CODE OF GOVERNANCE

1

• CODE OF GOVERNANCE
• FOR PAYMENT SYSTMES
• AND BEST PRACTICES
• BY
• STATE BANK OF PAKISTAN

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Core Standards of Governancefor Financial
Stability

• Macro Standards Agency
• 1. Data Dissemination IMF
• 2. Monetary Policy IMF
• 3. Fiscal Policy Transparency IMF
• Market and Infrastructure
• 4. Corporate Governance
  OECD
• 5. Accounting IFAC
• 6. Auditing IFAD
• 7. Insolvency World Bank
• 8. Money Laundering OECD/FATF
• Financial System
• 9. Core Principles of Bank Supervision BIS
• 10. Core Principles of Insurance
  Supervision IAIS
• 11. Core Principles of Securities Supervision
  IOSCO
• 12. Systemically Important Payment System BIS

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Importance of Payment Systems in Financial
Stability

• Why Payment Systems have emerged as
• one of the key factor in the stability of
• financial system. The value of payments
• settled in payment systems signify the
• importance of payment systems in financial
• Stability
• (Daily Average billion US ) GDP
• CLS 4,000
• Fedwire 1,909 13,195
• CHIPS 1,315
• CHAPS Euro 176 2,396
• CHAPS Sterling 358

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Development of Governance Code for Payment and
Settlement Systems

• The Task Force set up by the CPSS has identified
  
• Two Public Policy objectives (safety and
  efficiency) in systemically important payment
  systems (SIPS)
• Ten core principles for SIPS
• Four central banks responsibilities in applying
  the core principles

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Governance Codes Best Practices

• What is a systemically important payment system
  ?
• A PS is Systemically Important if disruption
  within it
• could trigger or transmit further disruptions
  amongst
• participants and ultimately in the financial area
  more
• widely.
• Broadly SIPS may be defined if
• It is the only or the main system in the country
• It handles payments of high individual value or
  where the aggregate is very high
• It is used for settlement of financial market
  transactions or of other relevant payment systems

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Governance Codes Best Practices

• The Core Principles are accepted Standards and
• Practices for safer design and efficient
  operation
• systemically important payment systems
• worldwide
• These principles apply whether the Payment
• Systems are operated by
• Central Bank
• Banks
• Private Owner
• Cross Border Multicurrency

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Governance Codes Best Practices

• Principle I The system should have a well
  founded legal basis under all relevant
  jurisdictions
• completeness and reliability of framework
  legislation
• enforceability of laws and contracts
• clarity of timing of final settlement
• legal recognition of netting arrangements
• relevant provisions of banking and CB laws

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Governance Codes Best Practices

• Legal Framework in Pakistan
• SBP Act 1956
• Negotiable Instrument Act 1881
• Payment Systems and Electronic Funds Transfer Act
  2007
• Electronics Transactions Ordnance 2002
• Cyber Crime Prevention Ordnance 2008
• Contract Act 1872
• Banking Companies Ordnance 1962
• Foreign Exchange Act 1947
• Public Debt Act 1944
• Companies Ordnance 1984
• Pakistan Telecommunication (Re-organization) Act
  1996

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Governance Codes Best Practices

• Principle II The systems rules and procedures
• should enable participants to have a clear
  understanding of the systems impact on each of
• the financial risks they incur through
  participation.
• Systems rules and procedures should
• be clear, comprehensive and up-to-date
• explain the systems design, risk management
  procedures, legal basis and role of the parties
• set out procedures and timetables for abnormal
  situations

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Governance Codes Best Practices

• Principle III The system should have clearly
  defined procedures for the management of credit
  risks and liquidity risks, which specify the
  respective responsibilities of the system
  operator and the participants and which provide
  appropriate incentives to manage and contain
  these risks
• The system must have
• Tools for managing credit risks
• Tools for managing liquidity risks
• General Tools
• Incentives to manage these risks

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Governance Codes Best Practices

• Principle IV The system should provide prompt
  final settlement on the day of value, preferably
  during the day and at a minimum at the end of the
  day
• Promptness of final settlement entails
• Clarity in the rules and procedures about the
  irrevocability of the payment
• A defined and legally effective moment of final
  settlement
• Ensuring that operating hours and the settlement
  processes are strictly enforced

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Governance Codes Best Practices

• Principle V A system in which multilateral
  netting takes place should, at a minimum, be
  capable of ensuring the timely completion of
  daily settlements in the event of an inability to
  settle by the participant with the largest single
  settlement obligation
• Additional financial resources must be available
  to meet this contingency
• The amount of these resources must be determined
  appropriately
• Alternatively, other system designs (e.g. RTGS)
  must be explored

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Governance Codes Best Practices

• Principle VI Assets used for settlement should
  preferably be a claim on the central bank where
  other assets are used, they should carry little
  or no credit risk and little or no liquidity risk
• If assets other than a CBs claim are used, it
  should be checked
• the creditworthiness of the issuer
• how readily the asset can be transferred into
  others
• size and duration of exposures of the issuer
• risk controls, if any

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Governance Codes Best Practices

• Principle VII The system should ensure a high
  degree of security and operational reliability
  and should have contingency arrangements for
  timely completion of daily processing
• The following issues should be considered
• General
• Security
• Operational reliability
• Business continuity

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Governance Codes Best Practices

• Principle VIII The system should provide a means
  of making payments which is practical for its
  users and efficient for the economy
• The following issues should be considered
• General Define objectives Identify user needs
  and constraints Identify system choices and
  benefits Determine social and private costs
  Develop decision choices
• Analytical Framework Identify efficiency and
  safety requirements Evaluate costs Identify
  resources Determine practical and safety
  constraints

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Governance Codes Best Practices

• Principle VIII The system should provide a means
  of making payments which is practical for its
  users and efficient for the economy
• The following issues should be considered
• Methods Cost-Benefits or other structured
  analysis involvement of participants and/or
  users in discussions Methodology for data
  collection and analysis Identify data sources

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Governance Codes Best Practices

• Principle IX The system should have objective
  and publicly disclosed criteria for
  participation, which permit fair and open access
• The following issues should be considered
• Access criteria should be justified in terms of
  both safety and efficiency
• Exit criteria

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Governance Codes Best Practices

• Principle X The systems governance arrangements
  should be effective, accountable and transparent
• Major decisions should be made after consultation
  with interested parties
• The systems consistently attains projected
  financial results
• The system delivers payment services that satisfy
  customer needs
• The system complies with the other 9 principles

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The Central Banks Responsibilities in Applying
the Core principles

• A The Central Bank should define clearly its
  payment system objectives and should disclose
  publicly its role and major policies with respect
  to systemically important payment systems
• B The Central Bank should ensure that the
  systems it operates comply with the core
  principles

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The Central Banks Responsibilities in Applying
the Core principles

• C The Central Bank should oversee compliance
  with the Core Principles by systems it does not
  operate and it should have the ability to carry
  out this oversight
• D The Central Bank, in promoting payment system
  safety and efficiency through the Core
  Principles, should cooperate with other central
  banks and with any other relevant domestic and
  foreign authorities

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Compliance Assessment

• These principles are broader codes and are to be
  implemented after assessment of the local market
  needs, local laws, level of development,
  agreements for cross border payments etc.. There
  are two methodologies for assessment of
  compliance
• Formal assessment as part of the Financial Sector
  Assessment Program carried out by IMF / World
  Bank.
• Self Assessment

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Governance Arrangements

• Governance arrangements are the key to
• achieve the objectives of Payment System
• Stability and Efficiency. Effective governance
• also results in
• Rapid and Low cost transactions
• Provide Resiliency, Security and Reliability
• Foster Innovation to meeting changing needs
• Practical for the users

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Governance Arrangements

• The core principle X requires Effective,
• Accountable and Transparent Governance
• Arrangements. There are two basic governance
  arrangements
• Oversight Framework
• Governance Structure and its disclosures to the
  public

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Oversight of Payment Systems

• Why the central bank should be the overseer
• CBs role in maintaining public confidence in
  money
• CBs responsibility for monetary policy (MP) and
  its MP strong link with payment systems
• CBs lender of last resorts function
• CBs ability to act in emergencies and prompt
  government support for its actions

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Standards of Oversight

• General
• Transparency
• International Standards
• Effective power capacity
• Consistency
• Co-operation with other Authorities
• Cross border International Co-operative
  oversight
• Notification
• Primary responsibility
• Assessment of the system on a whole
• Settlement arrangements

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Standards of Oversight

• Scope
• SIPS including RTGS
• Paper based clearing settlement systems
• Retail payment systems
• Securities settlement systems and central
  counterparties
• Payment instruments
• Third party service providers
• Correspondent banks and custodians

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Oversight Framework

• Role of the Overseer
• Develop principles and rules
• Assess/enforce rules compliance
• Promote/coordinate individual and collective
  actions
• Ensure system functioning
• Promote system development

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Oversight Framework

• Instruments of Oversight
• Regulations and Incentives
• For Large Value Systems, defining
  organizational, functional and technical features
  of the system
• For retail, minimum reliability and efficiency
  requirements/criteria for interoperability of
  payment systems

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Oversight Framework

• Instruments of Oversight
• Policy Dialogue (under the traditional activity
  of moral suasion)
• To secure a fair representation of the public and
  private interests and to create consensus for
  policy choices.
• At times, formalized in structured cooperative
  bodies

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Oversight Framework

• Instruments of Oversight
• Monitoring (through collection of information, on
  site inspections, etc.)
• Governance Structure of the system
• Direct Provision of Payment Systems (beyond the
  tradition provision of way to mobilize settlement
  accounts, e.g. RTGS systems, especially in
  emerging economies)

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Oversight

• Way Forward
• Establish dedicated oversight function
• Legal basis for oversight
• Develop co-operative framework with stakeholders
• Develop transparent policies strategies
• Oversee all the payment systems for safety
  efficiency
• Separate oversight for operations
• Foster competition provide level playing field
• Develop capacity and invest in research on policy
  issues

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• THANK YOU