Cross-Currency Settlement of Instant Payments in a Multi-Currency Clearing and Settlement Mechanism

Starting from the observed gap, mainly in terms of cost and speed, between domestic and crossborder retail payments in Europe, this paper focuses on the opportunities that a multi-currency technical platform may offer in bridging this gap. In particular, the ECB, in collaboration with Riksbank and Banca d’Italia (in its role of service provider of market infrastructures for the Eurosystem) started analyzing how TIPS (TARGET Instant Payment Settlement), as a multi-currency platform for the settlement of instant payments in central bank money, could support instant payment transactions across different currencies. Moving from a general overview of the recent developments in the market and the demand from public authorities to improve the efficiency of cross-border payments, the paper describes a threelayer model for the processing of cross-currency payments in a multi-currency clearing and settlement mechanism. Within this framework, different possible ways to handle the main elements of a crosscurrency transaction (i.e. the determination of the applicable exchange rate for a given transaction, the way to apply the agreed exchange rate and the settlement model) are identified and described. A methodology for assessing and comparing the different models identified for the three processing layers is also provided. Against this background, the paper concludes by providing a number of considerations (of policy, business, technical, operational and legal nature) to be taken into due account in the finalization of the ongoing analysis for the provision of a cross-currency instant payment settlement in TIPS, and its potential applicability in the broader context of cross-border payments between different technical platforms.