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Oversight of payment systems and other payment instruments

What is oversight?

Oversight of payment systems is one of the basic functions of the European System of Central Banks according to Article 105(2) of the Treaty establishing the European Community and Article 22 of the Statute of the European System of Central Banks. Oversight is aimed at preventing systemic risk, promoting efficiency of payment systems and instruments, and ensuring security of, and public trust in, the currency. Its stabilisation function is particularly important, because failures arising from potential risks in payment systems can result in breaches of monetary and financial stability. In addition to the stabilisation function, its function in the consumer protection area is of obvious relevance.

The oversight function applies primarily to payment systems because these are a major channel for the transfer of money. If a payment system or a participant fails, the effects can spread through domestic and international financial systems and markets. If the failure of a system or a participant can cause other participants to fail and is thus able to transmit shocks through the financial infrastructure, such a system is called a systemically important payment system (SIPS).

In the context of payment systems, oversight is focused first of all on systemically important large-value payment systems, which account for a large proportion of transfers in terms of value. They are followed by retail payment systems, which conversely dominate in terms of numbers of payments, and securities settlement systems. Oversight in Europe has also gradually expanded to include payment instruments and correspondent banking.

Oversight of payment and settlement systems is defined as a central bank function whereby the objectives of safety and efficiency are promoted by monitoring existing and planned systems, assessing them against the objectives and, where necessary, inducing change1.

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International standards

Payment and securities settlement systems are assessed according to the following international standards:

Oversight executed by the Czech National Bank

In line with the above, one of the Czech National Bank’s objectives is oversight of payment systems in the Czech Republic. The oversight function is legally incorporated into Article 2 of the Act on the CNB: “In accordance with its primary objective, the CNB shall… contribute to the safety, soundness and efficiency of payment systems and to the development thereof”.

By performing this activity, the CNB ranks among the central banks of the EU member states which execute oversight.

The CNB performs the following activities as part of its oversight function:

  • monitoring payment systems operating in the Czech Republic (CERTIS, SKD, securities settlement systems, card payment schemes, electronic money issuer systems, etc.)
  • monitoring and evaluating whether these systems operate in compliance with the standards and recommendations of European and international institutions
  • evaluating crisis situations in these systems
  • inducing possible changes in systems resulting in the removal of shortcomings.

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Assessments performed by the Czech National Bank

An assessment of operational reliability regarding business continuity in the SKD system was conducted at the CNB in 2008 in accordance with the international Recommendations for Securities Settlement Systems and the international Assessment Methodology for “Recommendations for Securities Settlement Systems” drawn up by the Bank for International Settlement (specifically Recommendation 11, Operational Reliability). The assessment result ranks the SKD system in the highest category “Observed”.

A similar assessment of the operational reliability of the CERTIS payment system followed the same year. The assessment was performed against the Business Continuity Oversight Expectations for SIPS approved by the European Central Bank. The assessment revealed that CERTIS is fully compliant with the principles required by this standard.

In late 2010/early 2011 the CNB performed a comprehensive assessment of the CERTIS payment system against the Core Principles for Systemically Important Payment Systems drawn up by the BIS and the Terms of Reference for the Oversight Assessment of Euro Systemically and Prominently Important Payment Systems Against the Core Principles issued by the ECB. This assessment revealed that the CERTIS fulfils all the core principles required by the recommended standard. The assessment result ranks the CERTIS in the highest category “Observed”.

In the course of the first half-year of 2011 the CNB assessed the SKD system in accordance with Recommendations for Securities Settlement Systems and Recommendations for Central Counterparties in The European Union. The assessment proved that the SKD is compliant with the respective applicable recommendations.

1 Oversight of Payment and Settlement Systems, BIS, 2005

 

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