## _cr15217 ## Source details **Canonical URL:** [_cr15217](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2015/_cr15217.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2015/_cr15217.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2015/_cr15217.pdf.json) --- ### Executive summary — major achievements and resilience - Bosnia and Herzegovina dismantled the old payment system, yielding significant efficiency improvements and risk reduction. - CBBH reduced transaction costs and the number of payment agencies. - Systems launched in 2001: - real-time gross settlement system (RTGS) for large-value payments, - giro clearing system (GCS) for retail payments. - Resiliency: interbank payment system continued to function normally since 2001, including through May 2014 floods. - Contingency: disaster recovery site located at a distant location from the primary site; plans to adopt the Principles of Financial Market Infrastructures of 2012 into the regulatory framework are at early stages. ### Currency board arrangement and credit risk implications - Currency board arrangement helped protect the payment system from credit risks. - No credit risk due to pre-funding requirements in the RTGS system. - CBBH prohibition on extending intraday credit and strict rules on use and replenishment of reserve requirements establish strong discipline for commercial banks. - Arrangement tested by provisional administration and liquidity management issues at some banks, containing settlement risks. ### Formal assessment of the RTGS system — key findings and areas for improvement - Overall: Many standards are observed, but key areas require improvement. - Legal basis and finality: - Legal basis relatively sound, but finality and netting arrangements require greater legal certainty at the law level. - It "cannot be ruled out that a transaction settled in the RTGS system can be revoked by a court order in the event of insolvency of a participant." - Recommended actions: - adopt an explicit law on settlement finality to empower authorities to designate payment systems and fully protect finality and netting, or - eliminate ‘zero-hour rules’ in insolvency. - Risk management framework: - Operational rules articulate mitigation measures on insufficient funds and contingency arrangements. - No comprehensive risk management framework exists; recommendation to develop one covering legal, liquidity, and operational risks and ongoing monitoring. - Liquidity risk management: - Generally effective but should be more robust. - Potential liquidity risk from high concentration of transaction values across five banks. - Risks from settlement delays in GCS, clearing agents, or settlement banks; default of the largest participant and its affiliates. - Areas for improvement: - stress testing the RTGS system to include potential default of the largest participant and affiliates, - establishment of throughput rules. - Operational risk and business continuity: - Operational risk well managed; secondary disaster recovery site around 200 kilometers from primary; tested three times a year with participants; each test duration five days. - Improvement needed: clearly establish in writing service availability and recovery time objectives, specifically a recovery time objective to ensure operations can resume within two hours following a disruptive event. - Efficiency and service levels: - Pricing policy aims at cost recovery, but fees have not been regularly revised to reflect costs. - Recommended actions: - conduct cost accounting annually, - revise fee schedules to reflect costs where applicable, - establish, monitor, and disclose minimum service levels. ### Key statistics and operational facts (as reported) - RTGS historical and operational statistics: - Value of transactions when introduced in 2001: KM 9 billion. - Value of transactions in 2013: KM 63 billion, which was 2.42 times of GDP. - Average daily value of RTGS transactions in 2014 (as of November 2014): KM 298 million. - Average daily value in 2013: KM 263 million. - CBBH RTGS operational hours: weekdays from 8:00 a.m. to 4:30 p.m.; payments accepted and settled until 4:00 p.m. - RTGS use required for interbank payments above KM 10,000; no minimum amount for RTGS payments. - RTGS settles GCS net balances at 3 daily intervals: 10:00 a.m., 1:00 p.m., and 3:00 p.m. - Bam Card net positions settled at 9:00 a.m. - Participants numbered 29 as of November 2014, including 28 commercial banks and the CBBH. - Table 1 entries (verbatim): - RTGS 773,09963 2.42 - GCS 35,026,52713 0.51 - RVP 8,9860.1 0.01 - CRS 30,4640.1 0.01 - Note: Nominal GDP in 2013 amounted to BAM 26.12 billion. - GCS specifics: - As of 2013, GCS settled KM 13 billion. - GCS operational hours: weekdays from 7:30 a.m. to 4:00 p.m. - GCS is deferred net settlement based on multilateral clearing; net positions sent to the RTGS for final settlement. - Clearing of international payments: - CBBH handles clearing of euro payments between BiH and Serbia (launched February 2008), operated by the National Bank of Serbia (NBS); participants included 5 commercial banks in BiH. - Total payment orders amounted to 122 million euros in 2013. - Similar agreement signed between CBBH and the Central Bank of Montenegro in September 2007. ### Transaction and credit registries; securities depositories and settlement - Transaction registry — Single Registry of Legal Entities’ Transaction Accounts: - Maintained by CBBH since July 2004. - Single database of all blocked accounts of legal entities established November 2012; disclosed on CBBH website and updated monthly. - As of 2013, total number of access points: 1,550, mainly used by commercial banks. - Account statistics: - Total accounts: 279,511 - Active accounts: 214,686 - Blocked accounts: 64,825 - Central credit registry (Central Registry of Credits): - Managed by CBBH since April 2006. - Data submitters: 29 commercial banks, 18 microcredit organizations, 9 leasing companies, and 3 other institutions. - Accessed 2.7 million times in 2013 from 1,529 access points. - Central Securities Depositories (CSDs) and securities settlement (2013 market capitalization): - BLSE market capitalization: KM 4.1 billion - SSE market capitalization: KM 4.7 billion - CSDs handle dematerialized securities and settle on a delivery versus payment (DVP) basis; CBBH and custodian banks involved in payment process. - CRS (Republic Srpska): established February 2001; 14 members as of December 31st, 2013; guarantee fund amounted to KM 1.7 million as of October 28, 2014. - RVP (Federation of BiH): established 1999; operates DVP Model 2 with cash settlement netting at T+3 through RVP’s special account at CBBH Sarajevo Main Unit; total basic payments by members: KM 90,000 at end-October 2014. - Planned settlement cycle shortening to T+2 at BLSE in early 2015; BLSE/SSE harmonization under review. ### Regulatory, supervisory, and oversight structure; staffing - Legal empowerment: - Law on the Central Bank of Bosnia and Herzegovina of 1997 (Chapter 1, Article 2, paragraph 3c) empowers CBBH "to promote or to establish and maintain appropriate payment and settlement systems." - Law establishes reserve requirements (Article 36) and money market operations (Article 37) underpinning the currency board arrangement. - Operational rules and instruments: - CBBH RTGS Operational Rules of 2004 and CBBH GCS Operational Rules of 2004 govern systems. - Issued instructions relate to IBAN, reserve requirement; decisions cover alternative backup procedures and minimal computer configurations for GCS. - CBBH staffing for payments: - Total personnel with payment operations tasks: 30 - Payment Systems Department (PSD) in Sarajevo composed of three units: Payment Systems Operations Unit, Information Technology Support Unit, SWIFT Unit. - PSD staffing: 18 persons (department head, 3 unit managers, and 14 officers). - Department for Monitoring Payment Systems and Back-Up Systems (Main Bank of RS in Banja Luka): staffed with 6 persons including the department head. - Unit for Monitoring and Payment Systems operates from Sarajevo and Mostar Main Units; each unit staffed with 3 persons. ### Past and ongoing reforms - Electronic interbank money market: adoption provides real-time capabilities; use voluntary among commercial banks, connection to central bank mandatory. - Legal reforms: Draft Law on Internal Payment Systems in FBiH under parliamentary consideration as of November 2014; similar law adopted in RS in 2012. - Settlement cycle harmonization: plans to shorten stock exchange settlement to T+2 to align with EU CSDR (CSDR adopted April 15, 2014; European markets migrated from T+3 to T+2 effective October 6th, 2014). ### Observance of Principles — selected findings, ratings, and prioritized recommendations - Summary ratings (selected): - Observed: Principles 2, 9, 13, 15, 18, 22 - Broadly observed: Principles 7, 8, 17, 19, 21, 23 - Partly observed: Principles 1, 3 - Not applicable: Principles 4, 5, 12, 16 - Prioritized recommendations for the RTGS system (selected, with exact timeframes): - Principle 1, 8 — Strengthen the legal framework to designate payment systems, and to protect settlement finality and netting in line with international standards. Relevant party: CBBH. Timeframe: Near-Term. - Principle 2 — Improve risk analysis and report progress on a quarterly basis at Governing Board meetings. Relevant party: CBBH. Timeframe: Immediate. - Principle 3 — Develop a comprehensive risk management framework for the RTGS system including legal, liquidity, and operational risks; monitor risks and report periodically to the Governing Board and Management. Relevant party: CBBH. Timeframe: Immediate. - Principle 7 — Stress test the RTGS system including the default of the largest participant and affiliates; establish throughput rules; adopt tools to monitor intraday liquidity flows. Relevant parties: CBBH, BARS, FBA. Timeframe: Near-Term. - Principle 17 — Establish service availability and recovery time objectives to ensure critical IT systems can resume within two hours following disruptive events and enable RTGS to complete settlement by end of day of disruption. Relevant party: CBBH. Timeframe: Immediate. - Principle 21 — Conduct cost accounting annually and revise fee schedules to reflect costs; establish, monitor, and disclose minimum service levels. Relevant party: CBBH. Timeframe: Near-Term. - Principle 23 — Develop and disclose a description of the RTGS system design and operations and relevant laws, regulations, instructions, decisions, and memoranda of understanding in the CBBH Annual Report and website. Relevant party: CBBH. Timeframe: Immediate. - Timeframe definitions: “Immediate” is within one year; “near –term” is 1-3 years; “medium-term” is 3-5 years. ### Liquidity resources, stress testing, and replenishment rules - Liquidity resources (verbatim): - "3.7 billion as of June 31, 2014, comprised around KM 1.37 billion of required reserves and KM 2.32 billion of excess reserves." - RTGS participants maintain settlement accounts at the CBBH. - No intraday liquidity facilities; all RTGS transaction accounts prefunded. - Reserve maintenance: - Required reserves maintained by cash holdings or deposits with central bank; calculated as average daily reserves over 10 day periods. - Calculation periods per month: (i) first to the tenth; (ii) eleventh to the twentieth; (iii) twenty first to the last day of the month. Every year consists of 36 calculations and maintenance periods. - Required reserves rate: As of February 1, 2011, lowered from 14 percent to 10 percent on the base with maturity up to one year. - Remuneration on required reserves: As of August 1, 2011, remuneration calculated as 70 percent of the rate equal to the weighted average of interest rates the CBBH earns in the same period on deposits invested up to a month; remuneration rate on excess reserves is 90 percent of that rate. - Replenishment and penalties (CBBH Instruction on the Manner of Operation...): - Article 2 (after one maintenance period): notification, deficit calculation and penalty interests, inform competent banking agency, collection of penalty interests no later than 5 days after expiry. - Article 3 (after two consecutive maintenance periods): discontinue transactions reducing reserve accounts upon request; limit settlement account payments to achieved daily inflows; transfer settlement account balance to reserve account; notify agency; collect penalty interests no later than 5 days after expiry. - Article 4: resumption of reducing reserve-account transactions after meeting reserve requirements. - Article 5 (after three consecutive maintenance periods): discontinue all payments from settlement account; transfer settlement account balance to reserve account; notify competent agency; collect penalty interests no later than five days after expiry. - Stress testing and monitoring: - No stress testing of the payment system to test sufficiency of liquid resources; CBBH conducts broader banking sector stress tests but not forward-looking payment-system stress scenarios. - Key liquidity risks: - High concentration of transaction values across five banks, including two settlement banks. - Settlement delays from GCS, Bam Card, or settlement banks hindering liquidity recycling. - Default of largest participant and affiliates could create material liquidity pressures. - Assessment of Principle 7: Broadly Observed. - Recommendations: - Stress test RTGS system including default of largest participant and affiliates. - Establish throughput rules and tools to monitor intraday liquidity flows daily. ### Authorities’ responsibilities — observance, gaps, and prioritized recommendations - Main findings: - Law of the CBBH establishes operational responsibilities but does not give sufficient powers for oversight of payment systems. - Lack of clearly defined and publicly disclosed criteria to identify FMIs that should be subject to regulation, supervision, and oversight. - Payment Systems Department resources focused on operational duties; staff lacked adequate training on CPMI-IOSCO PFMIs in past two years. - Internal audit of payment system conducted every two years and narrowly focused on information security; Risk Management Department (4 staff) focuses on foreign currency reserve financial risks and collates operational risk quarterly. - Internal working group to address oversight put on hold since 2007 due to potential conflicts of interest; Governing Board decision pending. - Ratings summary (Authorities’ Responsibilities): - Broadly observed: C, E - Partly observed: A, B, D - Prioritized recommendations for authorities (selected, with exact timeframes): - Responsibility A — Establish clearly defined and publicly disclosed criteria to identify FMIs to be subject to regulation, supervision, and oversight. Relevant party: CBBH. Timeframe: Near-term. - Responsibility B — Strengthen legal framework to designate payment systems and protect settlement finality and netting; establish memorandum of understanding to strengthen oversight of clearing agents, settlement banks, international payment clearing, and cooperation with relevant authorities; establish a new oversight unit in the Payment Systems Department with sufficient resources and separation of oversight and operational duties. Relevant party: CBBH. Timeframe: Near-term. - Responsibility C — Develop a policy document to clearly define and disclose regulatory, supervisory, and oversight policies of the CBBH for the RTGS system. Relevant party: CBBH. Timeframe: Immediate. - Responsibility D — Adopt the CPMI-IOSCO PFMIs with a time-bound plan and apply them consistently to the RTGS system. Relevant party: CBBH. Timeframe: Immediate. - Responsibility E — Improve advanced notification from entity banking agencies to the CBBH for timely closure of a bank and its suspension from the payment system; develop memorandum of understanding between CBBH, BARS, FBA, FBiH and RS Securities Commissions. Relevant parties: CBBH, BARS, FBA, FBiH and RS Securities Commissions. Timeframe: Near-term. ### Selected detailed assessments (legal basis, governance, risk management, operational resilience) - Legal basis (Principle 1): - CBBH RTGS Operational Rules (2004) establish rights/responsibilities, participation requirements, and protection of irrevocability and finality, including Section 3.2.1 and Section 3.2.2: “Any payment shall be deemed as final once the funds have been accounted for on the settlement account of the RTGS system participants.” - Nonetheless, transactions "can be revoked by a court order in the event of insolvency of a participant." - Recommendation: adopt explicit law on settlement finality and eliminate "zero-hour rules" in insolvency law. - Governance (Principle 2): - Ownership and organization: RTGS owned and operated by CBBH; PSD manages daily operations; head of PSD reports to Vice Governor. - Monthly reporting focuses on payment flows; risk analysis limited in scope and depth. - Recommendation: report analysis of potential risks and progress in mitigating them on a quarterly basis at Governing Board meetings. - Risk management (Principle 3): - No comprehensive risk management framework; existing components include RTGS Operational Rules, Business Continuity Plan, and Instruction on the Manner of Operation. - Risks identified verbatim: legal, credit (none), liquidity, operational. - Recommendation: develop comprehensive risk management framework covering identification, mitigation, monitoring, and reporting. - Operational risk and business continuity (Principle 17): - Business continuity: primary and disaster recovery sites linked; disaster recovery site around 200 kilometers from Sarajevo; tests three times a year lasting five days. - Scalability: RTGS scalable capacity around 260,000 transactions over an 8 hour period; current transaction level around 3,000 transactions per day in 2014. - Recommendation: establish service availability and recovery time objectives; BCP should ensure critical IT systems can resume within two hours following disruptive events and enable RTGS to complete settlement by end of disruption day. ### Authorities' response (selected) - Since 2005 CBBH has had a Commission for the Oversight of Payments Systems Operations. - CBBH will publish translation of CPMI-IOSCO principles and work out criteria for identification of FMI mandatory for participants. - Governing Board will decide oversight variant and publish enactments in Official Gazettes of BH, RS and FBiH within set deadline, adhering to CBBH Law. - Internal audit has assessed oversight of payment systems as very important and a priority. - CBBH will observe all recommendations from the Assessment of Observance of the CPMI/IOSCO PFMIs as per suggested deadlines and will regularly inform the IMF team on implementation. *Source: EXECUTIVE SUMMARY and chapter excerpts, _cr15217.* ### EXECUTIVE SUMMARY ___________________________________________________________________________ 4 ### EXECUTIVE SUMMARY ### Major achievements and recent resilience - Bosnia and Herzegovina was the first country of the former Yugoslavia to dismantle the old payment system, yielding significant efficiency improvements and risk reduction. - Central Bank of Bosnia and Herzegovina (CBBH) played a key role in reducing transaction costs and the number of payment agencies. - Development and launch in 2001 of: - a real-time gross settlement system (RTGS) for large-value payments, and - a giro clearing system (GCS) for retail payments. - Resiliency demonstrated against the severe floods of May 2014; the interbank payment system continued to function normally since its 2001 launch. - Contingency arrangements include a disaster recovery site located at a distant location from the primary site to ensure resumption of critical operations. - Plans to adopt the Principles of Financial Market Infrastructures of 2012 into the regulatory framework are at early stages. ### Currency board arrangement and credit risk implications - Currency board arrangement has helped protect the payment system from credit risks. - No credit risk due to pre-funding requirements in the RTGS system. - CBBH prohibition on extending intraday credit and strict rules on use and replenishment of reserve requirements establish strong discipline for commercial banks. - The arrangement was tested by provisional administration and liquidity management issues at some banks, which helped contain settlement risks that could have become systemic. ### Formal assessment of the RTGS system — key findings and areas for improvement - Overall: Many standards are observed, but key areas require improvement. - Legal basis and finality - The legal basis is relatively sound, but finality and netting arrangements require greater legal certainty and protection at the law level. - It cannot be ruled out that a transaction settled in the RTGS system can be revoked by a court order in the event of insolvency of a participant. - International best practice recommendations include: - adoption of an explicit law on settlement finality to empower authorities to designate payment systems and fully protect finality and netting, or - elimination of ‘zero-hour rules’ in insolvency. - Risk management framework - Operational rules articulate risk mitigation measures on insufficient funds and contingency arrangements. - No comprehensive risk management framework exists; one should be developed to formally identify risks, mitigation measures, and ongoing monitoring, including legal, liquidity, and operational risks. - Liquidity risk management - Generally effective but should be more robust. - Potential liquidity risk arises from high concentration of transaction values across five banks. - Liquidity risk may arise from settlement delays from the GCS, clearing agents, or settlement banks, which may hinder liquidity recycling by other participants. - Liquidity risk may also arise from the default of the largest participant and its affiliates in the payment system. - Areas for improvement include: - stress testing the RTGS system to include potential default of the largest participant and affiliates, and - establishment of throughput rules. - Operational risk and business continuity - Operational risk is well managed; the primary site is supported by a modern and well staffed secondary site located around 200 kilometers from the former, which acts as a disaster recovery site. - The secondary site is tested regularly three times a year with participants; each test has duration of five days. - Improvement required: clearly establish in writing the service availability and recovery time objectives, specifically a recovery time objective to ensure operations can resume within two hours following a disruptive event. - Efficiency and service levels - Pricing policy aims at recovering cost, but fees have not been regularly revised to reflect costs. - Recommended actions include: - conducting cost accounting of the payment system on an annual basis, - revising fee schedules to reflect costs where applicable, and - establishing, monitoring, and disclosing minimum service levels. ### Key statistics and operational facts (as reported) - RTGS historical and operational statistics: - Value of transactions when introduced in 2001: KM 9 billion. - Value of transactions in 2013: KM 63 billion, which was 2.42 times of GDP. - Average daily value of RTGS transactions in 2014 (as of November 2014): KM 298 million. - Average daily value in 2013: KM 263 million. - CBBH RTGS operational hours: weekdays from 8:00 a.m. to 4:30 p.m.; payments accepted and settled until 4:00 p.m. - CBBH rules require use of the RTGS for interbank payments above KM 10,000; there is no minimum amount for a payment to be made through the RTGS. - The RTGS settles GCS net balances at 3 daily intervals: 10:00 a.m., 1:00 p.m., and 3:00 p.m. - Bam Card net positions are settled at 9:00 a.m. - Participants numbered 29 as of November 2014, including 28 commercial banks and the CBBH. - Table 1 entries (preserved verbatim from source): - RTGS 773,09963 2.42 - GCS 35,026,52713 0.51 - RVP 8,9860.1 0.01 - CRS 30,4640.1 0.01 - Note: Nominal GDP in 2013 amounted to BAM 26.12 billion. - GCS specifics: - As of 2013, GCS settled KM 13 billion. - GCS operational hours: weekdays from 7:30 a.m. to 4:00 p.m. - GCS is deferred net settlement based on multilateral clearing; net positions are sent to the RTGS for final settlement. - Clearing of international payments: - CBBH handles clearing of euro payments between BiH and Serbia (launched February 2008), operated by the National Bank of Serbia (NBS). - Participants included 5 commercial banks located in BiH. - Total payment orders amounted to 122 million euros in 2013. - Similar agreement signed between CBBH and the Central Bank of Montenegro in September 2007. ### Assessment of authorities’ responsibilities — key findings and recommendations - Main findings: - The Law of the Central Bank of Bosnia and Herzegovina mainly establishes CBBH operational responsibilities but does not give it sufficient powers in the oversight of payment systems. - Assessment suggests lack of oversight powers, limited resources and supervisory capacity, and need to broaden and deepen oversight cooperation with other competent authorities. - Recommendations to strengthen oversight and supervisory framework: - Strengthen the legal framework to designate payment systems, and to protect settlement finality and netting in line with international standards. - Adopt the Principles for Financial Market Infrastructures into the regulatory framework. - Establish a new oversight unit within the Payment Systems Department, staffed with sufficient resources to carry out oversight responsibilities. - Develop memoranda of understanding to strengthen oversight of clearing agents, settlement banks, international payment clearing, and cooperation with relevant authorities, respecting the mandates of each competent authority. *Source: EXECUTIVE SUMMARY, _cr15217.* ### 10. The CBBH maintains a transaction registry as part of its tasks in the payment system. ### _cr15217 - 10. The CBBH maintains a transaction registry as part of its tasks in the payment system. ### Transaction registry: Single Registry of Legal Entities’ Transaction Accounts - Purpose: to protect the internal payment system from financial integrity risks and to monitor disclosure of all financial transactions of business entities in BiH; used by commercial banks, the tax administrator, and police to prevent tax evasion and money laundering, identify shell companies, and facilitate enforced collection. - Operational history and access: - Maintained by the CBBH since July 2004. - A single database of all blocked accounts of legal entities in BiH was established in November 2012 and is disclosed on the CBBH’s website and updated on a monthly basis. - As of 2013, total number of access points to the transaction registry was 1,550, and was mainly used by commercial banks. - Account statistics: - Total accounts in the transaction registry: 279,511 - Active accounts: 214,686 - Blocked accounts: 64,825 ### Central credit registry (Central Registry of Credits) - Purpose: to support assessment by financial institutions of potential credit risks of legal and physical entities based on collection of debt data updated daily to support loan processing. - Operational history and users: - Managed by the CBBH since April 2006. - Beneficiaries: CBBH, banking agencies, and commercial banks. - Data submitters: 29 commercial banks, 18 microcredit organizations, 9 leasing companies, and 3 other institutions. - Usage: accessed 2.7 million times in 2013 from 1,529 access points and used mainly by commercial banks. ### Central Securities Depositories (CSDs) and securities settlement - Market capitalization (2013): - BLSE market capitalization: KM 4.1 billion - SSE market capitalization: KM 4.7 billion - Structure and settlement: - CSDs handle dematerialized securities and settle on a delivery versus payment (DVP) basis. CBBH and custodian banks are involved in the payment process. - CSDs open special purpose accounts at the CBBH governed by two separate contracts for deposit services and execution of electronic banking, used exclusively for clearing and settlement of net debts or claims. - Brokerage firms hold client securities and funds in collective and individual accounts with the CSD and on the special purpose account with a settlement bank; client funds in the special purpose account are separated from the broker’s own funds. - Republic Srpska: Central Registry of Securities (CRS) - Established: February 2001 pursuant to the Law on the Central Registry of Securities. - Functions: registry and clearing house; opens and maintains accounts, performs clearing, settlement, and transfer of securities; registers shares, bonds, treasury bills. - Membership and governance: - There were 14 members as of December 31st, 2013, comprising 10 stock exchange intermediaries and 4 custodian banks. - Risk rating assessed as low by an international rating and advisory agency in 2013. - Registered net profits during 2012 and 2013; financial statements independently audited. - Settlement models: - Stock exchange transactions: DVP Model 2 — securities settled on a gross basis and cash settlements netted; CRS’ special account at the CBBH Main Bank of the RS at T+3. - Settlement cycle planned to shorten to T+2 starting in early 2015. - Money market transactions (treasury bills, repos): DVP Model 1 — gross securities settlement and same day cash settlement at T+0. - All CRS registered securities are dematerialized and have ISIN codes. - Guarantee fund: - Required under the Law on Securities Markets; members deposit funds (basic and additional payments) in a special account at the CBBH. - Basic payments calculated twice a year and fixed for the next six months; additional payments calculated monthly based on member obligations. - Guarantee fund was not used as of end-2013 and amounted to KM 1.7 million as of October 28, 2014, comprising KM 140,000 of basic payments and KM 1.77 million of additional payments. - Federation of Bosnia and Herzegovina: Registry of Securities (RVP) - Established: 1999 as a joint stock company under the Law on the Registrar of Securities (Article 2). - Functions: gross settlement of securities against net settlement of funds for the SSE; registration, safekeeping, maintaining information on securities, and transfers; holds dematerialized securities with ISIN codes. - Operates on DVP Model 2 with cash settlement on a netting basis at T+3 through RVP’s special account at the CBBH Sarajevo Main Unit. - Plans under consideration by the Securities Commission of the FBiH to shorten settlement cycle to T+2. - Participants contribute to a guarantee fund (basic and additional); total basic payments by members: KM 90,000 at end-October 2014. ### Regulatory, supervisory, and oversight structure - CBBH responsibilities and legal basis: - The Law on the Central Bank of Bosnia and Herzegovina of 1997 (Chapter 1, Article 2, paragraph 3c) empowers the CBBH "to promote or to establish and maintain appropriate payment and settlement systems." - The Law of the CBBH establishes reserve requirements (Article 36) and money market operations (Article 37), underpinning the currency board arrangement. - Operational rules and instruments: - CBBH RTGS Operational Rules of 2004 establish rights/responsibilities of the CBBH and RTGS participants, participation requirements, operational practices, clearing of net positions from card switching network and the GCS, and contingency procedures. - CBBH GCS Operational Rules of 2004 govern the giro clearing system separately. - RTGS operational rules (Section 4.3.6) require the CBBH to act in accordance with GCS operational rules if an RTGS participant has failed to obtain sufficient funds for settlement. - Issued instructions relate to IBAN structure/use and reserve requirement; decisions include alternative back up procedures for RTGS operations and minimal computer configurations/back up locations for the GCS. - CBBH staffing for payments: - Total personnel with payment operations tasks: 30 - Payment Systems Department (PSD) located in Sarajevo Main Unit and composed of three units: (i) Payment Systems Operations Unit, (ii) Information Technology Support Unit, and (iii) SWIFT Unit. - PSD staffing: 18 persons (department head, 3 unit managers, and 14 officers). - Department for Monitoring Payment Systems and Back-Up Systems (Main Bank of RS in Banja Luka): staffed with 6 persons including the department head; responsible for GCS operations and disaster recovery/back-up. - Unit for Monitoring and Payment Systems operates from Sarajevo Main Unit and Mostar Main Unit; each unit staffed with 3 persons and responsible for GCS operations and back-up. - Entity banking agencies and legal powers: - Banking Agency of RS (BARS) and Banking Agency of the FBiH (FBA) empowered to issue/revoke licenses for authorized organizations to perform internal payment transactions, under RS Law on Banks and FBiH Law on Banks. - Authorized organizations include banks headquartered in entities, bank branch offices, and other entities performing internal payment transactions on behalf of authorized organizations. CBBH is also empowered to perform internal payment transactions. - Internal payment transactions fall under 15 defined categories (i) through (xv) listed in law text. - BARS powers under RS Law on Internal Payment Systems of 2012 (Article 46–47) include cooperation in monitoring, requesting information, direct supervision, issuing recommendations/guidelines/obligatory orders, temporarily suspending or revoking licenses, and initiating measures/procedures against noncompliant authorized organizations. - FBA operates under similar law; a Draft Law on Internal Payment Systems largely identical to RS is under parliamentary consideration in the FBiH as of November 2014. - Central database maintained by separate agency: - Agency for Intermediary, Information Technology, and Financial Services (APIF) empowered under RS Law on Internal Payment Systems (Article 15) and the Law on Single Registry of Business Entities’ Accounts to maintain a single registry of accounts; authorized organizations must deliver account data continuously and immediately after changes; authorized organizations have electronic access to review data. - Draft FBiH Law on Internal Payment Systems (Article 9) establishes Financial and Information Technology Agency Sarajevo to maintain a similar registry. - Entity securities commissions: - Securities Commission of the RS regulates the CRS under the Law on Securities Market; Regulation on the Clearing, Settlement, and Transfer of Securities came into force in February 2013 as a rulebook for the CRS covering guarantee fund use, clearing/settlement procedures, custody instructions, and registry code procedures. - Securities Commission of the FBiH regulates RVP under the Law on Securities Market and the Law on the Registrar of Securities; RVP operates under the Rules of the RVP in the FBiH of 2009 (Articles 18 to 24 contain specific clearing and settlement provisions). ### Past and ongoing reforms - Electronic interbank money market: - Adoption of an electronic interbank money market for commercial banks to provide real-time capabilities for managing domestic currency deposits, foreign exchange, and cash operations. Use among commercial banks is voluntary, but connection to the central bank is mandatory. - Legal reforms: - Parliament of the Federation of Bosnia and Herzegovina expected to adopt a new Law on Internal Payment Systems to ensure flow of bank account information across entities, including the central bank, aimed at creating an environment conducive to credit growth and economic activity. A largely identical law was adopted in the RS in 2012. - Settlement cycle harmonization: - Plans to shorten settlement cycle for stock exchange trades to T+2 at the BLSE in early 2015 and under review for the SSE to harmonize with the EU Central Securities Depositories Regulation (CSDR) adopted on April 15, 2014, which imposes a harmonized standard settlement date of T+2 within the European Economic Area. - European markets under the CSDR migrated from T+3 to T+2 with effect from October 6th, 2014. ### Summary assessment of the RTGS system — Observance of the Principles (selected findings) - Legal basis and finality: - The operations of the RTGS system and payment transfers have a sound legal basis, but finality and netting arrangements require greater legal certainty and protection at the law level. - It "cannot be ruled out that a transaction settled in the system can be revoked by a court order in the event of insolvency of a participant." - Recommendation: adopt an explicit law on settlement finality to empower authorities to designate payment systems and fully protect finality and netting; eliminate "zero-hour rules" in insolvency law to prevent reversal of settled payments. - Further clarification recommended on whether the written statement between the CBBH and RTGS participants acts as a contractual agreement and under what law it could be used for legal action. - Governance and reporting: - Governance arrangements are clear, accountable, and transparent. - Monthly reporting largely focuses on payment flows; risk analysis appears limited in scope and depth. - Recommendation: report analysis of potential risks and progress in mitigating them on a quarterly basis at regular meetings of the Governing Board. - Risk management: - A comprehensive risk management framework is lacking. - CBBH RTGS Operational Rules articulate measures on insufficient funds and contingency arrangements, but there is no formal framework with identification of various risks, mitigation measures, and ongoing monitoring. *Source: IMF country report content provided in the supplied PDF excerpt.* ### 31. There is no credit risk as intraday or overnight credit by the central bank is not ### _cr15217 - 31. There is no credit risk as intraday or overnight credit by the central bank is not ### Credit and liquidity risk management - There is no credit risk as intraday or overnight credit by the central bank is not permitted under the currency board arrangement. - All RTGS transaction accounts are prefunded by transfers from reserve account balances at the start of a business day. - Outgoing payments with insufficient funds enter a queue until sufficient funds are received; payment instructions are returned to the sender if funds have not been secured. - As the CBBH does not provide intraday credit, use of collateral is not applicable in this institutional set-up. - Liquidity risk management is generally effective, but could be strengthened: - Potential liquidity risk arises from the high concentration of transaction values in the payment systems across five banks. - Two commercial banks act as settlement banks and have a large share of total transaction values. - Liquidity risk may arise from settlement delays originating from the GCS, Bam Card, or settlement banks, which may hinder liquidity recycling by other participants. - Liquidity risk may also arise from the default of the largest participant and its affiliates in the payment system. - Each reserve maintenance period of 10 days, although effective, should be monitored closely on a daily basis to ensure that a commercial bank has sufficient liquidity in its reserve account for settlement purposes. ### Settlement finality and legal risk - Legal uncertainty remains for settlement finality in the event of an insolvent participant: transactions settled in the system cannot be ruled out as revocable by a court order in the event of participant insolvency. - Money settlements are based on central bank money. - The RTGS is not an exchange-of-value settlement system (does not involve linked obligations such as delivery of securities against cash or currency exchange). ### Default management and participant rules - Participant-default rules and procedures are clearly defined and available to all participants. - Such rules and procedures need to be established, tested, and reviewed on a periodical basis. ### Operational risk, resilience, and business continuity - The RTGS system is owned and operated by the CBBH as part of its mandate to ensure payment and settlement operations in normal and extreme financial circumstances. - Because the Law on the CBBH stipulates its role in promoting or establishing and maintaining appropriate payment and settlement systems, CBBH is considered able to ensure continuity in extreme financial circumstances; therefore, requirements to prepare recovery and orderly wind-down plans do not apply, nor do requirements to hold ring-fenced liquid assets funded by equity or maintain a plan to raise additional equity. - The CBBH is financially sound with net profits registered during 2011 to 2013. - Operational risk is well managed, but a recovery time objective needs to be established: - Primary site is supported by a modern and well staffed secondary site located around 200 kilometers from the former, acting as a disaster recovery site. - The secondary site is tested regularly three times a year with participants; each test has duration of five days. - The operational risk management framework and business continuity plan could be further improved by clearly establishing in writing the service availability and recovery time objectives to ensure operations resume within two hours following a disruptive event and to help ensure cyber resilience in critical infrastructures. ### Access and participation - Access and participation requirements are clear, publicly available, fair, and objective. - Rules relating to suspension, termination, and exclusion are defined in CBBH RTGS Operational Rules. - There are no tiered participation arrangements; only direct participation from commercial banks and the CBBH. - Recommendation: Clarify in the CBBH RTGS Operational Rules that direct participation is only permitted for commercial banks and the CBBH with no tiered participation, and that participants should be disclosed. ### Efficiency and standards - Efficiency could be enhanced with fee schedule reviews and the setting of minimum service levels: - Pricing policy aims at recovering cost, but fees have not been regularly revised to reflect costs while service level objectives appear to be lacking. - The RTGS fee schedule has been revised once since its introduction in 2001 and was in support of time-zone pricing. - Minimum service levels do not appear to have been clearly established to monitor efficiency and effectiveness. - The RTGS system uses internationally accepted communication procedures and standards: SWIFT communication network and messages are used; within SWIFT a CUG is formed where payments are made within the group in BIH. ### Transparency and disclosure - RTGS rules and procedures are publicly disclosed, but disclosure would be more complete with relevant laws, regulations, instructions, decisions, and memorandum of understanding issued by competent authorities. - Testing and training should increase focus on understanding CBBH RTGS Operational Rules, relevant rules and procedures, and potential risks and mitigation measures. ### Ratings summary (RTGS System) - Assessment category — Principle - Observed: 2, 9, 13, 15, 18, 22 - Broadly observed: 7, 8, 17, 19, 21, 23 - Partly observed: 1, 3 - Not applicable: 4, 5, 12, 16 ### Prioritized recommendations for the RTGS system (selected, with exact timeframes) - Principle 1, 8 — Legal uncertainty for finality and netting in the event of insolvency: - Strengthen the legal framework to designate payment systems, and to protect settlement finality and netting in line with international standards. - Relevant party: CBBH. Timeframe: Near-Term. - Principle 2 — Lack of risk analysis and reporting to the Governing Board: - Improve risk analysis in the payment system, and report progress on a quarterly basis at the meetings of the Governing Board. - Relevant party: CBBH. Timeframe: Immediate. - Principle 3 — Lack of a comprehensive risk management framework: - Develop a comprehensive risk management framework for the RTGS system including legal, liquidity, and operational risks; monitor risks on an ongoing basis and include periodic reporting to the CBBH Governing Board and Management. - Relevant party: CBBH. Timeframe: Immediate. - Principle 7 — Liquidity concentration risk across five banks: - Stress test the RTGS system, including the default of the largest participant and affiliates. Establish throughput rules, and adopt tools to monitor intraday liquidity flows to assess sufficiency of liquidity in reserve accounts on a daily basis. - Relevant parties: CBBH, BARS, FBA. Timeframe: Near-Term. - Principle 17 — Lack of a recovery time objective: - Establish service availability and recovery time objectives. Business continuity plan should ensure critical IT systems can resume operations within two hours following disruptive events and enable RTGS to complete settlement by the end of the day of the disruption. - Relevant party: CBBH. Timeframe: Immediate. - Principle 21 — Lack of regular fee schedule reviews: - Conduct cost accounting of the payment system on an annual basis and revise fee schedules to reflect costs where applicable; establish, monitor, and disclose minimum service levels for RTGS services. - Relevant party: CBBH. Timeframe: Near-Term. - Principle 23 — Lack of disclosure of relevant laws, regulations, instructions, decisions, and memorandum of understanding: - Develop a description of the design and operations of the RTGS system and disclose along with relevant laws, regulations, instructions, decisions, and memorandum of understanding in the CBBH Annual Report and website. - Relevant party: CBBH. Timeframe: Immediate. - Timeframe definitions: “Immediate” is within one year; “near –term” is 1-3 years; “medium-term” is 3-5 years. ### Authorities’ responsibilities — observance and gaps - No clearly defined and publicly disclosed criteria to identify FMIs that should be subject to regulation, supervision, and oversight; CBBH plans to establish criteria after completion of assessments under the IMF-World Bank Financial Sector Assessment Program. - The Law of the CBBH establishes operational responsibilities (promoting/establishing/maintaining payment and settlement systems; entering into international clearing and payment arrangements; organizing facilities for clearing and settlement of interbank payments) but does not provide sufficient powers for oversight of payment systems. - Payment Systems Department resources are focused on operational duties and ancillary services not directly related to inter-bank settlements; staff have not received adequate training on FMI oversight in the past two years, especially on the CPMI-IOSCO PFMIs released in April 2012. - Internal audit of the payment system is conducted every two years and is narrowly focused on information security issues; Risk Management Department (including 4 staff) focuses on financial risks in foreign currency reserves and collates operational risk quarterly for reporting to CBBH Management. - Establishment of an internal working group to address oversight of payment systems was put on hold since 2007 due to potential conflicts of interest between operational and oversight duties; decision on appropriate location within the central bank is pending at the CBBH Governing Board. - CBBH responsibilities in the payment system are disclosed through Annual Report, Financial Stability Report, and website, but there is no coherent oversight policy document for the RTGS system. - The CBBH has not adopted the CPMI-IOSCO Principles for Financial Market Infrastructures and apply them consistently, but plans to do so after completion of the assessment. - Cooperation exists with entity banking agencies under a memorandum of understanding; advanced notification and coordination on planned closure of a problem bank and its suspension from the payment system could be improved to prevent unwinding of payments following a court order. - There is no formal cooperation with entity securities commissions; potential role for cooperative oversight of CSDs exists. ### Ratings summary (Authorities’ Responsibilities) - Assessment category — Responsibility - Broadly observed: C, E - Partly observed: A, B, D ### Prioritized recommendations for authorities (selected, with exact timeframes) - Responsibility A — Lack of established criteria to identify FMIs: - Establish clearly defined and publicly disclosed criteria to identify FMIs that should be subject to regulation, supervision, and oversight by the relevant competent authorities. - Relevant party: CBBH. Timeframe: Near-term. - Responsibility B — Lack of oversight powers and resources for FMIs: - Strengthen the legal framework to designate payment systems, and to protect settlement finality and netting in line with international standards. - Establish memorandum of understanding to strengthen oversight of clearing agents, settlement banks, international payment clearing, and cooperation with relevant authorities. - Establish a new oversight unit in the Payment Systems Department, staffed with sufficient resources; separate oversight and operational duties at department level or different units to avoid conflicts of interest and ensure impartiality. - Relevant party: CBBH. Timeframe: Near-term. - Responsibility C — Lack of policies with respect to FMIs: - Develop a policy document to clearly define and disclose the regulatory, supervisory, and oversight policies of the CBBH for the RTGS system. - Relevant party: CBBH. Timeframe: Immediate. - Responsibility D — Lack of adoption and application of the PFMIs: - Adopt the CPMI-IOSCO PFMIs with a time-bound plan and apply them consistently to the RTGS system. - Relevant party: CBBH. Timeframe: Immediate. - Responsibility E — Lack of supervisory coordination in bank closure and suspensions in the payment system: - Improve advanced notification from entity banking agencies to the CBBH to coordinate timely closure of a bank and its suspension from the payment system. - Develop memorandum of understanding between the CBBH, BARS, FBA, FBiH and RS Securities Commissions to collaborate on development and oversight of FMIs, respecting mandates of each competent authority. - Relevant parties: CBBH, BARS, FBA, FBiH and RS Securities Commissions. Timeframe: Near-term. - Timeframe definitions (repeated): “Immediate” is within one year; “near –term” is 1-3 years; “medium-term” is 3-5 years. ### Selected detailed assessment — Principle 1: Legal Basis (Key Consideration 1) - The CBBH RTGS Operational Rules of 2004 establish the rights and responsibilities of the CBBH and RTGS participants, participation requirements, and the protection of irrevocability and finality. - The RTGS system is only subject to the laws of BiH. - CBBH RTGS Operational Rules (Sections 1.3 and 1.4) establish rights and responsibilities of the CBBH and RTGS participants. - Participation requirements are established in CBBH RTGS Operational Rules (Section 2) (technical requirements for participation, authorized persons, termination by participants, and exclusion by the CBBH). - Legal protection for irrevocability and finality: CBBH RTGS Operational Rules (Section 3.2.1) states: “Payment orders that include amounts up to the cover on the settlement account of any RTGS system participant may not be reversed once transmitted through the RTGS system and shall be executed on the same day and by the RTGS close of business on that day.” *Source: _cr15217 - 31. There is no credit risk as intraday or overnight credit by the central bank is not* ### Section 3.2.2 establishes finality as follows: “Any payment shall be ### _cr15217 - Section 3.2.2 ### Finality statement - “Any payment shall be deemed as final once the funds have been accounted for on the settlement account of the RTGS system participants.” ### Key point - Finality is triggered when funds have been accounted for on the settlement account of the RTGS system participants. *Source: _cr15217 - Section 3.2.2 establishes finality as follows: “Any payment shall be* ### Section 4.2.4 establishes finality for the settlement of net positions ### _cr15217 - Section 4.2.4 establishes finality for the settlement of net positions ### Finality of settlement and netting arrangements - Quoted provision establishing finality for settlement of net positions from clearing agents: - “After the CBBH has debited the settlement account of a RTGS participant/net debtor, it shall immediately credit the settlement account of a RTGS participant/net creditor, as described in the submitted clearing report. Settlement of obligations and claims arising from clearing shall be deemed as final once the settlement account of the RTGS participant/net creditor has been credited.” - Netting arrangements: - Netting does not occur in the RTGS system. - For deferred net settlement systems (GCS and card switching network), there is no explicit legal protection for the finality of multilateral netting. ### Legal framework and enforceability - Principal legal and regulatory instruments cited as legal basis for RTGS and payment transfers: - Law on the Central Bank of Bosnia and Herzegovina (Article 2, 3c; Article 70). - CBBH Instructions and Decisions including: Instruction on Payment Account Structure; Instruction on the Structure and Use of the International Bank Account Number (IBAN); Instruction on Reserve Requirement; Operational Rules for the GCS; CBBH Decision on the Back Up Ways to Perform RTGS Operations; Decision on Minimal Computer Configurations and the Back Up Location for Giro Clearing. - Law on Electronic Signature. - Law on Electronic Legal and Business Transactions. - Entity- and jurisdiction-specific laws and regulations (listed for FBiH and RS) provide licensing, banking framework, securities, registry, and bankruptcy rules (no exhaustive list of cited items emitted here beyond content-provided items). - Enforceability and contractual basis: - CBBH RTGS Operational Rules (Section 6.1.2) requires RTGS participants to endorse rules with a written statement. - Section 6.1.3 requires RTGS participants to harmonize their regulations with the RTGS Operational Rules; failure to comply may revoke membership. - CBBH Instruction on the Manner of Operation... of March 31st, 2014 defines terms for holding balances with the CBBH for settlement purposes, includes measures ranging from temporary suspension to permanent exclusion from the payment system, and includes penal measures for noncompliance. - Degree of certainty: CBBH RTGS Operational Rules protect irrevocability and finality of payment orders, but “it cannot be ruled out that a transaction settled in the system can be revoked by a court order in the event of insolvency of a participant.” - Recommended legal improvements (as per source conclusions): - Further clarification on whether the written statement between the CBBH and RTGS participants acts as a contractual agreement and under what law it could be used for legal action would increase legal certainty. - Strengthen the legal framework to designate payment systems, and to protect settlement finality and netting in line with international standards. ### Governance of the RTGS (Principle 2 summary) - Ownership and organizational structure: - RTGS system owned and operated by the CBBH. - Payment Systems Department (PSD) manages daily operations; three units: (i) Payment Systems Operations, (ii) Information Technology Support, and (iii) SWIFT. - Head of PSD reports to the Vice Governor overseeing the Sector for Statistics, External Debt Servicing, European Integrations, and Payment Systems; Vice Governor reports to the Governor. - Disclosure and accountability: - Governance arrangements established in the Law on the CBBH and publicly available in the CBBH Annual Report and website. - Monthly reports prepared by Head of Payment Systems Department include transaction volumes and values and percentage shares of each payment system to total figures; participation in Governing Board meetings as requested. - Board and management responsibilities and integrity safeguards: - Law on the CBBH (Chapter II, Articles 5 to 24) specifies Governing Board powers and constitution; Governor chairs Governing Board and Management and approves operational rules, instructions, and decisions for RTGS. - Article 23 establishes rules on conflicts of interest; CBBH Rules of Business Conduct (May 30, 2013) includes conflict-of-interest avoidance procedures (Article 11). - Annual and financial reporting obligations under Article 64: Report on the State of the Economy; Report on Operations during the year; Financial Statement certified by the auditor. - Assessment and recommendations: - Key conclusion: governance arrangements are clear, accountable, and transparent. - Recommendation: Improve risk analysis and management in the payment system, and report progress on a quarterly basis at the meetings of the Governing Board. - Assessment of Principle 2: Observed. ### Risk management (Principle 3 summary) - Current framework: - No explicit comprehensive risk management framework exists for the RTGS system. - Components referenced as part of the broad framework: - Law of the CBBH. - CBBH Instruction on the Manner of Operation... (for failing banks and status changes). - CBBH Business Continuity Plan. - CBBH RTGS Operational Rules. - CBBH Decision on the Back Up Ways to Perform RTGS Operations. - Range of risks identified (verbatim descriptions from source): - Legal risk: Legal uncertainty for finality as it cannot be ruled out that a transaction settled in the system can be revoked by a court order in the event of insolvency of a participant; - Credit risk: There is no credit risk. The Law on the CBBH does not permit the CBBH to provide any credit to RTGS and GCS participants, which would serve as liquidity. - Liquidity risk: Default from the largest participant and its affiliates, and the consequential liquidity pressures faced by other participants in the payment system. Delayed settlement of net positions from the GCS or card switching network, or from an RTGS participant that also acts as a settlement bank to settle net positions for foreign card companies, could build up liquidity pressures for other RTGS participants that rely on incoming payments for making outgoing settlements; - Operational risk: A clearly established recovery time objective is lacking to resume RTGS operations at the secondary and back-up sites in the event that outages occur at the main site. - Risk management measures in place (excerpted from cited rules): - CBBH RTGS Operational Rules provide measures to mitigate operational risks with contingency settlement procedures. - CBBH Instruction on the Manner of Operation... establishes framework for liquidity management, including interest rate penalties for banks failing to replenish liquidity in reserve accounts. - CBBH Business Continuity Plan and CBBH Decision on the Back Up Ways to Perform RTGS Operations describe contingency measures and require commercial banks to provide their own back up locations or contract backup agreements. - Interdependencies and material risks with other FMIs and service providers: - RTGS interdependencies with two deferred net settlement systems: GCS and card switching network (Bam Card). - GCS settles net positions on a same day settlement basis with 3 daily intervals: 10:00 a.m., 1:00 p.m., and 3:00 p.m. - Bam Card settles net positions once a day at 9:00 a.m. at T+1. - Loss-sharing arrangements following a participant default do not appear in CBBH GCS Operational Rules or relevant instructions or decisions. - No information on the risk management framework for Bam Card. - Interdependency with settlement banks for foreign card companies: - Raiffeisen Bank dd Sarajevo for MasterCard. - UniCredit Bank dd Mostar for Visa. - Both foreign card networks use their settlement banks to settle their net positions in the RTGS system at T+2. - Incentives to manage participant risk: - Time-zone pricing for earlier submission of payment orders: - Transaction fees are KM 1.2 per item from 8.00 a.m. to 12 p.m., and increase to KM 3 per item from 12 p.m. to 4 p.m. - Assessment and recommendation: - Key conclusion: CBBH RTGS Operational Rules articulate mitigation measures on insufficient funds and contingency arrangements, but there is no comprehensive risk management framework that formally identifies risks, mitigation measures, and ongoing monitoring. - Assessment of Principle 3: Partly Observed. - Recommendation: Develop a comprehensive risk management framework for the RTGS system including legal, liquidity, and operational risks; ensure risks are monitored on an ongoing basis and include periodic reporting to the CBBH Governing Board and Management. ### Liquidity risk (Principle 7 summary) - Liquidity risk framework components cited: - CBBH Law (Article 36 on Required Reserves; Article 37 on Money Market Operations). - CBBH Instruction on the Manner of Operation... for cases involving banks failing to meet reserve obligations (includes interest rate penalties). - CBBH RTGS Operational Rules (Section 4.3.5) permits CBBH to transfer funds from participant/net debtor reserves to settlement accounts if there are insufficient funds. - Operational and analytical tools: - RTGS prevents settlement without pre-funding; participants required to secure funds in settlement accounts held with the CBBH prior to settlement. - CBBH may dispose of entire reserve funds of participants in settlement, which include required reserves. - Reserve requirements and related numeric provisions (verbatim): - Required reserves shall be maintained by way of cash holdings or by way of deposits with the central bank, through its head office and main units, and shall be calculated as average daily reserves over 10 day periods. - Calculation period for reserve requirements: There are three calculation periods per month, including (i) first to the tenth; (ii) eleventh to the twentieth, and (iii) twenty first to the last day of the month. The maintenance period follows the calculation period. Every year consists of 36 calculations and maintenance periods. - Required reserves rate: As of February 1, 2011, the required reserves rate was lowered from 14 percent to 10 percent on the base with maturity up to one year, representing a measure to increase liquidity and free up credit potential. - Remuneration on required reserves: As of August 1, 2011, remuneration was calculated as 70 percent of the rate that is equal to the weighted average of the interest rates the CBBH earns in the same period in the market on its deposits invested up to a month. The remuneration rate on excess reserves is 90 percent of that rate. - CBBH Law (Article 37 on Money Market Operations) stipulates that the central bank “shall not engage in money market operations involving securities of any type.” - Sources of liquidity stress identified: - Delayed settlement of net positions from the GCS. - Default of a large participant and affiliates generating aggregate liquidity obligations. - Assessment and conclusions: - The CBBH can intervene daily to ensure sufficient liquidity is available for RTGS participants by transferring funds from reserve accounts to settlement accounts. - Key conclusion: RTGS liquidity arrangements include tools to manage participant liquidity, but potential scenarios (e.g., delayed GCS settlement or default of a large participant) pose material risks that should be covered in a comprehensive framework. - (The source begins to report a numeric value for commercial bank reserves held with the CBBH but the provided excerpt ends before a complete figure is given.) ### Key conclusions and prioritized recommendations (from source) - Legal finality: - RTGS operations and payment transfers have a sound and relatively solid legal basis, but transactions “can be revoked by a court order in the event of insolvency of a participant.” - Recommendation: Clarify contractual status of written statements and strengthen legal protection for settlement finality and netting. - Governance: - Governance arrangements are clear, accountable, and transparent. - Recommendation: Improve risk analysis and management and report progress quarterly to the Governing Board. - Risk management: - No comprehensive risk management framework exists. - Recommendation: Develop a comprehensive risk management framework for the RTGS system covering legal, liquidity, operational, and other risks; monitor risks on an ongoing basis and report periodically to the Governing Board and Management. - Liquidity: - Tools exist for intraday liquidity management (including transfer from reserve to settlement accounts and pre-funding requirements), but stress scenarios from deferred net settlement systems and large participant defaults require explicit coverage in the framework. *Source: _cr15217 - Section 4.2.4 establishes finality for the settlement of net positions (excerpt).* ### 3.7 billion as of June 31, 2014, comprised around KM 1.37 billion of ### _cr15217 - 3.7 billion as of June 31, 2014, comprised around KM 1.37 billion of ### Availability and coverage of qualifying liquid resources - 3.7 billion as of June 31, 2014, comprised around KM 1.37 billion of required reserves and KM 2.32 billion of excess reserves. - RTGS participants maintain settlement accounts at the CBBH. - CBBH RTGS Operational Rules (Section 4.3.5) permits the CBBH to transfer funds from participant/net debtor reserves to settlement accounts if there are insufficient funds to effect payments. - Collateral eligible for pledging to (or for conducting other appropriate forms of transactions with) the relevant central bank should be available when needed. - An FMI should not assume the availability of emergency central bank credit as part of its liquidity plan. ### Supplemental liquid resources and liquidity providers - Size and composition of supplemental liquid resources: Not applicable. - Availability of supplemental liquid resources: Not applicable. - Use of liquidity providers: Not applicable. - Reliability of liquidity providers: Not applicable. ### Liquidity stress testing and monitoring - Key consideration: An FMI should determine the amount and regularly test the sufficiency of its liquid resources through rigorous stress testing. - Stress test program: - There is no stress testing of the payment system to test the sufficiency of liquid resources. - The CBBH conducts regular stress tests to determine the appropriate level of capacity of the banking sector to absorb extreme, but likely unfavorable scenarios; focus on asset quality, capital structure, credit risk, liquidity risk, and interest rate risk. - Stress test scenarios: There are no forward-looking stress test scenarios in a variety of extreme but plausible market conditions. - Review and validation: As there is no stress test for the payment system, there are no reviews or validation to test the sufficiency of liquid resources. ### Same-day settlement and replenishment of liquidity resources - Same-day settlement: The RTGS system operates on a same-day settlement basis. - Replenishment of liquidity resources: - CBBH Law (Article 36, Point 5) on Required Reserves of Banks: - If a bank fails to fulfill its required reserves for two consecutive periods, the central bank will cease to process withdrawal transactions for the bank, inform the appropriate banking authorities, and require correction within the same week. - If the failure continues another week, appropriate procedures to close the bank can be initiated. - The central bank will impose a penalty up to five per mil (5/1000) per day on the shortfall until corrected. - CBBH Instruction on the Manner of Operation... establishes a three-period framework with measures and penalties: - Article 2 (after one maintenance period) mandates notification, calculation of deficit and penalty interests, informing competent banking agency, and collection of penalty interests no later than 5 days after expiry of the previous maintenance period. - Article 3 (after two consecutive maintenance periods) discontinues transactions that reduce reserve accounts upon request, limits settlement account payments to achieved daily inflows, includes settlement account balance transfer to reserve account, notification, and collection of penalty interests no later than 5 days after expiry of the previous maintenance period. - Article 4 allows resumption of reducing reserve-account transactions the following working day after the bank meets reserve requirements. - Article 5 (after three consecutive maintenance periods) discontinues all payments from the settlement account, proceeds with settlement account balance transfer to reserve account, notifies competent agency, and collects penalty interests no later than five days after expiry of the previous maintenance period. ### Key conclusions and risks (Principle 7) - Framework to manage liquidity risk is generally effective and robust, but could be strengthened. - There are no intraday liquidity facilities. - Potential liquidity risks: - High concentration of transaction values across five banks, including two commercial banks that act as settlement banks with large shares of total transaction values. - Settlement delays originating from the GCS, Bam Card, or settlement banks may hinder liquidity recycling by other participants. - Default of the largest participant and its affiliates could create liquidity risk. - Each reserve maintenance period is 10 days and should be monitored closely on a daily basis to ensure sufficient liquidity in reserve accounts for settlement purposes. - Assessment of Principle 7: Broadly Observed. - Recommendations: - Stress test the RTGS system, including the default of the largest participant and affiliates. - Establish throughput rules. - Adopt tools to monitor intraday liquidity flows to assess sufficiency of liquidity in commercial banks’ reserve accounts on a daily basis. ### Settlement finality (Principle 8) - Point of settlement finality: CBBH RTGS Operational Rules (Section 3.2.2) — “Any payment shall be deemed as final once the funds have been accounted for on the settlement account of the RTGS system participants.” - Final settlement on the value date and intraday/real-time finality: Established by CBBH RTGS Operational Rules (Sections 3.2.1 and 3.2.2). - Revocation: Section 3.2.1 states payment orders up to cover on settlement account may not be reversed once transmitted and shall be executed on the same day by RTGS close of business. - Key conclusions: RTGS operations have a sound legal basis, but a transaction could be revoked by a court order in the event of participant insolvency. - Assessment of Principle 8: Broadly Observed. - Recommendation: Strengthen the legal framework to designate payment systems, and to protect settlement finality and netting in line with international standards. ### Money settlements (Principle 9) - Money settlements are based on central bank money; commercial banks hold settlement accounts and reserve accounts at the CBBH. - Assessment of Principle 9: Observed. - Recommendations and comments: None. ### Participant-default rules and procedures (Principle 13) - Participant default rules and procedures are described in the CBBH Instruction on the Manner of Operation... (see Principle 7 Key Consideration 10 for measures). - Procedures are clear, defined, applied in practice, and available to all participants. Default rules have been implemented against a commercial bank in practice (interest penalties for failing to fulfill minimum reserve requirements). - No involvement of participants in testing and review of default procedures. - Key conclusions: Rules and procedures are clearly defined and available to all participants. - Assessment of Principle 13: Observed. - Recommendation: Participant default rules and procedures need to be tested and reviewed annually. ### General business risk (Principle 15) - RTGS system is owned and operated by the CBBH. - CBBH financial reporting: - Management required to prepare financial statements in accordance with International Financial Reporting Standards. - Annual financial statements submitted to Governing Board and Parliamentary Assembly of BiH. - Profit allocation: The CBBH allocates 60 percent of the current profit to the account of the Ministry of Finance and Treasury of the Council of Ministers. - The amount of the subscribed capital and general reserves (retained earnings) must be equal or higher than 5 percent of total monetary liabilities. - Ministry is obliged to secure funds if there is no net profit. - Risk monitoring: Risk Management Department and Financial Stability Department monitor risks; internal and external audits carry out analyses. - Key conclusions: CBBH is financially sound with net profits registered during 2011 to 2013; RTGS owned and operated by CBBH. - Assessment of Principle 15: Observed. - Recommendation: None. ### Operational risk and business continuity (Principle 17) - Operational risk framework: - CBBH RTGS Operational Rules (Section 5) establish contingency settlement procedures. - Decision on Back Up Ways requires commercial banks to provide backup locations or contract backup agreements. - CBBH has a Business Continuity Plan (BCP) for internal use. - Operational risk identification includes internal factors, external factors, HR issues, payment systems, systems (hardware/software/telecom/electricity), outsourcing, and transaction management and reporting. - IMS acts as an incident monitoring and reporting system. - Operational risk management: - “Methodology for Operational Risk Management in the CBBH,” dated 2014. - Chief Internal Audit conducts audits every two years or as requested; reports to Governing Board. - Payment Systems Department assesses risks and publishes results in the CBBH Annual Report. - Measurement and reporting: - Operational Risk Tool and Vivaldi application used for event reporting. - Reports include Value at Risk with confidence levels of 99 percent and 99.9 percent, expected losses, loss statistics (number of events, gross loss, average loss, highest individual loss). - Roles and responsibilities: - Governor, with Governing Board approval, appoints Chief Internal Auditor. - Risk Management Department responsibilities include data entry, validation, VaR calculation, report generation. - Operational risk framework follows six steps: identification, measurement, monitoring, reporting, control, financing of losses. - Operational risks classified into 28 types following Basel 2. - Operational reliability objectives: No information available. - Scalability and capacity: - RTGS scalable capacity: around 260,000 transactions over an 8 hour period. - Current transaction level: around 3,000 transactions per day in 2014. - Physical and information security: - Primary and disaster recovery sites have CCTV, access control, air conditioning, UPS, fire prevention. - Modern software/hardware, hot standby equipment, regular penetration testing. - Business continuity plan details: - BCP aims to successfully close current business day and notify parties of account balances. - Business day on disaster recovery site resumes on day of disruption or no later than the following business day. - Disaster recovery site in Main Bank of the RS in Banja Luka, around 200 kilometers from Sarajevo. - Primary and disaster recovery sites linked through multiprotocol label switching. - Hot standby back-up system for RTGS on primary site. - Disaster recovery site testing: three times a year with participants; each test duration five days. - All primary site information uploaded to disaster recovery site and archived (RTGS, GCS, Electronic Interbanking Money Market, Central Registry of Credits, Single Registry of Legal Entities' Transaction Accounts, Clearing of International Payments). - Key conclusions: Operational risk in payment systems is well managed; primary site supported by well staffed secondary site 200 kilometers away; disaster recovery tested regularly three times a year with five-day participant tests. - Assessment of Principle 17: Broadly Observed. - Recommendations: - Establish service availability and recovery time objectives. - BCP should ensure critical IT systems can resume operations within two hours following disruptive events. - BCP should enable the RTGS system to complete settlement by the end of the day of the disruption, even in extreme circumstances. ### Access, participation and tiered participation (Principles 18 and 19) - Participation: - CBBH RTGS Operational Rules (Section 1.2.3) establish the CBBH and licensed banks as participants. - Section 1.2.4: RTGS settles payment orders from the GCS and any clearing agent (Bam Card). - Future direct participants (banks) required to have licenses from EBAs and meet technical requirements. - There were 29 participants at end-November 2014, including 28 commercial banks and the CBBH. - Disclosure and monitoring: - Changes to rules are presented to participants; operational rules published on CBBH website and submitted in writing to each participant; participants sign acceptance. - Participation criteria publicly disclosed (Section 2). - EBAs conduct regular supervision to ensure compliance. - CBBH empowered to restrict settlement operations and to exclude participants provisionally or permanently (Sections 1.3.9, 2.5.1, 2.5.2). - Tiered participation: - RTGS system only has direct participants (commercial banks and CBBH); no indirect participants category. - No current identification, monitoring, or management of material risks from indirect participants. - Assessments: - Principle 18: Observed. - Principle 19: Broadly Observed. - Recommendations: - Clarify in CBBH RTGS Rules that direct participation is permitted only for commercial banks and the CBBH with no tiered participation, and that participants should be disclosed. - Identify material risks from potential indirect participants. ### Efficiency, communication, and disclosure (Principles 21, 22, 23) - Efficiency (Principle 21): - RTGS designed to meet inter-bank settlement needs; equal and immediate access for participants. - Main objective: smooth and immediate execution of payment orders. - Pricing policy aimed at recovering maintenance cost, not profit-oriented. - RTGS tariffs: - Transactions charged KM 1.2 per item from 8:00 a.m. to noon. - Transactions charged KM 3 per item between noon and 4:00 p.m. - RTGS fee schedule was reviewed and amended once since services started in 2001 to introduce time zone pricing. - CBBH Internal Audit monitors operation; PSD conducts cost accounting; minimum service levels not clearly established. - Assessment of Principle 21: Broadly Observed. - Recommendations: - Conduct cost accounting annually and revise fee schedules to reflect costs where applicable. - Establish, monitor, and disclose minimum service levels for RTGS services. - Communication procedures and standards (Principle 22): - SWIFT communication procedures and network are used; Closed User Group (CUG) formed within SWIFT for BiH payments. - CAS holds all transaction accounts at CBBH. - RTGS SWIFT message types include MT 102, MT 103, MT 202, MT 205, MT 900, MT 910, MT 950, MT 920, MT 941, MT 942. - Assessment of Principle 22: Observed. - Recommendations and comments: None. - Disclosure of rules and data (Principle 23): - CBBH RTGS Operational Rules provide comprehensive rules and procedures and have been accepted in writing by all participants. - Relevant rules and key procedures (list) are publicly disclosed on the CBBH website. - System design and operations descriptions are not publicly disclosed. - Participants provided with detailed functional system specifications; testing and training required before live operations. - Tariffs published in Official Gazette and available on CBBH website; invoices monthly. - CBBH has work-in-progress on the CPMI-IOSCO Disclosure Framework and plans to disclose after completion of FSAP assessments. - RTGS transaction volume and values disclosed on the CBBH website on a monthly basis. - Assessment of Principle 23: Broadly Observed. - Recommendations: - Develop and disclose a description of the design and operations of the RTGS system along with relevant laws, regulations, instructions, decisions, and memoranda of understanding in the CBBH Annual Report and website. - Increase focus in testing and training on understanding CBBH RTGS Operational Rules, relevant procedures, potential risks and mitigation measures. ### Authorities’ responsibilities and oversight (Detailed assessment) - Responsibility A (Regulation, Supervision, Oversight of FMIs): - No clearly defined and publicly disclosed criteria to identify FMIs that should be subject to regulation, supervision, and oversight. - CBBH plans to establish criteria after completion of assessments against CPMI-IOSCO under the IMF-World Bank FSAP. - Assessment of Responsibility A: Partly Observed. - Recommendation: Establish clearly defined and publicly disclosed criteria to identify FMIs that should be subject to regulation, supervision, and oversight. - Responsibility B (Powers and Resources): - CBBH RTGS Operational Rules (Section 1.3.2) establish CBBH responsibilities to oversee and scrutinize banks’ RTGS operations and compliance. - Section 1.3.3 provides powers to oversee records and to hire/authorize auditing firms for oversight. - Section 2.5.1 empowers CBBH to exclude participants provisionally or permanently for breaches or nonconformity with participation requirements. *Source: _cr15217 - 3.7 billion as of June 31, 2014, comprised around KM 1.37 billion of* ### Section 2.5.2 further states that each participant may ### _cr15217 - Section 2.5.2 further states that each participant may ### Resources and organizational structure - The CBBH has 30 staff whose responsibilities are on payment system operations. - The Payment Systems Department (PSD) is located in the Sarajevo Main Unit of the CBBH and has three units: - (i) Payment Systems Operations Unit, - (ii) Information Technology Support Unit (which also handles inquiries relating to the credit registry managed by the CBBH), - (iii) SWIFT Unit. - The PSD is staffed with 18 persons, comprised of the department head, 3 unit managers, and 14 officers. - The Department for Monitoring Payment Systems and Back-Up Systems is located at the Main Bank of the RS of the CBBH in Banja Luka. It is staffed with 6 persons, including the department head, and is responsible for GCS operations and disaster recovery and back-up operations. - The Unit for Monitoring and Payment Systems operates from two separate locations at the CBBH Sarajevo Main Unit and the CBBH Mostar Main Unit. Each unit is staffed with 3 persons and is responsible for GCS operations and back-up operations. ### Legal protections (Operational Rules) - CBBH RTGS Operational Rules (Section 1.3.10) states that the CBBH shall not be held responsible for suspension or strained execution of payment orders where such suspension or strained execution has been result of SWIFT network related difficulties. - Section 1.3.11 notes that the CBBH shall not be held responsible for non-execution, erroneous execution or delayed execution of a payment order caused by a RTGS participant, any third party or an action which could not have been predicted or avoided. - CBBH RTGS Operational Rules (Section 1.3.9) empowers the CBBH to restrict settlement operations between individual RTGS participants and suspend operations of the RTGS system on prolonged or brief period of time if such action is in the best interest of the CBBH and the RTGS participants. In such situations, execution of payment orders shall be suspended or restricted and the Central Bank may not be held responsible for such suspension or restriction. ### Key conclusions and assessments – Responsibility B (Resources, regulatory and oversight responsibilities) - The Law of the CBBH mainly establishes the operational responsibilities of the central bank, including: - (i) promoting or establishing and maintaining appropriate payment and settlement systems; - (ii) entering into international clearing and payment arrangements; and - (iii) organizing facilities for the clearing and settlement of interbank payments. - Powers to discharge oversight responsibilities for FMIs are not clearly established in the Law of the CBBH. - Resources in the Payment Systems Department are focused on carrying out operational duties in the payment system, and other services that are not directly related to inter-bank settlements such as maintain the transaction registry and credit registry. - Staff have not received adequate training on FMI oversight in the past two years, especially on the new CPMI-IOSCO PFMIs, which were released in April 2012. - Assessment of Responsibility B Partly Observed ### Recommendations and comments – Responsibility B - Strengthen the legal framework to designate payment systems, and to protect settlement finality and netting in line with international standards. - Establish a new oversight unit in the Payment Systems Department, which is staffed with sufficient resources to carry out oversight responsibilities. - Establish memorandum of understanding to strengthen the oversight of clearing agents, settlement banks, international payment clearing, and cooperation with relevant authorities. ### Responsibility C — Disclosure of Policies with Respect to Financial Market Infrastructures - Key Consideration 1: There is no clearly defined policy document with respect to FMIs. - Key Consideration 2: Disclosure of policies and developments with respect to the RTGS system are contained in the CBBH Annual Report, CBBH Financial Stability Report, and the CBBH website. - The CBBH Annual Report includes a section on payment systems that describe developments in inter-bank versus intra-bank payment systems, and the performance of the payment cards market. The section on Financial Statements and Report of Independent External Auditor includes a description of credit and operational risks relating to the domestic payment and settlement system. - The CBBH Financial Stability Report includes a section on financial infrastructure which covers payment systems and regulatory framework. - The CBBH website contains information on regulations, statements, tariffs, and transaction reports relating to the RTGS system. - Key Conclusions for Responsibility C: The CBBH’s responsibilities in the payment system are disclosed through its Annual Report, Financial Stability Report, and website. However, there does not appear to be a coherent oversight policy document with respect to the RTGS system, which clearly describes its objectives, roles, and regulations. - Assessment of Responsibility C Broadly Observed - Recommendations and Comments: - Develop a policy document to clearly define and disclose the regulatory, supervisory, and oversight policies of the CBBH with respect to the RTGS system. ### Responsibility D — Application of the Principles for Financial Market Infrastructures (PFMIs) - Key Consideration 1: The CBBH has not formally adopted the CPMI-IOSCO PFMIs, but plans to adopt them after the completion of assessment of observance of the RTGS system and authorities’ responsibilities against the CPMI-IOSCO under the IMF-World Bank Financial Sector Assessment Program. - Key Consideration 2: The CBBH has not formally applied the CPMI-IOSCO PFMIs to the RTGS system, but plans to adopt them after the completion of assessment of observance of the RTGS system and authorities’ responsibilities against the CPMI-IOSCO under the IMF-World Bank Financial Sector Assessment Program. - Key Consideration 3: The CBBH has not formally applied the CPMI-IOSCO PFMIs to the RTGS system. There are no links with overseas jurisdictions. - Key Conclusions for Responsibility D: The CBBH has not adopted the CPMI-IOSCO Principles for financial market infrastructures and apply them consistently, but have plans to do so after the completion of assessment of the RTGS system and authorities’ responsibilities against the CPMI-IOSCO under the IMF-World Bank Financial Sector Assessment Program. - Assessment of Responsibility D Partly Observed - Recommendations and Comments: - Adopt the CPMI-IOSCO PFMIs with a time-bound plan and apply them consistently to the RTGS system. ### Responsibility E — Cooperation with Other Authorities - Key Consideration 1: The CBBH, banking agencies, and securities commissions in the entities have an interest in promoting the safety and efficiency of the payment system in BiH. - The CBBH: operational and oversight responsibilities of the RTGS system; maintains the settlement account of banks in the payment system. - Entity Banking Agencies (the FBA and BARS): responsible for banking supervision in each respective entity; regulate and supervise commercial banks which are RTGS participants; provide advanced notice to the CBBH which makes decisions to suspend a bank from the RTGS system; oversee financial integrity of internal payment systems to prevent use in money laundering. - Entity Securities Commissions: oversight responsibilities for the CSDs and SSSs in their jurisdictions. - The CBBH and CSDs in the FBiH and the RS have cooperated to improve the efficiency of cash settlements after securities trading, including meetings with central banks and CSDs in Serbia and Croatia. - Key Consideration 2: The RTGS system settles on domestic currency payments and has no interdependencies with cross-border or multi-currency FMIs. - The CBBH and the National Bank of Serbia (NBS) signed an Agreement on Clearing of Payments in Foreign Exchange in 2007. The NBS acts as the clearing operator to enable international payment clearing services in euros to be provided by commercial banks in BiH and Serbia. Multilateral net positions are calculated by each central bank and settled through a giro account held by commercial banks at the NBS. Final settlement is effected in an overseas commercial bank (Deutsche Bank AG Frankfurt). - A similar agreement was signed between the CBBH and the Central Bank of Montenegro in September 2007. - Key Consideration 3: Forms of cooperation: - The Memorandum on the Principles of Coordination of Banking Supervision and Cooperation and Exchange of Data and Information of June 2008 establishes the basis for cooperation between the CBBH and banking agencies in the entities. Specific provisions applicable to payment systems include Articles 7, 8, 10, and 13 covering exchange of data and information on banking sector situation, reserve maintenance, and payment operations. - The Memorandum of Understanding on the Establishment of the Standing Committee for Financial Stability of December 2009 provides a broader framework for cooperation across five authorities (Fiscal Council, CBBH, BARS, FBA, and the BiH Deposit Insurance Agency) including preparation of common assessments, contingency plans, stress testing, and coordination in crises. - The CBBH has no formal cooperative arrangements with securities commissions in the entities. - Efficiency and effectiveness: - Under the Memorandum, the CBBH and EBAs meet on quarterly basis at the minimum or as required. The CBBH Governor serves as chairperson. The PSD could propose an agenda on payment systems to be discussed at such meetings. - Key Considerations 4–6: Not applicable — There are currently no FMI links and the RTGS system settles only in domestic currency. The CBBH has primary responsibilities and conducts its own assessment of the RTGS system. - Key Consideration 7: EBAs provide advanced notification to the CBBH regarding the financial conditions of a commercial bank which may have an adverse impact on the payment system. - Key Consideration 8: Not applicable. - Key Consideration 9: CBBH may discourage use of an FMI or suspend services if not prudently designed or managed; a clear rationale should be provided. - Key Consideration 10: The Memorandum establishes that cooperative arrangements do not prejudice statutory powers of participating authorities and emphasizes mutual cooperation, trust and observance of work independence. - Key Conclusions for Responsibility E: - The CBBH and entity banking agencies cooperate on cross-cutting issues under a memorandum of understanding. However, advanced notification and coordination between competent authorities on the planned closure of a problem bank and its consequential suspension from the payment system could be further improved to prevent the unwinding of payments following a court order. Although the CBBH and entity securities commissions have a common interest in promoting safe and efficient FMIs, there is no formal cooperation. - Assessment of Responsibility E Broadly Observed - Recommendations and comments: - Improve the advanced notification from the entity banking agencies to the CBBH in order to coordinate the timely closure of a bank and its suspension from the payment system. - Establish a memorandum of understanding between the CBBH, entity banking agencies, and entity securities commissions to collaborate on the development, regulation, supervision, and oversight of FMIs, respecting the mandates of each competent authority. ### Authorities' response to the assessment (selected points) - Since 2005 the CBBH has had a Commission for the Oversight of Payments Systems Operations established by the Governing Board, tasked to elaborate the framework of the oversight in line with policies and criteria for the FMI according to the “old” principles. - In 2012, new principles were released (23 instead of then 10). - The CBBH will publish the translation of new CPMI-IOSCO principles (23 principles) on its web site and work out the criteria for the identification of FMI that will be mandatory for all participants. - The Governing Board will decide which recommended variant of oversight is optimal for implementation in the CBBH and will publish it in format of enactments in the Official Gazettes of BH, RS and FBH, within the set deadline, adhering to the provisions of the CBBH Law. - Internal audit has assessed the oversight of payments systems as very important business process in the Risk Map and defined it as a priority in performing the internal auditing process. - Within its authority, the CBBH will observe all recommendations from the Assessment of Observance of the CPMI/IOSCO Principles for Financial Market Infrastructures as per suggested deadlines. - The CBBH will regularly inform your team on implementation of each individual recommendation. *BOSNIA AND HERZEGOVINA INTERNATIONAL MONETARY FUND* --- _Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2015/_cr15217.pdf_