Technical Paper effective Oversight - MEFMImefmi.org/mefmifellows/wp-content/uploads/2016/10/... · It provides some recommendations for an effective Oversight ... Despite this relative

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.


4

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.


11

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


12

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.


13

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


14

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.


15

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


16

http://www.undp.org/

http://www.gapminder.org/

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.


17

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


18

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.


19

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.


20

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.


21

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


22

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


23

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


24

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.


25

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


26

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


27

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.


28

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


29

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


30

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.


31

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.


32

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)


33

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.


34

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


35

CENTRAL BANK OF LESOTHO PAYMENT SYSTEM DEPARTMENT

Governor

Deputy Governor

Director Operations

Banking Payment System

Currency Rural Finance

Development Finance

Oversight Operations


36

CENTRAL BANK OF SWAZILAND PAYMENT SYSTEM DEPARTMENT

Governor

Deputy Governor

Senior Deputy Governor

Director Payment System

Manager Manager Manager Currency Payment System Banking

Risk


37

Oversight RTGS Research

Analysis

BANK OF MOZAMBIQUE PAYMENT SYSTEM DEPARTMENT

Governor

Deputy Governor

General Manager

Director Currency & Payment System


38

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


39

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


40

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


41

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


42

BANK OF UGANDA PAYMENT SYSTEM DEPARTMENT

Governor

Deputy Governor

Executive Director Finance

Payment & Settlement Department


43


Assistant Director Payment System

BANK OF ZAMBIA PAYMENT SYSTEM DEPARTMENT

Governor

Deputy Governor

Director Banking, Currency and

Payment System

Assistant Director Payment System


44

Senior Manager Oversight

Senior Manager Senior Manager Policy& Research Operations

BANK OF TANZANIA PAYMENT SYSTEM DEPARTMENT

Governor

Deputy Governor

Director National Payment System


45

Deputy Director Oversight

Deputy Director Operations

BANK OF UGANDA PAYMENT SYSTEM DEPARTMENT

Governor

Deputy Governor

Executive Director Finance


46


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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http://www.bancomoc.mz/

http://www.bob.bw/

http://www.bou.or.ug/

http://www.boz.org/

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/

Documents

Technical Paper effective Oversight - MEFMImefmi.org/mefmifellows/wp-content/uploads/2016/10/... · It provides some recommendations for an effective Oversight ... Despite this relative