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8/3/2019 Arab Payment Systems
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“Arab Payment Systems
Integration Project – Outcome of theFeasibility Study”
GLOBAL PAYMENT WEEK
Amsterdam, October 19-22, 2010
The World Bank
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Contents
g Introduction & Objectivesg Objectives of the project
g What are the needs?g Main Assumptions
g Where are we?
g Feasibility Studyg key feasibility elementsg Main Conclusions
g Model Recommendedg Outcome of the detailed studiesg Settlement Cycle
g Next Stepsg Strategic Phases
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Introduction & ObjectivesObjectives of the project
g Economic development Reducing the need for reserves currencies currently required
with the regional trading partners
Promoting intra-region economic activities and accordingly
regional integration
g Financial Stability Ensuring national payment systems are compliant with
international standards and best practices
Setting up a common set of processes and procedures toexecute cross-border payments in the region
Using a common set of risk controls within the region.
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Introduction & ObjectivesObjectives of the project (Cont …)
g Efficiency
Creating services that are on line with users expectations
(price, timing, safety, …)
Developing a system that is highly reliable, secure and resilient
and easy for any expansion
g Synergies and externalities Working together to improve efficiency of the individual
markets for the common goal Potentially reducing the need for foreign currencies by
introducing a multilateral netting scheme
Improving the security of the financial information
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Introduction & ObjectivesWhat are the needs?
g Reducing the level of reserves that each bank needs to keep in itsforeign currencies accounts
g Adding more efficiency to the risk management related to thesettlement of cross-border payments by improving the reliance incentral bank money instead of commercial bank money
g Decreasing the costs of theses transactions by reducing the number of correspondent banks
g Reducing the processing time of cross-border payments within theregion
g Reducing the number and balance of bilateral accounts maintainedby some banks only for the settlement of theses transactions (ex110 accounts for a money transfer agency)
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Introduction & ObjectivesMain Assumptions
1. The system will cover only intra-region cross-
border payment transactions. Domestic as well as
international payments with any country outside
the region will not be processed by the system.
2. The system should not require major changes to
the existing infrastructure and regulatory
framework of the domestic payment systems in
the countries
3. The system should be as much open and flexible
as possible to allow for further expansion and
widening of the project scope.
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Introduction & ObjectivesMain Assumptions (Cont …)
4. The system must be in conformity with all international
standards and best practices, especially, the CPSS
principles and Anti-Money Laundering Standards.
5. The participation to the new system will be on voluntary
basis with no restrictions to any AMF member State.However specific pre-conditions and qualifying
prerequisites will be considered.
6. Central Banks of the region are the only direct participants.
Commercial banks must use the system through their
Central Banks.
7. Only regulated entities (under the supervision of CB) in each
country should be allowed to use the system.
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Introduction & ObjectivesMain Assumptions
8. Only intra-region transactions performed through thefinancial system will be part of the new scheme
9. Securities transactions will remain outside of the initial
scope of the project
10. The operational phase of the project may start with a certain
number of countries which have met the participation
requirements
11. The system will be designed to support multi settlementcurrencies.
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Feasibility StudyKey feasibility elements
g Is there a business case?
g A sufficient degree of harmonization in the fundamentalelements of the national payment systems of the participatingcountries in terms of:g
Sound legal and regulatory regimesg Compliance of the domestic RTGS systems with the international
standards
g Effective oversight practice
g Well-defined and commonly accepted objectives and designconstraints
g Lessons learned from other regional experiences
g Stakeholders commitment to the success of the project
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Feasibility StudyMain Conclusions
g Yes there is a business case, both in terms of value of the intra-regional transactions and in terms of possible value added servicesthat could be introduced by the regional system.
g However the degree of harmonization of the national RTGS systemscurrently in place is not high. only qualified countries will join the
system at the initial stage.
g The lessons learned from other regional payment integrationexperiences encourage the establishment of such system.
g Most central and Commercial Banks have highly welcomed theproject, however serious commitments are needed.
g This commitment will depend on the design of the system.
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Feasibility StudyModel Recommended
Centralized regional settlement:
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Feasibility StudyModel Recommended
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Feasibility StudyModel Recommended
CommercialBank
CommercialBank
Central
Bank A
Central
Bank B
Arab Regional
Payment System
Clearing SettlementAgent (ARSB)
Operations& Monitoring
Anyregulated entity
Anyregulated entity
Networking& Messaging
ARSB
Correspondent
Bank
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Feasibility StudyOutcome -Legal
Legal Structure
o One corporate entity will both act as the settlement agent
and manage the ARPS
o The ARSB will have the international legal status
Membership
o Opened to all Central Banks
o Upon participation into the ARSB Capital
o Once commonly agreed requirements on common
features of domestic RTGS are implementedo Requirements pertinent to settlement functions should
also be satisfied
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Feasibility StudyOutcome - Legal
Capital:
o Authorized capital divided into shares that have a nominal
value
o Central Banks and the AMF would hold the same number of shares and thus would have equal ownership and
voting rights o Central Banks will hold equal shares each
Corporate Governance
o Similar to International organizations’ governancestructure:
General Meeting of Shareholders (Governors, corporate matters and
policy lines)
Governing (Executive) Board (managerial functions) Senior Management Group
The AMF would act as the secretariat of the Governing Board
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Feasibility StudyOutcome - Legal
Operations of the ARPSo Membership agreement would need to be elaborated and would
include: membership criteria, working rules of the system,technical provisions and specifications, settlement accounts
opening, provision of collateral, and dispute settlement
mechanismo Agreements with third parties: either for provision of relevant
services or with international institutions (FED, ECB)
o Central Banks would empower the ARSB to undertake such
third-party agreements and shall be obliged to respect them
Oversighto Participating Central Banks would constitute a Cooperative
Oversight Group
o MOU would be signed
o Central Banks would still continue to be responsible of the
oversight of their domestic RTGS systems.
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Feasibility StudyOutcome - Legal
List of Legal measures required:o A general MOU signed by all Central Banks of the region and the
AMF to determine the major elements of the system. This wouldinclude a minimum level of legislative and regulatory
harmonization.
o Articles of Association and Statute of the ARSB to fully regulateits corporate structure, its scope, and its governance, to be
signed by funding central banks and other central banks
whenever joining the system.
o Membership agreement and all other ancillary ARSB/CB
agreements
o Third parties service agreements o MOU by all the Central banks to constitute the Oversight
Committee.
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Feasibility StudyOutcome -Business
ARPS core function – Settlement services
o Settlement deposit accounts USD will be the single currency settlement currency in the initial stage
All the transactions, credit lines, fees, interests will be denominated in USD
Each central bank will maintain a USD settlement account at the ARSB to fund
its payment obligations and hold its payment inflows (different from the capital
account used to capitalize the ARSB) It is recommended for each central bank to hold a minimum deposit balance in
its USD settlement account.
Bilateral Credit limits and multilateral net debit caps could be used to mitigate
any risk
o Credit and Collateral facilities Theses features will be implemented in the ARPS even though they will
be used only when the Governing Board decide to do so The required minimum deposit balance is not a perfect substitute for a
settlement credit facility in the ARPS
Without a collateralized overnight credit facility, there are risks of delays in the
settlement process (unwinding) and of liquidity issues at the level of receiving
commercial banks
The Board will need to decide whether the ARSB will provide credit facility and
if its will act as custody agent, in addition to type of eligible collateral securities.
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Feasibility StudyOutcome -Business
ARPS core function – Settlement services
o Credit risk There is NO principal credit risk as long as RTGS systems are used by Central
banks to initiate and process the transactions submitted to the ARPS.
o Liquidity risk There is a very low risk if central banks delay payments to avoid overnight
collateralized borrowing or if a central bank does not have sufficient eligible
collateral to borrow the required USD fund.
o Foreign exchange risk The ARSB has NO FX risk exposure
There is virtually no FX risk for participating Central Banks under normal
conditions
o Collateral risk The risk is virtually near zero and easily manageable by the lender.
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Feasibility StudyOutcome -Business
ARPS core function – Payment System Services
o Eligible Payments
o Participation in the ARPS Central Bank must have a CPSIPS-compliant RTGS system
CB must participate to the messaging and communication system (such asSWIFT) selected for the ARPS
CB needs to meet financial, operational and technical requirements of the
ARSB and the ARPS
CB needs to accept and sign the membership contractual agreement
The State of the CB needs to recognize the ARSB as an international
organization
The legal regime in the State of the CB must meet the Minimum common
requirements defined in the MOU.
o Clearing and Settlement procedures Payment file submission
Netting process
Funds transfer process
Time line for the ARPS settlement cycle: One settlement cycle per day, same-
day settlement of all eligible payments
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Feasibility StudyOutcome -Business
ARPS core function – Payment System Services
o Error, dispute and return procedures: cut-off time and rules to
correct errors, solving disputes, …
o Infrastructure requirements and technical procedures: Messaging and communications system: connects the ARSB and central banks
for the purpose of file submission, notification of net settlement, collateral,credit and funds positions and transfers and notification of settlement
completion. SWIFT might be the most efficient, secure and reliable option.
Payment data processing system:
whether having “in-house” operation within the ARSB or let a third-
party perform the day-to day processing
System resiliency and business continuity
Account management system: the core technical system operated within the
ARSB for its settlement banking operations in the ARPS.
o Default and delay procedures: notification and penaltiescomputation
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Feasibility StudyOutcome -Business
Oversight of the ARPS
o Setting up a Cooperative Oversight Group: Participating Central Banks and the AMF
Oversight agreement
o Defining the oversight procedures
o Reporting to the FED and the ECB of the use of the USD and theEuro
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Feasibility StudySettlement Cycle
The settlement cycle can me minimized based on the
liquidity management options provided by the system
06h30 GMT
10h30 UAE
Technicalopening time
Opening time
for transactions
Exchange
07h GMT
11h UAE
Closing time
for transactions
Exchange
12h GMT
16h UAE
13h GMT
17h UAE08h N. York
End of day
Positionsnotification
Technicalclosing time
Final Settlement
& dispatchingtransactions
14h30 GMT
18h30 UAE
15h GMT
19h UAE
Liquidity
Refunding period
Processingincoming
transactionsby central Banks
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Next StepsStrategic phases
Formulating an implementation plan that begins with a detailed
specification of the organizational and operational structure for the system:
Identifying the institutions that will be responsible for the general operations andorganization
Setting up the project management structure, …
Launching the construction phase:
Specifying the technological requirements for the various processing, informationmanagement, messaging and communications systems
Elaborating the operating procedures and interaction procedures of the various users
and service providers involved in these services
Defining a pilot program that will test the performance of the
various critical functions and organizational arrangements in thesystem and identify where improvements may be required. Once
the pilot program is considered to be running smoothly, thesystem can be opened more widely.