In the domestic context, there are two major types of interrelationship. The first type concerns DNS systems for interbank funds transfers in which participants' net settlement positions are settled over an RTGS system at one or more designated times. A key feature of this type of interrelationship is that final settlement of transfers in DNS systems is effected when debits or credits based on participants' net settlement positions are posted to their central bank accounts through the RTGS system. The net settlement positions may stem from various types of system, for example large­value DNS systems or retail payment systems (see Box 6).

BOX 6 HYPOTHETICAL EXAMPLE OF LINKAGES BETWEEN SETTLEMENT SYSTEMS

The second type of interrelationship concerns securities DVP mechanisms. The nature of the DVP relationship between an RTGS and a securities settlement system (SSS) depends on how the DVP system is structured and operates. One important relationship arises from a real­time DVP system. As noted earlier, a real­time DVP system is a model 1 DVP system operating in real time, in which transfers for both securities and funds settle on a trade­by­trade basis, with simultaneous final transfers of securities and funds. Depending primarily on whether or not the securities system maintains both securities and funds accounts for participants, real­time DVP can be achieved either (a) through an online communication link between the RTGS system and the securities settlement system (e.g. the SIC­SECOM link in Switzerland - see Box 7) or (b) within the securities settlement system itself (e.g. the Fedwire book­entry securities transfer system). In both cases, the cash legs of securities transactions are settled continuously by RTGS, which creates a close, real­time interrelationship between the RTGS system and the SSS.

Other forms of interrelationship occur when the RTGS system is involved in the designated­time settlement of the cash leg of securities transactions - typically the net positions resulting from the cash leg of securities transactions. The economic feature of this relationship is essentially the same as the foregoing RTGS­DNS relationship (see Box 6).

BOX 7 LINKAGE BETWEEN AN RTGS SYSTEM AND A SECURITIES SETTLEMENT SYSTEM: THE CASE OF THE SIC-SECOM LINK IN SWITZERLAND In Switzerland, an online link between SECOM (the securities settlement system) and SIC that provides real­time DVP has existed since March 1995. The settlement procedure when both the buyer and the seller of securities are SIC participants is illustrated as follows (see also the diagram below). On the settlement date, SECOM earmarks the corresponding securities in the safe custody account of the seller. If sufficient securities are available, a payment message is automatically transmitted from SECOM to SIC. SIC checks the cash account of the buyer and, if sufficient covering funds are available, the SIC account of the buyer and the seller are debited and credited respectively. SIC transmits a message confirming the payment to SECOM, which then makes the final transfer of the securities. If sufficient funds are not available, the payment message is kept in the central queue in SIC and tested for cover until settlement can take place.

BOX 8 TARGET SYSTEM The TARGET (Trans-European Automated Real-Time Gross Settlement Express Transfer) system is being built to facilitate the implementation of the single monetary policy in stage three of economic and monetary union and to provide a sound and efficient mechanism to settle "cross-border" payments denominated in the single currency (the euro). National RTGS systems in the EMU member states will be linked to each other via a common infrastructure using common procedures (the "Interlinking" system). The TARGET system will be operational on 1st January 1999. A cross-border transfer through TARGET is initiated when the sending credit institution transmits a payment message to the local national central bank (the sending NCB) through the local RTGS system. Assuming the sending credit institution has sufficient funds available, the amount of the payment will be irrevocably and immediately debited from the account the sending credit institution holds at the NCB. The sending NCB will then transfer the payment message through the Interlinking network to the receiving NCB. The receiving NCB will credit the receiving credit institution's account.

At the international level, as analysed in two earlier CPSS reports, future PVP mechanisms for foreign exchange transactions could involve important cross­border relationships between two or more national RTGS systems. Greater overlap of the opening hours of RTGS systems would facilitate this process. As noted earlier, although it is very different from the sort of cross­border linkage used in a PVP mechanism, the TARGET system currently being developed by the EU central banks represents a second type of cross­border linkage between national RTGS systems (see Box 8).

Implications of interrelationship. Of the possible consequences of the system linkages described above, the resulting liquidity interdependence between an RTGS system and other payment and settlement systems is likely to be particularly important. On the one hand, linkages between an RTGS system and other systems could improve the intraday distribution of liquidity across payment systems because RTGS can allow banks to use final funds during the day for the purpose of settlement in other systems and more intraday payment flows between participants could thus occur. On the other hand, as noted in Section II.2, if an RTGS system is involved in the settlement processes of other payment and settlement systems, "exogenous" settlement pressures would be generated by the linked system on the settlement process in the RTGS system (and vice versa). This could affect intraday liquidity requirements at the level of both individual banks and the system in the RTGS system.

The impact on RTGS liquidity depends on the size and timing of the exogenous settlement pressures. Where the interrelationship occurs only at designated times, as in an RTGS­DNS interrelationship, the impact may be local and concentrated in a particular short period of time. If settlement is to take place, it is important that the participants in the DNS system ensure that they have the necessary covering funds available at the designated times.

When an RTGS system is interrelated continuously with other systems as in the case of real­time DVP systems, the impact on RTGS liquidity can be more widespread and significant. Under this kind of linkage, participants may want or need to "earmark" the necessary intraday funds in their central bank account for the settlement of the transactions in the linked systems (in principle on a continuous basis during the day). This might increase the demand for intraday central bank credit, or might increase the number/value or duration of queued transfers if the necessary liquidity is not obtained promptly. Where the settlement of the transactions is effected through the linkage as in the case of real­time DVP, the expected liquidity position in the RTGS system would, in turn, affect the completion of settlement of the transactions under the linkage.

Whether intraday liquidity requirements in the RTGS system are increased by the interrelationships is an empirical question. However, to the extent that the need to settle the transfers from the linked systems gives rise to "competing" uses of balances at the central bank, intraday liquidity management issues are likely to arise. In particular, to the extent that the transfer orders stemming from the linked systems are time­critical, banks may need to address how they could be reconciled with other time­critical funds transfer orders, such as those relating to central bank operations, in terms of the use of RTGS liquidity. These points suggest that central banks (or system providers) need to analyse carefully the possible liquidity implications that may arise from any interrelationship. To ensure that such implications do not impinge on the efficient operation of either the RTGS system or the linked systems, consideration may need to be given to some design features of the RTGS systems (e.g. facilities for queuing such as prioritisation and queue management) and also to those of the linked systems.