New Payments Canada discussion paper examines credit risk in the ACSS

Payments Canada has released a new discussion paper that promotes conversation about credit risk in the Automated Clearing Settlement System (ACSS), which isn’t widely understood.

The paper, A Primer on Credit Risk in Payments Canada’s Automated Clearing Settlement System (ACSS), examined the magnitude of credit exposure when a Direct Clearer defaults. It also demonstrated that credit risk exists in the ACSS – it‘s embedded directly into the rules of the system, Neville Arjani, the paper‘s author, explained.

“There seems to be a misconception that there’s no credit risk in the ACSS because it’s all being done via collateralized payment in the LVTS,” Neville said. “That doesn’t make the credit risk go away in the ACSS.”

The paper is a sophisticated analysis that demonstrates the deep knowledge Payments Canada holds, which can been seen in the work that goes on here every day.

“I am excited that we are doing research that will provide ACSS direct clearers with the information they need to manage their risks,” said Carol Ann Northcott, the Chief Risk Officer & Vice-President, Risk, Security & Research

By looking at the last 10 years of daily ACSS data and simulating tens of thousands of potential defaults, Neville found that the largest exposure was more than $500 million for one participant. For a large bank, that’s most likely manageable when the economy is stable. Trying to secure $500 million in a crisis like the one being contemplated in the paper may be more difficult.

“I think that’s a key takeaway from the paper,” Neville said.

In the wake of the Bank of Canada’s designation of ACSS as a prominent payments system and the more stringent risk-management criteria that came with it, the paper’s empirical analysis could help answer the question about how much collateral should be posted in order to meet the credit risk standard. Neville said he hopes his paper will be considered as Payments Canada develops approach, but says there’s more work to be done to pin down the risk framework.

“We are committed to meeting our designation requirements in the most efficient and effective way for our members,” Northcott said. “Understanding the risk that arises in the system is an important step and will inform our dialogue with our members.”

Read Arjani’s study: PDF icon A Primer on Credit Risk in Payments Canada's Automated Clearing Settlement System (ACSS)