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United States General Accounting Office: 
GAO: 

Report to Congressional Requester: 

February 2002: 

Payment Systems: 

Central Bank Roles Vary, but Goals Are the Same: 

GAO-02-303: 

Contents: 

Letter: 

Results in Brief: 

Background: 

Core Principles Establishes Internationally Accepted Policy Objectives 
That, Along with National Law, Guide Central Bank Involvement in 
Payment Systems: 

Central Banks Are Involved in the Operations and Oversight of Wholesale 
Payment Systems: 

Central Bank Involvement in Retail Payment Systems Varies Considerably 
and Is Influenced by a Variety of Factors: 

Agency Comments: 

Appendixes: 

Appendix I: Objectives, Scope, and Methodology: 

Appendix II: The Core Principles for Systemically Important Payments 
Systems and Central Bank Responsibilities: 

Appendix III: Different Wholesale Settlement Systems Mitigate Different 
Risks: 

RTGS Systems Mitigate Systemic Risk: 

Net Settlement Systems Reduce Liquidity Needs: 

Appendix IV: Comments from the Federal Reserve System: 

Tables: 

Table 1: The Federal Reserve System’s Market Share of Payment Services: 

Table 2: Risks to Which Payment Systems Are Subject: 

Table 3: Common Retail Payment Instruments: 

Table 4: Relative Importance of Checks in Selected Countries, 1996-99: 

Table 5: Core Principles for Systemically Important Payments Systems: 

Abbreviations: 

ACH: automated clearinghouse: 

CHAPS: Clearing House Automated Payment System: 

CHIPCo: Clearing House Interbank Payments Company LLC: 

CHIPS: Clearinghouse Interbank Payments System: 

CPSS: Committee on Payment and Settlement Systems: 

ECB: European Central Bank: 

LVTS: Large Value Transfer System: 

MCA: Monetary Control Act: 

NYCHA: New York Clearing House Association LLC: 

RTGS: real-time gross settlement: 

TARGET: Trans-European Automated Real-time Gross settlement Express
Transfer: 

[End of section] 

United States General Accounting Office: 
Washington, D.C. 20548: 

February 25, 2002: 

The Honorable Carolyn B. Maloney: 
Ranking Minority Member: 
Subcommittee on Domestic Monetary Policy, Technology, and Economic 
Growth: 
Committee on Financial Services: 
House of Representatives: 

Dear Ms. Maloney: 

This report responds to your request that we study the roles of central 
banks in payment systems to provide perspective on the roles played by 
the Federal Reserve System[Footnote 1] in the United States’ payment 
system. Payment systems play an important role in the financial and 
economic health of nations. The smooth functioning of payment systems 
that handle very high-value, institution-to-institution payments—or 
wholesale payment systems—is important in ensuring the stability of 
financial markets and systems. Well-functioning payment systems that 
handle the low-value payments that constitute the bulk of payment 
transactions—or retail payment systems—are important in helping to 
maintain public confidence in financial systems. The degree to which a 
central bank should be involved in the payment system has been the 
subject of controversy. Views on this issue have evolved over time and 
therefore are likely to remain open to debate.[Footnote 2] 

We discuss the involvement of foreign central banks in their payment 
systems to provide perspective on the roles and functions of the 
Federal Reserve System in the U.S. payment system. We describe the 
roles of the Federal Reserve System in the Background section of this 
report. Although unique country characteristics make it difficult to 
conduct direct comparisons of the roles that central banks play in 
payment systems difficult, we reviewed these roles to illustrate the 
factors that influence the involvement of central banks in payment 
systems. The objectives of this report are to (1) identify 
internationally recognized objectives for payment systems and central 
bank involvement in those systems, (2) describe the roles of central 
banks in the wholesale payment systems of other major industrialized 
countries and the key factors that influence those roles, and (3) 
describe the roles of central banks in the retail payment systems of 
other major industrialized countries and the key factors that influence 
those roles. 

We reviewed literature provided by central banks and central bank 
organizations, foreign law commentaries, central bank Web sites, and 
academic studies. Our information on foreign laws is based on secondary 
sources and does not reflect our independent legal analysis. We also 
interviewed Federal Reserve System officials, members of trade 
associations, and academics. In analyzing the roles of other central 
banks in payment systems, we focused on countries with relatively 
modern, industrialized economies.[Footnote 3] Appendix I presents a 
detailed discussion of the scope and methodology of our work. 

Results in Brief: 

The primary objective of all central banks is to ensure the smooth 
functioning of their countries’ payment systems. Although their 
specific roles may vary slightly, the central banks of major 
industrialized countries have agreed on this and other common policy 
objectives and presented them in the Core Principles for Systemically 
Important Payment Systems (Core Principles).[Footnote 4] Intended to 
help promote safer and more efficient systemically important[Footnote 
5] payment systems worldwide, the Core Principles outlines specific 
policy recommendations for systemically important payment systems and 
describes responsibilities of central banks. The Core Principles is 
silent on the question of whether central banks should operate 
systemically important payment systems. However, many central banks 
believe that central bank operation of at least one large value funds 
transfer system in an economy is fundamental to financial stability. 
The Core Principles also recommends that central banks oversee all 
systemically important payment systems’ compliance with the Core 
Principles, including private-and public-sector systems. While the 
laws[Footnote 6] of the countries we studied give the central bank 
broad responsibility for ensuring that payment systems operate 
smoothly, some central banks are not specifically charged with 
providing payment clearing services,[Footnote 7] and some do not have 
explicit authority to regulate payment systems. 

All of the central banks we studied seek to ensure that their wholesale 
payment systems operate smoothly and minimize systemic risk. However, 
they pursue these goals in different ways that are influenced by 
various factors, such as the structure and history of the country’s 
banking system. All of the central banks we studied provide settlement 
services for their countries’ wholesale payment systems. In addition, 
some central banks that we reviewed provide wholesale clearing 
services. Other central banks have little operational involvement in 
clearing, but own the system, while others participated in partnerships 
with private-sector entities. 

Among the countries we studied, the roles of central banks in clearing 
retail payments varied more than they did with wholesale systems. 
Nonetheless, central banks consider retail payments to be an important 
component of their payment systems; therefore, central banks have some 
responsibility in fostering the smooth functioning of retail payment 
systems. All of the central banks we studied provide settlement for 
some retail payment systems. Some, but not all, central banks exercise 
regulatory[Footnote 8] authority over certain retail payment systems in 
their countries. The different roles played by central banks in retail 
payment systems reflect the influences of a variety of factors. For 
example, many European countries, such as Germany, the Netherlands, and 
Switzerland, have well-developed systems for credit transfers in which 
the central bank is not involved as a service provider. This reflects a 
history of payment networks established by postal organizations and 
other institutions like credit cooperatives, which provided financial 
services to the general population. Central banks also tend to have 
less operational involvement in countries where there is a relatively 
concentrated banking industry. In some countries, laws governing 
payments and the structure of the financial services industry direct 
the involvement of central banks in retail payment systems. Finally, 
central bank roles in retail payment systems reflect geographic and 
economic differences among countries. 

Background: 

The Federal Reserve System is involved in many facets of wholesale and 
retail payment systems in the United States, including: 

* providing wire transfers of funds and securities; 

* providing for the net settlement of check clearing arrangements, 
automated clearinghouse (ACH) networks, and other types of payment 
systems; 

* clearing checks and ACH payments; and; 

* regulating certain financial institutions and overseeing certain 
payment systems. 

Responding in part to a breakdown of the check-collection system in the 
early 1900s, Congress established the Federal Reserve System as an 
active participant in the payment system in 1913. The Federal Reserve 
Act directs the Federal Reserve System to provide currency in the 
quantities demanded by the public and authorizes the Federal Reserve 
System to establish a nationwide check clearing system, which has 
resulted in the Federal Reserve System’s becoming a major provider of 
check clearing services. 

Congress modified the Federal Reserve System’s role in the payment 
system through the Monetary Control Act of 1980 (MCA).[Footnote 9] One 
purpose of the MCA is to promote an efficient nationwide payment system 
by encouraging competition between the Federal Reserve System and 
private-sector providers of payment services. The MCA requires the 
Federal Reserve System to charge fees for its payment services, which 
are to be set to recover, over the long run, all direct and indirect 
costs of providing the services. Before the MCA, the Federal Reserve 
System provided payment services to its member banks for no explicit 
charge. The MCA expanded access to Federal Reserve System services, 
allowing the Federal Reserve System to offer services to all depository 
institutions, not just member banks. Congress again expanded the role 
of the Federal Reserve in the payment system in 1987 when it enacted 
the Expedited Funds Availability Act.[Footnote 10] This act expanded 
the Federal Reserve Board’s authority to regulate certain aspects of 
check payments that are not processed by the Federal Reserve System. 

Through specific regulatory authority and its general authority as the 
central bank, the Federal Reserve plays an important role in the 
oversight of the nation’s payment systems. The Federal Reserve Board 
has outlined its policy regarding the oversight of private-sector 
clearance and settlement systems in its Policy Statement on Payment 
Systems Risk. The second part of this policy incorporates risk 
management principles for such systems.[Footnote 11] 

The Federal Reserve System competes with the private sector in 
providing wholesale payment services. Wholesale payment systems are 
designed to clear and settle time-critical and predominantly large-
value payments.[Footnote 12] The two major wholesale payment systems in 
the United States are the Fedwire funds transfer system, owned and 
operated by the Federal Reserve System, and the Clearing House 
Interbank Payments System (CHIPS), which is owned and operated by the 
Clearing House Service Company LLC, a subsidiary of the New York 
Clearing House Association LLC (NYCHA) for use by the participant 
owners of the Clearing House Interbank Payments Company LLC (CHIPCo). 
Fedwire is a real-time gross settlement (RTGS) system through which 
transactions are cleared and settled individually on a continuous basis 
throughout the day.[Footnote 13] CHIPS began operations in 1970 as a 
replacement for paper-based payments clearing arrangements.Footnote 14] 
Since January 22, 2001, CHIPS has operated as a real-time settlement 
system.[Footnote 15] Payment orders sent over CHIPS are either 
simultaneously debited/credited to participants’ available balances or 
have been netted and set off with other payment orders and the 
resulting balance is debited/credited against participants’ available 
balances throughout the day.[Footnote 16] The transfer of balances into 
CHIPS and payments out occur via Fedwire.[Footnote 17] The Federal 
Reserve System oversees CHIPS’ compliance with its Policy Statement on 
Payment Systems Risk.[Footnote 18] 

The size and aggregate levels of wholesale transactions necessitate 
timely and reliable settlement to avoid the risk that settlement 
failures would pose to the financial system. Although wholesale 
payments constitute less than 0.1 percent of the total number of 
transactions of noncash payments, they represent 80 percent of the 
total value of these payments. Moreover, in 1999, the value of payment 
flows through the two major wholesale systems in the United States, 
Fedwire and CHIPS, was approximately 69 times the U.S. gross domestic 
product in that year. The Federal Reserve System also competes with the 
private sector in providing retail payment services. For example, the 
Federal Reserve System provides ACH and check clearing services. ACH 
systems are an important mechanism for high-volume, moderate to low-
value, recurring payments, such as direct deposit of payrolls; 
automatic payment of utility, mortgage, or other bills; and other 
business-and government-related payments.[Footnote 19] The Federal 
Reserve System also competes with private-sector providers of check 
clearing services. To do this, the Federal Reserve operates a 
nationwide check clearing service with 45 check processing sites 
located across the United States.[Footnote 20] 

The Federal Reserve System’s market share of payment services as of 
year-end 1999 is represented in table 1. 

Table 1: The Federal Reserve System’s Market Share of Payment Services 
(Volume of transactions in millions): 

Payment system: Large-Value systems[A]: Fedwire[B]; 
Market share, by year: 1995: $75.9; 
Market share, by year: 1996: $82.6; 
Market share, by year: 1997: $89.5; 
Market share, by year: 1998: $98.1; 
Market share, by year: 1999: $102.8. 

Payment system: Large-Value systems[A]: CHIPS[C]; 
Market share, by year: 1995: $51.0; 
Market share, by year: 1996: $53.5; 
Market share, by year: 1997: $59.0; 
Market share, by year: 1998: $59.1; 
Market share, by year: 1999: $57.3. 

Payment system: Check clearing: Federal Reserve System[D]; 
Market share, by year: 1995: $16,128.0; 
Market share, by year: 1996: $16,129.0; 
Market share, by year: 1997: $16,531.0; 
Market share, by year: 1998: $17,107.0; 
Market share, by year: 1999: $17,589.0. 

Payment system: Check clearing: Private clearing houses and direct 
exchanges[E]; 
Market share, by year: 1995: $28,145.0; 
Market share, by year: 1996: $29,852.0; 
Market share, by year: 1997: $30,020.0; 
Market share, by year: 1998: $30,082.4; 
Market share, by year: 1999: $30,304.7. 

Payment system: Check clearing: "On-us" checks; 
Market share, by year: 1995: $18,690.0; 
Market share, by year: 1996: $18,703.0; 
Market share, by year: 1997: $19,542.0; 
Market share, by year: 1998: $19,810.6; 
Market share, by year: 1999: $20,106.3. 

Payment system: Automated clearing houses: Federal Reserve System[F]; 
Market share, by year: 1995: $2,645.0; 
Market share, by year: 1996: $2,997.0; 
Market share, by year: 1997: $3,280.4; 
Market share, by year: 1998: $3,719.0; 
Market share, by year: 1999: $4,152.2. 

Payment system: Automated clearing houses: Private[G]; 
Market share, by year: 1995: $249.7; 
Market share, by year: 1996: $318.4; 
Market share, by year: 1997: $407.0; 
Market share, by year: 1998: $553.9; 
Market share, by year: 1999: $532.4. 

Payment system: Automated clearing houses: "On-us" ACH; 
Market share, by year: 1995: $595.0; 
Market share, by year: 1996: $738.0; 
Market share, by year: 1997: $861.0; 
Market share, by year: 1998: $1,057.0; 
Market share, by year: 1999: $1,557.6. 

[A] Number of originations. Data do not include nonvalue messages. 

[B] Fedwire is operated by the Federal Reserve System. 

[C] CHIPS, the Clearing House for Interbank Payments System, is 
operated by the New York Clearing House Association. 

[D] Includes personal, commercial, government and traveler’s checks, 
and commercial and postal money orders. 

[E] Checks are processed with "on-us" by private check clearing houses, 
direct exchange, or the Federal Reserve. 

[F] Includes all government and commercial debit and credit transfers 
as well as transfers sent by private, automated clearing houses to the 
Federal Reserve System for transmission to the receiving depository 
institution. In 1999, these were an estimated 153 million transfers. 
However, according to the Federal Reserve System, despite strong growth 
in both volume and value, the Federal Reserve System’s market share of 
ACH transfers fell during the 1994-98 period as private ACH networks 
experienced even more explosive growth. 

[G] The Electronic Payments Network, the largest private ACH services 
provider, estimates that its market share in 2001 had risen to 
approximately 20 percent. 

Source: GAO analysis is based on the following: Bank for International 
Settlements, Committee on Payment and Settlement Systems, Statistics on 
Payment Systems in the Group of Ten Countries— Figures for 1999. 

[End of table] 

During forums held by the Federal Reserve System’s Committee on the 
Federal Reserve System in the Payments Mechanism, held in May and June, 
1997, committee members and Federal Reserve staff met with 
representatives from over 450 payment system participants, including 
banks of all sizes, clearing houses and third-party service providers, 
consumers, retailers, and academics. Although a few large banks and 
clearing houses thought the Federal Reserve System should exit the 
check collection and ACH businesses, the overwhelming majority of forum 
participants opposed Federal Reserve System withdrawal. Participants 
were concerned that the Federal Reserve System’s exit could cause 
disruptions in the payment system. 

Core Principles Establishes Internationally Accepted Policy Objectives 
That, Along with National Law, Guide Central Bank Involvement in 
Payment Systems: 

The Core Principles illustrates how the central banks see their roles 
in pursuing their objective of smoothly functioning payment systems. 
[Footnote 21] Further, the Core Principles outlines central banks’ 
roles in promoting the safety and efficiency of systemically important 
payment systems that they or others operate. The laws of the countries 
we studied support this aspect of the Core Principles. These countries 
charge their central banks with broad responsibility for ensuring the 
smooth operation and stability of payments systems. In their basic role 
as banks, central banks generally are charged with acting as a 
correspondent bank for other institutions, providing accounts, and 
carrying out interbank settlements. Nonetheless, countries’ laws vary 
regarding the specific roles a central bank should play in the payment 
system. 

Core Principles Outlines Central Banks’ Objectives and Responsibilities 
for Systemically Important Payment Systems: 

Central banks in the G-10 countries[Footnote 22] and Australia have 
endorsed the Core Principles, which sets forth 10 basic principles that 
should guide the design and operation of systemically important payment 
systems in all countries as well as four responsibilities of the 
central bank in applying the Core Principles. (The principles and 
responsibilities are presented in appendix II.) The overarching public 
policy objectives for the Core Principles are safety and efficiency in 
systemically important payment systems. Although the Core Principles 
generally is considered to apply to wholesale payment systems, some 
payments industry officials said that some payment systems that process 
retail payments could reasonably be considered systemically important 
because of the cumulative size and volume of the payments they handle. 

Providing for the safety of payment systems is mostly a matter of 
mitigating the risks inherent to the systems. These risks are listed 
and defined in table 2. 

Table 2: Risks to Which Payment Systems Are Subject: 

Risk: Credit; 
Definition: The risk that a participant in a payment system will be 
unable to meet, in full, its financial obligations in the system when 
due or at any future time. 

Risk: Liquidity; 
Definition: The risk that a participant in a payment system will be 
unable to meet its financial obligations in the system when expected 
due to insufficient funds, but may be able to pay in full at some later 
time. 

Risk: Settlement; 
Definition: The risk that settlement in a payment system will not take 
place as expected. This risk can involve both credit and liquidity 
risk. It can also arise as a result of the operational risk. 

Risk: Operational; 
Definition: The risk that technical or mechanical problems in a system 
or mistakes by human operators will cause disruptions to a system that 
could result in unexpected losses. 

Risk: Systemic; 
Definition: The risk that the failure of one participant in a transfer 
system, or in financial markets generally, to meet its required 
obligations will cause other participants or financial institutions to 
be unable to meet their obligations (including settlement obligations 
in a transfer system) when due. Such a failure may cause significant 
liquidity or credit problems and, as a result, might threaten the 
stability of financial markets. 

Risk: Legal; 
Definition: The risk of loss because of the unexpected applications of 
a law or regulation or because a contract cannot be enforced. 

Risk: Fraud; 
Definition: The risk that a wrongful or criminal deception will lead to 
a financial loss for one of the parties involved. 

Source: GAO analysis of various industry publications. 

[End of table] 

Core Principle IV seeks to mitigate settlement risk by endorsing prompt 
final settlement, preferably during the day but, minimally, at the end 
of the day. The two major types of wholesale payment settlement systems 
are RTGS and multilateral netting systems. Recently, several hybrid 
systems have also been developed. (These two major types of systems are 
described further in appendix III.) In general, multilateral netting 
systems offer greater liquidity because gross receipts and deliveries 
are netted to a single position at the end of the day. An institution 
can make payments during the day as long as its receipts cover the 
payments by the end of the day. However, multilateral netting systems 
without proper risk controls can lead to significant systemic risk. 
Because transactions are processed throughout the day, but not settled 
until the end of the day, the inability of a member to settle a net 
debit position could have large unexpected liquidity effects on other 
system participants or the economy more broadly. RTGS systems rely on 
immediate and final settlement of transactions, and these systems have 
much less exposure to systemic risk that could result from a settlement 
failure. Without a system for the provision of adequate intraday 
credit, these systems cause potential liquidity constraints because 
they require that funds or credit be available at the time that a payer 
initiates a transaction.[Footnote 23] 

Efficiency in payment systems can be characterized as both operational 
and economic. Operational efficiency involves providing a required 
level and quality of payment services for minimum cost. Cost reductions 
beyond a certain point may result in slower, lower quality service. 
This creates trade-offs among speed, risk, and cost. Going beyond 
operational efficiency, economic efficiency refers to (1) pricing that, 
in the long run, covers all of the costs incurred and (2) charging 
those prices in a way that does not inappropriately influence the 
choice of a method of payment. 

The Core Principles sets forth four responsibilities of the central 
bank in applying the core principles, two of which address oversight 
functions. The first is that the central bank should ensure that the 
systemically important systems it operates comply with the Core 
Principles, and the second is that the central bank should oversee 
compliance with the Core Principles by systems it does not operate, and 
it should have the ability to carry out this oversight.[Footnote 24] 
Therefore, the Core Principles affirms the importance of central banks’ 
oversight responsibility for their countries’ systemically important 
payment systems, including those that they do not own or operate. 

Laws Give Many Central Banks Broad Responsibility for Ensuring 
Efficient Operations and Reducing Systemic Risk in Payment Systems: 

The laws of most of the countries we studied give the central bank 
broad responsibility for ensuring that payment systems operate 
smoothly. In addition, in their basic role as banks, central banks are 
generally charged with providing accounts to certain financial 
institutions and effecting interbank settlement. While some countries 
are specifically charged with providing additional payment services or 
regulating private payment systems, others are not. Similarly, 
regulatory and oversight authority is not always specified in laws but 
is obtained through historical development and the broader mission of 
the central bank. 

The European Central Bank (ECB) is the central bank for the countries 
that have adopted the euro.[Footnote 25] In conjunction with the euro 
area countries’ national central banks, the ECB oversees payment 
systems for the euro area and operates the Trans-European Automated 
Real-time Gross settlement Express Transfer (TARGET) system, the 
primary payment system for euro payments.[Footnote 26] The ECB’s powers 
and responsibilities are similar to those of national central banks. We 
therefore analyzed the ECB along with countries’ national central 
banks. In developing TARGET, the ECB set out strict rules regarding the 
national central banks’ provision of payment services, requiring each 
central bank to provide a RTGS system, which serves as a local 
component of TARGET. 

The laws of Canada, France, Japan, and the United Kingdom cast the 
central bank as a monitoring entity having general powers to ensure 
that payment systems do not pose systemic risk. The central banks in 
those countries are not specifically charged with providing particular 
payment clearing services. However, as a matter of practice, the 
central bank in France, which plans to discontinue its check clearing 
service in 2002, will continue to operate services related to check 
fraud. Although Australia’s law recognizes a limited role for the 
Reserve Bank of Australia to act as a service provider, the Reserve 
Bank of Australia’s primary purpose regarding payments systems is to 
serve as an oversight and regulatory mechanism designed to control risk 
to promote the overall efficiency of Australia’s financial system. 
German law authorizes the Bundesbank to furnish payments services, and 
the Bundesbank performs retail payment functions, including check 
processing, credit transfers, checks, and direct debits as well as 
owning and operating RTGSplus, which is an RTGS hybrid system for 
wholesale payments. 

The central banks we studied have general authority to take actions to 
protect against systemic risk. In some cases, the banks are to serve a 
particular regulatory function. For example, under Canadian law, the 
central bank decides upon the qualifications of payment systems 
determined by the central bank to pose systemic risk. However, except 
for Germany, Australia, and the United States, the laws of the 
countries we reviewed generally do not contemplate that the central 
bank is to regulate the provision of payment services for purposes 
unrelated to systemic risk. 

Central Banks Are Involved in the Operations and Oversight of Wholesale 
Payment Systems: 

All of the central banks we studied provide settlement for wholesale 
payment systems. Moreover, these central banks participated in the 
design and development of, and have oversight over, wholesale payment 
systems. Most central banks play a role in providing these wholesale 
payment services. However, as demonstrated by the central banks we 
studied, central bank involvement in wholesale payment systems varies. 
Some central banks have full ownership and operational involvement in 
the payment system; others have little operational involvement beyond 
settlement services. Other central banks participate in partnerships. 
In some cases, the central bank is a major provider or perhaps the only 
provider of wholesale payment services. The Federal Reserve System, as 
previously noted, is a major provider of wholesale payment services. 

Central Banks Participated in the Design and Development of Wholesale 
Payment Systems: 

Each of the central banks we reviewed has participated in the design 
and development of its country’s wholesale payment system. For example, 
the Bundesbank collaborated in developing the RTGSplus system. The Bank 
of France played a major role in the development of France’s systems. 
The Bank of England cooperated with the Clearing House Automated 
Payment System (CHAPS)[Footnote 27] in the development of a new system, 
NewCHAPS;[Footnote 28] the Bank of Canada assisted in the design and 
development of the Large Value Transfer System. 

In the G-10 countries, the first automated RTGS system was Fedwire in 
the United States, which is owned and operated by the Federal Reserve 
System. Although there are some net settlement systems for wholesale 
payments today, many countries are transitioning to RTGS systems. In 
Europe, various decisions over the past 5 to 10 years have encouraged 
current and potential euro area countries to develop national RTGS 
systems. The trend toward RTGS systems extends beyond Europe’s 
boundaries, as countries worldwide are adopting RTGS systems. 

Central Banks’ Roles in Providing and Overseeing Wholesale Payment 
Systems Vary: 

Central banks we studied played various roles in providing and 
overseeing wholesale payment services. All central banks provide key 
settlement services for wholesale payment systems. Some central banks 
own and operate wholesale payment systems that include clearance and 
settlement while others only provide oversight and settlement, leaving 
clearance and other processing activities to other parties. There is no 
clear pattern in the roles played by central banks in clearing 
wholesale payments. 

In addition to the United States, two of the central banks we studied, 
the Bundesbank and the Bank of France, have full ownership of their 
respective wholesale payment systems. The Bundesbank owns and operates 
the RTGSplus system, which was developed with the input of the German 
banking industry. The Bundesbank has full control over the practices of 
the system for large-value payments. 

The Bank of France owns and manages Transferts Banque de France, which 
is a RTGS system that is one of the two wholesale payment systems in 
France. The Bank of France is also a joint owner of the company that 
owns and operates France’s other wholesale payment system, which is a 
hybrid,[Footnote 29] real-time net settlement system. Although the Bank 
of France is only a partial owner of this system, it can exert 
considerable influence over it by virtue of its ownership role in the 
controlling company. 

The Bank of England is a member and shareholder of CHAPS Inc., which 
operates England’s sterling and euro RTGS systems. Although the Bank of 
England does not own or manage any payment clearing system, CHAPS 
payments settle by transferring funds among participating institutions’ 
Bank of England accounts. The Bank of England is the settlement bank 
for both the CHAPS Sterling and CHAPS Euro. 

The Bank of Canada has a more limited operational role in its system. 
The Bank of Canada entrusts the ownership and operation of the Large 
Value Transfer System (LVTS) to the Canadian Payments Association, 
which the Bank of Canada chairs. The Bank of Canada expressly 
guarantees settlement of LVTS in the event of the simultaneous default 
of more than one participant, and losses exceed available participant 
collateral. This guarantee is likened to “catastrophic insurance with a 
very large deductible,” with the latter being the collateral provided 
by the participants. 

Central Bank Involvement in Retail Payment Systems Varies Considerably 
and Is Influenced by a Variety of Factors: 

Although the extent of central bank oversight over retail payment 
operations varies, central banks generally consider retail payments as 
an important component of the payment system. As such, central banks 
have some responsibility for promoting well-functioning retail payment 
systems. The operational role of the central bank in retail payment 
clearing varies considerably among the countries we studied. The basic 
structure of retail payment systems depends largely on the structure of 
the underlying financial system and on the historical evolution of 
payment processes. Factors that influence central bank involvement in 
retail payment systems include the history and structure of the 
country’s payment system and banking industry. While we identified 
several factors that influenced the involvement of a central bank in 
its country’s retail payment system, these factors interact uniquely 
and occur to varying degrees in the systems we studied. 

Retail Payments Are Paper-Based or Electronic and May Be Cleared 
through a Variety of Arrangements: 

Retail payments are generally lower in value and urgency from the 
perspective of the financial system than wholesale payments, but retail 
payments occur more frequently. They typically include consumer and 
commercial payments for goods and services. Noncash retail payment 
instruments are generally categorized as paper-based (most commonly 
checks) or electronic (most commonly credit cards, credit transfer, 
debit cards, and direct debits). These payment instruments are further 
described in table 3. 

Table 3: Common Retail Payment Instruments: 

Payment instrument: Paper-based: Checks; 
Definition: Written orders from one party (the drawer) to another (the 
drawee, normally a bank) requiring the drawee to pay a specified sum on 
demand to the drawer or to a third party specified by the drawer. 
Checks may be used for settling debts and withdrawing money from banks. 

Payment instrument: Electronic: Credit cards; 
Definition: Instruments indicating that the holder has been granted a 
line of credit. Credit cards enable holders to make purchases and/or 
withdraw cash up to a prearranged ceiling; the credit granted can be 
settled in full by the end of a specified period or can be settled in 
part, with the balance taken as extended credit. Interest is charged on 
the amount of the extended credit, and the holder is sometimes charged 
an annual fee. 

Payment instrument: Electronic: Credit transfers (GIRO); 
Definition: Payment orders or possibly a sequence of payment orders 
made for the purpose of placing funds at the disposal of the 
beneficiary. Both the payment instructions and the funds described 
therein move from the bank of the payer/originator to the bank of the 
beneficiary, possibly via several other banks as intermediaries and/or 
more than one credit transfer system. 

Payment instrument: Electronic: Debit cards; 
Definition: Cards that enable the holder to have purchases directly 
charged to funds on an account at a deposit-taking institution. The 
debit function may sometimes be combined with another function, such as 
cash withdrawal or check guarantee, on a single card. 

Payment instrument: Electronic: Direct debits; 
Definition: Preauthorized debits on the payer’s bank account initiated 
by the payee. 

Source: Bank for International Settlements, Committee on Payment and 
Settlement Systems, A Glossary of Terms Used in Payments and Settlement 
Systems, 2001. 

[End of table] 

Central banks provide settlement for retail payments, but commercial 
banks also settle retail payments. Where the central bank provides 
settlement, it does so for “direct participants”—that is, institutions 
having settlement accounts at the central bank. Settlement of payments 
at the central bank sometimes requires tiering arrangements. Under 
these arrangements, “direct participants” settle payments through their 
accounts at the central bank, with indirect participants’ settling 
accounts with a direct participant with whom they have a settlement 
arrangement. Such is the case with the Bank of England, which acts as a 
banker to the settlement banks that are direct members of the United 
Kingdom’s primary payment clearing association. Settlement of retail 
payments may also occur through settlement agents, third-party 
arrangements, or correspondent accounts that institutions hold with 
each other for bilateral settlement. 

Despite Variations in Central Bank Involvement, Most Have an Interest 
in Promoting Well-Functioning Payment Systems: 

Although many central banks work to ensure that their retail payment 
systems are well-functioning, their approaches diverge. Some central 
banks play a prominent regulatory and operational role in retail 
payments and see these roles as keys to fostering well-functioning 
retail systems, while others assume more limited roles. Whatever the 
level of involvement in oversight or operations, most central banks 
consider retail payments as important components of the payment system 
and therefore assume some responsibility in promoting well-functioning 
retail payment systems. 

Structural Factors Influence Central Bank Involvement in the Clearance 
of Retail Payments: 

A number of structural factors influence the central bank’s role in 
retail payments. For example, the involvement of the central bank in 
check clearing can vary. In countries with a concentrated banking 
industry, on-us check clearing will occur with higher frequency. On-us 
checks are checks that are deposited at the same bank on which they are 
drawn, so that no third party, including the central bank, is required 
for clearing or settlement. For example, Canada has few banks, heavy 
check use, and little central bank involvement in clearing retail 
payments.[Footnote 30] On the other hand, the United States has a large 
number of banks and its central bank is heavily involved in providing 
check clearing services. If a country has many smaller banks, such as 
savings, rural, and cooperative banks, there will be more need for some 
kind of retail clearance system, thereby creating greater potential 
need for central bank involvement. 

Identifying the extent to which payment preferences influence central 
bank involvement in clearing payments is difficult. Some have suggested 
that central banks in countries that rely heavily on paper-based 
instruments are more involved in clearing retail payments, and that 
central banks of countries that are more reliant on electronic payments 
provide fewer clearing services. Central banks involved in check 
clearing include those in Germany, France, and the United States. 
[Footnote 31] France and the United States rely heavily on checks for 
retail payments. In contrast, the Bundesbank is heavily involved in 
clearing a variety of retail payment instruments, but Germany is not 
particularly reliant on checks as a means of payment. 

The physical size of a country determines the distances that payment 
instructions might have to travel between the paying and the drawing 
banks. This has particular relevance in countries that rely heavily on 
paper-based instruments such as checks, which might have to be 
physically moved great distances to be processed. For example, this is 
the case in the United States, which is much larger than any European 
country. The United States currently has approximately 19,000 
depository institutions. Canada, on the other hand, has far fewer 
financial institutions but is also physically large and uses checks 
extensively. Private-sector correspondent banks clear many checks and 
compete with the central bank. The central bank, however, is perceived 
as a reliable and neutral intermediary to clear payments and provide 
settlement on a large scale for a diverse set of institutions. 

Table 4 shows the relative importance of noncash payment instruments in 
selected countries. 

Table 4: Relative Importance of Checks in Selected Countries, 1996-99: 

Country: Canada; 
Volume of cashless transactions, by year: 1996: 45.4%; 
Volume of cashless transactions, by year: 1997: 39.4%; 
Volume of cashless transactions, by year: 1998: 34.6%; 
Volume of cashless transactions, by year: 1999: 31.5%. 

Country: France; 
Volume of cashless transactions, by year: 1996: 43.6%; 
Volume of cashless transactions, by year: 1997: 43.0%; 
Volume of cashless transactions, by year: 1998: 40.7%; 
Volume of cashless transactions, by year: 1999: n/a. 

Country: Germany; 
Volume of cashless transactions, by year: 1996: 6.4%; 
Volume of cashless transactions, by year: 1997: 5.7%; 
Volume of cashless transactions, by year: 1998: 4.8%; 
Volume of cashless transactions, by year: 1999: 4.0%. 

Country: United Kingdom; 
Volume of cashless transactions, by year: 1996: 37.8%; 
Volume of cashless transactions, by year: 1997: 34.7%; 
Volume of cashless transactions, by year: 1998: 32.0%; 
Volume of cashless transactions, by year: 1999: 29.0%. 

Country: United States; 
Volume of cashless transactions, by year: 1996: 74.5%; 
Volume of cashless transactions, by year: 1997: 72.9%; 
Volume of cashless transactions, by year: 1998: 70.8%; 
Volume of cashless transactions, by year: 1999: 68.6%. 

n/a = not applicable 

Source: Bank for International Settlements, Committee on Payment and 
Settlement Systems, Statistics on Payment Systems in the Group of Ten 
Countries—Figures for 1999, 2001. 

[End of table] 

Other Factors Influence the Involvement of Central Banks in Retail 
Payment Systems: 

A central bank’s role in the retail payment system reflects historical 
events and developments that have shaped retail payment systems in a 
particular country over many years. For example, the GIRO system serves 
as a primary retail payment in many European countries. The GIRO system 
was originally developed by the European Postal agencies, rather than 
by banks. Historically, European banking systems were largely 
decentralized and in most cases highly regulated. Therefore, in the 
absence of an efficient payment system for retail payments developed by 
the banking industry, payers in most European countries turned to 
national institutions, such as the postal service, which offered credit 
transfers (so-called GIRO payments) through a nationwide network of 
branches. Commercial banks subsequently began to offer GIRO services. 
As a result of these events, many European countries have well-
developed systems that do not rely on central bank clearing for credit 
transfers. These systems were originally established by the public 
sector to respond to needs that were not being met by the private 
sector. Similarly, as previously noted, the Federal Reserve System was 
established to respond to events that pointed to the lack of a private 
remedy to market problems. 

Agency Comments: 

We received comments on a draft of this report from the Board of 
Governors of the Federal Reserve System. These comments are reprinted 
in appendix IV. Board staff also provided technical comments and 
corrections that we incorporated as appropriate. 

We are sending copies of this report to the chairman of the House 
Subcommittee on Domestic Monetary Policy, Technology, and Economic 
Growth; the chairman of the Board of Governors of the Federal Reserve 
System; the president of the Federal Reserve Bank of Atlanta, and the 
president of the Federal Reserve Bank of New York. We will make copies 
available to others on request. 

Please contact me or James McDermott, Assistant Director, at (202) 512-
8678 if you or your staff have any questions concerning this report. 
Other key contributors to this report are James Angell, Thomas Conahan, 
Tonita W. Gillich, Lindsay Huot, and Desiree Whipple. 

Sincerely yours, 

Signed by: 

Thomas J. McCool: 
Managing Director, Financial Markets and Community Investment: 

[End of section] 

Appendix I: Objectives, Scope, and Methodology: 

The objectives of this report are to (1) identify internationally 
recognized objectives for payment systems and central bank involvement 
in those systems, (2) describe the roles of central banks in the 
wholesale payment systems of other major industrialized countries and 
the key factors that influence those roles, and (3) describe the roles 
of central banks in the retail payment systems of other major 
industrialized countries and the key factors that influence those 
roles. 

In analyzing the roles of other central banks in payment systems, we 
focused on countries with relatively modern, industrialized economies. 
These countries included Australia, Canada, France, Germany, Japan, the 
United Kingdom, and the United States. To identify widely held public 
policy objectives for payment systems, we reviewed Core Principles for 
Systemically Important Payment Systems, which was developed by the 
Committee on Payment and Settlement Systems (CPSS), of the Bank for 
International Settlements. The CPSS established the Task Force on 
Payment System Principles and Practices in May 1998 to consider what 
principles should govern the design and operation of payment systems in 
all countries. The task force sought to develop an international 
consensus on such principles. The task force included representatives 
not only from G-10 central banks and the European Central Bank but also 
from 11 other national central banks of countries in different stages 
of economic development from all over the world and representatives 
from the International Monetary Fund and the World Bank. The task force 
also consulted groups of central banks in Africa, the Americas, Asia, 
the Pacific Rim, and Europe. We also reviewed materials available on 
the Web sites of the central banks we studied; these sites often 
included mission statements, basic data, and authorizing statutes. We 
reviewed a variety of legal analyses and commentaries to analyze those 
statutes. Where we make statements regarding to central banks’ 
authorizing statutes, they are based on these sources rather than on 
our original legal analysis. 

To describe the roles of central banks in the wholesale and retail 
payment systems of other major industrialized countries and the key 
factors that influence those roles, we reviewed materials available on 
central bank Web sites as well as other articles and publications from 
various central banks. We reviewed publications available from the Bank 
for International Settlements, and also the European Central Bank’s 
Blue Book: Payment and Securities Settlement Systems in the European 
Union. We also reviewed numerous articles and commentaries on the roles 
of central banks as well as discussions of recent reform efforts. To 
enhance our understanding of these materials, we interviewed Federal 
Reserve officials, members of trade associations, and officials from 
private-sector payment providers. 

We conducted our work in Washington, D.C., and New York, N.Y., between 
June 2001 and January 2002 in accordance with generally accepted 
government auditing standards. 

[End of section] 

Appendix II: The Core Principles for Systemically Important Payments 
Systems and Central Bank Responsibilities: 

The core principles for systemically important payments systems (core 
principles) are shown in table 5. 

Table 5: Core Principles for Systemically Important Payments Systems: 

Principle: I; 
Description: The system should have a well-founded legal basis under 
all relevant jurisdictions. 

Principle: II; 
Description: The system’s rules and procedures should enable 
participants to have a clear understanding of the system’s impact on 
each of the financial risks they incur through participation in it. 

Principle: III; 
Description: The system should have clearly defined procedures for the 
management of credit risks and liquidity risks, which specify the 
respective responsibilities of the system operator and the participants 
and which provide appropriate incentives to manage and contain those 
risks. 

Principle: IV; 
Description: The system should provide prompt final settlement on the 
day of value, preferably during the day and at a minimum at the end of 
the day. 

Principle: V; 
Description: A system in which multilateral netting takes place should, 
at a minimum, be capable of ensuring the timely completion of daily 
settlements in the event of an inability to settle by the participant 
with the largest single settlement obligation. 

Principle: VI; 
Description: Assets used for settlement should preferably be a claim on 
the central bank; where other assets are used, they should carry little 
or no credit risk and little or no liquidity risk. 

Principle: VII; 
Description: The system should ensure a high degree of security and 
operational reliability and should have contingency arrangements for 
timely completion of daily processing. 

Principle: VIII; 
Description: The system should provide a means of making payments that 
is practical for its users and efficient for the economy. 

Principle: IX; 
Description: The system should have objective and publicly disclosed 
criteria for participation, which permit fair and open access. 

Principle: X; 
Description: The system’s governance arrangements should be effective, 
accountable and transparent. 

[End of table] 

The responsibilities of the central bank in applying the core 
principles are as follows: 

* The central bank should define clearly its payments objectives and 
should disclose publicly its role and major policies with respect to 
systemically important payments systems. 

* The central bank should ensure that the systems it operates comply 
with the core principles. 

* The central bank should oversee compliance with the core principles 
by systems it does not operate and should have the ability to carry out 
this oversight. 

* The central bank, in promoting payment system safety and efficiency 
through the core principles, should cooperate with other central banks 
and with any other relevant domestic or foreign authorities. 

[End of section] 

Appendix III: Different Wholesale Settlement Systems Mitigate Different 
Risks: 

Different forms of settlement for wholesale payments result in 
different risks. Various wholesale payment systems in major 
industrialized countries use similar means to transmit and process 
wholesale payments. However, they sometimes use different rules for 
settling those transactions. In general, wholesale payments are sent 
over separate, secure, interbank electronic wire transfer networks and 
are settled on the books of a central bank. That is, settlement is 
carried out by exchange of funds held in banks’ reserve accounts at a 
central bank. However, various wholesale payment systems use different 
rules for settling these large-value payments. Some systems operate as 
real-time gross settlement (RTGS) systems, which continuously clear 
payment messages that are settled by transfer of central bank funds 
from paying banks to receiving banks. Other systems use net settlement 
rules, wherein the value of all payments due to and due from each bank 
in the network is calculated on a net basis before settlement. Each 
form of settling wholesale payments presents different risks to 
participants. Recently, some hybrid systems have been developed, 
building on the strengths and minimizing the risks associated with pure 
RTGS or netting systems. 

RTGS Systems Mitigate Systemic Risk: 

RTGS systems are gross settlement systems in which both processing and 
settlement of funds transfer instructions take place continuously, or 
in real time, on a transaction by transaction basis. RTGS systems 
settle funds transfers without netting debits against credits and 
provide final settlement in real time, rather than periodically at 
prespecified times. In most RTGS systems, the central bank, in addition 
to being the settlement agent, can grant intraday credit to help the 
liquidity needed for the smooth operation of these systems. 
Participants typically can make payments throughout the day and only 
have to repay any outstanding intraday credit by the end of the day. 

Because RTGS systems provide immediate finality of gross settlements, 
there is no systemic risk—that is, the risk that the failure to settle 
by one possibly insolvent participant would lead to settlement failures 
of other solvent participants due to unexpected liquidity shortfalls. 
However, as the entity guaranteeing the finality of each payment, the 
central bank faces credit risk created by the possible failure of a 
participant who uses intraday credit. In the absence of collateral for 
such overdrafts, the central bank assumes some amount of credit risk 
until the overdrafts are eliminated at the end of the day. 

In recent years, central banks have taken steps to more directly manage 
intraday credit, including collaterization requirements, caps on 
intraday credit, and charging interest on intraday overdrafts. Fedwire 
was established in 1918 as a telegraphic system and was the first RTGS 
system among the G-10 countries. Presently, account tallies are 
maintained minute-by-minute. The Federal Reserve Banks generally allow 
financially healthy institutions the use of daylight overdrafts up to a 
set multiple of their capital and may impose certain additional 
requirements, including collateral. In 1994, the Federal Reserve System 
began assessing a fee for the provision of this daylight liquidity. 
Other central banks have only recently adopted RTGS systems and have 
established a variety of intraday credit policies, such as intraday 
repurchase agreements, collateralized daylight overdrafts, and other 
policies. 

Net Settlement Systems Reduce Liquidity Needs: 

Other networks operate under net settlement rules. Under these rules, 
the value of all payments due to and due from each bank in the network 
is calculated on a net basis bilaterally or multilaterally. This occurs 
at some set interval—usually the end of each business day—or, in some 
newly developed systems, continuously throughout the day. Banks ending 
the day in a net debit position transfer reserves to the net creditors, 
typically using a settlement account at the central bank. 

Net settlement systems, with delayed or end of business day settlement, 
enhance liquidity in the payment system because such systems 
potentially allow payers to initiate a transaction without having the 
funds immediately on hand, but available pending final settlement. 
However, this can increase the most serious risk in netting systems, 
which is systemic risk. Recognizing that systemic risk is inherent in 
netting systems, central banks of the G-10 countries formulated minimum 
standards for netting schemes in the Lamfalussy Standards.[Footnote 32] 
The standards stress the legal basis for netting and the need for 
multilateral netting schemes to have adequate procedures for the 
management of credit and liquidity risks. 

Although netting arrangements generally reduce the need for central 
bank funds, they also expose the participants to credit risks as they 
implicitly extend large volumes of payment-related intraday credit to 
one another. This credit represents the willingness of participants to 
accept or send payment messages on the assumption that the sender will 
cover any net debit obligations at settlement. The settlement of 
payments, by the delivery of reserves at periodic, usually daily, 
intervals is therefore an important test of the solvency and liquidity 
of the participants. In recent years, central banks in countries using 
net settlement rules have taken steps to reduce credit risks in these 
systems as part of overall programs to reduce systemic risks. 

[End of section] 

Appendix IV: Comments from the Federal Reserve System: 

Board Of Governors Of The Federal Reserve System: 
Louise L. Roseman, Rector: 
Division Of Reserve Bank Operations And Payment Systems: 
Washington, D.C. 20551: 

February 19, 2002: 

Mr. Thomas J. McCool: 
Managing Director, Financial Markets and Community Investment: 
United States General Accounting Office: 
Washington, DC 20548: 

Dear Mr. McCool: 

Thank you for the opportunity to comment on the GAO's draft report 
entitled Payment Systems: Central Bank Roles Vary, but Goals Are the 
Same. We believe the report accurately recognizes the common and 
important roles played by central banks in overseeing payment systems 
and providing settlement services. In addition, the report provides 
insight into the reasons for the differences in the extent of central 
banks' provision of payment clearing services. 

We have provided technical comments on the draft report under separate 
cover. 

Sincerely, 

Signed by: 

Louise L. Roseman: 

[End of section] 

Footnotes: 

[1] The Federal Reserve System comprises the Board of Governors and the 
Federal Reserve Banks. The Federal Reserve Banks own and operate the 
wholesale and retail payment systems offered by the Federal Reserve 
System, while the Board of Governors provides oversight of these 
operations and serves as the regulator where they possess such 
authority. In this report, we use the term “Federal Reserve System” 
generically to refer to either entity. 

[2] U.S. General Accounting Office, Federal Reserve System: Mandated 
Report on Potential Conflicts of Interest, [hyperlink, 
http://www.gao.gov/products/GAO-01-160] (Washington, D.C.: Nov. 13, 
2000). 

[3] For this report, we focused on Australia, Canada, France, Germany, 
Japan, the United Kingdom, and the United States. 

[4] The Core Principles was developed by the Committee on Payment and 
Settlement Systems (CPSS) of the G-10 Central Bank Governors. The 
secretariat for this committee is provided by the Bank for 
International Settlements. The CPSS established the Task Force on 
Payment System Principles and Practices in May 1998 to consider what 
principles should govern the design and operation of payment systems in 
all countries. The task force sought to develop an international 
consensus on such principles. The task force included representatives 
(1) from major industrial nations’ central banks and the European 
Central Bank, (2) from 11 other national central banks of countries in 
different stages of economic development from all over the world, and 
(3) from the International Monetary Fund and the World Bank. The task 
force also consulted groups of central banks in Africa, the Americas, 
Asia, the Pacific Rim, and Europe. 

[5] A payment system is systemically important where, if the system 
were not sufficiently protected against risk, disruption within it 
could trigger or transmit further disruptions among participants or 
systemic disruptions in the financial area more widely. 

[6] Our discussion of the laws of other nations is based on secondary 
sources rather than our original legal analysis. 

[7] Clearing refers to transmitting, reconciling, and, in some cases, 
confirming payment orders before settlement, possibly including the 
netting of instructions and the establishment of final positions for 
settlement. Settlement refers to the process of recording the debit and 
credit positions of two parties in a transfer of funds. We discussed 
these and other aspects of payment systems in the following: U.S. 
General Accounting Office, Payments, Clearance, and Settlement: A Guide 
to the System, Risk, and Issues, [hyperlink, 
http://www.gao.gov/products/GAO/GGD-97-73] (Washington, D.C.: June 20, 
1997). 

[8] We use the term “regulatory” to indicate the authority to issue and 
enforce specific regulations governing the payment system. In our 
previous report, [hyperlink, http://www.gao.gov/products/GAO-01-160], 
we found no evidence to suggest that the Federal Reserve has not 
adequately separated its role as a provider of services and its roles 
as regulator, supervisor, and lender. 

[9] Depository Institutions Deregulation and Monetary Control Act of 
1980, Pub. L. No. 96-221 § 107. 

[10] Pub. L. No. 100-86, Title VI, § 609 (2000). 

[11] These standards are based on the Lamfalussy Minimum Standards, 
which are the forerunners of the Core Principles. 

[12] Although the wholesale payment systems of some countries handle 
securities transactions, we do not discuss securities settlement 
systems in this report. 

[13] A daylight overdraft occurs when a depository institution’s 
Federal Reserve account is in a negative position during the business 
day. In Fedwire, an institution that incurs an overdraft is charged a 
fee that is based on its average daily overdraft, and the size of the 
overdraft is limited according to a predetermined cap. 

[14] Each of the 57 CHIPS members, primarily large money-center banks, 
has an ownership interest in CHIPCo, the company that owns and operates 
CHIPS. Management of CHIPCo is directed by the CHIPCo board, which is 
elected by the membership. The CHIPCo board sets strategy and makes key 
decisions. 

[15] Before January 22, 2001, CHIPS operated as an end-of-day 
multilateral net settlement system. 

[16] During the day, net settlement may be either bilateral (i.e., 
offsetting payment orders to and from two institutions) or multilateral 
(i.e., offsetting payment orders to and from all participants). Payment 
orders that remained queued until the end of the processing day are 
settled on a multilateral net basis. 

[17] Since 1981, CHIPS has used an account at the Federal Reserve Bank 
of New York for settlement purposes. 

[18] The Federal Reserve staff charged with administering the Policy 
Statement on Payments System Risk are separate from the staff providing 
payment services such as Fedwire. 

[19] ACH payments can flow through one or multiple operators. 
Transactions processed within the Federal Reserve Banks’ ACH network 
settle in the participants’ Federal Reserve Bank accounts or in the 
Federal Reserve Bank account of a correspondent institution. 
Transactions that are cleared and processed within a private-sector 
operator’s network generally settle on a net basis through the net 
settlement services provided by the Federal Reserve Banks. ACH 
transfers that flow over two or more networks must comply with the 
operational guidelines and fees of each network. 

[20] As part of this nationwide service, the Federal Reserve Banks use 
private-sector couriers to transport checks between offices, see U.S. 
General Accounting Office, Check Relay: Controls in Place Comply With 
Federal Reserve Guidelines, [hyperlink, 
http://www.gao.gov/products/GAO-02-19] (Washington, D.C.: Dec. 12, 
2001). 

[21] Systemically important payment systems are a major channel by 
which shocks can be transmitted across domestic and international 
financial systems and markets. In most cases, these are wholesale 
payment systems. 

[22] The G-10 is made up of 11 major industrialized countries that 
consult on general economic and financial matters. The 11 countries are 
Belgium, Canada, France, Germany, Italy, Japan, the Netherlands, 
Sweden, Switzerland, the United Kingdom, and the United States. 

[23] Daylight credit is an important aspect of the RTGS systems 
discussed in this report. For Fedwire, the Federal Reserve System 
allows, within certain guidelines, the use of daylight overdrafts in 
banks’ Federal Reserve accounts, as outlined in the Federal Reserve 
Board’s Policy Statement on Payments System Risk. In other countries, 
various forms of intraday credit are used, including daylight 
overdrafts and intraday repurchase agreements. 

[24] The other two responsibilities relate to how the central bank 
should clearly define and publicly disclose payments objectives and 
cooperate with other central banks and relevant authorities. 

[25] The 11 countries that have adopted the euro include Austria, 
Belgium, Finland, France, Germany, Ireland, Italy, Luxembourg, the 
Netherlands, Portugal, and Spain. 

[26] TARGET is a RTGS system that transfers an average of 211,282 
transfers per day, totaling a daily average of about 1.3 trillion euro. 

[27] CHAPS is an electronic transfer system for sending same-day 
payments from bank to bank. 

[28] Following a strategic review, the CHAPS Clearing Company and the 
Bank of England developed NewCHAPS, which was designed to be an 
enhanced replacement RTGS service for CHAPS Sterling and CHAPS Euro. 

[29] The Paris Net Settlement system is described as a hybrid because 
it offers a netting mechanism while transactions are settled in real 
time. 

[30] The Bank of Canada does provide interbank net settlement for these 
payments. 

[31] Due to check truncation, check payments in France are largely 
processed electronically, and all check clearing houses operated by the 
Banque de France will be closed in 2002. The Banque de France remains 
involved in guarding the safety of check payments in France by 
maintaining two national databases that contain information on lost or 
stolen checks and individuals barred from using checks. 

[32] The main objective of the Lamfalussy Standards is that the 
participants and the service providers should have both the incentives 
and the capability to manage credit and liquidity risks arising from 
the netting schemes. 

[End of section] 

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