Settlement Finality and Associated Risks in Funds Transfers – When Does Interbank Payment Occur?

This paper addresses the first meaning of settlement finality, that is, the discharge of the interbank obligation. The discussion focuses on large-value transfer systems, namely, systematically important payment systems, and examines settlement finality therein under the provisions of Article 4A of the Uniform Commercial Code-Funds Transfers. Primary attention is given to the various implications of settlement finality under Article 4A, as well as to compliance with the statutory scheme with BIS Core Principles, in conjunction with system rules. Following the present discussion on the meaning of settlement finality, Part 2 of the paper sets out settlement mechanisms in large-value transfer systems. Part 3 discusses quality of settlement assets in large-value transfer systems. Particularly, it emphasizes the security accorded by the use of central bank money; however, it also takes into account less than perfect substitutes in connection with correspondent banking. Part 4 is a detailed analysis, under the provisions of U.C.C. Article 4A of inter- bank settlement, in connection with both central bank money and correspondent banking. Certainty of settlement as bridging the possible gap between finality and completion of settlement is discussed in Part 5 in connection with rules governing the operation of selected large-value transfer systems. The conclusion in Part 6 is that so far as settlement finality in the sense of discharge of the interbank obligation is concerned, Article 4A of the Uniform Commercial Code is capable of providing a required framework satisfying settlement risk controls in connection with diversified system designs. This does not mean that all its provisions are necessarily beyond any criticism; there is room for specific clarifications and improvements. Particularly troublesome is the lack of precision in various systems rules in the use of finality and completion in relation to settlement