Norges Bank’s settlement system – main functions
Norges Bank’s new settlement system (NBO) commenced operations on 17 April 2009. Banks have access to the new system via the international SWIFT network or a system resembling a web-based banking application called NBO Online. Each bank has a main account (Real Time Mechanism, RTM, account), a loan account and one or more subaccounts (Liquidity Optimization Mechanism, LOM, account).
Payment orders via SWIFT
The international messaging and communications network SWIFT is the main channel for the largest banks’ payment orders to NBO. Norges Bank has established a closed user group based on Y-copy for banks that use SWIFT and have an account with Norges Bank. Payments in SWIFT format can be sent directly to NBO, or via NICS for banks included in the closed user groups for NICS SWIFT. Automated procedures for settlement of payment instructions and provision of account information have been established for SWIFT-based payments to banks that are not SWIFT members.
Norges Bank and the largest banks have developed specifications for the use of SWIFT messages in NBO. The specifications are available from Norges Bank on request.
Access to the settlement system
Participating banks have direct access to NBO via NBO Online and can monitor account balances, access detailed information about securities pledged to Norges Bank, make enquiries and make printouts of reports. The banks can also use NBO Online to register payment orders and manage payment orders held in a queue.
The main account (RTM account) contains banks’ overnight deposits, and only transfers between banks and Norges Bank are settled over this account, i.e. F-loan and F-deposit principal, interest on deposits and loans and payment for participation in NBO. The RTM account is also linked to the loan account so that any borrowing automatically raises the balance on the RTM account. Interbank payments are settled over a subaccount, the NBO LOM account. Banks can arrange standing intra account transfers from the main account to the subaccounts. At the beginning of the day, banks’ deposits and the amount a bank withdraws from the borrowing facility are transferred from the RTM account to one or more LOM accounts. At the end of the day, deposits from LOM accounts are transferred back to the RTM account. Any overnight deposits in the RTM account are interest-bearing.
Any loans in Norges Bank are recorded in a separate loan account. The credit limit on the loan account is determined on the basis of securities banks have pledged as collateral for loans from Norges Bank, F-deposits and collateral in the form of deposits in banks’ accounts in Sveriges Riksbank and Danmarks Nationalbank. At the end of the day, deposits in the RTM account are used to repay any loans in this account. If the bank’s deposits are not sufficient to repay the loans, the bank will have an overnight loan (D-loan), which will incur interest (overnight lending rate).
Deposits can be held in banks’ subaccounts (LOM accounts) through the day. Any deposits are transferred to the RTM account at the end of the day. A payment can only be settled in NBO if banks have sufficient liquidity to cover the payment amount. In order to be able to settle as many payments as possible even when banks’ liquidity is tight, NBO has a gridlock resolution mechanism. This mechanism, which is linked to the LOM accounts, settles banks’ incoming and outgoing payments to and from other banks over the same LOM account. These payments are settled if each bank has sufficient funds to cover its net position. Remaining payments that cannot be settled due to insufficient funds in the account are placed in a queue.
Banks can decide the order in which queued payments are to be settled by assigning priorities or by sequencing the payments. If a bank does not have sufficient funds to cover all outgoing payments, the payments with the highest priority will be settled first. Sequencing means that a bank changes the sequence of payments with the same priority. The bank can thus decide that a payment be settled before another payment of the same priority. If payments from a bank have the same priority, and if the bank has not changed the order of payments by sequencing, payments are settled in the order they are captured in the system.
A bank is not permitted to give a gross payment the same or higher priority than the bank’s payment position in a concurrent batch if the batch is queued due to lack of liquidity in one of the participating banks’ accounts.
Banks can have three LOM accounts: NBO LOM, VPO LOM and CLS LOM.
- All payments that are not settled over the VPO LOM or CLS LOM accounts are settled over the NBO LOM account. All participating banks have an NBO LOM account, and all banks have to settle interbank payments over this account. Most banks have initiated standing orders to transfer all disposable funds to this account in the morning (balance and borrowing facility) and transfer disposable funds back to the main account (RTM account) at the end of the day.
- The cash leg of securities trades settled in the Norwegian Central Securities Depository ASA (VPS) are settled over the VPO LOM account. This type of account is restricted to banks that participate directly in securities settlement in Norges Bank. These banks must transfer deposits to their VPO LOM account before securities transactions are netted in the VPS (twice a day). Deposits transferred to a VPO LOM account cannot be moved to another account until the securities settlement cycle has been completed in Norges Bank.
- Payments to and from the Continuous Linked Settlement (CLS) system are settled over the CLS LOM account. This type of account is restricted to banks that make payments to and receive payments from the CLS in Norwegian kroner. These banks are direct participants in the CLS or correspondent banks for banks that are direct participants in the CLS.
Statement of account
Banks using SWIFT receive daily statements of the balance on the accounts from Norges Bank for the RTM account, the loan account and each of the LOM accounts. Banks that do not use the SWIFT system must obtain account balance statements from NBO Online.
Calculation of interest, debit and credit
The interest on D-loans and deposits are calculated daily in arrears on the basis of the calendar year of 365 days.
Interest on D-loans is debited from a bank’s account on the first settlement date after the loan agreement was drawn up. If the first day and any following days in a month are not banking days, the interest for these days will be debited on the second settlement date in the next month. If the first day in a month is a Sunday, interest for Friday and Saturday will be charged to the following Monday, while the interest for Sunday will be charged to the following Tuesday. Similar rules for the calculation of interest apply to deposits.