This article investigates the factors influencing the timing and funding of payments in the CHAPS Sterling system, drawing where appropriate on comparisons with payment activity in Fedwire. This analysis indicates that even though the intraday liquidity regime supporting CHAPS Sterling payments does not give rise to the same incentives for minute-by-minute payment coordination as those in Fedwire, the observed degree of liquidity recycling appears to be high. The authors have seen that the intraday profile of payments is comparatively smooth. Taken together, these observations reveal that even if collateral posting is perceived to be costly by some banks -- and hence a "liquidity incentive to delay" does exist in CHAPS Sterling -- other features of the system help avoid a prisoner's dilemma equilibrium in which the majority of payments are delayed until late in the day. This serves to reduce the maximum liquidity required to make a given set of payments and hence the aggregate value of collateral that needs to be posted.
Christopher Becher, Marco Galbiati, and Merxe Tudela The Timing and Funding of CHAPS Sterling Payments • Participants in CHAPS Sterling often use 1. Introduction incoming funds to make payments, a process known as liquidity recycling. • Liquidity recycling can be problematic if T he use of real-time gross settlement (RTGS) systems for the settlement of large-value payments offers considerable advantages, the principal one being the elimination of the credit participants delay their outgoing payments in risk that can arise between participants in deferred net settle- anticipation of incoming funds. ment systems. However, in comparison with deferred net settlement systems, RTGS systems require relatively large amounts of liquidity to support payment activity. This liquidity • An analysis of CHAPS payment
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