HVPS Case Study

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3.4 Risks
Every system comes with numerous risks and HVPS is not excluded. HVPS faces risks such as liquidity, legal, operational and credit. To minimize liquidity risk, HVPS provide functions such as account inquiry, balance warning and business queuing which helps to improve liquidity management. HVPS have taken measures such as business limitation, account balance control and debiting control to strengthen the management of credit risk. Whereas to prevent legal risk, People’s Bank of China (PBC) has formulated a series of regulations, rules and procedures on payment transaction processing, automatic pledge financing and operational management. To ensure that HVPS runs safely and steadily and avoids risks resulting from technical failures
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To minimize liquidity risk, BEPS provides functions such as netting queuing, adjustment of the net debit cap and matching of queuing transactions. Whereas to strengthen credit risk management, BEPS shares the same clearing accounts system with HVPS, and is also designed to have the central bank as the central counterparty and set a net debit cap for all direct participants. Only payments within the net debit cap can be netted. Otherwise, they will be queued. Where the net debit cap is guaranteed by collateral and earmarked funds, if a direct participant presents a credit risk and is unable to settle its net debit position, PBC can take the collateral and earmarked funds. PBC has formulated a series of rules and procedures on payment transaction processing, collateral management and operational management. Numerous measures have been taken to ensure BEPS safety and reliability and avoid risks resulting from technical failures and manual mistakes. Similar to HVPS, BEPS adopts highly reliable networks and computers, encryption of communications and business, checks on instruction format and authority, equivalence checks on balances at the end of the time period, and establishment of a mechanism for dealing with failure and …show more content…
In the current EIS, because financial institutions’ deposit accounts with PBC are dispersed among regional branches there are problems (such as differences in call-market rates) of fund efficiency and the effectiveness of financial adjustment. With CNAPS, financial institutions’ deposit accounts with PBC are collectively managed by the host centre, greatly alleviating these problems. Intraday overdrafts and automatic repo facilities are also provided, and liquidity risk management is improved. Whereas for small-amount payments, particularly between distant places, CNAPS is more efficient than EIS in which payment is performed on a gross basis. Finally, by CNAPS connecting of the government bond entry and payment system at CDC to the payment system, delivery versus payment(DvP) payment of government bonds may become

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