    Keywords: Payment; clearing; and settlement systems;

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    1. Antoine Martin, 2005. "Recent evolution of large-value payment systems : balancing liquidity and risk," Economic Review, Federal Reserve Bank of Kansas City, issue Q I, pages 33-57.
    2. Bech , Morten L. & Soramäki, Kimmo, 2001. "Gridlock Resolution in Interbank Payment Systems," Research Discussion Papers 9/2001, Bank of Finland.
    3. James J. McAndrews & Simon M. Potter, 2002. "Liquidity effects of the events of September 11, 2001," Economic Policy Review, Federal Reserve Bank of New York, issue Nov, pages 59-79.
    4. James McAndrews & Samira Rajan, 2000. "The timing and funding of Fedwire funds transfers," Economic Policy Review, Federal Reserve Bank of New York, issue Jul, pages 17-32.
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