The near-10-hour outage of the UK’s real-time gross settlement system (RTGS), Chaps, on October 20, 2014, sent shockwaves through the payment and market infrastructure community. It prompted many central banks to examine if their existing systems could handle expanded payment volumes and new security requirements.
The prognosis was not good. Most RTGS systems in developed countries were established as a result of in-house projects introduced in the late 1990s. But by the late 2000s, the updates required to keep them operational and safe had become increasingly expensive. New systems were required at a time of tight budgets. This opened up the possibility of using external off-the-shelf software providers.
While the Bank of England has yet to tender for its new RTGS system, it is exploring the “lessons learned from a number of other recent real-time implementations, including the Scandinavian model for instant payments”, according to the minutes of the meeting of the UK central bank’s external advisory board on October 5, 2017.
While there are a number of important payments initiatives under way in Scandinavia, one common element at the RTGS level is Perago. The software company, set up by the former payments team at the South African Reserve Bank, was acquired by Italy’s Società Interbancaria per l’Automazione (now SIA) in 2005.
Both Sweden and Norway adopted Perago’s RTGS system in 2009, with Denmark planning to go live with its software in the first half of 2018. All three of the Scandinavian countries – as well as two other new customers, Iceland and New Zealand – were looking for a resilient and standardised system that would prove to be cheaper to implement than systems developed in-house.
The National Bank of Denmark, for example, decided to upgrade to Perago in part because its own system had become a liability, with only a few veterans capable of managing the security updates, according to Jesper Mærsk, head of banking at the Danish central bank. And Perago would probably be far cheaper than developing a new in-house system from scratch. “Developing one in-house would definitively have entailed higher costs,” Mærsk tells Central Banking.
Denmark may also have taken comfort from the system’s performance record.
Long-time client Norges Bank, for example, found its previous RTGS system was prone to failures, but the situation improved markedly since its upgrade to Perago. “In eight years with Perago, we have just registered three minor problems. The system is very reliable,” says Kjetil Watne, director of the Norges Bank interbank settlement department.
In eight years with Perago, we have just registered three minor problems. The system is very reliable
Kjetil Watne, Norges Bank
Perago says that its 17 customers worldwide are handling an average of 35,000 transactions a day. It adds that the Perago system was benchmarked for more than 1 million transactions per hour, and this exceeds by far the daily average of more than 150,000 transactions on the UK’s Chaps and at least twice that for the eurozone’s Target2 platforms.
By buying off-the-shelf software, central banks must accept the vendor is in control of the software and its future development. But this does not appear to be a major source of concern.
Every year, Perago holds a meeting where it showcases the innovations it has developed with clients, so other central banks can assess whether or not they are useful for them, with the aim of improving the overall system.
“When we create a module, we are simultaneously thinking how to integrate it into our systems and offer it to the rest of our customers. It allows us to constantly improve,” says Claudio Ceresani, Perago’s chief executive.
In addition, Páll Kolka Ísberg, head of payments systems at the Central Bank of Iceland, explains that the Nordic central banks get together “three or four times a year” to “compare the performance of our RTGS systems”. This collaboration has given the Nordic central banks confidence that Perago will listen to any concerns. “If Perago developed something that we do not like, we would raise our voice, and they would react,” adds Denmark’s Mærsk.
Perago has also demonstrated its willingness to build new features to its service offerings. For instance, it is developing two specific modules with the National Bank of Denmark that will complement its RTGS system.
One module is a monetary policy instrument that will help the central bank reach its policy target, which is based on stabilising the krone’s exchange rate against the euro.
“If we have too much liquidity, we cannot allow banks to buy too much krone, in order to avoid the appreciation of the exchange rate,” says Mærsk. “The new module will control liquidity. If banks surpass the deposit limit in their accounts with us, the system will remove the surplus at the end of the day.”
This development is already being examined by Iceland, Ísberg tells Central Banking.
The other module under development in Copenhagen interacts with a central securities depository system that will allow Denmark to become the first non-euro country to operate in Europe’s Target2-Securities system, facilitating centralised delivery and payment of securities in central bank money across markets in the eurozone.
Perago’s technological innovation will enable liquidity to be added or removed from a settlement account in the RTGS system from and to a krone-denominated account in T2S. “This will allow Spanish banks to trade in real-time, krone-denominated securities, and Danish banks to deal with securities anywhere in the eurozone,” says Mærsk.
“The module enables banks to see from the RTGS system their position in T2S – it can automatically increase liquidity in T2S and convert the currency,” says Perago chief executive Ceresani. “It is the management of external accounts in an external system.”
The creation of a flexible platform compatible with new technologies, such as blockchain or cryptocurrencies, is another plus. Perago has also helped to tackle instant lower payments. In addition to the RTGS system, the central bank of Iceland handles the retail payments system of the country.
“In our tender, we wanted vendors to support us with both components. Perago was the only one that fulfilled our requirements of an integrated platform for RTGS and retail payments,” says Ísberg. “Our system settles payments instantly, and, since 2001, has been operated by the same IT provider as the RTGS system. It was very important to transition both simultaneously.”
The Scandinavian community Perago has nurtured has helped increase the software firm’s attractiveness to new customers, as more central banks consider external software providers. In 2017, the company reached an agreement with the Reserve Bank of New Zealand to install its new RTGS system, due to go live in 2019. “It is one of the few companies providing off-the-shelf systems in developed countries. Their RTGS system has an exceptional pedigree,” says Mike Wolyncewicz, chief financial officer at the RBNZ.
He stresses the importance of joining a community of highly sophisticated central banks that will allow the RBNZ “to benefit from other people’s development”.
The RBNZ will also implement Perago’s RTGS Extreme Contingency Service, says Wolyncewicz: “In case of massive failure or cyber attack, this facility will allow us to roll back to our previous system. This is a unique feature.”
The Central Banking Awards were written by Christopher Jeffery, Daniel Hinge, Dan Hardie, Rachael King, Victor Mendez-Barreira, Iris Yeung, Joel Clark and Tristan Carlyle