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Access Policies for Payment Systems

Access Policies for Payment Systems. Daniel Heller Swiss National Bank Washington, 30 May 2007. Definition of access policy Trade-off between safety and efficiency Heterogeneous access policies and participation structures: Some facts and figures Case studies Conclusions.

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Access Policies for Payment Systems

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  1. Access Policies for Payment Systems Daniel Heller Swiss National Bank Washington, 30 May 2007

  2. Definition of access policy Trade-off between safety and efficiency Heterogeneous access policies and participation structures: Some facts and figures Case studies Conclusions Structure of presentation

  3. Access policy • Access policy establishes the criteria for participation in a payment system. • Possible access criteria: • Qualitative standards • Financial institution’s legal status • Regulatory position • Quantitative minimum requirements on • Capital base • Credit rating • Technical and operational requirements • Geographical criteria

  4. To avoid that individual participants introduce unacceptable settlement, operational or legal risk into the payment system Restricted participation To increase efficiency through competition between institutions for large-value payment services to customers Benefit from economies of scale Antitrust laws may require fair access  Broad participation Trade-off between safety and efficiency

  5. How to influence the trade-off • The design of the system and a differentiated access policy help to avoid and limit potential additional risks of an open access policy • Controls on credit and liquidity risks • Credit risk: RTGS systems • Liquidity risk: provision of intraday credit • Control on credit risk for settlement institution • Collateralization of credits • Possibility of differentiated access criteria: • For different categories of participants provision of different service packages • For different service packages different requirements (technical or risk related criteria, e.g. rating)

  6. Broad perspective  The payment system is part of the whole financial system • Risks avoided within the payment system does not necessarily mean that the risks disappear. Risks may shift to other areas within the financial system. • This trade-off should be evaluated carefully. • Potential risks in a strongly tiered payment system • Greater effects of operational incidents at correspondent banks • Larger risk of correspondent bank running into liquidity problems due to second tier banks • Lesser degree of finality • Greater credit exposures between first and second tier banks

  7. Other factors influencing the participation structure • Participation does not only depend on access criteria laid down by settlement institution. The final access decision lies with the potential participants. They evaluate costs and benefits of direct and indirect participation according to the following factors: • Participation fees and settlement prices • Costs for the operational infrastructure • Risk management costs (e.g. default fund) • Costs due to regulatory requirements • Local market habits • The totality of the payment system landscape: SSS, retail

  8. Core Principle IX: Access criteria The system should have objective and publicly disclosed criteria for participation, which permit fair and open access. Core Principle VIII: Efficiency The system should provide a means of making payments which is practical for its users and efficient for the economy. Core Principles for systemically important payment systems

  9. Heterogeneous policy landscape • National access policies depend on specific local factors • Access to central bank account • Access to central bank credit facilities • National legal structure • Structure of financial industry • Historical development of payment landscape

  10. Types of participation • Direct participant • Holds an account at the settlement institution • Is signatory to the set of internal system contracts • Domestic access • Remote access • Online • Not online (e.g. through central bank) • Indirect participant • Does not hold an account at the settlement institution (debits and credits take place within the system on an accounts of direct participants) • Recognition of indirect participants by system operator varies from system to system

  11. Source: New developments in large-value payment systems, CPSS, 2005

  12. Case study: Access policy in Switzerland • 1987 access only for • Banks domiciled in Switzerland and supervised by Swiss Federal Banking Commission • Domestic clearing organization • 1998 liberalization due to • Further internationalization of financial market • Non-Swiss Eurex participants • SNB wants to increase number of participants in Swiss money market Open access for • Supervised securities dealers • International joint ventures • International clearing houses and associated banks  From countries that have at least the same standards as Switzerland with respect to banking supervision, fight against money laundering and telecommunication infrastructure.

  13. B settl acc SSP B B B settl acc SSP Case study: Access to Target2Ways of participation (1) • Direct participant • Holds settlement account • Indirect participant • Does not hold settlement account • Listed in Target2 directory • Submits/receives payments via direct participant • Is addressable in the system • Protected by EU Settlement Finality Directive • Supervised credit inst. located in the EEA • Adressable BICs (Bank Identifier Code) • Does not hold settlement account • Listed in Target2 directory • Submits/receives payments via direct participant • Is addressable in the system • No protection by Settlement Finality Directive • Any direct participant’s correspondent worldwide B B B settl acc SSP

  14. Mc Dc Dc Mc Dc Dc acc acc acc acc SSP SSP Case study: Access to Target2Ways of participation (2) • Liquidity pooling • Banking group can consolidate several settlement accounts • in form of consolidated information or virtual account • Multi-address access • Banking group can choose to have only one settlement account as direct participant • Branches can send/receive payments directly to/from the system • Settlement takes place on account of direct participant (Mc) Mc: Mother companyDc: Daughter company

  15. Trends in access policy • More open and differentiated access… • …such as remote access in different forms and due to different reasons • Internationalization of market infrastructure (e.g. CLS, Eurex) • Central bank policy to integrate the market (e.g. ECB) or open and deepen market participation (e.g. CH) • …new: Outsourcing of the management of the central bank account and the RTGS account to another bank (currently requested by a SIC participant in CH)

  16. Conclusions • There is no such thing as THE access policy! • For each system one has to carefully consider the environment it is embedded into. • Access policies should not be carved in stone but should be periodically reviewed and if necessary adapted to the needs of the market participants. • Cautiously but determined: open access is to be preferred. • But may have to be supported by a careful design and a differentiated access policy.

  17. References • New developments in large-value payment systems, BIS, May 2005 • The role of central bank money in payment systems, BIS, August 2003 • Core principles for systemically important payment systems • Tiering in UK payment systems: credit risk implications, Financial Stability Report, Bank of England, December 2005 • Regulating access to international large-value payment systems, ECB Working paper series, June 2000

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