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Auction-based liquidity saving mechanisms

Author

Listed:
  • Rodney Garratt
  • Morten Linnemann Bech
  • Marko Nanut Petric
  • Caner Ates

Abstract

This paper introduces a novel liquidity-saving mechanism (LSM) for real-time gross settlement (RTGS) systems based on an auction framework. Unlike conventional queue-based LSMs that optimise payment netting given pre-committed liquidity, the proposed mechanism reverses the process by eliciting bids from participants to establish mutually beneficial liquidity-sharing arrangements. These arrangements are supported through side payments from liquidity receivers to liquidity providers, ensuring incentive alignment. The mechanism is evaluated using agent-based simulations calibrated with transaction data from four RTGS systems: BCRP-RTGS (Peru), SAMOS and SADC-RTGS (South Africa), and SIC (Switzerland). Across all trials, auction success rates averaged 79% (ranging from 62 to 100%). These success rates were sufficiently high that observed failures typically did not increase liquidity usage. Overall, the findings demonstrate the importance of side payments in coordinating participant incentives, reveal the trade-off between liquidity efficiency and settlement delay, and highlight the potential of auction-based LSM designs to enhance RTGS system efficiency.

Suggested Citation

  • Rodney Garratt & Morten Linnemann Bech & Marko Nanut Petric & Caner Ates, 2025. "Auction-based liquidity saving mechanisms," BIS Working Papers 1318, Bank for International Settlements.
    • Handle: RePEc:bis:biswps:1318
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    References listed on IDEAS

    as
    1. Morten L. Bech, 2008. "Intraday liquidity management: a tale of games banks play," Economic Policy Review, Federal Reserve Bank of New York, vol. 14(Sep), pages 7-23.
    2. Bech, Morten L. & Garratt, Rod, 2003. "The intraday liquidity management game," Journal of Economic Theory, Elsevier, vol. 109(2), pages 198-219, April.
    3. Gabriele Galati, 2002. "Settlement risk in foreign exchange markets and CLS Bank," BIS Quarterly Review, Bank for International Settlements, December.
    4. Morten L. Bech & Rodney J. Garratt, 2012. "Illiquidity in the Interbank Payment System Following Wide‐Scale Disruptions," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 44(5), pages 903-929, August.
    5. Morten Linnemann Bech & Yuuki Shimizu & Paul Wong, 2017. "The quest for speed in payments," BIS Quarterly Review, Bank for International Settlements, March.
    Full references (including those not matched with items on IDEAS)

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    Keywords

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    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • D44 - Microeconomics - - Market Structure, Pricing, and Design - - - Auctions

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