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APPROVED
Board of the Bank of Lithuania
11 September 2003
Resolution No. 92 |
PAYMENT AND SECURITIES SETTLEMENT SYSTEMS
OVERSIGHT POLICY
I. GENERAL PROVISIONS
1. The purpose of this document is to define and disclose the
objectives of the Payment and Securities Settlement Systems (Systems) Oversight
Policy performed by the Bank of Lithuania, measures and other important
provisions of the oversight policy of systems.
2. Main definitions:
2.1. Payment system – a system operating on the
basis of an agreement between system participants that has common rules and a
standardised procedure for executing payment instructions between system
participants.
2.2. Securities settlement system – a system
operating on the basis of an agreement between system participants that has
common rules and a standardised procedure for executing securities transfer
instructions between system participants.
2.3. Systems oversight – activities aimed to
encourage stability and efficiency of systems.
2.4. System operator – a legal entity responsible
for the operation of the system in accordance with the rules of that system.
2.5. Systemic risk – probability that a failure in
meeting obligations by at least one of the system participants or a disruption
in the system itself will cause the inability of other participants of the
system to meet their obligations, will have an impact on other systems or the
financial market.
2.6. Extraordinary situation – a situation in the
system entailed by technical, operational, financial reasons that endanger its
stability and/or efficiency.
3. The legal basis for the systems oversight performed by the
Bank of Lithuania is the Law on the Bank of Lithuania, Law on Settlement
Finality in Payment and Securities Settlement Systems and other legal acts
regulating the oversight of systems. In addition, the Bank of Lithuania observes
the Treaty establishing the European Community, Protocol on the Statute of the
European System of Central Banks (ECBS) and of the European Central Bank (ECB),
follows other ECB legislation, approved and generally accepted documents
associated with the oversight of systems of various international institutions
and organisations.
4. Item 8 of Paragraph 1 of Article 8 of the Law on the Bank
of Lithuania establishes that one of the functions carried out by the Bank of
Lithuania in implementing its primary objective is the promotion of stable and
efficient operation of the payment and securities settlement systems.
5. Paragraph 2 of Article 8 of the Law on the Bank of
Lithuania provides that the Bank of Lithuania carries out the activities
necessary for the implementation of the functions laid down in Paragraph 1 of
Article 8 and for the development and maintenance of the infrastructure needed
for their implementation.
6. Article 105.2 of the Treaty establishing the European
Community and Article 3.1 of the Statute of the ESCB and of the ECB set out that
one of the tasks to be carried out by the ECBS when implementing its primary
objective is to promote the smooth operation of payment systems. Article 22 of
the Protocol on the Statute of the European System of Central Banks and of the
European Central Bank provides that the ECB and national central banks may
provide facilities, and the ECB may make regulations, to ensure efficient and
sound clearing and payment systems within the Community and with other countries.
II. SCOPE AND OBJECTIVE OF THE SYSTEMS OVERSIGHT
7. The scope of the systems oversight is payment and
securities settlement systems.
8. In the area of systems oversight the Bank of Lithuania
gives priority to systematically important payment systems and oversight of
securities settlement systems. A payment system is treated systematically
important if it complies with one of the following aspects:
8.1. it is the most significant according to the value of all
operations executed by the national payment systems;
8.2. it is designed for large value transfer operations;
8.3. it is used in making settlements for securities market
operations or for other payment systems.
9. The objective of the systems oversight is to promote their
stability and efficiency. The system is treated as stable if the systemic risk
incurred by the system is low: the system operator and its participants
understand the danger of credit, liquidity and operational risks, are able to
foresee and assess them and apply appropriate risk management tools. The system
is considered efficient if the services provided by it meets market demands and
its operations are performed quickly and at low cost.
III. SYSTEM OVERSIGHT INSTRUMENTS
10. System oversight instruments are the following:
10.1. system registration;
10.2. system assessment;
10.3. system monitoring.
IV. SYSTEM REGISTRATION
11. The objective of the system registration is to legalise
the operation of systems and disclose information on these systems and their
participants, thus forming the conditions for the assessment and monitoring of
registered systems.
12. The Bank of Lithuania shall take a decision on the
registration of a system or its revocation. The Bank of Lithuania shall have the
right to refuse system registration in case the system participant declines to
submit documents necessary for system registration, system rules contradict laws,
or it is possible to make a judgement from presented documents that an efficient
and stable operation of the system will not be ensured.
V. SYSTEM ASSESSMENT
13. The objective of the system assessment is to determine
the system’s compliance with the Core Principles for Systemically Important
Payment Systems1 (Annex 1), Recommendations for Securities Settlement
Systems2 (Annex 2) established by the Bank for International
Settlements, and/or other standards, principles or recommendations (standards)
established by international institutions and organisations.
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1 “Core principles for systemically important payment systems”; http://www.bis.org/publ/cpss43.htm
2 “Recommendations for securities settlement systems”; http://www.bis.org/publ/cpss42.htm
14. Standard application areas cover not only the operation
of systems but also the activities of systems’ oversight and their
participants’ supervision institutions and of Government institutions
establishing and implementing the national legal framework. Therefore,
requirements on systems compliance with standards are applied to system
operators to the extent they are related to the operation of systems, their
operators and/or participants, as well as system rules and norms of contractual
relations associated with systems.
15. Systems, operated by the Bank of Lithuania, shall be
assessed by the Bank of Lithuania and competent foreign or international
institutions and organisations.
16. Systems whose operator is other than the Bank of
Lithuania shall be assessed by the Bank of Lithuania together with their
operators. Upon agreement of system operators, additional assessment of systems
may be performed by competent international institutions and organisations.
17. The system assessment shall be carried out according to
an assessment methodology. It must contain the description of the system
assessment process and define the following:
17.1. object of assessment (payment, securities settlement
system);
17.2. standards applied to the assessed object;
17.3. assessment questionnaire;
17.4. the assessor’s principles used for drawing
conclusions and making recommendations;
17.5. principles of the Action Plan of the system operator
aimed at system compliance with standards.
18. The system assessment methodology shall be determined by
the Bank of Lithuania and/or competent international institutions and
organisations, depending on the authority performing system assessment.
VI. SYSTEM MONITORING
19. The objective of system monitoring shall be a periodic
analysis of system status, which shall be conducted in-between system
assessments, and crisis prevention.
20. The Bank of Lithuania shall determine the information
needed for individual monitoring of every system and intervals for its
presentation. Such information may include:
20.1. volume and value of operations (payments, securities
transfers) being executed: total and by an individual participant;
20.2. data on intra-day liquidity and/or overnight loans
issued to the system participants;
20.3. system capacity use;
20.4. system availability ratio;
20.5. number of unexecuted operations: total and by an
individual participant;
20.6. number of payment and/ or transfer instructions to be
executed: total and by an individual participant;
20.7. total number of technical and operational disruptions
of the system, their reasons and duration;
20.8. prices of system services and methods of their
calculation;
20.9. number and nature of violations of the system rules;
20.10. number and nature of complaints of the system
participants.
21. For the monitoring of the systems operated by other than
the Bank of Lithuania, the Bank of Lithuania may request the system operators to
create the conditions for getting acquainted with reports of internal and
external auditors and their conclusions on the performance of systems and their
operators, as well as with the reports of system operators.
22. In case of an extraordinary situation in the system, the
operator must in immediately inform the Bank of Lithuania thereof and provide
the following information:
22.1. an actual reason, if identified, for the occurrence of
such an extraordinary situation, or an inferred reason, in case the system
participant has not identified the actual one;
22.2. Contingency Plan to remove the extraordinary situation;
22.3. other information which the Bank of Lithuania requires
additionally in order to assess the extraordinary situation.
23. In case of an extraordinary situation in the system, the
system operator shall inform the Bank of Lithuania about the process of the
implementation of Contingency Plan to remedy the situation.
24. The Bank of Lithuania may initiate testing of back-up
systems and/or checking of coordination and/or management of extraordinary
situations in systems by participating in these exercises. System operators must
establish conditions appropriate for the performance of these actions.
VII. INTERNAL MANAGEMENT SYSTEM
25. Reasonable implementation of the system oversight policy
depends on the efficiency of the internal management system. The internal
management system of the Bank of Lithuania shall consist of the following
management levels: Board of the Bank of Lithuania, Payment Systems Department of
the Bank of Lithuania, and Internal Audit Division of the Bank of Lithuania.
This system establishes conditions for attaining the objectives of the system
oversight. Each level of the internal management system has explicitly defined
functions, authorities and responsibilities.
26. The Board of the Bank of Lithuania shall determine the
system oversight policy and instructs the Payment Systems Department of the Bank
of Lithuania to implement it.
27. The Payment Systems Department of the Bank of Lithuania
shall:
27.1. perform the functions of the overseer and operator of
the systems operated by the Bank of Lithuania;
27.2. perform the oversight function of systems operated by
other than the Bank of Lithuania.
28. The organisational structure of the Payment Systems
Department of the Bank of Lithuania shall be based on the principle of
segregation of functions of system operator and overseer. The functions of
system operator and overseer shall be performed by different structural units of
the Department.
29. The Internal Audit Division of the Bank of Lithuania
shall carry out periodic audits of the performance of systems operated by the
Bank of Lithuania, assesses the efficiency of internal controls and gives
recommendations on the improvement of relevant activities and enhancement of
internal controls.
30. The internal management system shall operate in a manner
that provides an equivalent oversight of the systems operated by other than the
Bank of Lithuania and those whose operator is the Bank of Lithuania.
VIII. COOPERATION WITH COMPETENT
NATIONAL, FOREIGN
AND
INTERNATIONAL ORGANISATIONS
31. An international nature of markets and participants and a
hyperlink between systems are characteristic features of modern systems.
Cooperation with competent national, foreign and international institutions and
organisations forms favourable conditions for various oversight institutions of
systems and supervision institutions of their participants to exchange
information on systems, their operators and participants.
32. The Bank of Lithuania shall be an authorised institution
in Lithuania to present information on systems to the Commission of the European
Communities, authorised institutions of the European Union and to provide
information to the operators of the systems registered in the Bank of Lithuania
on the commencement of bankruptcy proceedings or suspended operations of system
participants. The Bank of Lithuania shall be informed about the commencement of
bankruptcy proceedings or suspended operations of the system participants by
court or another institution. In such a case the system operators must take
measures not to submit to the system payment instructions and/or securities
transfer instructions of that participant, thus making the system operation
smooth and protecting other system participants from potential losses associated
with the failure of the mentioned system participant to fulfil its obligations.
33. The Bank of Lithuania shall cooperate with the Securities
Commission, oversight authorities of systems and supervision authorities of
their participants of other countries, European Central Bank, International
Monetary Fund, World Bank and other international institutions and organisations,
which implement various system assessment programmes.
IX. FINAL PROVISIONS
34. The Bank of Lithuania shall ensure confidentiality of the
information received in performing system oversight, except in cases provided
for by laws and when the system operators agree to disclose such information.
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Annex 1 of the Payment and Securities Settlement
Systems Oversight Policy |
CORE PRINCIPLES OF THE BANK FOR INTERNATIONAL SETTLEMENTS
FOR
SYSTEMICALLY IMPORTANT PAYMENT SYSTEMS
1. The system should have a wellfounded legal basis under all
relevant jurisdictions.
2. 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.
3. 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 those risks.
4. 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.
5. 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.
6. 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.
7. The system should ensure a high degree of security and
operational reliability and should have contingency arrangements for timely
completion of daily processing.
8. The system should provide a means of making payments which
is practical for its users and efficient for the economy.
9. The system should have objective and publicly disclosed
criteria for participation, which permit fair and open access.
10. The system’s governance arrangements should be
effective, accountable and transparent.
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Annex 2 of the Payment and Securities Settlement
Systems Oversight Policy |
RECOMMENDATIONS OF THE BANK FOR INTERNATIONAL SETTLEMENTS
FOR
SECURITIES SETTLEMENT SYSTEMS
Legal risk
1. Legal framework
Securities settlement systems should have a well founded,
clear and transparent legal basis in the relevant jurisdictions.
Pre-settlement risk
2. Trade confirmation
Confirmation of trades between direct market participants
should occur as soon as possible after trade execution, but no later than trade
date (T+0). Where confirmation of trades by indirect market participants (such
as institutional investors) is required, it should occur as soon as possible
after trade execution, preferably on T+0, but no later than T+1.
3. Settlement cycles
Rolling settlement should be adopted in all securities
markets. Final settlement should occur no later than T+3. The benefits and costs
of a settlement cycle shorter than T+3 should be evaluated.
4. Central counterparties (CCPs)
The benefits and costs of a CCP should be evaluated. Where
such a mechanism is introduced, the CCP should rigorously control the risks it
assumes.
5. Securities lending
Securities lending and borrowing (or repurchase agreements
and other economically equivalent transactions) should be encouraged as a method
for expediting the settlement of securities transactions. Barriers that inhibit
the practice of lending securities for this purpose should be removed.
Settlement risk
6. Central securities depositories (CSDs)
Securities should be immobilised or dematerialised and
transferred by book entry in CSDs to the greatest extent possible.
7. Delivery versus payment (DVP)
CSDs should eliminate principal risk by linking securities
transfers to funds transfers in a way that achieves delivery versus payment.
8. Timing of settlement finality
Final settlement should occur no later than the end of the
settlement day. Intraday or real-time finality should be provided where
necessary to reduce risks.
9. CSD risk controls to address participants’ failures to
settle
CSDs that extend intraday credit to participants, including
CSDs that operate net settlement systems, should institute risk controls that,
at a minimum, ensure timely settlement in the event that the participant with
the largest payment obligation is unable to settle. The most reliable set of
controls is a combination of collateral requirements and limits.
10. Cash settlement assets
Assets used to settle the ultimate payment obligations
arising from securities transactions should carry little or no credit or
liquidity risk. If central bank money is not used, steps must be taken to
protect CSD members from potential losses and liquidity pressures arising from
the failure of the cash settlement agent whose assets are used for that purpose.
Operational risk
11. Operational reliability
Sources of operational risk arising in the clearing and
settlement process should be identified and minimised through the development of
appropriate systems, controls and procedures. Systems should be reliable and
secure, and have adequate, scalable capacity. Contingency plans and backup
facilities should be established to allow for timely recovery of operations and
completion of the settlement process.
Custody risk
12. Protection of customers’ securities
Entities holding securities in custody should employ
accounting practices and safekeeping procedures that fully protect customers’
securities. It is essential that customers’ securities be protected against
the claims of a custodian’s creditors.
Other issues
13. Governance
Governance arrangements for CSDs and CCPs should be designed
to fulfil public interest requirements and to promote the objectives of owners
and users.
14. Access
CSDs and CCPs should have objective and publicly disclosed
criteria for participation that permit fair and open access.
15. Efficiency
While maintaining safe and secure operations, securities
settlement systems should be cost-effective in meeting the requirements of users.
16. Communication procedures and standards
Securities settlement systems should use or accommodate the
relevant international communication procedures and standards in order to
facilitate efficient settlement of cross-border transactions.
17. Transparency
CSDs and CCPs should provide market participants with
sufficient information for them to identify and evaluate accurately the risks
and costs associated with using the CSD or CCP services.
18. Regulation and oversight
Securities settlement systems should be subject to
transparent and effective regulation and oversight. Central banks and securities
regulators should cooperate with each other and with other relevant authorities.
19. Risks in cross-border links
CSDs that establish links to settle cross-border trades
should design and operate such links to reduce effectively the risks associated
with cross-border settlements.
