Payment and Settlement Systems for Treasury Transactions - Article

Introduction

A treasury dealer may execute a transaction in a few seconds, but execution does not by itself complete the transaction.

A treasury transaction normally passes through several stages:

Trade → Confirmation → Clearing → Settlement

For example, when a bank buys a Government security:

• the trade is first executed;

• obligations are determined;

• funds have to move from the buyer;

• securities have to move from the seller; and

• the transaction must become final.

The same principle applies to:

• money-market transactions;

• Government securities;

• repo and TREPS;

• foreign-exchange transactions; and

• treasury-related fund transfers.

The current 2026 IIBF CAIIB BFM syllabus specifically includes Payment and Settlement Systems under Module C – Funding and Regulatory Aspects.

For CAIIB, the most important task is to understand which system performs which function.

Learning Objectives

After studying this topic, you should be able to:

• distinguish trading, clearing, payment, and settlement;

• explain RTGS and NEFT and their major differences;

• understand RBI's role in payment-system regulation;

• explain CCIL's role in treasury-market settlement;

• distinguish DvP from PvP; and

• trace settlement of Government securities, money-market, and foreign-exchange transactions.

Why Settlement Matters in Treasury

Treasury transactions commonly involve:

• large values;

• strict value dates;

• market-price movements;

• counterparty exposure; and

• interconnected payment obligations.

A failure to settle one transaction can affect several other payments.

Therefore, an efficient settlement system should help reduce:

• principal risk;

• counterparty risk;

• liquidity risk;

• operational risk; and

• systemic risk.

Trading, Clearing and Settlement

These terms are related but different.

Trading

The buyer and seller agree on the transaction.

Examples include execution through:

• NDS-OM;

• NDS-CALL;

• a repo platform; or

• a permitted forex dealing platform.

Confirmation

Transaction details are checked between the parties or through the relevant system.

Important details can include:

• instrument;

• amount;

• price or rate;

• counterparty;

• value date; and

• settlement instructions.

Clearing

Clearing determines the obligations created by the trade.

It answers:

• who must pay;

• how much must be paid;

• which securities or currencies must be delivered; and

• whether obligations will be settled gross or net.

Settlement

Settlement is the actual discharge of obligations.

It involves final transfer of:

• money;

• securities; or

• currencies.

Legal Framework for Payment and Settlement Systems

The Payment and Settlement Systems Act, 2007 (PSS Act) provides the principal legal framework for regulation and supervision of payment systems in India.

The Act came into force on 12 August 2008.

It designates the Reserve Bank of India as the authority responsible for regulation and supervision of payment systems.

Importantly for treasury markets, the PSS Act also provides the legal basis for concepts such as:

• netting; and

• settlement finality.

Settlement Finality

Settlement finality means that once settlement becomes final according to the applicable system rules and law, the completed transfer cannot simply be reversed because one party subsequently faces financial difficulty.

This is particularly important in large-value and interconnected financial markets.

RBI's Centralised Payment Systems

Two important RBI-owned and operated Centralised Payment Systems are:

• RTGS

• NEFT

RBI identifies both RTGS and NEFT as its Centralised Payment Systems.

They serve different purposes and use different settlement methods.

Real Time Gross Settlement – RTGS

RTGS stands for:

Real Time Gross Settlement

The name itself explains the system.

Real Time

Transactions are processed when they are received rather than waiting for a later settlement batch.

Gross

Each payment instruction is settled individually.

It is not first offset against unrelated transactions to produce a net amount.

RBI states that RTGS payments settle individually in its books and are final and irrevocable.

Main Features of RTGS

Under the current RBI framework:

• RTGS is available 24×7×365;

• minimum customer remittance is ₹2 lakh;

• RBI prescribes no upper ceiling; and

• transactions settle individually on a real-time basis.

RTGS is therefore especially important for:

• large-value payments;

• inter-bank payments;

• treasury funding movements; and

• time-critical settlements.

Why RTGS Is Important to Treasury

Treasury may need to transfer very large amounts at precise times.

For example:

• repayment of overnight borrowing;

• transfer arising from an inter-bank transaction;

• funding a settlement account; or

• meeting another same-day treasury obligation.

Because RTGS settles in central-bank money in RBI's books, it plays an important role in reducing settlement risk.

National Electronic Funds Transfer – NEFT

NEFT stands for:

National Electronic Funds Transfer

NEFT differs from RTGS because it processes transactions in batches rather than settling each transfer individually in real time.

RBI currently operates NEFT:

• 24×7×365;

• through 48 half-hourly batches each day; and

• without an RBI-prescribed minimum or maximum transaction amount.

NEFT is widely used for customer and institutional fund transfers.

However, for high-value, immediate treasury settlement, RTGS normally has greater direct relevance.

RTGS vs NEFT

Role of e-Kuber

e-Kuber is RBI's Core Banking Solution and forms an important part of central-bank settlement infrastructure.

RBI has explained that settlement of payment systems in central-bank money takes place through infrastructure including e-Kuber and RTGS.

In treasury operations, e-Kuber is also relevant for areas such as:

• Government-security auctions;

• RBI current accounts;

• settlement-related fund movements; and

• central-bank transactions.

Do not confuse e-Kuber with a normal retail-payment channel such as NEFT.

CCIL and Treasury Settlement

The Clearing Corporation of India Limited (CCIL) is a critical financial-market infrastructure for Indian treasury markets.

Depending on the market segment, CCIL performs functions including:

• central counterparty clearing;

• novation;

• multilateral netting;

• risk management;

• determination of settlement obligations; and

• settlement coordination.

CCIL has a particularly important role in:

• Government securities;

• market repo;

• TREPS; and

• inter-bank foreign exchange.

What Is Novation?

Suppose Bank A sells a security to Bank B.

When a qualifying trade is accepted by CCIL for central-counterparty settlement, CCIL interposes itself between the original parties.

CCIL becomes:

buyer to the seller

and

seller to the buyer

This process is called novation.

It replaces the original bilateral settlement exposure with obligations against CCIL under its settlement framework.

What Is Netting?

Suppose a bank executes many purchases and sales during the day.

Without netting, every obligation would need to be settled separately.

With multilateral netting, compatible obligations are offset to arrive at a smaller final settlement amount.

Benefits include:

• fewer settlement movements;

• lower intraday funding requirement; and

• greater operational efficiency.

CCIL uses multilateral netting in its Government-security and foreign-exchange settlement frameworks.

Delivery versus Payment – DvP

A securities transaction involves two obligations:

• delivery of securities; and

• payment of money.

Delivery versus Payment (DvP) links these two legs so that the securities transfer and funds settlement are connected.

The objective is to reduce the risk that one party delivers its asset but fails to receive the corresponding consideration.

DvP-III

Government-security transactions cleared through CCIL use DvP-III settlement.

Under DvP-III:

• securities obligations are netted; and

• funds obligations are also netted.

CCIL confirms that secondary-market Government-security transactions are settled after multilateral netting under DvP-III.

Government-Security Settlement Flow

A typical secondary-market G-Sec transaction follows this flow:

Trade on NDS-OM

↓

Trade flows to CCIL

↓

Exposure and risk checks

↓

Novation

↓

Multilateral netting

↓

DvP-III settlement

↓

Funds and securities positions updated

CCIL states that NDS-OM and repo trades flow electronically into its clearing and settlement systems.

SGL and CSGL in Securities Settlement

Government securities are held and transferred through prescribed book-entry arrangements.

SGL

Subsidiary General Ledger

Generally used for an eligible entity's proprietary Government-security holdings with RBI.

CSGL

Constituent Subsidiary General Ledger

Used for Government securities held on behalf of constituents.

Under CCIL's settlement framework:

• proprietary securities obligations settle through SGL;

• constituent obligations settle through CSGL; and

• relevant demat obligations use the depository-linked CSGL arrangement.

Funds Leg of G-Sec Settlement

For Government-security trades cleared by CCIL, funds obligations are settled through the applicable:

• RBI current account; or

• Settlement Bank account.

CCIL's current process also uses e-Kuber for applicable combined funds settlement.

Therefore:

SGL/CSGL → securities side

RBI/Settlement Bank account → funds side

Settlement of Repo and TREPS

Market repo and TREPS are collateralised money-market transactions.

CCIL's securities segment settles:

• outright Government-security trades;

• market repo; and

• triparty repo/TREPS

through its CCP framework.

These transactions are included in multilateral netting and DvP-III settlement according to the applicable segment rules.

For TREPS, securities are handled through the relevant triparty repo account structure maintained under the CCIL framework.

Settlement of Call Money

Call Money is different.

It is unsecured borrowing or lending.

Transactions can be executed or reported through NDS-CALL, but the call-money funds settlement is bilateral through the RTGS system rather than through the same CCIL DvP mechanism used for collateralised repo transactions.

RBI's review of money-market operating procedures specifically notes that call-money trades are settled bilaterally through RTGS, while market repo and TREPS are settled through CCIL on a DvP-III basis.

This distinction is highly exam-relevant.

Payment versus Payment – PvP

Foreign exchange involves two different currencies.

For example, in USD/INR:

• one party must pay USD; and

• the other must pay INR.

If one currency is paid but the counter-currency is not received, the party can suffer principal settlement risk, traditionally associated with foreign-exchange settlement risk.

Payment versus Payment (PvP) links the two currency payments so that settlement of one currency occurs against settlement of the other.

Conceptually:

Currency A paid ↔ Currency B paid

CCIL Forex Settlement

CCIL currently settles inter-bank USD/INR:

• Cash;

• Tom;

• Spot; and

• Forward transactions.

It:

• validates and matches trades;

• acts as CCP after novation for accepted trades;

• performs multilateral netting; and

• settles the final currency obligations on a PvP basis.

For the INR leg, CCIL uses the member's current account with RBI under its settlement framework.

The USD leg is settled through the applicable correspondent/settlement-bank arrangement.

DvP vs PvP

Remember:

Security + Money → DvP

Currency + Currency → PvP

CLS and Foreign-Exchange Settlement

For global foreign-exchange markets, Continuous Linked Settlement (CLS) is an important PvP infrastructure.

CCIL's CLS arrangements support settlement of eligible foreign-exchange transactions through the CLS framework.

CLS settles both sides of eligible FX transactions simultaneously on a PvP basis, reducing settlement risk created by different time zones and payment systems.

For CAIIB, the main concept is more important than operational detail:

CLS → International FX settlement using PvP

Straight-Through Processing

Straight-Through Processing (STP) means transaction information passes electronically from one stage to another with minimal repeated manual entry.

For example:

Trading → Clearing → Settlement

can be connected electronically.

Benefits include:

• fewer manual errors;

• faster processing;

• better control;

• easier reconciliation; and

• lower operational risk.

However, automation does not remove the need for independent:

• limits;

• confirmation;

• reconciliation; and

• exception management.

Settlement Risks Treasury Must Monitor

Principal Risk

One party delivers value but does not receive the counter-value.

DvP and PvP directly address this concern.

Counterparty Risk

The counterparty may default before settlement.

A CCP and margin framework can reduce bilateral counterparty exposure.

Liquidity Risk

The bank may have a valid transaction but insufficient cash at the required settlement time.

Operational Risk

Errors can arise from:

• incorrect account numbers;

• incorrect settlement dates;

• wrong amounts;

• system failures; or

• failed instructions.

Settlement Failure

A party may fail to deliver funds or securities on the value date.

This can create:

• penalties;

• replacement costs;

• liquidity stress; and

• reputational issues.

Practical Banking Application

Assume a bank treasury completes three transactions.

Transaction 1: Overnight Call Borrowing

The transaction is executed through the permitted call-money framework.

The funds leg is settled bilaterally through RTGS.

Transaction 2: Government-Security Purchase

The trade is executed on NDS-OM.

CCIL:

• accepts the trade according to its framework;

• acts as CCP;

• nets obligations; and

• settles using DvP-III.

The security moves through the relevant SGL/CSGL mechanism while funds settle through the applicable RBI/Settlement Bank account.

Transaction 3: USD/INR Inter-Bank Spot Trade

The accepted transaction enters CCIL's forex settlement framework.

USD and INR obligations are netted, and final settlement occurs using PvP.

The three transactions demonstrate that:

different treasury products use different settlement arrangements.

CAIIB Exam Focus

Payment, clearing, and settlement are not identical terms.

The PSS Act, 2007 gives RBI authority to regulate and supervise payment systems.

RTGS = real-time + gross + transaction-by-transaction settlement.

RTGS payments are final and irrevocable once settled.

RTGS currently operates 24×7×365, with a ₹2 lakh minimum and no RBI maximum.

NEFT is batch-based, not RTGS.

NEFT currently operates in 48 half-hourly batches, 24×7×365.

CCIL is a CCP for relevant treasury-market transactions.

Novation = CCIL becomes counterparty to accepted trades.

Government-security settlement uses multilateral netting and DvP-III.

SGL/CSGL relate to securities holdings and settlement, not fund-transfer systems.

Call Money settles bilaterally through RTGS.

Market repo and TREPS settle through CCIL under the DvP framework.

Forex settlement uses PvP to reduce principal settlement risk.

DvP = security against money.

PvP = one currency against another currency.

Common Exam Traps

Trap 1: NDS-OM Is a Payment System Like RTGS

Incorrect.

NDS-OM is primarily a Government-security trading platform. Settlement subsequently occurs through the relevant CCIL/RBI infrastructure.

Trap 2: CCIL and RTGS Perform Exactly the Same Function

Incorrect.

CCIL performs clearing, CCP, netting, and settlement-related functions in specified financial markets.

RTGS is an RBI-operated real-time gross funds-transfer system.

Trap 3: NEFT Is Real-Time Gross Settlement

Incorrect.

NEFT processes transfers in half-hourly batches.

Trap 4: RTGS Nets All Payments Before Settlement

Incorrect.

RTGS settles each transaction individually on a gross basis.

Trap 5: SGL Is Used to Transfer Ordinary Customer Funds

Incorrect.

SGL is associated with Government-security holdings and transfers.

Trap 6: DvP Means Two Currencies Are Exchanged Simultaneously

Incorrect.

That concept is PvP.

DvP links securities delivery with funds payment.

Trap 7: PvP Is Mainly a Government-Security Settlement Mechanism

Incorrect.

PvP is particularly relevant to foreign-exchange settlement.

Trap 8: Call Money and Repo Have the Same Settlement Method

Incorrect.

Call Money is settled bilaterally through RTGS, while market repo is cleared and settled through CCIL's collateralised securities framework.

Trap 9: NDS-CALL Settlement Itself Replaces RTGS

Incorrect.

NDS-CALL supports execution/reporting; the cash obligations of call-money transactions are settled through RTGS.

Trap 10: Novation Means the Original Trade Is Cancelled Without Replacement

Incorrect.

Novation substitutes the original bilateral obligations with obligations against the CCP.

Trap 11: Netting and Settlement Are the Same

Incorrect.

Netting determines reduced final obligations.

Settlement actually transfers the resulting funds, securities, or currencies.

Trap 12: Electronic Processing Eliminates Operational Risk

Incorrect.

STP reduces manual intervention but does not eliminate:

• incorrect inputs;

• system failure;

• insufficient funds;

• settlement exceptions; or

• reconciliation risk.

Memory Technique

Remember the transaction chain:

T-C-S

• T – Trade

• C – Clear

• S – Settle

For settlement protection:

Securities + Payment = DvP

Payment + Payment = PvP

For major systems:

RTGS → Real-time funds

NDS-OM → G-Sec trading

CCIL → Clearing and CCP

SGL/CSGL → Securities

The central CAIIB rule is:

Execution creates the obligation; settlement completes it.