金融部门评估规划（Financial Sector Assessment）手册：Chapter 11 Assessing Systemic Liquidity Infrastructure

Chapter 11 Assessing Systemic Liquidity Infrastructure ling key features of central b markets- iency and effec 11 2000).Key features of financial market infrastructure and financial policy operations that affect liquidity management include the following: Design and operation of payment systems and securities settlement systems Design of monetary policy instruments and procedures for money and exchange markets operations .Public debt and foreign exchange reserves m gement strategies and operations. of money,exhange,an markets Those infras ary and fiscal the efficient functior ncial markets the soundness of fi ancia the broader systemic stability isa key focu of assessing systemic liquidity infrastructure.Another equally important consideration is to examine the extent to which limitations on the availability of infrastructure pose a constraint on the development of money and securities markets and on sound and profit- able operations of financial institutions.The remainder of this chapter highlights the key issues to consider in assessing the above-listed infrastructure elements. 11.1 Payment and Securities Settlement Systems The role and types of payment systems and securities settlement systems,key principles the sound operations of these systems,and the methodoloy for and practices to vance of these principles are discussed below. 289

289 1 I H G F E D C B A 12 11 10 9 8 7 6 5 4 3 2 Systemic liquidity infrastructure refers to a set of institutional and operational arrange￾ments—including key features of central bank operations and of money and securities markets—that have a first-order effect on market liquidity and on the efficiency and effec￾tiveness of liquidity management by financial firms (see Dziobek, Hobbs, and Marston 2000). Key features of financial market infrastructure and financial policy operations that affect liquidity management include the following: • Design and operation of payment systems and securities settlement systems • Design of monetary policy instruments and procedures for money and exchange markets operations • Public debt and foreign exchange reserves management strategies and operations. • Microstructure of money, exchange, and securities markets Those infrastructure elements are important for the effective implementation of mon￾etary and fiscal policy, but their effect on the efficient functioning of financial markets, the soundness of financial institutions, and the broader systemic stability is a key focus of assessing systemic liquidity infrastructure. Another equally important consideration is to examine the extent to which limitations on the availability of infrastructure pose a constraint on the development of money and securities markets and on sound and profit￾able operations of financial institutions. The remainder of this chapter highlights the key issues to consider in assessing the above-listed infrastructure elements. 11.1 Payment and Securities Settlement Systems The role and types of payment systems and securities settlement systems, key principles and practices to govern the sound operations of these systems, and the methodology for assessing the observance of these principles are discussed below. Chapter 11 Assessing Systemic Liquidity Infrastructure

Financial Sector Assessment a Handbook 11.1.1 Payment Systems sysrems discused.1)playan in the f the maintaining a financial stability,and the fa broad international consensus has developed on the need to strengthen those systems by promoting internationally accepted standards and practices for their design and opera- tion.This section briefly reviews the Core Principles for Systemically Important Payment Systems(CPSIPS)developed by the Committee on Payment and Settlement Systems (CPSS 2001)of the central banks of the Group of 10 countries,the systems and issue they cover,and the way they can be Payment systems are characterized by a set of rules,procedures,and mechanism for transferring money between two or more financial institutions and their customer The principal mechanisms in a payment system are (a)the payment instruments,(b) the network arrangements for communication between the participants and the system provider,and (c)the facilities for clearing and for settlement operated by the system provider.Payment instruments can vary from a simple written order on paper to very mplex electronic dev ces in y schemes.In modern systems,the of pape ments is practically elimina ed.To promot effici ncy ar d toreduce the cycle,payment orders are sent electronically through an interati communicati network like SWIFT or through a proprietary network that is specifically constructed for the relevant payment system.Also,Internet technology is used for communications that 11 entail,in addition to payment orders,information exchange on statements of accounts. lists of settled payments,queued payments,and so forth.The facilities for clearing and settlement can vary considerably in complexity,depending on the way the settlement takes place the ay ailability of que euing mechar sms,the liq uidity man ageme nt and credit acilities,the links tooth payment systems ands itie systems,ands However,in countries with very low amounts of inter-bank payments,clearing and settle ment are sometimes done manually Payment systems can be divided into (a)large-value systems that are used for inter bank payments,financial market transactions,and execution of monetary policy,and (b)systems for the clearing and settlement of retail payments.Large-value payment sys. tems are mostly characterized by a relatively low volume of payment orders,whereas the s settled are ofren huge oOn an al hasis the ver in a large-value systen a multiple of the gr mestic product t(GDP)in t ntry developed markets up to 100 times or more of GDI In retai payment it is the othe way around.The number of transactions(volumes)is huge,while,normally,the turnover (value)is modest.The separation of large-value and retail payment flows is not always clear-cut,and often in developing countries the same system is used for both inter-bank and retail payments,especially when checks are the main instrument used to transfer monev. Systems can settle on (a)a net basis,in which case an agreed bilateral or multilateral offsetting of pos ns or obligat ns by participants takes place,or (b)instruction-by instruction (gross)basis.In a multilateral netting system,a participant's net credit pos tion(the amount to receive)or net debit position(the amount to pay)is calculated as the 290

290 Financial Sector Assessment: A Handbook 1 I H G F E D C B A 12 11 10 9 8 7 6 5 4 3 2 11.1.1 Payment Systems Payment systems (and securities settlement systems discussed in section 11.1.2) play an essential role in the functioning of financial markets, the maintaining and promoting of financial stability, and the facilitating of economic development. In the past decade, a broad international consensus has developed on the need to strengthen those systems by promoting internationally accepted standards and practices for their design and opera￾tion. This section briefly reviews the Core Principles for Systemically Important Payment Systems (CPSIPS) developed by the Committee on Payment and Settlement Systems (CPSS 2001) of the central banks of the Group of 10 countries, the systems and issues they cover, and the way they can be assessed. Payment systems are characterized by a set of rules, procedures, and mechanisms for transferring money between two or more financial institutions and their customers. The principal mechanisms in a payment system are (a) the payment instruments, (b) the network arrangements for communication between the participants and the system provider, and (c) the facilities for clearing and for settlement operated by the system provider. Payment instruments can vary from a simple written order on paper to very complex electronic devices in e-money schemes. In modern systems, the use of paper documents is practically eliminated. To promote efficiency and to reduce the settlement cycle, payment orders are sent electronically through an international communication network like SWIFT or through a proprietary network that is specifically constructed for the relevant payment system. Also, Internet technology is used for communications that entail, in addition to payment orders, information exchange on statements of accounts, lists of settled payments, queued payments, and so forth. The facilities for clearing and settlement can vary considerably in complexity, depending on the way the settlement takes place, the availability of queuing mechanisms, the liquidity management and credit facilities, the links to other payment systems and securities settlement systems, and so on. However, in countries with very low amounts of inter-bank payments, clearing and settle￾ment are sometimes done manually. Payment systems can be divided into (a) large-value systems that are used for inter￾bank payments, financial market transactions, and execution of monetary policy, and (b) systems for the clearing and settlement of retail payments. Large-value payment sys￾tems are mostly characterized by a relatively low volume of payment orders, whereas the amounts settled are often huge. On an annual basis, the turnover in a large-value system can be a multiple of the gross domestic product (GDP) in the country—in some highly developed markets up to 100 times or more of GDP. In retail payments, it is the other way around. The number of transactions (volumes) is huge, while, normally, the turnover (value) is modest. The separation of large-value and retail payment flows is not always clear-cut, and often in developing countries the same system is used for both inter-bank and retail payments, especially when checks are the main instrument used to transfer money. Systems can settle on (a) a net basis, in which case an agreed bilateral or multilateral offsetting of positions or obligations by participants takes place, or (b) instruction-by￾instruction (gross) basis. In a multilateral netting system, a participant’s net credit posi￾tion (the amount to receive) or net debit position (the amount to pay) is calculated as the

sum of the value of all payment transfers it has received during a certain period of time less the value of all transfers it has sent to all other participants in the system.Netting reduces the amount of liquidity needed to settle the payment flows between participants substantially.However,the underlying payments will be settled with finality if,and only if,all participants with a net debit position are able to fulfill their obligations to pay at the end of the settlement cycle.If there are no adequate safeguards in the form of liquidity and loss-sharing arrangements,the netting result has to be unwound,deleting some or all pro uidity pre res to ot er partic nay,in extreme cases,re significant and unpredictable system Such potential s con quences migh lead tostrong pressure on bank tointerveneand tobail out the participan involved.In a gross settlement system,the unwinding risk does not exist.In a Real-Time Gross Settlement(RTGS)system,payments are processed on an individual basis as they arrive during the day and are settled with finality in real time whenever the participant has a sufficient balance in its account with the settlement bank.If the participant has insufficient funds,the payment is queued and settled later with the proceeds of incoming nt,participants have to manage their payment flows heir a en intraday liquidity from the ank or by borrowing funds in the inter-bank money marke The e intraday finality in an RTGS system means that the receiver can immediately use the funds for settling its own obligation.Intraday finality reduces risk and facilitates: .Urgent inter-bank payments 11 The settlement of intraday and overnight credit transactions with the central bank-for instance,fine tuning operations.(Because those operations are most often collateralized,an effective link with a securities settlement system should be in place to ensure delivery versus payment [DVP]on a gross basis.) 。The settl。nent of m actions The delivery of cash colla Payment versu paymen (PVP)in cross-border arrangements.(For instanc settled at the same time as the corresponding transaction in another currency to avoid the settlement risk when the payment of one part of the currency transaction is delayed [due to time zone differences].) In the past decade,hybrid systems have been developed and have combined elements of RTGS systems and netting systems.A hybrid system is most often an RTGS system intended for each othe in their individual tem,if no part have ffic ent fun their accounts to sette the individual qu ents is no throughput.Hybrid systems,however,will have procedures in plad er to settle the queued payments(or part of them)on a bilateral netting basis.Within thi framework,the system tries to identify groups of payments that can be settled simultane- ously,most often on a bilateral basis but sometimes on a multilateral basis.The procedures enhance throughput in the system substantially. 397

291 Chapter 11: Assessing Systemic Liquidity Infrastructure 1 I H G F E D C B A 12 11 10 9 8 7 6 5 4 3 2 sum of the value of all payment transfers it has received during a certain period of time, less the value of all transfers it has sent to all other participants in the system. Netting reduces the amount of liquidity needed to settle the payment flows between participants substantially. However, the underlying payments will be settled with finality if, and only if, all participants with a net debit position are able to fulfill their obligations to pay at the end of the settlement cycle. If there are no adequate safeguards in the form of liquidity and loss-sharing arrangements, the netting result has to be unwound, deleting some or all pro￾visional transfers that the participant is unable to settle. Such a procedure has the effect of transmitting liquidity pressures to other participants and may, in extreme cases, result in significant and unpredictable systemic risk. Such potential systemic consequences might lead to strong pressure on the central bank to intervene and to bail out the participant involved. In a gross settlement system, the unwinding risk does not exist. In a Real-Time Gross Settlement (RTGS) system, payments are processed on an individual basis as they arrive during the day and are settled with finality in real time whenever the participant has a sufficient balance in its account with the settlement bank. If the participant has insufficient funds, the payment is queued and settled later with the proceeds of incoming payments. In a real-time environment, participants have to manage their payment flows and balances in their accounts actively and can influence the throughput by obtaining intraday liquidity from the central bank or by borrowing funds in the inter-bank money market. The intraday finality in an RTGS system means that the receiver can immediately use the funds for settling its own obligation. Intraday finality reduces risk and facilitates: • Urgent inter-bank payments • The settlement of intraday and overnight credit transactions with the central bank—for instance, fine tuning operations. (Because those operations are most often collateralized, an effective link with a securities settlement system should be in place to ensure delivery versus payment [DVP] on a gross basis.) • The settlement of money market transactions • The delivery of cash collateral • Payment versus payment (PVP) in cross-border arrangements. (For instance, to ensure that in foreign exchange transactions, the payment in one currency will be settled at the same time as the corresponding transaction in another currency to avoid the settlement risk when the payment of one part of the currency transaction is delayed [due to time zone differences].) In the past decade, hybrid systems have been developed and have combined elements of RTGS systems and netting systems. A hybrid system is most often an RTGS system with special bilateral and multilateral netting facilities. Participants may have payments intended for each other in their individual queues. In an RTGS system, if no participants have sufficient funds in their accounts to settle the individual queued payments, there is no throughput. Hybrid systems, however, will have procedures in place that will try to settle the queued payments (or part of them) on a bilateral netting basis. Within this framework, the system tries to identify groups of payments that can be settled simultane￾ously, most often on a bilateral basis but sometimes on a multilateral basis. The procedures enhance throughput in the system substantially

Financial Sector Assessment a Handbook RT的2 Ithcm the de In some nts,one netting and atio netting system nes,reta payments ar cleared and settled on a netting basis.A retail system can be dedicated to the settlemen of a specific instrument such as checks or card payments.In such a situation,there might be two or more retail payment systems in a country,each operating on a netting basis and completed by an RTGS. There are often links between the main payment system of the central bank and the so-called ancillary systems,most often netting schemes for large-value or retail payments operated by the pr tosettle in ce tral bank money.Furthermore,the ntral bank is ms :ide the central ba nates principal th risk that ofiet ot eiveayetoher tar th buyer will make a payment but will not receive delivery. The more links that are established,the greater the risk of contagion.An operational failure-or any other problem-in one system can prevent the timely settlement of a transaction-the delivery of cash of securities-in another system,thus spreading the problem across markets,and perhaps countries,and potentially magnifying its scale and Good descriptions of ities infras cture in tionalSedlcnecnt ntries can be found in publ ne (Red Books)and the Europear Cenra Bank (Books),which provide mation.Als 11 within the framework of payments initiatives of the World Bank in different regions, descriptions of the infrastructure,legal background,and regulation or oversight in a spe cific country in that region are published periodically(Yellow Books for countries in Latin America and the Caribbean,and Green Books for countries in southern Africa). 11.1.I.I Relevance to structural Develotment and stability Considerations The availability of an effective set of non-cash payment instruments and a well-designed are essential for the develop ent of the economy.Non-cash p ruments nhance the effic iency in the economy by reducing the Cost of kin reducing risks payment systems support the development and functioning of sophis ticated financial markets. The systems are also the channel for the implementation of monetary policy and liquidity management of commercial banks.With the development of financial markets.the call increases for a more-sophisticated payment and securities settlement infrastructure that relies fully on electronic payments,intraday finality,DVP. and PVP. y。ec roblems easily lead to and domin the failure of agio nstitution tom t it other participants or financial instituti Well-deiged paymen ffectand preve pllovers ther partici pants or systems.Weaknesses in the design and operational reliability of a payment system 292

292 Financial Sector Assessment: A Handbook 1 I H G F E D C B A 12 11 10 9 8 7 6 5 4 3 2 In some countries, two parallel systems exist for large-value payments, one netting and one RTGS system. In such a situation, the outcome of the clearing process in the netting system is settled in the RTGS system. In almost all countries, retail payments are cleared and settled on a netting basis. A retail system can be dedicated to the settlement of a specific instrument such as checks or card payments. In such a situation, there might be two or more retail payment systems in a country, each operating on a netting basis and completed by an RTGS.1 There are often links between the main payment system of the central bank and the so-called ancillary systems, most often netting schemes for large-value or retail payments operated by the private sector to settle in central bank money. Furthermore, the payment system of the central bank is often linked to securities settlement systems inside or outside the central bank to ensure DVP. DVP eliminates principal risk—the risk that the seller of securities will deliver the securities but will not receive a payment, or the risk that the buyer will make a payment but will not receive delivery. The more links that are established, the greater the risk of contagion. An operational failure—or any other problem—in one system can prevent the timely settlement of a transaction—the delivery of cash of securities—in another system, thus spreading the problem across markets, and perhaps countries, and potentially magnifying its scale and effect. Good descriptions of payment and securities infrastructure in specific countries can be found in publications of the Bank for International Settlements (Red Books) and the European Central Bank (Blue Books), which also provide statistical information.2 Also within the framework of payments initiatives of the World Bank in different regions, descriptions of the infrastructure, legal background, and regulation or oversight in a spe￾cific country in that region are published periodically (Yellow Books for countries in Latin America and the Caribbean, and Green Books for countries in southern Africa).3 11.1.1.1 Relevance to Structural Development and Stability Considerations The availability of an effective set of non-cash payment instruments and a well-designed payment system are essential for the development of the economy. Non-cash payment instruments can enhance the efficiency in the economy by reducing the cost of making payments and reducing risks. Large-value payment systems support the development and functioning of sophis￾ticated financial markets. The systems are also the channel for the implementation of monetary policy and liquidity management of commercial banks. With the development of financial markets, the call increases for a more-sophisticated payment and securities settlement infrastructure that relies fully on electronic payments, intraday finality, DVP, and PVP. The payment infrastructure is one of the first places where financial stress from credit and liquidity problems manifests itself. Liquidity problems can easily lead to contagion and domino effects, where the failure of one institution to meet its required obligations causes other participants or financial institutions to be unable to fulfill their obligations. Well-designed payment systems contain the effects and prevent spillovers to other partici￾pants or systems. Weaknesses in the design and operational reliability of a payment system

Chapter 11:Assessing Systemic Liquidity Infrastncture may expose the financial system to systemic risk,impair the effectiveness of monetary policy instruments,and jeopardize effective liquidity management by banks.Thus,an assessment of the soundness,safety,and efficiency of payment systems is a crucial element of any assessment of stability and financial sector development. 11.1.1.2 The CPSS Core Principles The CPSS has defined 10 core principles and 4central bank responsibilities with respect to payment systems.The core principles are intended to apply to a wide range of circum stances and types of systems.and can be considered as universal guidelines to encourage the design and operation of a safe and efficient payment infrastructure.The core prin ciples cover (a)legal issues,(b)effective risk ma ment,(c)electronic data proce (EDP)audit aspects,(d)efficiency and level playing field,and (e)goverance,and are summarized in box 11.1. The core principles apply to any system whose role in the economy is so critical that it is regarded as a systemically important payment system(SIPS).A system is regarded as systemically important if it(a)is the system in the country or the Box 11.1 Summary of the CPSS Core Principles Legal Foundation VI.Assers used for settl should preferably b 11 Risk Management I.The system's rules and procedures should enable arrangements for timely comple Efficiency and Level Playing Field pavm ng the ens ng the timelycom of daily Governance of the Payment System X.The system's governance arrangements should be effective,accountable,and transparent. 293

293 Chapter 11: Assessing Systemic Liquidity Infrastructure 1 I H G F E D C B A 12 11 10 9 8 7 6 5 4 3 2 may expose the financial system to systemic risk, impair the effectiveness of monetary policy instruments, and jeopardize effective liquidity management by banks. Thus, an assessment of the soundness, safety, and efficiency of payment systems is a crucial element of any assessment of stability and financial sector development. 11.1.1.2 The CPSS Core Principles The CPSS has defined 10 core principles and 4 central bank responsibilities with respect to payment systems. The core principles are intended to apply to a wide range of circum￾stances and types of systems, and can be considered as universal guidelines to encourage the design and operation of a safe and efficient payment infrastructure. The core prin￾ciples cover (a) legal issues, (b) effective risk management, (c) electronic data processing (EDP) audit aspects, (d) efficiency and level playing field, and (e) governance, and are summarized in box 11.1. The core principles apply to any system whose role in the economy is so critical that it is regarded as a systemically important payment system (SIPS). A system is regarded as systemically important if it (a) is the only payment system in the country or the principal system of aggregate value of payments, (b) handles mainly payments of high individual Box 11.1 Summary of the CPSS Core Principles Legal Foundation I. The system should have a well-founded legal basis under all jurisdictions. Risk Management II. The system’s rules and procedures should enable participants to have a clear understanding of the system’s effect on each of the financial risks that they incur through participation in it. III. The system should have clearly defined pro￾cedures for the management of credit risks and liquidity risks, which specify the respec￾tive responsibilities of the system operator and the participants and which provide appropriate incentives to manage and contain those risks. IV.* The system should provide prompt final settle￾ment on the day of value, preferably during the day and at a minimum at the end of the day. V.* A system in which multilateral netting takes place should, at a minimum, be capable of ensuring the timely completion of daily settle￾ments in the event of an inability to settle by the participant with the largest single settlement obligation. VI. 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. Security and Operational Reliability, plus Contingency Arrangements VII. The system should ensure a high degree of secu￾rity and operational reliability, and should have contingency arrangements for timely comple￾tion of daily processing. Efficiency and Level Playing Field VIII.The system should provide a means of making payments that is practical for its users and effi￾cient for the economy. IX. The system should have objective and publicly disclosed criteria for participation, which permit fair and open access. Governance of the Payment System X. The system’s governance arrangements should be effective, accountable, and transparent. * Systems should seek to exceed the minimum in those core principles. Source: CPSS (2001)

Financial Sector Assessment:A Handbook Box 11.2 Responsibilities of Central Banks in Applying the CPSS Core Principles A and ithoud have the ability to ral bank,in B. The() emtcnt foreign authorities. Source:CPSS(01) value,or (c)is used for the settlement of financial market transactions or for the settle- ment of other payments in the same currency.Although retail payment systems are nor mally not seen as systemically important be ause they settle in large-value systems tha fulfill the criteria for systemic importance,they can influence the function of the latter systems. The responsibilities of central banks with respect to payment systems center on the ayment systems,focusing on the liance of the SIPSs with the 11 CPSSCore nd on mnagment (e box 11.foraiing cet bank responsibilities).Crisis management deals with major problems in the systems- instance,the bankruptcy of a participant,the technical problems in the systems itself or in the system of a larger participant,or the major liquidity problems.Crisis management often requires coordn en different uthor or instance,between the pa ment system overseer an d the banking supervisor and b etween the payment overseer and the securities regulator.Coordination with monetary policy departments is also necessary because the payment system is the main channel for the transmission of monetary policy and the decisions on liquidity support in the payment system will also influence monetary volved,how decisions should be made,how information is organized forth should be in place.Preferably narios should be developed in advance for dealing with specific problems.Cooperation coordination,and exchange of information among the different supervisory authorities in the country,as well as with relevant foreign authorities.are often worked out in a memo. randum of understanding(MOU). In addition to an oversight role,a central bank might have other roles in the pay ment area such as a developmental role (designer of the strategy with respect to the development and international positioning of markets and infrastructure)and an operat- ing role (system provider or owner of payment systems or securities settlement systems). Sometime conflicts of interest might arise between the different roles.One way to make ct clear is to enh nce transparency of the different roles and the goals and objectives of a central bank in the payment area. 294

294 Financial Sector Assessment: A Handbook 1 I H G F E D C B A 12 11 10 9 8 7 6 5 4 3 2 value, or (c) is used for the settlement of financial market transactions or for the settle￾ment of other payments in the same currency.4 Although retail payment systems are nor￾mally not seen as systemically important because they settle in large-value systems that fulfill the criteria for systemic importance, they can influence the function of the latter systems. The responsibilities of central banks with respect to payment systems center on the effective oversight of payment systems, focusing on the compliance of the SIPSs with the 10 CPSS Core Principles and on crisis management (see box 11.2 for a listing central bank responsibilities). Crisis management deals with major problems in the systems—for instance, the bankruptcy of a participant, the technical problems in the systems itself or in the system of a larger participant, or the major liquidity problems. Crisis management often requires coordination between different authorities—for instance, between the pay￾ment system overseer and the banking supervisor and between the payment overseer and the securities regulator. Coordination with monetary policy departments is also necessary, because the payment system is the main channel for the transmission of monetary policy, and the decisions on liquidity support in the payment system will also influence monetary policy. Clear procedures for who should be involved, how decisions should be made, how the exchange of information is organized, and so forth should be in place. Preferably, sce￾narios should be developed in advance for dealing with specific problems. Cooperation, coordination, and exchange of information among the different supervisory authorities in the country, as well as with relevant foreign authorities, are often worked out in a memo￾randum of understanding (MOU). In addition to an oversight role, a central bank might have other roles in the pay￾ment area such as a developmental role (designer of the strategy with respect to the development and international positioning of markets and infrastructure) and an operat￾ing role (system provider or owner of payment systems or securities settlement systems). Sometimes conflicts of interest might arise between the different roles. One way to make this potential for conflict clear is to enhance transparency of the different roles and the goals and objectives of a central bank in the payment area. Box 11.2 Responsibilities of Central Banks in Applying the CPSS Core Principles A. The central bank should clearly define its pay￾ment system objectives and should publicly dis￾close its role and major policies with respect to systemically important payment systems (SIPS). B. The central bank should ensure that the sys￾tem it operates complies with the CPSS Core Principles. C. The central bank should oversee compliance with the CPSS 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 CPSS Core Principles, should cooperate with other central banks and with any other relevant domestic or foreign authorities. Source: CPSS (2001)

Chapter 11:Assessing Systemic Liquidity Infrastncture Oversight of payment systems is a core task of a central bank,and often a paymen system department is charged with the function.If it is to avoid conflicts of interest with respect to the compliance of the systems operated by the central bank itself,the oversight unit,at a minimum,should be separated from the operational section. The payment system oversight policy should comply with the International Monetary Fund (IMF)Code of Good Practices on Transparency in Monetary and Financial Policies Transparency practices relate to (a)the roles.responsibilities.and obiectives of a centra hank or fins ability of informa ncy:(b)financial policy formulation andr ting;(c)public on; d (d)a nd a ssuranc bank good transparency practices. 11.1.1.3 The Assessment Methodology and Assessment Experience A CPSS assessment of core principles seeks to identify the strengths and weaknesses of the SIPS,including its potential to transmit shocks (also originating in other countries),as well as risks to the monetary system or financial markets or across the economy more gen erally.The methodology for the assessment and the structure and scope of the assessment report are explained in detail in the guidance note prepared by the IMF and the World eindPSS (IMF and World Bank 2001).It contains guidelines fo Bank in cons the s of the dividual。 iples by providing a shor criteria,as wella pects tha sho this cor deally,before an ssessment takes place,the central ban of the country first provides 11 list of systems in the country that are deemed systemically important and then conducts self-assessments of those systems.The self-assessments are reviewed by the assessor,and they provide a basis for the discussions with the stakeholders in the payment system such as the central bank,system provider(s)in case systems that are privately operated,and any relevant governmental and private sector entities (including bankers associations.carc ompanies,clearinghouses,and securities market ope rators) Exper e pr ciples of the CPSS has shown that the prin eful and r ity and efficiency o suaussasse ayL (ZOOZ WI aas)suonepuawuooal Aonod Bune obust framewe k for as n gest that there are substantial weaknesses in many payment systems.Payment systems in advanced economies and,to a large extent,in transition economies observe most of the core principles.In developing countries,a significant maiority of the systems suffers shortcomings of varying importance in design and operation that may expose the systems to risks in the events of a problem. In many systems.the awareness of risk and the possibilities for the particinants to manage and majority of the ne settle- o adequat egu i pla to ensure timely complei ent of all systems give evidenc of an uncertain legal basis,mainly from the absence of legal recognition of netting and finality,and from unclear rules and regulations governing the systems.The effectiveness of the governance structure could be improved in more than 60 percent of the systems In around half of the systems,the operation reliability is not addressed in full and may 295

295 Chapter 11: Assessing Systemic Liquidity Infrastructure 1 I H G F E D C B A 12 11 10 9 8 7 6 5 4 3 2 Oversight of payment systems is a core task of a central bank, and often a payment system department is charged with the function. If it is to avoid conflicts of interest with respect to the compliance of the systems operated by the central bank itself, the oversight unit, at a minimum, should be separated from the operational section. The payment system oversight policy should comply with the International Monetary Fund (IMF) Code of Good Practices on Transparency in Monetary and Financial Policies. Transparency practices relate to (a) the roles, responsibilities, and objectives of a central bank or financial agency; (b) financial policy formulation and reporting; (c) public avail￾ability of information; and (d) accountability and assurances of integrity. The central bank responsibilities in the CPSS Core Principles document (CPSS 2001) include those good transparency practices. 11.1.1.3 The Assessment Methodology and Assessment Experience A CPSS assessment of core principles seeks to identify the strengths and weaknesses of the SIPS, including its potential to transmit shocks (also originating in other countries), as well as risks to the monetary system or financial markets or across the economy more gen￾erally. The methodology for the assessment and the structure and scope of the assessment report are explained in detail in the guidance note prepared by the IMF and the World Bank in consultation with CPSS (IMF and World Bank 2001). It contains guidelines for the assessment of the individual core principles by providing a short explanation and the assessment criteria, as well as additional aspects that should be evaluated in this context. Ideally, before an assessment takes place, the central bank of the country first provides a list of systems in the country that are deemed systemically important and then conducts self-assessments of those systems. The self-assessments are reviewed by the assessor, and they provide a basis for the discussions with the stakeholders in the payment system such as the central bank, system provider(s) in case systems that are privately operated, and any relevant governmental and private sector entities (including bankers associations, card companies, clearinghouses, and securities market operators).5 Experience with assessing the core principles of the CPSS has shown that the prin￾ciples provide a useful and robust framework for assessing the reliability and efficiency of SIPSs and formulating policy recommendations (see IMF 2002). The assessments sug￾gest that there are substantial weaknesses in many payment systems. Payment systems in advanced economies and, to a large extent, in transition economies observe most of the core principles. In developing countries, a significant majority of the systems suffers shortcomings of varying importance in design and operation that may expose the systems to risks in the events of a problem. In many systems, the awareness of risk and the possibilities for the participants to manage and control those risks are insufficient. A significant majority of the net settle￾ment systems have no adequate safeguards in place to ensure the timely completion of daily settlements in the event of a default. Nearly 70 percent of all systems give evidence of an uncertain legal basis, mainly from the absence of legal recognition of netting and finality, and from unclear rules and regulations governing the systems. The effectiveness of the governance structure could be improved in more than 60 percent of the systems. In around half of the systems, the operation reliability is not addressed in full and may

Financial Sector Assessment a Handbook be vunerable to failures that can prevent the daily settlement from being completed in time.Ass essment of transparency of central banks'policy on payments shows that the objectives and institutional framework for oversight are not always transparent and that some central banks do not disclose the general policy principles for the oversight of pay- ment systems. The assessments,as appropri ate,recommend changesor reforms to the SIPS.They also help make the authorities aware of thos aspects of their SIPS that should be kept unde review as the economy and financial markets develop.In practice,some assessments have used the core principles as a basis for more widely assessing the whole payment infrastruc. ture of a country and the risks arising from interrelation between various payment systems (IMF.Paragrap 1).While such may be helpful,peally in developed fin y5 ems where there a e links h ystems domestically and sometimes abroad,a decision to assess the whole system must take into account the resource intensity of also assessing systems that are not systemically important. The level of observance of the CPSIPS in the countries assessed highlights some key nt sustems The reaui CPSS Core Prine ments to ensure iple IV) nd the need to setlement system even if the largest single obligor fails (CPSCore Principle V)were not fully observed in many countries that were assessed.This weakness was com- pounded by legal uncertainty,weak governance,and insufficient operational reliability in a significant number of countries.In light of this,policy recommendations have focused 11 on the following .Reviewing procedures to deal with settlement problems,including loss-sharing and risk control systems,information to system participants,and provision of intraday liquidity .Strengthening bankruptcy law (including the laws on bilateral and multilateral net. g finality of payments,and clarifying laws on pledges and collateral 。Establishingb s and te tingency procedure s,including procedures against potential liquidity problems through cross-sectoral and cross border exposures .Establishing transparent access criteria and reviewing cost structures and pricing policies,including full cost recovery,to improve efficiency ssments have also highlighted factors that could have potential negative impact on the liquidity situation in payment systems in different countries.This negative impac is the result of (a)arrangements for resolution of troubled banks,(b)nontransparent systemic liquidity arrangements provided by the central bank,(c)liquidity that is concen- trated among only a few of the banks in a country in which there is currently no intraday liquidity available from the central bank, nd (d)settlem isks in the securities and the foreign exchange markets caused by the lack of DVP and PVP facilities,respectively.I many countries,it is implicitly assumed by most participants that the central bank would in practice,cover liquidity shortages,even failures,to avoid any systemic effects(IMF 2002,p.4,paragraph 4). 296

296 Financial Sector Assessment: A Handbook 1 I H G F E D C B A 12 11 10 9 8 7 6 5 4 3 2 be vulnerable to failures that can prevent the daily settlement from being completed in time. Assessment of transparency of central banks’ policy on payments shows that the objectives and institutional framework for oversight are not always transparent and that some central banks do not disclose the general policy principles for the oversight of pay￾ment systems. The assessments, as appropriate, recommend changes or reforms to the SIPS. They also help make the authorities aware of those aspects of their SIPS that should be kept under review as the economy and financial markets develop. In practice, some assessments have used the core principles as a basis for more widely assessing the whole payment infrastruc￾ture of a country and the risks arising from interrelation between various payment systems (IMF 2002, p. 7, paragraph 12). While such wider assessment may be helpful, especially in developed financial systems where there are links between several systems domestically and sometimes abroad, a decision to assess the whole system must take into account the resource intensity of also assessing systems that are not systemically important. The level of observance of the CPSIPS in the countries assessed highlights some key policy areas that require attention in many payment systems. The requirements to ensure prompt final settlement on the day of value (CPSS Core Principle IV) and the need to settle a net settlement system even if the largest single obligor fails (CPSS Core Principle V) were not fully observed in many countries that were assessed. This weakness was com￾pounded by legal uncertainty, weak governance, and insufficient operational reliability in a significant number of countries. In light of this, policy recommendations have focused on the following: • Reviewing procedures to deal with settlement problems, including loss-sharing and risk control systems, information to system participants, and provision of intraday liquidity • Strengthening bankruptcy law (including the laws on bilateral and multilateral net￾ting), ensuring finality of payments, and clarifying laws on pledges and collateral • Establishing backup processing sites and testing contingency procedures, including procedures against potential liquidity problems through cross-sectoral and cross￾border exposures • Establishing transparent access criteria and reviewing cost structures and pricing policies, including full cost recovery, to improve efficiency Assessments have also highlighted factors that could have potential negative impacts on the liquidity situation in payment systems in different countries. This negative impact is the result of (a) arrangements for resolution of troubled banks, (b) nontransparent systemic liquidity arrangements provided by the central bank, (c) liquidity that is concen￾trated among only a few of the banks in a country in which there is currently no intraday liquidity available from the central bank, and (d) settlement risks in the securities and the foreign exchange markets caused by the lack of DVP and PVP facilities, respectively. In many countries, it is implicitly assumed by most participants that the central bank would, in practice, cover liquidity shortages, even failures, to avoid any systemic effects (IMF 2002, p. 4, paragraph 4)

Chapter 11:Assessing Systemic Liquidity Infrastcture 11.1.2 Securities Settlement Systems The term secrities settlement systems is defined to include the full set of institutional arrangement for confirmation,clearance,and settlement of securities trades and safekeep. ing of securities. 11.1.2.1 Recommendations for Securities Settlement Systems In November 2001,the CPSS and the Technical Committee of the International Organization of Securities Commissions(IOSCO)issued Recommendations for Securities Settlement systems (RsSs)as a benchmark to assess the soundness and effectiveness of ecurities settlem systems(see CPSS and Techr nical committee of the losco 2002) 19 recomme endations are considered to b min um standards intended to reduc risks,increase effi national financial stability (see box 11.3).Those recommendations recognize the impor tance of securities settlement systems for the infrastructure of the global financial markets, and they note that weaknesses in securities settlement systems can be a source of systemic risks to securities markets and to other payments and settlements systems. The recommendations are designed to cover securities settlement systems for all and go tbonds,and money market instru .They provi detailed d criptions o the ange ents for ,clearance settlement,and s afekeeping of securities.They also ad 1 ss specific topic 11 access,governance,efficiency,transparency,and regulation and oversight.Ensuring safe and reliable securities clearing and settlement systems requires a clear understanding of the various risks involved in the process of securities transactions.The recommendations describe those risks and provide a wide range of measures to address them.The main risk settlement ac itiesis credit risk,which is the po trad tle its obligations whe n due or a tim reafter. which is the possibility that a counterparty may not be able to meet its obligations when due but may settle at a later stage-is another relevant risk.Other risks involved i settlement activities are legal risk,custody risk,operational risk,and the risk of a settle. ment bank's failure. The reduction of pre-settlement risks is considered crucial to ensure the timely settle. ment of securities transactions.In this context,the recommendations define some rules for trade confirmation,settlement cycles,central counterparties,and securities lending In par the re ndation req ade tion take place on the RaEhheeaaoea that settlement cycles ne time of exchanging securi agains recommendations advocate cost-benefit analysis for the introduction of a central coun terparty (CCP)and encourage securities lending and borrowing. The recommendations discuss the sources of settlement risks and provide several measures to address them.For instance,a recommendation on central securities deposi- tory (CSD)requests that securities be immobilized or dematerialized and then transferred by book entry in a CSD.By centraliz ing the e procedure of iss ance and safekeeping 297

297 Chapter 11: Assessing Systemic Liquidity Infrastructure 1 I H G F E D C B A 12 11 10 9 8 7 6 5 4 3 2 11.1.2 Securities Settlement Systems The term securities settlement systems is defined to include the full set of institutional arrangement for confirmation, clearance, and settlement of securities trades and safekeep￾ing of securities. 11.1.2.1 Recommendations for Securities Settlement Systems In November 2001, the CPSS and the Technical Committee of the International Organization of Securities Commissions (IOSCO) issued Recommendations for Securities Settlement Systems (RSSS) as a benchmark to assess the soundness and effectiveness of securities settlement systems (see CPSS and Technical Committee of the IOSCO 2002). The 19 recommendations are considered to be minimum standards intended to reduce risks, increase efficiency, provide adequate safeguards for investors, and enhance inter￾national financial stability (see box 11.3). Those recommendations recognize the impor￾tance of securities settlement systems for the infrastructure of the global financial markets, and they note that weaknesses in securities settlement systems can be a source of systemic risks to securities markets and to other payments and settlements systems. The recommendations are designed to cover securities settlement systems for all securities, including equities, corporate and government bonds, and money market instru￾ments. They provide detailed descriptions of the institutional arrangements for confirma￾tion, clearance, settlement, and safekeeping of securities. They also address specific topics and issues, including the legal framework for securities settlements, risk management, access, governance, efficiency, transparency, and regulation and oversight. Ensuring safe and reliable securities clearing and settlement systems requires a clear understanding of the various risks involved in the process of securities transactions. The recommendations describe those risks and provide a wide range of measures to address them. The main risk related to settlement activities is credit risk, which is the possibility that a counterparty to a trade may fail to settle its obligations when due or at any time thereafter. Liquidity risk—which is the possibility that a counterparty may not be able to meet its obligations when due but may settle at a later stage—is another relevant risk. Other risks involved in settlement activities are legal risk, custody risk, operational risk, and the risk of a settle￾ment bank’s failure. The reduction of pre-settlement risks is considered crucial to ensure the timely settle￾ment of securities transactions. In this context, the recommendations define some rules for trade confirmation, settlement cycles, central counterparties, and securities lending. In particular, the recommendations require that trade confirmation take place on the same trade date and that settlement cycles—the time of exchanging securities against cash—be no more than three days after trade execution. To reduce settlement failure, the recommendations advocate cost-benefit analysis for the introduction of a central coun￾terparty (CCP) and encourage securities lending and borrowing. The recommendations discuss the sources of settlement risks and provide several measures to address them. For instance, a recommendation on central securities deposi￾tory (CSD) requests that securities be immobilized or dematerialized and then transferred by book entry in a CSD. By centralizing the procedures of issuance and safekeeping

Financial Sector Assessment:A Handbook Box 11.3 Summary of the RSSS Recommendation 1 deals with legal soundness. Recommendat 12 endation 2 requires confirmation of trade rure of CSDs and CCPs. 13 deals with govemance struc occurs no la es CSDs and CCPs t users. aa6hhm Re in CSDs. Re CSDs and CCPs t tion 7 requests securities transfers to be rovide market ion to ide 11 and credit risks. R endation 1o deals with the cash settle assets and expresses preference for central bank cros-border links between CSD ith the risks related t money nd e one can reduce costs through economies of scale.The centralizing would also affect the risk positively by reducing the number of intermediaries involved in the process of issu tody.To eli the risk that delivered but payment is that the tra sfer link ed in a way that achieves deli ery versus pay yment(DVP) ay.The recommendations also require that CSDs put in place risk control measures to address the failure of the participants.The use of unwinding-excluding the default participant and 298

298 Financial Sector Assessment: A Handbook 1 I H G F E D C B A 12 11 10 9 8 7 6 5 4 3 2 one can reduce costs through economies of scale. The centralizing would also affect the risk positively by reducing the number of intermediaries involved in the process of issu￾ance and custody. To eliminate the risk that securities are delivered but payment is not received (principal risk), one recommendation requires that the transfer of securities and the cash payment are linked in a way that achieves delivery versus payment (DVP). It is also crucial that the finality of the settlement occurs during the settlement day. The recommendations also require that CSDs put in place risk control measures to address the failure of the participants. The use of unwinding—excluding the default participant and Box 11.3 Summary of the RSSS Recommendation 1 deals with legal soundness. Recommendation 2 requires confirmation of trade details between market participants within the same trade day. Recommendation 3 requires that final settlement occurs no later than T+3 Recommendation 4 requests cost-benefit analysis for CCPs. Recommendation 5 encourages the use of securities lending and borrowing to reduce settlement risk. Recommendation 6 deals with dematerialization and immobilization of securities and book-entry transfer in CSDs. Recommendation 7 requests securities transfers to be based on DVP. Recommendation 8 requires settlement finality to occur no later than the end of the settlement day. Recommendation 9 requests CSDs to put in place adequate risk control measures to deal with liquidity and credit risks. Recommendation 10 deals with the cash settlement assets and expresses preference for central bank money. Recommendation 11 requires CSDs and CCPs to identify and minimize operational risk, and it deals with outsourcing of clearing and settlement activi￾ties. Recommendation 12 requires the employment of account practices and safekeeping procedures to pro￾tect customers’ securities. Recommendation 13 deals with governance struc￾ture of CSDs and CCPs. Recommendation 14 requires CSDs and CCPs to have objective and fair access criteria. Recommendation 15 requires settlement systems to be cost-effective in meeting the requirements of the users. Recommendation 16 encourages the use of interna￾tionally recognized communication procedures and standards. Recommendation 17 requires CSDs and CCPs to provide market participants with sufficient informa￾tion to identify and evaluate the risks and costs with clearing and settlement activities. Recommendation 18 requests transparent and effec￾tive regulation and oversight, and it encourages cen￾tral banks, securities regulators, and other relevant public authorities to cooperate within and outside the country. Recommendation 19 deals with the risks related to cross-border links between CSDs. Source: Adapted from CPSS and Technical Committee of the IOSCO (2001)