E. The Large Value Transfer System (LVTS)

• 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: 330-333

Page 330

The Large Value Transfer System (LVTS) came into operation on 4 February 1999 as the system for clearing and settling large-value Canadian dollar transactions, currently defined as payments in excess of $25 million. It now processes about 90 percent of the economic value exchanged in Canada and is typically used by large corporations, governments, and large institutions such as investment dealers to transfer payments. Its systemic importance to the payments system is such that it has been designated by the Bank of Canada under the Payment Clearing and Settlement Act (PCSA) and so is subject to especial Bank of Canada scrutiny, although it is owned and operated by the CPA pursuant to the LVTS By-law No. 7 and the LVTS Rules.³⁹

Before the introduction of the LVTS in 1999, large-value payments were processed through a dedicated system called Interbank International Payment System (IIPS), which used the facilities operated by the Society for Worldwide Interbank Financial Telecommunication (SWIFT), based in Belgium. IIPS operated on the basis of an end-of-day bilateral balance of netted debits and credits, but this was considered to create too much systemic risk in the Canadian payments system, so the CPA moved toward the LVTS, which is a real-time, multilateral netting system operated in Canada by the CPA using the SWIFT network.

Page 331

The movement toward a discrete large value payment system followed international trends after the Bank for International Settlements (BIS) published a series of reports in the early 1990s⁴⁰identifying credit and liquidity risks as major concerns in relation to systemic risk in the world’s banking systems.

The BIS recommended that systemically important payment systems become real-time, multilateral systems so as to reduce these risks. The LVTS is that system in Canada. As a real-time system, payment messages are processed by the payee bank when received from the payer bank so that payments are immediate, final, and irrevocable, and the participants and the Bank of Canada can monitor the system throughout the day so as to act immediately should there be any possibility of default. The LVTS is also multilateral, so that there is a continual recalculation of the net position of each participant throughout the day with settlement at the Bank of Canada of one net amount by each participant at the end of the day. These characteristics of the LVTS mean that there is unlikely ever to be a default, but...