Although, Payment systems can be classified differently, based on the
settlement adopted, they can be broadly classified into two types viz.,
Net periodic settlement systems and real time gross settlement
(RTGS) systems. Both are associated with particular risk control
measures.
Net Periodic Settlement System
In net periodic settlement system, participants send instructions to
each other over a period of time, with final transfer occurring at the
end of the processing cycle. During the processing cycle, running
balances of debits and credits are calculated and at the end of
processing cycle, net positions are settled by book entries passed
across the participants' account with Central Bank. If a participant has
insufficient funds in its central bank account to meet payment
obligations, the participant is informed and given an opportunity to
obtain necessary funds. Usually, settlement takes place on a
multilateral net basis, in which incoming funds are treated as cover for
out going funds. Multilateral netting significantly reduces the need to
have intra-period settlement cover for ongoing payment transactions.
Transactors are required to have a sufficient balance to cover net
amounts at the end of processing cycle.
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The most serious risk in netting systems is the risk that a participant
may fail to settle its net debit position. In that case some or all
transfers involving the failed participant may be unwinded or
recalculated to form a new settlement position. The unwinding of all
transactions involving a failed participant has the potential to result
in a "Knock-on" effect leading to systemic risk.
Risk in net settlement system can be controlled through :
a) Appropriate membership criteria and supervisory management
b) Monitoring of payment system for early identification of risk
c) Limiting the size of each participants net debit position.
d) Loss sharing arrangements among participants.
