MACROECONOMIC AND FINANCIAL MANAGEMENT INSTITUTE OF EASTERN AND SOUTHERN AFRICA (MEFMI)
TECHNICAL PAPER
ON
AN APPROACH TO IMPLEMENT EFFECTIVE OVERSIGHT OF PAYMENT, SETTLEMENT AND SECURITIES SYSTEMS IN THE
MEFMI MEMBER COUNTRIES.
By Kennedy Komba Bank of Tanzania
Mentor: Gynedi Srinivas Reserve Bank of India
____________________
A Technical Paper Submitted in Partial Fulfillment of the Award of MEFMI Fellowship ____________________
An Approach to Implement Effective Oversight of Payment, Settlement and Securities Systems in MEFMI Region © Kennedy Komba
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Table of Contents Table of Contents........................................................................................................................i Abbreviations.............................................................................................................................ii Acknowledgments.................................................................................................................... iii Foreword ...................................................................................................................................iv Abstract .....................................................................................................................................vi Chapter I...................................................................................................................................1 Introduction..............................................................................................................................1 1.0 Introduction....................................................................................................................1 1.1 What is Oversight ..........................................................................................................1 1.2 Why is Oversight Required............................................................................................3 1.3 Literature Review on Oversight.....................................................................................4 1.3.1 The Pillars of Oversight .................................................................................................8 1.3.2 CPSS-Oversight Principles ..........................................................................................10 Chapter II ...............................................................................................................................16 Payment Systems in the MEFMI Region.............................................................................16 2.0 Introduction..................................................................................................................16 2.1 Status of payment and settlement systems in the MEFMI Region ..............................16 2.1.1 Real Time Gross Settlement Systems (RTGS) ............................................................16 2.1.2 The Net Clearing Systems ...........................................................................................18 2.1.3 Other Retail Systems....................................................................................................20 2.1.4 Securities Settlement Systems .....................................................................................21 Chapter III..............................................................................................................................23 Evaluation of the Status of Oversight in the MEFMI region.............................................23 3.0 Introduction..................................................................................................................23 3.1 Organisation of the Payment System Department .......................................................23 3.1.1 Separation of function and staff...................................................................................23 3.2 Governance and Regulatory Arrangements .................................................................24 Chapter IV..............................................................................................................................27 Recommendations for an Effective Oversight Approach...................................................27 4.0 Introduction..................................................................................................................27 4.1 Implementation Steps...................................................................................................27 4.1.1 Oversight Function Unit ..............................................................................................27 4.1.2 Oversight Objectives....................................................................................................28 4.1.3 Oversight Documentation ............................................................................................29 4.1.4 Oversight Activities .....................................................................................................29 Chapter IV................................................................................................................................32 Conclusion ...............................................................................................................................32 5.0 Conclusion ...................................................................................................................32 Schedules.................................................................................................................................33 Schedule I.................................................................................................................................33 Template of Oversight Framework..........................................................................................33 Schedule II ...............................................................................................................................34 Template of Oversight Operations Manual..............................................................................34 Schedule III..............................................................................................................................35 MEFMI Countries NPS Organisation Charts ..........................................................................35 References...............................................................................................................................47
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Abbreviations
BIS Bank for International Settlement
CDS Central Depository System
CPSS Committee of Payment and settlement Systems
CTPs Customized Training Programs
DvVP Delivery versus Payment
EAC East Africa Community
ECOWAS Economic Community of West Africa States
FSAP Financial Sector Assessment Program.
IMF International Monetary Fund
IOSCO International Organisation of Securities Commissions
MEFMI Macroeconomic and Financial Management Institute of East and Southern
Africa
PvVP Payment versus Payment
RTGS Real Time Gross Settlement
SADC Southern Africa Development Community
SSS Securities Settlement System
STP Straight Through Processing
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Acknowledgments
This work would not be achieved without the contributions of several people and institutions.
I highly acknowledge the support of the MEFMI secretariat in ensuring that this project is a
success by providing customized training programs (CTPs) and other professional activities
that aimed at equipping me with the requisite knowledge on payment systems. The MEFMI
secretariat, Mr. Ncube, Mr. Rutahakana, and Ms. Seleka have been so instrumental in
ensuring that I received all the MEFMI support in this work.
I extend my profoundly gratitude to my mentor, Gynedi Srinivas of the Reserve Bank of
India for his professional enthusiasm on this work. He made valuable contribution to the
shaping and production of this work. He spared his precious time to ensure that the work
produced is outstanding.
I appreciate extensively the efforts of my employer, the Bank of Tanzania, for having
approved my participation in this program, and the facilitations that went along to ensure that
I complete the program successfully. I am thankful for the management and staff of the
Directorate of National Payment Systems, Mr. J.M.B Massawe (Director), Ms. L. Kinunda
(Deputy Director), Mr. B.Dadi (Deputy Director), Ms. G. Tabaro (Supervisor), Ms. I. Francis,
Mr. F. Sumaye, Ms. L. Mtei, Ms. S. Mwinyi, Mr. J. Mwombeki, Ms. L. Shaidi and Mr. A.
Liyau for their help.
I profoundly thank MEFMI central banks particularly the payment system departments’ staff
and other staff from other departments for responding to the questionnaires and provision of
information.
Last but not the least I am very grateful to my lovely wife Magnificat for her consistent moral
support, and her endurance in times when I was away in the CTPs and more so for the late
night vigilances while drafting of the paper.
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Foreword
Central banks worldover have been traditionally involved in payment and settlement systems
either as owners, operators, and providers of settlement asset or participants in a particular
system. In their involvement with payment and settlement systems, central banks had and
continue to have an overarching interest in the safety and efficiency of payment and
settlement systems, as the transfer of value through various payment instruments between
economic agents is undertaken through the payments and settlement system.
It is in this context, that the issue of Oversight over payments and settlement systems gains
critical and crucial importance. It is only during recent times that the function of oversight
has acquired a more formal character and is being carried out in a more systematic manner.
Oversight is a function “whereby the objectives of safety and efficiency are promoted by
monitoring existing and planned systems, assessing them against these objectives and, where
necessary, inducing change”1.
Central banks of MEFMI countries in the recent past, have made rapid strides in the
development of a safe and efficient payment and settlement system infrastructure within their
countries. It is therefore appropriate that MEFMI is encouraging the development of regional
capacity building in this important and critical area through the candidate fellow programme.
The programme involves submission of a technical paper by the candidate fellow on the
subject chosen. Mr Kennedy Komba, Candidate Fellow in Payment Systems has under my
guidance prepared a technical paper on Oversight of payment and settlement systems in the
MEFMI region.
The technical paper “An approach to implement effective Oversight of payment and
settlement systems including securities settlement systems in the MEFMI member countries”,
reviews the standard literature available on Oversight, provides a tour-de-force of
developments in payments system within the region and evaluates the status of the function
1 Central bank Oversight of Payment and Settlement Systems Report, BIS May 2005 (BIS- CPSS Central Bank
Oversight Report) , p. 1
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of oversight within the region. It provides some recommendations for an effective Oversight
approach and proposes how these could be implemented by MEFMI central banks.
Mr Kennedy Komba of the Bank of Tanzania needs to be commended for his sincere efforts
in producing this technical paper. I wish him all the best in all his future endeavours.
Gynedi Srinivas
Reserve Bank of India
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Abstract
The purpose of this paper is to provide an effective oversight approach on payment systems
in the MEFMI member states. In doing so, it is structured into two main parts; the first part is
devoted to a situational analysis of the oversight function among the member states, while the
second part provides for an effective approach in implementing oversight in the region.
To understand the existing state of the oversight function within the region, information was
requested from all member countries through a structured questionnaire. The results of the
analysis reveal that only 2 out of 13 member states have a clear separation of functions
between the payment system oversight and operations function within the central bank.
Despite this relative low oversight function implementation status, all member states
appreciate the need to perform the oversight function for ensuring safe and efficient national
payment systems.
A systematic approach towards oversight function is not visible in the countries performing
an oversight function, which includes an application of the three pillars of oversight viz.,
clearly laid down Oversight objectives, defining the Scope of oversight and Activities of
oversight. Only 3 out of the 13 countries have a policy document on oversight function. The
other countries only use “experience” in conducting their oversight activities, defined as part
of the overall function of the central bank in ensuring safety in the financial sector in its
objective of financial stability.
It is only 2 out of 13 countries that have a dedicated department or unit that is distinct from
the operations functions unit and which is manned by skilful staff. In the rest of the central
banks, the oversight function is performed by the same staffs who are involved in operations
with the reporting lines directed to the same head of operations.
In recommending an effective approach of oversight function for the MEFMI member states,
a structured and phased implementation plan is recommended, that could be used by all
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central banks in the region, depending on their level of payment systems development,
availability of skilled human resources and financial resources.
For implementing an effective oversight function, a template framework and working
manuals are provided in the paper for the use of central banks.
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Chapter I
Introduction 1.0 Introduction
The concept of oversight of payment and settlement systems has recently gained formal
significance in most countries. Oversight of payment and settlement system is a function
performed by the central banks as part of their overall objective of ensuring monetary and
financial stability. Oversight has gained significance in recent times because of the increased
complexity and sophistication in payment and settlement systems, which have a significant
role in the implementation of monetary policy and in transfer of funds in the financial sector
and the economy at large. Central banks have thus been concerned in monitoring these
systems to ensure their smooth and efficient operations without disruptions that could lead
and possibly jeopardise the functioning of the financial sector and ultimately the economy.
Therefore, the overall obligation of performing the oversight function vests with the central
banks2 given their traditional role in payment and settlement systems as well as their overall
objective of containing systemic risk.
1.1 What is Oversight
Oversight of a payments system is defined as a public policy activity principally intended to
promote the safety and efficiency of payment systems and in particular to reduce systemic
risk3.
It is also defined as a central bank task, principally intended to promote the smooth
functioning of payment systems and to protect the financial system from possible “domino
effects” which may occur when one or more participants in the payment system incur credit
2 BIS- CPSS Central Bank Oversight Report, 2005, pp 2 to 7 3 BIS- CPSS Glossary of Terms, 2001
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or liquidity problems. Payment systems oversight aims at a given system (e.g a funds transfer
system) rather than individual participants4.
From these two definitions, we deduce that oversight is a function of the central bank
exercised by them for ensuring safety and efficiency of payment and settlement systems
including securities settlement systems, with focus being managing risks in the payment
system, with particular emphasis on mitigating systemic risk.
In 2005, the Committee on Payment and Settlement Systems (CPSS) provided a working
definition of payment system oversight. Oversight has been defined as “a central bank
function whereby by the objectives of safety and efficiency are promoted by monitoring
existing and planned systems, assessing them against these objectives and, where necessary,
inducing change”5. This working definition did not divert from the former definitions of
oversight by maintaining that oversight is a central bank function that centers on risk
management. Albeit, the working definition expounds on how the oversight function is
performed that is by monitoring and assessing systems against the objective of safety and
efficiency and inducing change. In this paper, we shall move a step forward by providing
steps of implementing the oversight function in the MEFMI countries.
There are notable differences between payment system oversight and banking supervision
functions besides both functions being major functions of the central bank6, which
complement each other in ensuring the stability of the financial sector as a whole. The major
difference in these complementing functions is that, oversight concentrates in managing risks
of the systems while supervision focuses the soundness of individual institutions. In
oversight, the system is viewed in a holistic context, that risk management measures are
applied to the national payment system as a whole, though particular major payment systems
(critical mission system or systemically important systems) may be monitored and assessed.
The ultimate objective is to mitigate systemic crisis. While in supervising institutions are
4 BIS-CPSS Glossary of Terms, 2003 5 BIS-CPSS Central Bank Oversight of Payment and Settlement Systems, 2005 6 Not all jurisdictions have banking supervision as a function in the central bank. Separate regulatory organs
perform this function with close cooperation with the central bank. In the MEFMI countries banking supervision is a function of the central bank
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monitored and assessed individually on managing risks emanating in these individual
institutions. The ultimate goal is to guard against its failure and possible disruption of the
soundness of the entire financial sector.
1.2 Why is Oversight Required
The main reason which motivates central banks in oversight of payment system is the desire
to improve the safety and efficiency of payment and settlement systems by reducing risks in
the system, particularly those that could cause systemic disruption of the financial sector.
Central banks have common policy objectives in ensuring financial stability and accordingly
they implement risk management measures in payment systems .
Central banks have an interest in the efficient working of financial markets, they share market
participants’ interests in reducing payment and settlement costs and minimising financial
risks exposures (credit and liquidity). On the other hand, central banks also carry the
responsibility for the integrity of the financial system as a whole and for the conduct of
monetary policy. Thus, central banks are required to encourage developments that can
increase the safety and efficiency while maintaining and enhancing the integrity of the
payment systems.7. This can only be achieved through close complementarity between the
oversight function and the supervisory responsibility.
It should be noted that notwithstanding the importance of oversight, it is only recently that
oversight has been formally recognised as a distinct function and approaches of some
jurisdictions is to give it statutory powers. Even in jurisdictions where oversight function has
not acquired a formal statutory obligation, central banks do perform the oversight function
using several methods – chief amongst them being through their role as operator, owner, and
provider of the settlement asset and also through moral suasion.
7 Report of the Committee on Interbank Netting Schemes of the G-10 countries (“Lamfalussy Report”), 1990 at
p.6
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What then has led to this recent formalisation of the oversight function? One of the reasons
for this could be the growth in the volume and value of interbank settlements coupled with
the increasing complexities in payment and settlement activities has strained the capacity of
some existing interbank payment systems and of some central banks’ own settlement
services. Central banks are also concerned with the impact that changes in interbank payment
and settlement systems may have on the structure and efficiency of the financial markets
which these systems support.
Central banks have a general interest in containing systemic risk that may arise in the
interbank payment systems. It is noted that the size and duration of credit and liquidity
exposures experienced by financial institutions in the course of settling their transactions
contributes to systemic risk because as these exposures increase so too does the likelihood
that some institutions may be unable to satisfy their obligations. Systemic risk is also related
to the relative propensity of payment and settlement systems to transmit exposures suddenly
or unexpectedly from one participant to another - and from one market to other markets - in
ways that increase the difficulty all participants will have in managing and containing their
exposures8.
Central banks are concerned on the problem of “moral hazard” in the market arising from the
markets’ presuming that central banks would act to avert a system’s settlement failure. Thus
the market may design systems without sufficient regard to the need for built-in mechanisms
and incentives to control risks and deal with the consequences of a settlement failure9.
Therefore, the above concerns of the central banks inevitably require close monitoring of the
market (oversight) to ensure that the overall need of financial stability and meeting of
monetary policy objective is achieved.
1.3 Literature Review on Oversight
The main sources for this literature review are the various reports of the CPSS and
publications on the topic by select central banks. 8 Lamfalussy Report, p. 3 9 Ibid.
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One of the earliest works is the Report of the Committee on Interbank Netting Schemes of the
central banks of the Group of Ten countries (Lamfalussy Report) 10. The Lamfalussy report
notes that central banks have shared policy interests both in the efficiency and stability of
interbank payment systems and, more generally, in the efficiency and stability of the financial
system as a whole. In particular, all central banks have an interest in limiting the level of
systemic risk in the banking system while encouraging improvements in the efficiency of
interbank markets and the settlement systems, which support these markets. Central banks
also seek to maintain the effectiveness of the policy instruments used to pursue their ultimate
objective of the stability of their currency and to ensure their continued ability to oversee
developments in the markets through which monetary and exchange rate policies are
implemented11.
The report, set forth minimum standards for the design and operation of multi-lateral netting
systems. The standards are summarised in Box 1 in the next page.
10 Lamfalussy Report, at p 3. This report was prepared for analyzing policy implications of cross-border and
multi-currency netting arrangements in the G-10 central banks. 11 Ibid, p. 2
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Box 1
Lamfalussy Standards
I. Netting schemes should have a well-founded legal basis under all relevant jurisdictions.
II. Netting scheme participants should have a clear understanding of the impact of the
particular scheme on each of the financial risks affected by the netting process.
III. Multilateral netting systems should have clearly-defined procedures for the management
of credit risks and liquidity risks which specify the respective responsibilities of the
netting provider and the participants. These procedures should also ensure that all parties
have both the incentives and the capabilities to manage and contain each of the risks they
bear and that limits are placed on the maximum level of credit exposure that can be
produced by each participant.
IV. Multilateral netting systems 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 net-debit position.
V. Multilateral netting systems should have objective and publicly-disclosed criteria for
admission, which permit fair and open access.
VI. All netting schemes should ensure the operational reliability of technical systems and the
availability of back-up facilities capable of completing daily processing requirements.
According to the report the above standards are only minimum standards for risk
management. Central banks and the participants are required to ensure they meet this or apply
higher standards in managing risks in the netting systems. The report further notes that the
primary responsibility for ensuring that netting and settlement systems have adequate credit,
liquidity, and operational safeguards rests with the participants. The presentation of these
minimum standards by central banks in no way diminishes this responsibility12.
The Core Principles for Systemically Important Payment Systems (2001) while drawing
extensively from the Lamfalussy Report added several new principles which apply more
12 Lamfalussy Report, p. 3
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broadly to systematically important payment systems of all types13 The core principles note
the contribution of technological developments in payment systems where systems such as
RTGS have been implemented can effectively address some of the financial risks highlighted
in the report14. Unlike the Lamfulsussy report which dealt with netting system for cross-
border and domestic systems, the core principles apply to systemically important payment
systems, whether they involve credit or debit transfers or whether manual or electronic
processing and whether they process electronic or paper-based debit instruments15. These
principles have been widely accepted and adopted by most central banks as standards for
their oversight functions. For instance the G-10 countries, the European Union, the Sothern
Africa Development Community (SADC) member states, the Asian countries the Latin
American Countries, the Economic Community of West African States (ECOWAS) the East
African Community (EAC) and other regional blocks. However, in the MEFMI member
countries, not all have been able to practically utilise these core principles as tools of risk
management in their oversight activities.
IMF/World Bank use the core principles in their Financial Sector Assessment Program16.
This FSAP programme extensively applies the Core Principles in assessing the payment
system of countries that agree to the FSAP. In conducting the assessment an assessment
methodology document17 is used which has set of questions based on the core principles that
assist the assessor in carrying out the assessments. The analysis is based on a qualitative
approach where compliance weight to the core principles is categorized as observed, not
observed, broadly observed, partially observed and not applicable. Several countries have
been assessed under the FSAP arrangement. IMF has published these reports in their
website18 Nine (9) out of thirteen (13) MEFMI central banks state that they have undergone
an IMF assessment.
The FSAP assessment on payment system has had a positive impact on the countries that
have gone through the process. The assessment process and the ultimate report assist in
13 Core Principles for Systematically Important Payment System, BIS-CPSSS, 2001 14 Ibid, p. 5 15 Ibid 16 IMF/WB Financial Sector Assessment Program 17 Assessment Methodology, IMF 18 For details of countries that have under gone FSAP visit www.imf.org/external/np/fsap/fsap.asp
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improvement in risk management and development of systems that facilitate management of
risks in payment systems.
The committee of payments and settlement system (CPSS) of the BIS report on Central Bank
Oversight of Payment Systems (2005), (CPSS-Oversight Report), explains why and how
central banks oversee payment and settlement systems. In analyzing the reasons for the
involvement of the central banks and the overall concept of oversight, the report looked at the
approach and practices prevalent in the central banks, represented in the CPSS and the central
bank of Luxemburg. This paper will draw extensively on the pillars and the principles of
oversight in recommending effective oversight implementation in the MEFMI countries. This
paper extends the CPSS-Oversight Report by proposing step by step implementation of the
activities and function of oversight ( for details see chapter 3 of this report)
1.3.1 The Pillars of Oversight
There are three pillars of oversight which are derived from the Oversight Report’s working
definition of oversight. The pillars are (i) public policy objectives of oversight (safety and
efficiency), (ii) scope (payment and settlement systems and instruments) and (iii) oversight
activities (monitoring, assessing and inducing change). The working definition itself from
where the three pillars are derived states that “oversight of payment and settlement systems is
a central bank function whereby the objectives of safety and efficiency are promoted by
monitoring existing and planned systems, assessing them against these objectives and, where
necessary, inducing change”19
(a) The public policy objectives of oversight
Safety is a priority for most central banks that in overseeing systemic risk in a
payment system because of the serious consequences that can arise if the risk is
realised. But where systemic risk is not an immediate issue then, for example,
inadequate market infrastructure may mean that the relative priority for a central
bank at a particular time is to promote efficient payment arrangements within the
19 BIS- CPSS Oversight Report, 2005, p. 11
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constraints of broad safety parameters. Or a central bank in a country where there
has been a major payments fraud problem may place particular emphasis on
payment system security20
Other public policy objectives apart from safety and efficiency, include, control of
money laundering, consumer protection and the avoidance of anticompetitive
practices21. These are addressed in the design and operation of payment and
settlement systems. Not all central banks however have these objectives as part of
their oversight objectives, as they see them to fall under other authorities.
Transparency is used as a tool to create responsibility, accountability,
effectiveness and consistency to the central bank in the oversight function22. Thus,
central banks are urged by the core principles to publicly disclose their oversight
objectives and policies.
(b) Scope of oversight
This refers to those payment and settlement systems that central banks oversee by
applying some form of safety and efficiency standards or policy. Scope may be
defined by the law, which may set generic criteria to determine which systems
should be “designated” and thus subject to oversight. In other countries scope is
determined by the central bank’s policy such as consideration being given on the
systemic risk poised by the system. Yet, in other central banks, scope may include
all payment and settlement system in the country because of the small numbers of
the systems23.
(c) Oversight activities
The activities include monitoring, assessing and inducing change. In monitoring,
the central banks are required to gather information from the payment and
settlement system or instruments. Information may be obtained using various
20BIS- CPSS Oversight Report, 2005, p. 15 21 Ibid. 22 Ibid. 23 Ibid., p. 17
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methods of data collections and at such frequency as the central bank may
determine.
Assessment of the information gathered is vital to arrive at the nature of the
payment system monitored and the risks that have been identified therein. The
assessment or analysis is made using benchmarks, standards and policies seing
whether the system is in compliance.
Inducing change follows the results of the assessment. The overseer, thus would
consider proposing changes to the system or operations of the system that would
ultimately comply to the assessment standards, as part of risk management
measure. Tools used in the inducement of change vary from ranging from moral
suasion, voluntary agreements, public statements, to statutory powers to enforce
oversight decisions24.
1.3.2 CPSS-Oversight Principles
The CPSS-Oversight Report sets principles for effective oversight; the principles are divided
into two major parts general principles (applicable on domestic oversight) and international
cooperative oversight principles. The general oversight principles are Transparency,
International standards, Effective powers and capacity, Consistency and Cooperation with
other authorities. The international cooperative oversight principles are; Notification, Primary
responsibility, Assessment of the system as a whole and Settlement arrangement. These
principles are listed in Box 2..
24 CPSS-Oversight Report, 2005, p. 23
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Box 2 Principles of Oversight
1: General Oversight Principles A: Transparency Central banks should set out publicly their oversight policies, including the policy requirements or standards for systems and the criteria for determining which system these apply to. B: International standards Central banks should adopt, where relevant, internationally recognised standards for payment and settlement systems. C: Effective powers and capacity Central banks should have the powers and capacity to carry out their oversight responsibilities effectively. D: Consistency Oversight standards should be applied consistently to comparable payment and settlement systems, including systems operated by the central bank E: Cooperation with other authorities Central banks, in promoting safety and efficiency of payment and settlement systems, should cooperate with other relevant central banks and authorities. 2: Cooperative Oversight Principles 1: Notification Each central bank that has identified the actual or proposed operation of a cross-border or multicurrency payment or settlement system should inform other central banks that may have an interest in the prudent design and management of the system 2: Primary responsibility Cross-border and multicurrency payment or settlement system should be subject to oversight by a central bank which accepts primary responsibility for such oversight, and there should be a presumption that the central bank where the system is located will have this primary responsibility. 3: Assessment of the system as a whole In its oversight of a system, the authority with primary responsibility should periodically assess the design and operation of the system as a whole. In doing so it should consult with other relevant authorities 4: Settlement arrangements The determination of the adequacy of a system’s settlement and failure-to-settle procedures in a currency should be the joint responsibility of the central bank of issue and the authority with the primary responsibility for oversight of the system 5: Unsound system In the absence of confidence in the soundness of the design or management of any cross-border or multicurrency payment or settlement system, a central bank should, if necessary discourage use of the system or the provision of services to the system , for example by identifying these activities as unsafe and unsound practices.
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General oversight principle A: Transparency
Central banks should set out publicly their oversight policies, including the policy
requirements or standards for systems and the criteria for determining which
systems these apply to.
This principle requires central banks to be transparent about their oversight policies to enable
payment and settlement system operators to understand and observe applicable policy
requirements and standards. Transparency can be achieved through publicly available
documents, which clearly explain a central bank’s oversight policies. These documents
should set out the central bank’s oversight responsibilities, including its objectives, and how
it intends to meet these responsibilities, including the policy requirements or standards for
systems and the criteria for determining which systems these apply to.
General oversight principle B: International standards
Central banks should adopt, where relevant, internationally recognised standards
for payment and settlement systems.
This principle requires central banks to adopt relevant international standards concerning
safety and efficiency of payment and settlement systems. Such standards, include the CPSS
Core principles for systemically important payment systems and the CPSS-IOSCO
Recommendations for securities settlement systems and Recommendations for central
counterparties.
General oversight principle C: Effective powers and capacity
Central banks should have the powers and capacity to carry out their oversight
responsibilities effectively.
This principle requires central banks to ensure that their powers to obtain information and
induce change in payment and settlement systems are in line with their oversight
responsibilities for these systems. The tools that central banks’ use in oversight vary. Most
central banks use moral suasion for their day-to-day oversight, others use statutory powers.
This principle also requires central banks to have sufficient resources, which includes
suitably qualified personnel, and organisational structure that allows those resources to be
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used effectively. The organisational models should be clear where responsibility for oversight
lies within the central bank. Those involved in carrying out oversight will need to be able to
draw on the skills and expertise of other central bank functions (eg legal, markets, credit,
audit and IT).
General oversight principle D: Consistency
Oversight standards should be applied consistently to comparable payment and
settlement systems, including systems operated by the central bank.
This principle requires consistent application of policy requirements and standards, including
to systems operated by the central bank itself. The central banks’ consistency is promoted by
transparency about their policies for their own systems and the use of the same policy
requirements and standards, applied to other comparable private sector systems. The
Organisational separation between the central bank’s oversight and operational functions
helps to ensure the consistent application of policy requirements and standards.
General oversight principle E: Cooperation with other authorities
Central banks, in promoting the safety and efficiency of payment and settlement
systems, should cooperate with other relevant central banks and authorities.
This principle requires cooperation between the central bank and other regulatory authorities
in conducting oversight in payment systems. This applies in systems such as securities
settlement systems where securities regulators operate. Cooperation also applies with the
banking supervisors. Through such cooperation, oversight becomes more effective and
minimises the potential duplication of effort and burden on the overseen system. It also helps
to avoid the inconsistency of policy approach that could arise if different authorities acted
independently, and it reduces the possibility of gaps in oversight.
This principle also requires central banks to cooperate with each other in respect of cross-
border and multicurrency systems where such systems are of sufficient relevance to more
than one central bank.
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B. Principles for international cooperative oversight
These principles for cooperation in cross-border and multicurrency payment and settlement
systems were initially developed by the Lamfalussy Report (1990). The CPSS has reviewed
the principles in light of central banks’ experience since 1990. The CPSS has updated these
principles and suggested that these are not limited to netting schemes only but to all other
payment and settlement systems that are cross border in nature.
Cooperative oversight principle 1: Notification
This principle requires each central bank that has identified the actual or proposed operation
of a cross-border or multicurrency payment or settlement system to inform other central
banks that may have an interest in the prudent design and management of the system.
Cooperative oversight principle 2: Primary responsibility
This principle requires that cross-border and multicurrency payment and settlement systems
should be subject to oversight by a central bank which accepts primary responsibility for such
oversight, and there should be a presumption that the central bank where the system is located
will have this primary responsibility. Acceptance by a central bank of primary responsibility
means that it agrees to carry out the role set out in Principle 3. It does not prejudice the ability
of other central banks to fulfil their individual responsibilities and does not represent any
delegation of responsibility to the central bank with primary responsibility from the other
central banks. The central bank with primary responsibility needs to be able and willing to
carry out the agreed role.
Cooperative oversight principle 3: Assessment of the system as a whole
This principle requires that the authority with primary responsibility in the oversight, should
periodically assess the design and operation of the system as a whole. In doing so it should
consult with other relevant authorities. A key element of the role of the central bank or other
authority with primary responsibility is to carry out periodic comprehensive assessments of
the design and operation of the system as a whole on the basis of agreed policies and
standards. Where applicable, internationally agreed standards such the CPSS Core principles
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for systemically important payment systems and the CPSS-IOSCO Recommendations for
securities settlement systems and Recommendations for central counterparties.
Cooperative oversight principle 4: Settlement arrangements
This principle requires the joint responsibility of the central bank of issue and the authority
with primary responsibility for oversight of the system in determining the adequacy of a
system’s settlement and failure-to-settle procedures in a currency.
Cooperative oversight principle 5: Unsound systems
This principle requires central banks, where necessary to discourage use of the system or the
provision of services to a system that is identified to have activities and practices that are
unsafe and unsound. Although, it is important to maintain cooperation in the use of the cross-
border and multicurrency systems on terms acceptable to all relevant central banks, it is
however vital that central banks maintain their discretion to discourage the use of a system or
the provision of services to a system, if, in its judgment, the system is not prudently designed
or managed.
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Chapter II
Payment Systems in the MEFMI Region
2.0 Introduction
MEFMI has a membership of 13 countries25. These countries are considered emerging
economies with an average GDP growth rate of 3% with an average GDP per capita income
of USD 2,468.1526.The financial markets developments are average with existence of mid
range activities in the secondary market, with robust primary market dealings in Government
papers.
The economies are liberalized (free market), with private players in the financial sector
encouraging growth in the banking industry were the are average of 15 banks per country.
The per capita bank accounts across the MEFMI region is less than 1% of the respective
countries population. This implies that the region is predominately under banked. The major
payment instrument is cash followed by cheques and low usage of card payment instruments
(debit and credit cards). The region also has mobile phone usage of around 10% of the
population, trends shows that mobile phone usage is in the increase in the region. This is a
positive attribute for implementation of mobile payment system. In Tanzania, the market has
realized this potential and one private company and a bank have partnered to rollout a mobile
payment system.
2.1 Status of payment and settlement systems in the MEFMI Region
2.1.1 Real Time Gross Settlement Systems (RTGS)
RTGS systems are new in the MEFMI countries, with the oldest system in the region being
the RTGS system of Zimbabwe which went live in 2002 with the youngest in Lesotho’s
which went live in August 2006. Nine (9) out of the thirteen (13) MEFMI countries have
25 Current members of MEFMI are, Angola, Botswana, Kenya, Lesotho, Malawi, Mozambique, Namibia,
Rwanda, Swaziland, Tanzania, Uganda, Zambia and Zimbabwe. 26 UNPD, Human Development Trends 2003 data www.undp.org and www.gapminder.org
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operational RTGS systems27. In all the 9 countries, the RTGS systems are owned and
operated by the central banks. The operations responsibility is placed in Payment System
departments28
All 9 central banks with the RTGS provide the settlement asset and collateralized liquidity
(intra and overnight facilities). The RTGS systems have common similarities in all the
countries, because they were developed out of a common agreed request for proposal (though
slightly modified according to country specifications) for the case of Southern Africa
Development Community Countries (SADC), which are 729 out of the 9 countries with the
RTGS. The suppliers of the system are two, which implemented the system in al these
countries. The RTGS systems have two basic modules the Real Time option, which rejects
payment instructions if there are insufficient funds and the Liquidity Optimisation Option
which queues the payment instructions until availability of funds, failure of which at final
cut-off time they are rejected with a penalty. Several liquidity management measures are
embedded in the system, which include incentives on charges separated in different windows,
the windows in the early morning hours have less charges compared to those towards the
initial cut-off time and final cut-off time. Access criteria is provided in readily available rules
and regulations of the systems. The rules also provide details of the operational rules and they
do have exit criteria. Management is also provided in the rules. The rules in all the countries
are open to the public. Determination of value in customers account varies from 2 hours to 24
hours. SWIFT is used as a messaging provider in 8 of the countries, Malawi uses its own
network for domestic payments known as Malswitch.
The average monthly volumes and values of the RTGS systems are provided in table 1
below30.
27 Countries that have not implemented the RTGS system to date are Angola, Mozambique, Swaziland and Rwanda. 28 The word department also means directorate or division. Each member country uses one of these words in its organization structure, for a clarity see diagrammatic presentations in page….. 29 Non SADC members of the 9 countries members of MEFMI with RTGS are Uganda and Kenya. 30 This table only provides information of countries that promptly responded to the questionnaire.
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Table 1. Average monthly volumes and values of RTGS transactions.
Country Volumes Values (Million USD)Kenya 11,837 49,575,709.28Malawi 9130 16,008,361.33Tanzania 9,119 2,618,105,490.00Lesotho 970 16,838.30Zimbabwe 112,000 256,250,000.00
In these countries, the volumes and values of the RTGS transactions have been increasing
progressively over time. The increase will continue even as these countries impose value
limits in the cheque systems.
2.1.2 The Net Clearing Systems
The Net Clearing System in the MEFMI countries uses the cheque instrument. All 13-
member countries have this system. The net system is semi automated in most countries
except for 2 (Malawi and recently Uganda).
In Malawi cheques are truncated. Cheques are truncated at the receiving bank (in all its
branches), the image is then transmitted to the headquarter of each receiving bank. The
headquarter receiving bank produces a consolidated file of the amounts and the images are
transmitted via Malswitch to the Electronic Cheque Clearing House (ECCH), where netting is
done on the same day and the net batch is sent to the RTGS for final settlement.
In Uganda, they have recently implemented the use of SWIFT File Act services, where the
presenting banks process their electronic journals and upload in SWIFT File Act as bulk file
and send it to the Clearing House. The clearing house process the net obligations of the
members and the net batch file is submitted to the RTGS for final settlement on the same day.
Physical items (cheques) are later submitted at the clearing house for exchange.
In other member countries, the semi automation level operates as follows; the presenting
banks process electronic journals and submit them in a diskette to the clearing house. The
clearing process the net obligations and submits the file (by manual uploading the data to the
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RTGS system for final settlement on the same day. Physical items (cheques) are submitted
for exchange at the clearing house the same time the electronic journals are submitted.
The operations and ownership of the clearing houses differ in the member countries. The
majority is vested with the central bank. Table 2 highlights the ownership and operations role.
Table 2. Ownership and Operational Roles of the Net Clearing System
S/N Country Ownership Operator 1 Botswana Bankers Association Bankers Association 2 Kenya Central Bank of Kenya
(CBK) and Bankers Association
CBK & Bankers Association
3 Lesotho Central Bank of Lesotho (CBL)
CBL
4 Malawi Bankers Association Bankers Association 5 Mozambique Bank of Mozambique
(BOM) BOM
6 Namibia NamClear Limited. Owned by banks
NamClear Ltd.
7 Rwanda National Bank of Rwanda (NBR)
NBR
8 Swaziland Central Bank of Swaziland (CBS)
CBS
9 Tanzania Bank of Tanzania (BOT) BOT 10 Uganda Bank of Uganda (BOU) BOU 11 Zambia Bank of Zambia (BOZ) BOZ 12 Zimbabwe Reserve Bank of
Zimbabwe (RBZ) RBZ
The settlement asset is central bank money. Access to the system is provided in readily
available rules of the system, but it is restricted to commercial banks (banks that issue
cheques). The volumes and values of the clearing houses in most countries are still high
despite the implementation of the RTGS system (see table 3). This makes the Net Clearing
System a systemically important payment system second only to the RTGS system in these
countries. Plans are underway in most of these countries to implement value limits in cheque
clearing.
In some countries, failure to settle mechanisms was adopted to mitigate failure of the highest
net obligator in the net clearing system. A case is noted in Uganda, where they have opted for
defaulter’s pay mechanism.
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Table 3. Average monthly volumes and values of Net Clearing Systems transactions.
S/N Country Volumes Values (Million USD)1 Kenya 1,274,000 16,759,404.062 Malawi 123,306 3,110,237.083 Tanzania 4,035 31,167.924 Lesotho 40,086 1,590.615 Zimbabwe 1,085,000 41,500,000.00
2.1.3 Other Retail Systems
Retail systems in the region include, direct debits, direct credits (EFTs) and card payment
systems (switches and instruments). Cheques clearing as discussed in 2.1.2 above is still not
per se equated as a retail system in most member countries due to aggregate values processed
in the system. However, with introduction of value limits it would be a matter of time when it
starts processing only low-value instruments. Most of these retail systems, apart from card
payment switches, are processed through the net clearing system. The method of submission
of files is similar to that of cheques. That is by diskettes in countries with semi-automated
clearing houses and by network submission in the case of Malawi (Malswitch) and Uganda
(SWIFT FileAct).
Settlement of these retail payments is processed in the RTGS (for countries with RTGS) or in
books of the banks in the central bank for final settlement. These systems are governed by
operating rules, and managed by central banks or bankers associations (see Table 3, it also
applies to the retail systems). The settlement asset is the central bank money. The average
monthly volumes and values of the EFT transactions is provided in table 4.
Table 4. Average monthly volumes and values of EFT transaction.
S/N Country Volumes Values (Million USD)1 Kenya 430,000 3,123,678.532 Malawi N/A N/3 Tanzania 12,984 13,682,694.124 Lesotho N/A N/5 Zimbabwe 3,788,000 5,053,500.00
A
A
Card payment switches are operated by private sector or with joint venture with the central
bank. The switches clear card payment transactions Point of Sale and ATM transactions.
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Final settlement is done either in commercial bank money (where banks have agreed to have
a settlement agent and in other countries, it is through the central bank). Table 5 shows the
card switch ownership and operations arrangements.
Table 5. Ownership and Operational Roles of the Card Switches
S/N Country Ownership Operator 1 Kenya Consortium of banks
formed Kenswitch Ltd. Kenswitch Ltd.
2 Malawi Central bank and Malswitch Ltd.
Malswitch Ltd.
3 Namibia NamClear Limited. Owned by banks
NamClear Ltd.
4 Rwanda National Bank of Rwanda and banks established Simtel Ltd
Simtel Ltd.
5 Tanzania Bank of Tanzania Settlement agent for Visa Domestic Clearing
BoT as settlement agent of domestic visa card transactions
8 Zambia Bank of Zambia Settlement agent for Visa Domestic Clearing
BoZ as settlement agent of domestic visa card transactions
9 Zimbabwe Consortium of banks formed Zimswitch
Zimswitch Ltd.
2.1.4 Securities Settlement Systems
Securities settlement systems referred in this part is the trade and settlement of Government
Treasury Bills/Bonds. All MEFMI central banks own and operate the securities settlement
system, where Government securities are kept in book entry in a central depository system
(CDS), most countries have dematerialised their securities in the CDS. The system is
interfaced with the RTGS systems in most countries to achieve DvP with straight through
processing (STP). The securities in all countries are used as collateral in provision of central
bank lending and for implementation of monetary policy. The linkage to the RTGS also
facilitates efficient pledging of these securities in intraday loan facility and efficient
implementation of the monetary policy. Table 6 provides an overview of operations of
securities settlement systems in the MEFMI region.
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Table 6. Operations of Government Securities Settlement System
S/N Country Settlement cycle
Eligible participants
Link to RTGS
CDS-Ownership
1 Botswana T+0 Primary dealers (banks)
No BOB
2 Kenya T+2 Direct participation
Yes CBK
3 Lesotho T+5 Primary dealers (banks)
Yes CBL
4 Malawi T+6 Primary dealer(banks)
Yes RBZ
5 Mozambique T+3 Primary dealer (banks/pension firms)
No RTGS BOM
6 Namibia T+1 Primary dealer (banks/pension firms)
No RTGS BON
7 Tanzania T+1 Primary dealer(banks)
Yes BOT
8 Zambia T+0 Primary dealer(banks)
Yes BOZ
9 Zimbabwe T+0 Primary dealer (banks)
Yes RBZ
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Chapter III
Evaluation of the Status of Oversight in the MEFMI region
3.0 Introduction Oversight function in the MEFMI region is still at its infancy stage. Not all central banks
have oversight function. Out of the 13 members, only 8 countries have defined oversight
units. However even in these central banks with oversight function, in some the function is
not well defined and it lacks capacity (staff ) to perform the oversight activities.(see the
organizational structures which highlights in detail in figure 1 in section 3.1 ).
3.1 Organisation of the Payment System Department
Payment system departments in the region have emerged in the last ten years, following
modernisation of countries payment systems. In the SADC region (which has 10 of the
members of MEFMI) modernisation commenced in late 1990s, under the auspices of SADC
payment system project31. SADC member countries were urged to have a documented and
authorised strategic framework for its domestic payment system before the year 200032. This
was achieved and currently all countries have or are reviewing their strategic frameworks. In
these strategic frameworks, payment system organisation was one of the agenda. Its
implementation however differed across the central banks. In MEFMI countries as the
payment system departments have recently gained independence from other departments such
as management information systems or banking. The separation has to some extent led
central banks to effectively perform payment system functions. RTGS systems have had a
major contribution to the need of creation of payment system departments, including the
increase of market players in payment system service provision.
3.1.1 Separation of function and staff
The oversight activities in MEFMI central banks has been placed in payment system
departments. There are countries that have separate units of oversight and operations of
31 Payment System in the Southern Africa Development Community, BIS 1999 32 Ibid., p ii
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payment systems. However, when it comes to human resource the same staff in operations
also perform oversight functions. In other countries, the oversight function is not established
though structurally it is envisioned. Separation of functions of operations and oversight is
vital in ensuring that the central banks systems are consistently assessed without any biases.
It is important that the oversight is carried out by a unit separate or distinct from the
operations unit. The BIS-CPSS Oversight Report provides that a principle that states-
“…A central bank needs to be clear when it is acting as regulator and when as owner and/or operator. This can be facilitated by separating the functions into different organisational units, managed by different personnel.”33
This is not the case in all MEFMI countries, as indicated in table 7 below and the
organization structures provided in schedule III.
Table 7. Oversight structure in the region
S/N Country Existence of Oversight Unit
Number of Staff
Existence of documented policy
Activities done on what basis
Separation of functions
1 Botswana Yes 2 officers No Adhoc/periodic Not clear 2 Kenya Yes 2 officers No Adhoc/periodic Not clear 3 Lesotho Yes Nil No Adhoc No 4 Malawi Yes Nil/ but
operations staff perform this duty
No Adhoc/periodic No
5 Mozambique Yes 3 officers No Adhoc/periodic No 6 Namibia Yes 2 officers No Adhoc/periodic No 7 Rwanda No Nil No No No 8 Swaziland Yes 2 staff No Adhoc No 9 Tanzania Yes 3 officers Drafts Adhoc/Periodic Yes 10 Uganda Yes Nil/ but
operations staff perform this duty
No Adhoc/Periodic Not clear
11 Zambia Yes 2 officers Drafts Adhoc/periodic Not clear 12 Zimbabwe Yes 2 officers Yes Adhoc/periodic Yes
3.2 Governance and Regulatory Arrangements
The governance arrangement for the payment and settlement systems in the region is
performed by the entities that operate the system. Regulation is done by the central banks.
The Governance arrangement takes the form of multilateral contractual framework where
33 CPSS-Oversight Report, 2005, p. 26
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operating rules of the system and service level agreements are executed by all members.
Membership criteria is provided in the rules of these systems.
Regulation of these payment and settlement systems is done by the central banks, by either
explicit statutory powers or by the role of the central bank as a regulator of the financial
sector in a country or under contractual framework or both. In some countries statutory
regulatory mandate is provided in the NPS Act or provision in their Banking Act where the
central bank is given specific powers to regulate the payment, clearing and settlement system,
by supervision, oversight and monitoring. In others the central bank applies the powers of the
supervisory role of financial sector in regulating the system, albeit, most of these systems are
operated by the central banks hence the question of strict regulation of the system is not
applied in such cases.
It has been observed that, even where there are explicit statutory provisions, the practice of
actual regulation (oversight) has not been applied effectively in the field. These has been due
to several factor, that include capacity (skills and resources), management appreciation of the
importance of payment system oversight, and lack of effective oversight tools. The
subsequent chapter ventures to find practical solutions to these challenges facing the MEFMI
countries.
The legal and regulatory framework in most of the countries does not support electronic
transactions. As we have noted, all modern payment and settlement systems are electronic
systems, thus changing the traditional banking practices which was manual and paper work
intensive. Principles such as finality and irrevocability of payment and settlement, netting
arrangements, DvP, PvP lack legal support in most MEFMI countries. The only reliance is
made on contractual arrangement to bind the parties to the principles and laws of general
applications, such as company law, Bills of Exchange Act, Insolvency Laws, Banking Laws
and other laws relevant to the operations of payment systems. This is a great challenge, as it
creates legal uncertainty in the event of liquidation or bankruptcy or litigations pertaining to
the payment and settlement system transactions. Table 8 highlights legal status in support of
payment system operations in the region.
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Table 8. Legal Status in Support of Payment System Operations
S/N Country NPS Act Recognition of Electronic Evidence
Contractual Arrangements
1 Botswana Yes No Yes 2 Kenya No Yes Yes 3 Lesotho No No Yes 4 Malawi No No Yes 5 Mozambique No No Yes 6 Namibia Yes No Yes 7 Rwanda No No Yes 8 Swaziland No No Yes 9 Tanzania No Yes Yes 10 Uganda No No Yes 11 Zambia No No Yes 12 Zimbabwe Yes Yes Yes
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Chapter IV
Recommendations for an Effective Oversight Approach
4.0 Introduction
In recommending an effective approach of oversight function for the MEFMI member states,
a structured and phased implementation plan is recommended, that may be applied by all
countries depending on their level of payment systems development, skills and human
resources.
It has been observed that where there are developments in payment and settlement systems,
the regulatory aim is to ensure that the systems do not poise risks to the financial sector and
thereby affecting the financial stability in a country. The BIS for instance has issued several
reports on payment systems such Core Principles for Systemically Important Payment
Systems34, Recommendations for Securities Settlement Systems35, and the Oversight
Report36. These reports, all have a common theme, which is management of risks in payment
systems. The approach and implementation of risk management tools is left for the central
banks application and the development of type of the tools is also an issue left for the central
banks. This chapter provides a structural approach on effective implementation of oversight
for the MEFMI member states in a generic manner that may be adopted by any of the
country, even in those that have began implementing an oversight framework.
4.1 Implementation Steps 4.1.1 Oversight Function Unit
The first step is to establish an oversight functional unit, with adequate skilled human
resources. The unit would document, monitor and perform the day to day activities of
oversight. This institutional setup should be structured in such a way that independence is
34 CPSS Report, 2002 35 CPSS-IOSCO Report, 2003 36 CPSS Report, 2005
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achieved, the reporting lines should clearly remove possibilities of bias or compromise to the
recommendations that the oversight unit may provide, specifically in cases where the
overseer is overseeing a system operated by the central bank. The underlying principle should
be quoted below:-
“…A central bank needs to be clear when it is acting as regulator and when as owner and/or operator. This can be facilitated by separating the functions into different organisational units, managed by different personnel.”37
In countries that have mixed the functions or use staff from operations to conduct oversight
should discourage this practice as it may undermine effective oversight function. See
Schedule III to this paper for the oversight organization structures of the member countries.
4.1.2 Oversight Objectives
The second step of implementing an oversight function is to ensure that appropriate
objectives for the function are set. The objectives of oversight should reflect the main
objectives of risk management in the existing payment systems in a country. The main risk is
systemic risk. Other risks inherent in the payment system should be identified and managed
as they could possibly lead to systemic risk. The objectives can be summarized into two parts
safety and efficiency38 of the payment system. Safety relates to risk management and
efficiency relates to the practicality, usefulness and cost effectiveness of the systems.
However, other objectives may be articulated depending on the policy of the central bank,
such as consumer protection, competition and money laundering control. Central banks
should publish their oversight policy in an oversight framework document that is open for
public consumption, since transparency will create responsibility, accountability,
effectiveness and consistency in the oversight function. The oversight objectives could also
have a statutory backing by being included for example in the NPS Act. For a template see
Schedule I to this paper.
37 CPSS-Oversight Report, 2005, p. 26 38 BIS-Oversight Report at p. 14, provides that central banks share the same oversight objectives of safety and
efficiency.
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4.1.3 Oversight Documentation
The third step is to develop documentation for oversight activities, which includes adopting
the international standards for assessment, (customized to a country’s environment) and
supporting documentation that clearly lays down the scope, oversight operational manuals,
reporting formats etc ( templates on these are provided in the Schedules II to this Paper).
4.1.4 Oversight Activities
The fourth step is to act on the set objectives and the oversight framework that is
documented, following a consistent working plan, with identifiable deliverables (reports)..
The central banks should ensure that human resource capacity is provided which is
multidisciplinary in nature, with expertise in financial analysis, legal, economics, information
technology and other relevant fields. Periodic capacity building should also be carried out to
keep the staff abreast with changes in the market. The activities of oversight should be
performed objectively and consistently with predetermined deliverables that may be
disseminated to higher authority for action and possibly published for the markets
consumption. The authority should take timely actions on the recommendations to remedy
the problem or effect a change as the case may be.
The activities include:-
(a) Data Collection
Information should be gathered to meet the oversight objective. Information on
systems performance, operations, liquidity needs, instruments usage, and any
other relevant information that would assist in risk management and other
objectives of oversight. Formats or forms of requesting the information should be
simple and easy to fill.
The source of information should be identified as some of the information may be
obtained within the central bank itself, particularly from systems that the central
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bank is operating. Regular reporting intervals should be established for
submission of information to the oversight unit.
Where necessary formal powers may be used or moral suasion applied in
gathering information from the operators and members of the payment system.
Cooperation with Banking Supervision department is vital, joint oversight team
may be established with the Supervisors to determine the type of information
Oversight request so as to avoid duplication and reduce costs of production of
information. Cooperation should also be extended with the external regulators
such as capital markets authority, telecommunication authority and any other
relevant regulator.
(b) Analysis
The information gathered needs to be interpreted and analysed. Effective methods
should be applied to arrive at the desired result within a reasonable time. Methods
may be either using qualitative or quantitative analysis tools.
Qualitative analysis may take the form of assessing compliance to standards such
as the core principles, recommendations on securities settlement systems,
domestic standards, benchmarks etc. While quantitative analysis may use
quantifications of the data, trends analysis, probabilities, assumptions using
different risk analysis formulas.
(c) On going Monitoring
Apart from periodic data collection and analysis there should also be a constant
monitoring of the systems such as the RTGS and the Net Clearing Systems of
systemic importance. Online monitoring should be objective, where assessment of
the risk in the system is done. For instance liquidity risk can be monitored by
observations on the participants with the need and whether such liquidity would
build up to cause credit risk to the participant. The overseer would be able to
know this and should report on the same to his supervisors for actions. Similarly
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other risk can be monitored such as operational risks e.g down times or
disruptions of the network etc.
(d) Corrective Action
Following the results of analysis or online monitoring report of the results should
be timely communicated to the authorities for action. Actions to remedy a
problem should likewise be promptly taken, delays may exacerbate the problem.
In some instance particularly in systems not operated by the central bank powers
may be required. The central bank should device means to ensure its corrective
orders are implemented by the participants. The rules of the systems should
provide for remedial actions in events by the overseer or supervisor in risk
management issues.
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Chapter IV
Conclusion
5.0 Conclusion
Few countries in the MEFMI region have oversight function, and even in those that the
function exists, the approach has not been systematic and structured. Due to a number of
challenges, ranging from, lack of mandate, complacency (regarding oversight as part of
banking supervision activities), lack of capacity (skilled human resource), ineffective
institutional setup of the oversight or PS unit and lack of documentation that highlight the
central bank’s role and obligation on payment system oversight.
Chapter 3 of this paper proposed several implementation steps that if implemented central
banks would be able to effectively oversee their payment, settlement and securities settlement
systems. The recommendations are generic they may be used by any country in the region.
Oversight tools and templates are provided in the Schedules to the paper, which may be
extended and adjusted according to the needs in each country.
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Schedules
Schedule I
Template of Oversight Framework The Oversight Framework Document should provide for the overall oversight structure of a central
bank. The framework provides a bird’s eye view of the oversight function in a particular country. This
document does not provide for the detailed hands on activities but it is a high level sort of policy
document. The contents and layout may be structured as follows:-
1. Introduction
Provide the overall importance of payment system in your country, its current developments and
impact on the monetary policy and financial markets developments in the country. Briefly state the
role of central banks ensuring financial stability and connect the same with the need for oversight
as part of the role of the central bank in financial system stability.
2. Oversight Objectives
Clearly state the oversight objectives that the central bank shall pursue. Conventionally its safety
and efficiency. It is all about risk management inherent in the countries payment system.
3. Oversight Organisation
Highlight of the ideal organisation structure should be provided, to sensitise, where the central
bank is not aware of independence setup. This section should which unit in the central bank is
responsible for oversight and how it shall be able to pursue the activities without bias to central
bank’s systems
4. Scope of the Oversight
Indicate the outreach of the oversight activities that is it will cover what systems and instruments
and what kind of institutions that operate such systems and instruments
5. Oversight Activities
State the type of activities that will be performed such as monitoring, assessment, enforcement or
inducing change, sensitization, consumer protection etc
6. Oversight Tools
State the type of methods that will be used to facilitate production of deliverables. Such as
research methodology that would be used for information gathering, legal mandate to obtain the
information, analytical tools (quantitative or qualitative methods)
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Schedule II
Template of Oversight Operations Manual The Oversight Operations Manual Document should highlight on the detailed oversight activities that
the overseer shall undertake. The contents and layout may be structured as follows:-
1. Introduction
Briefly introduce the oversight role of the central bank, when was it established, from what basis
is it drawing its oversight mandate and the scope of oversight.
2. Payment System Risks
Identify the risks in the payment, settlement and securities system. Define them and indicate the
possible methods of containing them. Level them according to their severity and impact on the
payment system. Provide for record of such risks and in which systems are prone and concentrated
3. Monitoring and Assessment of Risks
State the methodology that will be used, in data collection and analysis. Use qualitative and
quantitative analysis, to determine the probability and severity and impact of the risks. The aim of
the analysis should be investigative on how and what if the risks occur. The analysts should be
capable of applying analytical formulae to determine probabilities of occurrence of such risks and
impact of such risks if they are to occur.
4. Management of Risks
Provide how the identified probable risks may be mitigated, by suggestions, recommendations,
and action plans to be implemented by the system that has or is likely to introduce the risk.
5. Assessment Outputs
State how the reporting shall be timely and properly addressed to the relevant authority for action.
6. Consistency
The monitoring and assessment should be continues activity with pre-determined schedules that
are strictly followed.
7. Standards and Benchmarking
State the type of standards that will be used in the assessment e.g BIS Core principles for
systemically important payment systems and the benchmarks set to be achieved in efficiency or
controlling risks.
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Schedule III
MEFMI Countries NPS Organisation Charts
Governor
Deputy Governor
Senior Division Chief
Finance & Surveillance
Oversight Policy Project
RESERVE BANK OF ZIMBABWE PAYMENT SYSTEM DIVISION
Operations
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CENTRAL BANK OF LESOTHO PAYMENT SYSTEM DEPARTMENT
Governor
Deputy Governor
Director Operations
Banking Payment System
Currency Rural Finance
Development Finance
Oversight Operations
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CENTRAL BANK OF SWAZILAND PAYMENT SYSTEM DEPARTMENT
Governor
Deputy Governor
Senior Deputy Governor
Director Payment System
Manager Manager Manager Currency Payment System Banking
Risk
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Oversight RTGS Research
Analysis
BANK OF MOZAMBIQUE PAYMENT SYSTEM DEPARTMENT
Governor
Deputy Governor
General Manager
Director Currency & Payment System
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Head of Division Currency
Head of Division Payment System
Operations Oversight Team Team
BANK OF NAMIBIA PAYMENT SYSTEM DEPARTMENT
Governor
Deputy Governor
Assistant Governor
Director Banking Supervision
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Deputy Director Banking Examination &
Analysis
Deputy Director
Business Developments
Operations
Payment System Deputy Director
Policy & Regulation
Oversight& Risk
BANK OF BOTSWANA PAYMENT SYSTEM DEPARTMENT
Governor
Deputy Governor
Director National
Manager Payment System
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Assistant Manager Policy/Research/development/Oversight
Supervisor Help desk
Operations clerk
Assistant Manager Operations
Supervisor/clerk
Supervisor/clerk
RESERVE BANK OF MALAWI PAYMENT SYSTEM DEPARTMENT
Governor
Deputy Governor
General Manager
Director Banking & Payment System
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Manager Payment System
Manager Banking Payment
Policy & Research
Risk & Oversight
RTGS Operations
NATIONAL BANK OF RWANDA PAYMENT SYSTEM DEPARTMENT
Governor
Vice Governor
Director Payment System
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BANK OF UGANDA PAYMENT SYSTEM DEPARTMENT
Governor
Deputy Governor
Executive Director Finance
Payment & Settlement Department
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Oversight Operations
Assistant Director Payment System
BANK OF ZAMBIA PAYMENT SYSTEM DEPARTMENT
Governor
Deputy Governor
Director Banking, Currency and
Payment System
Assistant Director Payment System
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Senior Manager Oversight
Senior Manager Senior Manager Policy& Research Operations
BANK OF TANZANIA PAYMENT SYSTEM DEPARTMENT
Governor
Deputy Governor
Director National Payment System
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Deputy Director Oversight
Deputy Director Operations
BANK OF UGANDA PAYMENT SYSTEM DEPARTMENT
Governor
Deputy Governor
Executive Director Finance
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Oversight Operations
Payment & Settlement Department
References Reports
Bank for International Settlement, Central bank Oversight of Payment and Settlement Systems, May 2005
Bank for International Settlement, Core Principles for Systemically Important Payment Systems, January 2001
Bank for International Settlement, Glossary of Terms, 2001
Bank for International Settlement, Recommendation for Securities Settlement Systems Basel, 2002
Bank of England, Oversight of Payment Systems, November 2000
Bank of England, Payment System Oversight Report, 2005
UNPD, Human Development Trends 2005
World Bank/CEMLA, The Oversight of the Payments Systems: A framework for the Development and Governance of Payment Systems in Emerging Economies, July 2001
Websites
http://www.bancomoc.mzhttp://www.bis.org
http://www.bna.ao http://www.bnr.rw
http://www.bob.bw
http://www.bot-tz.org
http://www.bou.or.ughttp://www.boz.org
http://www.centralbank.go.ke
http://www.centralbank.org.ls
http://www.centralbank.org.sz
http://www.gapminder.org
http://www.imf.org/external/pubs/ft/fsa/eng/index.htm
http://www.rbm.mw
http://www.undp.org
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