LVTS provides each participating institution with two options, or Tranches, for exchanging payments with other participants. Both payment options are equal in their ability to provide real-time finality to the recipient and certainty of settlement to the financial institution. The difference lies solely in the method by which they are supported by collateral.

Tranche 1 payments are backed by the sending participant’s collateral on a dollar-for-dollar basis. This option ensures a financial institution can make time-sensitive payments without being dependent on credit extended by other financial institutions participating in the system. Throughout the day, any Tranche 1 payments received by a participant immediately increase the amount of Tranche 1 credit it has available. This option is used for only two per cent of LVTS payments, mainly due to high collateral costs.

Tranche 2 payments are backed by collateral pledged by the receiving LVTS participants. Each morning, every participant decides how much credit it is willing to extend to every other participant in the form of a net credit line – that is, the largest net exposure it is prepared to accept with respect to every other participant on that day. In addition, each participant (as a sender) has a multilateral net debit cap, calculated as the sum of all bilateral lines extended to it, multiplied by a constant percentage (currently set at 24 per cent). Tranche 2 payments represent 98 per cent of the total volume of LVTS payments, and 90 per cent of the value.

In both Tranches, the amount of credit available is verified at the time of each transaction, in real time, based on the positions and credit limits of the participants involved. If a payment does not pass the risk control tests, it will be rejected and a notification will be sent to the sending participant.

By offering these two streams within one system, LVTS takes an innovative approach to ensuring real-time finality of payment and certainty of settlement while minimizing the costs of collateral.