Canadian Payment Systems &

Modernization
Srikanth Nadakuduru
This paper contains details about the current payment systems
in Canada, viz. ACSS, LVTS, Interac, USBE and how they
function. It also talks about the modernization roadmap of
Canadian Payment Systems, ISO 20022 financial messaging
standards portfolios used by Payments Canada.
Table of Contents
1 Introduction ............................................................................................. 5
1.1 About the Paper ......................................................................................... 5
1.2 About Canadian Payments ......................................................................... 5
2 Modernization Roadmap ......................................................................... 5
2.1 LYNX .......................................................................................................... 5
2.2 RTR ............................................................................................................ 6
2.3 Retail Batch System ................................................................................... 7
2.3.1 Enhancements to the current retail batch system, the ACSS ......................... 7
2.3.1.1 New Exchange Window .............................................................................................. 7
2.3.1.1.1 Time-Zones across Canada ................................................................................... 7
2.3.1.2 Two-hour funds availability......................................................................................... 7
2.3.1.3 Adoption of ISO 20022 for AFTs .................................................................................. 8
2.3.1.4 New system implementation ...................................................................................... 8

3 Existing Payment Systems and Processes ................................................. 8

3.1 Retail Batch System, the ACSS .................................................................... 8
3.1.1 The Automated Funds Transfers (AFTs) ........................................................ 9
3.1.1.1 Participants involved in ACSS payment....................................................................... 9
3.1.1.1.1 Direct Clearer ........................................................................................................ 9
3.1.1.1.2 Group Clearer ........................................................................................................ 9
3.1.1.1.3 Difference between a Bank and a Credit Union .................................................. 10
3.1.1.1.4 Indirect Clearer.................................................................................................... 10
3.1.1.1.5 Bank of Canada ................................................................................................... 10
3.1.1.2 Types of AFTs ............................................................................................................ 10
3.1.1.2.1 A typical AFT transaction Flow ............................................................................ 11
3.1.1.2.2 What does AFT File Contain? .............................................................................. 13
3.1.1.2.3 CPA Standard 005 ............................................................................................... 13
3.1.1.2.4 AFT Interbank Clearing and Settlement .............................................................. 13
3.1.1.2.5 ACSS Working Days ............................................................................................. 14
3.1.2 Electronic Data Interchange (EDI) ............................................................... 14
3.1.3 Interac Payments ....................................................................................... 15
3.1.3.1 Interac e-Transfer...................................................................................................... 15
 3.1.3.2 Interac Debit ............................................................................................................. 16
3.1.3.2.1 Interac Flash ........................................................................................................ 16
3.1.3.2.2 On Mobile............................................................................................................ 16
3.1.3.2.3 e-Commerce ........................................................................................................ 16
3.1.3.2.4 Interac Debit (Chip and PIN) ............................................................................... 16
3.1.3.2.5 Cross Border debit (Pay with your card in US) .................................................... 16
3.1.3.3 Interac Cash............................................................................................................... 16
3.1.3.4 Interbank Clearing and Settlement of Interac Payments ......................................... 16
3.1.3.5 Interac as Instant Payments System ......................................................................... 17

3.2 Large Value Transfer System (the LVTS) .................................................... 17

3.3 US Dollar Bulk Exchange system (USBE).................................................... 18
4 Migration to ISO 20022 financial messaging standards .......................... 19
4.1 What is ISO and what is the advantage of ISO 20022? .............................. 19
4.2 ISO 20022 Message Portfolio of Payments Canada ................................... 19
5 Citations ................................................................................................ 20
Table of Figures
Figure 1: Modernization Roadmap – LYNX ................................................................................ 6
Figure 2: Modernization Roadmap – RTR .................................................................................. 6
Figure 3: ACSS Exchange Windows ............................................................................................ 7
Figure 4: Modernization Roadmap - Retail Batch System ......................................................... 8
Figure 5: Retail Batch System - Payment Types ......................................................................... 9
Figure 6: Atypical AFT transaction flow ................................................................................... 11
Figure 7: List of ACSS Direct Clearers ....................................................................................... 12
Figure 8: AFT file structure....................................................................................................... 13
Figure 9: A typical EDI transaction Flow .................................................................................. 15
Figure 10: A typical LVTS transaction flow............................................................................... 18
Figure 11: ISO 20022 Message Portfolios of Payments Canada .............................................. 20
Abbreviations
Abbreviation Description
ABM Automated Bank Machine
ACSS Automated Clearing Settlement System
AFTs Automated Funds Transfers
CA$ Canadian Dollar
CPA Canadian Payments Association
CSN CPA Services Network
DC Direct Clearer
DNS Deferred Net Settlement
EDI Electronic Data Interchange
EDT Eastern Daylight Time
EOD End of Day
FIF Financial Institution File
ISO International Organization for Standardization
LVTS Large Value Transfer System
MT Message Type
PAD Pre-Authorized Debit
RTGS Real Time Gross Settlement
RTR Real Time Rail
STP Straight Through Processing
SWIFT Society for World-wide Interbank Financial Telecommunication
USBE US Dollar Bulk Exchange
UTC Coordinated Universal Time
XML Extensible Mark-up Language
1 Introduction

1.1 About the Paper

The aim of this paper is to explain in detail about,

 Current Payment systems in Canada, viz. ACSS, LVTS, Interac, USBE and how they function
 The Modernization Roadmap of Canadian Payment Systems
 Adoption of ISO 20022 Financial messaging Standards

1.2 About Canadian Payments

Canada is the second largest country in the world by total area, with a population of 38 million
approximately, as per Q2, 2020 census. Operating across 6 primary time zones, the consumer and
business transactions constitute a total of 21.1 billion by volume and CA$ 9.9 trillion by value, for the
year 2018, as per Payments Canada Association. The value is approximately 4 times the GDP of
Canada in 2018, i.e. CA$ 2.39 trillion.

Payments Canada, which was officially established as Payments Canada Association in 1980, is the
key body to establish and operate Payment Clearing and Settlement systems in Canada, viz. the
Automated Clearing Settlement System (ACSS) and the Large Value Transfer System (LVTS). With the
growing new technologies, the customer demands and increased international competition,
Payments Canada had initiated modernization of existing Canadian Payment Systems, and will also
build a new real-time retail payments system.

2 Modernization Roadmap
With an aim to accelerate the economy of Canada, modernization of Canadian Payment Systems is
one of the key initiates, which will benefit the Canadian financial institutions, other payment Service
providers, businesses and consumers. Introduction of faster, safer and data-rich payments will boost
the payments digitization which will further improve the bottom lines and lowers the operational
costs.

The Roadmap depicts the progress and the tentative time-lines for the completion of a new and
modern Canadian Payment Systems. Let us take a look at the progress of each payment system and
their Roadmap.

2.1 LYNX
LYNX is a new real-time gross settlement system which will replace the current Large Value Transfer
System (LVTS). This system includes enhanced risk model that complies with Canadian and
international risk standards and is also enabled with ISO 20022 global financial messaging standards.

The following diagram depicts the progress of various implementation stages and the timelines of
Lynx,
 Figure 1: Modernization Roadmap – LYNX

2.2 RTR
RTR, known as Real-Time Rail (used only for the project purpose and will be changed in the future) is
a retail instant payments system and will be available 24/7/365. This system will feature account
number based routing and is enabled with ISO 20022 financial messaging standards.

RTR is a completely new payment system, but may efficiently utilize the existing Interac payments
network infrastructure. Interac payments will be explained in the subsequent sections.

The following diagram depicts the progress of various implementation stages and the timelines of
RTR go-live,

Figure 2: Modernization Roadmap – RTR

2.3 Retail Batch System
Automated Clearing Settlement System (ACSS) is the current retail batch payments system.
Modernization includes,

 Enhancing the current system,

o to enable more frequent transfer of funds by introduction of new exchange window
o two hour funds availability to the beneficiary
o adoption of ISO 20022 financial messaging standards for Automated Funds Transfers
(AFTs)
 New retail batch system implementation

2.3.1 Enhancements to the current retail batch system, the ACSS

2.3.1.1 New Exchange Window

Currently, ACSS payments are processed in two exchange windows, across the time-zones, as shown
below. The introduction of new exchange window will benefit the customers from other time zones,
especially from the west coast, to submit their payment files beyond 16:30:00 hours (EDT) and still
get settled with the same value day. The record highlighted below in yellow is the 3rd exchange
window.

S.No Exchange Deadline (EDT) Exchange Period (EDT)

(for receipt of payment files)
21:00:01 (previous business day)
to
1 09:30:00 hours 09:30:00 (current business day)
09:30:01 (current business day)
to
2 16:30:00 hours 16:30:00 (current business day)
16:30:01 (current business day)
to
3 21:00:00 hours 21:00:00 (current business day)

Figure 3: ACSS Exchange Windows

The introduction of new window has increased 10% to the existing transaction volume of ACSS.
Please note that, the time periods mentioned on the above table are expressed in Canada Eastern
Daylight Time (EDT), Toronto.

2.3.1.1.1 Time-Zones across Canada

1. UTC – 2:30 hours, Newfoundland Daylight Time (NDT)
2. UTC – 3:00 hours, Atlantic Daylight Time (ADT)
3. UTC – 4:00 hours, Eastern Daylight Time (EDT)
4. UTC – 5:00 hours, Central Daylight Time (CDT)
5. UTC – 6:00 hours, Mountain Daylight Time (MDT)
6. UTC – 7:00 hours, Pacific Daylight Time (PDT)

2.3.1.2 Two-hour funds availability

In case of Automated Funds Transfers (AFTs), the beneficiary institution has to credit the beneficiary
within 2 hours of receiving the payment instruction files. For example, if the cut-off for ordering
institution to submit the payment files to the beneficiary institution in the first exchange window is,
09:30:00 hours, the beneficiary bank has to credit the beneficiary before 11:30:00 hours and make
the funds available for withdrawal.

Implementation of this enhancement certainly benefited the customers with faster availability of
funds in their bank accounts on the same value day.

2.3.1.3 Adoption of ISO 20022 for AFTs

Currently, for AFTs, the financial institutions exchange the payments files using the proprietary
standards called, the CPA Standard 005. The adoption of ISO 20022 will enable the financial
institutions to exchange the files using ISO 20022 messages, which is a global standard.

2.3.1.4 New system implementation

Besides the on-going enhancements being done currently to the existing retail batch system, the
ACSS, Payments Canada is simultaneously studying the design and business capabilities required for
a new retail batch system. Migration to a new system seems to be a little longer way to go.

The following diagram depicts the progress of various implementation stages and the timelines of
RETAIL BATCH system,

Figure 4: Modernization Roadmap - Retail Batch System

3 Existing Payment Systems and Processes

3.1 Retail Batch System, the ACSS

The Automated Clearing Settlement System (ACSS) is a Deferred Net Settlement (DNS), which
processes the non-urgent, low-value payments in Canada. It supports processing of various payment
types shown below,
 Paper Based Electronic
Cheques Automated Funds Transfers (AFTs)
1. Direct Deposits (Credit Transfers)
2. Pre Authorized Debits - PADs (Direct Debits)
Paper remittances Interac Payments
(POS purchases, Online purchases, ABM Cash
Withdrawals)
Government Items Electronic Data Interchange (EDI)
(government cheques, redeemed (business to business bill payments)
bonds, treasury bills, and coupons)
Imaged Paper Items
(processing of scanned Cheques)

Figure 5: Retail Batch System - Payment Types

With the growing digitization, the volume of paper based payments has significantly reduced and the
use of electronic payment instruments has significantly benefited the customers with faster credits
into their bank accounts on the same value day. In the coming future, the paper based payments will
further reduce and will have a minimal usage. With this understanding, we will focus on the
processing of electronic payments such as AFTs, Electronic Data Interchange (EDI) and Interac
payments.

3.1.1 The Automated Funds Transfers (AFTs)

3.1.1.1 Participants involved in ACSS payment

Before understanding the AFTs, it is important to understand various participants involved in an
ACSS payment.

3.1.1.1.1 Direct Clearer

As per Section D, Rule D3 of CPA (Canadian Payments Association), Our System Rules and Standards,
a Direct Clearer is a Financial Institution which can clear and settle payments of their own customers
and can also act as clearing and settlement agent for the customers of other indirect clearers and
financial institutions.

To be a Direct Clearer the following is the minimum requirement,

a. Should be member of CPA (Canadian Payments Association)

b. Should have a transaction volume of not less than 0.5% of the total national volume of
Payments

c. Should maintain a settlement account at the Bank of Canada (Canada Central Bank)

d. Should maintain a loan facility with the Bank of Canada, for credit risk management

e. Should meet the technical requirements set out in the Rules

3.1.1.1.2 Group Clearer

A Group clearer, which is also a direct clearer, is a financial institution which represents a group of
financial institutions, known as members, example, Central 1 Credit Union in Canada. A group
clearer functions similar to a direct clearer and will act as a clearing and settlement agent for its
members.
3.1.1.1.3 Difference between a Bank and a Credit Union
A bank is a profit making financial institution which accepts deposits and lends to consumers,
businesses and other organizations in need. In addition to the core business, banks also often
involve in other profit making businesses such as Foreign Exchange, and a wide variety of investment
products.

A Credit Union is non-profit financial institution which works similar to as a bank. It accepts deposits
and lends to consumers, businesses and other organizations in need at an interest rate lesser than
banks. Unlike a bank, a Credit Union is owned by their members/customers, who are the accounts
holders.

A bank and a credit union are regulated by Central Banks.

3.1.1.1.4 Indirect Clearer

As per Section D, Rule D3 of CPA (Canadian Payments Association), Our System Rules and Standards,
indirect clearer is a Financial Institution which clears and settles their customer payments through a
Direct Clearer/Clearing agent.

To be an Indirect Clearer the following is the minimum requirement,

a. Designate at least one Clearing Agent for the Exchange and Clearing of their Payments,
from among the Direct Clearers.

b. Maintain a settlement account with each of its Clearing Agents

c. Establish a loan facility with each of its Clearing Agents, for credit risk management

Multiple Clearing Agents:

An Indirect clearer may also designate multiple clearing agents (Direct Clearers) for multiple
payment instruments, such as,

a. One Clearing Agent for Paper based payments

b. One Clearing Agent for Automated Fund Transfers

c. One Clearing Agent for Electronic Data Interchange

3.1.1.1.5 Bank of Canada

Bank of Canada is the Central Bank which holds the Settlement accounts of all the direct clearers. It
is responsible for Settlement of funds between the direct clearers. It is a default member of Canada
Payments Association (CPA).

With the above understanding of various participants involved, let us now move on to the detailed
understanding of an AFT transaction flow.

3.1.1.2 Types of AFTs

The AFTs are of two types,

1. Direct Deposits
 A direct deposit is nothing but a Credit Transfer initiated by a payer (ordering
customer) to transfer the funds from his/her bank account to a payee (beneficiary
customer)
2. Pre-Authorized Debits
 A pre-authorized debit is nothing but a Direct Debit initiated by a payee (originator)
to collect the funds from their payers (customers)

3.1.1.2.1 A typical AFT transaction Flow

Figure 6: Atypical AFT transaction flow

ACSS – Is the Automated Clearing Settlement System where all the direct clearers will enter the
obligations after every exchange window. The interbank clearing and settlement process is explained
in the subsequent sections.

FIF – Financial Institutions File

 Is a directory of all the financial institutions in Canada, containing the routing numbers to
facilitate payments

PD – Participants Directory

 In order to be a system participant (direct & indirect participants of ACSS, LVTS), it is

mandatory to be a member of Canada Payments Association (CPA)

DC – Direct Clearers

 Is a directory of all the Direct Clearer participants of ACSS

A direct clearer institution which clears and settles the ACSS payments will need to maintain these
directories to validate and process the payments. All the direct clearers will have access to all the
above directories.

Below is the list of all the Direct Clearers of ACSS. The data is taken from the published list in Canada
Payments Association website.

Figure 7: List of ACSS Direct Clearers

Source: https://www.payments.ca/our-directories/retail-system-acss-direct-and-group-clearers

CSN – CPA Services Network

 Is a secured network to send and receive the payment files between the direct clearers

DC – Is a Direct Clearer

CPA Standard 005 – Is a proprietary financial messaging standards used to transfer AFT files from
one financial institution to the other.

AFT Transaction flow description

1. Customers of the Direct Clearers including Individuals, Businesses, other Corporates and
Indirect Clearers submit their payment instructions to their respective Direct Clearers. These
instruction files are submitted in a format agreed with their Direct Clearers.
2. The direct clearers will then perform validations on the submitted files and prepares AFT
files by destination direct clearer, by payment type (Credit Transfer/Direct Debit) and sends
through CSN Network at 3 different Exchange windows explained in the earlier section
(2.3.1.1).
3. The destination direct clearers will credit/debit their customers on receiving the AFT files.
  In case the actual beneficiary customer belongs to an indirect clearer institution or
other financial institution for which the destination direct-clearer is acting as an
agent, the AFT files containing these transactions will be further forwarded to
indirect clearers or other financial institutions in the format agreed between them.

3.1.1.2.2 What does AFT File Contain?

An AFT file contains AFT transactions, such as Credit Transfers, Direct Debits, Returns and Recalls. A
single Credit Transfer AFT file may contain multiple transactions. The AFT files are prepared by the
ordering direct clearers by destination direct clearer and transaction type, meaning, for all the
beneficiary customers linked to a particular direct clearer and with transaction type Credit Transfers,
one AFT file is prepared. A snap shot of an AFT file with Credit Transfer Transactions.

Figure 8: AFT file structure

The Logical Records mentioned in the AFT file are the transactions formatted in CPA Standard 005.

3.1.1.2.3 CPA Standard 005

CPA Standard 005 is a proprietary format used for exchanging AFT files between the ACSS
participants. The following are the message types of this standard.

1. Logical Record A – Header of AFT file

2. Logical Record Z – Trailer of AFT file
3. Logical Record C – Customer Credit Transfer transaction record
4. Logical Record D – Customer Direct Debit transaction record
5. Logical Record E – Customer Credit Transfer recall request transaction record
6. Logical Record F – Customer Direct Debit reversal request transaction record
7. Logical Record I – Customer Credit Transfer return transaction record
8. Logical Record J – Customer Direct Debit return transaction record

3.1.1.2.4 AFT Interbank Clearing and Settlement

 Typically 2 hours after the end of every exchange window (09:30, 16:30, 21:00), all the Direct
Clearers enter manually the total volume and value of the amount that it is owed by each
direct clearer by transaction type, meaning, by AFT Credit Transfer, by AFT Direct Debit etc.,
in ACSS.
  At the End of Day (EOD), the ACSS, will calculate the multilateral net positions of each direct
clearer
o If the net position is debit for a direct clearer, then the ACSS settlement account of
the direct clearer at Bank of Canada has to be debited.
 In the above case, a settlement instruction has to be initiated by the Direct
Clearer through LVTS and sent to Bank of Canada to debit their account.
o If the net position is a credit for a direct clearer, then the ACSS settlement account
of the direct clearer at Bank of Canada has to be credited.
 In the above case, Bank of Canada will credit the settlement account of the
Direct Clearer from the LVTS instructions received from other direct clearers
who owes funds
 Typically the interbank clearing and settlement process is completed on T + 1 by 11 AM,
where ‘T’ being Today

3.1.1.2.5 ACSS Working Days

 ACSS operates typically from Monday to Friday in a week
 ACSS does not operate on
o Weekend – Saturday and Sunday
o Public Holidays

3.1.2 Electronic Data Interchange (EDI)

EDI payments are typically business to business bill payments towards the generated invoices. A
manufacturing Company making a purchase of raw materials from a seller could be an example of
EDI payment. The advantage of making the payment using EDI format enables Straight Through
processing (STP), easy reconciliation of payments using invoice numbers. In the example shown
below, a manufacturing company is sending payment instructions in EDI format (CPA Standard 023)
to its Financial Institution. The indirect clearer further forwards the payment file to its Direct Clearer
(DC1), shown the figure below. EDI payment files are submitted for clearing and settlement once in a
day at 17:00 EDT (Eastern Daylight Time). The files are sent through a secured network called CPA
Services Network to the receiving direct clearer. The receiving direct clearer will further forward the
EDI file to the seller financial institution to credit the seller account.
 Figure 9: A typical EDI transaction Flow

CPA Standard 023 – Details the EDI file format, developed by ASC X12 of the American National
Standards Institute (ANSI).

3.1.3 Interac Payments

Interac is a third party payment service provider network, which enables consumers and businesses
in Canada to send or receive money in low-value in near real time. The Interac Corporation was
formed by an association of financial institutions across Canada.

Services provided by Interac broadly include the following,

1. Interac e-Transfer
2. Interac Debit
3. Interac Cash

3.1.3.1 Interac e-Transfer

Interac e-Transfer enables the consumers and businesses to transfer funds from one account to the
other using email ID or mobile number. If a Financial Institution has to provide Interac Services, it
will first have to register with Interac, only then it will be able to provide these services.

Interac e-Transfers can be domestic or international. In case of international, Interac is collaborated

with Western Union to provide the service.

Let us look briefly into how a domestic e-Transfer takes place,

The ordering customer initiates e-Transfer using beneficiary customer’s email-id/mobile number,
and with a security question. The Interac network immediately sends an email/SMS to the
beneficiary customer. The beneficiary customer can then login to their online/mobile banking
channel and supply the security answer to the security question by asking the ordering customer.
After submitting the security answer, funds get immediately credited to his/her account.
3.1.3.2 Interac Debit
There are various types of Interac Debit services as explained below. The following services are
various payment methods used by consumers and businesses for the purchase of low-value goods
and services.

3.1.3.2.1 Interac Flash

Tap the interac enabled debit card on the POS machine and the account gets debited immediately
and a confirmation is sent to POS machine.

3.1.3.2.2 On Mobile
Add interac enabled debit card details to GPay, ApplePay, SamsungPay in your mobile. Select the
debit card while making the payment and tap on the POS machine. The account gets debited
immediately and a confirmation is sent to POS machine.

3.1.3.2.3 e-Commerce
Add interac enabled debit card details in the payment methods at an e-Commerce website. Once
added, the consumer will be able to make payments using Interac debit card.

3.1.3.2.4 Interac Debit (Chip and PIN)

Insert Interac enabled debit card in the POS machine, enter the PIN to confirm the transaction. The
account gets debited immediately and a confirmation is sent to POS machine.

3.1.3.2.5 Cross Border debit (Pay with your card in US)

The Interac debit cards can be used to make payments towards the purchases made in United States
of America. Currently, 2 million retail outlets in US are providing interac enabled debit cards
payment service. This is a foreign exchange transaction towards the purchases made in USD against
the account maintained in CAD, in Canada.

3.1.3.3 Interac Cash

Interac Cash service will enable the consumers and businesses to withdraw cash from Interac
enabled ABMs in Canada. ABMs are the Automated Bank Machines in Canada which enables to
withdraw/deposit cash from/to their bank account.

In all the above services, we noticed that the customers are debited or credited into their bank
accounts in near realtime. What about the banks? How are they clearing and settling the Interac
Payments drawn on their banks?

3.1.3.4 Interbank Clearing and Settlement of Interac Payments

The interbank clearing and settlement of Interac payments is done through the retail batch system,
the Automated Clearing Settlement System (ACSS).

 Typically 2 hours after the end of every exchange window (09:30, 16:30, 21:00), all the Direct
Clearers enter manually the total volume and value of the amount that it is owed by each
other direct clearer for the Interac payments, in ACSS. In case of indirect clearers and other
financial institutions, who are not direct clearers, will have to send their Interac payment
files to their direct clearers for clearing and settlement.
 At the End of Day (EOD), the ACSS, will calculate the multilateral net positions of each direct
clearer
 o If the net position is debit for a direct clearer, then the ACSS settlement account of
the direct clearer at Bank of Canada has to be debited.
 In the above case, a settlement instruction has to be initiated by the Direct
Clearer through LVTS and sent to Bank of Canada to debit their account.
o If the net position is credit for a direct clearer, then the ACSS settlement account of
the direct clearer at Bank of Canada has to be credited.
 In the above case, Bank of Canada will credit the settlement account of the
Direct Clearer from the LVTS instructions received from other direct clearers
who owes funds
 Typically the interbank clearing and settlement process is completed on T + 1 by 11 AM,
where ‘T’ being Today

3.1.3.5 Interac as Instant Payments System

As mentioned earlier, the new instant e-Transfer payment system, called the Real-Time-Rail (RTR)
will be efficiently utilizing the current Interac network infrastructure to develop this instant e-
Transfer payment system. The email-id, mobile number will be replaced with the account number
and a Business Identifier number to initiate the transfer.

3.2 Large Value Transfer System (the LVTS)

LVTS is a large value, real-time gross settlement system in Canada. It enables the consumers,
businesses and the Financial Institutions to make high priority and high value payments. The funds
are cleared and settled in near real-time. Other than the high-value payments between the FIs, the
multi-lateral net obligations raised out of the Automated Clearing Settlement System (ACSS) will also
be settled through LVTS.

LVTS uses SWIFT (Society for World-wide Interbank Financial Telecommunication) network to send
and receive the payments between the participants. The following are the SWIFT Message Types
used for making an LVTS payment,

1. MT 103 – FI to FI Single Customer Credit Transfer

2. MT 205 – FI to FI Financial Institution transfers
 Figure 10: A typical LVTS transaction flow

 Ordering Customer Initiates the payment instructions and sends to their Financial Institution
where the account is held.
 The ordering institution will validate the payment instructions, debits the customer account
and sends out an MT 103 message to SWIFT.
 SWIFT copies a part of the message details such as, Ordering Institution, Beneficiary
Institution, Transaction amount etc. to the LVTS.
 LVTS performs clearing and then sends back the confirmation/authorisation of the MT 103
copy to SWIFT.
 SWIFT, on receiving the confirmation, will then send the confirmed/authorised MT 103 to
the beneficiary institution. This method is called SWIFT Y-Copy service.
 The beneficiary institution will then credit to the beneficiary customer and a notification will
be sent.
 The interbank settlement for this transfer happens at the End of the Day (EOD) at Bank of
Canada
 A Financial Institution should be direct participant of LVTS to perform these transfers on
behalf of itself and its customers. A direct participant can act as an agent to other indirect
participants.

3.3 US Dollar Bulk Exchange system (USBE)

 US Dollar Bulk Exchange system is not a Clearing and Settlement system, unlike ACSS and
LVTS
 It provides a mechanism to track US Dollar payments, drawn on customer US Dollar accounts
maintained at a financial institution in Canada.
 The USBE participant financial institutions, make entries into USBE to reflect the US Dollar
payment exchanges with each other
 The settlement of funds is affected through correspondent banks in New York, through a
series of SWIFT payments
4 Migration to ISO 20022 financial messaging standards
As a part of Modernization of Payments Canada, the current messaging standards used by ACSS –
the CPA Standards, LVTS – the SWIFT MT Standards will be migrated to ISO 20022 financial
messaging standards.

4.1 What is ISO and what is the advantage of ISO 20022?

ISO is an International Organization for Standardization. It is an independent, non-governmental
international organization with membership of 164 countries. The ISO develops and publishes the
standards, which are agreed internationally by experts. The standards could cover a huge range of
activities, such as making a product, managing a process, delivering a service, or supplying materials
etc. The published standards are adopted by businesses, governments, financial systems and many
others.

The ISO 20022 is the financial messaging standards published by ISO, adopted by various financial
systems around the world, including SWIFT. The ISO 20022 is based on XML message format.

Below are some of the key advantages of using ISO 20022 XML based financial messaging standards,

 Structured data – Will help improve Straight Through Processing(STP) of the payments
 Interoperability – Being adopted by various payment systems globally, will facilitate the
domestic and cross border payments to be more efficient, by reducing the funds settlement
cycle, improving the STP rates etc
 Supports different types of payment systems such as Deferred Net Settlement Systems,
RTGS systems, hybrid systems etc., which will result in lower operational costs, by removing
the dependency on proprietary standards

4.2 ISO 20022 Message Portfolio of Payments Canada

The below snapshot, depicts the portfolio of ISO 20022 messages that will be used by Canadian
Payment Systems, after the modernization is live.

The following snapshot is taken from the published reports by Canada Payments Association.
 Figure 11: ISO 20022 Message Portfolios of Payments Canada

Source: https://www.payments.ca/resources/iso-20022-resource-centre/overview-message-portfolio

5 Citations
1. https://www.payments.ca/
2. https://www.iso.org/home.html
3. https://www.bankofcanada.ca/
4. https://www.swift.com/