Payment, Other Clearing and Settlement Systems
What is a payments system?
Canadians use
various "payment instruments" to purchase goods
and services, to make financial investments, and
to transfer funds from one person to another.
These instruments include cash, cheques, debit
and credit cards, and e-money.
Except for cash,
payment instruments involve a claim on a
financial institution, such as a bank, credit
union, or caisse populaire. Financial
institutions therefore need arrangements to
transfer funds among themselves, either on their
own behalf or that of their customers. A
payments system is the set of instruments,
procedures, and rules used to transfer these
funds.
The Canadian Payments Association (CPA)
The Canadian Payments Association is a
not-for-profit organization created under the
Canadian Payments Association Act. Its mandate
is to establish and operate national systems for
the clearing and settlement of payments.
How are payments processed?
Payments go through
two steps: first they are cleared, then they are
settled. Clearing is the daily process by which
CPA members exchange deposited payment items,
and the net amounts owed to each other are then
determined. Settlement is the procedure by which
CPA members use funds on deposit at the Bank of
Canada to fulfil their net obligations to all
other members.
There are two
systems in Canada through which all non-cash
payments settle:
-
Large Value Transfer System (LVTS): The
LVTS is an electronic wire transfer system
that processes large-value or time-critical
payments quickly and continuously throughout
the day.
In 2004, the LVTS handled an average of 17,193 payments—worth an
average total of $130 billion—each day.
In 2004,
the ACSS handled an average of 19.8 million
payment items per day, with an average total
value of over $16.65 billion. Paper items
accounted for 24.0 per cent of the volume and
70.0 per cent of the value cleared and settled,
while electronic items made up about 76.0 per
cent of the volume and 30.0 per cent of the
value.
The Bank of Canada's roles
Beyond its regulatory responsibilities under the
Payment Clearing and Settlement Act, the Bank of
Canada plays several other important roles in
Canada's payments systems. Other helpful links can be found here Payment Systems Links - Courtesy of RBC
One such role comes
in settling the positions among the participants
in the LVTS and the ACSS. There are about a
dozen financial institutions in these systems
that have "settlement accounts" with the Bank.
At the daily settlement times, the systems
calculate the net amounts owing among the
institutions, and those amounts are settled via
entries to the institutions' accounts at the
Bank.
Another important
Bank role is to lend funds overnight to any
institution that is unable to cover its LVTS or
ACSS obligations on a given day. This is
referred to as "providing liquidity."
Unlike central banks
in many other countries, the Bank of Canada
neither owns nor operates any of Canada's major
payments systems. However, the Bank of Canada
has a keen interest and involvement in these
systems, for several reasons:
-
The safety and stability of payments systems
contributes to the Bank's broader objective
of promoting a safe and sound financial
system in Canada.
-
Unsafe or unsound payments systems could
impair the Bank's ability to implement
monetary policy effectively.
-
As the ultimate source of liquidity to the
financial system, the Bank is naturally
concerned about the safety and soundness of
Canada's systems. Poorly designed systems
could generate significant liquidity and
credit risks for their participants.
-
Final settlement of payment obligations
among the participants in the systems takes
place through the transfer of funds held in
their settlement accounts at the Bank.
-
The Bank is a participant in the LVTS and
the ACSS, settling amounts owing to or from
itself and to or from the Government of
Canada.
-
The Bank has strong links to the Canadian
Payments Association, which operates
Canada's national payments systems.
-
The Bank participates in international
groups—particularly the Group of Ten (G-10)
countries—that attempt to identify risks in
payments systems, and to establish best
practices for the management and control of
these risks.
July 2001
