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# System prepended metadata

title: System account fiat buffer

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# System account fiat buffer

This will build up naturally as a result of positive clearing limits; automatic collection of collateral/securing of risk associated with $L_c^-$ but could also come from transaction or membership fees. Can be used to reduce [late payment](/iIVkdpz_S76a_6FexHZWAw?both) and [default](/nO2IbqcMTbiNSY0AG0PCnA) risk in accordance with the [club agreement](/jTFZpns5QBixTAwG8Rl9-w).


## Late payment

In the event of late payment, there is no need to distribute loss and so the fiat buffer simply acts to loosen the coupling between the intervals at which the club's intermediating system account receives and makes payments; if there are any late payments (if transfers are expected to be made automatically on the day of settlement, then anything other than $\Delta t=$ 0 would be classified as such) then immediate settlement in full or in part to members expecting fiat may still be possible. This will depend on the amount in the buffer $\beta$ and the sum of payments that are overdue $Q_{N,sys}^{m_{\Delta T> 0}}=\sum_{i=1}^{N}q_{i,sys}^{m_{\Delta T> 0}}$; the probability that $Q_{N,sys}^{m_{\Delta T> 0}}>\beta$ can be described by a 'buffering factor' $\mu$.

Clearly a larger buffer will have a smaller chance of being overwhelmed, but $Q_{N,sys}^{m_{\Delta T> 0}}$ cannot be known in advance. However, if its probability distribution is known from historical data, it becomes possible to estimate $\mu$ for a given value of $\beta$ and hence choose a desirable buffer size.

An equitable way to deploy the buffer in the event of late payment to the system account could be as follows: an equal share is apportioned to all members expecting fiat payment and then distributed in rounds until it is either used up or all parties have received their total amount due. For example, if one member was expecting to receive £10, another £20, another £100 and another £140 but late payments meant this amount was not made available on the designated day of settlement then a buffer of £300 would be distributed as follows:
* £75 (£300/4) would be initially assigned to each: the first and second members would receive everything they are due, whilst the third and fourth would still be expecting £25 and £65 respectively.
* The £120 (£300-£10-£20-£75-£75) left in the buffer is again split evenly between the members still due payment, in this case the third and fourth. The third receives their last £25, whilst the fourth receives £60 and is still due £5.
* There is now £35 (£120-£25-£60) left, and so the fourth member can receive their final £5 with £30 left over. The buffer will be replenished when the delayed payment arrives.

If the buffer is used up, then the parties still due fiat would presumably wait until the payment has been made (at which point it would be immediately passed on from the system account). Alternatively, the rest of the club could collectively supply the necessary funds, ensuring that no member faces an indefinite wait to receive what may be a considerable sum, with the drawback that everyone is now out of pocket until the payment is made. This could be an additional facet of the [risk reductions](/vlzc8wOPTsu18oMWc64wpw?both) club membership is expected to bring.


## Default

In the main late payment entry bilateral default is defined as non-payment after some multiple of the agreed period, e.g. 90 days if 30 days were originally specified. In the context of payments to the system account, default could be defined as non-payment after some multiple of the settlement period, at which point it becomes necessary to apportion the loss. Assuming that the default is initially absorbed by the buffer (which then has to be replenished), there are several options:

* Mutual liability: all remaining members are equally liable; if a payment of £100 due to the system account is defaulted on and there are 10 members, then each pays £10 into the system account to replenish the buffer.
* Proportional liability: each member is liable in proportion to how much credit they received from the defaulting party over the settlement period before the payment became overdue. This would provide an incentive for each member to consider whether to accept MCU from other members, and hence a self-regulating defence against incentives to [game balance limits](/fNhqlAK8TNqmDiXtEuLUWg). However, creditworthiness is meant to be assessed when a member joins the club as part of a multilateral process, and there a mechanism should also be in place to periodically adjust limits in accordance with changes. Furthermore, given that all credit is extended to a member by the entire club, this may run counter to the spirit of mutuality.

If the buffer is not sufficient to cover the loss, then a mix of the above is possible; mutual liability up to the system buffer and individual liability beyond it.


## Resources

See also 'Collective action and market failure' (pages 35-37) [here](http://www.hblr.org/download/HBLR_1_1/Ricks-Regulating_Money_Creation.pdf), 'Bank Runs, Deposit Insurance, and Liquidity' [here](https://www.macroeconomics.tu-berlin.de/fileadmin/fg124/financial_crises/literature/Diamon_Dybvig_Bank_Runs__Deposit_Insurance__and_Liquidity.pdf).

'... credit that is provided by banks and other financial intermediaries is crucial to the functioning ofmarkets. Such credit is particularly needed when one shop fails and the economy is threatened with a cascade of shop failures. In such circumstances, the easier it is for a potential entrant to find finance the more likely it is that the cascade will be counteracted or even averted by a replacement shop that allows other transactors to resume business as usual. But when banks and other financial intermediaries find their balance sheets in disarray they are less willing and able to provide this crucial finance' - see page 10 [here](http://www2.econ.iastate.edu/tesfatsi/WhatHaveCentralBankersLearnedFromMacro.PHowitt.JMacro2011.pdf).