Assessment methodology for payment systems

Pdf File 635.88 KByte,

ASSESSMENT METHODOLOGY FOR PAYMENT SYSTEMS

1.

General introduction

In June 2013 the Governing Council adopted the Principles for financial market infrastructures (PFMIs) developed by the Committee on Payment and Settlement Systems (CPSS) and the Technical Committee of the International Organization of Securities Commissions (IOSCO) as a basis for the conduct of Eurosystem oversight in relation to all types of financial market infrastructures (FMIs). For payment systems, the PFMIs will be implemented through the ECB Regulation on oversight requirements for systemically important payment systems (SIPS) (the SIPS Regulation) and the revised oversight framework for retail payment systems (RPSs).

The SIPS Regulation applies to and is binding on all payment systems which meet the criteria laid down in Article 1(3) of the SIPS Regulation, i.e. both large-value payment systems (LVPSs) and RPSs of systemic importance, operated both by central banks and private operators. Payment systems that do not meet the criteria set out in Article 1(3) will not be considered to be of systemic importance and the SIPS Regulation will not apply to these systems. However, these systems nevertheless play a role, to various degrees, with respect to both the safety and efficiency of the financial system and citizens' confidence in the euro. While non-systemically important LVPSs have to respect the PFMIs in their entirety, non-systemically important RPSs must comply with a sub-set of PFMIs and key considerations (KCs) , as set out in the revised oversight framework for RPSs (principle of proportionality).

The Eurosystem has developed an assessment methodology for payment systems. This methodology aims at ensuring a consistent and harmonised application of the SIPS Regulation, and the PFMIs, in the conduct of oversight assessments by the Eurosystem. The assessment methodology serves to promote full observance of the requirements laid down in the SIPS Regulation/PFMIs by helping assessors to identify non-compliance and/or issues of concern that should be addressed. The answers to the questions will serve as key input for the actual oversight assessment; the assessment itself should always use the requirements, either in the SIPS Regulation or the PFMIs, as a reference.

The Eurosystem assessment methodology takes the CPSS-IOSCO assessment methodology as a basis (i.e. the PFMIs and KCs applicable to payment systems) and complements it with questions from the previously used "Terms of Reference for the oversight assessment of euro systemically and prominently important payment

systems against the Core Principles", thereby establishing one single framework for SIPS and non-SIPS. The new methodology also covers the "Oversight expectations for links between retail payment systems" (November 2012).

2.

Use of this assessment methodology

The CPSS-IOSCO general instructions and practices for conducting an assessment against the PFMIs are valid for all assessments of payment systems conducted by the Eurosystem, regardless of the classification of the payment system. Guidance on defining scope, fact finding, the structure of assessment reports, etc. is contained in the CPSS-IOSCO report entitled "Principles for financial market infrastructures: Disclosure framework and Assessment methodology" (December 2012). As concerns the assessment rating of levels of compliance with the SIPS Regulation, the following assessment rating will be used:

Compliant The SIPS complies with all provisions of the article.

Broadly compliant

The assessment has identified an infringement of one or more provision(s) of the article which the SIPS operator shall address and follow-up on in a defined timeline.

Partly compliant

The assessment has identified an infringement of one or more provision(s) of the article that could become serious if not addressed promptly. The SIPS operator shall accord a high priority to addressing these issues.

Not compliant

The assessment has identified a serious infringement of one or more provisions of the article that warrant(s) immediate action. Therefore, the SIPS operator shall accord the highest priority to addressing these issues.

For reasons of efficiency and comparability with the CPSS-IOSCO methodology (where ratings are assigned at the level of each principle), compliance ratings under the SIPS Regulation are assigned at the level of an article. However, an infringement of the SIPS Regulation is always identified in relation to a specific provision of the Regulation (e.g. a specific paragraph of an article) and not to an article as a whole.

Page 2 of 105

In case of `broadly', `partly' and `not compliant' ratings, the competent authority, following the process described in Article 22 of the Regulation, shall inform the SIPS operator of the nature of the non-compliance. In these cases the competent authority may impose a corrective measure. With regards to the imposition of a sanction, and in accordance with Article 23 of the Regulation, the ECB will apply Regulation (EC) No 2157/1999 of the European Central Bank of 23 September 1999 on the powers of the European Central Bank to impose sanctions1. Corrective measures may be imposed independent of or in parallel with sanctions, as their useful effect is different. This document consists of two parts: the first part contains questions for the assessment of payment systems (all categories) and the second part contains the questions for the assessment of links between RPSs. The questions for non-SIPS can be found in the right-hand column and these are all taken from the CPSSIOSCO methodology, including the numbering. However, the sequence of the assessment questions in this document follows the order of the articles of the SIPS Regulation. The questions for SIPS, which can be found in the left-hand column, have been drafted in such a way that they reflect the text and the requirements of the SIPS Regulation. Overseers will use the questions in the left-hand column if the payment system being assessed is classified as a SIPS and the relevant questions from the right-hand column when assessing a payment system that is not a SIPS. Competent authorities, i.e. Eurosystem central banks with primary oversight responsibilities for one or more payment systems, are expected to regularly assess compliance of these systems with the SIPS Regulation requirements and/or the PFMIs, whichever is applicable.

1 In determining whether to impose a sanction and in determining the appropriate sanction, the ECB must be guided by the principle of proportionality and must take into consideration, the circumstances of the specific case (e.g. good faith, the degree of openness of the SIPS operator in the interpretation and fulfilment of the obligation arising from an ECB regulation, degree of diligence and cooperation, evidence wilful deceit; the seriousness of the effects of the infringement; repetition, frequency or duration of the infringement; profits by reason of the infringement; economic size of undertaking; prior sanctions imposed by other authorities on the same undertaking and based on the same facts). The sanctions take the form of fines/periodic payments and have an upper limit of 500.000 in the case of fines or 10.000/day of infringement (up to six months), in the case of periodic payments.

Page 3 of 105

3.

Assessment questions for payment systems

Article 3 Legal soundness / Principle 1 Legal basis SIPS

Non SIPS LVPS PIRPS ORPS

Article 3(1)

PFMI 1 KC 1

A SIPS operator shall assess whether the applicable law in all relevant legal The legal basis should provide a high degree of certainty for each material

systems provides a high degree of certainty for and supports each material aspect aspect of an FMI's activities in all relevant jurisdictions.

of the activities of its SIPS.

3.1.1: What are the material aspects of the SIPS's activities that require a high degree of certainty (for example, rights and interests in financial instruments; settlement finality; netting; interoperability; arrangements for PvP; collateral arrangements; and default procedures)?

3.1.2: What are the relevant legal systems for each material aspect of the SIPS's activities?

Material aspects and relevant jurisdictions

Q.1.1.1: What are the material aspects of the FMI's activities that require a high degree of legal certainty (for example, rights and interests in financial instruments; settlement finality; netting; interoperability; arrangements for PvP; collateral arrangements; and default procedures)?

3.1.3: Is there any specific legislation in the legal system governing the SIPS that relates to payments (please list) and/or is there any national legislation that relates to the electronic processing of payments? (If so, please explain.)

3.1.4: What legal system and legal framework governs the establishment and activities of the SIPS operator itself?

Q.1.1.2: What are the relevant jurisdictions for each material aspect of the FMI's activities?

Q.1.1.3: Is there any specific national legislation in the jurisdiction governing the system that relates to payments (please list) and/or is there any specific national legislation that relates to the electronic processing of payments?(please explain)

Page 4 of 105

3.1.5: How does the SIPS operator ensure that t h e applicable law and its rules, procedures and contracts for the operation of a SIPS (its legal basis) provide a high degree of legal certainty for each material aspect of the SIPS's activities in all relevant legal systems?

Q 1.1.4: What jurisdiction and legal framework governs the establishment and activities of the system operator itself?

Legal basis for each material aspect

3.1.6: How does the operator of a SIPS that has a netting arrangement ensure that its legal basis supports the enforceability of that arrangement?

3.1.7: How is it ensured that the SIPS's legal basis supports the finality of transactions (moment of entry into the system, moment of irrevocability), including those of an insolvent participant? Does the legal basis for the external settlement mechanisms the SIPS uses also support this finality?

Q.1.1.3: How does the FMI ensure that its legal basis (that is, the legal framework and the FMI's rules, procedures and contracts) provides a high degree of legal certainty for each material aspect of the FMI's activities in all relevant jurisdictions?

d) For an FMI that has a netting arrangement, how does the FMI ensure that its legal basis supports the enforceability of that arrangement?

e) Where settlement finality occurs in an FMI, how does the FMI ensure that its legal basis supports the finality of transactions, including those of an insolvent participant? Does the legal basis for the external settlement mechanisms the FMI uses, such as funds transfer or securities transfer systems, also support this finality?

Article 3(2)

PFMI 1 KC 2

A SIPS operator shall establish SIPS rules and procedures and enter into An FMI should have rules, procedures, and contracts that are clear,

contracts, which are clear and consistent with the applicable law in all relevant understandable, and consistent with relevant laws and regulations.

legal systems.

3.2.1: How has the SIPS operator demonstrated that the SIPS's rules, procedures Q.1.2.1: How has the FMI demonstrated that its rules, procedures and contracts are

and contracts are clear and understandable?

clear and understandable?

3.2.2: How does the SIPS operator ensure that the SIPS's rules, procedures and contracts are consistent with the applicable law in all relevant legal systems (for example, through legal opinions or analyses)? Have any inconsistencies been identified and remedied? Are the SIPS's rules, procedures a nd contracts reviewed or assessed by external authorities or entities?

Q.1.2.2: How does the FMI ensure that its rules, procedures and contracts are consistent with relevant laws and regulations (for example, through legal opinions or analyses)? Have any inconsistencies been identified and remedied? Are the FMI's rules, procedures and contracts reviewed or assessed by external authorities or entities?

3.2.3: Do the SIPS's rules, procedures and contracts have to be approved before Q.1.2.3: Do the FMI's rules, procedures and contracts have to be approved before

Page 5 of 105

coming into effect? If so, by whom and how?

coming into effect? If so, by whom and how?

3.2.4: Which specific and legally binding rules (and procedures)/contracts/terms and Q 1.2.4: Which specific and legally binding rules (and procedures)/ contracts/terms

conditions govern the SIPS? Broadly speaking, what areas do they cover?

and conditions govern the system? Broadly speaking, what areas do they

cover?

Article 3(3)

PFMI 1 KC 3

A SIPS operator shall be able to specify the applicable law, rules, procedures and An FMI should be able to articulate the legal basis for its activities to relevant

contracts for the operation of a SIPS to the competent authority, participants, authorities, participants, and, where relevant, participants' customers, in a

and, where relevant, participants' customers, in a clear and understandable way. clear and understandable way.

3.3.1: How does the SIPS operator specify the legal basis for the SIPS's Q.1.3.1: How does the FMI articulate the legal basis for its activities to relevant

activities to relevant authorities, participants and, where relevant, participants'

authorities, participants and, where relevant, participants' customers?

customers?

Art 3(4)

PFMI 1 KC 4

A SIPS operator shall take measures to ensure that its rules, procedures, and An FMI should have rules, procedures, and contracts that are enforceable in

contracts are enforceable in all relevant legal systems, and that the actions it all relevant jurisdictions. There should be a high degree of certainty that

takes under such rules, procedures and contracts will not be voided, reversed, or actions taken by the FMI under such rules and procedures will not be voided,

subject to stays.

reversed, or subject to stays.

3.4.1: What are the measures the SIPS operator has taken to ensure that the SIPS's rules, procedures and contracts related to the SIPS's operations are enforceable in all relevant legal systems (for example, through legal opinions and analyses)?

3.4.2: If the SIPS's rules allows for foreign participation, has the Settlement Finality Directive (Directive 98/26/EC, the SFD) or, in the case of participants from non-EEA countries, a piece of legislation similar to the SFD been fully implemented in the legal system(s) of these participants or has a legal review process of the legal system(s) governing these participants identified any issues related to the aspects covered by the SFD (in particular related to irrevocability, finality, and/or enforceability of collateral in the case of insolvency of a foreign participant)? (If so, please explain.)

Enforceability of rules, procedures and contracts

Q.1.4.1: How does the FMI achieve a high level of confidence that the rules, procedures and contracts related to its operations are enforceable in all relevant jurisdictions identified in key consideration 1 (for example, through legal opinions and analyses)?

Q. 1.4.2: Has the Settlement Finality Directive (SFD) been fully implemented in the jurisdiction which governs the system or has a legal review process identified any issues related to the implementation of the SFD in the law governing the system? (please explain)

Page 6 of 105

Download Pdf File