Oversight Policy Framework and Operational Guidelines Presented by

Oversight Policy Framework and Operational Guidelines Presented by Patrick Ibrahim MEFMI Workshop on Practical Application of Payment Systems Oversight , October 2017

Agenda: The Ws and H of Oversight Policy and Operational Guidelines What Why Who How 2

OUTLINE • • Scene Setting Policy Framework Operational Guidelines Conclusion

SCENE SETTING: RECALL THE NEED FOR OVERSIGHT Effect of increased vol/val Plus Leading to: Changing market environment

SCENE SETTING: • In order to guaranteed the public policy objectives of safety and efficiency, overseers need to establish policy frameworks that enables a systematic and consistent approach towards full implementation of the oversight function • Among others, the policy framework provides a launch pad for overseers to better carry out the three key oversight activities of monitoring, assessment and inducing change • Through this, the role of the Overseer as regulator and catalyst of change in the payments space (usually implemented through PS units) is consolidated • However, some of the policy frameworks adopted are not as comprehensive or, in some instances, not fully implemented

A. Oversight Policy Framework

Objectives Based on safety and efficiency of PS Minimizing risk (especially systemic) Support pursuit of further PS reforms Scope Systems not institutions Focus of the oversight activities Designation of systems Instruments Operator Implementation steps Outline strategies / policies for risk mgt. Onsite and offsite inspections Dynamic System profiles Action FRAMEWORK Blue print / guiding policy for oversight process Recall: Oversight Framework

STRUCTURE AND CONTENT OF AN OVERSIGHT FRAMEWORK 1. Introduction • Explain the importance of the PS in terms of: ü Economy ü Risk propagation • Explain the rationale and mandate (legal powers) of the Overseer to regulate PS • Link this to the Central Bank’s vision and mission statement especially on PS • Briefly highlight stakeholder roles and responsibilities in the oversight process • Describe the best practice standards and implementation approach to be adopted

STRUCTURE AND CONTENT OF AN OVERSIGHT FRAMEWORK 2. Objective of the Policy Framework • General statements on Overseers commitment towards: ü Safety ü Efficiency ü Further development of the NPS • Link this to the importance of the PS to the FMI and the economy

STRUCTURE AND CONTENT OF AN OVERSIGHT FRAMEWORK 3. Definition of Technical Terms • This part should contain the definition of technical terms used in the Policy: ü i. e. In this Oversight Policy Framework document, PS means “ …”; settlement means “…” etc. • Use conventional / standard definitions • Where necessary, liaise with experts and other regulators on terminology that might be peripheral but still important in PS and have been included in the policy framework • Either work backwards or update the chapter on the go (as and when a technical term is introduced in the documents!)

STRUCTURE AND CONTENT OF AN OVERSIGHT FRAMEWORK 4. Overview of the National Payments System • This chapter highlights the current status of the national payments infrastructure in a country in terms of: ü implemented systems ü instruments in use ü system participants ü payment bodies / associations and their roles ü current oversight arrangements including cooperation with other regulators ü other achievements and challenges • The chapter lays the foundation for policies that need to be implemented to improve safety and efficiency

STRUCTURE AND CONTENT OF AN OVERSIGHT FRAMEWORK 5. Policy Statement • This is where you provide specific policy statement to guide payments system oversight in terms of: i. Safety e. g. o Bank of Zemunda shall ensure systems are operating under robust and supportive legal framework complying with Banking Act, 1989, NPS Act, 2016 and other laws and regulations relevant to NPS infrastructure in Zemunda o Bank of Zemunda shall ensure that payment systems are developed and operated with adequate and appropriate risk management controls; particularly on monitoring, evaluation and management of payment systems risks (list them) o Bank of Zemunda shall ensure systems are effectively governed; by encouraging effective cooperate governance principles, transparency and accountability in operations of the systems

Policy Statement/… ii. Efficiency, e. g. o Bank of Zemunda shall encourage innovation and adoption of appropriate technology that reduce cost of providing services, o Central Bank shall encourage development and operation of payment systems that are interoperable to enhance cooperation and competition in the market iii. Equity, e. g. o Central Bank shall ensure payment system services are conducted on an equitable basis without undue restrictions on access or over pricing etc.

STRUCTURE AND CONTENT OF AN OVERSIGHT FRAMEWORK 6. Policy Implementation, Monitoring and Evaluation • This is where you convert policy statements into action for effective implementation e. g. i. Institutional Setup o In recognition of cross cutting issues in payments, the NPS department is hereby being entrusted with the role of implementing and monitoring the policy framework o In pursuit of this, the NPS department shall do the following: - update Bo. Z mgt on any dvpts related to the policy - undertake periodic reviews of the policy - develop guidelines and directives related to oversight etc.

Implementation, Monitoring and Evaluation/… ii. Performance Monitoring and Evaluation • The NPS Department shall be responsible for implementing and monitoring this Policy by, among others: o establishing measures to assess progress in meeting set objectives o establishing procedures to ensure stakeholder buy-in on all oversight policy framework issues

7. REFERENCES • Source documents • Include Appendices

B. Operational Guidelines Framework

WHY OPERATIONAL GUIDELINES • Assists the Overseer to operationalize the policy by providing guidance on the actual day – to – day activities related to oversight function • Highlights the specifics within the modalities of conducting oversight • This enables analyst to shape their skills and techniques in carrying out oversight

STRUCTURE AND CONTENT OF OPERATIONAL GUIDELINES 1. Introduction • Provide a working definition of oversight and highlight the salient issues therein • The Overseer should interpret and link these salient issues to the domestic payments environment Example • Based on the BIS definition “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” • How do we interpret safety and efficiency? For which systems? Who does what to attain this and how?

STRUCTURE AND CONTENT OF OPERATIONAL GUIDELINES 2. 0 Purpose • State the purpose of the Guideline: • For example: This Guideline operationalizes the oversight policy by providing guidance on conducting payment systems oversight • Specifically, it seeks to highlight the activities and organization of the oversight function including scope, tools and deliverables

STRUCTURE AND CONTENT OF OPERATIONAL GUIDELINES 3. 0 Oversight Mandate • As is the case with the Policy Framework, relate this to the specific statutory provisions in all the relevant legislations, regulations and policies e. g. Banking Act, NPS Act, Interoperability Directive etc.

STRUCTURE AND CONTENT OF OPERATIONAL GUIDELINES 4. 0 Scope of Oversight • Designation of Systems to be overseen ü Identify type of systems to be overseen and the justification for the choice • Determination may also be based on: ü interbank systems üaggregate throughput (in relative terms) ü significance in the economy (i. e. only system in the economy? ) ü cross-border systems etc.

Scope of Oversight/… • Types of Payment Instruments List down the instruments to be included and the justification; nature, relative importance etc • The justification may also be based on: ü volume and values ü degree of acceptability as a means of payments ü inter-bank payment instruments ü cross-border instruments etc.

STRUCTURE AND CONTENT OF OPERATIONAL GUIDELINES 5. 0 Oversight Activities i. System and Instrument Profiling • As a follow up to designation, develop profiles for identified systems and instruments • The profile may reflect some of the following: ü The System/ instrument risk management policies and mechanisms ü Members of the systems ü Purpose of the system (what is it for; payments, clearing or settlement? and of what? fund or securities or both? ). ü Statistics (throughput, incident reports, operational risks etc)

Oversight Activities/… • ü ü • Information could be sourced from: NPS and BASU dpts. (through their licensing activities) System participants, other operators and regulators The profiles need to be updated regularly to keep abreast with market trends ii. Payment Systems Risk Profiling • Identify main risks • Develop risk registers for each system and instrument profiled • Regularly update the risk registers

Oversight Activities/… iii. Action Plan • Come up with Activity Schedule based on the risk profiles • Priority should be given on the high risk area. • Take action: ü Instituting risk management measures provided in the legal instruments (e. g. system rules) ü Cooperate with other regulators depending on issues at hand ü Conducting ad-hoc on-site inspections ü Enforce compliance (as per the legal powers)

Oversight Activities/… iv. Reporting • Reports should be based on the activities such as: ü System Profile Report o system’s relative importance o risk management o recommendations ü Instrument Profile Report o instrument’s relative importance o risk Management o recommendations

Oversight Activities/… ü • o o o Risk Profile Report based on risk matrix, showing: Identified Risks probability and impact of occurrence Recommendations ü On-site and off-site reports ü Periodical Progress Reports

STRUCTURE AND CONTENT OF OPERATIONAL GUIDELINES 6. 0 Payment System Standards and Best Practices • State the international, regional and national standards and best practices that shall be adopted in ensuring safety and efficiency of the national payments system e. g. PFMIs • The standards and best practices should be reviewed regularly based on market developments (including conduct of participants) in assessing the systems and instruments to ensure their operations and provision of services are safe and efficient to the economy.

7. REFERENCES • Source documents • Include Appendices

CONCLUSION • Oversight framework provides a blue print formalizing the oversight function of the Central Bank. • Among others it highlight the objectives, scope and approach to be taken and justification thereof. • To operationalize the policy framework, some Overseers come up with Operational Guidelines detailing the specific modalities of conducting the oversight function.

References BIS (2003): Risk Management Principles for Electronic Banking, Basle; available at www. bis. org/publ/bcbs 98. pdf BIS (2005): Central bank oversight of payment and settlement systems, Basle; available at http: //www. bis. org ECB (2010): The Payment System, edited by Tom Kokkola, ECB, Frankfurt am Main; available at http: //www. bis. org

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