Importance of the payment and securities settlement systems for the stability of the financial system, possibilities to perform functions of the central bank, also prompting the confidence in currency obliged competent institutions of different countries to pay appropriate attention to the management of risks arising in the systems as well as to the efficient operation of the systems. Usually, oversight is carried out by national central banks that often cooperate with other institutions responsible for the supervision of participants of securities market or credit institutions.

Oversight, as a public function, is needed due to possible market failures related to operation of the systems. Like other infrastructures, systems are characterised by relatively high fixed costs. In order to cover the latter, economy of scale has to be achieved, the size of which is often close to that of the market of the whole country. Therefore systems acquire features of a natural monopoly. Another important aspect is the externality on other economic entities. In case of a failure of a system or in case of failure of one of the participants, an external impact would have a negative impact not just on other participants of a system (systemic risk) but also on other entities in the market if they are not able to fulfil their settlement obligations. This negative externality should be evaluated by taking decisions concerning the size of an investment in the safety and stability of the systems.

International good practice

In the course of the recent 20 years, beginning with the so-called Lamfalussy Report (1990)¹, the international community coordinated actions in the field of systems oversight. That prompted the emergence of international recommendations, principles and (or) standards, e. g. Core Principles for Systematically Important Payment Systems established by Bank for International Settlements (BIS) (thereinafter – Core Principles)², Recommendations for Securities Settlement Systems established by BIS together with IOSCO (2001)³ and Recommendations for Central Counterparties (2004)⁴, Recommendations for Securities Settlement Systems and Central Counterparties in the European Union established by the European System of Central Banks (ESCB) and the Committee of European Securities Regulators (CESR) (2009) (thereinafter ESCB-CESR Recommendations)⁵.

Individual regions and states, taking into account the changing environment, local specificity and needs, expanded the mentioned documents and (or) made them more specific. In 2006, the Governing Council of the European Central Bank (ECB) approved Business Continuity Oversight Expectations for Systematically Important Payment Systems (thereinafter – Business Continuity Oversight Expectations)⁶ supplementing Core Principles in the field of business continuity. At the end of 2009, the Bank of England declared that – apart from ten Core Principles established by BIS – it will apply four additional principles⁷.

Oversight in Lithuania

The Bank of Lithuania oversees four payment systems (LITAS-RLS, LITAS-MMS, LITAS-PHA and KUBAS⁸) and a securities settlement system⁹. The Bank of Lithuania, together with the Eurosystem, participates in conducting TARGET2 oversight.

On 11 September 2003, the Board of the Bank of Lithuania approved the Payment and Securities Settlement Systems Oversight Policy. It defined the objectives and tools of the oversight and provided for the cooperation with other Lithuanian supervisory authorities as well as supervisors of foreign systems in the field of oversight. Two objectives of oversight are raised: system stability and efficiency. The system is considered stable, if it applies credit, liquidity and operational risk management measures, which limit the systemic risk. The system is considered efficient, if the services provided by it meet market needs and its operations are performed quickly and at a low cost.

The following oversight measures are applied in Lithuania: system registration, system assessment and system monitoring. Where relevant, changes in the systems are induced.

System registration procedures have been established by the Resolution of the Board of the Bank of Lithuania of 4 September 2003 “On Approving the Procedure for the Registration of Payment and Securities Settlement Systems, Data Management and Publication”. According to this Procedure, 2 systems were registered on 12 February 2004: securities settlement system and payment system KUBAS.

System monitoring comprises periodic analysis of the status of the systems performed between system assessments. The Bank of Lithuania provides a monthly summary of the performance results of the payment systems LITAS-RLS, LITAS-MMS, TARGET2-LIETUVOS BANKAS and LITAS-PHA and a quarterly summary of the results of the securities settlement system and the payment system KUBAS.

When assessing the systems, the Bank of Lithuania recently applies to the payment systems the Core Principles of the BIS and the ECB Business Continuity Oversight Expectations. It also applies ESCB-CESR recommendations for the securities settlement systems.

Summary of the results of earlier assessments are provided in the table below:

Year	System assessed	Applicable recommendations, principles and (or) standards	Assessment results
2004	Payment system LITAS	Core Principles of BIS	System observed nine of ten Core Principles and broadly observed one (7th) Core Principle
2005-2006	Securities settlement system and its link to securities settlement system of the international securities depository Clearstream Banking Luxembourg Plc. operating in Luxembourg	Standards for the use of EU securities settlement systems in ESCB credit operations	System and the link between the securities settlement systems – with a few minor reservations – observed the standards established by the ECB
2006-2007	Payment system LITAS-PHA	Core Principles of BIS	System observed all applicable Core Principles
2008	Securities settlement system	Recommendations for securities settlement systems of BIS-IOSCO	System observed 14 out of 19 recommendations, broadly observed 3 (3rd, 11th and 18th) recommendations and partly observed 2 (5th and 9th) recommendations
2009	Securities settlement system	Recommendations for securities settlement systems of BIS-IOSCO. Considering the measures implemented and changes in the market, the 2008 assessment was revised.	System observed 16 out of 19 recommendations, broadly observed one (3rd) recommendation, partly observed one (9th) recommendation and one (5th) recommendation was not applicable
2009	Payment systems LITAS-RLS and LITAS-MMS	Core Principles of BIS and ECB Business Continuity Oversight Expectations	System observed all applicable Core Principles. Referring to management of business continuity, the assessment showed that the Bank of Lithuania properly formulated objectives of business continuity, was ready to incident management and communication while preparation of the plans for business continuity, their testing and updating thereof need additional attention.

Cooperation with other institutions

In the light of the oversight policy of the Eurosystem¹⁰ in the field of card payment schemes, the Bank of Lithuania signed a Memorandum of Understanding with the ECB and the Nationale Bank van Belgiė/Banque Nationale de Belgique in September 2009 aiming at exchange of information in the field of international card payment schemes oversight.

At the end of 2009, the Bank of Lithuania and Securities Commission signed a Memorandum of Understanding on cooperation in the field of securities settlement systems oversight.

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¹ http://www.bis.org/publ/cpss04.htm
² http://www.bis.org/publ/cpss43.htm
³ http://www.bis.org/publ/cpss46.htm
⁴ http://www.bis.org/publ/cpss64.htm
⁵  http://www.ecb.int/press/pr/date/2009/html/pr090623.en.html
⁶  http://www.ecb.int/press/pr/date/2006/html/pr060609.en.html
⁷  http://www.bankofengland.co.uk/publications/news/2009/141.htm
⁸ The Central Credit Union of Lithuania is the owner and operator of KUBAS.
⁹ The Central Securities Depository of Lithuania is the owner and operator of the securities settlement systems.
¹⁰  http://www.ecb.int/press/pr/date/2009/html/pr090220.en.html