Intraday Settlement

Intraday settlement is the settlement of payment obligations between participants at one or more points during a business day, rather than once at the close of business or on a later day. When settlement happens intraday, the receiving institution gets final, usable funds within the same day the payment was sent, often within minutes or seconds. It is used by central bank payment systems, securities settlement systems, card and ACH operators and foreign exchange settlement services.

The term covers two different designs. In a real-time gross settlement (RTGS) system each payment settles individually and continuously throughout the day. In a net system, payments are collected and offset, and the resulting balances are settled in several scheduled batches during the day. Intraday settlement is contrasted with deferred net settlement, where all obligations of a day are settled together at a single later time.

In an RTGS system such as Fedwire, T2 in the euro area or CHAPS in the United Kingdom, each instruction is checked against the sending bank's balance at the central bank and, if covered, is debited and credited immediately. Settlement is final at that moment, so the receiving bank can pass the money on straight away.

In a multi-batch net system, the operator calculates each participant's net position at set times and posts those positions to settlement accounts, usually at the central bank. US Same Day ACH, for example, has several settlement windows across the day rather than a single overnight settlement. Card schemes and some real-time payment systems also settle participant positions in several cycles a day, even though the customer sees the payment instantly.

Settling during the day means banks need funds available during the day, not just at the end of it. This need is called intraday liquidity. A bank that sends many large payments early but receives most of its incoming funds later can run short in the middle of the day even if its end-of-day position is positive.

Central banks provide several tools to deal with this:

• Intraday credit. Central banks lend to participants during the day, typically against collateral, with the loan repaid before close. The Federal Reserve calls this daylight overdraft credit and charges a fee on usage above a free allowance.
• Queues and offsetting. A liquidity-saving mechanism holds payments in a queue and releases offsetting payments together, so that less money is needed to settle the same value.
• Throughput guidelines. Some systems ask members to send a set share of their daily payments by certain times so that funds circulate rather than being held back.

The main benefit of intraday settlement is lower settlement risk. Because obligations are settled during the day, the amount owed between institutions at any moment is smaller, and the failure of one participant does not leave a full day's worth of unsettled payments behind. It also supports settlement finality earlier in the day, which matters for time-critical payments such as securities purchases, margin calls and property completions.

The cost is liquidity. Banks must hold more central bank balances or collateral, and the operator must run longer operating hours with reliable technology. If a system goes down during the day, payments that were expected to settle intraday may be delayed, which can spread pressure across the market.

Securities settlement systems use intraday settlement to support delivery versus payment, so that cash and securities change hands together within the day. In foreign exchange, Continuous Linked Settlement (CLS) settles both sides of eligible currency trades during a short daily window when the relevant central bank systems are open at the same time, using payment versus payment to remove the risk of paying one currency without receiving the other.

Every intraday system works to a timetable. A payment submitted after a settlement cut-off waits for the next window or the next business day, which is why corporate treasurers and payment providers plan their submissions around the published schedule. Operators have tended to add more windows and extend operating hours over time, and some central banks are studying round-the-clock settlement so that the settlement cycle of wholesale systems moves closer to the instant experience customers already see.

• Committee on Payments and Market Infrastructures
• Federal Reserve Financial Services