Reviewing access to RTGS accounts for settlement

Responding to this discussion paper

Why we are issuing this discussion paper

Three key factors motivated the Bank’s decision to review RTGS access policies:

1. Promoting greater access to central bank money settlement to support financial and monetary stability in a changing payments landscape;
2. Increased capacity and functionality in the renewed RTGS service enabling continuous industry innovation; and
3. Fulfilling the Bank’s commitment to the G20 roadmap to enhance cross-border payments. Our review is informed by the self-assessment framework published by the Committee on Payments and Markets Infrastructures (CPMI) in 2022.

Who we would like to hear from

Industry input on the initial proposals outlined in this paper is important to help us continue to develop access policies that support innovation while preserving resilience. We encourage a wide range of existing and potential future users of the RTGS service as well as other stakeholders to respond to this discussion paper. This includes banks and building societies, payment service providers, financial market infrastructures, the wider payments industry, technology providers, payment users, firms, trade associations, academics, other central banks and public authorities.

Who in your organisation should respond

Responses should include collated views from people with a broad, strategic view of their organisation’s future priorities and how access to RTGS can support them.

When we need responses by and how to respond

We would be grateful for responses to this discussion paper by 30 April 2024.

Please respond to the consultation via this link. If you have any questions about this consultation, please email RTGSRoadmap@bankofengland.co.uk

Please indicate in your response if you believe any of the proposals in this discussion paper are likely to impact persons who share protected characteristics under the Equality Act 2010, and if so, please explain which groups and what the impact on such groups might be.

Please see the Bank’s privacy notice and the RCEP privacy notice which set out how we handle personal data in the performance of our functions.

Next steps

We will continue to engage with a range of stakeholders as we analyse the responses to this discussion paper and pursue further internal work on potential changes to our access policies. Feedback to this discussion paper will form the basis for further research and dialogue between the Bank, the payments industry, technology providers, payments users, firms, academics, other central banks, and public authorities.

The Bank will consider industry views and aims to publish a response to this discussion paper within 12 months of the closing date (firms have until 30 April to respond to this paper).

Foreword

The payment landscape continues to change rapidly reflecting shifts in customer demand and new technology developments, and the Bank of England has been evolving its policies and practices in line with these changes.

The way users transact continues to evolve. There has been a decisive move towards card, mobile, and electronic payments and an increasing trend towards always-on, real-time retail and wholesale transactions. This change is not just about technology but a fundamental shift in user behaviour and preferences. Customers expect financial transactions to keep pace with the speed of digital communication. The flow of payments has also changed. Cross-border payments continue to increase in value and importance in an ever more interconnected, global digital economy, and the G20 has placed great importance on enhancing them. And technology is pushing the boundaries of automation, allowing for processes that were once manual and time-bound to be conducted efficiently and continuously.

RTGS is at the heart of the UK payments industry as it provides settlement in central bank money – the safest form of money. Our vision is for RTGS to act as an open platform for change and innovation, supporting the Bank’s financial stability and monetary policy objectives. This platform should drive improvement in wholesale settlement efficiency and foster an ecosystem which encourages competition between firms while minimising credit and operational risk. Ultimately, we want to support the development by industry of innovative features which would lead to cheaper, safer and faster domestic and cross-border payments.

RTGS is currently being renewed to respond to the changing payment landscape, and industry feedback. We have already introduced ISO20022 for CHAPS, and this year will introduce a new core ledger and settlement engine – delivering a more resilient, flexible and innovative sterling settlement system to support monetary and financial stability. The renewed RTGS service will benefit the industry across four key areas: increased resilience, greater access, wider interoperability, and improved user functionality. It will be able to support a significantly larger number of participants than the current RTGS platform and allow for more streamlined onboarding of new participants.

Expanding access to RTGS to enable greater competition and innovation is an integral part of our vision, and builds on our previous enhancements to access arrangements made in response to innovative payment models and technologies. While our existing RTGS access policies create a strong basis for supporting innovation, this review is an opportunity for the Bank to ensure that the processes behind those policies enable us to fully realise the capability and benefits of a renewed RTGS service.

This discussion paper summarises the findings from the Bank’s internal analysis and identifies four areas where we think the Bank’s access policies can be further enhanced. We would like to hear views from industry in each of these areas before we consider any concrete next steps.

Victoria Cleland, Executive Director for Payments

Executive summary

The Bank of England offers access to settlement in sterling central bank money through a range of different accounts in its Real Time Gross Settlement (RTGS) Service. Firms use RTGS to settle payments obligations between themselves in the safest way possible, which helps to support financial stability.

Allowing payment firms – not just banks – to access RTGS allows more transactions to be settled in central bank money, maintains a level playing field for competition in the provision of payment services, and can drive innovation. However, when setting RTGS access policies the Bank needs to balance these benefits against the risks that can arise from providing access to payments firms that are not operationally and financially sound, especially if shortcomings could affect the wider payments ecosystem. The Bank’s access policies offer different types of accounts to firms based on the functionality they require and the type of regulation in place to mitigate the risks their payments activities could pose to the payments ecosystem or wider financial system.

Over recent years, new technologies have revolutionised the way payments and settlement function, and new firms such as NBPSPs have emerged at a rapid pace. In response, the Bank of England has introduced a number of changes to its policies which govern access to RTGS to allow innovative new firms to access its accounts and compete more fairly with incumbents. In 2017, the Bank of England became the first central bank in the G7 to offer access to NBPSPs, and since 2021 the Bank has offered omnibus accounts that allow payment system operators to pool participant funds in a single account. This is in addition to initiatives to continue to reduce tiering and concentration in the payments ecosystem, such as streamlined participant onboarding processes, and the onboarding of 23 new CHAPS direct participants between 2008 and 2023.

Alongside these changes to policy, the Bank is now in the final stages of upgrading the IT infrastructure which supports RTGS (RTGS Renewal Programme). This will bring increased functionality and benefits for participants, as well as expanding the number of firms which can participate in the system and facilitating quicker technical on-boarding to it. It is therefore timely for the Bank to assess its RTGS access policies and continue improving them to ensure that they are as effective as possible when put into practice and can catalyse further innovation in payments.

In line with the international framework set out by the Committee on Payments and Market Infrastructures (CPMI), we have reviewed the Bank’s access arrangements for NBPSPs, FMIs and foreign banks. Our work has confirmed that the Bank has a positive story to tell on access, as these three types of firms already have access to RTGS accounts for settlement, mitigating an important barrier to fast and efficient cross-border payments identified in the G20 Roadmap for Enhancing Cross-Border Payments. However, while our analysis has shown that the Bank’s current access policies represent a strong foundation, there are still further steps we can take to improve how these policies are put into practice to remove unwarranted barriers to access. We have identified four priority areas for further work to facilitate wider access to RTGS accounts for settlement and settlement services while maintaining resilience. These priorities are the focus of the analysis in this discussion paper which the Bank is keen to receive feedback on.

• Priority 1: Enhancing the Bank/FCA process for consideration of NBPSPs seeking access to RTGS – this section outlines the strengthened assessment and ongoing compliance process for NBPSPs developed with the FCA, to better assess NBPSPs’ preparedness to satisfy the compliance and supervisory requirements for access to RTGS.
• Priority 2: Understanding demand of foreign banks for access to RTGS to support payment system settlement – this section sets out the factors that can encourage or discourage foreign banks to use their reserves accounts for direct settlement purposes. Our analysis suggests that awareness and understanding of the Bank’s access policy among foreign banks can be improved.
• Priority 3: Clarifying requirements for FMIs to access RTGS – this section sets out the Bank’s intention to prepare for increasing numbers of new FMIs seeking to settle in RTGS by introducing proportionate requirements and expectations for non-systemic FMIs. It also proposes the introduction of a mobilisation stage for infrastructures who are recent start-ups, providing a time-limited stage during which the FMI would operate under restrictions on activity ahead of being capable of fully meeting the Bank’s RTGS access requirements.
• Priority 4: Review of the CHAPS value threshold – this section outlines the Bank’s plans to review its approach to managing tiering risks in the CHAPS system, including by reviewing the current 2% value threshold above which indirect participants are generally expected to join CHAPS as a direct participant.

Introduction

The Bank’s RTGS system allows firms to settle payments across accounts held with the Bank. These payments are settled in central bank money – the most secure and liquid sterling asset available.

This discussion paper mainly focuses on direct access to settlement in central bank money – where an institution has an RTGS account in its own name that may be used for settlement or where the Bank provides settlement services to the institution. RTGS accounts offer different types of services and are used by different types of firms with different requirements depending on the level of risk they pose. The Bank provides accounts in RTGS in order for firms to access central bank money. These accounts can be broadly split into two types: accounts used to hold reserves, and accounts used to settle payment obligations.

RTGS accounts used to hold reserves only are defined as:

• Reserves Accounts – Banks, Building Societies, Broker-dealers and certain FMIs, that do not participate directly in payment systems settling in the Bank’s RTGS, can have access to a reserves account for holding funds.

RTGS accounts used for settlement purposes have three levels of functionality. These are defined as:

• Reserves and Settlement Accounts – Banks, Building Societies, Broker-dealers and certain FMIs can use their reserves account to directly participate in payment systems (eg Faster Payment Service) which settle in RTGS.
• Settlement Account – Non-banks and FMIs (that are not eligible to hold reserves accounts) can directly participate in payments systems settling in RTGS but cannot hold funds on those accounts beyond those needed to support that settlement.
• Omnibus Account – FMIs that are recognised by HM Treasury can co-mingle reserves from different entities (all of which will be reserves account holders) in a single account to pool participant funds to back settlement in their own ledger.

The eligibility requirements and service levels of these accounts are outlined more fully in Table A, below.

Expanded access to settlement in central bank money can deliver financial stability benefits. These benefits can be realised in different ways. First, extending access to RTGS to more firms increases the proportion of settlement in central bank money. This supports financial stability by reducing financial exposures that arise between direct and indirect participants (see Box C on direct versus indirect participation and Figure 2). Second, allowing more firms to have direct access can create more diverse payment arrangements with fewer single points of failure – making the payments ecosystem more resilient overall.

But these benefits need to be balanced against risks of expanding access. The expansion of access can present risks (for example an increase in operational risk) to the Bank or to financial stability, when not mitigated appropriately.

Figure 1: Reasons for the Bank’s access review

The Bank is reviewing its policies on access to RTGS (and settlement in central bank money) for three reasons:

1. Supporting the Bank’s objectives in a rapidly evolving payments landscape.
   In a changing payments landscape with more firms or new types of firms wanting direct access to payment systems, the Bank must ensure that its access requirements for settlement accounts and services remain fit for purpose and continue to support its objectives of maintaining financial and monetary stability. The ability to safely and smoothly transact using resilient and competitive payment firms underpins confidence in the wider financial system, and central bank money settlement reduces risk building up whenever it is used.
2. Enabling continuous innovation under the renewed RTGS service.
   The demand for RTGS accounts has been growing. For example, the number of CHAPS Direct Participants grew from 15 in 2008 to 38 in 2023; since 2017 several NBPSPs have gained access to RTGS accounts for settlement; and Fnality has become the first omnibus account holder. There is increasing interest for access to RTGS accounts for settlement to support innovative payment arrangements. To meet the demands of a rapidly developing payments landscape the Bank is currently in the process of renewing its RTGS service. The renewed RTGS service is being built to accommodate a substantial increase in the number of account holders – with a simpler and more proportionate technical onboarding process (see Box A). This will support access and enhance competition and innovation in sterling payments.
3. The Bank’s commitment under the G20 Roadmap to improve cross-border payments.
   Improved access to payment systems is an important focus of the G20 roadmap to improve cross-border payments. Expanded access can help to address four key frictions in cross-border payments – long transaction chains, high funding costs, weak competition, and legacy technology. Analysis by the CPMI as part of the G20 roadmap found that access to payment systems is particularly important for NBPSPs, FMIs and foreign banks^{footnote [1]} – which are key players in the cross-border payments ecosystem – but have access in only a minority of countries.

Figure 2: Transaction chains of indirect versus direct participants

The current RTGS access framework

The framework that governs who can have access to the Bank’s RTGS accounts for settlement and settlement services has changed over time.

The current access framework is made up of a combination of interlocking elements such as legislation, policy and regulation. The Bank, as the operator of RTGS and CHAPS, sets and publishes its policies for access to RTGS accounts for settlement (including omnibus) and settlement services. These policies often require the applicant to be subject to appropriate regulation, the scope of which is defined in legislation. The interlocking elements are set out below in Figure 3.

Figure 3: The current access framework

Direct access to payment systems that settle in RTGS in central bank money requires holding a central bank account that can be used for settlement. The Bank offers access to several different types of central bank accounts (please see further information in Table A below).

The Bank offers reserves accounts to banks, building societies, broker-dealers, central counterparties (CCPs) and international central securities depositories (ISCDs). Balances held on these accounts are remunerated at Bank rate and are therefore a mechanism for implementing monetary policy. Firms that are eligible for a reserves account may also use that account to directly participate in payment systems which settle in the Bank’s RTGS. If firms do not apply for access to payment systems, their reserves account enables them to hold funds in RTGS but not to settle in RTGS as a direct participant in a payment system.

In addition, the Bank offers settlement-only accounts to NBPSPs and other types of FMIs to support payment system participation. Since 2021 the Bank has also offered omnibus accounts to regulated payment system operators allowing them to pool participant funds in RTGS to back transactions in their own system. Omnibus accounts are remunerated, but settlement-only accounts are not.^{footnote [2]}

The Bank also provides settlement services to payment system operators such as Pay.UK, Euroclear UK and International, LINK, MasterCard, Visa, and PEXA. This means that the Bank enables final settlement of obligations arising in these payment systems by transferring funds between the RTGS accounts of settlement participants.

Four priority areas

The Bank has overall a positive story to tell on RTGS access policies, with access to settlement in RTGS already available for all three types of firms (NBPSPs, FMIs, foreign banks) identified in the CPMI framework. At the same time, we want to make sure that our access policies are as effective as possible. And, as our review to date has uncovered, there are further steps we can take to improve how these policies are put into practice to enable further innovation in payments. We are therefore exploring and would welcome feedback on potential enhancements in four priority areas.

Figure 4: The four priority areas

Priority 1: Enhancing the Bank/FCA process for consideration of NBPSPs seeking access to RTGS

To promote financial stability and increase competition and innovation the Bank expanded access to RTGS accounts for settlement for NBPSPs in 2017.

Access to settlement in central bank money (through RTGS) has several benefits for NBPSPs. They can settle on their own behalf without relying on a sponsor, who they may be in competition with in providing payment services to other businesses and individuals. There are fewer intermediaries in the payment chain, and payments can be made faster. NBPSPs with direct access to payment systems may be able to provide better services to their customers at a cheaper price. Additionally, there is greater certainty because sponsors providing indirect access can withdraw from providing it, either in general or to specific firms, or be unwilling to grant it in the first place on commercial grounds. But the expansion of access to NBPSPs can also lead to increased financial and operational risks for the Bank and the wider payments ecosystem.

The main mitigant for these risks is for NBPSPs to be subject to regulation and supervision by the FCA. The FCA authorises, regulates, and supervises NBPSPs. It also oversees the assessment of the NBPSP’s systems and controls, before providing the Bank with either an ‘objection’ or ‘non-objection’. The FCA continues to supervise the relevant NBPSPs if and after they gain RTGS access.

The Bank and the FCA have introduced a supervisory assessment process to minimise the risk that NBPSPs could have inadequate safeguarding, governance and financial crime controls. The supervisory assessment provides assurance that NBPSPs that gain RTGS access meet the FCA’s requirements for controls around financial crime, strong governance and safeguarding of customer funds. Having robust controls is also important for NBPSPs as gaining RTGS access can introduce new risks for them.

The FCA’s supervisory assessment ahead of onboarding lasts several months and involves in-depth review of the applicant firm’s:

1. Safeguarding controls;
2. Financial crime systems and controls;
3. Governance and oversight;
4. IT controls; and
5. Financial/prudential controls.

Since 2017, the Bank, working with the FCA and Pay.UK, has on-boarded several NBPSPs to RTGS. Under the current process, once an initial supervisory assessment and a non-objection is provided by the FCA to the Bank, the firm undergoes 12 months of enhanced supervision by the FCA. After that it undergoes an ‘anniversary s166 assessment’ to determine its continued compliance and suitability for access to RTGS. The s166 (also known as ‘skilled person’s review’ under s166 of the Financial Services and Markets Act 2000) is an assessment carried out by an independent party to review the firm’s internal controls, risk management and governance. Following the s166 assessment the FCA ensures the firm executes a remediation plan if any flaws are found as part of the assessment.

The Bank and the FCA have jointly evaluated the effectiveness of the supervisory assessment process introduced in 2017 and are proposing changes to strengthen the process. The improvements proposed will help to make it better focused and more efficient by helping to identify key risks at an earlier stage. The proposed changes are:

Figure 5: Strengthening the FCA assessment process

Change 1:

Applicant firms should generally have actively undertaken regulated activities for a period of at least nine months before the FCA will begin the full assessment to support access to RTGS. In line with requirements applicable to other types of account holder, this recognises that newly authorised firms that are yet to use their authorisations are unlikely to be able to provide the necessary evidence to achieve a positive outcome from the supervisory assessment process. The FCA retains discretion over the use of this requirement if exceptions to the ‘nine-month’ rule are appropriate.

Change 2:

The FCA will require a s166 assessment ahead of providing a non-objection in respect of a firm’s access to RTGS. The goal of conducting this extensive assessment early on is to ensure that firms are compliant with regulatory requirements from the outset. This in turn will lead to a smoother on-boarding process and management during a possible period of growth. We recognise that the s166 assessment prior to RTGS access could be perceived as an additional cost barrier for firms seeking access, but given that all firms who eventually gain access to RTGS would have undergone the s166 assessment after one year (under the current process), the expense for firms is simply brought forward.

Change 3:

Some firms that gain access to RTGS are rapidly growing, which is often associated with increased risk. As a result, strengthened supervision and ongoing assurance is often required. Such rapidly growing firms will benefit from the FCA's recently introduced enhanced supervision for emerging and rapidly growing firms. Firms that proceed to access RTGS will therefore be considered for referral to enhanced supervision.

Priority 2: Understanding demand of foreign banks for access to RTGS to support payment system settlement

The Bank has not identified any particular challenges for foreign banks to access RTGS should they wish to do so. However, our analysis has allowed us to understand better what factors drive the decision of foreign banks to become direct participants of payment systems. Many of the factors outlined in this section are also applicable to smaller UK banks.

Direct access to payment systems for foreign banks could have particular benefits for cross-border payments. Direct access can remove frictions in the transmission of cross-border payments and reduce the risk of banks losing access if their sponsor banks decide to de-risk payment corridors. Direct access also reduces tiering risk (as explained in the table of definitions below) in UK payment systems and supports financial stability. But gaining direct access to UK payment systems might be costly for smaller foreign banks.

In recent years, the Bank has seen an increase in participants in the Sterling Monetary Framework (SMF), with many being foreign banks. Foreign banks have access to RTGS accounts for settlement^{footnote [3]} in the Bank’s RTGS if they are authorised in the UK (which also means that they have a UK presence – either a branch or a subsidiary), comply with PRA and FCA threshold conditions, and are participants in the SMF. Currently, more than 50 foreign banks have a reserves account, but only a few have a reserves account that can be used for settlement. This means that most foreign banks participate indirectly in payment systems settling in RTGS, which can lead to inefficiencies in processing and settling payments.

Figure 6: Gaining access to RTGS and UK payment systems for foreign banks

There are different factors that influence the decision of foreign banks when it comes to direct access to UK payment systems. To better understand the demand of foreign banks for direct access and the driving factors in access decisions the Bank held workshops to discuss:

• Foreign banks’ perception of direct access to payment systems in the UK – with a focus on the perceived benefits of and barriers to direct access.
• How foreign banks’ demand for direct access and different types of access to payment systems in the UK might have changed over time.

Why foreign banks choose not to pursue direct access. Through conversations with workshop attendees and other organisations we have identified several factors that can impact the demand of foreign banks for direct access.

1. Foreign banks do not pursue direct access as they perceive the costs associated with it as high or have valuable relationships with their sponsors
   While direct access to payment systems has numerous benefits, some foreign banks chose not to become direct participants due to their small size and payment volumes within the UK. Many smaller foreign banks perceive the cost of becoming a direct participant as high without knowing what the exact costs include, or the exact requirements, and where to find the relevant information. However, workshop attendees acknowledged that this might be an outdated perception – especially as technological advances could decrease costs of direct access.
   
   Many workshop attendees valued the relationship with their sponsor banks which extends beyond the provision of payment settlement services and includes advisory services such as providing guidance on regulatory and legislative changes across multiple jurisdictions. This is particularly important for smaller banks as they don’t have the capacity to follow all legal changes across multiple jurisdictions. Additionally, the relationship with the sponsor bank can often be reciprocal. For example, the bank that is the indirect participant in the UK may act as the correspondent for the UK sponsor bank in their home currency.
   
   
2. In the future more foreign banks could apply for direct access as software updates and technical connections through third parties could lower cost of direct access
   One of the main costs of gaining direct access is linked to technical requirements that a firm needs to meet to directly connect to the relevant payment system and to RTGS, and to maintain appropriate operational capacity. However, workshop attendees stressed that the adoption of ISO 20022 and broader adoption of APIs in their own firms could mean that direct access becomes easier and cheaper going forward. Some attendees mentioned that recent technology investments meant re-examining direct access would be timely. Others stressed that the rise of third-party firms that can provide technical connections to RTGS can also lower access costs and help to tip the preference of foreign banks towards direct access.

Priority 3: Clarifying requirements for FMIs

Changes in the payments landscape and the new capabilities of the renewed RTGS could lead to further innovation in the FMI space. This is likely to lead to more demand from FMIs to settle sterling obligations in RTGS. The Bank needs to ensure that new FMIs provided with access are safely run to avoid introducing risk in RTGS. The proposals outlined in this section aim to facilitate development of innovative new settlement arrangements by ensuring FMIs seeking access to RTGS are subject to proportionate requirements. They include introducing a discretionary mobilisation stage for less mature (start-up) FMIs.

Enabling FMIs to have RTGS access can have financial stability benefits by expanding settlement in central bank money. Currently, FMIs can access settlement in central bank money in different ways:

• FMIs, such as payment system operators, can ask the Bank to act as their settlement service provider – with the Bank enabling final settlement of obligations by transferring funds between the RTGS accounts of settlement participants. The Bank provides settlement services to payment system operators such as Pay.UK, Euroclear UK and International, LINK, MasterCard, Visa, and PEXA.
• FMIs can hold an account with the Bank that can be used for settlement in RTGS, including in the payment system they operate.

The Bank as a settlement service provider. The term FMI captures many different types of firms and business models. FMIs for example include central counterparties (CCPs), central securities depositories (CSDs), securities settlement systems and payment systems. A payment system operator requires a settlement service provider (SSP) to provide final settlement of the obligations that arise between its settlement participants. The Bank acts as SSP for most UK payment system operators, providing settlement in central bank money so that the credit risk that would otherwise be present through settlement in commercial bank money is eliminated. Some, but not all, FMIs participate in the settlement arrangements of the FMI they operate or those of other FMI(s).

Criteria for the provision of settlement services for FMIs. Any FMI can apply for settlement services from the Bank or for a settlement account if they meet the criteria in the Bank’s Settlement Account Policy.

When reviewing the application, the Bank will assess the financial stability benefits of providing settlement services to a specific FMI guided by criteria such as the below:

• The value and volume of transactions processed by the FMI – the larger the value/volume of transactions, the greater the financial risks the system can present, and therefore the greater the financial stability benefits if the system settled in central bank money.
• The nature of the transactions processed in the FMI – this criterion assesses the relative importance of a payment to the economy or society, irrespective of the value of the transactions. For example, if the payment of salaries is disrupted, the economic impact can be significant (as people rely on their salary to make other payments) and therefore the financial stability benefits if the system settled in central bank money would be greater.
• The number of direct participants (in the FMI) eligible for a settlement account – this criterion gives the Bank an indication of the market reach of the payment system. But it also indicates the risk-reducing benefits (as participants ineligible for a settlement account would not be able to settle in central bank money and this would diminish the risk-reducing benefits of providing settlement services).

FMIs holding a settlement account at the Bank. For some UK payment systems, such as CHAPS, direct participants must have a settlement account at the Bank. This means that if FMIs want to become direct participants in such payment systems they will need first to obtain a settlement account at the Bank.

Criteria for the provision of a settlement account to an FMI. For an FMI to be eligible for a settlement account:

• The Bank must consider that financial stability would be enhanced if the FMI settled in central bank money by becoming a direct participant of a payment system for which the Bank acts as SSP.^{footnote [4]} To assess this the Bank reviews criteria such as the volume, value and nature of transactions processed (as explained above).
• The FMI needs to be a settlement participant of a payment system (potentially the one that they operate).

These accounts are provided at the Bank’s sole discretion; for ICSDs and CCPs these would be linked to SMF participation.

When deciding to grant access to settlement services or settlement accounts the Bank must balance the benefits and risks of providing access using the criteria set out in its Settlement Account Policy. Almost every FMI that requests settlement services or applies for a settlement account is different in its business model, the settlement model it requires, and its maturity (it might have little activity/history of acting as an FMI). And while the Bank objectively assesses each application from an eligibility perspective, there has been limited standardisation of the assessment processes before RTGS access is granted – due to the difference between the applicants. This can make the assessment of applicant FMIs resource intensive and time consuming for the Bank and the applicant. Similar challenges apply to ongoing assurance for FMIs that have obtained access to RTGS.

Such a mobilisation stage would be a risk based, time-limited stage during which the FMI would have access to RTGS but operate under specified restrictions. During this time, the FMI may not need to comply fully with every access requirement, while the restrictions could include limits on the number of participants in the FMI. This approach would allow the FMI to build up its operations and processes over time in a risk-based way. The FMI would have to comply with all applicable requirements at the end of the mobilisation stage giving them time to scale their capacity to meet them.

Priority 4: Review of the CHAPS value threshold

CHAPS, the UK’s high-value payment system, has a highly tiered structure, which has effects on credit, liquidity, and operational risk.

High-value payment systems – such as CHAPS – often have a tiered structure where a limited number of firms have direct access and those firms provide indirect access to other firms wishing to make or receive payments. The degree of tiering in a payment system is of interest to policy makers and regulators because it can impact the smooth functioning of the payment system and financial markets by increasing risk between the direct and the indirect participants. For example, tiering can increase concentration in the payment system as more payments are made through a smaller number of direct participants – meaning that they can become a single point of failure.

Currently there is a value threshold of 2% of the total CHAPS system value in place. This means that indirect participants settling payments worth more than the threshold are generally expected to seek direct access. Nonetheless, CHAPS remains highly tiered – it has 38 direct participants, with several thousand indirect participants. The current value threshold means that the Bank will consider whether to withdraw consent to access from a specific indirect participant if their average daily value of CHAPS payments sent and received exceeds 2% of the average daily value of CHAPS payments. The Bank will enforce this rule unless the relevant Direct Participant (the sponsor of the indirect participant) demonstrates to the Bank, as the operator of CHAPS, that there are ‘other factors’ that would provide sufficient risk mitigation against the risks between direct and indirect participant such as collateralisation or having multiple sponsors.

In the 2017 blueprint for RTGS Renewal the Bank proposed reviewing the CHAPS value threshold at a later date once the implications of RTGS Renewal for the costs of direct access could be better understood. Lowering the value threshold could broaden direct participation of firms in CHAPS and support the Bank’s mission of maintaining financial stability by reducing concentration, operational and credit risks in the CHAPS system.

While lowering the CHAPS value threshold can have a positive impact on financial and concentration risk it can also create risks that the Bank needs to further assesses. The lowering of the CHAPS value threshold could impact the business models of firms, and some might withdraw from offering indirect access. Or a lower threshold could encourage firms to find ways to suppress their CHAPS traffic to avoid hitting the threshold. This could lead to a decrease of the proportion of settlement in central bank money – increasing operational and financial risks (just not to CHAPS).

For example, the Bank could look at the systemic importance of firms in the financial system by drawing on already existing classifications such as global systemically important banks (G-SIB) and the PRA’s categorisation of the potential impact of firms. These classifications indicate that the failure of a specific firm would have impacts on the stability of the UK financial system.

The Bank believes that the barriers to entry, which previously have made direct access less attractive, have reduced in recent years and will continue to decrease. The cost of the technical infrastructure required for CHAPS access has reduced due to the possibility of outsourcing to Cloud Service Providers and/or SWIFT Service Bureaux. Non-technical factors have and will continue to reduce the burden for direct access, including changes to the CHAPS rules to make them clearer and better aligned to existing international standards, a more streamlined on-boarding process made possible by the RTGS Renewal Programme and a more proportionate assurance process.

Table of definitions