Faster Payments - Bank of England Settlement

Pre-Funded Settlement Guide


The Faster Payments Scheme (FPS) is a Financial Market Infrastructure that exchanges payments in real-time 24*7, with Deferred Net Settlement performed 3 times daily (banking days) by way of Central Bank funds with the Bank of England.  This requires each Direct Settling Participant to hold a Reserves Account with the Bank of England, which is used to perform settlement.

Each Participant is responsible for setting its own Net Sender Cap (NSC).  The NSC acts as a control mechanism to limit the credit exposure each Participant brings to the system.  The NSC should be set at a level that more than covers the anticipated maximum intra-cycle debit position for that Participant, recognising that the flow of funds in and out of each Participant may vary during each settlement cycle.

In order to eliminate settlement risk (in accordance with CPMI-IOSCO* Principles), each Participant is also required to hold a cash sum equal to the value of the NSC in a separate account Reserves Collateralisation Account (RCA). For example, if Bank A has a £50m NSC for its Faster Payments obligation, it will need to hold a minimum of £50m in cash on its RCA as well.  In normal operation, the RCA will remain untouched, as after each Settlement Cycle, the Participant should settle any obligations by using their main Reserves Account. 

This Pre-Funded Settlement Model ensures that, should any Participant encounter difficulties meeting its settlement obligations, then FPS can instruct the Bank of England to use the cash held on that Participant’s RCA to complete settlement, whilst ensuring no other Participant is impacted.  In that circumstance, FPS would reduce the bank’s NSC before the Bank of England debit the RCA, to reflect the debit amount, only increasing the NSC if the Participant replenishes the RCA with additional cash. 

By doing this, no financial settlement risk exists between the different FPS Participants.  

This means that each Participant is responsible for its own settlement obligations whilst protecting all other Participants as well as ensuring the underlying Faster Payment transactions and associated settlement of those payments can be met.

The diagram on the following page provides an overview of how this works.

In this diagram the following steps occur:

  • PSP A – PSP A is a Net Receiver therefore no requirementy to fund its Bank of England Settlement Account or RCA as it will be the recipient of credit funds
  • PSP B – With the pending £20m settlement to occur, this could leave PSP B close to its current NSC.  If for example this was over a busy period and a weekend (Easter Bank Holiday), PSP B may want to increase its NSC to handle the higher than normal level of transactions and avoid hitting their cap (as payments would reject if the cap was reached)
  • This example would only work if PSP B has sufficient excess funds in its RCA and potentially would have funded this in anticipation of the busy period
  • PSP C – with this example, PSP C has sufficient funds on its settlement account and can therefore settle its Faster Payment obligations accordingly
  • FPSL Operations then has the ability to increase the NSC to the desired level (as long as this mirrors funds held on the RCA) and notify the Bank of England accordingly so that at the beginning of the next Banking Day the Bank of England can action their records accordingly


FPS Pre-funding Diagram

*CPMI –Committee on Payments and Market Infrastructure, and IOSCO is International Organisation of Securities Commission