jamtronix

I only just realised this while talking tonight with James from Decillion, but any settlement process should always involve an odd number of parties.

To prove it, we'll first need some definitions:

Call the party that owes money the debtor
Call the party that is owed money the creditor
Call the party that holds the account the debtor will pay out of, the debtor's settlement agent
Call the party that holds the account the creditor will be paid in to, the creditor's settlement agent

The simplest case is if the debtor and the creditor both hold accounts at the same insitution. Then there are 3 parties - the debtor, the creditor, and the single insitution that acts as settlement agent for both parties .

If the debtor and the creditor do NOT hold accounts at the same institution, then settling between the debtor and the creditor creates a debt between the two agents. I.e. the debtor's settlement agent itself becomes a debtor to the creditor's settlement agent, and that debt needs to be settled using  accounts held at some third insitutution in the name of the agents.

So settlement is a recursive function, and each level of recursion adds 2 parties, while  the final call adds 1. And 2*n+1 is always odd for an integer value of n.

Here's the settlement algorithm as pseudo C#

static void SettleDebt(Party creditor, Party debtor, double amount) {
    if (creditor.SettlementAgent == debtor.SettlementAgent)
    {
        Party agent = creditor.SettlementAgent;
        agent.FindAccount(debtor).Balance -= amount;
        agent.FindAccount(creditor).Balance += amount;
    } else  {
        SettleDebt(creditor.SettlementAgent, debtor.SettlementAgent, amount);
        debtor.SettlementAgent.FindAccount(debtor).Balance -= amount;
        creditor.SettlementAgent.FindAccount(creditor).Balance += amount;
    }
}

Let's apply this to direct deposit transactions, and assume Alice has bought a 2nd hand copy of Applied Cryptography on eBay, so she need's to transfer $98.36 to Bob. Also assume Alice banks at the CBA. She uses the CBA website to initiate a transfer to Bob's account.

If Bob also banks at the CBA, then the settlement process is completed by CBA updating it's record of the current balance of both Alice's and Bob's accounts. In this case there are a total of 3 parties involved (Bob,Alice, the CBA).

But if Bob's account is at NAB, then as well as both NAB and CBA updating their records of Bob's and Alice's accounts, a debt is created beween NAB and CBA that gets settled by the RBA updating the NAB and CBA Exchange Settlement accounts. That makes a total of 5 parties (Bob,Alice, the CBA,NAB and the RBA).

I haven't talked about transfers to overseas accounts yet, so for the moment I'll just confirm there can be 7 parties to the transaction, one of them being the Bank for International Settlements, and interested readers can fill in the blanks themselves.