1. Large Value Systems: Applying International Standards World Bank Training Course, in Cooperation with AMF and BMA Bahrain, March 16, 2005 Massimo Cirasino Financial Sector Operations and Policy mcirasino@worldbank.org

2. Best practices for Large Value Systems: the Core Principles for Systemically Important Payment Systems The FSAP assessment Best Practices in Large Value Systems Presentation structure

3. 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 Assessing International Standards

4. 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

5. The 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

6. The Core Principles can be seen not only as standards, but also as best practices for designing and implementing Large Value Payment Systems The Core Principles

7. 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

8. 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

9. The Core Principles - Principle II System’s rules and procedures should:  be clear, comprehensive and up-to-date  explain the system’s design, risk management procedures, legal basis and role of the parties  set 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

10. The Core Principles - Principle III The system must have:  Tools for managing credit risks  Tools 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

11. 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 minimum at the end of the day

12. 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

13. 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

14. The Core Principles - Principle VII The following issues should be considered:  General  Security  Operational reliability  Business continuity The system should ensure a high degree of security and operational reliability and should have contingency arrangements for timely completion of daily processing

15. 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

16. 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

17. 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

18. 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

19. 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

20.  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 Principles The central bank’s responsibilities in applying the Core Principles

21. The World Bank Role in the 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)

22. 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)

23. The FSAP Experience - Findings  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