Reports on Observance of Standards and Codes

Ireland and the IMF

I.  Banking Supervision
II.  Insurance Supervision
III.  Payment Systems
IV.  Securities Supervision
V.  Transparency of Monetary and Financial Policies

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REPORT ON THE OBSERVANCE OF STANDARDS AND CODES (ROSC)
Ireland

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   International Monetary Fund
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III.  Payment Systems

Prepared by a staff team of the International Monetary Fund, on the basis of information provided by the Irish authorities.

Review of CPSS Core Principles for Systemically Important Payment Systems

February 20, 2001

Contents

Executive Summary

  1. Introduction
  2. Review of CPSS Core Principles for Systemically Important Payment Systems
    1. Well-founded Legal Basis in all Relevant Jurisdictions
    2. Understanding and Managing Risks
    3. Settlement
    4. Security and Operational Reliability
    5. Practicality and Efficiency
    6. Disclosure
    7. Governance
  3. Staff Commentary

Text Table

Table 1. Ireland: Adherence to CPSS Draft Core Principles for Payment Systems

 

Executive Summary

This report provides an assessment of Ireland’s observance of CPSS Core Principles for Systemically Important Payment Systems. The assessment was undertaken as part of a Financial Sector Assessment Project (FSAP) by an MAE team and a group of peer assessors in the context of the 2000 Article IV consultations with Ireland. The conclusions of this report are based on discussions between the team and the authorities.

Ireland observes the CPSS core principles for systemically important payment systems. The only systemically important payment system in Ireland is IRIS, the Irish real-time gross settlement system (RTGS). This is facilitated by ECB actions to ensure that national payment systems participating in Trans-european Automated Real-time Gross Settlement Express Transfer (TARGET) System embody all the features necessary for smooth functioning of cross-border transactions. As a participant in TARGET, IRIS has already been tested under higher standards than many other countries, as the design of TARGET was based on a number of minimum common performance features to ensure the continuity of cross-border payments between TARGET participants.

 

I.  Introduction

1.  In connection with the 2000 Article IV consultations, Ireland participated in the Financial Sector Assessment Project (FSAP).1 The assessment of Ireland’s financial system included an assessment of the individual components of the sector, as well as a review of systemic stability, including of potential vulnerabilities that could arise from the interlinkages among different financial sector participants.

2.  The attached document reviews Ireland’s compliance with the 10 Draft Core Principles for Systemically Important Payment Systems, which were first released by a Task Force established by the Committee on Payment and Settlement Systems of the central banks of the G10 countries (CPSS) in December 1999.2

3.  The only systemically important payment system in Ireland is IRIS, the Irish RTGS (real-time gross settlement) system. IRIS is a component of TARGET, the RTGS system which processes the euro through the national RGTS systems of the ESCB and the European Central Bank (ECB) payment mechanism (EPM). Those systems are interlinked so as to provide a uniform platform for the processing of cross-border payments.3 Within the Eurosystem, the ECB takes the necessary actions to ensure that the national payment systems participating in TARGET embody all features necessary for smooth functioning of cross-boarder transactions. As such IRIS has already been tested under very high standards.
 

II.  Review of CPSS Core Principles for Systemically Important Payment Systems

A.  Well-founded Legal Basis in all Relevant Jurisdictions

Core Principle I

4.  Under the Central Bank Act, 1997, the CBI is empowered to regulate payment systems. The Act provides for the CBI to authorize all payment systems and to approve their rules. Actions of the CBI related to conditions, requirements, etc. would be “as the Bank sees fit in the interest of proper and orderly regulation of the payment system concerned and of competition between payment systems.” In the context of the EU, the EU directive on Settlement Finality in payment and securities settlement systems (Directive 98/26/EC), implemented in Ireland in January 1999, provides protection from any zero-hour type rule, and facilitates real-time finality.

B.  Understanding and Managing Risks

Core Principles II-III

5.  Rules are available to participants as well as applicants. For those banks operating settlement accounts with the CBI, settlement balances in real time can be obtained from the RTGS system through the S.W.I.F.T system or through a participant’s workstation.

6.  Requiring that all large-value interbank payments be settled in real time (i.e., continuously throughout the day) in gross terms and in central bank money virtually eliminates all systemic risk. All overnight credit and intraday liquidity provided to participating banks in the RTGS system is fully collateralized in accordance with regulations of the ESCB.

7.  To fund overdraft positions, banks may avail themselves of free-of-charge intra-day liquidity facilities from the CBI subject to provision of adequate collateral under the terms of repurchase agreements. Collateral provided must meet ESCB requirements and the operation is conducted under the terms of a Master Repurchase agreement entered into by the CBI with each credit institution. The EU Directive on Settlement Finality provides that collateral be readily realizable even in the event of insolvency of the collateral provider.

C.  Settlement

Core Principles IV-VI

8.  The RTGS system does not permit negative balances. Settlement is in central bank money and is unconditional, irrevocable and final at the moment when the sending member’s account is debited in the Central Accounting System.

D.  Security and Operational Reliability

Core Principle VII

9.  Based on the common performance features of TARGET (see para. 3), the RGTS system is secure and reliable. If a technical failure occurs, on-site recovery within one hour is required and achievable because of on-site system replication. Currently, if both on-site systems fail during the business day the system would revert to end-of-day aggregate gross settlement with recovery of the remote site on opening for business the next day. The Central Bank of Ireland is moving toward having the remote site operational within four hours. The contingency plans have been reviewed and tested regularly.

E.  Practicality and Efficiency

Core Principle VIII

10.  The system is practical and efficient and provides a sufficient degree of backup to avoid delays in case of temporary failures. Features enhancing efficiency include gridlock resolution and queuing facilities.

F.  Disclosure

Core Principle IX

11.  Access to membership of IRIS is set out in the Memorandum and Articles of Association of the company, which are publicly available documents. There is also a set of operating rules, which are available to members and applicants. Access costs are subject to CBI approval. Legislation does not prevent insolvent financial institutions from participating in the RTGS. However, the requirement of a settlement account at the CBI makes it unlikely that an insolvent financial institution could continue participating in a payment system.

G.  Governance

Core Principle X

12.   The systems’ governance arrangements are effective, accountable and transparent.

 

Table 1. Ireland: Adherence to CPSS Draft Core Principles for Payment Systems

Category Principle Observance Comments or Main Particular Features

Well-founded legal basis in all relevant jurisdictions

I

Observed

 

Understanding and managing risks

II-III

Observed

All credit and liquidity provided to participating banks in the RTGS system is fully collateralized in accordance with regulations of the ESCB. The EU Directive on Settlement Finality provides that collateral be readily realizable even in the event of insolvency of the collateral provider.

Settlement

IV-VI

Observed

The RTGS system does not permit negative balances.

Security and operational reliability

VII

Observed

Currently, if both on-site systems fail during the business day, the system would revert to end-of-day aggregate gross settlement with recovery of the remote site on opening for business the next day.

Practicality and efficiency

VIII

Observed

 

Disclosure

IX

Observed

 

Governance

X

Observed

The system’s governance arrangements are effective, accountable and transparent.

 

III.  Staff Commentary

13.   Ireland observes the CPSS core principles for systemically important payment systems. The only systemically important payment system in Ireland is IRIS, the Irish RTGS system. The adherence to the core principles is facilitated by ECB actions to ensure that national payment systems participating in TARGET embody all the features necessary for smooth functioning of cross-border transactions. As a participant of TARGET, IRIS has undergone a review based on a high standard, as the design of TARGET was based on a number of stringent common performance features to ensure the continuity of cross-border payments between TARGET participants.

The principle-by-principle assessment found:

  • The CBI Act states that the general objective of the regulatory regime is to ensure that payment systems in Ireland are effective, efficient and transparent and that they promote stability in the financial markets;

  • Participants have the means to reach a clear understanding of the system’s impact on each of the financial risks they incur. The RTGS system allows for clearly defined procedures for the management of credit and liquidity risks;

  • The system provides prompt and final settlement on the day of value and in real time;

  • The system ensures a high degree of security and operational reliability and has appropriate contingency arrangements;

  • The system provides a practical and efficient means of making payments;

  • The system has objective and publicly disclosed criteria for participation, which permit fair and open access; and

  • The system’s governance arrangements are effective, accountable and transparent. These are set out in the Memorandum and Articles of Association and operating rules, which are publicly available.


1 The assessment was prepared by the International Monetary Fund as part of a Financial Sector Assessment Project (FSAP) mission. The team was led by Tomás J. T. Baliño and, for payment systems, included Anne-Marie Gulde, Angeliki Kourelis, Armando Morales (all MAE), and Natalia Koliadina (EU1).

2 The task force consisted of payment system experts from 23 central banks, the International Monetary Fund and the World Bank.

3 A detailed presentation of the role of the Eurosystem in the field of payment system oversight and the practical organization of oversight activities within the Eurosystem is contained in the policy statement issued by the ECB on June 21, 2000 (see http://www.ecb.int/, under “Press Releases”).

 

II. Insurance Supervision        Ireland ROSC         IV. Securities Supervision

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