Identifying collateral minimization opportunities for a Canadian bank in the large value transfer system using process control techniques

The Large Value Transfer System (LVTS) is one of the most important payment systems in Canada with which fifteen members (including the Bank of Canada and the major Canadian bank being studied) send money to each other. The Canadian Bank studied currently processes outgoing payments on a First-In First-Out basis and only employs manual controls to manage liquidity needs for large "Jumbo" transactions (those exceeding 100 million Canadian dollars). This time consuming manual process does not optimize liquidity usage which results in excess collateral being tied up in the LVTS system at a significant cost to the Bank.;This work developed a real time controller, similar to those in use in continuous process manufacturing systems, involving an engineering software package, CadSim. The Controller manages the Canadian Bank's payments process automatically to optimize its liquidity and collateral needs and to provide an overview of its role in the LVTS. The Controller's efficiency was tested with the Bank's historical data and found that collateral requirements can be reduced by 20% with minor payment delays. The reduction in liquidity needs will free up valuable collateral for the Bank and hence, reduce the opportunity cost of using the LVTS.