A new provision in Canada’s clearing rules will cap the value of cheques, bank drafts and other paper-based payment items going through Canada’s clearing system at $25 million, effective February 3.

Payments over this amount can be made via wire transfer using the Canadian Payments Association’s Large Value Transfer System (LVTS), which is offered by financial institutions under various proprietary names.

Following an extended period of consultation with CPA member financial institutions and key stakeholders, the plan to implement the ceiling was announced by the CPA board of directors in June 2002.

Capping the value of these payments, which are currently cleared and settled through the Automated Clearing Settlement System (ACSS), and migrating their value to LVTS ensures that the safety and stability of the Canadian payments system is enhanced.

The settlement of ACSS payments is not guaranteed, so if one financial institution were to default on its settlement obligations, the problem could potentially spread to other institutions, putting the entire financial system at risk.

The potential for such risk — referred to as systemic risk — is eliminated under LVTS since settlement of all payments that flow through it is guaranteed.

Only about 100 payments a day will be affected by the cap. Still, the initiative has the potential to shift up to $7 billion per day to LVTS.

The CPA says its initiative is consistent with international best practices, and similar measures have been adopted by a number of other countries, including the United States, South Africa and Sweden. In addition, the International Monetary Fund has urged countries to promote stability in their financial systems by maximizing the value flowing through payment systems that provide guaranteed settlement, such as LVTS.