Over the past decade we have come to take Real Time Gross Settlement (RTGS) Systems for granted as a part of the general payments and settlements landscape. Because RTGS systems form a part of the core backbone of the national payments system in countries where this type of settlement exists, it's normally accepted, as a given, that the RTGS system itself is risk free. However this is only true in cases where the BIS's "Core Principals for Systematically Important Payment Systems" are fully complied with. This 100 percent compliance is rarely true.



A critical issue in the determination of how risky a "risk free" RTGS system is, is the degree and extent to which a national central bank will accept either responsibility or liability for any operational failures which may occur. The degree to which this is true determines the true risk exposure of system participants to failures which may not be of their own making.

First however some points of clarification; the terms "payment" and "settlement" tend to be used interchangeably often leading to confusion. While "payment" and "settlement" may be used to describe the same operation, we have categorized these two terms according to what happens within the RTGS system. Everything that occurs in the RTGS system is a settlement – remember it is a settlement system! Some settlements are in respect of payments while others are settlements for other payment and/or clearing systems (these are usually multilateral, but can also be those in which payments occur one a bilateral basis).

So what is the real difference between a payment and a settlement? A payment is the payer's (i.e. the sending customer, not the bank) transfer of a monetary claim on a party acceptable to the payee (the receiving customer). Typically, claims take the form of banknotes or deposit balances held at a financial institution or at a central bank (i.e. in the RTGS settlement account). A payment is the transfer of something of value to compensate for goods or services that have been, or will be, received. Payment can be made in cash, on credit or by a transfer of ownership of assets.

Settlement on the other hand is the discharge of an obligation between banks in respect of the payments that they process on behalf of customers by a transfer of funds, either at the central bank or through a correspondent relationship.

So, what then is the true situation in an RTGS system, regarding responsibility and liability?

We have recently undertaken a survey across a range of countries. Countries in this random sample include the European Union (in terms of a very specific directive to all members). Some EU countries have additional agreement conditions or rules (such as Austria, Finland, Denmark, Germany and Luxembourg). We have also looked at New Zealand and the United States.

Generally no central bank or operator of a RTGS system acknowledges any form of responsibility or liability for operational failures except in the case of Finland, Germany & New Zealand which provide for limited central bank liability in the case of gross negligence.

In the EU (for both TARGET and for national RTGS systems) a "Compensation Scheme" exits. In terms of this scheme central banks are liable to pay limited compensation for failures that are directly in the control of the ECB (European Central Bank) or the national central bank. However in accepting this compensation the claimant waives all other claims, including any claims for consequential damages. The maximum level of compensation is capped at Euro 50 per payment order plus interest at the ruling rate.