15 terms
Settlement mechanics
- Correspondent banking Correspondent banking is the arrangement in which one bank holds accounts for other banks and makes payments on their behalf, forming the chain through which most cross-border payments still travel.
- Deferred net settlement (DNS) Deferred net settlement offsets many payments against each other and settles only the net amounts at set times, saving liquidity but leaving participants exposed to settlement risk until the netting cycle completes.
- Liquidity fragmentation Liquidity fragmentation is the splitting of money and assets across separate, unconnected systems, so that the same funds cannot be reused freely and must be pre-positioned in each place they are needed.
- Nostro and vostro accounts A nostro is an account a bank holds at another bank in a foreign currency; a vostro is that same account seen from the other side, the account a bank holds on behalf of a foreign bank.
- Pre-funding Pre-funding is posting money in advance so a payment can settle, because the settlement system does not net obligations or extend intraday credit, which ties up liquidity that could otherwise be put to work.
- Real-time gross settlement (RTGS) Real-time gross settlement is the settlement of payments one at a time, at full value, continuously through the day, in central bank money, so that each payment is final the moment it settles.
Risk & finality
- Atomic settlement Atomic settlement is the exchange of two assets so that both transfers happen or neither does, with no possibility of one completing while the other fails.
- Payment versus payment (PvP) Payment versus payment is a settlement mechanism in which each currency leg of a foreign-exchange trade settles only if the other leg settles too, removing the risk that one party pays and the other does not.
- Settlement finality Settlement finality is the point at which a transfer of money or assets becomes irrevocable and unconditional, and cannot be reversed even if a party later fails.
- Settlement risk Settlement risk is the risk that one party to a trade delivers what it owes while the other fails to deliver in return, exposing the first party to the loss of the full amount.
Digital cash
- Singleness of money Singleness of money is the property that all forms of a currency settle at par, so that a dollar is worth a dollar regardless of which bank or instrument holds it.
- Stablecoin A stablecoin is a digital token designed to hold a stable value by referencing an official currency, issued by a non-bank against a reserve of backing assets and, under new laws, redeemable at par.
- Tokenised deposits A tokenised deposit is a commercial bank deposit recorded on a programmable ledger, remaining a claim on the bank that issued it and settling at par in central bank money.
Frame category
- On-chain attestation On-chain attestation is a machine-verifiable proof, recorded on a ledger, that a condition has been met, which any authorised party can check without taking the claimant's word for it.
- Programmable settlement Programmable settlement is the settlement of payments on infrastructure that can carry conditional logic, so that transfers execute automatically when defined conditions, including compliance checks, are met.
Common questions
- What is settlement in banking?
- Settlement is the final transfer of money or assets that discharges an obligation between two parties. A payment is only truly settled when value has moved irrevocably, which is a distinct moment from the instruction to pay. This is what settlement finality describes.
- Why do cross-border payments take so long?
- Most cross-border payments travel through correspondent banking, a chain of banks that each hold accounts for the next. Value moves across separate ledgers, in different currencies and time zones, within each bank's operating hours, so a payment can take days to settle rather than seconds.
- What is the difference between clearing and settlement?
- Clearing is the process of working out what each party owes, including matching and netting the obligations. Settlement is the actual, final transfer of value that discharges those obligations. Clearing prepares a payment; settlement completes it.