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FRM Part II · FRM Exam Part II · Intraday Liquidity Risk Management

A bank participates in a real-time gross settlement (RTGS) system. Which statement best describes how payments are settled in such a system?

In an RTGS system each payment is settled individually and continuously during the day, typically in central bank money, and becomes final immediately. This differs from deferred net settlement, where obligations are accumulated and netted at a cut-off, creating credit exposure between participants.

  1. APayments are settled continuously and individually, in central bank money, with finality on a transaction-by-transaction basisCorrect
  2. BPayments are accumulated during the day and settled on a net basis at a single end-of-day cut-off
  3. CPayments are settled on a net basis only after a participant's collateral is liquidated
  4. DPayments are settled through commercial bank money across the books of a correspondent bank

Explanation

RTGS settles each payment individually and continuously, usually in central bank money, giving immediate finality. Deferred net settlement is the end-of-day netting alternative described in the second option, which is therefore wrong for RTGS.

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