Bank of England rolls out new account model for wholesale payment systems to offer settlement funded in central bank money
The Bank of England has published a new Omnibus Accounts Access Policy. This provides for a novel account model under which payment system operators can offer their participants settlement funded in central bank money. The eligibility criteria restrict availability of the omnibus account to operators of wholesale payment systems recognised under the Banking Act 2009. This new offering is expected to support payment system innovation and is a welcome development for the fintech industry and more broadly.
Omnibus accounts – a new settlement model
The Bank of England has updated its website with a new Omnibus Accounts Access Policy. Under this policy, eligible payment system operators may open an omnibus account on behalf of their participants in the Bank’s Real-Time Gross Settlement (RTGS) system. This provides a new model for payment system operators to offer settlement services fully funded in central bank money.
Important benefits of the new structure identified by the Bank of England include that full funding in central bank money means participants bear reduced credit risk when holding funds and making payments, and that the payment system can offer greater flexibility in terms of intraday settlement as well as operation outside RTGS operating hours. This new offering will sit alongside existing models for settlement in central bank money, such as the real-time settlement model used for CHAPS (the Clearing House Automated Payment System) and various deferred net settlement arrangements.
How does it work?
If a payment system operator holds its participants’ funds in an omnibus account in the Bank of England’s RTGS system, payment transactions can be settled between the participants in real-time simply by updating the participant balances in the payment system representing entitlements in the omnibus account. The transactions may be made between the participants acting on their own account or on behalf of their customers. The policy document sets out an illustrative example on page 5.
The Bank of England will pay interest on balances held overnight in the omnibus account at the base rate. This interest must be fully passed on to the relevant participants.
The policy sets out five eligibility requirements for opening an omnibus account, as summarised below:
- The sterling balances in the relevant payment system must always be fully funded with monies in the omnibus account. This must be maintained by processes that are supported by robust contingency arrangements and have clear risk management and governance arrangements.
- The entities that can hold an overnight entitlement (i.e. have beneficial ownership rights to funds in the account outside RTGS operating hours) in the account are restricted to participants in the Sterling Monetary Framework that hold reserves at the Bank of England and which are not subject to a target level of reserves. This would, for example, include banks and broker dealers but exclude central counterparty clearing houses (CCPs) for the time being. It remains to be seen whether other entities would be able to participate in the payment system if they only hold funds during RTGS operating hours.
- The payment system operator holding the account needs to have robust legal arrangements that protect both the participants and the Bank of England from legal risks and liability exposures. For example, the payment system operator must hold the account on trust on behalf of the participants, and the payment system must be designed under the Settlement Finality Regulations.
- The account holder must be an operator of a payment system that has been recognised under the Banking Act 2009. Such payment systems are regulated and supervised by the Bank of England. This requirement will limit the eligibility to payment systems of systemic importance or those that have the potential at launch to be systemic.
- Specific settlement services should not increase the risk to financial or monetary stability. The omnibus account model may not be the most suitable model for a given payment system to mitigate financial stability risks. If approved, the account will be granted for a particular set of settlement services, subject to modification from time to time with the approval or non-objection of the Bank.
The operator must also become a direct participant in CHAPS (in order to facilitate funding and de-funding of the account). As such, it will need to comply with the applicable CHAPS requirements.
Next steps/ other developments
Those interested in making an application can contact the Bank of England at email@example.com.
The Bank of England has also updated the section of its website relating to prefunding accounts in respect of certain retail systems. It notes that applications for such accounts must be made via Pay.UK.
Please do not hesitate to get in touch with any of our listed contacts if you would like to discuss any of these matters.