RTGS
Prior to the introduction of the RTGS system in 1996, banks settled payments among themselves by way of position netting. Such position netting was not obligatory and not supported by a formal legal framework as in the case of obligation netting. A bank paid (or received) only the net difference of the payments payable to (or receivable from) all the other banks participating in the system at the end of each business day. Position netting exposed banks to systemic risk because the failure of one bank to pay the amount due at the end of the day might expose other banks to unexpected payment obligations, triggering a chain of defaults.
In an RTGS system, large-value interbank payments are settled on a continuous, deal-by-deal basis through the banks' settlement accounts with the settlement institution of the system. As these payments are settled one by one during the day, systemic settlement risks arising from end-of-day netting are eliminated.
As opposed to position netting, RTGS requires banks to have more intraday liquidity to settle payments during the day. Banks in Hong Kong can obtain interest-free intraday liquidity through intraday repurchase agreements with the HKMA using Exchange Fund Bills and Notes.
Payment-versus-payment (PvP)
PvP is a mechanism for settling a foreign exchange transaction where payments in the two currencies involved are settled simultaneously. The Hong Kong dollar, US dollar, euro and renminbi RTGS systems in Hong Kong are interlinked to enable banks to settle US dollar/Hong Kong dollar, US dollar/renminbi, euro/US dollar, euro/Hong Kong dollar, euro/renminbi and renminibi/Hong Kong dollar foreign exchange transactions on a PvP basis. PvP greatly improves settlement efficiency and eliminates settlement risk arising from time lags in transactions and from time-zone differences.
Settlement Finality
The settlement of transactions made through the Hong Kong dollar, US dollar, euro and renminbi RTGS systems is final and irrevocable. This finality is protected from insolvency laws and other laws by thePayment Systems and Stored Value Facilities Ordinance.
Liquidity-saving Tools
The HKMA has introduced a number of improvements to the RTGS systems over the years to smooth payment flows and enable banks to use liquidity more efficiently. They include:
- CHATS Optimiser
- RTGS Liquidity Optimiser
- Cross-Currency CHATS Optimiser
- CCASS-related Optimisers
