Liquidity Transfers in TIPS: The Deposit Model and the Three Basic Rules

TIPS uses a deposit model for liquidity, which means that a participant holds its instant payment liquidity in a TIPS Dedicated Cash Account, known as a TIPS DCA, and that account is funded by moving money from the participant main cash account in TARGET. The TIPS DCA is like a wallet that a bank tops up in the morning and uses through the day to settle instant payments, and the bank can move money back to its main account when it no longer needs it in TIPS. For example, a bank in Germany might move EUR 10 million from its TARGET main cash account to its TIPS DCA at the start of the day, use EUR 6 million of it for instant payments during the day, and move EUR 4 million back at the end of the day. The deposit model keeps the instant payment liquidity separate and visible. The first basic rule for liquidity transfers in TIPS is that a transfer can only take place between accounts in the same currency. A euro liquidity transfer can only move euro between a euro main cash account and a euro TIPS DCA, and a Swedish krona transfer can only move krona between krona accounts. A bank cannot use a liquidity transfer to convert euro into krona, and it cannot fund a euro TIPS DCA from a krona main cash account. That rule sounds obvious, but it matters in practice, because a bank that holds liquidity in several currencies must manage each currency separately, and a funding error in one currency cannot be fixed by moving money from another currency through TIPS. The second basic rule is that there is no reservation of funds in a liquidity transfer, unlike an instant payment. In an instant payment, TIPS reserves the funds on the payer TIPS DCA while the payee bank decides, and that reservation protects the payment. In a liquidity transfer, there is no payee bank decision to wait for, and no reservation is needed, because the transfer is a simple movement of funds between two accounts owned by the same participant or by the system itself. The transfer is checked, and then it either settles or it is rejected, with no waiting period in between. That simplicity is one reason liquidity transfers are fast and reliable, even at high volumes. The third basic rule is that a liquidity transfer is settled or rejected immediately, with no intermediate waiting state. When a bank instructs a liquidity transfer of EUR 500,000 from its TARGET main cash account to its TIPS DCA, TIPS and TARGET together check the instruction, verify the funds, and either settle it at once or reject it at once. There is no reserved state, no ten second window for a counterparty to answer, and no expiry to manage. If the main cash account has enough funds, the EUR 500,000 moves immediately. If it does not, the transfer is rejected immediately, and the bank knows at once that it must fund its main account before it tries again. These three rules together make liquidity management in TIPS predictable, and that predictability matters for banks that settle thousands of instant payments every hour. A treasurer who knows that a liquidity transfer only works in the same currency, that it has no reservation, and that it settles or fails immediately, can plan funding with confidence. For example, a bank in France that expects EUR 20 million of instant payment outflows in the afternoon can move EUR 20 million into its TIPS DCA in the morning, knowing the transfer will settle at once, and it can move any surplus back in the evening, knowing that transfer will also settle at once. That is the deposit model working as designed.