RTGS Full Form

Real Time Gross Settlement is the rtgs full form. Real Time Gross Settlement is a process in which funds are transferred from one bank to another, and then that transfer becomes final when it’s verified by two different computers at each end.

1. Real-time gross settlement(RTGS) systems combine the speed of a cheque clearing system with the stability and security of a bank balance.

2. This is because RTGS transactions are processed as a batch at a particular time, rather than one by one as they arise, so there is no need to wait for the next available payment window to process each transaction.

3. It also means that if there is not enough cash in an account for responding institutions to pay out all their debtor balance claims simultaneously, those institutions can borrow from other lenders as long as collateral is provided until cash becomes available. The lender has first call on repayments before institutions can automatically replenish themselves from currently published sources of credit such as the deposit money banks.

4. RTGS realises key benefits of central bank reserves, even if they are not used to provide credit for individual institutions, by making it possible to make payments without incurring any credit risk.

5. Unlike other types of payment systems, such as card networks or interbank lending arrangements which are based on the promise of payment, RTGS is based on the actual transfer of funds. This reduces credit risk and therefore protects both individual account holders and their banks from counterparty insolvency.

6. The main difference between retail and wholesale RTGS systems is that the former targets a single institution making payments to other institutions while the latter allows multiple institutions to send and receive payments with each other.

7. RTGS also makes it possible to offer individual account holders the service of real-time credit, which is conducted on a deferred net settlement basis at the end of each day following RTGS processing.

8. The only difference is that deficits in accounts are settled using central bank reserves rather than by borrowing from other institutions, although this can be done if necessary.

9. In order to minimise risk an individual bank may wish to have several accounts at different banks or one or more accounts at a number of smaller banks, so that none has a large share of its cash resources exposed to any one counterparty.

10 .In some countries such as Canada and China , where money supply is determined by the central bank and cash is not fully convertible, obligations between banks arising from RTGS transactions are settled in central bank money rather than through an interbank transfer of credit.

11 .The economic significance of RTGS activity is therefore that it makes it possible for banks to hold balances at the central bank throughout the day and conduct their own internal settlement within each country on a backbone of high-value liquidity while still having access to very low-cost intraday liquidity support.

12. The advantages offered by netting arrangements operated among either all participants or some preselected set of institutions includes: (1) facilitating real-time participation; (2) reducing the need for settlement and reporting; (3) economising on collateral requirements; (4) allowing for more efficient capital management.

13 .The main disadvantage of RTGS is that there is no instantaneous mechanism by which to ensure that all payments are upheld, so some transactions may not be settled on the day on which they are made, while others may even be reversed. This can cause liquidity problems for institutions with large amounts of low-value clearance items needing to be paid out at the end of each day.

14 .A central counterparty acts as a guarantor for settlement obligations between participants in an RTGS system, either individually or collectively. If one participant defaults, then the regulator immediately knows which other participants are affected and can immediately shut them down before any damage is done contagion effects.

15 .The first RTGS systems were developed to allow payment between financial institutions (usually banks) operating on an intraday basis using high-value funds held by the Bank of England .

16. The value of reserves deposited with an RTGS system depends on its size and transaction volumes.

17 .The main advantage of netting arrangements over multilateral netting is that they reduce the need for collateral to be posted or held at each institution because two or more transactions can be netted off against each other with a single transfer being made out of each settlement account which then contains only the residual amount, known as the “outstandings”, after all net positions have been reconciled through offsetting.

18 .The main disadvantage associated with clearing arrangements arises from the possibility that two or more transactions may be simultaneously processed and settled by an RTGS system. This can cause a problem known as “settlement risk”, which occurs when one or both of the transactions involved does not settle as expected.

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