C. The Automated Clearing and Settlement System (ACSS)

• Author: M.H. Ogilvie
• Profession: LSM, B.A., LL.B., M.A., D.Phil., D.D., F.R.S.C. Of the Bars of Ontario and Nova Scotia Chancellor's Professor and Professor of Law, Carleton University
• Pages: 320-329

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The Automated Clearing and Settlement System (ACSS) came into operation on 19 November 1984 to calculate the settlement balances of direct clearers in place of the earlier method, whereby clerks from the direct clearers met each morning to calculate manually the net balances of the previous day’s clearing. Although now automated, the fundamental principles undergirding the ACSS, or any other automated settlement system, continue to reflect those developed in the eighteenth century in the City of London, where bank clerks met at coffee houses twice daily to exchange cheques and settle balances among themselves.²³

"Clearing" is the process whereby banks collect cheques deposited by their customers and pay cheques drawn by their customers or whereby collection and payment are carried out electronically. More specifically, clearing refers to the netting of the mutual claims bank participants in the clearing system have against each other in a process similar to set-off. The ACSS is a multilateral net-net system, rather than a bilateral one, in that netting occurs among all the participants, that is, all the direct clearing banks in system, rather than between any two of them or all of them with a central counterparty. "Settlement" is the companion process, whereby participants exchange economic value with one another so as to extinguish the payment obligations among the participants. This is accomplished on a daily basis through the adjustment of the balances in the accounts each direct clearer is required to maintain at the Bank of Canada.

The rules²⁴for the operation of the clearing and settlement systems are made by the board of directors of the CPA pursuant to the Canadian Payments Act²⁵but are effective only after approval by the Governor in Council.²⁶

The CPA first approved the Clearing By-law, By-law No. 3, in 1985, and this together with the ACSS Rules Manual are revised from time to time as required.²⁷

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There are two classes of participants in the ACSS: direct clearers and indirect clearers. Direct clearers are CPA members with the largest annual volume of payment items processed by the ACSS, and they have settlement accounts at the Bank of Canada, as well as being connected by computer to the ACSS. There are eleven direct clearers at present, as well as the Bank of Canada, and they act for the indirect clearers in the ACSS. There are 108 indirect clearers. The indirect clearers are also CPA members, but as much smaller financial institutions accepting deposits, they do not have direct access to the clearing system. Rather, they are represented by the direct clearers, who clear on their behalf. The relationship between direct and indirect clearers is regulated by private contract, and indirect clearers do not usually maintain accounts at the Bank of Canada and have no computer connection to the ACSS. Some indirect clearers have formed groups and are represented by one member of their group as a group clearer. Groups of cooperative credit societies access the ACSS in this way, and at present two credit union centrals are direct clearers, although many individual credit unions continue to access the ACSS through a bank direct clearer.

The direct clearers participate in the ACSS at two different levels: at six regional settlement points throughout the country (Halifax, Montreal, Toronto, Winnipeg, Calgary, and Vancouver) and at the Bank of Canada. The regional settlement points are places where there is a clearing and provisional settlement among the participants in that region. The results are transmitted through the ACSS to the Bank of Canada, which does the final netting of the regional results to determine the net obligations of the direct clearers to one another on a daily basis and then settles those obligations by a single debit or credit entry to the settlement account of the clearer. The entire system operates on a network of personal computers and is linked by a secure, dedicated communication link to a data centre in Toronto to which the Bank of Canada has access and to which the data summaries are communicated daily for the final netting. Data is available through each day to the participants so that they can manage their positions and to the Bank of Canada so that it can assess solvency throughout the day. The net position is assessed at about 12:00 noon daily EST by the Bank of Canada for the previous day.

The ACSS clears and settles both paper and electronic payment instructions, or "payment items," a term which covers both paper and electronic payments. The Clearing By-law permits only certain payment items through the system: (i) paper payment orders, including cheques and other negotiable instruments, bank drafts, money orders, travellers’ cheques, and Receiver General’s warrants; (ii) payment or-

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ders recorded on magnetic, computer-readable tape; and (iii) payment orders transmitted electronically. The clearing rules further provide specific technical requirements that all payment items must satisfy before they will be permitted into the ACSS, including rules relating to size, encoding, paper quality, designs and legal requirements, for example, so that paper items fulfill the legal requirements for a negotiable instrument. Since the payment items are machine read and/or sorted, very specific technical requirements are necessary, and it is not possible to clear and settle a payment item through the ACSS unless the specifications set out in By-law No. 3 and the ACSS Rules Manual are completely fulfilled. Electronic items are grouped into three categories:

(i) debit and credit transfers on magnetic tape; (ii) payment items generated at electronic point-of-sale (POS) terminals; and (iii) electronic data interchange (EDI) items.

Against this structural background, it is now possible to trace the clearing and settlement of an individual paper payment item.²⁸

When a customer deposits a cheque for collection into the customer’s account, that cheque will already be MICR encoded with information at the bottom left-hand corner, identifying the cheque number, bank branch transit number, and account number. The cheque will be further encoded either at the branch or at the regional settlement point with the amount payable and sorted from the branch. The cheque will also be microfilmed, front and back, to ensure a copy is available for any future inquiry. An "on-us" item, that is, a cheque drawn on an account at another branch of the same bank, will be sent for clearing within that bank’s own internal clearing system by being sent to the branch...