Removal of the unwinding provisions in the automated clearing settlement system: A risk assessment

A default in the Automated Clearing Settlement System (ACSS) occurs when a Direct Clearer is unable to settle its final obligation. In August 2012, the Canadian Payments Association amended the ACSS by-law and rules to repeal the unwinding provisions from the ACSS default framework. Without unwinding, payment items are no longer returned by the defaulter to the other participants as a means of reducing the defaulter's final obligation. Instead, the other Direct Clearers (survivors) pay only additional settlement obligations to cover the defaulter's shortfall. To assess the potential exposures of an ACSS default without unwinding, we use simulations to estimate the value of additional settlement obligations for each survivor and compare these exposures to their capital and liquid assets. Results indicate that these exposures are indeed manageable by survivors and, therefore, that the ACSS does not pose systemic risk.