When Doug Kreviazuk looks at the 2008 debt crisis and the situation unfolding in the Eurozone, he has to reckon with the interdependency of financial institutions and the cascading effects of failure. “The CPA [Canadian Payments Association] prepares in advance for such events and establishes procedures to prevent these cascading impacts, should they ever start in Canada,” says Kreviazuk, who serves as vice president of policy and public affairs for the organization.
The CPA grounds itself in the minutiae. Every day, individuals, businesses, and governments use a variety of payment methods to purchase goods and services, make financial investments, withdraw cash from banking machines, and transfer funds from one person to another. If a payment transfers between accounts held at the same financial institution, the transaction is completed internally by ledger entry, and the CPA is not involved. But if the two parties to a transaction have accounts in different institutions, the financial institutions need a common, structured means of exchanging funds between themselves to complete the transaction. That’s where the CPA comes in.
The CPA was created by federal statute as a public-purpose organization governed by a private board of directors, most of whom are drawn from member financial institutions, with three others appointed by the Minister of Finance. It operates as a nonprofit and is privately funded by
member dues. Membership was originally open to all deposit-taking
institutions, but in 2001 eligibility was extended to life-insurance comp-
anies, securities dealers, and qualified corporations on behalf of money-
market mutual funds.
The CPA does several things. Its primary activity is to provide clearing services (the process for financial institutions to exchange and reconcile their clients’ payments, and to calculate net balances due) and settlement systems (the process by which CPA members transfer funds between accounts held at the Bank of Canada to fulfill their net clearing obligations).
The organization also facilitates the interaction of the CPA’s systems with external payment systems, and encourages the development of new payment methods and technologies. In this regard, it establishes the rules and standards that apply to funds transferred by financial institutions within the Canadian payments system.
The CPA operates two main systems for the clearing and settlement of payments in Canada. The Automated Clearing Settlement System (ACSS) clears retail payments—generally high-volume, low-value payments. The primary function of the ACSS is to determine the net position of member institutions at the end of every business day. It is used for clearing both paper (such as cheques and money orders) and electronic payments (such as payroll direct deposits, preauthorized debits, and online- and telephone-banking payments). ACSS handles the vast majority of payments made in Canada: approximately 24 million per day with an average daily value of $21 billion.
The Large Value Transfer System (LVTS) is an electronic-wire system, used mainly for wholesale payments—high-value, low-volume payments. Approximately 26,000 occur daily, and the payments are irrevocable, with final payment averaging more than $157 billion daily. The LVTS is also used to effect settlement in the retail system by transferring calculated balances from the ACSS system into participants’ Bank of Canada accounts at the end of each business day.
Boiled down in the simplest terms, the CPA works diligently to provide a sound legal framework to anchor Canada’s economy. In the unlikely event that one financial institution were to default on its obligations and fail, the ACSS assures that surviving participants would pick up and share in any losses, thereby stabilizing the system so that settlement will occur. The system is therefore insulated from the implications associated with a financial-institution failure.
“At the end of the day, settlement must occur,” Kreviazuk says. “That is an absolute requirement for the system.”