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Examining Full Collateral Coverage in Canada’s Large Value Transfer System

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  • Lana Embree
  • Varya Taylor

Abstract

The Large Value Transfer System (LVTS) is Canada’s main electronic interbank funds transfer system that financial institutions use daily to transmit thousands of payments worth several billions of dollars. The LVTS is different than real-time gross settlement (RTGS) systems because, while each payment is final and irrevocable, settlement occurs on a multilateral net basis at the end of the day. Furthermore, LVTS payments are secured by a collateral pool that mutualizes losses across participants in the event of a default. In this paper, we use the Bank of Finland Simulator to examine the implications of fully collateralizing LVTS payments, similar to an RTGS. An important caveat to consider, however, is that the simulations do not take into account the anticipated change in payment behaviour in response to a change in collateral requirements. In this regard, we include a queuing mechanism to at least reflect more efficient use of liquidity. The results indicate that collateral requirements vary by participant and some participants actually require less collateral in the simulation than what is required under the current LVTS design.

Suggested Citation

  • Lana Embree & Varya Taylor, 2015. "Examining Full Collateral Coverage in Canada’s Large Value Transfer System," Staff Working Papers 15-29, Bank of Canada.
    • Handle: RePEc:bca:bocawp:15-29
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    References listed on IDEAS

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    1. Perlin, Marcelo & Schanz, Jochen, 2011. "System-wide liquidity risk in the United Kingdom’s large-value payment system: an empirical analysis," Bank of England working papers 427, Bank of England.
    2. Enghin Atalay & Antoine Martin & James J. McAndrews, 2008. "The welfare effects of a liquidity-saving mechanism," Staff Reports 331, Federal Reserve Bank of New York.
    3. Kim McPhail & Anastasia Vakos, 2003. "Excess Collateral in the LVTS: How Much is Too Much?," Staff Working Papers 03-36, Bank of Canada.
    4. Nellie Zhang & Tom Hossfeld, 2010. "Losses from Simulated Defaults in Canada's Large Value Transfer System," Discussion Papers 10-14, Bank of Canada.
    5. Devin Ball & Walter Engert, 2007. "Unanticipated Defaults and Losses in Canada's Large-Value Payments System, Revisited," Discussion Papers 07-5, Bank of Canada.
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    Cited by:

    1. Shaun Byck & Ronald Heijmans, 2020. "How much liquidity would a liquidity-saving mechanism save if a liquidity-saving mechanism could save liquidity? A simulation approach for Canada's large-value payment system Shaun Byck," Working Papers 682, DNB.

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    More about this item

    Keywords

    Financial Institutions; Payment clearing and settlement systems;

    JEL classification:

    • E - Macroeconomics and Monetary Economics
    • E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates
    • E47 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Forecasting and Simulation: Models and Applications
    • G - Financial Economics
    • G2 - Financial Economics - - Financial Institutions and Services
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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