NICS’ clearings are undertaken at two levels:
For Level 1 banks, e.g. banks whose settlements are undertaken via their own settlement account in NBO.
For Level 2 banks, e.g. banks whose settlements are undertaken through a level 1 bank.
Unlike a traditional ‘tiered participation’ system, participants on Level 1 and Level 2 are direct participants in NICS, and hold their own responsibility for transactions they send to NICS. Therefore, banks on Level 2 cannot be described as indirect participants in NICS, even though the two-level clearing system share similarities with a more traditional ‘tiered participation’ system.
The clearing and settlement process operates in the following way: NICS calculates the net position of each participant for each clearing. The net position of Level 2 bank is added to the net position of its private settlement bank on Level 1. The net position of the private settlement bank, including the underlying net position of Level 2 banks, are sent to Norges Bank for settling via the Level 1 bank’s settlement account in Norges Bank. Upon completion of the settlement via Norges Bank, the private settlement bank will undertake a settlement against its own underlying banks. This is done as the underlying Level 2 bank’s net position is posted into the Level 2 bank’s settlement account in the private settlement bank. The settlement bank and the underlying bank are free to negotiate the conditions for completion of the settlement at Level 2 amongst themselves.
The settlement bank is obligated to settle with other banks for all transactions in NICS to/from their own underlying level 2 banks. The amount the settlement bank is obligated to settle with is limited to a CAP that the settlement bank has registered in NICS. CAP is a frame determined by the settlement bank for an underlying bank’s accumulated net debit position in NICS Net Clearing. The CAP is set for the clearing period (24 hours).
The two-level clearing system is considered practical and as a risk reducing measure in itself. The system does not expose NICS to financial risks, operational risks, or other risks.