By Bob Lyddon – 4 minute read
THE BANK OF ENGLAND’S newly-unveiled CHAPS system went down for several hours on Monday 15th August 2023. This was just weeks after the go-live of the so-called ‘RTGS Renewal’ project to replace the old CHAPS system – CHAPS being the UK’s Real-Time Gross Settlement (RTGS) payment system.
Having an RTGS is critical to financial stability: it avoids the financial system going under as a whole if and when one major participant in it goes under. The details are fully explained at the foot of this article, but It is not an overstatement to say that CHAPS is the most critical single-point-of-failure in the UK financial system.
To all intents and purposes the UK can now regard itself as not having such a system, because ‘Five Nines’ availability during scheduled operating hours is a prerequisite – the system must be available for 99.99999 per cent of the time.
It’s time to face reality: the UK lacks a main pillar of financial stability.
This does not say much for the capabilities of the Deputy Governor for Financial Stability – Sir Jon Cunliffe – or for Sarah Breeden, Executive Director for Financial Stability Strategy and Risk. Nor does it act as an endorsement for their boss, Governor Andrew Bailey. They should resign at once, along with the RTGS Renewal project team. They have failed the country collectively and individually.
The RTGS Renewal project was kicked-off after the previous multi-hour fallover of CHAPS in 2014. A report was duly commissioned by the Bank itself, of which only a summary was made public. Blame was duly laid on external factors, in particular the usage of the SWIFT MT message format (which dated back to the late 1970s) for the payment message exchanges between the Bank and the system participants.
It was duly decided to retire the MT message format in favour of ISO20022 XML (see footnotes). This ‘global’ format was in fact only in use for the Single Euro Payments Area (SEPA) when the Bank of England selected it. Even then its usage in the Single Euro Payments Area was nuanced: it was used within the settlement systems but not by customers. To remedy that the EU did what the EU does best: it compelled customers to use it by banning its existing competitor formats and setting a very high bar for any new entrant.
RTGS Renewal project documentation is full of reasons for adopting ISO20022 of the type ‘it is global and everyone else is going to adopt it’ and ‘World Bank/G-20/Financial Stability Board/Bank for International Settlements have espoused it, adopted it, made it part of their charter’ or whatever.
Such internationalist blandishments mask the weak case for adopting ISO20022 as a better data format than others, and as a solution to the problem that caused CHAPS to fall over in 2014. In its desperation to adopt EU and globalist approaches, the Bank of England lost sight of where the original problem lay – and has now left the country badly exposed.
The 2014 CHAPS failure
The CHAPS outage in 2014 was caused by the failure of a look-up routine regarding a routing table of participant SWIFT addresses. A new participant was introduced, namely Danske Bank, separately from Northern Bank that it had acquired.
Danske’s name was added to the table without Northern Bank’s name being removed, at which point the bank at the bottom of the table – UBS AG (London branch) – fell off.
Thus, CHAPS message traffic meant for UBS was not directed to it – it never reached the gateway into the SWIFT system – and traffic from UBS was put into a queue behind the SWIFT gateway, as – according to the table – its sender was not a valid CHAPS participant. The ripple effect of this, particularly on account balances available to settle other payments, caused the system as a whole to fail.
The problem lay not with the message exchanges between the Bank of England’s SWIFT gateway and the participants – which SWIFT MT carried out – but in the Bank’s internal systems.
The proof of this is that in the years following 2014 the Bank of England was only able to open 12-19 new accounts per annum, and this at a time when the Prudential Regulatory Authority and the Financial Conduct Authority were licensing dozens of neo-banks and payment service providers.
Each new account-opening – which is what the addition of Danske Bank in 2014 came down to – ranked as a ‘system change’. Only one ‘system change’ could be put into production per week and after rigorous testing, with 20+ weeks reserved for other purposes (like 13 for Base Rate changes after meetings of the Monetary Policy Committee), and with no changes being put into production over the summer or over Christmas/New Year. The residue of slots was available for a limited number of new accounts to be put into production.
This confirmed what lay behind the CHAPS fallover in 2014: inadequacies in the Bank’s internal systems. Now we have a new CHAPS system and we have ISO20022 XML, but CHAPS has fallen over again, endangering the settlement of UK payments, undermining the UK’s reputation as a global financial centre, and threatening the country’s financial stability.
Is this not the final straw for the Bank of England management? Do we actually have to wait until our financial system has been collapsed by the team in charge of it, or is it still possible to decipher the Writing on the Wall?
Bob Lyddon is an independent financial analyst specialising in international and central banking.
RTGS: Real-Time Gross Settlement payment systems are normally those run by central banks to handle payments that are of high value and/or are urgent and/or are characterised as ‘systemically-important’, a phrase that usually means the payment is being made or received either by the central bank itself or a government entity that the central bank is acting for. These systems are also normally the ones through which cross-border payments are cleared and settled, because the respective payment messages are transmitted over the SWIFT network.
International Standards Organization 20022 XML: a book of messages with layout and options for content, expressed in Extensible Markup Language (XML) and contemplated for global usage for both domestic and cross-border payments. First used for the Single Euro Payments Area schemes in 2008.
SEPA imposes a monopoly: the SEPA Migration End Date Regulation 260/2012 of 14 March 2012 imposed a monopoly for ISO20022 XML as the data format for domestic and cross-border payments in euro within the Single Euro Payments Area