At the opening of the BIS Innovation Hub Eurosystem Centre in Paris, Agustín Carstens said “we are proud that the whole Eurosystem will join … and contribute to the success of the BIS Innovation Hub. Europe is a pioneer in addressing many of the challenges ahead.” The Committee is trying to build a faster payment system for the antiquated and ridiculously slow banking payment system that they have endured for years.
Earlier this month, the Committee on Payments and Market Infrastructures (CPMI) released a consultative report on facilitating increased adoption of payment versus payment (PvP) settlement mechanisms. PvP is a mechanism that ensures the final transfer of payment in one currency occurs only if the final transfer of payment in another currency occurs. The report highlights several challenges that need to be addressed to promote the adoption of PvP, and in this article, we will discuss three main points from the report.
The first point is that existing PvP arrangements are not practicable for settling certain trades or are too costly for some potential users. While PvP arrangements are available for the most traded currency pairs and products, they are not practical for settling certain trades. Additionally, the cost of using existing PvP arrangements is too high for some potential users, which limits their adoption. This presents a significant challenge to the broad adoption of PvP as a settlement mechanism.
The second point is that new PvP solutions are seeking to complement the existing arrangements by targeting emerging market economy (EME) currencies, providing new functionalities such as settlement on demand, offering extended operating hours, and expanding their services to retail users. These new solutions are at varying stages of development and seek to address the challenges associated with existing PvP arrangements. They also seek to promote the adoption of PvP by targeting EME currencies and providing new functionalities that can appeal to retail users.
The third point is that the slow uptake of some existing PvP arrangements appears to reflect barriers that would similarly constrain the broad adoption of new solutions. These barriers include weak incentives for users to settle FX transactions on a PvP basis, technical challenges for PvP providers to access and interoperate with real-time gross settlement (RTGS) systems during operating hours that meet user demands, and complications for PvP providers to reconcile differences in national regulatory requirements around settlement finality and related protections.
In conclusion, the CPMI’s consultative report on facilitating increased adoption of PvP settlement mechanisms highlights several challenges that need to be addressed to promote the adoption of PvP as a settlement mechanism. The report identifies existing PvP arrangements’ limitations, new PvP solutions’ potential, and barriers that constrain the broad adoption of PvP. Addressing these challenges will be critical to enhancing cross-border payments and promoting financial stability. The CPMI is leading 11 BBs, including BB 9 on facilitating increased adoption of PvP settlement mechanisms.
