Large Value Transfer System (LVTS)

What Is the Large Value Transfer System?

The large value transfer system (LVTS) is an electronic wire payment system in Canada, facilitating the transfer of funds between large financial institutions, including the central Bank of Canada. It is a real-time gross settlement (RTGS) equivalent. Payments are not settled in real time however are settled that very day they are handled, in the evening. This makes the payments for all intents and purposes instantaneous.

Seeing Large Value Transfer System LVTS)

The large value transfer system (LVTS) processes most payments made in Canada and handles funds in Canadian dollars (CAD). On a run of the mill business day, LVTS clears and settles around 28,000 payments per day worth CAD $153.5 billion. LVTS was sent off in 1999 and is operated by Payments Canada. Sixteen Canadian banks, including the Bank of Canada, right now partake in the LVTS.

LVTS and the Overnight Rate

LVTS transactions can be performed for banks or their clients. Toward the finish of every day, all participating banks need to settle up their LVTS transactions. This cycle might leave a few banks with extra funds, while different banks need more funds to cover their transactions. Banks that have extra money are permitted to utilize the LVTS to loan money to banks that need more funds to cover their transactions. This is an overnight loan that happens in the overnight market, at the overnight interest rate.

The overnight rate is set by the Bank of Canada, which expects to keep the rate inside an operating band one-half of a percentage point wide. The target for the overnight rate is in the center of this band. Thus, if the operating band for the overnight rate 2.5 to 3.0 percent, the target for the overnight rate is 2.75 percent. The bank rate is at the highest point of the operating band, or, in this model, 3 percent, and this will be the rate that the Bank of Canada will charge on any overnight loans to banks in the LVTS system. The deposit rate is at the lower part of the operating band, or, in this model, 2.5 percent, and this will be the rate the Bank of Canada will pay on any surplus funds held overnight. The target for the overnight rate is comparable to the Federal Reserve's target for the federal funds rate.

Benefits of LVTS Transactions

These transactions are instant, which works on the snappiness and productivity of business transactions. When the transaction is sent through the system, it can't be turned around. This forestalls deficient funds, stop payments and fraud. Since settlements through the LVTS system are guaranteed and irreversible, the system lessens the overall systemic risk for the Canadian economy.