large value systems: applying international standards world bank training course, in cooperation...
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Large Value Systems: Applying International Standards
World Bank Training Course, in Cooperation with AMF and BMABahrain, March 16, 2005
Massimo CirasinoFinancial Sector Operations and
Best practices for Large Value Systems: the Core Principles for Systemically Important Payment Systems
The FSAP assessment
Best Practices in Large Value SystemsPresentation structure
Recognizing the Importance of PSSS, in the late 1990s the Financial Stability Forum, the Standard Setters and the International Financial Institutions (especially the IMF and the WB) have pushed for the update and/or release of common international standards and best practices for payments and securities settlement systems and for the assessment of the systems with them
Developing and AssessingInternational Standards
The Committee on Payment and Settlement Systems (CPSS, Bank for International Settlements) has traditionally been the forum to discuss and develop international standards and best practices in the payments arena
In May 1998, the CPSS established a Task Force on Payment System Principles and Practices, which released its final report in January 2001
The Core Principles
The TF identifiedThe TF identified Two Public Policy objectives (safety
and efficiency) in systemically important payment systems (SIPS)
Ten core principles for SIPS Four central bank’s responsibilities
in applying the core principles
The Core Principles
The Core Principles can be The Core Principles can be seen not only as standards, seen not only as standards, but also as best practices for but also as best practices for designing and implementing designing and implementing Large Value Payment SystemsLarge Value Payment Systems
The Core Principles
A PS is Systemically Important if disruption within it could trigger or transmit further disruptions amongst participants and ultimately in the financial area more widely
It is likely that a system is a SIPS if at least one of the following is true: It is the only or the main system in the country It handles payments of high individual value It is used for settlement of financial market transactions or
of other relevant payment systems
The Core Principles
The Core Principles - Principle I
Completeness and reliability of framework legislation
Enforceability of laws and contracts Clarity of timing of final settlement Legal recognition of netting arrangements Relevant provisions of banking and CB laws
The system should have a well founded legal basis under all
relevant jurisdictions
The Core Principles - Principle II
System’s rules and procedures should:be clear, comprehensive and up-to-dateexplain the system’s design, risk management
procedures, legal basis and role of the partiesset out procedures and timetables for
abnormal situations
The system’s rules and procedures should enable participants to have a clear understanding of the system’s impact on each of the financial risks they incur through participation in it
The Core Principles - Principle III
The system must have:Tools for managing credit risksTools for managing liquidity risks General Tools Incentives to manage these risks
The system should have clearly defined procedures for the management of credit risks and liquidity risks, which specify the respective responsibilities of the system operator and the participants and which
provide appropriate incentives to manage and contain these risks
The Core Principles - Principle IV
Promptness of final settlement entails: Clarity in the rules and procedures about the
revocability of the payment A defined and legally effective moment of final
settlement Ensuring that operating hours and the settlement
processes are strictly enforced
The system should provide prompt final settlement on the day of value, preferably during
the day and at a minimumat the end of the day
Additional financial resources must be available to meet this contingency The amount of these resources must be determined
appropriately Alternatively, other system designs (e.g. RTGS) must
be explored
The Core Principles - Principle V
A system in which multilateral netting takes place should, at a minimum,be
capable of ensuring the timely completion of daily settlements in the event of an inability to settle by the participant with the largest single
settlement obligation
The Core Principles - Principle VI
If assets other than a CB’s claim are used, it should be checked: the creditworthiness of the issuer how readily the asset can be transferred into others size and duration of exposures of the issuer risk controls, if any
Assets used for settlement should preferably be a claim on the
central bank; where other assets are used, they should carry little or no credit risk and little or no
liquidity risk
The Core Principles - Principle VII
The following issues should be considered: GeneralSecurityOperational reliabilityBusiness continuity
The system should ensure a high degree of security and operational
reliability and should have contingency arrangements for
timely completion of daily processing
The Core Principles - Principle VIII
The following issues should be considered: General: Define objectives; Identify user needs and
constraints; Identify system choices and benefits; Determine social and private costs; Develop decision choices
Analytical Framework: Identify efficiency and safety requirements; Evaluate costs; Identify resources; Determine practical and safety constraints
The system should provide a means of making payments which is
practical for its users and efficient for the economy
The Core Principles - Principle VIII
The following issues should be considered: Methods: Cost-Benefits or other structured analysis involvement of participants and/or users in
discussions Methodology for data collection and analysis Identify data sources
The system should provide a means of making payments which is
practical for its users and efficient for the economy
The Core Principles - Principle IX
The following issues should be considered:Access criteria should be justified in terms
of both safety and efficiency
Exit criteria
The system should have objective and publicly disclosed criteria for
participation, which permit fair and open access
The Core Principles - Principle X
Major decisions should be made after consultation with interested parties
The systems consistently attains projected financial results
The system delivers payment services that satisfy customer needs
The system complies with the other 9 principles
The system’s governance arrangements should be effective,
accountable and transparent
The central bank’s responsibilities in applying the Core Principles
A: The Central Bank should define clearly its payment system objectives and should disclose publicly its role and major policies with respect to systemically important payment systems
B: The Central Bank should ensure that the systems it operates comply with the core principles
The Core Principles
C: The Central Bank should oversee compliance with the Core Principles by systems it does not operate and it should have the ability to carry out this oversight
D: The Central Bank, in promoting payment system safety and efficiency through the Core Principles, should cooperate with other central banks and with any other relevant domestic and foreign authorities
The Core PrinciplesThe central bank’s responsibilities
in applying the Core Principles
The World Bank Role inthe implementation of the Core Principles
Applying the Core Principles In the payment system component of the
Financial Sector Assessment Program (FSAP): The IMF/WB joint effort to assess the vulnerability of the financial sector. The FSAP normally includes a formal assessment of the standards and codes indicated by the Financial Stability Forum (ROSC)
In Regional Initiatives (e.g. Western Hemisphere Initiative)
The World Bank Role in the implementation of the Core Principles
Applying the Core Principles The Bank and the Fund have
conducted a comprehensive evaluation of the past FSAP experience to draw lessons for the future and improve the process (Paris Outreach in November 2001) and we actively participated in a joint broad Outreach with the CPSS (in February 2003)
The FSAP Experience - Findings Our study shows that:Our study shows that:
There are weaknesses in many of the 57 payment systems (42 countries) assessed between 1999 and end-2001
There are potential negative impacts on the liquidity situation in PSs in different countries
Based on assessments, FSAP missions have made specific recommendations to address the shortcomings
There have been some limitations in the assessment process, as well