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Examining the Trade-Off between Settlement Delay and Intraday Liquidity in Canada's LVTS: A Simulation Approach

Neville Arjani

Staff Working Papers from Bank of Canada

Abstract: The author explores a fundamental trade-off that occurs between settlement delay and intraday liquidity in the daily operation of large-value payment systems (LVPS), with specific application to Canada's Large Value Transfer System (LVTS). To reduce settlement delay, participants generally must maintain greater intraday liquidity in the system. Intraday liquidity and settlement delay can be costly for LVPS participants, and improvements in the trade-off are desirable. The replacement of standard queuing arrangements with a complex queue-release algorithm represents one such improvement. These algorithms are expected to lower intraday liquidity needs and speed up payments processing in an LVPS. Simulation analysis is used to empirically test this proposition for the case of Canada's LVTS. The analysis is conducted using a payment system simulator developed by the Bank of Finland, called the BoF-PSS2. The author shows that increased use of the LVTS central queue (which contains a complex queue-release algorithm) reduces settlement delay associated with each level of intraday liquidity considered, relative to a standard queuing arrangement. Some important issues emerge from these results.

Keywords: Payment; clearing; and; settlement; systems (search for similar items in EconPapers)
JEL-codes: E47 G21 (search for similar items in EconPapers)
Pages: 43 pages
Date: 2006
New Economics Papers: this item is included in nep-cmp, nep-fin, nep-fmk, nep-mac and nep-mst
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4) Track citations by RSS feed

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