Operating rules will specify how inter-participant settlement occurs. This may be a scheme-specific settlement process, or it may take advantage of an existing process existing, for example, at the central bank of the country. In either event, the rules will specify when the settlement will occur and how it is triggered (by a time period, for example, or by the accrual of a set level of liability (net exposure) by one participant). The rules will specify how settlement transactions will be posted to a chosen settlement bank for the system. Importantly, the rules will specify whether or not participants are allowed to have such liability (that is, run a negative net balance prior to funding the settlement account) or not, and if allowed, what the terms and limits are, and how these terms and limits are managed and modified over time. This is a situation where best practices are emerging among payments systems, particularly those used for retail payments, this includes continuous (rolling or in short, discrete time periods) same-day settlement and fully pre-funded settlement accounts for participants.
End User Settlement
Operating rules may or may not specify how end-user settlement by participants occurs: that is, when funds are debited from the sending party and when they are credited to the receiving party: in the latter case, when funds are available for use if that differs from the date/time of credit. These issues may also be covered by national law or regulation.
The Financial Inclusion Perspective
Same day inter-participant settlement help to ensure the system and its participants have as close to zero exposure from a failing participant. This controls liquidity risk, and therefore, reduces cost. Additionally, more frequent end user settlement help to ensure end users are not waiting for their funds to transfer, which is considered essential for customers who make low value payments, frequently.