## _cr11237

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---

### Introduction, scope and methodology
- Assessment context:
  - Undertaken in the context of an IMF Financial Sector Assessment Program (FSAP) exercise for the United Kingdom over the period January-July 2011.
  - Covered the CHAPS system and the relevant operational services provided by the Bank of England (BoE) in support of CHAPS.
- Roles and responsibilities:
  - CHAPS scheme is managed by CHAPS Clearing Company Limited (CHAPSCo).
  - Payments are processed by the RTGS infrastructure owned and operated by the BoE.
  - The BoE:
    - settles CHAPS payments through debits and credits to members’ settlement accounts;
    - operates the Enquiry Link for members to monitor payments, manage centralized queue, and make certain funds transfers;
    - provides CHAPS members with collateralized intra-day liquidity to support CHAPS payments.
- Methodology and approach:
  - Derived from the Core Principles and the IMF and World Bank’s Guidance Note for Assessing Observance of Core Principles for Systemically Important Payment Systems.
  - Assignment of assessment category based on current situation without regard to proposed or ongoing actions.
  - Authorities and other stakeholders were fully cooperative; no obstacles faced.

### Institutional and market structure; key statistics
- System function and usage:
  - CHAPS provides real-time gross settlement for transfers denominated in pounds sterling.
  - No restrictions on type or value of transactions.
  - Typical payments: large financial transactions between banks or between banks and corporations; some retail transactions (e.g., housing market purchases); sterling pay-ins/pay-outs related to CLS; transfers to/from concentration bank for LCH margin payments.
- Payment concentration and membership:
  - Average size of payment transferred by the system in 2009: £1.76 million.
  - Approximately 94 percent of payment value is attributable to 5 percent of payment volume.
  - CHAPS is highly-tiered: 16 direct members of CHAPS as well as the BoE and CLS Bank.
  - Five most active members account for approximately 80 percent of payment value; two most active account for half of the total value.
- Daily average volumes (thousands) and values (£ billions), 2007–2010:
  - 2007: Volume 141; Value 268
  - 2008: Volume 136; Value 284
  - 2009: Volume 126; Value 235
  - 2010: Volume 127; Value 224
- Concentration over 2003–2010 (Percentage of CHAPS payment value sent):
  - Top-2: 2003 52.2; 2004 50.6; 2005 52.4; 2006 54.0; 2007 53.2; 2008 53.7; 2009 54.5; 2010 49.5
  - Top-5: 2003 84.3; 2004 84.5; 2005 85.2; 2006 85.4; 2007 85.2; 2008 83.3; 2009 84.5; 2010 80.4
- Faster Payment Service (FPS):
  - Managed by CHAPSCo; launched in May 2008.
  - From January-September 2010, FPS settled a daily average value of £643 million and daily average volume of 1.7 million payments.

### Legal framework and contractual arrangements (CP I)
- Legal basis and designation:
  - CHAPS operates under a well-founded legal basis reinforced by designation under Financial Markets and Insolvency (Settlement Finality) Regulations 1999.
  - CHAPS was formally recognized by HM Treasury under the Banking Act on January 5, 2010, giving the BoE statutory responsibility for overseeing it (Part 5 of the Banking Act 2009).
- Contracts and MoU:
  - All CHAPS members agree to the CHAPS Rules, which incorporate by reference other relevant documents.
  - Clear contractual relationship between CHAPS members and the BoE as provider of RTGS infrastructure and intra-day credit (RTGS Terms and Conditions and the Master Repurchase Agreement).
  - Memorandum of Understanding (MoU) between CHAPSCo and the BoE sets forth detailed service level expectations; MoU is not a binding legal contract.
  - Recommendation: the BoE should undertake a legal review of the consequences of the nonbinding nature of the MoU, either internally via the BoE’s Legal Department, or externally. The BoE indicated its legal department is undertaking this supplementary legal review in H1 of 2011.

### Understanding and management of credit and liquidity risks (CP II–III)
- Normal operations:
  - Real-time gross settlement; credit risk does not arise in normal operations because settlement is immediate and final upon debiting and simultaneous crediting of BoE settlement accounts.
  - Throughput guidelines: "50 percent of payment value by 12:00 and 75 percent of payment value by 14:30." BoE and CHAPSCo monitor monthly average performance.
- Contingency (Bypass mode) and remaining risks:
  - If RTGS inoperable at both primary and secondary sites, Bypass mode delivers messages directly between members and CHAPSCo calculates multilateral net positions for settlement.
  - In Bypass mode:
    - Members operate using Net Sender Caps (defined in CHAPS Functional Specification).
    - Settlement would be on a multilateral net basis at the end of each settlement cycle; two cycles expected (one mid-afternoon and one end of day), more if necessary.
    - Current rules do not address consequences of a participant default in a net debit position while in Bypass mode.
  - Recommendation: CHAPSCo should develop procedures specifying how losses would be allocated if a participant in a net debit position were to default while in Bypass mode. The BoE has formally identified and communicated this requirement to CHAPSCo; CHAPSCo is in the process of developing these procedures and it is expected that this work will be completed in 2011.
  - Medium-term consideration: CHAPSCo and the BoE are considering a back-up RTGS system that would replace the Bypass mode in the event both BoE operational sites are down.

### Settlement finality and settlement assets (CP IV–VI)
- Finality:
  - Finality occurs in real time on a gross basis and in central bank money upon debiting and simultaneous crediting of members’ settlement accounts at the BoE.
  - In contingency modes:
    - Authenticated fax: irrevocability upon receipt by BoE; finality upon debiting and crediting.
    - Bypass mode: irrevocability when sending member transmits payment to SWIFT; final settlement on multilateral net basis at end of each settlement cycle.
- Settlement assets and tiering:
  - Settlement between CHAPS members takes place through transfers of claims on the BoE (central bank money).
  - Significant amount of large-value payment activity settles in commercial bank money on books of most active CHAPS members; top-2 banks account for half of payment value in 2010.
  - Recommendation: The BoE should continue efforts to raise awareness of risks of tiering and encourage direct participation where practical; the high concentration of payments in two settlement banks should be monitored by banking supervisors.

### Operational reliability, resilience and contingency planning (CP VII–VIII)
- Security and compliance:
  - CHAPS Security Policy and Security Code of Conduct based on ISO 27002; members must self-certify compliance annually.
- RTGS performance and resilience:
  - RTGS availability target: "99.95 percent of the operating day over the course of each month."
    - BoE failed to meet availability in 2 out of 12 months of 2008.
    - Since start of 2009, only one eight-minute period (in February 2010) where RTGS was unable to process CHAPS payments.
  - MOU requires RTGS capacity to process a peak day’s volume within four hours; historic peak ~300,000 payments in a day. BoE tests show it can process 300,000 payments in 2.5 hours.
  - Two processing sites are about 12 miles apart and therefore exposed to wide-area event risk.
- Contingency options and testing:
  - Bypass mode is the main contingency if both primary and secondary sites are inoperable.
  - CHAPSCo and the BoE are considering SWIFT Market Infrastructure Resilience Service as a generic RTGS to replace Bypass mode if both BoE sites were down; planning phase with preliminary delivery estimate 2013/2014 if approved.
  - Contingency options are regularly tested, including Tripartite Resilience Benchmarking Project, November 2009 Market-wide Exercise, remote site working, fax testing, and SWIFT "cold start" tests.

### Access, fees and governance (CP IX–X)
- Access and fees:
  - Membership criteria publicly disclosed; membership restricted to institutions that hold sterling settlement accounts at BoE and meet technical/operational requirements.
  - CHAPSCo entry fee for new members: "£70,000."
  - CHAPS Rules and fees are not published but must be requested from CHAPSCo; recommendation: CHAPSCo is encouraged to make the CHAPS Rules and fees public to aid prospective members in developing a business case.
- Governance:
  - CHAPSCo Board usually meets quarterly; each member entitled to appoint one Director regardless of activity; BoE attends with "observer status."
  - Board composed entirely of CHAPS and FPS member settlement banks; lacks independent Board members.
  - CHAPSCo operates both CHAPS and FPS, raising governance and resourcing challenges; independent governance and management review completed and implementation planning underway.
  - Recommendation: CHAPSCo should demonstrate it can simultaneously manage both CHAPS and FPS schemes and improve succession planning; governance structure could be made more transparent (e.g., publish governance arrangements on CHAPS website).

### Central bank responsibilities and RTGS assessment (Responsibilities A–D)
- BoE oversight framework:
  - BoE has clearly defined objectives for payment system oversight and uses the 10 Core Principles plus four additional principles (Business Risk; Interdependencies; Indirect Participants; Outsourcing).
  - Since 2005 BoE has published Payment Systems Oversight Review (PSOR); no report published in 2009 due to regime change; first report since implementation of Banking Act 2009 expected later in the year (format focused on main risks and mitigants).
- RTGS and assessment gap:
  - The BoE operates the RTGS used by CHAPS and other schemes, but RTGS itself is not a recognized interbank payment system under the Banking Act 2009 and is not designated under the Settlement Finality Regulations.
  - Observed practice: the BoE assesses the RTGS indirectly and fragmentedly through oversight of recognized systems that rely on RTGS.
  - Recommendation: The BoE should undertake a formal, direct, and holistic assessment of the RTGS against the Core Principles:
    - This should be a specifically designated and arm’s length assessment by the BoE’s oversight function, distinct from episodic internal reviews.
    - The assessment should include evaluation of the legal basis supporting RTGS (including potential insolvency practitioner challenges), and processes for RTGS activity outside recognized systems (intra-day liquidity movements, payments outside CHAPS hours, SBLS recycling).
    - A single, cohesive assessment is preferable to fragmented assessments done through oversight of individual recognized systems.
- Oversight powers and cooperation:
  - Part 5 of the Banking Act 2009 provides statutory tools (e.g., Sections 190–200) including powers to issue directions, require information, appoint inspectors, impose sanctions, and commission independent reports.
  - The BoE has a dedicated Oversight team of 12 staff; staffing and access to specialist skills can be challenging.
  - The BoE cooperates with domestic and foreign authorities (e.g., FSA; participates in cooperative oversight colleges for CLS, LCH.Clearnet, Euroclear, SWIFT).

### Summary of principle-by-principle assessment (Table 1 highlights)
- CP I: Observed
  - Recommendation: legal review of nonbinding MoU; BoE legal department indicated it is undertaking review.
- CP II: Observed
- CP III: Broadly observed
  - Shortcoming: no clear procedures for losses allocation if participant in net debit position defaults in Bypass mode.
  - CHAPSCo to develop procedures; expected completion in 2011.
- CP IV: Observed
- CP V: Not Applicable
- CP VI: Observed
  - Note: significant exposure to commercial settlement banks; concentration needs monitoring by supervisors.
- CP VII: Observed
  - Note: two processing sites about 12 miles apart; consideration of Market Infrastructure Resilience Service; preliminary delivery estimate 2013/2014 if approved.
- CP VIII: Observed
- CP IX: Observed
  - Note: CHAPS Rules and fees not published; may hinder prospective members.
- CP X: Broadly observed
  - Governance concerns due to CHAPSCo operating both CHAPS and FPS; external governance review completed and implementation planning underway.
- Central Bank Responsibilities:
  - Responsibility A: Observed
  - Responsibility B: Broadly observed
    - Recommendation: BoE should formally assess the RTGS infrastructure’s compliance with the Core Principles in a unified manner.
  - Responsibility C: Observed
  - Responsibility D: Observed

### Recommended actions and timelines
- Core Principle III:
  - CHAPSCo should develop procedures clarifying loss allocation if a member in a net debit position defaults while in Bypass mode. Work expected to be completed in 2011.
  - Medium term: CHAPSCo and BoE considering RTGS back-up solution to replace Bypass mode if both BoE RTGS sites were down.
- Core Principle X:
  - CHAPSCo should demonstrate capacity to manage CHAPS and FPS concurrently and improve succession planning; implementation of external review recommendations underway.
- Central Bank Responsibility B:
  - BoE should formally assess RTGS infrastructure’s compliance with the Core Principles in a unified manner.
- Additional recommendations:
  - CP I: Supplement Oversight analysis with legal review of nonbinding MOU (BoE legal review indicated).
  - CP VI: BoE should continue raising awareness of tiering risks and encourage direct participation where practical; banking supervisors should monitor concentration in settlement banks.
  - CP VII: CHAPSCo and BoE encouraged to implement RTGS back-up solution; preliminary timelines estimate delivery date of 2013/2014 if approved.
  - CP IX: CHAPSCo encouraged to make CHAPS rules and fees public.
  - CP X: Increase CHAPS governance transparency (e.g., publish governance arrangements on CHAPS website).

### Authorities’ response and follow-up
- Authorities welcome the assessment and will consider and review assessors’ recommendations; work on many recommendations is already in train.
- IMF recommendation: BoE should “formally assess the RTGS infrastructure’s compliance with the Core Principles in a unified manner...”
- BoE response: RTGS is an accounting infrastructure supporting some payment systems and CPSS Core Principles apply to Payment Systems; nonetheless, BoE will conduct a unified assessment of RTGS this year based on its existing internal risk assessment, monitoring and management framework, at arms length as well as by line management.

*Source: _cr11237 - 1.  Summary Observance of the CPSIPS*

### 1.  Summary Observance of the CPSIPS

### 1.  Summary Observance of the CPSIPS and Central Bank Responsibilities in Applying the CPs

### Introduction
- Assessment context:
  - Undertaken in the context of an IMF Financial Sector Assessment Program (FSAP) exercise for the United Kingdom over the period January-July 2011.
  - Covered the CHAPS system and the relevant operational services provided by the Bank of England (BoE) in support of CHAPS.
- Roles and responsibilities:
  - CHAPS scheme is managed by CHAPS Clearing Company Limited (CHAPSCo).
  - Payments are processed by the RTGS infrastructure owned and operated by the BoE.
  - The BoE:
    - settles CHAPS payments through debits and credits to members’ settlement accounts;
    - operates the Enquiry Link for members to monitor payments, manage centralized queue, and make certain funds transfers;
    - provides CHAPS members with collateralized intra-day liquidity to support CHAPS payments.

### Information and Methodology Used for Assessment
- Prior work and documents:
  - Detailed assessment made in 2002 FSAP.
  - BoE published assessment as Annex to 2008 Payments System Oversight Report.
  - BoE prepared a 2010 assessment updated for the FSAP mission.
- Methodology:
  - Derived from the Core Principles and the IMF and World Bank’s Guidance Note for Assessing Observance of Core Principles for Systemically Important Payment Systems.
  - Assignment of assessment category based on current situation without regard to proposed or ongoing actions.
- Cooperation:
  - Authorities and others were fully cooperative; no obstacles faced.

### Institutional and Market Structure
- System function and usage:
  - CHAPS provides real-time gross settlement for transfers denominated in pounds sterling.
  - No restrictions on type or value of transactions.
  - Typical payments: large financial transactions between banks or between banks and corporations; some retail transactions (e.g., housing market purchases); sterling pay-ins/pay-outs related to CLS; transfers to/from concentration bank for LCH margin payments.
- Payment concentration and statistics:
  - Average size of payment transferred by the system in 2009: £1.76 million.
  - Approximately 94 percent of payment value is attributable to 5 percent of payment volume.
  - CHAPS is highly-tiered: 16 direct members of CHAPS as well as the BoE and CLS Bank.
  - Five most active members account for approximately 80 percent of payment value; two most active account for half of the total value.
- Statistical information regarding CHAPS — Daily Average Volumes (thousands) and Values of Transactions (£ billions), 2007–2010:
  - 2007: Volume 141; Value 268
  - 2008: Volume 136; Value 284
  - 2009: Volume 126; Value 235
  - 2010: Volume 127; Value 224
- CHAPS-Euro and TARGET2:
  - CHAPS Euro decommissioned in 2008 following launch of TARGET2.
  - Liquidity bridge remains between RTGS infrastructure and TARGET2 to allow euro funds to act as collateral for intra-day sterling liquidity.
- Faster Payment Service (FPS):
  - Managed by CHAPSCo; launched in May 2008.
  - Deferred multilateral net settlement system for retail electronic payments; uses RTGS for final settlement during the day.
  - From January-September 2010, FPS settled a daily average value of £643 million and daily average volume of 1.7 million payments.
- Governance structure:
  - CHAPSCo Board usually meets quarterly; covers both CHAPS and FPS; system-specific issues voted on separately.
  - Each member entitled to appoint one Director regardless of activity in CHAPS and/or FPS.
  - BoE attends CHAPSCo Board meetings with “observer status.”
  - CHAPSCo has contractual relationship with the U.K. Payments Council; CHAPSCo agreed to comply with directions given by the Board of the Payments Council.
- Legal and statutory designation:
  - CHAPS designated under Financial Markets and Insolvency Regulations 1999 (implements EU Settlement Finality Directive).
  - On January 5, 2010, HM Treasury recognized CHAPS as an interbank payment system under Part 5 of the Banking Act 2009, giving the BoE statutory responsibility for overseeing it.

### Main Findings — Legal Framework (CP I)
- Legal basis:
  - CHAPS operates under a well-founded legal basis reinforced by designation under FMIR 1999.
  - BoE’s oversight legal basis established in statute under Part 5 of the Banking Act 2009, providing statutory tools for oversight.
- Contracts and MoU:
  - All CHAPS members agree to the CHAPS Rules, which incorporate by reference other relevant documents.
  - Clear contractual relationship between CHAPS members and the BoE as provider of RTGS infrastructure and intra-day credit.
  - Memorandum of Understanding (MoU) between CHAPSCo and the BoE sets forth detailed service level expectations; MoU is not a binding legal contract.
  - Recommendation: the BoE should undertake a legal review of the consequences of the nonbinding nature of the MoU, either internally via the BoE’s Legal Department, or externally.

### Main Findings — Understanding and Management of Risks (CP II–III)
- Risk awareness and controls:
  - CHAPS rules enable members to have a clear understanding of risks through participation.
  - Points of irrevocability and finality are clearly defined in normal and contingency operations.
  - Controls for liquidity risk: throughput guidelines, offsetting algorithms for queued payments, Sterling Bank Liquidity Scheme to help recycle trapped liquidity.
  - Operational risk measures: Enquiry Link, authorized fax, RTGS Bypass mode.
- Bypass mode and credit risk:
  - In normal operations, members do not face credit risk (real-time gross settlement).
  - In Bypass mode, settlement would be on a multilateral net basis at the end of each settlement cycle, exposing members to credit risk.
  - Recommendation: CHAPSCo should develop procedures to set forth how losses would be allocated in the extremely unlikely event that a participant in a net debit position were to default while in Bypass mode.

### Main Findings — Settlement (CP IV–VI)
- Settlement finality:
  - Finality occurs in real time on a gross basis and in central bank money upon debiting and simultaneous crediting of members’ settlement accounts at the BoE.
  - In Bypass mode, settlement occurs on a multilateral net basis at the end of each settlement cycle.
  - It is expected that two settlement cycles would be run (one mid-afternoon and one end of day) to prevent build-up of net debit positions; more frequent cycles could be run if necessary.
  - Recommendation: CHAPSCo should develop processes and procedures to ensure final settlement can take place in Bypass mode if there were a default of a participant in a net debit position.
- Tiering and commercial bank money:
  - Significant amount of large-value payment activity in the United Kingdom settles in commercial bank money on books of most active CHAPS members.
  - Potential vulnerability if a major clearer became unavailable, imposing significant liquidity pressures.
  - BoE awareness and action: BoE has worked to raise awareness and encourage second-tier banks with significant activity to become direct members.
  - Note: direct participation increased with J.P. Morgan and Bank of America becoming CHAPS members in the second half of 2010, but settlement remains highly concentrated.

### Main Findings — Operational Reliability and Efficiency (CP VII–VIII)
- Security and resilience:
  - CHAPS offers high degree of security and operational reliability.
  - Members and suppliers must comply with CHAPS Security Policy and Security Code of Conduct; comprehensive compliance confirmation process exists.
- Outsourcing and performance:
  - Core operational infrastructure outsourced to the BoE; MoU specifies operational performance and reliability targets historically met by the BoE.
  - BoE operates a hot back-up site; two processing sites are about 12 miles apart and thus exposed to wide-area event risks.
  - Consideration of SWIFT Market Infrastructure Resilience Service as a generic RTGS to replace Bypass mode if both BoE sites were down.
  - Contingency options are regularly tested, including with members.
- Market view:
  - Discussions with members suggest CHAPS provides an efficient solution for making large-value payments in a reliable and safe manner.

### Main Findings — Access and Governance (CP IX–X)
- Membership and transparency:
  - Membership in CHAPS is fair and open; membership criteria publicly disclosed.
  - Main barrier to entry appears to be lack of a business case rather than formal criteria.
  - Governance and fees could be made more transparent to help prospective members develop a complete business case.
- CHAPSCo operating multiple schemes:
  - CHAPSCo operates both CHAPS and FPS, which are at different stages of development, raising governance and management challenges.
  - CHAPSCo needs to demonstrate it has resources and capacity to satisfy needs of both schemes.
  - BoE has identified this as an issue and CHAPSCo governance structure is being revised.

### Main Findings — Central Bank Responsibilities (A–D)
- BoE oversight framework:
  - BoE has clearly defined objectives for payment system oversight.
  - Recognized systems under Part 5 of the Banking Act 2009: CHAPS; CLS; Bacs; FPS; and inter-bank payment systems operated as part of CREST, LCH, and ICE.
  - Operators must have regard for principles set by the BoE; BoE uses the 10 Core Principles plus four additional principles covering business risk, interdependencies, indirect participants, and outsourcing.
  - BoE follows a program of risk reviews for each recognized system to set expectations for operator actions.
- Cooperation and operational role:
  - BoE effectively cooperates with domestic and foreign authorities (e.g., FSA, other central banks).
  - BoE operates the RTGS infrastructure providing RTGS for CHAPS and CREST and settlement of FPS, Bacs, Cheque and Credit Clearing, LINK.
  - RTGS also facilitates intra-day liquidity transfers, reserve account transfers, transfers for note circulation, and transfers outside CHAPS operating hours.
- Assessment recommendation:
  - BoE assesses RTGS indirectly and fragmentedly through oversight of recognized systems that rely on RTGS.
  - Given not all RTGS activity relates to overseen schemes and given RTGS importance, the BoE should undertake a direct, unified assessment of the RTGS, systemically evaluating it against the Core Principles.
  - This should include assessment of finality of RTGS movements made outside context of schemes designated under the Settlement Finality Regulations.

*Source: _cr11237 - 1.  Summary Observance of the CPSIPS*

### 20.      Table 1 offers a principle-by-principle a summary of assessment results.

### _cr11237 - 20.      Table 1 offers a principle-by-principle a summary of assessment results.

### Summary assessment results (Table 1)
- CP I – The system should have a well-founded legal basis under all relevant jurisdictions: Observed
  - While incentives between the BoE and CHAPSCo appear well aligned, the BoE’s Oversight area analysis on the lack of a binding contract between the two parties was not supplemented by a legal review of consequences of the nonbinding nature of the MOU, either internally via the BoE’s Legal Department, or externally. The BoE indicated that its legal department is undertaking this supplementary legal review.
- CP II – The system’s rules and procedures should enable participants to have a clear understanding of the system’s impact on each of the financial risks they incur through participation in it.: Observed
- CP III – The system should have clearly defined procedures for the management of credit risks and liquidity risks...: Broadly observed
  - In the unlikely scenario that RTGS were to become inoperable at both primary and secondary sites for a substantive period of time, Bypass mode offers the main contingency option and, in this case, there is some credit risk between members.
  - In the event that a member in a net debit position were to default while in Bypass mode, there are no clear procedures to set forth how the losses would be allocated.
  - At the time of assessment CHAPSCo was considering how to ensure settlement could complete in the event of a member default while in Bypass mode; it is expected that this work will be completed in 2011.
- CP IV – The system should provide prompt final settlement on the day of value...: Observed
- CP V – A system in which multilateral netting takes place should...: Non Applicable
- CP VI – Assets used for settlement should preferably be a claim on the central bank...: Observed
  - There is significant exposure to commercial settlement banks in general and to two institutions in particular, which implies credit risk needs to be managed outside of the system.
- CP VII – The system should ensure a high degree of security and operational reliability...: Observed
  - The two processing sites are only about 12 miles apart as the crow flies and therefore still exposed to the risk of a wide-area event.
  - CHAPSCo and the BoE are considering whether to proceed with the Market Infrastructure Resilience Service, which would replace the Bypass mode in the event both of the BoE’s RTGS sites being down.
- CP VIII – The system should provide a means of making payments, which is practical for its users and efficient for the economy.: Observed
- CP IX – The system should have objective and publicly disclosed criteria for participation...: Observed
  - CHAPS Rules and fees are not published but have to be requested from CHAPSCo. This may make it more difficult for a prospective member to develop a complete business case.
- CP X – The system’s governance arrangements should be effective, accountable and transparent.: Broadly Observed
  - CHAPSCo is the operator of both FPS and CHAPS, raising governance concerns given the different stages of development of the two schemes and resource/capacity needs.
  - Governance concerns extend to succession planning following the retirement of the Company Manager.
  - An external review of governance is underway; a report has been completed and plans for implementation are currently being developed. The BoE will be monitoring progress.
  - Company documentation is available to members via a secure access website, but no information is published on the CHAPS governance structure on the public access website.

- Central Bank Responsibility A – The central bank should define clearly its payment system objectives and should disclose publicly its role and major policies...: Observed
- Central Bank Responsibility B – The central bank should ensure that the systems it operates comply with the core principles.: Broadly observed
  - The BoE assesses the RTGS infrastructure against the core principles in an indirect and fragmented manner through its oversight of CHAPS (and other recognized systems that use it, such as CREST, FPS, and Bacs). A direct and unified assessment would be beneficial.
- Central Bank Responsibility C – The central bank should oversee observance with the core principles by systems it does not operate...: Observed
- Central Bank Responsibility D – The central bank... should cooperate with other central banks and with any other relevant domestic or foreign authorities.: Observed

### Recommended actions (Tables 2 and 3)
- Core Principle III
  - CHAPSCo should develop procedures to make clear where losses would fall if a member in a net debit position were to default while in Bypass mode.
  - The BoE has formally identified and communicated this requirement to CHAPSCo; CHAPSCo is in the process of developing these procedures. It is expected that this work will be completed in 2011.
  - In the medium term, CHAPSCo and the BoE are considering a back-up RTGS system that would replace the Bypass mode in the event that both of the BoE’s operational sites are down.
- Core Principle X
  - CHAPSCo should demonstrate that it can simultaneously manage both the CHAPS and FPS schemes, and demonstrate improvements to succession planning.
  - Improvements to governance are forthcoming following an external review; a report has been completed and planning for implementation is underway. The BoE has provided important input on Board composition, senior manager appointments, and operation of multiple schemes.
- Central Bank Responsibility B
  - The BoE should formally assess the RTGS infrastructure’s compliance with the Core Principles in a unified manner, given not all activity in the RTGS infrastructure relates to systems that the BoE oversees, and given the importance of the RTGS infrastructure to the U.K. financial system.
- Additional recommendations (Table 3)
  - Core Principle I: Supplement the Oversight analysis with a legal review of consequences of the nonbinding MOU; the BoE indicated its legal department is undertaking this supplementary legal review.
  - Core Principle VI: The BoE should continue efforts to raise awareness of risks of tiering and encourage direct participation where practical. The high concentration of payments in two settlement banks should be monitored by banking supervisors.
  - Core Principle VII: CHAPSCo and the BoE are encouraged to proceed with implementing an RTGS back-up solution to replace the Bypass mode. Preliminary timelines estimate a delivery date of 2013/2014 if approved.
  - Core Principle IX: CHAPSCo is encouraged to make the CHAPS rules and fees public.
  - Core Principle X: The CHAPS governance structure could be made more transparent; for example, publish governance arrangements on the CHAPS website.

### Authorities’ response and follow-up
- The U.K. authorities welcome the assessment of CHAPS against the CPSS Core Principles and of the Bank of England against the Central Bank Responsibilities.
- The authorities will consider and review the assessors’ recommendations and additional actions; work on many is already in train.
- The IMF recommends the Bank should “formally assess the RTGS infrastructure’s compliance with the Core Principles in a unified manner...” The Bank responds that RTGS is an accounting infrastructure supporting some payment systems and that it would not be appropriate to assess RTGS against the CPSS Core Principles as they apply to Payment Systems. The Bank will, however, conduct a unified assessment of RTGS this year based on its existing internal risk assessment, monitoring and management framework, at arms length as well as by line management.

### Assessment methodology and classification
- Observance categories used: observed, broadly observed, partly observed, non-observed, and not applicable.
  - Observed: all assessment criteria generally met without any significant deficiencies.
  - Broadly observed: only minor shortcomings; corrective actions scheduled and realistically achievable within a prescribed period.
  - Partly observed: shortcomings sufficient to raise doubts about achieving observance within a reasonable time frame.
  - Non-observed: major shortcomings.
  - Not applicable: does not apply given structural, legal and institutional conditions.

### Detailed legal environment highlights (CP I descriptive findings)
- Regulatory framework: Banking Act 2009 Part 5 establishes statutory framework for oversight of recognized interbank payment systems.
  - CHAPS was formally recognized by the treasury under the Banking Act on January 5, 2010, giving the BoE responsibility for oversight.
- CHAPS designation under the Financial Markets and Insolvency (Settlement Finality) Regulations 1999 implements the EU Settlement Finality Directive in the United Kingdom, providing protections including irrevocability of payment orders and enforceability of collateral.
- Contractual arrangements and documentation:
  - There has not historically been a formal membership agreement between CHAPSCo and its members; a confirmation of membership agreement was developed and all existing members have signed it.
  - Members’ relationships with the BoE are governed by contracts (the RTGS Terms and Conditions and the Master Repurchase Agreement).
  - CHAPSCo, member banks and the BoE have contracts with SWIFT including service level agreements.
  - There is an MOU between the BoE and CHAPSCo setting out expectations and responsibilities; the MOU does not create legally binding rights and obligations.
- Membership and cross-border considerations:
  - The majority of members are incorporated in the United Kingdom, as is the infrastructure and settlement service provider (the BoE).
  - Some members are incorporated in foreign jurisdictions; CHAPSCo and the BoE require legal opinions from new members confirming enforceability of CHAPS rules and RTGS terms and conditions.
  - Legal opinions held by CHAPSCo will be refreshed every three years on a rolling basis; any country-based issues will be added to the company risk register.
- Rule framework:
  - All members agree to CHAPS rules, which incorporate by reference: The FIN Copy Service Description (SWIFT); The CHAPS Functional Specification; The CHAPS Procedural Documentation; The CHAPS Security Code of Conduct; The RTGS Reference Manual; The SWIFT User Handbook; The CHAPS Glossary; The BACS Industry Sorting Code Directory (ISCD) Member Procedures.
  - CHAPS rules and associated rights and obligations are governed by the laws of England and Wales; members agree the courts of England and Wales have exclusive jurisdiction for disputes not resolved by appeal process.
- Governance support:
  - CHAPSCo Board has delegated responsibility to the CHAPS Legal Committee (LegCo) for ensuring rules remain robust and up-to-date; LegCo meets at least once a year and on an ad hoc basis as required.

*Source: IMF staff assessment excerpt (detailed assessment and recommended action plans as presented in the provided content).*

### Annex to the MOU sets out in detail expected service levels in key areas. The

### _cr11237 - Annex to the MOU sets out in detail expected service levels in key areas. The

### Oversight and Memorandum of Understanding (MOU)
- BoE’s Oversight concluded a binding contract would not be preferable to the MOU because "the costs of doing so would outweigh the benefits."
- Oversight view: incentives are "already well aligned between the BoE and CHAPSCo," making "the probability of an irresolvable dispute" small.
- Re-characterising the MOU (particularly the Annex’s "service level" terms) as a binding contract could be "a complex and relatively costly exercise."
- Assessment: Observed.
- Recommendation/Action: Supplement the Oversight analysis with a legal review of the MOU’s nonbinding nature (internally via BoE Legal Department or externally). The BoE indicated it would undertake this supplementary legal review in H1 of 2011.

### CP II — Disclosure of rules and impact on participant financial risks
- Description:
  - CHAPS Rules set high-level duties; detailed requirements are in referenced documentation.
  - Scheme documentation is made available to members via "Livelink."
  - Irrevocability/finality: payment message is entered when the member's settlement account is debited; at that point the message is not capable of being revoked.
  - CHAPS designated under the Settlement Finality Regulations.
  - Bypass mode exists as contingency if BoE primary and standby systems are unavailable; rules and procedures for Bypass are in CHAPS Rules, CHAPS Procedural Documentation, and the RTGS Reference Manual.
  - Bypass has never been used; regular tests help ensure familiarity.
  - Liquidity controls explained in CHAPS Procedural Documentation and RTGS Reference Manual: throughput guidelines, “circles” processing, transfer of sterling liquidity in contingency.
  - Sterling Bank Liquidity Scheme does not fully mitigate risk that a member could become a liquidity trap during an operational outage; members are aware of this risk.
  - FSA developing new liquidity regulations that may require a dedicated intra-day liquidity buffer; BoE working with members on possible liquidity savings measures (e.g., offsetting algorithms for queued payments).
- Assessment: Observed.

### CP III — Management of credit and liquidity risks
- Description:
  - In normal operations, CHAPS design means credit risks do not arise: payments settle in real time and are irrevocable/final when the sending member’s RTGS settlement account is debited.
  - If RTGS inoperable at both sites, Bypass mode introduces some credit risk: messages delivered directly between members, CHAPSCo calculates multilateral net positions, forwarded to BoE for settlement.
  - In Bypass mode:
    - Members operate using Net Sender Caps (defined in CHAPS Functional Specification), calculated and applied by members; collateralized and based on each member’s Group Balance at time of RTGS failure.
    - Provision for multiple settlement cycles; rules do not currently address consequences of a participant default in Bypass mode.
    - CHAPSCo is developing documentation clarifying where losses would fall in event of a member default while in Bypass mode.
  - BoE provides collateralized intra-day liquidity (majority via intra-day repurchase agreements under Master Repurchase Agreement, using BoE’s Narrow Open Market Operations Collateral set). BoE also provides intra-day credit against deposits in cash ratio deposit accounts and Euro balances via De Nederlandsche Bank.
  - Members have real-time enquiry Link balances and message status; schedulers used to manage order of settlement.
  - Queuing mechanism and "circles" processing (simultaneous gross settlement of offsetting payments) mitigate liquidity risk.
  - Throughput guidelines: "50 percent of payment value by 12:00 and 75 percent of payment value by 14:30." BoE and CHAPSCo monitor monthly average performance.
  - No financial penalties for failing throughput guidelines; enforcement via peer pressure and escalation to "Star Chamber."
  - Contingencies if a member can receive but not send:
    - Settlement Bank Liquidity Scheme (SBLS) allows operationally stricken member to recycle liquidity via intra-day loans; transfers via Enquiry Link or authenticated fax; SBLS loans expose lending member to credit risk managed outside CHAPS.
    - Faxing of priority payments is operationally feasible; payments via authenticated fax are considered payments under CHAPS.
- Assessment: Broadly Observed.
- Comments/Recommendations:
  - To achieve full observance, CHAPSCo needs procedures clarifying loss allocation if a participant in a net debit position defaults in Bypass mode. BoE has asked CHAPSCo to consider settlement in that event; expected that work will be completed in 2011.
  - In medium term, CHAPSCo and BoE are considering a further back-up option to be used instead of Bypass mode if both BoE RTGS sites were down.

### CP IV — Prompt final settlement on value day
- Description:
  - Normal operations: finality occurs in real time upon debiting and crediting of BoE settlement accounts; this is the point of irrevocability.
  - CHAPS designation under Settlement Finality Regulations provides added assurance against legal challenge in event of member insolvency.
  - Contingency:
    - Enquiry Link: finality occurs upon debiting and crediting of settlement accounts.
    - Authenticated fax: irrevocability upon receipt by BoE; finality upon debiting and crediting.
    - Bypass mode: irrevocability when sending member transmits payment to SWIFT; final settlement on multilateral net basis at end of each settlement cycle (likely two cycles: middle of afternoon and end of day; more cycles possible).
  - Payments in Bypass mode covered by CHAPS’ designation under the FMIRs.
- Assessment: Observed.

### CP V — Multilateral netting capability
- Description:
  - Normal mode: gross real-time settlement; Principle V does not apply in normal operations.
  - Bypass mode: multilateral netting would occur; messages delivered directly between members, CHAPSCo calculates multilateral net positions forwarded to BoE for settlement.
  - Current rules do not address consequences of participant default in Bypass mode (see CP III).
- Assessment: Non applicable.

### CP VI — Settlement assets quality and tiering risks
- Description:
  - Settlement between CHAPS members takes place through transfers of claims on the BoE (central bank money).
  - System is highly tiered: many institutions participate indirectly through direct members; significant activity settled in commercial bank money—possible vulnerability if a member with large settlement obligations cannot settle.
  - Direct participation increased with JP Morgan and Bank of America becoming CHAPS members in second half of 2010.
  - FSA liquidity regulations requiring a dedicated intra-day liquidity buffer (when introduced) may increase incentives for direct participation.
  - Concentration statistics (Percentage of CHAPS payment value sent by top-2 and top-5 members, 2003-2010):
    - Year: 2003 2004 2005 2006 2007 2008 2009 2010
    - Top-2: 52.2 50.6 52.4 54.0 53.2 53.7 54.5 49.5
    - Top-5: 84.3 84.5 85.2 85.4 85.2 83.3 84.5 80.4
  - In 2010, modest decrease in concentration, but top-2 still combine for half of payment value.
  - BoE working with FSA on prudential regulation to account for concentration risks; FSA published good practices for credit risk management and supervisors will follow up in supervisory processes.
- Assessment: Observed.
- Recommendation: BoE should continue raising awareness of tiering risks and encourage direct participation where practical; high concentration in two settlement banks should be monitored by banking supervisors.

### CP VII — Security, operational reliability and contingency arrangements
- Description:
  - Security/operational policy decisions made at senior management (CHAPS Board); procedures cover business-as-usual and contingency.
  - Security Policy and Security Code of Conduct based on ISO 27002; Code specifies encryption, authentication, contingency, physical/logical access controls.
  - Members must complete annual detailed questionnaire and self-certify compliance with Code (including head of audit sign-off).
  - Core RTGS processing outsourced to BoE; MOU lists performance targets and BoE is subject to Code of Conduct.
  - RTGS availability target: "99.95 percent of the operating day over the course of each month."
    - BoE failed to meet availability in 2 out of 12 months of 2008.
    - Since start of 2009, only one eight-minute period (in February 2010) where RTGS was unable to process CHAPS payments.
  - MOU requires RTGS capacity to process a peak day’s volume within four hours; historic peak ~300,000 payments in a day.
    - BoE tests show it can process 300,000 payments in 2.5 hours.
  - SAS70s conducted annually for CHAPSCo and RTGS; no outstanding material concerns for year 2010.
  - Business continuity and recovery provisions extensive; Tripartite Resilience Benchmarking Project (repeated end of 2007) shows high standard.
  - No known single points of failure; redundancy on primary site and a "hot" back-up site in Debden.
  - Caveat: two processing sites are only around 12 miles apart as the crow flies and thus exposed to risk of wide-area event.
  - Bypass mode is main contingency if both primary and secondary sites are inoperable.
  - CHAPSCo and BoE considering Market Infrastructure Resilience Service (generic RTGS by SWIFT operated by BoE) to replace Bypass in event both BoE systems down; planning phase, subject to project approval, preliminary delivery estimate 2013/2014.
  - Contingency exercises: Tripartite 2007, November 2009 Market-wide Exercise, remote site working, fax testing, SWIFT "cold start" tests. BoE and CHAPSCo discussing more rigorous testing (e.g., Bypass mode tests).
  - Member service-level guidelines in Procedural Documentation; failure leads to escalation and "Star Chamber" hearings; peer pressure approach typically sufficient.
- Assessment: Observed.
- Comments/Recommendation:
  - Additional comment: two processing sites are around 12 miles apart and therefore exposed to wide-area event risk; mission strongly encourages CHAPSCo and BoE to proceed with implementing an RTGS-based back-up solution. Work in planning phase; preliminary timelines estimate delivery in 2013/2014 if approved.

### CP VIII — Practicality and economic efficiency for users
- Description:
  - CHAPS is a real-time system suitable for time-critical payments requiring certainty and avoidance of settlement risk.
  - RTGS systems are more costly to operate and use due to higher resilience requirements and liquidity costs.
  - CHAPSCo charges distributed pro rata among members based on volume, subject to a minimum charge of "2 percent (applied up to an overall maximum of 26 percent of costs being charged in this manner...)" to limit low-volume members’ contribution.
  - Members face two calls for funds in June and December; December call lowered if yearly budget not exhausted.
  - BoE RTGS fee objectives:
    - to recover the BoE’s investment and running costs, including all allocated overheads attributed to the members;
    - to recover attributable costs taking one year with another; and
    - to avoid cross-subsidization of one service by another.
  - BoE current tariff: "16.5 pence per transaction, down from 17.1 pence." BoE also charges a yearly account management fee.
  - Members also face charges for using SWIFT FIN Copy and bilaterally negotiated SWIFT message charges.
  - BoE provides collateralized intra-day liquidity free of charge; cost to members is opportunity cost of lodging collateral.
  - MOU transmission time target between member systems: "no longer than 60 seconds (30 seconds for network processing and 30 seconds for processing by the RTGS processor)"; actual transmission generally much quicker.
  - Faster Payment Service (FPS) went live in May 2008; expected to take over 50 percent of CHAPS volumes over next five years, but migration slower than expected. Migration could increase average RTGS cost per payment; CHAPSCo and BoE need to consider responses as FPS migration occurs and liquidity savings mechanisms are introduced.
- Assessment: Observed.

### CP IX — Access criteria and fees transparency
- Description:
  - Access criteria set out in CHAPS Rules and available on CHAPSCo public website; rules themselves not published but made available to potential members.
  - Membership restricted to financial institutions that hold sterling settlement accounts at BoE, qualify under Settlement Finality Regulations, and meet technical/operational requirements; members must be a shareholder of the Company.
  - CHAPSCo entry fee for new members: "£70,000." Fee justified as contribution to offset technical costs; not judged to be a significant barrier—main barrier is lack of business case.
  - Information on fees is not published and must be requested from CHAPSCo, which may hinder prospective members in developing a business case.
- Assessment: Observed.
- Recommendation: Mission encourages CHAPSCo to make the CHAPS Rules and fees public.

### CP X — Governance effectiveness, accountability and transparency
- Description:
  - CHAPSCo governance: Board has ultimate responsibility; Board delegates day-to-day management to Company Manager. Company documentation available to members via "Livelink."
  - Board composed entirely of CHAPS and FPS member settlement banks; lacks independent Board members—lags best practice.
  - Payments Council (PC) provides strategic guidance with independent representation: PC Board has four independent members who collectively exercise a veto. PC does not interfere in day-to-day operations but promotes strategic goals across payment schemes.
  - CHAPSCo operates both FPS and CHAPS, raising management and governance challenges given different development stages of the systems.
  - Since February 2010, CHAPSCo shared management on an interim basis with Bacs pending permanent appointment after CHAPSCo Company Manager’s retirement.
  - Independent governance and management review (commissioned jointly with Bacs) due to report in January 2011; scope includes strategic goals, Board composition/functioning, cross-scheme issues, senior management structure and resourcing. A report has been completed and plans for implementation are being developed; BoE had significant input.
- Assessment: Broadly Observed.
- Comments/Recommendations:
  - CHAPSCo must demonstrate capacity to operate and manage both CHAPS and FPS simultaneously and improve succession planning.
  - Governance structure could be made more transparent.
  - Implementation of recommendations expected following external review; BoE will monitor progress.

### Responsibility A — Central bank objectives and disclosure
- Description:
- The BoE’s broad financial stability objective is codified in the Banking Act 2009: "to contribute to protecting and enhancing the stability of the financial systems of the United Kingdom."

*Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2011/_cr11237.pdf*

### Part 5 of the Banking Act 2009 establishes a statutory regulatory regime for

### _cr11237 - Part 5 of the Banking Act 2009 establishes a statutory regulatory regime for

### Statutory regime and recognition
- Part 5 of the Banking Act 2009 establishes a statutory regulatory regime for payment systems. This regime, operated by the BoE, replaced the previous non-statutory arrangements.
- Interbank payment systems which meet the criteria set out in section 185(1) of the Act may be recognized by HM Treasury and brought within the BoE’s oversight regime.
- Part 5 of the Act gives the BoE a set of statutory tools to assist its oversight function.

### Criteria for systemic significance (section 185)
- Two criteria in section 185(1) for identifying interbank payment systems that are of systemic significance to the United Kingdom:
  - The first criterion: systems that would have the potential to threaten the stability of, or confidence in, the U.K. financial system if there were any deficiencies in their design or if their operation were disrupted.
  - The second criterion: systems where any deficiency in design or disruption to their operation could lead to serious consequences for business or other interests throughout the United Kingdom.

### Factors to consider (section 185(2))
- Section 185(2) specifies factors to be taken into consideration when assessing systemic significance:
  - the number and value of the transactions that the system presently processes or is likely to process in the future;
  - the nature of the transactions that the system processes;
  - whether those transactions or their equivalent could be handled by other systems;
  - the relationship between the system and other systems;
  - whether the system is used by the BoE in the course of its role as a monetary authority.

### Principles for recognized payment systems
- Operators of recognized payment systems are required to have regard for Principles published by the BoE.
- The BoE uses the 10 Core Principles for Systemically Important Payment Systems, plus the following four additional principles:
  - Business Risk: The system should manage its business risks so that its users can rely on continuity of its services.
  - Interdependencies: The system should regularly review the risks it bears from, and poses to, other infrastructures as a result of interdependencies, and should implement controls adequate to manage those risks
  - Indirect Participants: The system should understand and manage risks that are brought to the system as a result of participants’ relationships with indirect participants
  - Outsourcing: The system should manage its outsourced relationships prudently, ensuring that contractual and risk management arrangements are clear, appropriate and robust.

### Oversight approach and tools
- The BoE makes an assessment of the risks to financial stability posed by a particular system and aims to calibrate the intensity of its oversight accordingly.
- As a matter of routine, the BoE follows a program of risk reviews for each system, which includes an annual review against the BoE’s principles.
- The BoE uses its Oversight Risk Framework as an input into its risk reviews of recognized systems:
  - The Oversight Risk Framework assigns risks to three broad headings: settlement risk, business risk, and operational risk.
  - The Framework includes a “register” of possible risks and assigns probabilities and impacts to each of the risks to rank relative importance.
- Outcomes of risk reviews are formalized in Expectations Letters to each system operator, specifying expectations and timescales. Example: With regard to CHAPS, the BoE delivered its Expectation Letter following its last risk review in May 2010.
- The BoE expects, as a matter of routine, to meet senior representatives of the operators of recognized interbank payment systems at least four times each year to gather information and review progress in mitigating risks, to carry out risk assessments and to communicate its expectations as to improvements.

### BoE operational role and RTGS
- The BoE is the operator of the RTGS system, which provides real-time gross settlement for CHAPS and CREST, as well as settlement of other payment schemes (FPS, Bacs, Cheque and Credit Clearing, LINK).
- The RTGS also facilitates intra-day liquidity transfers, reserve account transfers, and transfers in respect of the note circulation system.
- The BoE is a shareholder in CHAPSCo and attends CHAPSCo Board meetings with “observer status.”
- The BoE also plays a role designating systems under the Settlement Finality Regulations; the BoE considers whether a payment system that has applied for designation meets the criteria specified in the Regulations.

### Publications and reporting
- Since 2005 the BoE has published an annual Payment Systems Oversight Review (PSOR) setting out key developments and the focus of BoE oversight work.
- No report was published in 2009 owing to the change of regime to a statutory footing.
- The BoE expects to publish the first report since the implementation of the Banking Act 2009 later this year.
- The forthcoming report will adopt a different format to previous reports: it will be shorter with a greater focus on the main risks and mitigants, rather than a principle-by-principle assessment of the system.

### Assessment of RTGS and recommendation
- Observed: The BoE does not formally assess its RTGS system against the core principles, except indirectly and in a fragmented manner through oversight of CHAPS and other recognized systems that use it (e.g., CREST, FPS, and Bacs).
- Not all activity in the RTGS is undertaken in regard to these recognized systems (examples: end-of-day net settlement of the Cheque and Credit system and the LINK system; intra-day liquidity movements; adjustments to reserve account balances; movements to reflect transactions in the note circulation system; transfers outside of CHAPS operating hours or as a contingency measure).
- The RTGS is clearly the most important component of the U.K. payments and settlement infrastructure.
- Recommendation: The BoE should undertake a formal, direct, and holistic assessment of the RTGS against the Core Principles:
  - This should be a specifically designated and arm’s length assessment of the RTGS directly by the BoE’s oversight function, distinct from episodic reviews conducted by internal bank departments such as internal audit.
  - The assessment should include evaluation of the legal basis supporting RTGS, including potential for insolvency practitioner challenges to RTGS adjustments (example: adjustments made for the settlement of LINK).
  - The assessment should evaluate processes and procedures supporting RTGS activity that can occur outside of recognized systems (intra-day liquidity movements, payments outside CHAPS hours, recycling liquidity via the Settlement Bank Liquidity Scheme).
  - A single, cohesive assessment is preferable to fragmented and incomplete assessments done through oversight of individual recognized systems.

### Observations on responsibility and compliance (Responsibilities B, C, D)
- Responsibility B (central bank should ensure that systems it operates comply with core principles):
  - Description: CHAPS is operated by CHAPSCo; the BoE operates the RTGS underpinning CHAPS. CHAPS is a recognized system under the Banking Act 2009, but the BoE’s RTGS system is not.
  - The RTGS would have the potential to threaten stability or confidence if deficient, but is not considered an interbank payment system for the purposes of the Banking Act 2009.
  - The RTGS is not designated under the Settlement Finality Regulations.
  - Conclusion: The BoE should undertake a formal, direct, and holistic assessment of the RTGS against the Core Principles.
- Responsibility C (central bank should oversee observance with the core principles by systems it does not operate and have the ability to carry out this oversight):
  - Interbank payment systems meeting section 185 can be recognized by HMT and brought within BoE oversight. The Treasury has issued a guidance note on the recognition process (publicly available).
  - Recognized systems include: CHAPS; CLS; Bacs; FPS; and inter-bank payment systems operated as part of CREST, LCH, and ICE.
  - For each recognized system, the BoE’s risk review process analyzes:
    - qualitative information about features and operations;
    - quantitative information and statistics relating to flows and resulting risks;
    - target areas for further risk mitigation;
    - where the system’s current level of observance of the CPSS Principles lies relative to the BoE’s assessment of the appropriate level.
  - Statutory tools in the Banking Act 2009 available to the BoE:
    - Section 204: require provision of information which the BoE thinks will help HM Treasury determine which systems should be recognized, or which the BoE otherwise requires in relation to its oversight functions.
    - Section 190: power to instruct an operator to take particular actions in respect of the system’s rules.
    - Section 191: general power to issue directions to the operators of recognized interbank payment systems.
    - Sections 193–194: powers to appoint an inspector to enter premises on, or from which, any part of a recognized interbank payment system is operated (including outsourced technical service providers).
    - Section 195: powers to require an operator to commission an independent report from an expert in a particular field.
    - Sections 197–200: powers to impose sanctions in the event of compliance failure and certain other circumstances (publishing details of compliance failure and sanctions (197); imposing a penalty (198); stopping the system from operating (199); disqualifying management (200)).
  - Regarding Section 204 information provision: the BoE has identified a core set of information related to the BoE's principles and indicated expected update frequencies; the BoE reserves the right to make other requests case by case.
  - The BoE has a dedicated Oversight team of 12 staff, several with specialist skills; the Oversight team has a separate reporting line from the Operational teams (RTGS, intra-day credit). Where specific skills are not available they are drawn from other areas such as the BoE’s Legal Unit. Hiring and keeping the right expertise is challenging; expert teams face other demands stemming from EU and international regulatory agendas.
- Responsibility D (cooperation with other central banks and domestic/foreign authorities):
  - The BoE cooperates with the FSA, given the FSA’s interest in payment systems.
  - Under the Financial Services Markets Act 2000, the FSA regulates recognized bodies (operators of CCPs and SSSs) and participants in recognized interbank payment systems; the FSA is responsible for regulation of credit, liquidity, and operational risks participants may incur by using such systems.
  - For systems effecting both securities transfers and payment transfers, the FSA will consult the BoE before deciding whether to make a designation order under the Settlement Finality Regulations.
  - Section 192 of the Banking Act 2009 requires the BoE, in exercising its powers under Part V, to have regard for any action the FSA has taken or could take, and to consult with the FSA before taking action under Part V in respect of a recognized payment system operated by an investment exchange or clearing house recognized under the Financial Services and Markets Act.
  - The BoE and FSA have agreed to an MOU covering respective roles and responsibilities in relation to payment and settlement systems.
  - The BoE regularly liaises with the Payments Council.
  - At the international level, the BoE participates in co-operative oversight colleges and international groups (examples and arrangements):
    - CLS Bank: based in New York; the U.S. Federal Reserve is lead overseer and chairs the CLS Oversight Committee (OC). The OC comprises 23 central banks and meets in person at least annually along with more frequent written communication and teleconferences.
    - LCH.Clearnet Group: incorporated in the United Kingdom and subject to supervision on a consolidated basis by the French Authorité de Contrôle Prudentiel. Central banks and regulatory authorities from Belgium, France, the Netherlands, Portugal, and the United Kingdom participate in cooperative oversight meetings at both high level and working level, with rotating chairmanship.
    - Euroclear Group (ESA): based in Belgium; the National Bank of Belgium (NBB) and Commission Bancaire, Financiere et des Assurances jointly chair the ESA High Level Committee (HLC) and the ESA Technical Committee (TC). The HLC and TC comprise six central banks and six national regulators. The ESA HLC meets biannually and the ESA TC meets quarterly.
    - SWIFT: not a recognized payment system in the United Kingdom, but its services are of systemic importance. SWIFT’s head office is in Belgium and the NBB is its lead overseer and chairs the oversight arrangements. Thirteen co-operating central banks are organized in a two-tier structure of senior and technical level. The senior level oversight group meets twice a year and the technical level group meets four to five times a year with SWIFT management and internal audit.
  - The BoE is also active in international groups of overseers (example: member of CPSS and the ECB’s Payment and Settlement Systems Committee).

*Source: IMF staff report content on Part 5 of the Banking Act 2009 and BoE payment systems oversight.*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2011/_cr11237.pdf_