How much liquidity would a liquidity-saving mechanism save if a liquidity-saving mechanism could save liquidity? A simulation approach for Canada's large-value payment system

Published: February 18, 2020

Payments Canada has released its latest discussion paper, How much liquidity would a liquidity-saving mechanism save if a liquidity-saving mechanism could save liquidity? A simulation approach for Canada's large-value payment system. As part of the modernization of Canada’s payment systems, the LVTS will be replaced by a real-time gross settlement (RTGS) system. Replacing the LVTS with an RTGS system has the potential to increase LVTS participants’ liquidity costs. Fortunately, there are ways to reduce the amount of liquidity demanded by an RTGS system—one of which is to implement liquidity-saving mechanisms (LSMs). LSMs are commonplace in RTGS systems around the world as a way to allow FMIs to manage liquidity risk effectively. In this paper, the authors simulate moving to an RTGS system and study the effectiveness of LSMs at reducing liquidity costs.