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



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



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.



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



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)



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.



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.



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.



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



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.



Feasibility StudyModel Recommended

Centralized regional settlement:







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



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



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




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.




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.



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.




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.




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




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




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



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



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.



Thank You for your attention

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Arab Payment Systems

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