Authors: Christopher Becher, Marco Galbiati, and Merxe Tudela

Real-time gross settlement (RTGS) systems such as CHAPS Sterling require large amounts of liquidity to support payment activity. To meet their liquidity needs, RTGS participants borrow from the central bank or rely on incoming payments from other participants. Both options can prove costly—the latter in particular if participants delay outgoing payments until incoming ones arrive. This article presents an empirical analysis of the timing and funding of payments in CHAPS. The authors seek to identify the factors driving the intraday profile of payment activity and the extent to which incoming funds are used as a funding source, a process known as liquidity recycling. They show that the level of liquidity recycling in CHAPS is high and stable throughout the day, and attribute this result to several features of the system. First, the settlement of time-critical payments provides liquidity to the system early in the settlement day; this liquidity can be recycled for the funding of less urgent payments. Second, CHAPS throughput guidelines provide a centralised coordination mechanism, in effect limiting any tendency toward payment delay. Third, the relatively small direct membership of CHAPS facilitates coordination between members, for example, through the use of bilateral net sender limits. Coordination encourages banks to maintain a relatively constant flux of payments throughout the day. The authors also argue that the high level of recycling helps to reduce liquidity risk, and that the relatively smooth intraday distribution of payments serves to mitigate operational risk associated with highly concentrated payment activity. They note, however, that the benefits of liquidity recycling are not evenly distributed between members of CHAPS.