Auction-based liquidity saving mechanisms

Rodney Garratt, Morten Linnemann Bech, Marko Nanut Petric and Caner Ates

No 1318, BIS Working Papers from Bank for International Settlements

Abstract: This paper introduces a novel liquidity-saving mechanism (LSM) for real-time gross settlement (RTGS) systems based on an auction framework. Unlike conventional queue-based LSMs that optimise payment netting given pre-committed liquidity, the proposed mechanism reverses the process by eliciting bids from participants to establish mutually beneficial liquidity-sharing arrangements. These arrangements are supported through side payments from liquidity receivers to liquidity providers, ensuring incentive alignment. The mechanism is evaluated using agent-based simulations calibrated with transaction data from four RTGS systems: BCRP-RTGS (Peru), SAMOS and SADC-RTGS (South Africa), and SIC (Switzerland). Across all trials, auction success rates averaged 79% (ranging from 62 to 100%). These success rates were sufficiently high that observed failures typically did not increase liquidity usage. Overall, the findings demonstrate the importance of side payments in coordinating participant incentives, reveal the trade-off between liquidity efficiency and settlement delay, and highlight the potential of auction-based LSM designs to enhance RTGS system efficiency.

Keywords: payment system; liquidity savings mechanism (LSM); real-time gross settlement (RTGS) system; auctions (search for similar items in EconPapers)
JEL-codes: C72 D44 G21 (search for similar items in EconPapers)
Date: 2025-12
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