Bank of England may hold cash to defend UK payments system

 
Tim Wallace
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PAYMENTS systems and their customers face worrying levels of settlement risk because the operators have not yet set aside funds to fall back on in case of a liquidity or credit squeeze on major members, the Bank of England warned yesterday.

The Bank argues the solution is to pre-fund – that is, hold cash with the central bank in case any member of the system runs short of funds and cannot settle up at the end of the day.

“Bacs and the Faster Payments Service’s default arrangements do not yet meet the new requirement in the principles for financial market infrastructures that payment systems hold sufficient resources to cover the credit exposures created by the two largest members and their affiliates,” read the Bank’s report.

“To satisfy this principle, both the Bank and system members favour a model in which members fully pre-fund their payments with cash reserves held at the Bank, as this would fully eliminate the credit and liquidity risks arising between members.”

Meanwhile, the Bank of England also revealed the UK’s main securities clearing house suffered an outage on New Year’s Eve.

LCH Clearnet was hit by the troubles which highlight a problem with part of the financial system seen as central to keeping markets stable.

“The nature of the problem created obstacles to reverting to contingency arrangements and hindered internal and external communication,” the Bank said.