The Bank of England (BoE) issued two discussion papers on the real-time gross settlement (RTGS) service on 8 February 2024. The changes will respond to the needs of households and companies, technology advancements, and an evolving regulatory landscape.
The first discussion paper on RTGS and CHAPS operating hours focuses on extending the hours to near 24x7 (at least 23 hours a day). No decision has been made on whether, when or by how much the BoE would extend operating hours.
In the second discussion paper on RTGS access policies, the BoE has identified four priority areas to facilitate wider access to RTGS accounts for settlement and settlement services, while maintaining resilience.
The latest discussion papers are part of the BoE’s wider RTGS renewal programme.
In this article
What does this mean?
Exploring longer operating hours for RTGS
The BoE operates the UK’s RTGS service for the main sterling payment systems. The infrastructure performs two key functions for enabling settlement in central bank money. RTGS must be open for the settlement of wholesale obligations going through CHAPS, CREST and CLS. It also enables the net obligation settlements of seven retail payment systems at fixed points each day.
RTGS is open for settlements from 6am to 6pm on business days, with certain functions and a contingency window operating for longer. To ensure the infrastructure remains competitive, the BoE believes there may be a case for extending both RTGS and CHAPS hours.
The key drivers for the BoE are to:
- Address some of the frictions currently affecting cross-border payments, also a priority for the G20 countries.
- Leverage the renewed technical capabilities of the RTGS service, with no technical barriers to near 24x7 operation, if desired.
- Support the BoE’s strategy to provide sustainable innovation in the UK financial system, especially on wholesale settlement.
Longer operating hours could enable net settlement of retail payment obligations overnight and at the weekend, reducing settlement and credit risk (for uncollateralised transactions) or reducing liquidity cost (for collateralised transactions). Extended hours would increase the overlap with global RTGS and wholesale payment systems and help to reduce frictions for cross-border payments, directly increasing speed and facilitating other innovations such as liquidity bridges, interlinking and payment versus payment (PvP).
According to the BoE, longer operating hours could also facilitate greater efficiency and reduced risk by allowing new digital money innovations (e.g. central bank digital currency, systemic stablecoins and tokenised deposits) to integrate central bank money more seamlessly in their solutions. ‘Synchronisation’ would allow a wider range of ledgers, including those using distributed ledger technologies, to connect to RTGS to synchronise transactions and to enable ‘atomic settlement’ (or conditional settlement).
The BoE acknowledges that the industry may prefer a staggered implementation approach. The BoE would like to consider models where participants can choose the time at which they start and close their operations. The BoE proposes to provide minimal business support during the potential RTGS overnight hours.
Access to RTGS accounts for settlement
Direct access to payment systems which settle in RTGS in central bank money requires holding a BoE account which can be used for settlement. The BoE offers reserves accounts to banks, building societies, broker-dealers, central counterparties and international central securities depositories. It also offers settlement-only accounts to non-bank payment service providers (NBPSPs) and other types of financial market infrastructures, as well as provides settlement services to payment system operators.
The BoE has identified four priority areas to facilitate wider access to RTGS accounts for settlement and settlement services while maintaining resilience. These are:
- Enhancing the BoE/FCA process for NBPSPs seeking access to require firms to undertake regulated activities prior to access, undergo s166 assessment, and consider relevant firms for more enhanced supervision.
- Understanding the demand of foreign banks for access to RTGS to support payment system settlement, and ensuring the potential challenges to do so are understood.
- Clarifying access requirements for financial market infrastructures (FMIs), to ensure that new firms are safely run.
- Reviewing the CHAPS value threshold, currently 2% of the total CHAPS system value in place.
The BoE acknowledges that more payment firms accessing RTGS would allow more transactions to be settled in central bank money, maintaining a level playing field for competition, and driving innovation. However, when setting RTGS access policies, the BoE needs to balance the benefits against the risks which can arise from providing access to firms which are not operationally and financially sound.
What do firms need to do?
Near 24/7 operating hours would be a significant change to the industry and could impact the cost of operations.
Firms need to consider the changes required to systems, processes, technology and people.
While more firms may be able to access RTGS in the future, the regulatory and compliance scrutiny is likely to increase.
If the RTGS operating hours are extended, payment system operators and other market participants would need to consider the impact the different implementation models would have on their operations. These include technology upgrades, staff costs/training requirements and wider changes to business operations. For some, the near 24/7 operations could require a complete overhaul of systems, models, processes and legal documentation to ensure resilience and reduced operating risk.
Relevant firms would also need to consider how the reduced RTGS downtime would impact their ability to undertake planned system maintenance and upgrades, as well as unplanned fixes for any technical issues. This would likely require process redesign and additional automation to ensure compatibility with extended hours.
Changes could also impact certain market conventions (e.g. ‘business day’, ‘value date’, ‘start and end of day’), as well as extend the window in which operational or liquidity risks can materialise. Firms need to consider how to mitigate any operational issues potentially involving errors, fraud, money laundering/terrorist financing, or cyber-attacks, as well as ensure that their transaction monitoring systems and processes were sufficient for the new model and in place for the extended window. Participants would also need to ensure sufficient liquidity to support their activities during new operating hours and to understand the potential implications on their broader liquidity management approaches.
In terms of access to RTGS accounts for settlement, new NBPSPs need to consider the increased compliance requirements and associated costs as a result of the potential enhancements to the BoE/FCA process. Similarly, FMIs can expect increased regulatory scrutiny and expectations when making an application for a settlement account, including a discretionary mobilisation stage.
Next steps
The consultations close on 30 April 2024. The BoE plans to issue a formal consultation on RTGS and CHAPS operating hours, as well as a response to access to RTGS accounts for settlement in 2025.
The BoE will host a public event on 23 February on the discussion papers and next steps.
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