Introduction
The European Central Bank (ECB) has launched a public consultation on the revision of the ECB Regulation 795/2014 which provides for oversight requirements for systemically important payment systems (SIPS).
A payment system shall be identified as a SIPS if:
(a) it is eligible to be notified as a system pursuant to Directive 98/26/EC by a Member State whose currency is the euro or its operator is established in the euro area, including establishment by means of a branch, through which the system is operated; and
(b) at least two of the following occur over a calendar year:
(1) the total daily average value of euro-denominated payments processed exceeds EUR 10 billion;
(2) its market share is at least one of the following:— 15 % of total volume of euro-denominated payments,
— 5 % of total volume of euro-denominated cross-border payments,
— 75 % of total volume of euro-denominated payments at the level of a Member State whose currency is the euro;
(3) its cross-border activity involves five or more countries and generates a minimum of 33 % of the total volume of euro-denominated payments processed by that SIPS;
(4) it is used for the settlement of other Financial Market Infrastructures.
There are four payment systems that fall under the Regulation: TARGET2, EURO1, STEP2-T and CORE(FR).
The salient proposed changes are the following:
(1) That an identification exercise, ie. whether a system shall be identified as a SIPS or otherwise, shall be conducted on an annual basis.
(2) Apart from having documented governance arrangements providing for lines of responsibility and accountability, the SIPS operate must now also ensure that these arrangements are effective.
(3) A SIPS’s Board must include at least one independent director as part of the non-executive board members.
(4) A third line of defence – operations, has been introduced along with the current risk management and internal audit requirements.
(5) The Board’s approval shall be required for decisions that may impact the SIPS’s risk profile and/or key documents.
(6) The Board must approve and review key documentations annually at the minimum.
(7) Operators of a Deferred Net Settlement system shall ensure that (a) financial obligations are established no later than the moment at which a transfer order is included in the calculation of the net settlement positions accessible to each participant; and (b) that sufficient resources are held to cover the resulting credit exposures.
(8) Operators settling one-sided payments in euro shall hold, or ensure that participants hold, additional liquid resources by means of committed lines of credit, committed foreign exchange swaps, committed repos, investments, or other assets as referred to in the Regulation. This was already required, however, the proposed amendment adds that all of these instruments must allow cash to be available within a timeframe that allows the completion of same-day settlement. In particular, the SIPS operator must be able to demonstrate that non-cash instruments are readily available and convertible into cash on a same-day basis using prearranged and highly reliable funding arrangements, including in stressed market conditions.
(9) SIPS operators shall determine, based on the SIPS’s general business risk profile and the time required to achieve a recovery and/or orderly wind-down of its critical operations and services, the amount of assets required to implement the recovery/wind-down plan. This amount shall be no less than six months of current operating expenses.
(10) A SIPS operator shall review, audit, and test systems, operational policies, procedures and controls periodically and after significant changes.
(11) An effective cyber resilience framework is introduced. Sound awareness of cyber threats is also required. For this, operators must ensure that there is a process of continuous learning and adaptation to new risks.
(12) Increased powers to competent authorities for more effective oversight over SIPS, identification and investigation of threats and imposition of corrective measures.
The above proposed changes are a reflection of the ongoing and ever-increasing EU and ECB efforts to minimise the chances of “financial giants” sinking, and should they sink, that they cause only mere ripples in the financial market rather than tidal waves.
