Gross settlement definition
/What is Gross Settlement?
Gross settlement is the transfer of funds that will be immediately available to the recipient. This is an electronic transfer between banks, and typically involves separate payment instructions for each transaction. The cost of gross settlement transactions is high, so individual transactions tend to involve larger amounts of funds or be very time sensitive.
Characteristics of a Gross Settlement System
Here are the key characteristics of a typical gross settlement system:
Real-time processing. Transactions are settled as soon as they are initiated. This means that funds are transferred the the recipient immediately.
Individual settlement. Each transaction is processed and settled separately, rather than being grouped or netted with others.
Irrevocable transactions. Once a payment is settled, it is final and cannot be reversed.
High liquidity requirements. Participants must have sufficient funds or credit lines available in their accounts to process payments.
Reduced risk. Credit risk and settlement risk are minimized, since payments are settled at once. This means that participants do not face the risk of counterparties defaulting after initiating a transaction.
High operational cost. Due to real-time, one-on-one processing, the system requires robust infrastructure and incurs higher costs compared to net settlement systems.
Highly transparent. Each transaction is processed separately, allowing for clear and precise tracking of individual payments.
Gross Settlement vs. Net Settlement
Gross settlement involves the immediate transfer of funds for individual transactions, while net settlement involves the batching of a number of transactions, where the net amount is transferred at the end of the day. Gross settlements result in faster payments, but are also more expensive to process.
Terms Similar to Gross Settlement
Gross settlement is also known as a real time gross settlement.