After years on the drawing boards, a large-dollar electronic payment system for Canada is under development.

Modeled after the Clearing House Interbank Payments System - Chips - at the New York Clearing House Association, Canada's system will be designed to minimize the risks inherent in foreign exchange and other high-value, bank-to-bank transactions.

Dubbed the Large Value Transfer System, the Canadian network "will be the mechanism that will assure businesses and consumers that their important payments are transacted in a manner that is secure, timely, and without risk of reversal," said Serge Vachon, chairman of the Canadian Payments Association board.

Banking officials said Canada needs to upgrade its paper-based, next-day settlement system as more corporations increasingly do business across borders.

The current system, called International Interbank Payment System, moves an average $80 billion a day, well below the Chips figure, which exceeds $1 trillion.

Canada wants to follow others among the Group of 10 industrialized nations that have built payment systems that guarantee finality of payment.

That guarantee is crucial to institutions that exchange large numbers of payments during a normal business day. Without finality, a skein of credits and debits could be undone if any participating bank failed, leading to confusion and perhaps chaos.

Institutions are also subject to "temporal risk," which refers to the time it takes for two banks to complete a foreign exchange transaction. One bank could fail to deliver payment in one currency after having received payment in another.

The new system "is meant to provide finality and systemic risk mitigation," said Wendy Hope, a spokeswoman at the Canadian Payments Association. "If a financial institution goes into default, there is no domino effect."

The association, a quasi-official entity in Ottawa, said its proposed system will undergo trial runs by the third quarter next year.

The association granted a contract worth more than $7 million to DMR Group Inc., a Montreal-based unit of Amdahl Corp., Sunnyvale, Calif., to design and maintain the system.

The system will closely resemble Chips, which has successfully processed more than $2.75 quadrillion of payments in 26 years of operation. Canada's system will differ in that it will have a two-tier credit arrangement for participating banks.

Under the first option, called Tranche 1, participants may want certain banks to pledge collateral on a dollar-for-dollar basis. Under Tranche 2, payments will be backed by other participants through bilateral agreements.

Final settlement will occur once a day via a single debit or credit on the books of the Bank of Canada. A settlement amount will reflect a participant's multilateral net debit or credit position versus those of other banks.

Canadian officials began publicly discussing a large-value payment system in the 1980s, following an incident affecting two undisclosed Canadian banks.

The New York Clearing House, which has continually updated and augmented its rules to improve reliability and finality, had considered submitting a bid to build the Canadian system.

George Thomas, senior vice president at the U.S. organization, said the Canadians had "preconceived" ideas about how their system would operate. "Why build it again when we already had it?"

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.