What Is the Large Value Transfer System?
The large value transfer system (LVTS) is an electronic wire payment system in Canada, facilitating the transfer of funds between large financial institutions, including the central Bank of Canada. It is a real-time gross settlement (RTGS) equivalent. Payments are not settled in real time but are settled the same day they are processed, in the evening. This makes the payments practically instantaneous.
Understanding Large Value Transfer System LVTS)
The large value transfer system (LVTS) processes most payments made in Canada and handles funds in Canadian dollars (CAD). On a typical business day, LVTS clears and settles about 28,000 payments a day worth CAD $153.5 billion. LVTS was launched in 1999 and is operated by Payments Canada. Sixteen Canadian banks, including the Bank of Canada, currently participate in the LVTS.
LVTS and the Overnight Rate
LVTS transactions can be performed for banks or their clients. At the end of each day, all participating banks need to settle up their LVTS transactions. This process may leave some banks with extra funds, while other banks need more funds to cover their transactions. Banks that have extra money are allowed to use the LVTS to loan money to banks that need more funds to cover their transactions. This is an overnight loan that takes place in the overnight market, at the overnight interest rate.
The overnight rate is set by the Bank of Canada, which aims to keep the rate within an operating band one-half of a percentage point wide. The target for the overnight rate is in the center of this band. So, if the operating band for the overnight rate 2.5 to 3.0 percent, the target for the overnight rate is 2.75 percent. The bank rate is at the top of the operating band, or, in this example, 3 percent, and this will be the rate that the Bank of Canada will charge on any overnight loans to banks in the LVTS system. The deposit rate is at the bottom of the operating band, or, in this example, 2.5 percent, and this will be the rate the Bank of Canada will pay on any surplus funds held overnight. The target for the overnight rate is comparable to the Federal Reserve’s target for the federal funds rate.
Benefits of LVTS Transactions
These transactions are instant, which improves the quickness and efficiency of business transactions. Once the transaction is sent through the system, it cannot be reversed. This prevents insufficient funds, stop payments and fraud. Because settlements through the LVTS system are guaranteed and irreversible, the system reduces the overall systemic risk for the Canadian economy.