## _cr1281 — Executive Summary and Assessment of China’s Payment and Settlement Systems ## Source details **Canonical URL:** [_cr1281 — Executive Summary and Assessment of China’s Payment and Settlement Systems](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2012/_cr1281.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2012/_cr1281.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2012/_cr1281.pdf.json) --- ### Executive overview and infrastructure - PBC implemented the China National Advanced Payment System (CNAPS), consisting of the High-Value Payment System (HVPS) and the Bulk Electronic Payment System (BEPS). - HVPS design and connections: - Operates in a tiered way (multi-entry point) with a national processing center (NPC) and 32 local processing centers (LCPs). - RTGS system; backbone of the CNPS; mainly used for large value transfers. - Interconnected to many trading, payments, and securities settlement systems (SSS) to allow for central bank money settlement. - More than 1,600 direct participants. - BEPS: - Embedded in HVPS for retail transactions. - Retail transaction threshold: 1000 km) from the main station (system-wide) and FCPS backup distance reported > 500 km with one minute lag time between disaster backup and operating center data. ### Main deficiencies and recommended actions (preserve exact recommendations) - Legal foundation (CP I) — Partly observed: - Enactment of a payment system law to give full protection to settlement finality and netting arrangements. - Interpretation of the “Enterprise Bankruptcy Law” to avoid a “zero-hour rule.” - Upgrade payment systems rules and procedures to the level of PBC regulation. - Risk understanding and management: - Clarify with participants the potential legal risk associated with settlement finality. - Further monitor credit and liquidity risk through: - More comprehensive queuing and accounting monitoring functions. - Application of more active mark-to-market mechanisms. - As liquidity conditions evolve, maintain flexibility in conditions applied for intraday collateralized credit and consider the removal of charging. - Security, operational reliability and contingency arrangements: - Implement the second-generation payment system to: - Improve real-time operation monitoring function and risk warning capability. - Realize automatic handling of system failures to the maximum degree. - Reduce system maintenance workload, increase operation monitoring efficiency and upgrade operation maintenance level. - Efficiency and practicality (CP VIII): - Introduce a “single access point” feature to improve liquidity management. - Ensure high value electronic transactions are not perceived as relatively more expensive vis-à-vis large value cheque transactions. - Consider extending operating hours reflecting growing importance of the system. - Governance (CP X): - Involve more participants in the “second generation” project; create a formal users’ group. - Conduct regular rehearsals of crisis procedures for all types of emergency occurrences. - Over time, PBC should strive to achieve full observance of the other CPs. - Central bank responsibilities — main recommendations: - Publish a publicly available oversight policy document detailing policy stance, scope (including retail payments), instruments, criteria for systemic importance, and institutional cooperation arrangements. - Elaborate criteria for determining systemically important systems; provide and constantly update a list. - Consider more proactive oversight of CFETS and ACHs; assess safety and efficiency against relevant international standards. - Activate and implement Memoranda of Understanding on payment and settlement issues; create China National Payment and Clearing Association (national payments council/self-regulatory association). - Continue and deepen international cooperation and apply CPSS cross-border cooperative framework. ### CFETS, FCPS and foreign-exchange clearing observations - CFETS operations: - Domestic FX transactions mostly executed at China Foreign Exchange Trade Center (CFETC). - Participant counts at end-2009: - CY/FX spot market: 276 participants (265 banks and 11 NBFIs). - CY/FX forward: 73 participants. - CY/FX swap: 71 participants. - Currency swap: 20 participants. - Foreign currencies trading market: 85 participants. - BIS reported daily average trading of US$30 billion for CY/US$ spot transactions during April 2010 (of which US$19.8 billion are on-shore transactions). - Settlement methods: - Majority of participants settle bilaterally; 21 participants use a net clearing model with CFETC acting as CCP. - CY leg settles through HVPS; foreign currency leg settles with domestic settlement banks where participants hold FX accounts. - Mission lacked complete data on multilateral arrangement; PBC urged to assess compliance with international standards as soon as possible. - FCPS statistics (selected table highlights for U.S. $ and other currencies): - U.S. $: - 2008 Volume 68,594; Value (US$ million) 7,447; % Value/GDP 0.1693. - 2009 Volume 272,107; Value (US$ million) 45,918; % Value/GDP 0.9208. - Euro: - 2008 Volume 900; Value (US$ million) 290; % Value/GDP 0.0066. - 2009 Volume 3,872; Value (US$ million) 2,409; % Value/GDP 0.0483. - HKD: - 2008 Volume 1,101; Value (US$ million) 107; % Value/GDP 0.0024. - 2009 Volume 2,705; Value (US$ million) 1,308; % Value/GDP 0.0263. - Jp Yen: - 2008 Volume 429; Value (US$ million) 197; % Value/GDP 0.0045. - 2009 Volume 1,889; Value (US$ million) 905; % Value/GDP 0.0181. - GDP and exchange rate notes: - (1) 2008 GDP: CY 30,100 billion. 2008 year-end CY/ US$ conversion rate: 6.8434. - (2) 2009 GDP: CY 34,050 billion. 2009 year-end CY/ US$ conversion rate: 6.8282. - FCPS self-assessment highlights: - FCPS processes payment instructions individually in real-time and settles each payment to its full value (Article 10). - Liquidity and credit safeguards: real-time available quotas by currency (Article 51); participant obligations to maintain sufficient quotas (Article 53); risk deposit and risk-sharing mechanisms (Article 54); settlement agents provide overdraft facilities and pledge financing (Article 55). - Security and operational targets: 99.9 percent operational reliability and recovery time objective of 120 minutes; FCCPC capability of processing 70,000 payments per hour. - Pricing: maximum cost per transaction to FCCPC and settlement agents is 16 Yuan to 26 Yuan depending on currency; previous correspondent bank costs about 35 Yuan to 140 Yuan. ### Retail payments, remittances and financial inclusion initiatives - Card and terminal infrastructure (end-2009): - 1.57 million merchants accepting card payments. - 2.41 million POS terminals. - 215 thousand ATMs. - Growth rates: merchants accepting cards 59.9 percent in 2008 and 32.6 percent in 2009; POS terminals 56.2 percent in 2008 and 30.5 percent in 2009; ATMs 28.4 percent in 2008 and 28.3 percent in 2009. - Migrant remittances and rural initiatives: - Internal migrant-worker card remittance service (2007) used to remit over CY 2 billion. - PBC vegetable marketplace initiative in Shandong (2007) moved over CY 2.7 billion cash transactions to electronic means. - Rural-serving financial institutions collectively have 85,000 service outlets; 21percent of rural financial services outlets connected to HVPS and BEPS; around 16,248 rural service outlets had access to HVPS and BEPS as of end 2007. - Remittances: - World Bank estimate for 2009: US$47,553 million sent to China, representing 1.1 percent of China’s GDP. - Average total cost of sending US$200 to China from selected sending countries: 12.55 percent (WB Remittance Prices Worldwide database). - Policy suggestion: implement CPSS-WB General Principles for International Remittance Services and proactively embrace G-8 and G-20 Global Objective of reducing remittance costs by five percentage points in five years. ### Legal, regulatory and oversight framework - Legal/regulatory coverage is comprehensive but protection for settlement finality and legal validation of netting are not covered at the level of the law. - PBC oversight powers recognized in Article 4 of the “Peoples Bank of China law”; oversight and regulatory powers over retail payments, interbank payments, securities settlements and related functions. - Coordination: - Formal MoU defines general cooperation among PBC, MOF, CSRC and CBRC, but no specific MoU defining modus operandi over payment and settlement systems. - PBC has not issued a comprehensive public document covering objectives, scope, instruments and institutional arrangements of its oversight function. - PBC actions: - Oversight extended to nonbank payment service providers (PBC Decree [2010]-2). - Implemented Payment Management Information System (PMIS) for HVPS and BEPS data, standard analytical reports, ad-hoc analysis and real-time monitoring of participant liquidity positions. - Working on launch of “second generation” CNAPS; reform of legal and regulatory framework; initiatives to increase retail payment penetration. - PBC plans to establish China National Payment and Clearing Association. ### Authorities’ response and planned actions - Chinese authorities welcome the assessment and plan to: - Draft a payment system act to address the “zero hour rule” and give legal recognition of netting and settlement finality. - Launch CNAPS second generation (CNAPS2) to increase efficiency and extend settlement opening hours. - Improve management, upgrade the payment system, conduct regular emergency drills, clarify oversight policy publicly, extend oversight to all payments and SSS including retail systems, assess CFETS and ACHs for international standard compliance, establish China National Payment Association, and strengthen domestic and international cooperation. *Source: Executive Summary and assessment material in the content unit _cr1281.* ### Executive Summary ...................................................................................................... ### _cr1281 - Executive Summary ...................................................................................................... ### Executive Overview - The People’s Bank of China (PBC) implemented the China National Advanced Payment System (CNAPS), which consists of the High-Value Payment System (HVPS) and the Bulk Electronic Payment System (BEPS). - The HVPS currently operates in a tiered way (multi-entry point) with a national processing center (NPC) and 32 local processing centers (LCPs). - The HVPS is interconnected to many trading, payments, and securities settlement systems (SSS) to allow for central bank money settlement. - Numerous cheque clearing houses are administered by PBC local offices or delegated to banks. China Union Pay (CUP) handles clearance of card transactions whose balances are settled in the HVPS. Automated clearinghouses (ACHs) and other systems handle clearance and settlement for a variety of payment instruments. ### HVPS Systemic Importance and Usage Statistics - The HVPS is a systemically important payment system and the backbone of the national payments system in China. - The HVPS handled transactions for a value of CY 804 trillion in 2009, approximately 24 times the GDP value. - The BEPS is not currently a systemically important payment system, though its importance is growing. - Cheque clearinghouses: gross value of cheques issued in 2009 reached CY 248 trillion, about 7.4 times GDP. - Of this amount, 350 million cheques are interbank cheques valued at about CY 62.5 trillion. - The majority of cheques issued are “on us” cheques. - ACHs handled CY 69 trillion in 2009, about two times GDP. - China Domestic Foreign Currency Payment System (FCPS) launched April 2008; it is an RTGS system handling payment transactions in seven foreign currencies. Values settled do not show systemic importance; PBC conducted a self assessment (reported in Appendix I). ### Assessment Against CPSS Core Principles (CPSIPS) — HVPS - Overall conclusion: the HVPS observes (observed or broadly observed) all the Core Principles except CP I (legal basis). - Main improvement opportunities and recommended actions: - Legal foundation: - Enactment of a payment system law to give full protection to settlement finality and netting arrangements. - Interpretation of the “Enterprise Bankruptcy Law” to avoid a “zero-hour rule”. - Upgrade payment systems rules and procedures to the level of PBC regulation. - Understanding and management of risks: - Clarify with participants the potential legal risk associated with settlement finality. - Further monitor credit and liquidity risk through: - More comprehensive queuing and accounting monitoring functions. - Application of more active mark-to-market mechanisms. - As liquidity conditions evolve, maintain flexibility in conditions applied for intraday collateralized credit and consider the removal of charging. - Security, operational reliability and contingency arrangements: - Implement the second-generation payment system to: - Improve real-time operation monitoring function. - Improve risk warning capability to analyze potential risks and give timely warning. - Realize automatic handling of system failures to the maximum degree. - Reduce system maintenance workload, increase operation monitoring efficiency and upgrade operation maintenance level. - Efficiency and practicality: - Increase efficiency and practicality through: - A “single access point” feature of the system. - Ensuring high value electronic transactions are not perceived as relatively more expensive vis-à-vis large value cheque transactions. - Considering extending operating hours reflecting the growing importance of the system. - Governance of the Payments System: - Involve more system participants in the “second generation” project and eventually create a formal users’ group to facilitate cooperation and foster system performance. - Conduct regular rehearsals of crisis procedures for all types of emergency occurrences and not just for operational matters. - Over time, the PBC should strive to achieve full observance of the other CPs. ### Central Bank Responsibilities in Applying the CPs — Assessment and Recommendations - Overall conclusion: PBC broadly observes the central bank responsibilities but there are improvement opportunities. - Main recommendations: - Clarify in detail PBC’s policy stance in payment system oversight in a publicly available document expanding on scope of actions and plans to achieve public policy objectives in payment system matters. - Oversight policy document should cover major policies and instruments including risk control, access, governance, transparency, pricing, system reliability and business continuity, efficiency, and instruments ranging from moral suasion to on-site inspections, regulation, cooperation, sanctions, and provision of payment services. - Elaborate criteria used to determine when a system is systemically important; provide and constantly update a list of such systems. - Elaborate institutional arrangements and cooperation in the payment system arena. - Consider more proactive oversight by PBC over the China Foreign Exchange Trade System (CFETS) and the ACHs; in particular, assess safety and efficiency of these systems against relevant international standards. - Consider refinement of cooperative framework at the domestic level by activating and implementing Memorandum of Understanding (MoU) on payment and settlement issues and a structured oversight working framework with all relevant authorities and creating the China National Payment and Clearing Association. - At the international level, continue cooperation with relevant central banks and international organizations and apply the CPSS cross-border cooperative framework. ### CFETC, FCPS and Other Systems - Domestic FX transactions are mostly executed at the China Foreign Exchange Trade Center (CFETC). - Majority of participants settle transactions bilaterally; 21 participants use a net clearing model with CFETC acting as central counterparty (CCP). - Settlement of the CY leg occurs through the HVPS and settlement of the foreign currency leg with domestic settlement banks where participants hold FX accounts. - The mission was not provided complete data on transactions cleared and settled through the multilateral arrangement; PBC has not conducted an assessment of this payment system. - Given the nature and potential systemic importance, PBC is urged to assess this system’s compliance with international standards as soon as possible. ### Retail Payments, Cards, Cash and Oversight Scope - China is evolving to more intensive use of non-cash payment instruments, especially cards. - Cash (M0) to GDP has been declining from 16.7 percent of GDP in 2001 to 11.4 percent in 2009. - Cards issuance at end-2009: approximately 1.8 billion cards had been issued, of which 1.65 billion were debit cards. - The mission did not conduct a detailed assessment of retail payment systems; it may be advisable for PBC to formally include retail payments as an element of its oversight scope. - Suggested oversight scope expansion: - Clarify that oversight extends beyond efficiency and reliability to include promotion of competition in the payment services market and protection of consumer interests. - Explicitly state PBC decision to apply its powers over all payments and SSS in the country including retail payment systems and services. ### Remittances - China receives the biggest inflows of remittances worldwide after India. - World Bank estimate for 2009: US$47,553 million sent to China, representing 1.1 percent of China’s GDP. - Average total cost of sending US$200 to China from selected sending countries was 12.55 percent (WB Remittance Prices Worldwide database). This value decreased over the last two years but China remains among the 20 most expensive receiving countries globally. - Suggested actions to reduce remittance costs: - Implement the CPSS-WB General Principles for International Remittance Services. - Proactively embrace the G-8 and G-20 Global Objective of reducing remittance costs by 5 percentage points in five years. ### General, Information and Methodology - The assessment is of systemically important payment systems in the People’s Republic of China based on the CPSS CPSIPS and contains analysis of developmental issues related to payments system reform. - The assessment was conducted in the context of the first field mission of the Financial Sector Assessment Program (FSAP) to the PRC (June 2010). - Assessors of the CPSIPS: Massimo Cirasino and Mario Guadamillas. - Information used: relevant laws, rules and procedures; abundant internal and external material; extensive discussions with regulators (PBC, MOF, CSRC, CBRC, SAFE) and stakeholders including major banks, funds management companies, CUP, CFETC, CCDC, SD&C. - A PBC self-assessment of the country’s SIPS and of the central bank’s responsibilities in applying the CPs was provided prior to the mission and prepared by the PBC Payment and Settlement Department in close consultation with major CNPS stakeholders. *Source: Executive Summary (pages 4–8) of the assessment document provided in the content unit.* ### 13. In addition to the 2001 CPSS-CPSIPS Report, the methodology used follows the ### 13. In addition to the 2001 CPSS-CPSIPS Report, the methodology used follows the ### Methodology and references - Guidance Note for Assessing Observance of CPSIPS prepared by the IMF and the WB in collaboration with the CPSS in August 2001. - For SSS, references used include: - 2001 CPSS-IOSCO Report on Recommendations for Securities Settlement Systems (RSSS). - 2002 CPSS-IOSCO Assessment Methodology for the RSSS. - 2004 CPSS-IOSCO Report on Recommendations for Central Counterparties (RCCP). - Footnotes mention China Payment System Development Reports, 2007, 2008, and 2009, prepared by the PBOC Payment and Settlement Department. ### Payment systems infrastructure overview - PBC implemented the CNAPS, which consists of the High-Value Payment System (HVPS) and the BEPS. - HVPS characteristics: - RTGS system; backbone of the CNPS; mainly used for large value transfers. - More than 1,600 direct participants. - In 2009, the HVPS processed 247 million transactions amounting to CY 760 trillion. - BEPS: - Embedded in the HVPS for retail transactions. - Retail transaction threshold: 1000 km) from the main station. - Planned system overhaul referred to as “second generation” with a major up-haul planned to be launched in 2011. *Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2012/_cr1281.pdf* ### Box 2. CPSS – Principles for Co-operative Oversight of Payment and Settlement Systems ### Box 2. CPSS – Principles for Co-operative Oversight of Payment and Settlement Systems ### CPSS five principles for co-operative oversight - The CPSS report “Central bank oversight of payments and settlement systems” identifies ten principles; five specifically pertain to co-operative oversight of cross-border and multi-currency payment and settlement systems. - The five co-operative oversight principles are: 1. Cooperative Oversight Principle 1. Notification - Each central bank that has identified the actual or proposed operation of a cross-border or multi-currency payment or settlement system should inform other central banks that may have an interest in the prudent design and management of the system. 2. Cooperative Oversight Principle 2. Primary responsibility - Cross-border and multicurrency payment and settlement systems should be subject to oversight by a central bank which accepts primary responsibility for such oversight, and there should be a presumption that the central bank where the system is located will have this primary responsibility. 3. Cooperative Oversight Principle 3. Assessment of the System as a Whole - In its oversight of a system, the authority with primary responsibility should periodically assess the design and operation of the system as a whole. In doing so it should consult with other relevant authorities. 4. Cooperative Oversight Principle 4. Settlement Arrangements - The determination of the adequacy of a system’s settlement and failure-to-settle procedures in a currency should be the joint responsibility of the central bank of issue and the authority with primary responsibility for oversight of the system. 5. Cooperative Oversight Principle 5. Unsound Systems - In the absence of confidence in the soundness of the design or management of any cross-border or multicurrency payment or settlement system, a central bank should, if necessary, discourage use of the system or the provision of services to the system, for example by identifying these activities as unsafe and unsound practices. ### Assessment summary and observance (China HVPS) - Table summary data (as presented): - Observed: 6 — Core Principles II,III,IV,VI,VII,IX - Broadly observed: 2 + 4 — Core Principle VIII and X, Central Bank responsibilities A, B, C, D - Partially observed: 1 — Core Principle I - Non-observed: - - Not applicable: 1 — Core Principle V ### Recommended actions to improve observance of CPSS Core Principles and Central Bank Responsibilities (China HVPS) - Legal foundation (CP 1) - Chinese authorities should accelerate the legislative process to complete the reform of the legal and regulatory framework for payment and securities settlement. This will include: - The enactment of a payment system law to give full legal protection, among other things, to settlement finality and netting arrangements. - The introduction of the Interpretation of Enterprise Bankruptcy Law or revision of the Enterprise Bankruptcy Law to exempt the payment system sector from the “zero-hour rule.” - The upgrade of payment system rules and procedures to the level of PBC regulation. - Understanding and management of risks (CPs 2 and 3) - Actions and observations: - As it is not clear whether participants are fully aware of the potential legal risk associated with settlement finality, the PBC might want to inform participants about the measures it took to mitigate this risk and the projects under way to eliminate it. - The PBC should further monitor the credit risk and liquidity risk of the system by improving relevant rules and building the second-generation payment system. Relevant actions mainly include: - Provide participants with more comprehensive queuing and account monitoring functions, “package” liquidity real-time inquiry functions and large-value payment system queuing matching. - Apply more active mark-to-market mechanisms for the collateral used in the intra-day liquidity facility. - As liquidity conditions evolve, maintain flexibility in the conditions applied to intra-day liquidity facilities and consider the removal of charging for collateralized credit. - Settlement (CPs 4, 5, and 6) - (No specific bulleted measures listed under this heading in the source beyond CP references.) - Security and Operational Reliability, and Contingency Arrangements (CP 7) - The second-generation payment system will have a more efficient operation and maintenance mechanism, which realizes automatic upgrading of the system application software; it will further: - improve the real-time operation monitoring function, which carries out comprehensive and automatic monitoring of the IT resources of the payment system; - improve the risk warning capability, effectively analyzing the potential risks of the system and giving timely warning; - realize automatic handling of system failures to the maximum degree; and - reduce the system maintenance work load, increasing the operation monitoring efficiency and upgrading the operation maintenance level. - The second-generation payment system will provide the backup system with enhanced features, such as a complete production recovery capability, business switching capability and data searching capability on the framework of the production center, remote backup center and the data backup center in the same city to ensure the continuous processing of payment and the security and integrity of information and data in case of emergency. - The above measures are strongly encouraged. - Efficiency and Practicality of the System (CP 8) - Notwithstanding the important progresses achieved since the launch of the CNAPS, some features might be adjusted to increase efficiency and practicality to the users, such as: 1) The “multiple access point” feature of the system might impact the efficient management of liquidity and adds to the cost of participating in it. 2) High value electronic transactions might still be perceived as relatively more expensive vis-à-vis large value cheque transactions, although it is noted that commercial banks are gradually switching their customers to other electronic payment options. 3) Operating hours could be extended to reflect the growing importance of the system. - Criteria for Participation (CP 9) - To further strengthen supervision and management of the payment system participants and guarantee the secure and stable operation of the payment system, PBC plans to revise the Administrative Measures for Accessing to and Exiting the Payment System by Banking Financial Institutions. For instance, it plans to specify and detail the mode for examining the access applicants in the Administrative Measures: - testing relevant personnel on knowledge about the payment systems; - onsite check of the payment settlement processing environment; and - calling the top management together for prudent talks so as to increase the operability of access review and approval. - These measures are strongly encouraged. - Governance of the Payment System (CP 10) - Observations and recommendations: - The PBC is already addressing most of the existing shortfalls of the system and should be commended for the extraordinary effort to launch and operate a sophisticated and reliable payment system, which constitutes the backbone of China’s financial system. - Involving more and more system participants in the “second generation” project and, eventually creating a formal users’ group will facilitate cooperation and foster the systems’ performance over time. - Regular rehearsal of crisis procedures for all types of emergency occurrences and not just for operational matters, both within different departments of PBC and with system participants, would increase the PBC capacity to respond to unforeseen events. - Over time, the PBC should strive to achieve full observance of the other CPs. - Central Bank Responsibilities in Applying the CPs (Responsibilities A, B, C, and D) - The PBC should clarify in detail its policy stance in payment system oversight in a publicly available document, which would expand on the scope of its actions and its plans to achieve its public policy objectives in payment system matters. Specific content suggested for the oversight policy document: - Clarify that oversight extends beyond efficiency and reliability to a wider set of issues including the promotion of competition in the payment services market and the protection of consumer interests. - Explicitly state the PBC decision to apply its powers over all payments and SSS in the country — those that are systemically important and retail systems. - Cover in detail the PBC major policies and instruments, including risk control, access, governance, transparency, pricing, system reliability and business continuity, efficiency, etc. Instruments would range from moral suasion to on-site inspections, from regulation to cooperation, from sanctions to the direct provision of payment services. - Elaborate on the criteria used to determine when a system is systemically important. A list of these systems should be provided and constantly monitored and updated. - Elaborate on institutional arrangements and cooperation in the payment system arena (see Responsibility D). - Additional recommended actions: - The HVPS does not fully observe all CPSIPS and actions to achieve its full compliance should be completed by the PBC as a priority. - A thorough evaluation of the risks associated with the cheque clearing and proactive actions to remove large value payment items from the cheque clearinghouse should be carried out as a matter of urgency. - Some clarification of the roles of the Payment and Settlement Department and the internal audit department in the oversight of PBC operated payment systems might be necessary. - The mission considers that a more proactive oversight by the PBC over the CFETS and the ACHs might be advisable. In particular, an assessment of the safety and efficiency of these systems with relevant international standards is recommended. - The PBC should consider a further refinement of its cooperative framework at the domestic level, by activating and implementing Memoranda of Understanding on payment and settlement issues and a structured oversight working framework with all relevant authorities and creating the China National Payment Association. - At the international level, the PBC is encouraged to continue its commendable effort of cooperation with relevant central banks and international organizations. - A thorough application of the CPSS cross-border cooperative framework is also recommended. ### Authorities’ response and planned actions - Authorities’ high-level response: - The Chinese authorities welcome and support the CPSS assessment as an opportunity for reflection and improvement for China payment and settlement system according to international standards. The authorities appreciate the assessment team’s professionalism and recommendations. - Over the past decade, China has continuously pushed forward the development of China payment and settlement system, building a payment network consisting of: - the central bank inter-bank payment systems, - the banking institutions’ internal payment system, - the security settlement system, - the FX settlement system, - the bankcards payment system and other retail payment systems run by private sectors. - Non-cash payment instruments have been widely used; bankcards penetration ratio has been on a fast track; online payment, mobile payment and telephone payment have been developing dramatically. China has implemented a nationwide identity authentication system of accounts with the Police Bureau to implement the “know your customer” scheme. The payment system oversight has been strengthened, with safety and efficiency as the priority. The PBC has improved supervision techniques and realized the DVP mode in the bond market. - Specific points and planned measures: 1. CP I legal Foundation. - The PBC has been aware of the shortcomings in the legal framework, and has decided to draft a payment system act to avoid the effects of the “zero hour rule” and give the legal recognition of netting arrangements and settlement finality. But the process of establishing legislation will take time and may involve many authorities. 2. CP VIII Practicality and Efficiency. - The PBC is launching the 2nd generation of CNAPS to increase efficiency and practicality. CNAPS2 will be designed to extend the opening hours of settlement to meet the needs of users in different areas and various financial markets. *Source: Box 2. CPSS – Principles for Co-operative Oversight of Payment and Settlement Systems (content unit: _cr1281).* ### 3. CP X Governance. The PBC has decided to improve management, upgrade the payment ### 3. CP X Governance. The PBC has decided to improve management, upgrade the payment ### PBC governance decision and commitments - The PBC has decided to improve management, upgrade the payment system and conduct a regular drill of emergency procedures, with an aim to achieving full observance of the CPs. - Central Bank Responsibilities A, B, C and D: The PBC fully agrees with the recommendations and will take proper measures to ensure full observances of all CPs. - The PBC will: - clarify in detail its policy stance in the payment system oversight in a publicly available document; - extend its oversight over all payments and securities settlement systems, including the systemically important systems and retail payment systems; - assess the safety and efficiency of the CFETS and the ACHs with relevant international standards; - establish the China National Payment Association; and - strengthen cooperation with relevant authorities, foreign central banks and international organizations. ### Appendix I: Self-assessment of China Domestic Foreign Currency Payment System (FCPS) — main features - The PBC conducted a self assessment of the FCPS, which was provided to the FSAP team. H3: Legal and Regulatory Framework - Rules and procedures for the FCPS include: - Administrative Procedures for Domestic Foreign Currency Payment System; - Procedures for the Administration of Settlement agents in Domestic Foreign Currency Payment System; - Operation Procedures for Domestic Foreign Currency Payment System; - Operational Procedures for Domestic Foreign Currency Payment System; - Contingency Plan for Domestic Foreign Currency Payment System; and - Circular of The PBC concerning Matters to Transaction Processing in Domestic Foreign Currency Payment System (PBC Doc [2008]-387). H3: Management of Financial Risks - Credit Risk: - Article 10: the system “processes payment instructions individually in real-time and settles each payment to its full value. Any payment sent by a participant or specially authorized participant shall become final upon settlement.” - Article 51: the system “shall calculate available quotas by currency for all participants in real time as a way to safeguard against credit risk.” - Liquidity Risk: - Article 53: “Participants shall maintain sufficient available quotas at Foreign Currency Clearing Processing Center (FCCPC) to ensure that foreign currency payments are timely cleared.” - Article 54: “Upon being informed by FCCPC that their payments have been placed in a queue for settlement, specially authorized participants shall timely notify and urge relevant participants to raise funds. In the event that any relevant participant fails to raise sufficient funds before the Settlement Window is closed, specially authorized participants shall ensure foreign currency payments are timely settled in the system by accessing risk deposit and risk-sharing mechanism.” - Article 55: “Settlement agents shall provide participants with liquidity support such as overdraft facilities and pledge financing as a way to safeguard against liquidity risk.” H3: Settlement - The FCPS is a RTGS system that settles payment instructions denominated in each of the currencies in real time upon receipt of such payment instructions from any participant provided that such participant has sufficient available quotas. H3: Settlement Asset - Commercial bank currency is used by the FCPS for settlement: participants use the foreign currency inter-bank deposit they maintain with settlement agents to complete settlement. - Major settlement agents designated by the FCPS: - Industrial and Commercial Bank of China (Euro & Japanese Yen) - BOC (U.S. Dollar) - CCB (Hong Kong Dollar) - Shanghai Pudong Development Bank (Pound Sterling, Australia Dollar, Canadian Dollar & Swiss Franc) - Mechanisms addressing credit and liquidity risk of settlement assets include: - Administrative Procedures require settlement agents to be financially robust and carry no or little liquidity risk. Article 13 conditions: (1) It is a corporate domestically registered for more than 10 years; (II) It has all licenses necessary for a FX service provider and has appropriate capacity for providing FX services; (III) It is operationally and financially healthy with strong ability to raise funds in foreign currencies; (IV) It owns an appropriate number of domestic branches and an appropriate number of overseas branches or a complete international network of correspondent banks; (V) It has an appropriate number of managers and operators that are familiar with foreign currency payment services and foreign currency payment system; (VI) It has safe and efficient internal operational systems; and (VII) It has a sound governance program for controlling its foreign currency settlement services. - The portfolio of settlement agents should be capable of ensuring that settlement assets be liquid and maintained at a high credit rating level. - The PBC monitors and keeps track of the liquidity and credit rating levels of the settlement agents. H3: Operational Reliability and Business Continuity - Security and operational targets: - The FCPS meets security policies and operational service levels agreed by the system operator and participants. - Implemented technical safeguards and procedures ensure a 99.9 percent of system operational reliability and a recovery time objective of 120 minutes. - Security measures: - Security policies conform to security standards centrally set for China's banking industry. - System mandated to attach digital signatures to payment transaction information and establish a process for verifying digital signatures to ensure integrity, authentication and non-reputability. - Primary backbone communications lines protected by IP encryption to ensure confidentiality. - PBC periodically conducts security tests and assessments of FCPS. - Operational reliability and redundancy: - Hot backup systems at FCCPC, shared member bank front ends (MBFEs) and settlement banks to avoid single-point failures. - Backup communications lines deployed. - Offsite backup centers for FCCPC and shared MBFEs to enable switching production to backup centers in emergencies. - Performance tests: the FCCPC is capable of processing 70,000 payments per hour. - Business continuity testing and parameters: - In late August 2009, the NPC successfully implemented emergency drills of the payment settlement system (including domestic foreign currency payment system). The system switched over to the emergency center and operated for a week under emergency scenarios. - Real time backup technology for business data is used between the disaster backup center of the FCCPC and the shared front end processors and the operating center. - There is a one minute lag time between the business data of the disaster backup center and the business data of the operating center. - The distance between the backup center and the main station is greater than 500 km and it uses communications and power lines that are different from those of the operating center. H3: Pricing - Current pricing methods: - FCCPC uses cost covering pricing. - Settlement agents use market pricing. - Transaction cost examples: - When participants process each transaction, the maximum cost they pay to the FCCPC and settlement agents is 16 Yuan to 26 Yuan, depending on the currency. - Before the FCPS was launched, the cost for a bank that used a correspondent bank as the agent bank for foreign currency settlement in China was about 35 Yuan to 140 Yuan. - Effect: construction of the FCPS has lowered the cost of banking institutions in processing foreign currency payments and increased competitiveness of banking institutions. H3: Access Criteria - Article 18 — direct participant conditions: - (One) Have qualifications as a financial entity in China; - (Two) Have qualifications as approved by the banking supervision and management authority of the SCl for processing the relevant foreign currency business; - (Three) Have an appropriate number of management and operations personnel familiar with the foreign currency payment business and foreign currency payment system; - (Four) Meet the applicable technical and security requirements for joining the foreign currency payment system; - (Five) Have a sound internal management system related to the foreign currency payment system; - (Six) Have an effective and feasible plan for preventing and eliminating foreign currency payment risks. - Article 19 — specially designated participant conditions: - (One) Have qualifications as approved by competent state authorities to process foreign currency settlements; - (Two) Meet the applicable technical and security requirements for joining the foreign currency payment system; - (Three) Have a sound internal management system related to the foreign currency payment system; - (Four) All of its members are participants in the foreign currency payment system or may authorize participants in the foreign currency payment system to perform settlements; - (Five) Have a sound risk bond system and have signed a risk sharing agreement with all members; - (Six) Have an effective and feasible plan for preventing and eliminating foreign currency payment risks. H3: Exit Criteria - Article 68 — participant grounds for suspension/withdrawal: - (One) Provides false application materials and join the foreign currency payment system by deceptive means; - (Two) Processes transactions through the foreign currency payment system that do not comply with state policies and regulations related to foreign currency control; - (Three) Fails to verify and reply or fails to verify and reply in a timely manner after receipt of an inquiry; - (Four) Fails to process a foreign currency refund after receipt of an application for a foreign currency refund in accordance with the applicable provisions; - (Five) The available limit is insufficient, causing the foreign currency payment system to repeatedly open the settlement window; - (Six) Has major a risk hazard that affects the secure and stable operations of the foreign currency payment system; - (Seven) After the occurrence of a foreign currency payment system failure or unexpected incident, fails to report same according to the applicable provisions or fails to actively take effective measures, thus affecting the secure and stable operations of the foreign currency payment system. - Article 69 — specially designated participant grounds for suspension/withdrawal: - (One) Provides false application materials and join the foreign currency payment system by deceptive means; - (Two) Processes transactions through the foreign currency payment system that do not comply with state policies and regulations related to foreign currency control; - (Three) Fails to perform risk control over the net offset balance business launched thereby, causing the foreign currency payment system not to be able to settle normally at the end of the day; - (Four) Has major a risk hazard that affects the secure and stable operations of the foreign currency payment system; - (Five) After the occurrence of a foreign currency payment system failure or unexpected incident, fails to report same according to the applicable provisions or fails to actively take effective measures, thus affecting the secure and stable operations of the foreign currency payment system. - Article 71: - “Participants and specially designated participants that have been ordered by the PBC to withdraw from the foreign currency payment system shall not apply for joining the foreign currency payment system for a period of 2 years from the date of withdrawal. A bank whose qualifications as settlement agents for a certain currency have been terminated early by the PBC shall not apply for becoming a settlement agent for such a currency for a period of 2 years from the date of termination of such qualifications.” - Article 72: - “In the event that participants, specially designated participants, settlement agents and the FCCPC fail to process foreign currency payment business in accordance with the applicable provisions, thus causing any fund loss, they shall undertake the liability for damages in accordance with law; should such failure constitute a crime, criminal liability shall be pursued in accordance with law.” - Voluntary withdrawal (Article 30): - Participants and specially designated participants must submit a written application to the PBC and revoke all related sending/receiving bank number information in advance. The head office of PBC shall determine the effective date of withdrawal and make same public through the foreign currency payment system. H3: Governance Arrangements - Major decisions are made after seeking opinions of relevant parties and careful consideration; during design and construction, the PBC sought opinions of policy banks, state owned commercial banks and nationwide commercial banks on major issues such as system setup, ownership structure, system framework and business scope. - Key governance features: 1. The core system includes the FCCPC and settlement agents, where the FCCPC is operated by the PBC NPC. As a public institution under the aegis of the PBC, the NPC is a non-profit organization. 2. The NPC and settlement agents provide professional knowledge training for relevant management personnel, business supervisors, technical support personnel and operations personnel to ensure skills necessary for system goals and operational responsibility. 3. Ownership information of the FCPS is publicly available. Management structure information is issued in the form of official documents to settlement agents and all participants. Appointment procedures of senior management personnel are publicly available. 4. The Crisis Response Plan for the FCPS provides a detailed explanation of decision and notification procedures and timetables for handling abnormal situations. - No formal users’ group is established for participants to provide regular feedback on systems’ operation. Participants are also not fully aware so far of the details of the “second generation” project. The PBC organizes meetings and workshops on a regular basis with payment system stakeholders. *Source: _cr1281 - 3. CP X Governance. The PBC has decided to improve management, upgrade the payment* --- _Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2012/_cr1281.pdf_