5.19 Each of the central bank service options considered by the Working Group could potentially be made available to multilateral netting schemes. The Lamfalussy Report described the potential risk reducing benefits of sound netting schemes, as well as the possibility that netting schemes could shift, mask and concentrate risks if not designed and operated in a prudent manner. Thus , to reduce risk, it would be important to restrict central bank services to netting arrangements that meet the necessary standards for sound netting schemes. To the extent that the availability of central bank services facilitates the development of sound netting arrangements, systemic risk could decline from current levels.

5.20 Well-founded legal basis. The laws and regulations of an individual country would need to work in harmony with the operational and accounting procedures of its home-currency payments system to achieve intraday finality for transfers between accounts at the central bank of issue. This could require significant changes in some countries where this is currently not the case, and it could be particularly problematic in certain countries with zero-hour bankruptcy rules. Achieving finality in a multi-currency DVP settlement - whether DVP is created or supported by an extension of payments system operating hours, direct cross-border links between these systems or multi-currency central bank services - would require the combined support of the legal, regulatory, operational and accounting frameworks of all of the relevant countries of issue and large-value funds transfer systems.

5.21 To the extent that bilateral or multilateral settlements rely on final transfers, lack of finality would undermine effective risk management. In addition, to reduce settlement risk, any bilateral or multilateral settlement arrangement that makes direct or indirect use of these transfers would itself also need to have a well-founded legal basis. This would be influenced by numerous factors, including the location and corporate form of the entities involved in the settlement process.

5.22 Competitive effects. Although the Working Group selected and analysed central bank services that could facilitate the settlement of foreign exchange transactions, these services could also support the settlement of a variety of other domestic and international transactions. The most comprehensive support might come from the provision of an intraday final transfer capability, where this does not already exist, since such a capability could facilitate the settlement of home-currency obligations arising from any domestic or international transaction. As such, this feature could support the safety and efficiency of home-currency payments systems that offer it and financial markets that make use of it.

5.23 The settlement of other cross-border and multi-currency payment obligations might also be aided by the various central bank service options. For instance, central bank services could facilitate cross-border and multi-currency payments for securities and other financial instruments traded and delivered around the world. As pointed out in the DVP Report, however, cross-border and multi-currency linkages in the securities settlement process raise a number of issues including credit and liquidity risks, settlement efficiencies and costs, and central bank oversight.

5.24 The various service options could potentially alter the competitiveness of the world's payments system participants. For instance, although the provision of intraday finality is not tied to any required change in access to accounts and other services at individual central banks, payments processed in a system with intraday finality might be effected more competitively by participants with strong operational capabilities, significant central bank balances and potential access to central bank liquidity facilities. Furthermore, to the extent that intraday finality fosters the development of new private sector settlement arrangements, current banking relationships might also change.

5.25 This latter effect could equally arise through the creation of multi-currency DVP capabilities. In addition, because an extension of payments system operating hours, direct cross-border payments system links and multi-currency central bank services would facilitate multi-currency DVP settlements, these services may also favour those payments system participants with access to central bank accounts and funding in all of the relevant countries. Furthermore, depending on the timing of these settlements (and, hence, the potential need for prefunding and delayed access to credits in certain currencies), these approaches might eventually also encourage the use of some currencies rather than others. However, predicting such long-run developments, which would also depend on many factors other than the use of particular settlement services, is beyond the scope of this study.

5.26 Cost-effectiveness for the private sector. For those large-value funds transfer systems in which intraday final transfers are not available, developing this capability could require significant initial investment. In addition, users will also need to develop their own systems for managing their intraday cash positions in the new environment. Notwithstanding these costs, many countries are moving ahead with plans to develop this capability for the domestic payment and settlement benefits.

5.27 Beyond this common cost, each of the central bank service options could have a different impact on the cost-effectiveness of private sector settlement arrangements. For instance, the operational costs of providing and using final transfers and home-currency settlement accounts during normal business hours may be relatively low. Similarly, moderate extensions of home-currency payments system operating hours that would support DVP settlements among currencies of countries with overlapping payments system operating hours would not be expected to entail a significant increase in operating costs.

5.28 By contrast, the cost of creating or supporting the development of a multi-currency DVP mechanism for Asian, European and North American currencies could be substantial. For instance, to facilitate a simultaneous settlement of all G-10 currencies by creating an operational overlap of all those countries' large-value funds transfer systems, the costs incurred would be related to a major extension of the operating hours of several key systems as well as to setting up and running operational and informational links between them. To support a DVP settlement of all G-10 currencies with multi-currency payment and settlement services, costs would be incurred in setting up and running a central bank common agent (or multi-currency facilities at one or more individual central banks). In addition, there would be costs associated with the decision-making machinery that would be needed to monitor simultaneous settlements and to respond to any problems that might arise in the multi-currency DVP process.

5.29 These direct costs, however, should be viewed in the context of how the availability of the associated central bank services would influence the private sector's overall ability and willingness to adopt risk-reducing settlement arrangements. It is unclear whether or not market participants would have sufficient incentive to develop and use the types of arrangements that would be needed to realise the intended risk-reducing benefits of the various central bank service options. Without sufficient use of the various service options, it would be difficult to justify their costs.

5.30 To the extent that market participants have the incentive to develop net settlement arrangements, the provision of payment and settlement services by central banks could help lower the overall cost of managing credit and liquidity risks as required by the Lamfalussy minimum standards. For example, as discussed in Section 4, the use of intraday final transfers, central bank settlement accounts and other currently available home-currency services could lower the cost to netting schemes of protecting against settlement exposures.

5.31 The ability to conduct a multi-currency DVP settlement of all relevant currencies could reduce the need (and cost) of protecting against the credit and liquidity risks that can arise during a non-DVP settlement. With a multi-currency DVP settlement mechanism, however, the private sector would have to bear the newly created costs of providing adequate liquidity safeguards for the off-hour settlement of one or more of the currencies included. As described above, in the absence of well-developed off-hour money markets, these ongoing costs could take the form of lost interest associated with prefunding requirements for debits and delayed access to credits, as well as the cost of off-hour backup liquidity facilities.

5.32 Acceptability to individual central banks. Individual central banks would be concerned with the way the various service options might alter their roles of monetary authority, financial system supervisor or overseer and provider of liquidity. The introduction of intraday finality and the provision of central bank settlement accounts and other currently available home-currency services should not affect these roles as long as settlements in each currency continue to take place in a relatively independent manner, in the country of issue and during normal business hours. In contrast, by virtue of the settlement linkages that would be created by a multi-currency DVP process, a high degree of central bank coordination might be needed.

5.33 Enhanced central bank coordination would have potential advantages and disadvantages. On the one hand, growing interdependencies among the world's financial markets have increased the benefit to individual central banks of more accurate and timely information flows from around the world, including from other central banks, especially at times of financial stress. In this regard, the operational and informational links that might be created in conjunction with multi-currency DVP settlements, as well as the formalised relationships that would accompany the establishment of a central bank controlled common agent, would provide mechanisms for enhanced central bank coordination.

5.34 On the other hand, the structural interdependencies that would be created by directly linking the settlements of two or more currencies through multi-currency DVP procedures might reduce the ability of individual central banks to respond to liquidity problems in their home currencies. As discussed above, multi-currency DVP settlement means that home-currency settlement payments could be delayed or disrupted because of settlement problems in other linked currencies. In such circumstances, the ultimate resolution of the situation may depend more on the liquidity of money markets for other currencies and the action of other central banks than on home-currency liquidity provision. More generally, the formal mechanisms for central bank coordination that would be created to support multi-currency DVP settlements could constrain the ability of each central bank to respond in a relatively independent manner to home-currency settlement problems based on local market considerations.

5.35 Overall, new central bank services can raise difficult policy issues. It is of fundamental importance that any new central bank services should not adversely affect the ability of central banks to ensure monetary and macroeconomic stability. Accordingly, it is important for each central bank to recognise all of the possible side-effects of each service option and to weigh them carefully against the potential risk reduction and efficiency benefits. Given their unique institutional, legal and policy perspectives, individual central banks are likely to weigh differently the advantages and disadvantages of each option. The degree of difficulty in implementing intraday finality, the potential impact on domestic monetary policy operations and the pace of European Community financial integration are just some of the factors that could influence each country's view.