DNS - Deferred Net Settlement (also known as Designated-time Net Settlement)

A net settlement system where final settlements occur between participating banks at the end of a predefined settlement cycle when the net obligations between participants are calculated and presented to the settlement agent for settlement.

Historically DNS payment systems were doing settlement at the end of the day and were quickly replaced by hybrid systems.

RTGS - Real-Time Gross Settlement

A settlement system where final settlements occur real time (continuously throughout the day / transaction by transaction).

Typically these systems were called as “large-value payment systems” (LVPS), but hybrid systems with frequent intraday settlements changed this perception. An example may be polish ELIXIR payment system (hybrid), which finally removed upper limit for single payment operation.

In general, payments processed through an LVPS may feature one or more of the following characteristics:

• They are of large amounts;
• They are exchanged among financial market participants (so-called wholesale payments);
• They are usually urgent and require timely settlement (time-criticality);
• They are related to important financial market activities such as money market or foreign exchange transactions as well as many commercial transactions.

Examples are:

• TARGET2 by Eurosystem @ European Union,
• Fedwire by Federal Reserve @ United States of America,
• Sorbnet2 by Narodowy Bank Polski @ Poland.

Characteristics of DNS and RTGS payment systems

Hybrid Settlement

Risk issues, especially regarding systemic risk, not only triggered wide-scale adoption of RTGS systems, but also prompted many payment systems still using net settlement to develop mechanisms to reduce their risk‑related drawbacks. As a result, the use of DNS systems in the strict sense became rarer, especially for processing large-value payments. DNS systems were converted into “hybrid” systems combining the advantages of both settlement approaches.

In May 2005, the CPMI published a review of the various types of systems in use for processing large-value payments: “New developments in large-value payment systems”, CPSS, BIS, May 2005.

The key feature of hybrid systems lies in their frequent netting of payments throughout the day, with settlement providing immediate finality. The approach generally adopted is to keep payments in a queue (often centralised) and offset positions continuously or at close intervals. Settlement can take place as soon as the net debit balances are covered. Payments that cannot be settled remain in the queue until the next batch of netting and settlement processes are executed.

The frequent netting in hybrid systems is intended to limit liquidity needs relative to those of an RTGS system. At the same time, the risk associated with DNS systems is generally limited in hybrid systems because:

• only payments linked to covered net positions are processed in each batch of netting operations and
• final settlement of net positions takes place immediately after each batch of netting operations.

Examples are:

• EURO1/STEP1 by EBA Clearing (European Bank Authority Clearing) @ France,
• STEP2 ICT/SCT/SDD by EBA Clearing (European Bank Authority Clearing) @ France,
• ELIXIR by Krajowa Izba Rozliczeniowa S.A. @ Poland,
• CHIPS (the Clearing House Interbank Payments System) by The Clearing House @ United States of America.

Usage statistics / RTGS vs DNS popularity

Source: Bank of International Settlements, Statistics on payment, clearing and settlement systems in the CPMI countries, CPMI Papers, No 172

Note: in above calculations we have assumed that year 2016 consisted of 365 working days. So each calendar day was treated as working day in particular payment system. This is generally wrong assumption, but approach seems to be OK for daily volume/value comparison.

Features of selected interbank funds transfer systems (at end of 2016)

Following Features of selected interbank funds transfer systems (at end of 2016) publication we list various payment systems characteristics:

Legend:

• System - payment system name, eg. Fedwire
• Type - x such as:
  • L
  • R
  • FX
• Settlement - x
• Owner/manager - owner / manager of payment system such as:
  • B - bank
  • CB - central bank
  • PA - payment association
  • Other - x
• Processing - x such as:
  • RTT - real time transaction
  • ACH - automated clearing house
  • M - manual
  • nap - not applicable
  • nav - not available
• Membership
  • O - x
  • R - x
  • nav - not available
• Degree of centralisation
  • C - centralised
  • D - decentralised