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 circum­stances 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 prin­ciples 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.

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 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.

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 settle­ments in the event of an inability to settle by the participant with the largest single settlement obligation.

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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

value, or (c) is used for the settlement of financial market transactions or for the settle­ment of other payments in the same currency.4 Although retail payment systems are nor­mally 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.

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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 pay­ment 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, sce­narios 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 memo­randum of understanding (MOU).

In addition to an oversight role, a central bank might have other roles in the pay­ment area such as a developmental role (designer of the strategy with respect to the development and international positioning of markets and infrastructure) and an operat­ing 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.

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 avail­ability 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.

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