SWIFT INSTITUTE
WORKING PAPER

PAYMENT ‘TOKENS’: A ROUTE TO OPTIMIZING LIQUIDITYMANAGEMENT?
ALISTAIR MILNE (LOUGHBOROUGH UNIVERSITY) AND
OLAF RANSOME (3C ADVISORY LLC)

PUBLICATION DATE: MAY 2024

The views and opinions expressed in this paper are those of the authors. Swift and the SwiftInstitute have not made any editorial review of this paper, therefore the views and opinions
do not necessarily reflect those of either Swift or the Swift Institute.

Abstract
This paper examines the opportunities for better management of intra-day andovernight liquidity in financial markets, using ‘tokenised’ rather than tiered money
deposited with bank counterparts. It begins with a review of how financial firms
manage their intra-day liquidity, dealing with the inevitable surprises in payments flows
and payment obligations and the challenge of ‘timed’ payments that must be made byspecified time, not just on value date. It then discusses the opportunities for reducing
cost and risk from application of the new technologies of money associated withdecentralised finance and Web 3.0. With this background it examines the applicationof these technologies in three situations: domestic securities settlement; cross-bordertransactions; and derivative transactions. The principal opportunity identified from thisexercise is the creation of single pools of liquidity (SPooLs) for each institution in eachcurrency in which they transact. This should be both: directly held money, that
supports legally final settlement, not tiered deposits; and directly addressable money,
allowing settlement systems to achieve ‘atomic settlement’ in which trade settlement
can only ever occur as DvP (delivery against payment) or PvP (payment against
payment) and avoiding restrictions such as opening hours. ‘Distributed ledgers’ or‘blockchains’ are one possible way of implementing SPooLs, but it is the functionality
not the technology that matters, implementation using conventional centralised
databases is also possible. These arrangements could support new markets for nearreal time liquidity exchange, such as foreign exchange swaps or repo with the firstnear leg executed & settled immediately. This will allow market participants to
exchange assets or money (‘what they have’) into the form required for settlement(‘what they need, when they need it’). Further efficiency can be supported by‘warehousing’ of future settlement commitments, to ensure agreement on andtransparency of those obligations. These innovations can substantially reduce
collateral requirements and counterparty risks across global markets. There arethough significant challenges: persuading central banks to widen access to central
bank balances, either as wholesale central bank digital currency (wCBDC) or a
privately provided synthetic equivalent (sCDBC), and achieving sufficiently
widespread industry adoption for a critical mass of SPooL.

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CONTENTS

INTRODUCTION ......................................................................................................................... 4
LIQUIDITY MANAGEMENT AND THE OPPORTUNITIES FROM TOKENISATION. ........ 8
2.1
2.2
2.3
2.4

INTRA-DAY LIQUIDITY MANAGEMENT FOR FINANCIAL FIRMS ......................................................... 8‘TOKENISED’ VERSUS TIERED MONEY. ......................................................................................... 11
LESSONS FROM DECENTRALISED FINANCE AND WEB3.0 ............................................................. 15
SINGLE POOLS OF LIQUIDITY: SPOOLS......................................................................................... 16
LIQUIDITY USE CASES ........................................................................................................... 20

3.1
3.2
3.3

SCENARIO 1 – DOMESTIC SECURITY MARKET TRANSACTIONS ....................................................... 20
SCENARIO 2 – CROSS BORDER SECURITIES TRANSACTIONS ........................................................... 25
SCENARIO 3 – DERIVATIVE TRANSACTIONS .................................................................................. 29
REALISING THE BENEFITS: THE BUSINESS AND POLICY CHALLENGES .................. 34

4.1
4.2
4.3
4.4

OPERATIONAL REQUIREMENTS ..................................................................................................... 34
THE INDUSTRY CHALLENGE: CRITICAL MASS ................................................................................ 36
THE POLICY CHALLENGE: ACCESS ................................................................................................ 37
HOW MIGHT WE GET THERE? ........................................................................................................ 40
CONCLUSIONS ......................................................................................................................... 42

APPENDIX A – A PRIMER ON LIQUIDITY MANAGEMENT IN FINANCIAL MARKETS ............... 44
APPENDIX B – WHAT DOES ‘TOKENISATION’ MEAN? .................................................................... 52
APPENDIX C – LESSONS FROM DECENTRALISED FINANCE .......................................................... 57
GLOSSARY ................................................................................................................................................. 61
REFERENCES ............................................................................................................................................. 74
ACKNOWLEDGEMENTS .......................................................................................................................... 78

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INTRODUCTIONManaging liquidity is an existential activity for financial institutions (FIs). It is essential
for settlements and payments across the whole range of wholesale instruments:
foreign exchange (FX), securities, money-market instruments, derivatives and incollateral management.
Liquidity management is complicated by legacy payment arrangements and financial
market infrastructures (FMI). Multiple settlement and payment systems, lack ofinteroperability and limits on direct access to central bank money are but a few of the
known obstacles. Nostro accounts are used for making cross-border payments andsettling trades; this creates a need for intra-day credit lines. Liquidity is as a result
fragmented and used inefficiently. There is a disconnect between the speed of frontoffice and the limited processing ability of the back-office.
Liquidity has been an even greater concern since the Global Financial Crisis (GFC) of
2007-08, since when regulators have introduced a range of new liquidity requirements.
The Basel III reforms of bank prudential regulation introduced the NSFR (the net stable
funding requirement for funding of illiquid assets) and the LCR (liquidity coverage ratio,
the holding of sufficient high quality liquid assets to be able to absorb a projected thirtyday curtailment of access to funding). In addition, regulators have imposed additional
discretionary buffers to ensure firms have access to intra-day credit for fulfilling their
daily capital market and large value payment and settlement obligations.
The liquidity buffers required by the various regulators are large for individual banks
and huge for the industry as a whole. One study reports that large international banks
holding total liquidity buffers, holding of high quality liquid assets in excess of therequirements of the LCR, of $2.7trn in 2018. 1 More recent data from the BaselCommittee’s data dashboards indicate that this total buffer, for the 79 of the largest
international banks covered, has risen to $4.0trn in June 2023.2 Between 10 and 30%of that is to support intra-day liquidity.3 Intraday liquidity is not just a challenge forbanks. It is also a challenge for non-banks and now recognised as a risk to systemic
financial stability.4
These challenges of managing liquidity in globalised financial markets are far fromnew. More than two decades ago a task force of the New York Payments Risk
Committee found that “Recent developments in the global payments environment
have significantly increased demand for intraday liquidity by commercial banks,
including intraday liquidity in foreign markets.” and “Recent developments in the global
payments environment have also increased the need to make “timed” large-value
payments in both domestic and foreign markets.” and called for private industry “…
consideration to developing the following new intraday liquidity services: (a) intraday
real-time repos, (b) cross-border collateral pool facilities based on the intraday credit
provisioning of 15 one or more private institutions, (c) bilateral intraday currency swaps
between banks, and (d) real-time intraday collateral swap services.” with central banks
1 (Hartung et al., 2019)
2 (Basel Committee on Banking Supervision, n.d.)3 (Sawjiany et al., 2018)
4 Measures to address this source of systemic financial instability amongst non-banks are currently

under consultation by the Financial Stability Board (FSB, 2024).

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establishing arrangements to provide intra-day credit against foreign cash andsecurities held in these global collateral securities pools.5 These ideas were neverthough implemented.
This paper examines the potential of new digital monetary technologies to address thislongstanding problem. It focuses on the arrangements for exchange and transfer ofcash, proposing a redesign of our legacy arrangements, with financial institutions andclients using technology to more effectively access, hold and transfer monetary assets,
which might or might not be a central bank digital currency (CBDC). The focus is on
intra-day and overnight liquidity and collateral management in transaction settlement
and for complying with margin requirements. The research method employed is‘scenario analysis’, drawing on the extensive knowledge of the two authors about theoperational arrangements for execution of payments and other transactions inwholesale banking and financial market transactions. We examine three such
scenarios: domestic securities transactions; international transactions; and derivativetransactions.
The analysis is motivated by the strong current interest in ‘tokenisation’ of financial
assets.6 This term ‘tokenisation’, while used inconsistently, most often refers to theholding and transfer of financial assets on decentralised blockchains or distributed
ledgers. One finding from our analysis is that technological implementation is lessimportant than the functionality offered by the technology. While decentralised
blockchains / distributed ledgers are possible technologies which might be employed
to implement our proposal for improved intra-day liquidity management, the outcomes
we explore could also be achieved using more conventional centrally operated
databases.
Our interpretation of ‘tokenisation’ is therefore not that of decentralised holding ofmoney on blockchains or distributed ledgers. Rather, for the purposes of this paper,
tokenised money means money in a form that overcomes the current challenges of
intra-day liquidity management. In our scenario-based analysis this means providing
financial intermediaries with access to a Single Pool of Liquidity (SPooL) for eachcurrency in which they conduct business, one in which: balances are both directly heldand directly addressable; and from which settlement transfers can be instructed andexecuted, without restrictions based on either time or location, in near real-time withlegal finality.

5 (The Payments Risk Committee, 2003) pg 11, pg 13. See also (Pattinson, 2003).
6 This strong current interest is reflected in a number of reports: a related analysis to our own is (World

Economic Forum & Accenture, 2024) who focus on the use of wholesale central bank digital currency
to reduce costs and risks in wholesale financial market transactions; and other reports (Choudhury etal., 2023; UK Finance, 2023b) focus on tokenization of securities.

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By directly held and directly addressable we mean the following:(i)

Directly held. Settlement money is held directly by financial intermediaries,
not as a nostro account with a commercial bank. These settlement assets
could be central bank liability such as a wholesale CBDC or a 100%reserved private money. Settlement money is one in which transfer supports
legally final settlement, there is no requirement for an intermediary to itself
source liquidity to complete payment.

(ii)

Directly addressable. The accounts holding settlement assets, both moneyor securities, can be directly addressed by settlement systems, in order toreserve or earmark funds required for settlement and then subsequently coordinate the transfer of money and assets, thus ensuring PVP or DVP. Thisin turn can facilitate near instant settlement and can serve as a building
block for intraday liquidity markets.

Building on these functionalities, we argue that it can be possible to further support
more efficient liquidity and risk management by developing warehouses (orrepositories) for holding agreed future commitments, interoperable with directly heldand directly addressable liquidity pools.
The paper is arranged as follows. Section 2 reviews: (i) the arrangements for intra-day
and overnight liquidity management in global financial firms; and (ii) the various
interpretations of tokenisation as a means for improving operational efficiency intransaction banking. It also sets out our key proposal: for Single Pools of Liquidity(SPooLs) to support real time legally final transfers and exchange of cash for liquidity
and risk management. Section 3 is the core analysis, exploring the three scenarios
for the application of payment tokenisation to facilitate liquidity management by capital
market firms, in: (i) settlement of domestic securities market trades; (ii) cross-bordertransactions; and (iii) in derivatives trading. Section 4 discusses the costs and benefitsof the development of such single pools of liquidity (SPooLs) and associated industry
and regulatory challenges. The concluding Section 5 restates the key arguments andnotes some questions for further research.
There are three Appendices. Appendix A summarizes the day-to-day liquidity
management operations in global capital markets firms, supporting the scenario
analysis conducted in Section 3. This material will be familiar to some readers, those
who have worked in Treasury and money market roles in large global financial
institutions; it is provided for the many others, even those with extensive experiencein financial market firms or in financial regulation, who need more of the detail of capital
market operations in order to follow the Scenario Analyses of Section 3 in full.
Appendix B discusses some of the various different interpretations of ‘tokenisation’,highlighting the two that are capable of providing a single pool of liquidity (SPooL):
either directly held central bank money (a wholesale or wCBDC) or an indirectly held
100% reserved monetary claim that can be used for legally final settlement of
payments (which can be described as a synthetic or sCBDC). This Appendix also
highlights the importance of control – the unhindered ability to dispose of a money oruse it for payments – here labelled as T2 to distinguish it from the historical monetary
usage of the word token as a low value representation labelled here as T1; anddiscussed the different legal concepts of property and their monetary applications.

6Appendix C is a review of decentralised finance (defi), discussing how it is able to offer‘atomic trading and settlement’ in which the acceptance of a trade is accompanied by
the instant settlement of the resulting obligations, all part of the same operational
process, and considering how these functionalities might be replicated in theoperations of mainstream financial markets. An important difference from mainstream
finance is that assets are held not with intermediaries, but directly using ‘wallets’. Thisis one way but not the only way of implementing direct holding and direct accessibility.

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LIQUIDITY MANAGEMENT AND THE
OPPORTUNITIES FROM TOKENISATION .
This section reviews current challenges of liquidity management in major financial
institutions from the perspective of the management of intra-day liquidity, the problem
on which this paper focuses. It then examines the concept of ‘tokenised money’ andreviews some of the issues this raises for central banks, monetary policy, and financial
regulation. Finally, it sets out, in sub-section 2.4, our proposed single pools of liquidity
SPooLs for unlocking the liquidity benefits of tokenisation.

2.1

I NTRA - DAY LIQUIDITY MANAGEMENT FOR FINANCIAL
FIRMS

To envisage how payment tokens might change how liquidity is managed, we startwith a summary of the cash management function for institutions participating in
financial markets. The description that follows is of the operation of the cash
management function of a global bank participating in global capital markets; butsimilar challenges of cash management arise for all financial institutions. Appendix A,
a more detailed primer on cash management in financial markets, provides fuller detail.
The role of the cash manager is to ensure the bank meets all its payments andsettlement obligations every day. This is a regular process: a routine that is repeatedeach day, ideally without major problems or surprises (that is “reassuringly boring”).
At the centre of this process are two tasks:
1. Ensuring that there is enough cash in the right currency in the right place andat the right time to make planned payments & settle securities transactions
This is what is described in the Appendix A as ‘funding to plan’.
2. Dealing with the inevitable unplanned events: for example, receipts which do
not arrive when anticipated, and/or unpredicted payment needs such as
margin calls which arise during the day. This is what is described in the
Appendix A as ‘funding to actual’.
If payments were entirely predictable then there would be no great problem of cash
and liquidity management: the task would simply be to fund-to-plan, implementing thebank’s Treasury policies, funding outgoing payments at least cost and investing longbalances for the best return. The liquidity challenges arise because of need to deal
with the unplanned need for cash or securities. Cash managers have several tools attheir disposal for dealing with these surprises which can be used depending onwhether these obligations are for overnight settlement (on “value date”) in the relevant
payment system or for a timed obligation that must be made a specific time e.g. by
9.00 CET as part of a CLS7 settlement. In both cases the objective is meeting payment
obligations at least cost.

7 CLS: Continuous Linked Settlement. CLS Bank is an FMI, a financial market infrastructure, which

support settlement of FX trades in 18 currencies. Only when both sides of an FX trade are CLS
currencies can it be settled via CLS. CLS works on a net funding, gross settlement basis. One-way
payments between two participants are not supported. See: https://www.cls-group.com

8Often a bank makes and receives payments using a nostro account with another bank(as described in Appendix A, this is indirect settlement) rather than with an accountheld directly with a central bank or an international settlement system such as CLS
bank or Euroclear (this is direct settlement). For indirect settlement the costs (interest
due or forgone; credit risk) are associated with either running an overnight unsecured
overdraft with the nostro or leaving an unutilised overnight balance. The cash manager
will seek to minimise these costs by aiming to be as near flat – I.e. having a zero
overnight balance in the nostro – as possible.
Payments which are simply made on value date, are normally charged on a ticket fee
basis. There are other immediate, direct costs when the bank needs to make an
immediate i.e. timed payment settlement. Payments to CLS and margin calls from
CCPs fall under this category. Typically, the nostro will charge on an ad valorem basis
for these specific payments.
There are also indirect costs 8 . Capital regulations require banks to have liquidity
buffers, which include buffers for intraday liquidity. Supervisors now apply themonitoring tools introduced under Basel Committee’s BCBS248 standard, foroverview of the exposure of internationally active banks, requiring banks todemonstrate they have adequate access to intraday liquidity in both normal operating
and defined stressed situations 9 . A major driver of size of the intraday buffer
requirement is the use of intraday credit from the nostro. This affects both the “credit
taker” and the “credit giver”.
For managing overnight balances the principal tool is repo (using collateral to obtaincash) and reverse repo (lending excess cash balances vs. collateral). An alternative
to the latter is a sweep to a money market fund to avoid having unsecured receivables.
The cash manager has limited scope for managing intraday exposures. Whilst
expected incoming payments are known, the timing is not. Where a bank is direct
member of payment scheme, there is typically either an overdraft facility, for example
the “debit cap” at the Fed, or an associated intra-day repo facility with central bank, forexample in Switzerland with the Swiss National Bank.
The remaining tool, open to those using a nostro and those with direct access to apayment system, is throttling, but this only shifts the liquidity management challenge
to other institutions. Throttling in order to reduce use of intra-day credit from thenostro is illustrated by Figure 1.

8 (Sawjiany et al., 2018)
9 (BCBS, 2013)

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Figure 1: Intraday Payment Flows and “throttling”

Payment obligations are generated by the product processes (Point 1) of the bank orother financial institution (A), e.g. from securities or foreign exchange transactions.
Nostros (B) control the flow of payments downstream to the payment systems (C).
To limit intraday overdrafts at the nostro (Point 3) the bank might ‘throttle’ the payments
upstream in their own systems (Point 2), delaying payments out of the nostro accountuntil incoming payments are received. While reducing the use of intraday overdraft, it
adds operational and systemic risk to the overall system. In the worst case there is a
“Mexican stand-off: I don't pay you and you don’t pay me.”As the more detailed discussion of Appendix A documents, cash management
involves a great deal of additional complexity, omitted from this brief overview. There
are many product processes each generating both planned payments and receipts.
There are many entities within the bank and these entities can hold accounts in many
currencies. Each entity must have an already established relationship with many
counterparties, used for example for borrowing funds through overnight repo.
Transactions must take place within the operating hours and cut-off times of thepayment systems used.
Dealing with this complexity requires further tools for effective monitoring of liquidity inreal time. These must give the cash manager a transparent and up to date picture of
all incoming and outgoing flows, what is anticipated and what actually happens, in all
the many accounts where the institution holds cash and securities. The cash manager
must then respond to surprises and the risks of these accounts either having
insufficient balances, while avoiding the costs and risks of unnecessarily largebalances.
The pressures on intra-day liquidity management seem set to increase only further inthe future. The US and other markets are shifting to T+1 10 settlement in security
markets, but as we describe below in this makes daily management of foreign cash
particularly difficult for foreign banks and investors; the next working day may leavethem with a window of only 2 hours (instead of 26 hours) or even less to replenish or
utilise balances; imposing considerable additional costs and risks 11 . Frequent
10 On the general move to T+1 settlement and its implications for FX markets see Bullmann 2023.
11 On the challenges posed by T+1 for foreign investors see (Gandy et al., 2023).

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episodes of market volatility, together with the trend towards increased use of central
counterparty clearing to limit counterparty risk, are triggering more frequent variation
margin calls which in turn drives intra-day demands, with which come added costs andincreased systemic risk.
The key issue explored in the remainder of the paper is the extent to which access offinancial institutions to ‘tokenised money’ can address these large and increasingproblems of intra-day liquidity management. As we shall argue, there are opportunities
to overcome the problems of fragmentation and access that currently hinder inter-day
liquidity flows; offering greater transparency about the timing of future cash andsecurities flows; and allowing each institution able to manage and to much more easily
exchange ‘what they have’ (cash or other HQLA) for ‘what they need’ (the required
account balances at the time of settlement). We shall argue that ‘nirvana’ for the global
cash manager is just one single pool of liquidity in each currency (i.e. SPooL) and to
be able to connect that to any payment or settlement need; P for payments. DvP for
securities and PvP for FX. The latter is extremely important; same-day FX without
settlement risk is practically impossible today. This would simplify cash management
and greatly reduce the associated liquidity costs.

2.2‘T OKENISED ’ VERSUS T IERED MONEY .

A principal finding of this paper, with the applications explored below in Section 3, isthat there are substantial liquidity management benefits for financial institutions fromholding settlement money directly, either as central bank liabilities (a wholesale
wCBDC) or as a privately provided equivalent (a synthetic or sCBDC), and which they
can in turn use as a ‘single pool or liquidity’ or SPooL for settlement in each of thecurrencies in which they transact, without requiring the services of a nostro. This direct
holding of settlement money, alongside direct addressability to facilitate automatedsettlement, are in our analysis the two key features for using tokenised money in intraday and overnight liquidity management.
Such direct holding of settlement money though runs counter to the ‘access rules’
which govern who may have a settlement account with the Central Bank (CB). Money
held in a CB account is a settlement asset and thus of unquestioned value in payments.
In a crisis a rational actor, given the choice of holding money directly in a central bankor indirectly with a commercial bank, and a payment system that supports instanttransfer, will shift to direct holding. Access thus brings with it ‘run risk’: in a crisis,money will withdraw from the commercial banks. This adds systemic risk andcomplicates monetary policy. This consideration is a central issue for any developmentof Central Bank Digital Currency (CBDC) of both the retail and wholesale flavours.
An implicit part of these ‘access rules’ is regulatory oversight. As a rule, direct
participants in any payment system need to be licensed legal entities local to thatjurisdiction, with local offices and local employees. The local requirement is driven bya need for oversight and accountability; if regulators need action to be taken, they do
not want to chase individuals in foreign countries. There are exceptions; CLS Bank,
which is a US regulated bank, has been granted remote access to a central bank11

settlement account in 17 currencies outside of the US dollar12. Switzerland too has
shown flexibility, allowing some foreign participants access in order to participate in
the repo market. There are then so-called “joint oversight” arrangements in place toensure accountability.
The literature uses the term ‘tiering’: to describe how indirect participants must haveaccounts with direct participants, i.e. with a nostro. This structure has both benefits
and risks. (Adams et al., 2010) explained that for direct participants in a payment
system, there are potentially two types of benefit to offering to be a nostro to indirect
participants: the Liquidity Effect and the Pooling Effect. The liquidity effect arises if
both the paying FI and the receiving FI use the same bank. The transfer is internalised
as a simple debit and credit. No liquidity is needed. Pooling occurs when the nostro
can take advantage of its customers’ incoming flows to cover its own or othercustomers’ outgoing flows. (Adams et al., 2010) also points out that this tiering, i.e.
indirect participants using the services of a nostro to access a payment system, leads
to certain risks when payments are internalised and that these transactions are notvisible to regulators. This is easy to visualize; imagine that in 2023 the entire crossborder business of the combined UBS and Credit Suisse were just in UBS. Extensive
internalisation, but potentially requiring lots of new intra-day overdrafts. Importantly,(Adams et al., 2010) were writing before the advent of BCBS 248 in April 2013.
The Bank of England (BoE) has taken steps to open access to reserve accounts & the
UK RTGS payment system CHAPS for new participants. New FMIs such as Fnality
may now have so-called omnibus accounts. Nonetheless, the real access issue
remains unsolved as the BoE restricts who may hold a direct account and a balancewith Fnality.
The use of tiering introduces further liquidity challenges. Financial firms holding direct
tokenised money have little incentive to delay a payment on value date; there is nosaving of either interest or the other costs of large nostro overdrafts. In contrast tiered
holding introduces liquidity problems in real time gross settlement RTGS payments;
making payments on behalf of clients often requires the nostro to grant them an intraday overdraft and so they are incentivised to delay making the payment.
The challenge here is that banks seeking to economise on their own liquidity (holdingof central bank reserves) will always look to make payments as late as possible. If
there is a chance to free ride, in other words, wait to receive funds before paying, they
will seek to take it. This problem has been addressed in the literature on RTGS
payments13. In order to prevent gridlock, an RTGS system needs to be complemented
by further tools, such as intra-day netting of offsetting payment obligations andintraday credit in the form of interest-free intraday repos provided by central banks inall the major currencies. At times, participants in an RTGS system may have enoughliquidity without any other tools. In 2000, (Heller et al., 2000) made this observation
about the period 1993 to 1999 in Switzerland. The same would largely be true of thepost GFC period up to late 2022.

12 Japan is an anomaly in the CLS landscape. There is a local entity, however it has no role in day-to-

day operations. It is like an “Honorary Consul”.
13 Contributions include (Leinonen & Soramäki, 1999; Bech & Garratt, 2003; Buckle & Campbell, 2003;
Martin, 2005; Jackson & Manning, 2007; Bech, 2008; Martin & McAndrews, 2010).

12

Some RTGS systems have local throughput rules or targets for volume and value
exactly to combat the risk of gridlock and ensure that “the payments day” is completed
in an orderly fashion. Price incentives are also used. In Switzerland, for example,
payment costs range from a single cent or two at the start of the day and 300 cents or
so at the end. This intra-day credit is not though ‘free liquidity’ because the collateralused has an opportunity cost. (Bech, 2008) suggested this cost was some 12 to 15
bps.14 This is consistent with the experience of one of the authors (Ransome) from histime at a G-SIB. This cost has been referred to as the “cost of immediacy” (Kahn &Roberds, 2001).
All this points to broader issues, going beyond the scope of this paper: the appropriate
use of both tiered (fractionally reserved) and tokenised (directly held or 100% reservedmoney). The use of tiered money creates challenges of managing intra-day andovernight liquidity and ensuring unrestricted flow of payments in large value RTGS
systems. The routine use of tokenised money eases these problems; but canpotentially worsen a systemic crisis if holders of money can freely shift out of tiered
deposits to directly held tokenised money. Accepting direct participation in a large
value payment system creates a range of further practical challenges for central banks
and regulators.
All this links to a well-established economics literature which examines why financial
institutions, households and firms hold low-yielding, but easily exchangeable assets,such as money or treasury bills, forgoing income on other higher-return but less liquid
assets.15 The principal reason is because of the risks and costs of exchanging otherrelatively illiquid assets for monetary assets that can be used for settling transactions
and making payments.
One standard example: even a well-established profitable firm cannot easily exchange
claims on future earnings (e.g. by issuing shares) to meet unanticipated financial andbusiness needs. Holding low yielding liquid assets provides insurance against thecosts of and constraints on obtaining external finance, whether this is obtained throughborrowing, share issue or asset sales. This liquidity management can also be liability
rather than asset based, maintaining a line of credit to deal with unanticipatedpayments.
The resulting arrangements for the holding and exchange of liquid assets to cope withfinancial and business extend well beyond the intra-day and overnight markets on
which this paper focuses, into the full range of longer maturity securities and their use
in portfolio and corporate financial management. In this broader context liquidity risk
is intertwined with both market and credit risk: as evidenced by numerous banking
crises including the relatively recent failures of SVB and Signature bank in March of2023.
This same theory highlights further liquidity management issues:
1. A distinction between liquid assets provided by private firms and financial
institutions (“inside liquidity”, the most important example being tiered monetary

14 Bps: Basis points. 1/100th of 1 percent or 0.01%.
15 Holström and Tirole (2008) provide a detailed exposition of this theory.

13

deposits) and liquid assets provided by government or international financial
markets (“outside liquidity” including directly held tokenised money)16;
2. The possibility of market-wide aggregate liquidity shortage, for example in theGFC, the onset of the global Covid pandemic in 2020, and yet again following
the SVB / Signature failures when (i) FIs faced difficulties in renewing shortterm money market funding ; (ii) credit spreads to all but the best quality
borrowers widened dramatically, resulting in a (iii) ‘flight to quality’ with anincreased premium (a price rise and fall in yield) on the most liquid assets suchas US Treasury bonds. Such episodes are characterised by an ‘endogenous’
shortage of liquidity, where the demand for liquidity, because of uncertainty
about the economic environment and concern about increased risk ofcounterparty failures, leads to falling prices for illiquid assets and further
demand for safe liquid assets17;
3. A role for the public authorities in providing additional outside liquidity in theevent of a large shocks which exhaust the liquidity of the private sector (as awhole or of individual firms). This provision is both fiscal and permanent(government-backed insurance against major shocks that cannot be coveredby private insurance) and monetary (temporary provision of outside liquidity tocope with endogenous but temporary liquidity demand, e.g. the central bankacting as ‘lender of last resort’).
Another issue, full discussion again goes beyond the scope of the present paper, isthe implications of a widespread shift to tokenised money for monetary operations.
The long-established mechanisms for central bank control over overnight money
market rates of interest depend on the tiering of money and the demand for holding
central bank reserves, for the purpose of settlement of interbank payments. A
widespread shift from tiered to tokenised money therefore raises concern about theoperating arrangements and transmission of monetary policy.
Intra-day and overnight liquidity and liquidity management operations thus cannot be
totally separated from the challenges of liquidity management during periods of
economy and market wide financial stress or from the operation of monetary policy.
Day-to-day demand for liquidity, and the regulation of intra-day and overnight liquidity,
are partly determined by expectations of, and associated regulation affecting, theability to access liquidity during such stress periods. A shift to tokenised money for
financial market settlement of the kind we advocate in this paper, will need to beaccompanied by very detailed consideration of the implications for monetary policy
operations and transmission and for systemic financial risk.

16 These terms, “inside liquidity” and “outside liquidity”, are taken from Holström and Tirole (2008).
17 Work on this “endogenous liquidity risk” can be traced back to the classic statement of the role oflender of last resort by (Bagehot, 1873); modern contributions, both before and after the global financial
crisis, include (Adrian & Shin, 2010; Brunnermeier & Pedersen, 2008; Bruno & Shin, 2013; Danielsson
et al., 2012; Eisfeldt, 2004).

14

2.3

LESSONS FROM DECENTRALISED FINANCE AND
WEB 3.0

The second key feature of tokenised money, one that we argue can address thechallenges of intra-day and overnight cash management, is that of being “directly
addressable”. This subsection explains this idea and how it relates to the operation ofadvanced internet (‘Web 3.0’) and decentralised finance (‘DeFi’) technologies.
Appendix C provides further supporting detail.
Two terms much used in and around things crypto and digital assets are‘interoperability’ and ‘programmability’. The latter term is widely associated with
Ethereum based ‘smart contracts’; code that checks when certain conditions are met
and then executes. Or it might allow something called ‘earmarking’: for example,
system A asks system B if client P has enough widgets and instructs them to reserve
them to meet an obligation to deliver 10 of them to client Q versus a payment of USD
995’000.
In Traditional Finance (‘TradFi’) we use the term DvP or Delivery vs. Payment. In somesystems both the asset, the widget, and the cash are held on the same system. In
others, there is an interaction between two discrete systems. Switzerland is an
example of where interaction has been a feature of the TradFi landscape for many
years. There, the securities settlement process in the local CSD, SIX Securities, starts
by asking: “Has the seller got the securities? If yes, reserve them for this specifictransaction.” It then interacts with the payment system, SIC, and asks “does the buyer
have CHF to pay for the purchase? If yes, then move the money, and then move theearmarked securities. If no, wait and try again on the money side shortly.” This is what
is meant by programmability and interoperability.
This capability is very powerful; a settlement system is orchestrating the interactionand ensuring that the exchange of securities and money is atomic, a term much usedby those in digital assets. Atomic settlement is a synonym for DvP; either both things
happen, or nothing happens. This reduces risk. Reduces, but does not eliminate. If thetwo parties to the securities trade are direct members both of the securities settlement
system and the payment system, then risk is eliminated; if ZKB sells 100 shares of
Nestle to UBS for CHF 10’400, shares and money are exchanged without settlement
risk, and there is no further credit risk. UBS does though have some market risk.
Now, if instead UBS is the Swiss custodian for an institutional client, say Fidelity Fund
#967, there is an amount of credit risk, because UBS has paid ZKB, but the systemdoes not know if the Fidelity Fund has the money, it just knows that UBS has “fronted
the cash”. If UBS has the right documentation in place, with a lien over securities
position, then it has secured risk, and the exposure is the mark-to-market position of
Nestle shares. Or, it has an unsecured receivable of CHF 10’400.
This example illustrates the example of what we refer to as money being ‘directly
addressable’. The idea is already widely used in decentralised finance and holding of
crypto assets. Assets can be held through a wallet, which provides the interface andprivate key security. The most secure approach being a cold wallet which is connectedto the internet only when making a transaction. But unlike a deposit at a bank, eitherof securities or money, the wallet provides only a technical service, the assets are15

controlled directly by the holder and, provided there is no security breach of the wallet,
cannot be accessed by anyone else. The assets are thus directly controlled (a key
aspect of tokenisation discussed in Appendix B).
Directly addressable takes this concept and carries it a step further. It is already usedin decentralised finance, allowing a holding of a crypto asset or a stablecoin to be ‘ear
marked’, i.e. to be reserved for a transaction, one of the functionalities made possibleby smart contracts in DeFi. Earmarking of this kind, based on an account being directly
addressable, can resolve the risk exposure problem faced by UBS in this example. If
the account, for Fidelity, is directly addressable then SIX securities can ask thequestion not “does UBS have the money for settlement” but instead “does Fidelity thecustomer and principal to this trade have the money for settlement, held as a tokenised
settlement money, not as a tiered deposit with UBS” and SIC will then only action DVP
when the principals on both side of the trade have confirmed they have the money andsecurities ready for final exchange.
Direct accessibility is also a requirement for managing liquidity i.e. ensuring balances
are available in securities accounts. This will be clear from our discussion of scenariosin the following Section 3. Current arrangements, holding securities indirectly withcustodian banks (depots), could shift to direct holding and direct accessibility withparallel benefits for management of securities account in settlement, as thosestemming from direct holding and direct accessibility replacing money held indirectlywith commercial banks (nostros). The issues are slightly different in that securities heldwith custodian banks are not fractionally reserved; but for settlement to take place
DVP it must be clear that the seller of securities has possession and control of thosesecurities, i.e. that they are not for loaned out or pledged, just as it must be clear thatthe buyer has possession and control of the money.
We leave as an open question whether this requires a shift from the current tiered
ownership arrangements for holding securities with custodians to individuallysegregated securities accounts, though the latter would be much more in line with
Web3.0. Unlike the case of tokenised money, where in order to remove credit risk andensure legal finality, 100% reserving or direct holding of central bank money isrequired, it is conceivable that the operating systems of custodians could support thenecessary earmarking of securities for settlement. On the other hand, there are further
advantages to customers of moving to individually segregated accounts with the CSD,
with the custodian operating as a wallet offering an interface to these accounts, notthemselves as a provider of security accounts. This would for example make it much
more straightforward for a client to shift to an alternative provider, facilitatingcompetition, and promote greater transparency of costs. These issues are though notcentral to facilitating better intraday and overnight cash management.

2.4

S INGLE P OOLS OF L IQUIDITY : SP OOL S

The ideal settlement asset or means of payment is central bank money. This
subsection discusses the features required for tokenised version of central bankmoney to be fully effective in liquidity management. Such accessible central bankmoney might come in one of two forms:

16

1. A public sector solution: a “wholesale” wCBDC for financial market participants,
issued by the central bank.
2. A private sector solution: sCBDC, a “synthetic” variant, designed to support
legally final settlement.
Does the difference between these matter? In our view the difference is not of great
concern provided that there is an appropriate regulatory regime for the sCBDC,
ensuring that it has four features: (i) 100% backed by fiat balances held with the central
bank in that currency; (ii) interoperable with any external or third-party payment or
settlement need; (iii) providing settlement finality – the transfer for purpose of settlinga security trade what happens is final and cannot be unwound in a bankruptcy event;and (iv) open to ‘remote’ participation by foreign financial institutions participating indomestic markets.
These requirements on a sCBDC can be summarised by saying that it must be a
regulated liability accepted and its operator must be overseen as a financial market
infrastructure (FMI) to provide assurance that it meets all these requirements.
Conversely any wCBDC will have to be designed to ensure that it provides both (ii),(iii) and (iv). Any solution, wCBDC or sCBDC, that provides these features can be a“Single Pool of Liquidity” or SPooL and used for real time intraday and overnightliquidity management.
Ultimately there is likely to be a choice in any particular jurisdiction between wCBDC
and sCBDC, but there is no need to have both for cash flow management. Some
express concern with sCBDC because of potential failure for operational or otherreasons18. There may naturally be a preference amongst regulators for a central bankoperated and owned solution. Central banks worldwide are exploring wCBDC
solutions19.
On the other hand, wCBDC solutions have not yet reached full development and somesCBDCs are already up and nearly running. There is a range of potential solutions. An
example is Fnality International, which started operations in the UK on a restrictedbasis in late 2023.20 It is a designated payment system and the transactions on its
systems fall under the UK settlement finality law. Fnality does not use blockchain but
uses a private Ethereum based ledger. It is licensed in the UK and started restricted
operations in December 2023. Fnality aims to set up similar structures in othercountries and currencies. RTGS.global is heading in a similar direction, though its
regulatory arrangements are not yet publicly announced.21
Considerable attention is now also being paid to the possibility of recording holdingsof both central bank money and regulated commercial bank money (and e-money)
using a single ‘unified’ record system that will support automated monetary exchange
regardless of whether money is state of privately issued. These ideas are being
18 e,g, (Adrian & Mancini-Griffoli, 2019).
19 Much of this work is done through the BIS Technology Hub, a recent example being Project Mariana

for the exchange of wholesale CBDC (BIS Innovation Hub, 2023). There are also individual central bankinitiatives: the Swiss Central bank has launched a pilot project (SNB, 2023); and the ECB is engaged
in extensive consultation on new technologies for wholesale settlement (ECB, 2024).
20 Described in (Fnality, 2023)
21 The most recent RTGS-global white paper is (RTGS Group Limited, 2024).

17

explored by both the Bank for International Settlements and also by a consortium of
global banks and other institutions participating in the so-called Regulated Liability
Network (RLN).22 Potential balances on such as system might be commercial bankmoney or backed by central bank money.
The ‘Single Pool of Liquidity’ SPooL proposed in this paper could be implemented
using any of these solutions, a central bank issued wCBDC or a private sCBDC fully
backed by central bank money. It could also work with a unified ledger such as thatbeing explored by the Regulated Liability Network, provided the SPooL is fully
reserved in central bank money (to remove counterparty credit risk) and holdings withindividual financial institutions are bankruptcy remote.
Other ‘tokenised’ money solutions may not serve so well as wCBDC or sCBDC. These‘tokenised’ money solutions include tokenised deposits, narrow banks and stable coins.
Tokenised deposits are commercial bank deposits placed on a distributed ledger tofacilitate real time transfer from one holder to another and offering inter-operability witha range of transaction systems. JP Morgan with its JPM Coin is the standout
example.23 Citi is also piloting tokenised deposit services24. But as currently developed
they are not 100% reserved, so exposing holders to credit risk and do not support legal
finality of settlement. Tokenised deposits have the same credit risk as a fiat balance
in a nostro account: an unsecured receivable. Potentially, pursuing the thinking
developed by the Regulated Liability Network, these could develop to include all thecharacteristics necessary for tokenised money to effectively becoming sCBDCs. This
would require that these individually issued tokenised deposits, such as JPM Coin, Citicoin etc., were all: (i) 100% reserved; (ii) bankruptcy remote from the banks that issue
them; and (iii) freely transferrable from one issuer to another. Without these features
holders would need to keep track of the issuer, because they would need to be clear
on who to make claims on in the event of a bankruptcy and rely on further operational
processes for legally final settlement.
A narrow bank is defined as one holding all its customer deposits with the central bankand not providing credit to customers. Since the 1990s several e-money solutions
have emerged which also do not provide credit and maintain a high-quality reserves
to back their private money. With a narrow bank or e-money provider, there is always
a risk of a change its business scope, or of operational problems, either of which could
trigger failure, though the resulting deposit risk could be mitigated with a bankruptcy
remote structure. However, this still falls short of sCBDC for the same reason as a
JPM Coin or a Citi coin and, as it is not regulated as a financial market infrastructure
it would not provide assurance of settlement finality.
Stablecoin is a loosely defined umbrella term covering several distinct arrangements.
The most discussed are those held on permissionless distributed ledgers and used torepresent fiat value in trading of cryptocurrencies and in DeFi (hence the term coin).
These fall well short on all the three requirements for a tokenised money to support
22 Thework of the BIS is reported in (BIS, 2023; Garratt & Shin, 2023). The thinking behind theRegulated Liability Network was first proposed in (The Regulated Liability Network, 2022) and thetechnological, business and legal issues have been further explored by network participants in both the
US (EY, 2023; RLNUS, 2023b, 2023a) and in the UK (EY, 2023; UK Finance, 2023a).
23 The JP Morgan initiatives are reported in (JP Morgan Onyx & Oliver Wyman, 2023). Their work hasreceived extensive media attention, for example in (Coindesk, 2019; Crawley, 2023; Pymnts, 2023)
24 See (Perper, 2023).

18

cash management in securities settlement. One problem is lack of transparency of
their reserves, though this could be addressed by providing a publicly visible real-timereconciliation of central bank holdings vs. balances held by clients25. This is exactly
what they would do internally at the end of the day, and it is exactly the standard thestablecoin Tether has to date failed to meet26. They also fall short on interoperability,
which is problematic to achieve because they do not maintain a 1:1 value against fiat
currencies, and do not offer settlement finality.
Other forms of stablecoin, for example the proposed and subsequently failed
Facebook Libra and Diem are more like money market mutual funds but held on
permissioned distributed ledgers. As we discuss briefly in our conclusions, there issome possibility of settlement solutions being based on money held in money market
mutual funds, but this would be difficult to adopt given present settlement
arrangements. The term stable coin can also be applied, somewhat loosely, to what
are essentially narrow banks or e-money issuers, which do not necessarily use
distributed ledger technology.
In summary, cash management in support of domestic securities trading could verymuch be helped by being able to use a form of tokenised money as the payment asset.
We refer to this as a single pool of liquidity or SPooL because it replaces a variety ofdifferent indirect or tiered deposits held in nostro accounts with commercial banks. As
discussed in the next section such a SPooL can serve all payment related needs: P
for Payment, both in DvP for Delivery vs. Payment and PvP for Payment vs. Payment.
We have identified both public and private sector solutions – wholesale or wCBDC
and synthetic sCBDC which could provide the necessary functionality. These functions(100% reserving, interoperability and addressability, legal finality) are more important
than who the issuer is and whether it is held on a permissioned distributed ledger oron a conventional centralised database. Whether market participants then hold theirbalance as a wCBDC or regulated liability sCBDC, this is the only balance that theywould need. The involuntary fragmenting of liquidity would be avoided.
This is an immediately feasible step that is already being explored as both wCBDC
and as sCBDC. There are further possibilities in the tokenisation of securities, althoughmuch of the functionality can be embodied in existing arrangements for tiered
securities holdings which is not necessarily ‘tokenisation’.

25 While outside the scope of this paper, it is also arguable that these traded stable coins fall also wellshort of the requirements for use in retail payments as an alternative to bank payments and cards.
26 Thus, inviting close regulatory scrutiny, and agree after regulatory sanction, to provide regulators with
reports of reserve holdings (Bossone et al., 2020; De, 2021).

19

LIQUIDITY USE CASESThis section explores the challenges for intra-day liquidity management, and how
these might be addressed using ‘tokenised’ payments, held in a single pool of liquidity
SPooL as described in Section 2.4. These three scenarios are: first domestic security
transactions; then cross-border payments and finally in derivatives trading.
The discussion of each scenario identifies the practical problems, how current
processes create challenges for intra-day and overnight management of cash andsecurities accounts; and examines how ‘tokenisation’ of cash and of securities
accounts could address these problems and what functionality would be required ofsuch ‘tokenisation’.
We are consciously not basing our analysis on viewing ‘tokenisation’ in financial
market operations as a cross-market shift to combining trading with settlement into
integrated processes taking place in near real time on permissioned distributed
ledgers. The discussion of this paper is restricted to more immediate possibilities: thelimited form of tokenisation in a SPooL for each currency, supporting the intra-day andovernight liquidity management functions that are embedded in the existing businessmodels of financial market participants. We also take a technologically agnostic
position, leaving open the question of whether this tokenisation is based on distributed
ledgers or more conventional centrally operated databases.
The broad vision of ‘tokenisation’ – in which cash and securities exchange completely
and finally at the time of trade as if they were bearer instruments through virtual peerto-peer exchange – is attractive. It can be labelled as ‘atomic trading and settlement’,a helpful term distinguishing it from the more imprecisely used term ‘atomic settlement’
which we already have today in the form of DvP Delivery vs. Payment, or Payment vs.
Payment, where either both things happen or neither happens.
Universal adoption of atomic trading and settlement for all market transactions as asingle ‘big bang’ reform of current market practice is neither practical nor realistic.
There are specific kinds of transaction which are by definition for settlement at a later
date: forwards, the far leg of swap or repo trades. And some market participants will
want to trade now and settle later. Much more credible is limited adoption of the kindproposed here, solving pressing practical problems such as those in intra-day andovernight liquidity management examined in this paper. For example, we findsupporting real-time exchange of currencies through foreign exchange swaps has
significant potential value. We believe there will also be a place for trades done for
future settlement, with warehouses and settlement services providing the coordination
over the lifecycle of the transactions. This is further described below.

3.1

S CENARIO 1 – DOMESTIC SECURITY MARKET
TRANSACTIONS

The objective of intra-day cash management in financial markets is to ensure that
trades – agreements to exchange financial assets – are settled and payments are
made “on value date” and that they then take place with “legal finality”; with nopossibility of the transaction having to be unwound, for example as part of a bankruptcy
process.
20

There are two types of risk associated with every settlement process. The first is“settlement risk”. I don’t want to just give you some money and hope you give me thesecurities, or the other currency. The solution to this is something that is an integral
part of financial transactions and in the case of securities trading is known as Delivery
vs. Payment or DvP.27 Either both things happen or neither does.
The other risk is ‘counterparty credit risk (‘CCR’). This is created by time. Typicalsecurities and FX settlement today is T+2; two parties meet at a marketplace andagree to settle in two business days’ time (some settlement, including the settlementof US equities from May 28th, 2024, is T+1; this shorter cycle reduces but does not
eliminate CCR). Even if I know that I will settle a share purchase on a DvP basis, so I
am not going to lose my principal, I am still at risk of loss if the seller fails to deliver theshares and, when I replace the purchase with a new trade the market price has gone
up. This is also referred to as ‘replacement risk’. As described in Box 1, sharedarrangements play an important role in managing this replacement risk.
Box 1. Shared arrangements in securities settlement: CCPs and CSDs.
In many securities markets, and in much derivatives trading, central counterparties(CCPs) are now used to limit replacement risk. SIX X-Clear and LCH, the London
Clearing House are examples of CCPs. In the US, the National Securities Clearing
Corp (NSCC), which is part of the DTCC, is another. A CCP becomes the buyer for
every seller and the seller for every buyer. They mutualise replacement risk because,in the event of default, the members of the CCP are responsible for making good theloss. Not every firm which is an active trader will be a member of a CCP. Some firms,
instead of accepting the obligation of members to protect other members, will settle
through a General Clearing Member (GCM).
The CCP employs several risk mitigation tools; it first asks for Initial Margin (IM) tocover its risk of having to liquidate a position if a participant defaults; then subsequently
it works out who is winning and who is losing based on the latest market prices,collecting variation margin (VM), i.e. the loss on the trade from the loser and passingthat money on to the winner.
This mitigates but does not eliminate risk. Importantly though, the CCP role is simply
to help deal with the time gap between trade date & settlement date. If there were notime delay, there would be no CCR to manage.
Another market wide arrangement in securities settlement is that of the central
securities depository (CSD), the designated institution where securities are issued,
held and settled. The CSD – examples are DTCC in the US, Euroclear UK and Irelandin London and Dublin and Deutsche Borse Clearstream in Frankfurt – maintains theultimate record of securities issuance, sometimes referred to as the notary function,
settling transfers resulting from trade settlement and ensuring that the number of
securities held by investors and on which income in the form of dividends or coupons
due matches the number of securities issued to which income is paid.

27 There is an equivalent in Foreign Exchange, FX, settlement called PvP, payment of one currency vs.

payment of another.

21

In some jurisdictions it is usual practice for investors to hold securities directly with the
CSD. Such ‘individually segregated accounts’ are already tokenised (in the directly
held sense of tokenisation as elaborated in Appendix 2). More commonly though – thisis the practice in the markets of Europe and North America – investors hold securities
indirectly with a custodian bank (major global providers of these custodian services
include State Street, Bank of New York Mellon, JP Morgan, and BNP Paribas). For
each security, the custodian then holds a single omnibus account with the CSD,
representing exactly the total number of securities in its customer accounts for thesame security.
There is a partial analogy between this tiered or indirect holding of securities in acustodian bank and the indirect holding of money in a commercial bank. The omnibus
accounts held by custodian banks at the CSD are analogous to the reserve accounts
held by commercial banks at the central bank. In both cases, as happens frequently,
a transfer of ownership between accounts held at different institutions requires
settlement at both levels – at investor level debiting one account and crediting theother and at central level debiting one reserve or omnibus account and crediting theother (all with legal finality). The analogy is though only partial: custodian banks hold,or should hold, 100% of their clients’ securities holdings in a single client omnibus
account. Clients’ cash holdings are not reserved. Their banking partner can “use its
balance sheet” and extend loans.
Some preliminary analysis is needed before we can lay out how cash management
might change if the means of payment, or the transfer of securities for that matter,
were tokenised. We first need to fully understand what happens in today’s world ofretail clients, institutional clients, brokers, marketplaces, CCPs and CSDs. The 2021
issues with the US broker Robin Hood and retail trading in shares in Game Stop (GME)
provide exactly the lesson and the insight we need – see Box 3B.
The key point that emerges from this example is the pressure that can be placed on
intra-day cash management, even in the simplest situation of domestic securities
settlement, by CCP margin calls. This example might be dismissed: after all the meme
stock at the centre of this episode only ever represented a tiny fraction of the US
market; but this would be a mistake. This example captures, clearly, the impact of our
financial market infrastructure on intra-day liquidity and illustrates the potential for
similar problems to recur on a much greater and more widespread scale.
In this particular case, the problem was that while Robin Hood had reserved funds
from its retail clients in order to settle trades, the separated systems of the CCP andconsequent margin calls did not recognise that funds were already earmarked for trade
settlement; client asset segregation rules prevent client funds being used as margin
payments in Robin Hood’s own cash management. In principle, the margin calls might
have recognised this mitigation of the counterparty credit risk associated with theseRobin Hood meme stock purchases; but in practice this was not done.
As we explain shortly, earmarking these funds in a tokenised form could have resolved
the conflict in current arrangements between client asset segregation (protecting
Robin Hood customers in the event of the financial failure of Robin Hood) and margin
calls (protecting the counterparties of trades conducted by Robin Hood on behalf of its
customers).

22

Client asset segregation rules are not the only reason why CCP margin calls
supporting securities settlement create challenges for intra-day liquidity management.
There are two broad problems, both of which are accentuated at times of market
volatility:•

Recycling of funds to meet variation margin (VM) calls Margin calls by CCPs
need to be met according to a strict timetable. So, not just “anytime on value
date Wednesday”, but “by no later than time X on value date”. The effect is that
CCP participants are dependent on their nostros and the availability of intraday
overdrafts to make these payments. This increases the reliance on intraday
credit, along with the cost of both taking it and giving it.

•

Impact of price volatility. Price volatility today will always affect variation
margin; somebody wins, somebody loses. It also affects the risk models whichreflect historic price volatility. The risk model drives both Initial Margin (IM), andDefault Fund contributions; how much might the price move if the CCP must
trade out of a position after a participant defaults?

In what ways might tokenised money help meet these intra-day liquidity demands?
The problem is not so pronounced when the clearing member is a bank with directaccess to central bank reserves in the currency of the margin call.
Here tokenised money, held directly by the underlying client, and which can be
immediately transferred to a new holder, can help reduce the resulting challenges of
intra-day cash management. The key requirements for this tokenised money,
differentiating it from money held with a nostro, is that such tokenised money cantransferred in near real-time to the CCP and then onwards as a legally final settlementof the margin payment.

23

Box 2: Case Study of GME Game Stop and Robin HoodIn the US, retail clients typically hold their individual securities investment via a broker.
Older readers will know of Charles Schwab, younger ones will have heard of Robin
Hood. The latter was and is targeted at the mass retail market. People who might buy$50 or $100 in shares at a time.
When a client of a retail brokerage submits an order to buy $100 of any stock, thebroker checks the client has the funds and blocks those funds to avoid any “double
spend” 28 , then the order is sent to be executed. There are various ways this canhappen. For Robin Hood, their clearing member was Citadel. Clearing takes place at
the NSCC. As soon as trades are submitted to NSCC there is a calculation of IM andthen until value date there are calculations to reflect the impact of market pricemovements. These result in movements of VM.
To keep everybody in the chain protected; CCPs as a rule will hold their members to
impose the same discipline and margin requirements on their clients. So, the NSCC
asks Citadel for margin and in turn they ask for margin from their clients, including
Robin Hood. Now there is an important nuance. Robin Hood knows that its clients canpay for their purchases; they have blocked the money. But they can only use those
funds on value date, T+2, when they deliver the purchased shares to the clients’accounts. The delay in settlement means that Robin Hood must meet any margindemands from Citadel from its own liquidity, be that capital or borrowed money. It ispart of the deal, well understood by Robin Hood and all the other retail brokers.
Game Stop became what is known as a meme stock. Fuelled by social media
channels, many retail investors came to believe in the prospects and future value ofGame Stop, which was then a retail outlet for video games. Other people’s views
differed. At the same time, there was some significant institutional ‘short interest’. In
simple terms, somebody thought the price was too high, so sold it with the plan to buy
it back cheaper later.29 GME became a ‘philosophical football’ and with that came arollercoaster of price movements. In January 2021, the price moved up by a factor of
30x.
Robin Hood came unstuck on two fronts. Firstly, its clients were pretty much all buyers.
If you have enough $50 and $100 orders, they soon mount up to a significant amountof money. And at the same time the price of GME moved massively. Price volatility isa major driver of the margin requirements that CCPs impose. And in turn, thoserequirements were passed on to Robin Hood. Margin demands went up from aprevious high of some USD 250 million to over 3 billion.30 Now remember that undercurrent practice, Robin Hood must use its own funds to cover that. It may not use theclients’ funds, even though all the executives at Robin Hood, at Citadel and even at
the NSCC and the DTCC know that Robin Hood will have locked up the money tomake those purchases settle on value date on T+2.

28 We are ignoring margin loans or the use of Lombard credit. Simply put, we assume that a retail client

has $100 in place when submitting an order.
29 Standard market practice is that if you want to “short sell” securities you have to borrow or at least
locate them before placing the order. In other words, you need to know you will be able to deliver to thebuyer.
30 Readers might want to read the longer version of the story in (Mezrich, 2021).

24

A margin call of 12x the previous high was too much for Robin Hood to meet. To avoid
a default, Robin Hood had to suspend purchases in GME and some other "memestocks". The stock crashed, the shorts covered some sales and Robin Hood’s retailclients lost out.
Both these features of tokenised money are required: for legal finality that they are
directly held and for near real-time transfer that they are directly accessible andprocessed inter-operably with the CCP’s systems.

3.2

S CENARIO 2 – CROSS BORDER SECURITIESTRANSACTIONSThe next scenario we consider is that of cross-border securities settlement. Crossborder investment & trading is an integral part of today’s capital markets. We must
remember that domestic settlement is co-mingled with cross-border settlement. The
two things are not discrete activities; in any marketplace completing a day’s settlement
activities requires all trades to be settled on the same timetable, whether these arepurely domestic transactions or involve foreign investors. The US equity market issome 40% owned by non-US investors.
Cross-border portfolio and trading transactions are in turn a major part of foreignexchange turnover. The foreign exchange markets are important, both in their own
right, and as the enabler of activities in other asset classes. Already today, they are asignificant driver, if not the most significant driver, of both counterparty settlement andof intra-day liquidity risks. 31 While the establishment of CLS Bank in 2002 has
supported a common PvP payments solution, this does not eliminate all counterparty
settlement risks, these are rising especially because of growing exchange of emerging
market currencies outside of the core CLS settlement services. In April 2022 thereported average daily value of OTC FX transactions settling without PVP, or otherloss protection, was $2.2trn out of a total of $5.6trn.32
Even where there are settlement risk protections, the absence of same day exchange
settlement means that foreign exchange transactions pose significant challenges forthe management of intraday liquidity in global banks. There are two dynamics toconsider in relation to cross-border; firstly, whether some form of payment tokenisation
aids liquidity and secondly how this might interact with the move to T+1 settlement.
The features of payment tokenisation we need to address these liquidity challenges
should have the exact same characteristics as tokenised money when used to address
cash management challenges in domestic security settlement. We require a single
pool of liquidity (SPooL) which is both:
1. Inter-operable and ‘directly accessible’, serve any payment need: P, PvP and
DvP, across all domestic and cross-border transactions.

31 A useful source of informed discussion are the CLS ‘FX ecosystem web pages’ (CLS, 2023), see inparticular (Bullman, 2023) on developing solutions to FX counterparty settlement risk.
32 (BIS, 2022, Table 27, pg 74)

25

2. Direct holding of central bank and not commercial bank money, not restrictedby the opening times of legacy banking systems and providing legal finality insettlement transactions.
In theory, a wCBDC, central bank digital currency, would be a solution in any one
currency and they could be connected as so called mCBDC, a multi-CBDC solution.33
However this raises questions about whether such a product will be inter-operable withmany other marketplace and settlement systems. A solution based only on exchange
of central bank money is clearly limited in application. In our view the appropriate
solution, for implementing the SPooL is a clear separation of the roles of public andprivate sector. The central banks and regulators need to set out the rules and risk
oversight, including access to central bank money for final settlement, leaving thedesign and product management to the private sector.
However achieved, interoperability is central. This means that there are standards
which enable any one part of the ecosystem to interact with the other parts. Then it
becomes relatively low cost for marketplaces to emerge that interoperate with asecurities settlement system and the SPooL; for example, to support real time trading
and settlement for the intraday-liquidity management. This real time trading is not a
replacement for current arrangements with deferred settlement of trades done in the
past: for the foreseeable future these current arrangements will still be needed,deferred rather than real-time settlement, in order to limit the need for pre-funding.
This is supplementary real-time trading to address the challenges of intra-day liquidity
management.
Does the SPooL concept require us to have a single global system? Simple answer:
no. If we design things well, there could be a wCBDC solution in one currency, asCBDC e.g. Fnality solution in another and perhaps others such as RTGS.global forfurther currencies. But in any one particular currency, the two participants would bothneed to have an account in the same system. So, for USD / GBP, both might be with
RTGS.global for USD and both with Fnality for GBP. That would work.
What is much harder would be if one party wants to use Fnality for GBP and the otherwants to use RTGS.global for GBP. Enabling such preferences would require an interoperability between the payment system. In the world of TradFi, we have this in CCPs.
However, the foundation of such a capability is that each CCP is a member of theother CCP. Where this is available, this has taken years to achieve, and limits thepotential risk protection CCPs can offer.
In operations having many ways of doing the same thing is almost never a good thing.
Another example of this was in international iCSDS, with the resulting complexities of
the Euroclear vs. Cedel bridge, a thorny issue. As with CCP interoperability, thisrequired the systems becoming members in the other system, creating additional costs
and risks. For this reason, competing solutions for intraday or other transactions in
one currency are unhelpful; the industry should agree on a single SPooL solution, and,if necessary, encouraged to reach agreement by central banks and regulators.
The cash management challenges resulting from interaction between domestic
securities settlement and cross-border currency exchange become much more
33 See: (Auer et al., 2021; He et al., 2022).

26

pronounced with the move from T+2 to T+1 securities settlement, such as is taking
place in the US. Without the intervening 24 hours between T and T+2, it becomes
extremely difficult for a foreign participant, those further East and whose working day
therefore finishes ahead of the domestic settlement cycle, to locate and provide the
cash required for next day settlement. While CLS Bank provides PVP replacement risk
free exchange of central bank money, their daily cycle imposes very specific timing
restrictions. These restrictions in turn make it difficult, or nearly impossible to settle
FX trades for sameday PvP settlement even if the necessary foreign exchange liquidity
can be found. For detail see Box 3C.
The cash management challenge is even more difficult if one of the currencies
involved is not CLS eligible, or a counterparty insists on settlement outside of CLS.
Ideally the management of cash cross-border should be supported by a SPooL in the
different currencies, for 24/7 settlement, together with the liquidity to support thecurrency exchange when it is needed.
The key issue here, one which does not arise to the same extent with domestic
securities transaction, except through the associated CCP margin calls, is the needfor same day close to real-time foreign exchange. At present this is not supported.
CLS is designed on T+1 or T+2 settlement which is enough to meet most of therequirements of market participants when securities settlement is also T+2. But theseincreased challenges of liquidity management from the shift to T+1 will increasingly
require an exchange, outright spot or foreign exchange swap, with the initial exchange
taking place in near real time.
Box 3: The challenges of cross currency cash management with T+1 domestic
settlement.
We should start by understanding where we are today. For illustration, we will use theUS equity market.
The majority of trading activity is in the last two hours of business, so 14:00 to 16:00
in New York. For businesses processing transactions anywhere East of New York,
whether in Europe or Australasia, this means trades will typically be processed locallyon T+1. So, the trade date is T, the booking date is T+1 and the settlement or value
date under current practice is T+2. From a purely funding or liquidity point of view, for
all non-US FIs, this is all very manageable. On T+1 they work out where they plan to
be on T+2 and can determine any FX needs for T+2. FX markets are expecting these
trades, so there is trading liquidity at the right time and there is time to submit eligible
FX trades to CLS Bank for Payment vs. Payment (PvP) settlement.
If we add a tokenised means of payment in USD to the mix, then non-US FIs would
benefit alongside the US FIs if tokenisation leads to the Single Pool of Liquidity as
discussed above. The easier it is to manage liquidity; the less likely things are to go
wrong and the lower the costs of intra-day liquidity might be.
However, if the only change is to have tokenised USD, then we would expect that
there will still be a reliance on intra-day credit. Recall that this is formally measured
and has an impact on the intra-day liquidity buffers that regulators impose on bothcredit takers and credit givers.

27

Let’s consider UBS Switzerland in its role as one of the biggest asset managers in theworld. It has many clients, both retail and institutional, placing orders in US equities
which UBS executes and then settles for them. Today, for trades done on T, UBS hastime on T+1 to understand the net funding needs in USD for T+2. Some of its clients
will have USD, many won’t, so let’s allow that if UBS is a net buyer of equities, it needs
to sell CHF and buy USD. Today, that trade will be done T+1 for settlement one day
later on T+2 with settlement via CLS Bank. Settling the trade has some impact on
UBS’s cash balance with its US nostro; CLS is based on net funding, gross settlement,so there is less money being moved than if each underlying trade settled gross. Notethat it does not make any difference if its nostro is UBS New York. In any case, there
is an intra-day impact, but other things being equal, no a priori need for any overnight
overdraft. In this sequence of events, UBS Switzerland has been able to swap what it
has, Swiss Francs (CHF), for what it needs, US dollars (USD). And this is without
settlement risk.
Let’s now consider what happens when settlement is moved to T+1. On the US side,
nothing changes; normal trading stops on T at 16:00 local time which is 22:00 over in
Zurich. The computers at UBS Switzerland will have moved or rolled to the next
business day. In theory, UBS staff somewhere in the world could still book all the equity
trades, and they could work out the net funding requirement for the settlement on T+1.
Again, let’s assume that they need to sell CHF and buy USD. Until now they havebeen able to execute that trade sometime on T+1 for settlement the next day T+2.
With the move to T+1 settlement, they have some different challenges:
They need to find somebody with whom to do that trade at just past 22:00 CET in
Zurich. At that time, there isn’t much if any liquidity because there isn’t much if any
demand. They would also like to settle that trade via CLS Bank. In theory they andwhoever they trade with have up until 0630 CET, another eight hours, to submit andmatch the trades. But there are some obstacles: (i) If UBS’s trading counterpart is nota Settlement Member, they might not be able to submit so late; (ii) Between 00:00 and
06:30 there is a funding operation inside CLS Bank called “In-Out Swaps” which help
make funding positions more manageable. If new FX trades are submitted after thatpoint, the funding will be more awkward.
We should also understand the edge case of what the impact would be if UBS
Switzerland were to do nothing. To settle the trades, they will be reliant on intra-day
credit from their custodian. Recall that this has an impact on the intra-day liquidity
buffer requirements for both credit givers and credit takers. These are implicit, fixed
costs which are not associated with activity on any one day. If that intra-day credit
were to turn into an overnight overdraft, there is an impact on the balance sheet ofboth parties, and an explicit cost to UBS Switzerland, which we would expect will leadto some implicit costs for the underlying retail and institutional investors.
If later on T+1, UBS were able to find a counterpart willing to sell USD vs. CHF, that
trade would not settle in CLS. So, to exchange what it has, CHF, for what it needs,
USD, there would be settlement risk. Added to that UBS has a particular interest; itreally needs those USD now and not later. USD which arrives at the end of the day
are only somewhat useful; by then, the damage has been done in terms of intra-day
overdrafts and their impact.

28

There are thus two significant obstacles for cross-border securities settlement
associated with a move to T+1:•

The availability of an intra-day liquidity marketplace to support the FX needs.
Finteum is an example of a new capability in the space, but it remains to be
seen if this, or similar solutions, can attract the necessary participation to
support 24/7 real time foreign currency exchange.

•

The ability in terms of interoperability / programmability to settle those FX trades
instantly, in other words atomic trading & settlement. The exchange of what I
have now for what I need now.

The realization of such atomic trading and settlement, not just the atomic settlement
at T+2 which is already provided effectively by CLS Bank, will in turn depend on accessto the direct addressability of a SPooL of tokenised money by market participants. We
can envisage a virtuous circle of increasing liquidity in same date foreign exchange,
with the ability to find counterparts for immediately exchange in the marketplace forexample through Finteum, enhanced by wider adoption of tokenised directly
addressable monetary deposits, which in turn brings greater liquidity to themarketplace, all incentivised by the shift to T+1 securities settlement.
Whatever solution is used to overcome these obstacles, it will have to comply with therelevant regulations and be consistent with the FX Global Code July 2021, a set ofglobal principles of good practice in the foreign exchange market. 34 The foreignexchange market participants sign up to the code are committed to avoiding settlement
risk (Principle #35) and to strictly measuring and managing it (Principle #50).

3.3

S CENARIO 3 – DERIVATIVE TRANSACTIONS

The final scenario we consider is that of derivatives. For these purposes, let’s not be
too pedantic about “when is a trade a derivative?”, rather let us just think about the
cash flows that come from these instruments and more importantly when the parties
involved know about them.
Item

Type

When does cash or securities collateral flow?

1.

Cleared derivatives –IRS, interest rate swaps/ equity swaps / CDS
credit default swaps

Initial Margin (IM) on trade date – can be met withsecurities.
Variation margin (VM) daily from trade date +1,
based on prior end-of-day.

2.

Un-cleared derivatives-

IM only where applicable
Variation margin (VM) daily from trade date +1.
May be subject to some thresholds or minimum
amounts.

34 (Global Foreign Exchange Committee, 2021)

29

3.

Options

Premium payment from buyer to seller on value
date, normally at least T+1.
Potentially plus the treatment for un-cleared
derivatives above.
If the options result in a deliverable event at
expiry, then this is usual T+1 or more days.
If the option is cash settled, then this too istypically due T+1 or more days.

Table 1: Types of payments associated with derivatives.

In simple summary terms, there are two kinds of payment or cash movement. Firstly,
those we know about today and must make “in the future” and secondly those we must
make today. In both cases, market participants will generally have the means todetermine these commitments as market prices change, often using the same models
that their clearing house or CCP uses. So far this is very similar to the requirements
discussed above for cash management for domestic securities settlement. The
difference with derivative transactions is that the contract can be as long as 25 years
or more, not limited like typical securities settlement to day T+2. However, for intraday and overnight cash management it is not material whether the incoming margin
payment request is for a short- or long-term contract; what is required is visibility ofthese demands and the wherewithal to quickly locate the necessary funds.
In the world of cleared derivatives, there are some very strict rules about the timeframes for meeting VM calls. For example, in the UK, LCH requires members to use
its protected payment scheme. This forces a member who is not themselves a clearing
bank to ask a local clearing bank for support to make these “timed payments”. Timedin the sense that the requirement is not to pay anytime, but to pay no later than acertain time. In other words, the construction removes the flexibility to choose when to
pay. Settlement related payments, unlike VM payments, are not timed, they are due
on value date rather than at a specific time.
As a rule, correspondent banks / nostros charge on an ad valorem basis for timed
payment facilities; so, it is not GBP 2.00 a payment, but maybe 15 bps or more of theamount being paid. Some nostro providers are very strict; if a client is long USD 100
and must pay USD 80 in a margin call, they will still charge some basis point amounton the VM payment of 80 because they no longer have any discretion and are forced
to make it at a certain time. Those payments add to the reliance on intraday credit /overdrafts, which in turn drive the requirement for intraday liquidity buffers.
VM calculations and payments are something which is done one, maybe two times aday. The processes we have available today are simply not able to adapt to a more
frequent cycle.
Box 4: reactive v. proactive margin management30

In 2022, before its demise, the crypto firm FTX took steps to change the way margining
is done in derivatives. FTX had an existing approval as a DCO, a derivative clearingorganisation. That approval comes from the CFTC, the Commodity Futures Trade
Commission, a US regulator. There is convergence here between the old world andthe new world. Even though crypto currencies are not regulated, derivatives are, so
FTX had to obtain this approval. Initially, that approval was for fully collateralised
positions with no leverage. So, the margin questions were not a feature.
In 2022, FTX wanted to evolve the model and move away from that 100%collateralisation to a more traditional TradFi approach. This required them to make anapplication to change the rules of engagement. In their filings, FTX suggested a new
margining process. Clients would be asked to keep margin on-hand with FTX to cover
margin calls. Even if the positions stayed the same, FTX proposed to recalculate
margins really frequently and then call for collateral from the pre-funded accounts. If
collateral calls could not be met, a portion of the positions would be closed out until
equilibrium was re-established. Only partially, but enough to bring margin positions
back into line. No friction, no human intervention.
Essentially, FTX wanted to move the task of collateral management from being areactive one to being a proactive one. The TradFi process is re-active or ex-post;
calculations are made, the parties react and post collateral reasonably quickly, butwith some delay. The DeFi process which FTX proposed would have changed that; itputs the burden on the clients to monitor events and ensure their collateral accounts
are ready.
Opinions differed on whether this was a good or a bad thing and might perhaps leadto over hasty declaration of defaults35. At least technically it would have worked, but
only if funds to cover the margin calls were posted in advance with FTX. Now, abouta year later, we all know that depositing anything with FTX did not end well.
A further feature of TradFi, distinguishing it from DeFi, is that the management ofmargins is re-active rather than pro-active (See Box 4 and Appendix C). In DeFi, andin the replication of DeFi margin management proposed by FTX before its demise, therealignment of a margin position with exposure is undertaken automatically by code.
If margin is not immediately available then positions are closed to reduce risk exposure.
This however removes the role of intermediaries in the management of cash and asset
balances, along with the possibilities for regulatory oversight of cash management andthe provision of public liquidity as a lender of last resort.
What is also missing today, as already discussed in the previous sub-section, is any
easy ability to do FX trades or repo borrowing for same-day near real-time settlement.
If FIs were more readily able to exchange what they have now for what they need now,then there would be less reliance on intra-day overdrafts and with that less need for
intraday liquidity buffers.
New infrastructure which supports this funding need would help mitigate risk: easieruse of FX, more frequent margin calls. They key part here is to avoid fragmenting

35 See: FTX, 2022.

31liquidity. This brings us back to the concept of the SPooL, a single pool of liquidity,
which can serve any payment need: P, PvP and DvP.
Two further diagrams can illustrate what we envisage. Error! Reference source notfound., illustrates how the various forms of P might interact with other systems. For
an Outright FX (1), there needs to be interoperability with two currencies in a SPooL.
Theoretically, each currency could be on a separate platform, however for any one
currency payor and payee would need to be on the same platform. For a securities
trade (2) there needs to be inter-operability between a SPooL and a securities
settlement system. This is the way that securities settlement works in Switzerland
today. That “system” could also be individual Web 3.0 wallets, owned by individuals
or legal entities. For a one-way payment (3) an instruction is simply issued by anauthorised party. All this rests on the combination of direct holding and directaccessibility.
Figure 2: Instant Settlement Interactions

For transactions which are not for instant settlement, which applies to pretty much allderivative transactions, we will need a series of services to manage the lifecycle (cf.
3). An ideal way to manage this is firstly, transactions need to be fed to a repository or
warehouse (A) (we prefer the word warehouse to avoid confusion with the traderepositories mandated in Dodd Frank and EMIR). To manage the transaction acrossits lifecycle, the warehouse can provide various essential functions: margin calculation,
collateral management, and settlement management. Where a Central Counterparty(CCP) is involved all, of these functions are integrated. Outside of a CCP for example
with uncleared derivatives, different actors might perform the roles, or one actor might
perform all of them.

32

Figure 3: Deferred Settlement Interactions

In either case efficient processing rests on systems interoperability, based onstandardisation of contract terms as well as of messaging, which can in turn feed into
the monitoring tools used by cash managers and treasury in financial institutions. Sucharrangements can also potentially support improved regulatory oversight of credit,
liquidity and market risks. Ideally there should be a convergence of interest, with
sufficient operational benefits from improved systems to justify investments which also
ensure more effective regulatory compliance.36

36 McNulty et al., 2023 make a broader argument for the benefits of having firm’s operational systems

aligned with regulatory objectives across all areas of financial regulation.

33

REALISING THE BENEFITS : THE BUSINESS AND
POLICY CHALLENGES
This section considers the benefits, in terms of reduced need for liquidity buffers andof settlement failures, from a shift to tokenized money or what we prefer to call SPooLs(single pools of liquidity) in the form of directly held and directly accessible settlementmoney along with the business and policy challenges that arise if the industry is to
move in this direction.

4.1

OPERATIONAL REQUIREMENTS

In the introduction, we highlighted the very high costs associated with liquidity buffers
generally and intraday buffers specifically. We start with the working assumption that
intraday liquidity buffers cost 100 bps.37 Then if we assume that a regular big bank has
USD 100 billion in buffers and just 10% of that is for supporting intraday, then on
January 1 there are fixed costs for the year of USD 100 million. Just to support
settlement, just for one bank. That makes the nirvana of a SPooL and theinteroperability it supports well worth striving for.
Similar benefits can be achieved from interoperability in the securities legs of trading
and settlement. There would need to be interoperability between the marketplace, theasset custody, and the means of payment. And both parties would need to havecustody accounts which are operationally compatible. There is more flexibility here,
hence using this term “compatible”: the two parties do not have to have the same
custodian as long as their systems support immediate and final transfer reflected inboth the investor accounts held with the custodians and the omnibus accounts heldby the custodians with the CSD.
On the ‘cash side’ though being operationally compatible is not enough because tiered
monetary deposits are not matched 1:1 by an omnibus reserve account with thecentral bank used for settlement, instead accounts are only fractionally reserved. Bothparties would need accounts in final settlement money. Together these innovations
would substantially reduce the occurrence of trade failures which introduce additional
frictions throughout the trading process, and which jump substantially at times ofextreme market stress because of difficulties in obtaining funding.
It might be thought that these benefits could obtained simply through private sector
initiative. This possibility is evident in the ‘tokenised deposits’ we already have. JP
Morgan and JPM Coin, which now includes some ‘programmable money’ functionality
and similar initiatives at Citibank (discussed above in Section 2.4)
Essentially these are ‘new payment rails’ inside the major banks that offer ‘always on’access and first versions of’ ‘programmability’. This might be as simple as “pay as longas balance will not go down below USD 100” or “Pay Counterpart X if payment Y from
X is received”.

37 This is the spread between long-term funding cost for the capital and any short-term returns. The faircost of liquidity in ‘normal times’ for most FIs.

34

These new rails are effective at moving money between clients of the same bank.
Depending on the scope of the new solution, they might also enable clients to makeconditional fiat payments to payees who use other banks. In this case, there is a crossover from the new to the old; in the new system a decision is made to make a payment,
which is then executed over the fiat rails. Perfectly acceptable for a simple one-way
payment.
As we examine these developing ideas, it is important to note that it is not the money
per se which is programmable, rather the payment systems which enable conditions
or dependencies to be attached to a payment.
This is not though interoperability; it is transacting inside the four walls of the bank.
Not able to do more sophisticated things like ‘Siemens wants to make payment X tocounterpart Y only if unsecured risk exposure to Y would stay below 100’. This isbecause the risk exposure is inside the Siemens systems and, as such, does not help
with an order to a marketplace to buy or sell 100 Apple shares, or to swap CHF for
USD. That needs inter-operability protocols, and it needs a means of payment thatuses central bank money.
What this shows is that a purely private proprietary money, even if tokenized in thesense of supporting quite sophisticated automated transactions, cannot support a
SPooL. Consider JPM Coin, the much-discussed tokenised deposit solution being
developed for customers by JP Morgan (JPM), processed on blockchain, albeit a
private, permissioned one. JP Morgan is one of the strongest financial institutions in
the world, the positions of holders of JPM Coin and account holders with “old fashioned”
long cash balances are identical; every single one of them is an unsecured creditor for
every single dollar.
So, it is easy to see that a bank issued stablecoin is the same as a tokenised deposit
is the same as an IOU. They are all commercial bank monies and – without a system
for interbank settlement in central bank money – are not practical for transfer outside
the four walls of any bank that issues them. It is also easy to see that the nature of theclaim, or the liability, is not dictated by the technology which is used. The product iscommercial bank money. That said, the technology can change the process, so a
digital product may have a process which offers advantages that a traditional or TradFi
product process cannot. In India for example, JP Morgan is offering local banks a new
way to settle USD claims between themselves using its blockchain based ONYX
system38. This new digital product is a new internal JP Morgan technology solution
which is available 24 * 7 * 365. But it only works if all the parties have an account withJP Morgan. The improvement is that the digital product delivers an ‘always on’capability but without interbank settlement in central bank money.
Stablecoins are not a solution to either. USDC is like a mutual fund; it invests in a
portfolio of assets and only has some of its assets in cash. And, that cash is with acommercial bank. There is risk that at a particular moment in time, the fund cannot
offer redemption at par. The assistant governor (financial system) of the Reserve Bank
of Australia expresses this as follows: “The enduring challenge for private money is to

38 See (Crawley, 2023; Das & Sircar, 2023).

35

closely replicate the special features of safe public money so that they areinterchanged at the same rate, thus preserving the ‘singleness of money’”.39
A payment system infrastructure would appear to be the logical choice for a SPooL in
any particular currency, whether this in the form of a wholesale CBDC or, delivering
the same functionality, an upgrading of RTGS large value payments and rules on
holding reserves with the central bank. Provided this support 24/7 immediate payment
and interoperability through being directly accessible to the various settlement
systems then it can be SPooL in that particular currency.
SPooLs though need not be standardised at a global level. Payment systems are avery specific species: as critical ‘financial market infrastructure’ they are regulated
locally in each country. They are subject to a large body of rules, much of which isdriven by the Principles for Financial Market Infrastructure (PFMI). It is also possiblethat individual jurisdictions might choose to prefer a SPooL in the form of a licensed
private entity in their currency. As discussed in Section 2.4 above, these could beforms of proposed synthetic sCDBC such as Fnality or the RTGS.global or it could bea development of the current work on the Regulated Liability Network RLN on which
many institutions are co-operating to provide SPooL functionality.
In short, addressing the challenges of intraday and overnight liquidity requires a new
foundation of tomorrow’s payments infrastructure, offering for each currency a SPooL,
whether this a wholesale wCBDC or a private sCBDC equivalent, that is establishedor licensed by the relevant authorities, and for this SPooL to offer both the required
direct accessibility for settlement systems to automate the required payments fortransaction settlement together with intraday access for ‘remote’ members: i.e. foreign
institutions using this system as their SPooL in each particular currency.

4.2

T HE INDUSTRY CHALLENGE : CRITICAL MASS

Our analysis of the challenges of intra-day and overnight cash management suggestthat there can be strong demand for holding SPooLs. We then anticipate that newmarketplaces will evolve, for intraday FX, and existing marketplaces such as Repo toadapt to the new capabilities and allow institutions to obtain the balances of cash andof securities to fulfil all their settlement obligations relatively seamlessly whencompared to what is required today with large liquidity buffers to cope with uncertainty,
buffers that can still be exhausted at times of extreme market stress.
This though runs into an all too familiar problem in innovation of financial
infrastructures, both wholesale and retail. Adoption and usage are significant
challenges. There are two substantial barriers to adoption.40 Co-ordinating change isdifficult: adopting new standards, connecting to a SPooL, whether as a user or a
supplier of liquidity, is not costless. These costs will only be borne if firms are confident
that other firms are doing the same. Some firms, e.g. those with substantial nostro
business, may be more reluctant than others to ‘get on board’, seeking instead for theircustomers, and the revenues they bring, to wait until making any change.

39 (Jones, 2023).
40 For a theoretical discussion, in the context of retail payments infrastructures, see (Milne, 2006)

36

Without adoption across the market, usage then is also limited. With only partial
adoption and limited usage, liquidity will be more rather than less fragmented. We haveseen this in the recent past with ForexClear and the adoption of NDF clearing, with a“half in, half out” situation being unsatisfactory for all participants.
Times are changing. We are in a different place from other when The Payments Risk
Committee advocated the establishment of global collateral pools. 35 Across theindustry there is a recognition now that was not there ten or even five years ago:
technological developments can now support a step improvement in the efficiency andsafety of global capital market operations. We have the impression that the costs of
new technology are noticeably lower than a couple of decades ago, withinteroperability far more easily achieved than in the past because of the adoption ofcommon standards such as ISO20022 and the widespread use of application
programming interfaces. The most recent rallying cry, that of ‘tokenization’, has shownthat it is possible to get much of the industry behind a common agenda for change.
Still, this is far from enough. In contrast to many consumer industries (homeentertainment, mobile phones, photography to name just three which have been
through digital transformation over the past quarter of a century) change ofinfrastructures will not follow, automatically, from technical break throughs. It is notenough to simply propose solutions, whether this is the SPooLs outlined in this paperor some other arrangement for effective intraday liquidity management. There has inaddition to be a collective focus on practical solutions, what they will actually cost as
well as the benefits they will bring; and a major effort is then required to persuade all
involved, not just the digital technology teams but all of senior management right up
to board level, of the need to make the necessary investment in change. From this it
will be apparent that a paper such as ours, even if persuasive in principle, will need to
be followed by further detailed analysis to bring everyone along.

4.3

T HE POLICY CHALLENGE : ACCESS

However, this develops another crucial role will be placed by ‘access rules’, where theresponsibility for change lies with central banks not industry. Access rules are theenablers of the required interoperability for effective intraday liquidity management.
Let’s use the example of UBS needing to access US dollars and Commerzbank(CoBa) being willing to swap USD for Swiss francs (CHF) as collateral. Typically, UBS
will use local repo markets to raise secured funds. Those funds will be in CHF. TodayUBS can use the combination of FX markets and CLS settlement to trade today withsettlement tomorrow in order to obtain the required US dollars. This is often done ona swap basis and referred to as a tom/next swap.
If there were a new marketplace where participants could trade and settle instantly,
the marketplace would want to be sure that each of UBS and CoBa have what they
are selling, what we have referred to as “atomic trading & settlement”. Settlement
would be part of the trade; following the matching the earmarked funds are moved.
For this to happen the two parties need to operate accounts on the same system. The
USD and CHF do not have to be on same system, rather in each currency the twoparties must have accounts in the same system. So, one part of this is simply atechnology challenge; are there licensed payment systems, can they inter-operate with37

marketplaces, with systems of asset custody and with other payment systems in othercurrencies?
The technological requirements are relatively straightforward and could be
implemented in several ways, perhaps with permissioned distributed ledgers but also
likely equally well with traditional centralised databases. The more fundamental
challenge is access and that is the policy question. Neither UBS nor CoBa are directly
regulated by the Fed and CoBa is not regulated by FINMA, the Swiss regulator. So,
can they get the SPooLs in US dollars and CHF which they need for effective intraday cash management?
Access restriction is regarded as a key element of monetary policy control. And it
enables the two-tier system with commercial banking to function properly. The ability
to hold reserves, to those banks given access to the central bank balance sheets forsettlement, is what determines the overnight money market rates of interest (the‘opportunity cost’ of holding reserves which must adjust to bring the demand forreserves into equilibrium with supply of reserves provided by the central bank.
Therefore, a central policy issue is what impact would there be on the demand forreserves and on monetary policy operations from moving to global access forregulated financial institutions to central bank reserves.
What also worries every central bank is ‘run risk’; if anybody or any entity was able tohold central bank money, in a crisis everybody would use that facility. Wholesalebanking could be extremely fragile, with a danger of rapid collapse at times of stress.
In short, when all of us who are trying to change the system and build tomorrow’s
infrastructure find ourselves talking to central bankers about our latest and greatest
idea, we are certain to be asked: “Who has a claim against whom for what?” They are
gauging the potential impact of our “new, new thing” on control over monetary policy
and systemic financial risk. Their starting point is that they are reluctant to give any
wider access than they already do today. For the most part, that is a concern about
end-of-day positions, although there is an issue to be managed around the impact of
an intra-day issue.
There is a clear case that all this new infrastructure is all about settling trades, so
allowing wide access is important. Going a bit further, allowing wholesale market
participants to hold limited overnight balances, at least regulated ones, would be avery good and sensible thing from the viewpoint of FIs’ operational staff. Just maybe
some central bankers might agree with this, but suggesting we make such a bigchange would be highly scrutinised. A conversation with say the Bank of England,
might go like this:“So, you’d like to create a new designated payment system, which operates withsettlement finality, and you’d like that system to have a reserve account with the BoE?”“Yes.”And you propose that financial institutions the BoE doesn’t regulate could hold abalance of GBP in the ledgers in your system during the day and overnight?”
“Yes”

38

“Let’s say one of those institutions is ZKB from Switzerland, whom we do not regulate.
If they have a balance of 100 GBP in your ledger at the end of today, what do they
have a claim on?”
“They would have a claim for a 100 slice of the GBP in the omnibus account at theBoE.”“That would be outside the current scope of our access rules. Only those who areunder the Sterling Monetary Framework are allowed to hold overnight balances.”“But we only want to settle trades.”“What would you propose?”“How about we allow those ‘foreign’ regulated institutions to hold a limited amountovernight. Maybe one amount for G-SIBs, another for D-SIBs41 or some other simple
structure.”“Just supposing we were to allow that, perhaps a cap of GBP 200 million for G-SIB
and 50 million for a D-SIB. How would your system work if one day, ZKB decided tosimply sell CHF vs. GBP 1 billion and sit long the GBP?”“We assume market participants are rational actors and ZKB will only do that trade tosettle trades today.”“But, with what you propose, they could be irrational, could they not? What about if
your system goes bankrupt during the day and stops operating before ZKB can use
those GBP?”
These are complex issues which go well beyond what we can fully address in thispaper. A successful SPooL requires wide access. With that it must have a structure
which fits within monetary policy norms. Of course, we need new infrastructure andthe same time the settlement arrangements must respect the operational requirements
of monetary policy. Without fully resolving the issues, we offer the following
considerations and possibilities:•

A structure which allows unfettered access to the risk-free asset to all globally
active institutions is not obviously necessary. Just maybe, central banks willagree to allow foreign institutions some limited intraday holdings, without
access to any intraday borrowing. That will require payment system operators
to design a structure which ensures control. One possible combination is torequire that foreign institutions have a domestic sponsor. If there is an intraday
event, the rules would say the reserve balances belong to the sponsor, who inturn has a liability to the foreign institution. At day end, there would need to bea process to “sweep” any balance, or excess balance, to the sponsor. In effectan automated unsecured money-market loan by the sponsor to the foreign
institution. The result is then much the same as the situation today if a foreign
institution uses a correspondent bank. The institution can proactively manage
its end-of-day balance seeking as today to be flat. If it does not it has a credit

41 D-SIB is domestically systemically important bank. ZKB in Switzerland is an example of a D-SIB thatis not a G-SIB.

39

balance, which in accounting terms is an unsecured receivable vs. its nostro.
Access rules could limit the size of intraday balances held by the foreign
institution for settlement purposes.
•

This proposed solution would allow monetary operations to continue as they dotoday, based on matching the supply and demand for reserves. Such domestic
sponsorship of foreign institutional access to central bank money would clearly
increase the demand for overnight reserves by the domestic sponsor, theywould need to be in a position to restore the foreign institution with direct accessto central bank money at the beginning of the next day; these unsecured
deposits would need to be fully not fractionally reserved. But this additional
demand could be easily met, if required, by increasing the quantity of reserves.

The argument for central banks considering such arrangements is strengthened byfurther policy benefits. First and most obviously, such wider access to central bankmoney used as SPooLs will ease the intraday liquidity challenges in RTGS systems.
Timed payments would be made from intraday balances, preceded as necessary with‘atomic trading and settlement’ for a funding transaction either in forex or repo markets
and near real-time crediting of the necessary funds. There would no longer be any
incentive to delay payments and put liquidity pressure on the RTGS system.
Second, such SPooLs combined with intraday markets for liquidity, based on atomic
trading and settlement and real-time receipt of credit balances for forex and repo
transactions, would provide the central bank with new tools to address systemic
liquidity risk. The need to lend directly to individual institutions with the burden ofassessing the value of collateral offered by a wide range of global institutions, can be
replaced by overnight lending to the major domestic institutions (perhaps with a series
of intraday auctions to capture shifts in the overnight interest rate reflecting intraday
movements in liquidity demand) who can then in turn be in a position to lend to thoseother market participants, domestic and foreign, who need to increase their SPooLs
to meet their settlement obligations.

4.4

HOW MIGHT WE GET THERE ?

We have described what we think nirvana for the means of payment may look. We aretechnology agnostic. We think having a SPooL in each currency, with wide access forwholesale market participants is the right foundation for the financial market
infrastructure of tomorrow. We are neither alone, nor completely new in our thinking.
Back in 2003, Barclays’ then Treasurer, Richard Pattinson highlighted the need for a“Cross-Border Collateral Pool”.42
Moving to anything new has one inherent challenge; initially, every new settlement
and payment system adds to fragmentation of liquidity before it improves anything. A
so-called “J-curve effect.” Unless a new solution can quickly gain widespread traction,
we will not be better off. So, how might we move to a new tomorrow?
In GBP, for example, Fnality International has made a start with its Sterling Fnality
Payment System (£FnPS). 43 That system can interoperate with other parts of the
42 (Pattinson 2003)
43 (Ledger Insights, 2023)

40

financial market infrastructure. Initially, with only one currency live, it could and likely
will be used for one-way payments for margin requirements. The next logical stepwould be to add DvP, delivery vs. payment to support re-purchase / repo trades forliquidity management, with HQLAx the expected marketplace. The latter could allow
participants to exchange what they have, securities collateral, for what they need, cash,
which can then be used to make payments.
This is a start. What is missing?
•Widespread access to GBP accounts in the £FnPS.

•

Compatible payment systems in other currencies, specifically with the status ofdesignated payment systems deemed to offer settlement finality under local
laws.

•

New marketplaces and settlement systems.

Multiple currencies are important. If readers agree with us that all FIs want to fund theirsettlement and payment needs efficiently and effectively, then we would expect they
will make use of FX markets that allow them to swap the currency they have now for
the currency they need now. If marketplaces emerge which facilitate that exchange,
then there is no ex-ante need to hold balances in “foreign” currencies, so such new
infrastructure should not fall afoul of regulators’ desire to be re-strictive on who may
hold overnight balances in their currency.
From a conversation with a European regulator, we have had the observation thatonce such marketplaces exist, the requirements for intraday liquidity buffers wouldchange44. Today, the requirements force banks to hold buffers aligned to their payment
needs and use of intraday overdrafts in foreign currencies. Once they are able toexchange their home currency for foreign currency intraday, the requirement would beeither eliminated or at least significantly reduced.
As soon as we have multiple currencies and wider access, we necessarily enter therealms of “cooperative oversight”; the regulator in any one currency wants theformalities in place to enable them to supervise any institutions to whom remote
access is given. CLS has just such an arrangement; all 18 currencies are represented,
together with several Eurozone countries,45 the Fed has the Chair.
The speed and spread of adoption might be accelerated if the G-20, perhaps under
the FSB, laid out a mechanism for such cross-border oversight, together withappropriate standards or guidelines. Currencies, or payment systems would then beclear on what they need to do to ensure inter-operability and potential participants
would understand what they would be allowed to do in foreign currencies.

44 Source: off-the-record discussion with a G10 regulator.
45 (CLS, 2022)

41

CONCLUSIONSThis paper has considered the possibilities for employing ‘tokenised’ money (whereby
tokenised we mean holding of cash and non-monetary assets using modern
communication and security technologies) to support intra-day cash and transaction
management in global financial institutions. The status quo is very much dependent
on access to intra-day credit, the cost and risk of which is becoming increasingly
obvious to all participants.
To really progress, we need to be able to settle trades & make payments between allparticipants intra-day and in near real-time. We have argued that creating thearrangements for each global institution to hold a Singe Pool of Liquidity (SPooL) in
each currency in which they transact and using this to drive liquidity management insecurities, FX and derivative markets is the right place to start. That needs a lot ofindustry wide cooperation.
There are two aspects of this tokenisation which in our analysis are needed to support
this outcome. Blockchain or distributed ledgers are not though necessary to achieve
the liquidity benefits of tokenisation:
1. Directly held. Holding money directly in a form which is effectively free ofcounterparty risk and can be used for legally final settlement.
2. Directly accessible. Universal access and availability, ideally 365/24/7 and globally,
and available for automated execution in all the systems for exchange andsubsequent settlement, both of money and of securities.
We call this combination a ‘SPooL’ because it would allow globally active financial
institutions to hold a single pool of liquidity in each currency that supports financial
market transactions for themselves and their clients. The current fragmentation ofliquidity, documented in Section 2 and Appendix A, suggests there will be immediatedemand for such arrangements.
With this foundation we then envisage the services we have today evolving into newforms. Widespread use of SPooLs can support the emergence of marketplaces forreal-time liquidity markets, with intra-day exchange and settlement, employing
collateralised transactions, both foreign exchange swaps and domestic repo. It canalso support transaction management services; what we refer to as warehouses,
providing both calculation of margin and the tracking of obligations for deferred
settlement, to ensure full transparency of settlement obligations. Both requireinteroperability and immediate access to directly held money in a SPooL in eachcurrency, which can be exchanged for securities or another currency, or to be used asa payment. These functionalities in turn reinforce the opportunity for a range offinancial institutions to participate as market makers or liquidity providers in themarkets for intra-day liquidity.
As today, messaging & standards will be essential. We will need inter-operability
solutions and standards to manage the interaction of marketplaces, warehouses,
means of payment and securities settlement systems. Some of this work has alreadystarted, for example the Secure Asset Transfer Protocol (SATP). Another element that42

can facilitate the transfer and exchange of liquidity will be the fuller adoption of the
Global LEI as a standard identifier to support the addressability of SPooLs.
Our outline – or ‘road map’ – for the adoption of technology in intra-day cash
management can be compared with the recent account of the technologicalopportunities in global finance provided by the Bank for International Settlements.46
The BIS offer a persuasive description of how new technology (they emphasise‘tokenisation’) could transform financial infrastructures, reducing transaction costs andrisks and supporting the emergence of new financial services unfeasible with current
legacy infrastructures. The BIS though do not discuss the challenge of adoption. Whilestating that the global financial “…system could be on the cusp of a major technologicalleap.” with substantial potential benefits, theirs is a description of where financial
operations could be in two or three decades from now, not of how to get there.
Our analysis complements that of the BIS by sketching out both a business and policy
case for ‘tokenisation’ in one important area of application, creating our proposed‘SPooLs’ for unfettered access to and transfer of settlement money in intra-day cash
management. Adoption requires both a return on investment for the firms involved –which in our analysis emerges from the substantial reduction in liquidity buffers held
for intra-day transaction management – and a willingness of the monetary andregulatory authorities to accommodate greater direct access to central bank money.
We hope that our work can help industry and the public authorities reach a consensus
on steps that will allow new technologies to be adopted in the relatively near future inthis area of financial transactions.
Achieving this consensus will require further research and analysis, moving beyond
the rather general work undertaken to date on distributed ledgers and tokenisation,
focusing more on the roadblocks: the practical business and policy concerns that could
prevent adoption. Issues that need further attention include: (i) quantifying the
reductions in liquidity buffers that could be achieved from innovation of the kind we
describe; (ii) exploring fully the implications for both monetary policy operations andfinancial stability of widened access to settlement money, and developing workablearrangements for access that deliver the potential benefits to industry without
unacceptably hindering policy interventions; (iii) distinguishing what actions need tobe co-ordinated at a global level (for example messaging and data standards) fromthose which can be left to individual jurisdictions. For example, we have argued thatthe choice between direct access to central bank money in the form of wholesale
CBDC or a privately provided sCBDC is something that can be decided jurisdiction byjurisdiction, provided these individual solutions support the necessary interoperability.

46 (BIS, 2023).

43

APPENDIX A – A PRIMER ON LIQUIDITY MANAGEMENT IN
FINANCIAL MARKETSTo envisage how payment tokens might change how liquidity is managed, we startwith a summary of how the cash management function works today in global banking.
The role of the cash manager is ensuring, from day-to-day, that the bank meets its
obligations relating to payments and settlement. This can be distinguished from thelonger-term Treasury activity of ensuring adequate funding. This section describes the
typical activities involved in these cash management operations.

Constraints and challenges
Effective cash management must cope with a number of constraints and challenges.
A first guiding theme, for every cash manager, is “fund-to-plan” vs. “fund-to-actual”;
what was and is expected to happen vs. what did happen and what could still happen?
If everything goes to plan, then the job of cash management is relatively easy. It issimply a matter of ensuring that sufficient balances of cash and securities are available
when settlement takes place. But inevitably the unexpected will sometimes happen,
so the cash manager must retain flexibility, keeping unused balances of cash of
securities or utilising credit lines to cope with unanticipated developments.
A further issue is that these payments originate in two flavours of accounts: directly
cleared and indirectly cleared (see Table 1). Direct clearing imposes strict settlement
obligations with consequently substantial operational obligations and risks. Indirect
clearing, using a ‘nostro’ account or clearing arrangement with another institutions,offers some additional flexibility but at the cost of maintaining a balance or utilising aline of credit with the nostro. Typically, the cash management function will focus where
there are the largest flows: normally those cases where the FI is a direct clearer andon the major currencies: GBP, USD, EUR.
Even with this focus, the task is challenging. FIs have many legal entities and even in
any one currency there are numerous accounts to be managed. At any moment in
time, those accounts are discrete, mutually exclusive. Long funds in one account are
not immediately usable to cover shorts or shortages in another. This is referred to as
fragmentation. Moving balances between systems in the same currency is notnecessarily instant. If you need USD in your Euroclear account, you might need to
instruct your nostro to move those funds. How quickly they move depends on yourcurrent balance, or your intraday credit line from your nostro, as well as the Nostro’s
backlog and available liquidity and the deadlines imposed for payments/transfers. In
some systems that movement is easier. For example: in the Euro System, moving
cash between securities settlement and payments is instant.
Type

Description

1. Direct
Clearing

The FI is a direct member of a payment or settlement system, suchas CLS Bank for FX or Euroclear for securities.
In payment systems, generally, a participant can only control their
payments, but cannot control when monies are received.

44

Type

Description

2. In-Direct
Clearing

In instant payment systems, the level of control is lower; the FI sets
limits for individual users and the system may impose a maximumsize.
In both cases, there are normally some rules about the amount ofliquidity which needs to be in place at the start of business. Theremay be additional processes requiring certain balances to be
maintained or achieving certain volume & value throughput targets.
For all accounts, the cash manager needs to actively check that the
day’s processing is processing “normally”. Normal will vary bysystem, currency, FI. An example is that a cash manager might
expect that if the payment system opens at say 00:00 on value date,then by 06:00 50% of the payments have been made. Or for
securities settlement, do most trades settle by a certain time?
In this case the FI uses a nostro or Correspondent Bank or acustodian.
The working assumption is that payments have been sent to thenostro and that all counterparts will send funds due sometime on
value date. Securities are trickier; one trade may fail, causing anothertrade to fail. The textbook case is that the FI buys two lots of an asset,
800 and 200, and sells 1’000. The 800 is delivered and settled, but
the 200 is not received and so the 1’000 cannot be delivered. The
cash manager is impacted because 800 has been spent, probably inthe form of an overdraft. Funding for securities settlement requires
continuous interaction with the settlement team.
Usuual aim is to be “flat”, i.e. zero balance, at the end of the day.

Table 2A further important facet of the cash manager’s life is that intraday currency balances
are separate and not exchangeable. No matter how many Swiss francs a Swiss bankhas right now, they are of no use to meet any needs in other currency. There iscurrently no financial market infrastructure which will help an institution instantly oreven same-day exchange what they have for what they need without taking settlementrisk.
In sum, there are three key challenges for the cash manager in their daily business:
1. Fragmentation: the need to hold any one currency in many different, mostly
unconnected, places to drive payments and settlements. This adds complexity
and naturally results in excess liquidity, because in each place you might havemore than you really need.
2. Reliance on intra-day credit: at any point in time today what you have in one
currency will not help you with what you need in another. You have to haveliquid securities collateral or rely on your nostro for an intra-day overdraft. Thisdrives up fixed operational costs.

45

3. Accommodating new demands on liquidity: T+1, greater use of variation margin,
more instant payment schemes.
Opening cash reconciliation
With these constraints and challenges in mind, the typical activities of the cash
manager can be reviewed. On any day, the starting point is the cash reconciliation; isthe amount of money in each bank account what we expected it to be? You might
have been short / overdrawn because money you expected to receive did not comein or sales of securities did not settle, or long because payments were not made, orpurchases of securities did not settle.
If there are significant reconciling items, the cash manager needs to talk to theircolleagues in settlement operations and form a view as to whether those failing items
are likely to settle today. If not, there will be a need to either source more cash tocover the short positions or decide to use any long funds. At this stage, following the
mantra “maximise interest income, minimise interest expense”, broadly, the cash
manager is worried about:
1. The cost of overnight overdrafts.
2. The credit risk of having long balances with the nostro because these areunsecured receivables.
3. The loss of potential interest income on credit balances; in this case thespread between the market rate and the lower rate from the nostro.
FX trade receipts
Attention then shifts to “today”.
Next on the list of things to focus on is FX trade settlement via CLS. If the Financial
Institution (FI) is a direct member of CLS Bank, then the cash manager wants to be
sure that all the payments are made on time. Those payments cover all the shortpositions for the trades settling via CLS. Once the shorts are covered, FX trades
settle and then CLS re-cycles the funds to the FI’s nostros. The “fund-to-plan” view
will be counting on receiving these funds. CLS is almost infallibly reliable. Members
make their payments, trades settle, and long positions are paid out. The cash
manager can expect that what was planned will actually happen.

Unanticipated payment needs
During the day, there will also be some same-day payment needs, which were not partof any fund-to-plan numbers. CCPs, central counterparts, are the likely source of thesedemands. Variation Margin (VM), i.e. the mark-to market on open positions is theregular cause. VM demands need to be met intra-day. These lead to a “timed payment”,
i.e. one which needs to be made by a certain time rather than just anytime on value
date. In uncleared derivatives there will also be bi-lateral payments with trading
counterparts. These are driven by something called UMR, Uncleared Margin Rules. In
simple terms, if you don’t settle via a CCP you still have to calculate and exchange
46

margin with many of those counterparts. From a cash management perspective allforms of margin are essentially a “surprise” for the cash manager. You know it’s goingto happen, you can do some guesstimating, but when it comes, you must get themoney moved and quickly.
Real-time liquidity management.
As the day progresses, a cash manager will want to be able to switch from “fund-toplan” to “fund-to-actual”, in other words to adjust to what has or hasn’t happened. This
is what we refer to as real-time liquidity management. To do this properly requires anumber of tools or inputs. The first is actual input; you need intra-day status messages
both for payments and securities trades. Then you need some software to help you
match those messages about what has happened to what you expected would happen.
Figure shows an illustration of what a helpful picture might look like.
The cash manager has to have an eye on both cash and securities related accounts
and activity. For example, if securities trades are unsettled, the cash manager needs
a view from the securities settlement team whether trades may yet settle. Perhaps
securities can be borrowed to make deliveries? Or there is an expectation that a large
buy trade will settle, and a long balance of cash now will be used.
Recall that there are lots of entities and lots of accounts to manage. As soon as there
are multiple nostros involved, cut-off times play a role; different banks have different
practices. Another “degree of difficulty” is the corporate structure. Which entity canlend to or borrow from which other entities is another set of rules which need to beunderstood and followed.
Overall, these complexities means that the tools need to give a clear view and quickly
guide the cash manager to the exceptions which need attention.
Figure A1: Expected vs. Actual – an ideal view

Managing any anticipated end of day funds mismatch
At this point in the day, payments and securities start to interact. If there is not enoughcash in the payment system, then the next line of defence is the repo market, eitherwith market counterparts or the central bank. That requires eligible collateral. Eligibility
is a function of quality; HQLA is the operative term. High Quality Liquid Assets. Assets
47

are considered to be HQLA if they can be easily and immediately converted into cash
at little or no loss of value. Holdings of HQLA are what enables a bank to satisfy a key
metric imposed by the Basel Capital Regulations; LCR, the Liquidity Coverage ratio,requiring expected short-term outflows to be backed by HQLA. So, FIs will have HQLA,
and other securities collateral. So, the cash manager needs an answer to the question:“what have we got, where is it and what is it worth?”
Importantly it was at this point in the day that a substantial subset of the UK pension
fund industry tripped up in late 2022. They had outsized margin demands and wereunable to mobilise collateral in short order. In summary: a lack of operational
capabilities.
If the projections indicate there will be excess funds, the cash manager needs todecide what to do with those funds. Domestically, leaving large balances in a payment
system overnight is not ideal, as quite often balances are not interest-bearing. Leaving
long balances with a commercial bank involves credit risk and is something which isactively avoided. A standard approach is to make an overnight investment in a money
market fund or to do a reverse repo. In both cases, this mitigates credit risk but adds
to the challenges of liquidity management, because the cash manager does not know
exactly when those funds will come back in tomorrow. And again, any one currency isseparate from all the others. If you are long EUR at the close of business in Europe
and need USD, there is no way to exchange what you have for what you need without
taking settlement risk. You are reliant on any USD collateral you have or on theintraday overdraft from the nostro.
Visibility of incoming flows. Typically, in a payments system there is no visibility ofincoming payments. Kahn & Roberds (2003) correctly observed that this is asignificant constraint. The typical flow is illustrated in Error! Reference source notfound. of Section 2. Inside a Financial Institution (FI), As a general rule, FIs do notpass on information about expected to their nostro provider (B) or, if they are direct
participants, to the Payment System (C). This is because it is information that cannot
be acted on in any risk-free manner.
Reliance on intra-day credit. Typically, nostro providers grant intra-day credit oroverdrafts (see below, especially Figure A2). This is a driver of intraday liquidity buffer
assessments for both credit taker and credit giver. The credit check process at thenostro (3) is key, it governs what flows downstream and how much intra-day credit isused.
Regulation. In wholesale banking, there are specific regulations which result in a needto hold liquidity buffers generally, as well as buffers specific to intraday liquidity
management. General liquidity buffers are set by the Basel III Pillar 1 requirements.47
Additional intraday liquidity requirements fall under Pillar 2 of Basel and are dictatedby a subjective assessment by the national prudential regulators following theguidelines set out in the Basel committee document. The buffers are intended to47 The Basel capital guidance developed since the global financial crisis requires banks to hold High

Quality Liquid Assets (HQLA). HQLA are “cash or assets that can be converted into cash quickly
through sales (or by being pledged as collateral) with no significant loss of value” (Financial Stability
Institute, 2018). The quantum is dictated by two key ratios: the short-term focussed Liquidity Coverage
Ratio (LCR) and the longer-term focussed Net Stable Funding Ratio (NSFR).

48

underpin and support each bank’s ability to support day-to-day operations: settling all
trades and making all payments.
From the established practice set out in the PFMI, we know what good looks like48"Principle 9: Money settlements" states:"An FMI should conduct its money settlements in central bank money where practicaland available. If central bank money is not used, an FMI should minimise and strictly
control the credit and liquidity risk arising from the use of commercial bank money."
One other vital quality of settlement is also needed: settlement finality. This meansthat the settlement process cannot be reversed through subsequent court order:
what’s done is done. Whatever systems or FMI we do use with tokenised payments,
each system needs the formal legal designation of operating with settlement finality.
Intraday credit and ‘throttling’. Cash managers have also had to concern themselveswith pro-actively managing their intraday positions. Intraday credit is a major ingredientof liquidity. Figure A2 illustrates the usual payment flow involved in nostro payments.
A payment need emerges from the product process (Point 1), which is then instructed
through the payment gateway (Point 2), and subject to credit cheques by the nostro(Point 3), the payment is added to the payments queue in the payments system; thenwhen the payment is settled through a reduction in the nostro credit balance or an
increase intra-day nostro overdraft.

If an FI is overdrawn during the day with its nostro it is using credit and the nostro isgiving credit. Post the Lehman collapse and the global financial crisis (GFC) which
followed, regulators recognised that liquidity is the lifeblood of financial services. andthey have become more prescriptive about operational liquidity requirements. National
regulations have their origins in guidance from the Basel Committee on Banking
48(Committee on Payment and Settlement Systems. & International Organization of Securities
Commissions. Technical Committee., 2012)49

Standards (BCBS) and their BCBS 248 guidelines “Monitoring tools for intraday
liquidity management (BCBS, 2013). This subjects banks to some quantitative
reporting on credit given, credit taken & available liquidity. In addition, there are also
qualitative requirements concerning operational capabilities, in other words the tools
to measure and manage intraday positions.
At some point during the day, there will be a formal funding of foreign currency
requirements for the next day. In simple terms, if a Euro based bank expects to be
short USD tomorrow, then today its funding desk, normally via its G10 FX traders, will
do a Tom/Next swap of EUR vs. USD. In other words, borrowing USD with EUR as
collateral for tomorrow with a commitment to return the USD the following day. The
cash manager would see these trades reflected in the expected balances for the nextday.
One tool that is now often used to manage intra-day nostro overdrafts is payment
control, which is sometimes referred to as throttling (see Figure A3). Under the current
guidelines, some FIs now seek to throttle the payments upstream in their own systems(Point 2), with the aim of not relying on the intraday overdrafts from the nostro (Point
3). Once the FI uses any form of throttling, it needs to be actively managed. Overall,the BCBS 248 guidelines lead to the banks having to hold an intraday liquidity buffer.
This is estimated at between 10 and 30% of overall buffers. A large bank may haveoverall buffers of USD 100 billion. The 30 G-SIBs, the world’s largest banks, have an
average of USD 235 billion in liquidity buffers. So intraday positions are a verysignificant influence on the size and cost of those buffers. In the short-term, intra-day
buffers are fixed, like the insurance premium for driving your car. Periodically, the intraday metrics and operational capabilities are assessed by the regulator. Too muchusage or giving of credit will lead to increased buffers, as will a view that operational
capabilities are inadequate. To continue the car analogy, if you crash your car, thepremium goes up. You then have to drive safely for a period. Same when theassessment is negative; buffers go up and stay up. They are not dynamic. Your
institution must prove to the regulator that performance over time has been better.

50

Lessons
That is what is the on the cash manager’s plate today. On the horizon are more
complications: T+1 securities settlement, increased use of instant payment systems,
as well as changes brought about by tokenisation / FinTechs / defi.
Top of the wish list for cash managers would likely be:
1. Tools to support real-time liquidity management. There is a huge amount ofdata. The cash manager needs a view of both cash & securities. Turning thedata into actionable information requires good tool sets. Cash managers need
to be able to quickly assess whether what is happening is normal or not. Thatneeds investment in operational capabilities.
2. Avoid fragmentation. As we had new systems and solutions, we need to avoid
further fragmentation.
3. Single Pool of Liquidity (SPooL) / Inter-operability. Nirvana for any cash
manager would be to have just one pool of liquidity in each currency and to beable to connect that to any payment or settlement need. Most importantly to FX
markets to be able to exchange what they have for what they need. This would
simplify cash management and greatly reduce the liquidity costs.
Away from the day-to-day, there is always a question about the cost of liquidity andallocating those costs. It is not an over-simplification to say that as a rule front-office
folks “simply assume money”; they agree trades, book them, assume they will settle
and then enjoy the P&L. Cash managers mostly have to play the hand they are dealt.
Allocating costs is perhaps the only weapon that can influence behaviour. The working
assumption is that intraday liquidity buffers cost 100 bps: the spread between longterm and short-term funding rates. If a regular big bank has USD 100 billion in buffers
and just 10% of that is for intraday, then on January 1 there are fixed costs for the year
of USD 100 million. Just to support settlement. That makes the nirvana of a SPooL
worth striving for.

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APPENDIX B – WHAT DOES ‘TOKENISATION ’ MEAN?
There is a rapidly expanding research, policy and practitioner literature on tokenisationof financial and other assets. The catalyst for this interest has been the emergence of
crypto assets and decentralized finance defi, as novel cryptographically secured
financial assets and contracts held on permissionless blockchains without requiring
the involvement of any financial intermediaries and supporting near real time
settlement.
Discussion of these questions is hampered by imprecise language and lack ofconceptual clarity. There has been extensive discussion of the costs and inefficiencyof existing financial arrangements, together with assertions that these costs will be
reduced by the adoption of the technologies underpinning blockchains and distributed
ledgers with an associated decentralisation of financial transactions. In this context theterm tokenisation is widely used as a shorthand for adoption of these technologies
with the presumption that this can be a transformative cost reducing disruption ofmainstream ‘centralised’ finance. Relatively little of this literature addresses thepractical detail: exactly what form will this tokenisation take? How it will be adopted
and implemented in practice, within the existing inherited framework of law, regulationand established business models in financial services?
This appendix examines different interpretations of what is meant by tokenisation in
finance, in order to supports the analysis provided in the paper.49
The term token means different things to different people. In the historically longestablished English usage the meaning is clear: a token is a low value representationof something else of higher value (in the table this is labelled as interpretation T1). In
current fintech speak an entirely new meaning has emerged, referring to assets
recorded and held on permissionless blockchains or permissioned distributed ledgers.
But these databases vary hugely, so this is a source of confusion. This novel meaningof token can be made more precise, if it is defined as the ability to directly control anddispose of something of value, something which recording on a blockchain or
distributed ledgers supports (in the table T2).
Table 1 relates these two meanings of token and tokenisation (T1, T2) to three
underlying characteristics of the arrangements for holding and transferring monetary
assets, across a number of examples of money and payments.
The first of these characteristics is whether the money or other asset is directly held,
rather than being the liability of an intermediary with obligations to support withdrawal
or transfer to another intermediary.
An example is that of a central bank money, whether in the form of central bankreserves or note issue. While any indirectly held money e.g. a commercial bankdeposit or an e-money deposit, is tokenised in the sense T1, directly held central bankis not tokenised in this sense. Historically under metallic monetary standards, BoE
notes under the pre-1914 classical gold standard tokens representing a claim on gold
and were tokenised in the sense of T1.
49 This appendix draws on recent and current work of the co-author (Milne, 2022, 2023, 2024).

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The scenario analysis developed in Section 3 focuses on two forms of tokenisation(out of the seven in this table, numbers 2. And 7. highlighted in italics). These in our
analysis offer the opportunity for employing tokenisation to address the challenges of
intra-day and overnight liquidity management for financial market participants.
Does the owner have direct control over the asset, able to hold it securely without
concern about risk of loss and with the ability to make final transfer to someone else,
whether as a gift, as a payment for goods or services or for settlement of a debt?
Historically, prior to the computer age, such direct control was only possible whenmoney was held as a physical object, whether a note or coin. It was not possible toexercise such direct control over money held as an account with a financial institution(whether indirectly with a commercial bank or directly at the central bank. Transfer
relied instead on request-based access i.e. submitting a request for transfer to thebanks’ operating systems, whether through a written instruction, a cheque, or a verbal
instruction, through a teller or call centre.
A key characteristic of modern computer based automatically processed monetarytransactions is that the holder can now have a degree of direct control over money
held as an account with a financial intermediary, e.g. a commercial bank deposit.
Subject to limits on size and security checks, they dispose as they wish of their money
by interacting directly with the bank’s systems.
Money held with commercial banks can also take the form of Certificates of Deposit(CDs), which are fixed term deposits, with the investor or client still facing the credit
risk of the issuing bank. In the wholesale markets, there is also widespread use ofCommercial Paper (CP), a short-term funding instrument which is not deemed asecurity. Again, investors take the issuer risk of the bank. For more detail see Aquilana
et al, 2023).
In the current usage of the term “tokenised deposit”, something else is meant. The
word ‘token’ has, with the emergence of blockchains and distributed ledgers, come tobe associated with this second concept of direct control (T2). This is because, inherent
to the design of these ledgers, is the ability of owners of assets held on them to directly
execute transfers of their assets to other ledger participants. This impressive technicalcapability has though led to an all-too-common misperception. Much of the interest inblockchain and distribute ledger has rested on the impression that the direct control
possible in blockchains and distributed ledgers relies on their operational
decentralisation, with no central operator responsible for the execution of ledger
operations. Advances in cryptographic and biometric security, and their application infor example application programming interfaces (APIs) means that there is notechnical barrier to the same direct control being exercised on more conventional
centralised ledgers. The choice between centralised and decentralised depends onother considerations – it may be less costly to build such direct control into existing
centralised databases than create entirely new decentralised databases. On the other
hand, decentralised databases may promote resilience and avoid the system being
exposed to a single point of failure.

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Table B1: The (many) different interpretations of tokenised money.

Law or code based

Token? “representing something else”(T1); AND/ OR “directly controlled” (T2).

Holding

Control

Monetary
ExamplesDirect holding

PhysicalpossessionLaw‘thingpossession’Direct holding

Direct access

Law “thing in action”

Not T1, can be T2

Direct holding

Direct access

Code “controllable
electronic asset”

T2 with anonymity; also, T1 in case of Crypto currencies,
stablecoins
Stablecoins

Indirect holding

Requestbased

Law “thing in action”

T1 but not T2 in that a cheque or offline Cheque, offline card
payment may bounce
payment

Indirect holdings

Integrated
systems

Law “thing in action”

T1 and to a limited degree T2.

Indirectholding, Direct accessfractionalised

Law “thing in action”

T1 and also T2 for transfer amongst account Regulated
holders with the issuer
network

Indirectholding, Direct access
100% reserved

Law “thing in action”

Yes. T1 and T2.

in T2 and also T1 under gold standard; but not Bank notes, coins,
T1 under fiat
Centralbank
reserves, CBDCBank deposit infaster payments
liability

Fnality
Payment
System (FnPS)

This table elucidates the different meanings and forms of tokenisation. Of the seven different possibilities for tokenisation of monetary
assets, our analysis of tokenisation and liquidity in capital markets focuses on just two: number 3 direct, law based monetary holdings
with control by direct access (exemplified by wholesale CBDC) and number 7 direct, law based monetary holdings with control bydirect access (exemplified by tokenised or ‘synthetic’ CBDC solutions such as RTGS Global or Fnality’s Fnality Payment System.

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What limits the widespread availability of direct control for all forms of financial asset is simply
the business case for the necessary support of investments in intermediary operating systems
and industry infrastructure. Over time though this business case can be expected to be made.
Indeed, the main purpose of the present paper is to develop the business case for making suchinvestments to support direct, automated monetary transfer in capital market transactions.
The third column of Table B1 turns to the legal definitions of ownership of money under property
law. Which of three possible concepts of legal ownership applies to the monetary asset andsupports finality of payment? Is legal ownership based on:
1. Possession. Money as a “thing in possession”, this concept applies where the value isinherent in a physical object, including monetary instruments such as notes and coin;
2. Legal obligations of a financial intermediary. Money as a “thing in action”, where legal
ownership rights have to be asserted through the obligations of the provider of the asset,
this concept applies to account-based money such as commercial bank accounts,
central bank reserves or e-money, but also to traded monetary instruments andcollective investments such as money market instruments and money market mutual
funds.
3. Code-based control over an electronic record of value, without requiring involvement of
an intermediary. Money falling under the new legal concept, of a controlled electronic
record, a concept that has emerged to deal with the challenging legal issues surroundingof legal ownership and transfer of cryptocurrencies, stablecoins and other assets held
and transferred on permissionless blockchains.
The first two concepts of legal ownership are old, they can be traced back at least to the law ofClassical Rome as summarised in the Justinian code. The third concept of legal ownership isnew, it did not exist at all before the emergence of cryptocurrencies. It was unnecessary until
the development of blockchain revealed the possibility of implementing ownership of financial
or other assets held and transferred using ‘permissionless’ ledgers, i.e. entirely code-basedwith no operators responsible for controlling access to or ensuring accuracy of the ledger
recording asset ownership and transfers. The possibility of such permissionless record keeping
was the breakthrough of the 2008 Nakamoto Bitcoin whitepaper and code and is the key
characteristics of the subsequent development of so-called decentralized finance (defi) without
the involvement of any financial intermediaries. A new concept of legal ownership was required
because these were neither physical objects that could be possessed nor accounts supportedby the legal obligations of intermediaries.
Are assets such as cryptocurrencies that are held on permissionless blockchain tokens?
Because their ownership is code-based they are directly controlled, i.e. they are tokens in the
new sense T2, that of being directly controlled. They are not though usually tokens, in theoriginal meaning of the word token, that of representing something else T1. The exception arestablecoins: these are code-based held on permissionless blockchains, but there is also amechanism that seeks to maintain a stable value in terms of fiat currency, to date almost
exclusively in terms of the US dollar. This mechanism can either be an intermediary buying andselling to maintain a peg, the most prominent examples being Tether Ltd supporting the peg for
Tether and Circle supporting the peg for USD coins; or it can also be code based without anintermediary, so stable coins such as DAI directly supported by software in decentralisedPayment Tokens

finance. In addition to being tokens in these senses, assets held on permissionless assets arealso exchanged ‘pseudo-anonymously’ i.e. identities of recipients are linked to public
cryptographic keys not to real world identifies. In this way money transferred on permissionless
blockchains reproduces the anonymity of exchange of notes and coin. This further feature,
anonymous exchange, may have further encouraged the association of the blockchain basedtransfer with ‘tokenisation’.
Some further points are worth making, that help support the analysis of the paper. An irony
that the long-established standard English meaning of token T1 is something that represents
something else, e.g. tokens at a casino representing real money, so casino tokens are by
construction indirectly held liabilities (in this example of the casino). The fundamental
characteristic of a directly held asset is that it is not a representation of something else. The
recent association of directly held asset with ‘tokenisation’ seems to be because a directly held
asset could be held on a distributed ledger, a possibility which has been extensively exploredin experimentations with central bank digital currency, and hence are nowadays often but
confusingly referred to as tokenised.
This third new but non-monetary application of the term ‘tokenisation’, which we can refer to as
T3, meaning the representation of the ownership of a physical or illiquid financial asset on a
blockchain has been applied in many contexts monetary and non-monetary. The usage is often
aspirational, associated with the quite widely made claim that such tokenisation, can support aliquid market for the exchange of such tokenised claims, making hitherto illiquid assets liquid.
While this may be possible, it is not relevant to the discussion of tokenisation of monetary assets,
which are already liquid.
Reference can be made to an old distinction, which applied in the pre-computer age, between
accepting a payment based on verifying an object (coin, bank note) and verifying the identity ofa person, e.g. through a signature on a cheque presented for withdrawal or accepted. Thisdistinction has broken down with the development of automated digital payments. Now, withsome exceptions e.g. payment in physical notes and coins or using a personal cheque, what apayee is accepting is the arrangements of a payment scheme, i.e. a digital platform that
supports the payment transaction whether bank, card or e-money based.
When a merchant is presented with a Visa or Mastercard payment, with online connectivity,
their ability to accept the payment depends on them being able to access the payment platform,or to be assured of a guarantee by the payment scheme. In this latter case there is an elementof accepting the object, a forged card has no guarantee, but a genuine stolen card does. So,
this distinction, between verifying a payment instrument and verifying the payee is not relevant
to our analysis.

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APPENDIX C – LESSONS FROM DECENTRALISED FINANCE
This Appendix reviews some of the capabilities of decentralised finance or DeFi, explaining
how it achieves ‘atomic trading and settlement’ and discussing potential application to
mainstream financial markets. 50 DeFi avoids all use of intermediaries as transaction
counterparties, thus implementing our proposed ‘direct holding’ for all defi assets. Instead,agreement to exchange assets such as cryptocurrencies and stable coins, held on open
‘permissionless’ blockchains, is made directly between defi participants. The supporting
computer code are the defi protocols (consisting of a set ‘smart’ contracts, so called because
there is no institutional involvement in contract execution) that only allow a trade when theassets are held ‘on chain’; and then complete an exchange through verification of thetransaction on the supporting distributed ledger platform such as Ethereum, Solana or Tron(using a consensus mechanism to ensure consistency across the different instances of theledger). Because the ledgers use open-source coding, defi assets are also what we havedescribed as ‘directly accessible’. The main difference from mainstream finance is the degreeof automation of settlement. As discussed in our main text, mainstream finance supports‘atomic settlement’, in which the two sides of a transaction either PvP or DvP are settled
together, as a single process. This however requires the two sides of transaction to source thenecessary assets and money, before settlement takes place, so the settlement is delayed toe.g. T+2 instead of taking place in near-real time. defi, without intermediaries, achieves nearreal-time settlement through ‘atomic trading and settlement’, i.e. with trade agreement andsubsequent transfers PvP or DvP all taking place as a single process, through verification on
the supporting blockchain.
Defi protocols automate a wide range of further financial functions, built on the foundation of
their atomic trading and settlement. These include (i) ‘decentralised exchanges’, whereparticipants can earn a return (matching the order-book and dealer bid-ask spreads inmainstream finance) by providing liquidity pools, inventories of defi assets, that allow orders
execution for other participants; (ii) financing protocols where crypto assets are used ascollateral for automatically acquiring holdings of other crypto assets in order to conducttransactions (these are often referred to as ‘lending protocols’ but this is a little misleading
because unlike conventional bank loans and bonds they cannot be secured on future income
streams); and (iii) a wide range of ‘derivative’ contracts for conditional exchange depending on
cryptocurrency prices or on real world data imported into the defi protocol from internet sources
using so called ‘oracles’ Governance of defi is governance of the supporting protocols, withdecision making involving defi users.
Only a minority of crypto asset exchanges takes place using defi protocols. Most crypto asset
exchange is instead through centralised exchanges such as Binance, Coinbase and the failed
FTX platforms, simplifying the exchange of crypto assets by offering a combined custody
service and marketplace. The convenience of using these intermediaries comes though at thecost of exposing participants to counterparty risk because their assets and money are no longer
directly held. While defi avoids any counterparty risk for participants there is still liquidity risk: instressed market situation, the liquidity to support transactions in a crypto asset may vanish
making the asset worthless. Moreover, the complex interconnections of defi protocols can thentrigger systemic risk exposure for many participants. These possibilities were demonstrated by
50 For review of DeFi protocols see Schär, 2021; Auer et al., 2023.

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Payment Tokens

as the failure of the decentralised stable coin Terra and its associated crypto token Luna in May
2022, during the crypto winter. The absence of intermediaries means that there is no capacity
in defi for a lender of last resort as a defence against a market wide loss of liquidity. The needto retain both regulatory oversight and the possibility of providing public liquidity in a crisis
argues in favour of retaining conventional intermediary based finance with deferred settlement,
but where possible and appropriate using the atomic trading and settlement found in defi.
Can these DeFi capabilities help with supporting more efficient intraday and overnight cash
management? One example supporting mainstream participation in crypto markets istechnology from the US firm Fireblocks, who provide a secure platform for investors toparticipate
in
in
the
wide
range
of
cryptoandDeFi
marketssee
https://www.fireblocks.com/about/ . This technology allows its clients to earmark or block crypto
positions before sending sell orders to crypto brokers or exchange. This is a valuable capability
because it means that users / investors can hold their positions directly in their wallets and nothave to trust exchanges and brokers to look after their assets without putting their hands in theclient asset cookie jar. We know how that ended at FTX and other Crypto exchanges. More
broadly in decentralised finance. Anybody who wants to send USDC to Olaf just needs to know
Olaf’s wallet’s address. No more “send to UBS a/c Olaf”, just “send to Olaf”.
In our view we can have ‘the best of both worlds’: Defi and TradFI (Traditional Finance).
Consider Figure C1, which illustrates the separation of asset custody, market places and meansof payment. This separation or rather segregation, is what we already have today in TradFi. It
is an essential element of investor protection and robust processes. A major shortcoming of thecentralised exchanges used for much trading of crypto assets is that the marketplace, the asset
custody and the payment arrangements are not separated as they should be.
Figure C1: The Holy Trinity

At the same time TradFi fails to provide the immediate transfer of ownership of assets andmoney, following a trade, that is achieve in both DeFi (with genuine atomic trading andsettlement) and with trading of crypto assets in centralised assets (where trades are only

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Payment Tokens

conditionally settled, dependent upon the continuing ability of the exchange to honour its
obligations).
If we put those things together, what this suggests is that we can have atomic trading &settlement in mainstream finance where we need it. Orders are not matched and executed
unless both parties have what they are exchanging, allowing instant settlement, as part of the
trading process, without the requirement for separate clearing and settlement. This offers
improvements on several levels:
1. No need for a CCP for trades which are atomically traded & settled. This can free up
capital and avoids all need for margin.
2. Allows many-to-many connectivity. Consumers with USDC in their wallet could interact
with any number of counterparties in many marketplaces or sell their asset to any ofthem.
3. Gives investors control over the assets in their wallet.
Atomic trading & settlement is actually the promise of new digital asset exchanges such as
SDX, the SIX Digital Exchange. However, in the SDX case both the asset and the means of
payment need to be on the same platform making SDX an island. At the time of writing, volumes
at SDX are negligible.
Of course, there are some nuances and plenty of ‘ifs’ and ‘what abouts’ to consider. Let’s unpick
these changes, and the ifs and what abouts. Instant settlement is the most extremely contracted
form of settlement. Many markets, the US equity market first, are moving to T+1 settlement.
That shorter cycle has some impact on margin needs, but only slightly better and may be worsein the cross-border case (as discussed in Section 3.2).
If we take away the CCPs, brokers won’t need capital to support membership and they won’t
have to pass those costs on by charging clients for that. Ultimately good for all investors, both
retail and individual. To be clear there is still a need for transaction management when there isa transaction lifecycle to manage; for example, an OTC trade done with a future value date, ora repo or a derivatives transaction. Even if this trade is not centrally cleared through a CCP,
then as we have argued, a warehouse can support the management of the required exchangesof money and assets.
Many to many connectivity is a plus too; an investor could use USDC to buy ETH or BTC without
having to trust a broker or exchange. The assets are directly held by the holder using a wallet
and the wallet is directly addressable. The trading and settlement system can simply ask “doesOlaf have 100 shares of Apple in his wallet to fulfil for that order?” Very theoretically, you could
do this today with an API and Open Banking. But not every bank will support that, and eachbank might implement differently. And you want to earmark first and then complete if the orderis executed. In a new tech vs. old tech battle, new tech would win that one in terms of ease ofuse.
Control is something worth having too. Imagine that today you have an account at Robin Hoodand want to move to Charles Schwab. You have 29 different securities assets and a balance in
USD in your account. Some of those holdings are domestic, some foreign, some are mutual
funds and so on. Moving is difficult and far from instant, even if there is a solid process in the
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Payment Tokens

US known as ACATS to support these things. Certainly, in Europe in late 2023, if you are
moving your portfolio from Credit Suisse to another bank, and many are, the process takes
about a month, is manual and error prone.
If everybody has their own wallet, then perhaps regulated Financial Institution (FIs) have a newrole as wallet sponsors. They would take care of all things which are formally regulated; KYC,
AML, CTF, Transaction Monitoring, Suspicious Activity Reporting. There would be nocompulsion to have a sponsored wallet; however, we’d expect that moving between sponsoredwallets would be much easier than to unsponsored wallets. And on-chain, analysis of
movements is far easier than in the current TradFi world. Moving between FIs would become
as simple as moving your mobile contract from one provider to another. Phone stays the same,
number stays the same, apps stay the same. Sponsor in the background stays the same.
Nobody you deal with has to change anything.
What about if people lose their smart phone and with it their wallet? If the wallet is sponsoredby a regulated FI, we’d expect there was some back-up.
What about if somebody does not want to use USDC? This is where the story comes unstuck,at least a little. Very theoretically anybody wanting to use a marketplace could define what they
will accept in payment; I’ll take JPM Coin but not Citi. In practice this will not scale; if you have
100 USDC and 200 JPM Coin, you have 300 on your balance sheet but in practice you have
two discrete pots of non-fungible money. You do not have what the BIS refer to as the“singleness of money”. If you owe somebody 250 and they don’t want or will not accept JPM
Coin, you are out of luck. Doing an FX trade in advance will not work; you don’t know up front
who the seller is and what they might be willing to accept. How might we overcome thisobstacle?
One possibility would be to introduce an FX mechanism that would allow an outright FX trade
where one party could sell what they have vs. what the other needs. In the world of DeFi thiswould be an AMM, an automated market maker. The AMM would enable atomic trading andsettlement of the two assets. Technically this would work, but it would have friction in terms ofa trading spread. In a private sector marketplace, it is unlikely that somebody will provide themarket and do the transformation for free. There is going to be a spread and that brings explicit
costs.
Whilst DeFi does use blockchain technology, we would argue that it is not essential for themeans of payment. Rather, it is the capabilities, which we have outlined in the main body of thepaper, which are critical.

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G LOSSARY
TermDefinition

Access rules

National rules which dictate which wholesale market participants may
have a reserve account with the central bank in that country.

Atomic trading and The simultaneous trading and settlement of a financial market
settlementtransaction. Requires that the system or platform on which the trade
is to take place can determine whether the buyer has the means to
pay for what is being bought and the seller has the asset being sold.
The expression means that either the trade and the settlement all
happen, or nothing happens.
A system operating on this basis needs to earmark funds before theexecution. This ensures there is no double-spending, i.e. firstpromising the money and then doing something else with it.
Aka pre-funding.
Atomic settlement

This just means that either two things happen or neither happens. For
example: in DvP securities are delivered (D) vs. the receipt of apayment (P)Cash manager(s)Specialist in a wholesale banking institution who ensures that thereis the right amount of currency in the right place at the right time tosettle transactions and make payments.
May sit in either an operations, or a treasury team.

CBDC

See: Central bank digital currency

CCR

See: Credit & Counterpart Risk

Central bank

National bank, responsible for monetary policy, fiscal stability andensuring that payment systems function.

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Payment Tokens

Central bank digital Also called digital fiat currencies a digital currency issued by a central
currency (CBDC or bank, rather than by a commercial bank.
wCBDC)
It is a liability of the central bank and denominated in the sovereign
currency, as is the case with physical banknotes and coins.
Typically divided into two types: retail or wholesale, hence wCBDC.
It is not a Stablecoin.
sCBDC is used to denote the equivalent but issued by the private
sector, see: sCBDC
CentralSecurities A national body, also termed a financial market infrastructure,
Depository (CSD)
responsible for controlling public securities issuance, settlement andcustody.
CFTC

See: Commodity Futures Trading Commission

Commodity Futures A US regulator covering trading in commodities and futures.
Trading Commission Specifically, it does not oversee securities or banking activity.
(CFTC)
See: https://www.cftc.gov
CHAPS

The UK real-time gross payment system.

CLS

See: Continuous Linked Settlement.

CLS Bank

The banking entity, based in the US, which operates the CLS system.
See: Continuous Linked Settlement.

Continuous
Linked Financial market utility owned by the banks that provides settlement
Settlement (CLS)
services for FX trades.
See: http://www.cls-group.com
Credit & Counterpart A bi-lateral view of risk. Could be negative or positive. If you buy
Risk (CCR)Apple Shares from a counterpart, and the price goes up, you have
CCR vs. them. If the price goes down, they have CCR with you.
Credit Giver

The institution giving either intra-day, overnight or term credit to thecredit taker.
Typical usage: a Nostro gives its client an intra-day overdraft. Former
is the giver; latter is the taker.
See: Credit taker.

Credit Risk

One of the three major risk functions. Deals with the risk relating tocounterparts and clients. The losses that would be incurred if theclient went bankrupt. This is always a unilateral view; what if
something happens to them / the other party, e.g. they do not repay
a loan.
See also: Credit & Counterpart Risk (CCR)62

Payment Tokens

Credit Taker

The institution receiving either intra-day, overnight or term credit to
the credit taker.
Typical usage: a Nostro gives its client an intra-day overdraft. Former
is the giver; latter is the taker.
See Credit giver.

CSD

Central Securities Depository.
Each country will have a national institution responsible for custodyand settlement of publicly traded securities in its country. It has aninternational equivalent, the iCSD.

Debit CapAn intra-day credit facility provided by the Federal Reserve to its
participants. Is tied to the capital of the participant. It is uncollateralised. Other facilities are available on a collateralised basis.
see:
https://www.federalreserve.gov/paymentsystems/psr_overview.htm
See also: intra-day repo facility

Decentralised
Finance (DeFi)

Decentralized finance (DeFi) is an emerging financial technology
based on secure distributed ledgers similar to those used by
cryptocurrencies.

DeFi

See: Decentralised Finance

Delivery vs. Payment In wholesale banking is specific to the settlement of securities(DvP or DVP)
transactions vs. an amount of money in a currency.
Normally takes place via a CSD, or an iCSD
Directly addressable

The accounts holding settlement assets, both money or securities,
can be directly addressed by the settlement system, in order toreserve or earmark funds required for settlement and thensubsequently co-ordinate the transfer of money and assets, thus
ensuring PVP or DVP. This in turn can facilitate near instantsettlement and can serve as a building block for intraday liquidity
markets.

Directly held

Settlement money is held directly by financial intermediaries, not as
a nostro account with a commercial bank. These settlement assets
could be central bank liability such as a wholesale CBDC or a 100%reserved private money. Settlement money is one in which transfer
supports legally final settlement, there is no requirement for anintermediary to itself source liquidity to complete payment.

Direct Settlement

Settlement via an account held directly with a central bank, with apayment system, or an international settlement system such as CLS
Bank or Euroclear.
See: Indirect Settlement.

Distributed Ledger(s)A record keeping mechanism where there are multiple, but
synchronised, copies of a specific set of records.
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Distributed
Ledger The technology underpinning Distributed Ledgers.
Technology (DLT)
Depository Trust & The United States CSD.
Clearing Corp
See:
Designated payment A sub-set of all payment systems. The label “designated” means thatsystemthe government has said that transactions made on that system aresubject to local rules on settlement finality and cannot be reversed,
unwound or voided by the courts.
DTCC

See: Depository Trust & Clearing Corp

DVP or DvP

See: Delivery vs. Payment

E-money

Balances in a system operated by a licensed e-money operator.
Those balances are normally over-collateralisd, for example an
operator might be required to have 103% of its deposits in assets, inother words it needs 3% of its own capital to support the activity.
Note the difference to fractional reserve banking.

Financial
Board

Stability The Financial Stability Board is an international body that monitorsand makes recommendations about the global financial system.
See: https://www.fsb.org

Finteum

Technology company developing trading solutions to support intraday liquidity management.
https://finteum.com/

Fnality

See: Fnality International

Fnality International

Technology company developing solutions to support payments.
Fnality started operations in December 2023 with the Sterling Fnality
Payment System (£FnPS]. It is a designated payment system.
See:
See also: Designated payment system.

Foreign(FX)

Exchange The exchange of one currency for another.

Foreign
Exchange The exchange of one currency for another with a commitment toSwap (FX Swap)
unwind or reverse the trade at a fixed date in the future.
Typically used by a financial institution to fund its commitments byexchanging what it has in one currency for what it needs in another.
ForexClear

An FX clearing service operated by LCH.Clearnet.

Fractionally reserved

The practice in commercial banking where those banks are notrequired to have all their liabilities to clients backed by reserves at thecentral bank.
In simple terms, if you have a balance of 100, your bank lends out 90
and keeps 10 in reserves.

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Fragmented
fragmentation/ In this paper, used specifically to refer to the need for wholesalemarket participants to hold money and securities in various places orsystems.

FSB

See: Financial Stability Board

Funding to plan

Managing your funding for a given day on the assumption that all
trades will settle, all payments will be made and all incoming money
will be received.
See: Funding to actual.

Funding to actual

Managing your funding for a given day on the assumption based ondetermining what has happened vs. what was planned to happen.
See: Funding to plan.

FX

See: Foreign Exchange.

FX Global CodeA set of global principles of good practice in the foreign exchange
market.
See: https://www.globalfxc.org/fx_global_code.htm

FX Swap

See: Foreign Exchange Swap.

G20 / G-20

A group of Finance Ministers and Central Bank Governors from the
20 major economies. Aka: the G-20, G20, and Group of Twenty. This
was the forum in which many of the principals for the regulations
being in forced in the in the 2010’s as a response to the Great
Financial Crisis were agreed.
One might think of it as the Board level, where the BCBS, the BaselCommittee on Banking Supervision, is the executive arm; actually,translating direction into principles.
See: https://www.g20.org

GeneralClearing A member of a CCP or Clearinghouse with direct access, which
Member (GCM)
settles its own transactions and those of other members or nonmembers. See also DCM, Direct Clearing Member.
GlobalFinancial Financial crisis 2007 to 2008 and beyond, immediately pre and post
Crisis (GFC)
the collapse of Lehman Brothers.
See: http://en.wikipedia.org/wiki/Financial_crisis_of_2007–08
GFC

See: Global Financial Crisis

G-SIB

See: Globally Systemically Important Bank

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Globally Systemically A designation given by the Financial Stability Board (FSB) to the
Important Bank
world’s largest banks.
At the end of 2023 there were 30 of them, still counting Credit Suisseand UBS as two different entities.
See: https://www.fsb.org/wp-content/uploads/P231121.pdf
HQLA

Important element of liquidity management. New regulatory
requirements set forth certain ratios that the banks have to confirm
to, with HQLA being the type of asset the banks need to do this.
Assets are considered to be HQLA if they can be easily and
immediately converted into cash at little or no loss of value.
See: https://www.bis.org/basel_framework/chapter/LCR/30.htm

HQLAx

A financial technology firm leveraging DLT to provide services inwholesale banking.
See: https://www.hqla-x.com

iCSD

See: International Central Securities Depository.

Indirect Settlement

Using a Nostro or custodian.
See: Direct settlement.

Initial Margin (IM)This is a form of collateral normally taken by CCP’s or
Clearinghouses from members. This is an amount to protect the CCP
in the event of a default, if in order to close positions there are trading
losses. This is essentially the market risk. CCP’s use complex
scenario analysis to work out the worst-case loss over a 10-year
period.

IM

See: Initial Margin

Interoperable

See: Interoperability

Interoperability

The ability of one system to interoperate with another.
Specifically in the paper we cite the existing example in the TradFi
world where in Switzerland the securities settlement system (SIS) isinteroperable with the payment system or RTGS (SIC). The former
uses money from the latter to enable DvP settlement of securities
trades.

International Central This is the international equivalent of a CSD. It is a securities
Securities Depository depository capable of dealing with securities in more than one(iCSD)
currency. Euroclear, Clearstream and SIX Securities.
Intra-daySomething which happens or is done during the day.

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Intra-day(lines)credit An overdraft granted by a bank to its customer or client for use during
the business day. Typically, clients cover this credit as they receive
incoming funds during the day.
Typically, these facilities are “unadvised and uncommitted”; theNostro does not tell the client what the limit is and makes nocommitment to allow it on any given day. By avoiding thecommitment, the Nostro or Credit Giver, does not need to back thiswith capital.

Intra-daybuffers

liquidity These are a requirement imposed by regulators to make sure thatbanks can settle trades and make payments.
They are part of “Basel Pillar II”; a subjective assessment of a bank’s
operational capabilities, use or taking of intra-day credit, as well as
giving intra-day credit.
Buffers are held in the form of High-Quality Liquid Assets (HQLA)

Intra-day overdraft

Same as intra-day credit.

Intra-day repo facility

A repo where both the near and the far legs are settled today. Usedto help cash or liquidity management.

Joint OversightThis is a concept from the CPMI, the Committee on Payments &Market Infrastructure.
It is specifically used when the activities of a particular FMI, a financial
market infrastructure, in one country will have a significant effect on
infrastructure in another.
The requirements are part of the PFMI, the Principles for Financial
Market Infrastructure.
You might think of it like this. If I see financial market activity in mycountry which is driven by a wholesale market participant in yourcountry, then I want some means of, or route to, being able to makethe management team of that entity accountable for what I see themdoing in my country.
See: https://www.bis.org/cpmi/info_pfmi.htm

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JPM CoinA specific kind of account balance used by JP Morgan. Essentially a
USD account balance which can be used on their new blockchain
based payment system, Onyx.
For accounting purposes balances in JPM Coin are the same as
regular USD balances in an account at JP Morgan. They are both
unsecured receivables.
See: Onyx

LCR

See: Liquidity coverage ratio

Legally
settlement

final Settlement of a transaction with settlement finality

Legal finality

See: Settlement finality

Liquidity

Cash or securities which can be used to settle trades and makepayments.

Liquidity buffers

Collection of assets held to meet Liquidity coverage ratio (LCR) andintra-day liquidity buffer requirements.

Liquidity
ratio

coverage A ratio set out by the Bank for International Settlements (BIS)
dictating the minimum levels for short-term funding.
Buffers are held in the form of High-Quality Liquid Assets (HQLA)
See: https://www.bis.org/fsi/fsisummaries/nsfr.htm
See also: Net stable funding requirement (NSFR)
See also: High Quality Liquid Assets (HQLA)

Liquidity Effect

The ability for a Nostro / Correspondent bank to settle a payment or
securities transaction as a book transfer; if both the paying FI and thereceiving FI use the same bank, the transfer is internalised as asimple debit and credit. No liquidity is needed.

Liquidity Risk

The risk that an institution will have insufficient funds to meet its
financial obligations as and when expected, although it may be able
to do so in the future.

Margin Call

A call by either a Clearing House / CCP or a counterparty to provide
either or both of Initial or Variation Margin.
See: Initial Margin.
See also: Variation Margin.

Market Risk

The risk of losses on financial investments caused by adverse pricemovements. These might: changes in the price if a security orcommodity, interest rate moves or changes in the FX prices.

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MessagingAn electronic, structured message. FIX or Swift / ISO20022
messages would be examples from TradFi. the Secure Asset
Transfer Protocol (SATP) would be a digital asset or DeFi example.
Simply a structured communication from System A to system B:“Please carry out this instruction for me” or “Here is a status updateon your transaction”.

Narrow bank

National
Clearing(NSCC)

A bank with a regular banking license which by statute does not lendmoney or give credit and has 100% of its customers’ cash deposits
held in reserve either with a central bank or a Nostro.

Securities The CCP for US equity clearing & settlement. Part of the Depository
Corp Trust & Clearing Corp (DTCC), the US CSD.
See: Depository Trust & Clearing Corp.

NDF

See: Non-Deliverable Forward

Net stable funding A ratio set out by the Bank for International Settlements (BIS)
requirement
dictating the minimum levels for long-term funding.
See: https://www.bis.org/fsi/fsisummaries/nsfr.htm
See also: Liquidity Coverage Ratio (LCR)
Non-Deliverable
ForwardAn instrument in the FX asset class. A derivative where a currency
that is not deliverable is traded versus one that is. For example, KRW/ USD. Korean Won vs. US Dollars. The Korean Won is notdeliverable. The instrument is settled on a cash basis, with the actual
market rate being compared to the contractual rate.

NostroAn account held with a commercial bank by a wholesale market
participant.

NSCC

See: National Securities Clearing Corp.

NSFR

See: Net stable funding requirement

Omnibus accountAn account in which assets are held collectively. If in their accounts
at Goldman Sachs Hans has 10 shares of Apple and Greti has 20
shares, then Goldman will have a client omnibus account with 30
shares in it.

Onyx

New digital payments system inside JP Morgan. Uses JPM Coin torepresent balances in the system.

Option(s)A contract which gives a party the right but not the obligation torequire its counterpart to do something pre-determined either at fixed
date in the future (European Stye option) or up to but not later than afixed point in the future (US or American style option)

Pooling EffectPooling occurs when the nostro can take advantage of its customers’
incoming flows to cover its own or other customers’ outgoing flows.

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Privatemoney

proprietary Any form of balance in a privately operated system which can only
be transferred to other participants in the same system.
Both Fnality and JPM Coin are examples of new means of payment.
A balance in a JP Morgan account or Citi account is also private
proprietary money,

Programmablemoney

Money balances held on a system which enables those balances tointeract with third party systems.
This might be: Pay USD W to Party X if System X says that condition
Z has been met. For example, flight delay insurance. An external
system X determines a specific flight was more than 2 hours late andpays USD W to Party X.

Real-Time
Gross Normally used to describe a payments system where funds are
Settlement (RTGS)
transferred in real time. SIC, Swiss Interbank Clearing was the first in
1987. The Fedwire is the US equivalent and Target is the Euroequivalent.
Regulated
Liability The Regulated Liability Network is a potential new payment system
Network (RLN)
which is in development at the time of writing (Q1 2024)
See: https://regulatedliabilitynetwork.org
Repo

See: Repurchase Agreement
See also: Reverse Repo

Repository

Another word for warehouse. Specifically not used in this document
because the term is mostly used to refer to the trade repositories
mandated by US (Dodd Frank) and European (EMIR) regulations.

Repurchase
Agreement

A re-purchase agreement means you sell something today andsimultaneously agree to buy it back in the future.
Imagine your trader thinks German bonds will go up in price. He buys
1mm bonds at 100.0, for €1’000’000. He wants the bank to pay forthem. At that point your bank balance is -€1mm.
If the bank enters a repo, then it might be given €950’000 for thebonds if it promises to repurchase them back in, say, 3 months. The
reason it receives less cash is that the cash giver has allowed for a“haircut” or “margin”, allowing for changes in the bond price.
The second party to a repo is executing a reverse-repo.

Reverse Repo

See: Reverse re-purchase agreement

Reverse re-purchase A reverse re-purchase agreement means you buy something today
agreement (Reverse and simultaneously agree to buy it sell in the future.
Repo)
RLN

See: The Regulated Liability Network
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RTGS

See: Real-Time Gross Settlement

RTGS.global

Technology provider building the global infrastructure for a nextgeneration Financial Market Infrastructure (FMI) designed to solve
the liquidity and risk challenges.
See: https://www.rtgs.global

Run Risk

Risk that in a crisis money will run in a particular direction. In thebanking crisis of early 2023, money ran from the likes of Silicon Valley
Bank (SVB) and Credit Suisse (CS)sCBDC

Synthetic CBDC (see: Central bank digital currency).
The synthetic refers to a private system which is 100% backed byreserves held with a central bank. See: Fnality is an example.

Settlement Finality

Settlement of a transaction, either a payment, a DvP delivery of
securities vs. payment or PvP, payment vs. payment in a manner
which cannot be unwound or reversed by the courts.
Typically, local laws require that the system providing the settlement
or payment service be designated by a government body, e.g.
Treasury or Central Bank, and as such deemed to operate under the
local settlement finality law.

Singleness of money

With singleness of money, there is an unambiguous unit of accountthat underpins all economic transactions in society.
See: https://www.bis.org/publ/bisbull73.pdf

Single Pool(s) of A currency balance in a system which is sufficiently interoperable with
Liquidity (SPooLs)
other systems in the ecosystem that the currency balance can beused for any combination of P, a one-way payment, PvP, settlementof an FX trade, or DvP, settlement of securities on a delivery vs.
payment basis.
SPooL / SPooLs

See: Single Pool(s) of Liquidity

Systemic risk

Risk of contagion across a whole system. In the world of financial
services, this is used to refer to both domestic and global risks.
For example, when Credit Suisse was taken over by UBS, theregulators were concerned about global systemic risk.

T+1 / T+2 / T+X

Refers to when settlement or value date is for transaction, i.e. thedate on which the parties must meet their contractual obligation.
Often expressed as T + ‘something’, with something being a numberof business days. T+2 is normal for equities. That 2-day gap is due
to be shortened in 2024.
The terms T1, T2 are also used.

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Throttle

Refers to the practice of systematically delaying the flow of payment
instructions to a payment system or to a Nostro.

Tiering

This is the result of Access Rules. If only some institutions may havea reserve account with the central bank, then those who may notneed to buy a Nostro or correspondent banking service from one ofthose who can.
See: Access rules

Timed Payment

A payment which needs to be made no later than a specific time on
specific date. Widely used with meeting the funding requirements at
CLS Bank and for margin calls to CCPs.

Timed Obligation

See: Timed Payment.

Tokenisation

Used inconsistently, most often refers to the holding and transfer offinancial assets on decentralised blockchains or distributed ledgers.
One finding from our analysis is that technological implementation isless important than the functionality offered by the technology. Whiledecentralised blockchains / distributed ledgers are possible
technologies which might be employed to implement our proposal for
improved intra-day liquidity management, the outcomes we explore
could also be achieved using more conventional centrally operated
databases.

Tokenised

See: Tokenisation

Tokenised money

In this paper, tokenised money means money in a form that
overcomes the current challenges of intra-day liquidity management.

TradFiSee: Traditional Finance.

Traditional(TradFi)

Finance All the incumbent, old or legacy financial services infrastructure,
viewed from a 2024 perspective.
Specifically, not the things which are DLT, Blockchain, DeFi, FinTech,
Web 3.0.

Un-cleared
derivatives

Bi-lateral derivative transactions which cannot be cleared & settled
via a CCP. Generally, this occurs when two parties transact
something which is some combination of too exotic, not actively
traded.
There are specific collateral rules for these types of transactions.

USDC

See: USD Circle

USD Coin

USD Coin is a digital stablecoin pegged to the United States dollar.
USD Coin is managed by Circle. USDC is issued by a private entity
and should not be confused with a central bank digital currency.
Circle holds the invested funds in both cash and securities. There isan argument to say it is money market mutual fund.
See: https://www.circle.com/en/usdc

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Value Date

The date on which the parties to a transaction are required to settle /make their contractual obligations. Aka Settlement Date.
Note value date does not mean that the event happened on that date.
Often if settlement is delayed beyond value date, there are provisions
for interest to be charged.

Variation(VM)

Margin This is the result of determining at a point in time who is winning and
who is losing. Moving VM from the “loser” to the “winner” eliminates
both market and credit risk.

VM

Most often associated with CCP’s and Clearinghouses. This is a
mark-to-market amount that effectively collects winnings from theloser and passes them to the winner. It is a way of crystallizing the
P&L. In a bi-lateral contract, the P&L is theoretical, because it has notbeen collected. In a cleared environment, the P&L is collected andpaid on an on-going basis.

(Web 3.0) Wallet(s)Digital wallets designed for interacting with Web3 applications, which
are decentralized applications built on blockchain technology. They
enable users to store and manage their digital assets, such as
cryptocurrencies, NFTs, and other digital tokens.
See:
https://www.quicknode.com/guides/web3-fundamentalssecurity/basics-to-web3-wallets

wCBDC

See: Central bank digital currency

Web 3.0

Web 3.0 refers to the current iteration of the web, compared with theoriginal Web 1.0 of the 1990s and early 2000s. Web 2.0 is the current
version of the internet (a term often used interchangeably with web)with which we are all familiar, while Web 3.0 represents its next
phase.
See: https://www.investopedia.com/web-20-web-30-5208698

Wholesale (banking) Banking with / for institutions.
(market)Generally used to differentiate from retail banking.
Definitions vary. Normally includes banks, non-bank financial
institutions such as hedge funds and asset managers, financial
market infrastructures, and corporates.

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ACKNOWLEDGEMENTS
The authors would like to thank the Swift Institute for its support of this research, in particularNancy Murphy & Nick Kerrigan for their insights and patience.
Also, several industry veterans helped us with reviews and inputs: Steve Clements for helping
polish the “day in the life” on liquidity management. Gerard Hartsink, the former Chairman of
CLS, and John Trundle, ex CEO of Euroclear UK & Ireland, for reading and providing valuablecomments on the entire draft.
We hope that this paper will inspire debate and discussion. That is a necessary part of theevolution of our financial market infrastructure. We welcome any feedback.
Any remaining errors and lack of clarity is down to the authors.

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