Figure 1: Simplified U.S. Interbank Settlement Landscape1
Figure 1 depicts a simplified representation of the USD interbank payment system landscape. It depicts the internal ledgers of the Federal Reserve, a commercial bank, and a private sector FMI. It illustrates the settlement of payments between accounts on each ledger. Payments settled on the Federal Reserve ledger settle in central bank money. Payments settled on the commercial bank ledger settle in commercial bank money. Payments settled on the FMI ledger settle using an FMI settlement asset. The represented commercial bank, as well as other commercial banks, have accounts at the Federal Reserve and at the private sector FMI. The private sector FMI, which in this instance is a Financial Market Utility that has been designated as Systemically Important by the Financial Stability Oversight Council, also has an account at the Federal Reserve. The commercial bank has a wide variety of account holders.
Figure 2: (A) Simplified CHIPS Settlement and Federal Reserve
Interaction
(B) FMI Money Settlements Using Fedwire
(C) FMI Money Settlements Using NSS
(D) FMI Money
Settlements in Commercial Bank Money
(E) Simplified FedNow
Settlement of a Single Payment and Related Bank Ledger Updates
(F) Simplified CLS Settlement and Related Funding Using
Central Bank Ledgers
Figure 2A: Simplified CHIPS Settlement and Federal Reserve Interaction Figure 2A provides a simplified depiction of the CHIPS payment system and its link to the Federal Reserve systems. It depicts the internal ledger of CHIPS and the internal ledger of the Federal Reserve. It illustrates the settlement of payments on the CHIPS ledger between accounts held for participating commercial banks. It also illustrates the funding payments from commercial banks’ Federal Reserve accounts to the joint account for CHIPS settlement at the Federal Reserve, and the pay-outs from the joint account to banks’ accounts. Figures 2B-2D illustrate more of the variety of settlement models in use in the current USD interbank payment landscape. These figures depict large-value settlements of other hypothetical FMIs as instructive examples. Figure 2B FMI Money Settlements Using Fedwire In this illustration, money settlements related to the operations of FMI X all occur inside the Federal Reserve operating perimeter using central bank money. Commercial banks that owe the FMI each send a payment over Fedwire from their respective accounts at the Federal Reserve to the FMI’s account at the Federal Reserve. The FMI sends payments to each bank it owes using Fedwire. Figure 2C: FMI Money Settlements Using NSS In this illustration, the relevant entities and settlement obligation values remain the same as in Figure 2B. Settlement again occurs within the Federal Reserve operational perimeter and in central bank money. The NSS transfer mechanism differs from Fedwire, however. Settlement of all relevant payments occurs in a single process. The settlement agent, typically the FMI, submits a settlement instruction file that contains all relevant information. Banks that owe are all debited and banks that are owed are all credited. Figure 2D: FMI Money Settlements in Commercial Bank Money In this illustration, all money settlements between the FMI and its participants are in commercial bank money. These settlements occur in multiple operating perimeters. The FMI has an account at each of its settlement banks and the FMI’s participants have accounts at at least one of the FMI’s settlement banks. Each payment between the FMI and a participant is executed individually. The FMI may transfer money between its commercial bank accounts as part of or between settlement cycles. Those interbank payments will settle in central bank money for the banks themselves, but the FMI is receiving commercial bank money in the form of a credit to its commercial bank account at some point after the interbank transfer is complete. Figure 2E: Simplified FedNow Settlement of a Single Payment and Related Bank Ledger Update This figure depicts the Federal Reserve internal ledger and internal ledgers for commercial banks A and B. Banks A and B have accounts at the Federal Reserve. The figure illustrates a single payment from a customer of Bank A to a customer of Bank B. The interbank payment settles in central bank money at the Federal Reserve, while bank customers at all times have commercial bank money. Bank A debits its customer’s account on its ledger and Bank B credits its customer’s account on its ledger. Figure 2F: Simplified CLS Settlement and Related Funding Using Central Bank Ledgers Figure 2F provides a simplified illustration of CLS settlement of PvP transactions on its ledger and related funding processes at relevant central banks. The figure depicts the internal ledgers of CLS, the Federal Reserve, the Bank of Japan, and the European Central Bank. CLS has an account at every central bank. Commercial banks have an account at CLS and at one or more central banks. PvP settlement of transactions between commercial banks happen on the CLS ledger. This settlement is funded and defunded at the relevant central banks.
Figure 3: (A) Simplified Canadian Interbank Settlement Landscape
(B) Simplified Interbank Settlement Landscape
Figure 3A: Simplified Canadian Interbank Settlement Landscape Figure 3A depicts a simplified illustration of the Canadian interbank settlement landscape. It depicts the internal ledgers of the Bank of Canada, a commercial bank, and an FMI. The account holders in the FMI are the same set of institutions that have settlement accounts at the central bank, plus the Bank of Canada. Interbank payments are settled on the FMI ledger using a settlement asset that is legally defined as central bank money. Interbank payments are not settled on the central bank operated ledger. Figure 3B: Simplified Interbank Settlement Landscape for DKK Figure 3B depicts a simplified illustration of the DKK settlement landscape. It depicts the internal ledgers of the Danmarks Nationalbank, the European Central Bank, and a commercial bank. Commercial banks have accounts at the Danmarks Nationalbank and the European Central Bank. Interbank settlement in DKK takes place in the European Central Bank using a settlement asset that is legally defined as Danmarks Nationalbank’s central bank money. Interbank settlements do not take place in the Danmarks Nationalbank’s operated ledger. Banks can increase their available balances in their settlement accounts at the European Central Bank by pledging collateral to Danmarks Nationalbank.
Figure 4: (A) Simplified Potential RLN Arrangement, with Single
Transaction
Figure 4A: Simplified Potential RLN Arrangement, with Single Transaction Figure 4A provides a hypothesized simplified illustration of an industry concept called the Regulated Liability Network (not a live payment system). The illustration attempts to depict a set of partitions within an FMI. Some partitions are for commercial banks and one is for a central bank. It illustrates one payment that settles interbank in the central bank partition and has a corresponding debit and credit in two commercial bank partitions.