Meaning
A financial mechanism for the immediate transfer of funds between bank accounts where each transaction is processed individually on a continuous basis. This real time gross settlement system eliminates the risk of a settlement delay because the transfer of value occurs simultaneously with the instruction.
Risk Reduction
Settlement happens on a gross basis meaning that every payment is handled one by one rather than being netted against other obligations at the end of the day. This approach ensures that the failure of one bank does not prevent other institutions from receiving the funds they are owed.
Liquidity Provision
Participants must maintain sufficient balances in their central bank accounts to cover every outgoing payment in real time. Because the system requires immediate funding, banks often use intraday credit facilities provided by the monetary authority to bridge temporary gaps in their cash flow.
Transaction Flow
High value payments such as those for the purchase of government bonds or the settlement of foreign exchange trades rely on this infrastructure to maintain the smooth functioning of the global economy. The continuous nature of the settlement process prevents the accumulation of large unpaid balances that could threaten the health of the entire banking sector during a period of financial stress.
