Document Sample

           Wouter Bossu
        Purpose of the presentation
to describe briefly the main legal aspects
regarding the role of central banks vis-à-
vis the payment system.
I.       Introduction

     1. Definition - “payment system” is the combination of
     institutions, systems, mechanisms and instruments utilized
     within an economy, or between interacting economies, in order
     to transfer dematerialized monetary value between economic

• The concept of “monetary value” should be given a sufficiently wide
  meaning: not only “money on account,” but also bonds, money
  market instruments and shares. It may even cover claims resulting
  from financial transactions (derivatives).

• Bank notes and coins not included.
2. The Payment System is an integral part of the Financial System

• The financial system has three main components:

   1.   the markets on which financial assets (credit, including bonds
        and money market instruments, shares, foreign exchange,
        derivatives, etc) are exchanged,

   2.   the (financial) institutions that participate in the said markets
        (banks, investment firms, insurance companies, mutual and
        pension funds, hedge funds, etc.), and

   3.   the payment system.

• Within the payment system, financial institutions execute the
  transactions they have concluded on the financial markets by
  transferring financial assets.
3. Relevance of the Payment System for Central Banks

The payment system is relevant for central banks for six reasons:

1.   Central banks hold one of the most important assets traded on the
     financial markets: (risk free) central bank money.

2.   Central banks have traditionally been involved in the exchange of
     central bank money through payment systems.

3.   Central banks use these payment systems to execute their monetary
     policy operations.

4.   Banks and other money market participants channel liquidity in the
     money market through those very same systems.

5.   The stability of the financial system depends strongly on the quality of
     each of its three key components, including the payment system.

6.   Some central banks would extend their concern toward the use of
     payment instruments with a view to maintain public confidence in the
II.     Role of Central Banks vis-à-vis the
        Payment System
Mandate of Central Banks

A. Traditionally no specific mandate

B. The last two decennia: fundamental, twofold change in approach:

• First, many central banks have received from the lawmakers a
  specific mandate to pursue the stability or soundness of the
  (national) financial system.

• Second, many central banks have now received from the lawmakers
  a specific mandate with respect to the payment system.
Twofold Approach

Central banks should be in a position to pursue their mandate through
a double approach.

1. Through operational involvement in the payment system.

2. Through some form of surveillance - often referred to as “oversight” -
   over key components of the payment system that they do not
   operate themselves.

    – Include systemically important payment systems, central
      securities depositaries, clearing houses, securities settlement
      systems, e-money schemes and sometimes even systemically
      important custodians or service providers (such as SWIFT).

    – Oversight would consist of the (1) formulation and (2)
      enforcement of standards by which key system operators and
      participants would have to abide.
III.    Role of the Legal Framework in supporting
        the Central Bank’s Mandate


• The legal framework plays a key role in underpinning the policies
  and activities of central banks with respect to the payment system.

• Legal framework should:

   1. define with precision the central bank’s mandate
   2. delineate clearly its responsibilities
   3. offer adequate instruments
   4. document properly the central bank’s activities
Definition of the Central Bank’s Mandate: Key Elements

• An explicit mandate of the central bank with respect to the payment

• In the organic law of the central bank or in a specific payment
  system law.

• Precise “personal scope” of the central bank’s mandate: general
  concept of “payment system” rather than “payment, clearing and
  securities settlement systems,” or “payment systems.”

• Public policy objective(s) of the central bank vis-à-vis the payment

• An “effort based” approach – by using verbs as “promote,” “pursue”
  or “contribute to” – rather than a “results based” approach – as
  would result from the use of verbs as “guarantee” or “establish.”
   Delineation of Responsibilities

It is not uncommon that the central bank’s competence in the field of
the payment system is shared with other domestic institutions
(Securities Market Regulators, etc).

• The law should delineate clearly the division of tasks between the
  central bank and other competent authorities.

• The law should oblige the various authorities to co-operate and co-

• The legal framework should, at least under certain modalities, allow
  for the exchange of supervisory information between the authorities
Definition of Approaches and Instruments

• The law should provide an adequate legal basis for both the
  operational involvement in and oversight over the payment system
  by central banks.

• In addition, the law should offer adequate instruments by means of
  which central banks can bring about their policy objectives through
  these two approaches.
Legal Basis of Instruments of Operational Involvement

The legal framework should allow a central bank to:

   -    be involved in the ownership, management and operation of
        such systems;

   -    offer accounts and settlement assets to participants in such
        systems and grant such systems access to the said accounts
        and settlement assets on behalf of their participants;

   -    offer facilities to such systems (in particular intraday credit).

The law might also clarify whether or not the central bank should
require adequate collateralization of any credit exposures that it might
have on system participants.
Legal Organization and Documentation of Operational Involvement

Adequate legal organization and documentation of the central bank’s
involvement includes:

  -    the creation of separate legal entities through which systems are
       owned, operated or managed;

  -    legal documentation of the cash and securities accounts held in
       the books of the central bank (e.g. “current account rules”);

  -    “system rules” for the systems owned or operated by the central

  -    contractual framework for the access to the books of the central
       bank by systems which the central bank does not own, manage
       or operate;

  -    legal documentation of the provision of intraday credit and other
       facilities to system participants.
Instruments of Oversight: Soft Law versus Hard Law

Two different approaches of a central bank’s oversight over key
components of the payment system:

• “Soft law” approach: the central bank utilizes its “moral suasion” as
  the main instrument of steering the behavior of systems and their
  participants towards conformity with the standards imposed by the
  central bank.

• “Hard law” approach, the central bank would typically have specific
  statutory powers to license or register systems, to withdraw licenses,
  to investigate the books and operations of systems and to impose
  sanctions in case of non-compliance.

The choice between the two approaches is ultimately a policy matter
and would depend on the legal and institutional framework of a country,
as well as on the acceptance of the approach by the entities overseen.
International Co-operation

-   More and more key components of the payment system have cross-
    border implications.

-   The law should allow central banks to enter into cross-border co-
    operative arrangements with relevant foreign overseers in order to
    co-ordinate the activities of all overseeing agencies involved.

-   The legal framework should, where necessary, facilitate the
    exchange of confidential information and other co-operative actions
    (e.g. joint inspection teams) between the authorities involved.

-   The G10 central banks have established the Committee on Payment
    and Securities Settlement Systems (CPSS) under the auspices of
    the Bank for International Settlement (BIS) as a forum for their co-
    operation. The CPSS has established oversight standards for
    different key components of the payment system, which are now
    widely considered as international best practice.
IV.     A Wider Concept: The Legal Framework of
        the Payment System

Towards a “Sound Legal Basis”

• The legal framework underpinning a central bank’s involvement in
  the payment system plays a crucial role in supporting the latter’s
  legal framework. It does not, however, in itself, suffice to offer the
  payment system a genuinely sound legal basis. Other fields of the
  law, normally beyond the realm of central banks, might require
  specific intervention of the lawmakers.

• Central banks play an important advisory role in convincing the
  executive and legislative branches of government to shore up
  existing legal frameworks. On the basis of their mandate and
  experience, the monetary institutions would be instrumental in
  advising rule makers on the fine-tuning of the relevant sets of rules.

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