## _cr16170 ## Source details **Canonical URL:** [_cr16170](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2016/_cr16170.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2016/_cr16170.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2016/_cr16170.pdf.json) --- ### Executive summary — major achievements and context - Since the FSAP of 2005, the Central Bank of Bahrain (CBB) has modernized the financial market infrastructure (FMI). - Key milestones: - In 2007, the real-time gross settlement system and securities settlement system for government securities (also acting as a central securities depository) were launched. - Central bank intraday credit in the payment system has been fully collateralized. - The CBB and Financial Institutions Law was promulgated on September 6th, 2006. - A new payment system policy and oversight unit was established. - The Near Real-Time Electronic Funds Transfer System (EFTS) went live in the fourth quarter of 2015. ### Overall risk profile and observance summary - System interdependence and concentration: - RTGS is highly concentrated and tightly interdependent with the SSS; interdependencies at system, institutional, and environmental levels create oversight challenges. - Potential risk types identified: - Legal risks from legal uncertainty in case of participant insolvency. - Credit and liquidity risks under extreme but plausible market conditions. - Operational risks from wide-scale or major disruptions and failure of critical service providers. - Observance results: - RTGS system: observes 6 principles, broadly observes 10 principles, partly observes 2 principles. - SSS system: observes 8 principles, broadly observes 10 principles, partly observes 2 principles. ### Key findings and prioritized recommendations - Legal basis - Finding: Legal basis relatively sound. - Recommendation: Strengthen legal certainty for finality and netting arrangements in primary legislation; seek independent legal opinion on legal certainty for finality and netting arrangements. — CBB — Near-Term / Immediate (as listed) - Governance - Finding: Governance arrangements are clear and transparent, but gaps remain. - Recommendations: - Clarify roles and responsibilities of the Board and management. - Broaden Payments Committee (PC) representation to include legal, capital markets supervision, financial stability, and retail banking supervision directorates. - Increase Board involvement in establishing a comprehensive risk management framework and in regular risk monitoring; report risks to the Board on a quarterly basis. - Implement a staff succession plan for FMIs. - Comprehensive risk management framework - Finding: Risk management measures dispersed across various technical documents. - Recommendation: Develop a consolidated risk management framework covering legal, credit, liquidity, operational, and other risks, including interdependencies and closer cooperation among relevant Directorates. - Credit risk - Finding: Credit risk mitigated by high quality collateral but exposures remain because current policy applies no haircut. - Recommendations: - Review the credit risk management framework. - Apply haircuts to intraday credit (IDC) and overnight repos conducted between the central bank and direct members of the RTGS. - Liquidity risk - Finding: Well managed under normal conditions but not stress-tested. - Recommendations: - Conduct a stress test including default of the largest participant and affiliates. - Establish and monitor throughput rates. - Analyze and regularly report the share of liquidity usage in RTGS from core banking accounts, intraday credit, and incoming payments. - Adopt tools to monitor intraday liquidity flows. - Participant default rules and procedures - Finding: Established rules and procedures exist. - Recommendation: Improve effectiveness through greater legal certainty for finality in primary legislation and make rules precise with regular reviews and testing. - Operational risk - Finding: Well managed but could be improved. - Recommendations: - Enhance the business continuity plan (BCP) so critical IT systems can resume within two hours following wide-scale disruptions and RTGS can complete settlement by end of day. - Monitor and publicly disclose systems availability against the target of 99 percent. - Conduct comparative risk analysis of secondary site; secondary site should be geographically distant and have a distinct risk profile. - Increase frequency of business continuity testing, including participant–DRR tests. - Analyze scalable capacity for increasing stress volumes. - Identify and establish oversight expectations for critical service providers located in Bahrain. - Access and tiered participation - Finding: High concentration in the payments system. - Recommendation: Identify indirect participants/users responsible for significant proportions of transactions; consider RTGS membership for such indirect participants subject to appropriate risk management criteria. ### RTGS and SSS — key features, operational details, and statistics - RTGS system (CBB) - Settles high value interbank and customer payments and net clearing obligations from private retail systems. - Participants: 28 direct members (licensed retail banks with SWIFT network membership and SSS membership) and restricted members permitted to submit multilateral net settlement batches (MNSBs). - Operational hours on business days: from 8:00 a.m., to 2:07 p.m. - Settles on a gross basis, in real time, in central bank money, with finality (subject to funds availability). - Participants have access to intraday credit (IDC), fully collateralized against government securities held in SSS system and BD deposits. - Liquidity management tools include a gridlock mechanism and ascending fee schedule to encourage early submission. - Operational resilience: DRR site / near relocation area supports business continuity. - Key statistics: - RTGS transaction value: BD 63 billion in 2014. - RTGS value relative to GDP: around 5 times of GDP. - Average daily value of RTGS transactions: BD 289 million at end-August 2015. - Top 5 participants account for about 70 percent of transaction values. - Transactions per minute capacity: around 44 transactions per minute; transactions were around 12 transactions per minute in 2014. - Peak daily RTGS transactions settled: 8,778 on October 27, 2015. - Systems availability target: 99 percent. - Scripless Securities Settlement (SSS) System (CBB, also CSD for government securities) - Settles primary and secondary market government securities transactions in real time on a DVP1 basis through integration with RTGS. - Membership: - 28 direct participants (licensed retail banks including conventional and Islamic, the CBB, and BHB). - 17 indirect members (pension funds, insurance companies, international government institutions, local and foreign financial and investment institutions, and wholesale banks). - Statistics: - Total value of transactions settled in 2014: BD 7.3 billion (around 58 percent of GDP). - Scripless securities held in system at end-August 2015: BD 4.2 billion. - For first eight months of 2015: 3,151 DVP1 transactions with value BD 9.1 billion settled. - 17 free-of-payment transactions worth BD 23.9 million settled. - Fees: No transaction fees; direct SSS members pay an annual membership fee. - Risk: Settlement risk minimized by DVP1 simultaneous transfer of securities and money legs. ### Legal, governance, and institutional framework - Legal instruments and disclosure: - Primary legal basis: CBB Law; RTGS (Membership) Regulations of 2007; RTGS (Membership) Business Operating Guidelines of 2007; SSSS (Membership) Regulations of 2007; SSSS (Membership) Business Operating Guidelines of 2007; undertakings and standing instructions; CBB directives and circulars. - RTGSMR, RTGSMBOG, SSSMR, and SSSMBOG are publicly available on the CBB website. - Legal enforceability and finality: - Membership business operating guidelines establish settlement finality and irrevocability (RTGSMBOG Chapter 7 Clause 2; SSSMBOG Chapter 6 Clause 5). - Limitation: It cannot be ruled out that a transaction settled in RTGS and SSS can be revoked by a court order in the event of insolvency of a participant. - Assessment of Principle 1: Partly Observed. - Governance arrangements: - CBB Board: 7 Directors appointed by Royal Decree for renewable 4 year terms; Governor appointed for renewable 5 year term. - Governor must present report to Board within three months following end of each financial year. - Operational responsibility: - RTGS and SSS operated by Banking Services Directorate (BSD); oversight and policy via Payments Committee (PC) chaired by Executive Director of Banking Operations (EDBO). - ITD provides IT infrastructure including SWIFT; Capital Markets Supervision Directorate (CMSD) oversees non-government securities systems and BHB. - Governance gaps noted: - Board reporting focused on volumes/values rather than risk analysis. - Some senior officials assigned additional duties beyond FMI oversight; Deputy Governor position vacant as of December 20, 2015. - FMI risk analysis limited in scope and depth. - Assessment of Principle 2: Broadly Observed. - Recommendations (selected): Report RTGS/SSS risks quarterly to Governor/Board; develop staff succession plan; broaden PC membership. ### Risk management, credit, collateral, and liquidity details - Risk framework documents: - CBB Crisis and Incident Management Plan; CBB BCP; Recovery Strategy document; RTGS/SSS membership regulations and business operating guidelines; directives. - Credit and collateral: - IDC and repo are fully collateralized with government securities or BD deposits. - Current policy: no haircut applied to IDC/overnight repo between CBB and RTGS members despite the CBB having an established haircut policy in accordance with Basel standards. - Size of IDC/overnight repo: - Around BD 2.21 billion for the first 9 months of 2015. - Generally between BD 1–2 billion annually for 2010–2014. - Recommendation: Apply conservative haircuts to align with PFMI and central bank practices elsewhere; review collateral valuation policy as securities market evolves. - Liquidity risk and stress testing: - Liquidity tools: automatic IDC/overnight repo, gridlock detection, queuing of transactions. - Concentration: RTGS transaction value around BD 63 billion in 2014; top 5 participants account for about 70 percent of transaction values. - Recommended actions: - Stress test RTGS/SSS including default of largest participant and affiliates. - Establish and monitor throughput rates. - Analyze and report share of liquidity usage from core banking accounts, IDC, incoming payments. - Adopt intraday liquidity monitoring tools. - Participant-default rules: - RTGS and SSS settle in real time on gross and DVP1 basis respectively; CBB provides fully collateralized IDC and gridlock resolution mechanisms. - Default procedures: suspension or termination of defaulted member in consultation with respective supervision directorates. - Assessment of Principle 13: Broadly Observed. - Recommendation: Improve default procedures through regular reviews and testing with participants and stakeholders. ### Operational risk, continuity, IT and security - Operational framework: - BCP establishes recovery objectives; BCP tested once a year. - Recovery time objective (RTO): two hours and 30 minutes. - Maximum tolerable downtime objective: three hours. - NRA/DRR located nearly 20 kilometers from primary site; DRR is a ‘warm’ backup; DRR test frequency: once a year. - Member disaster recovery requirements include redundant SWIFT Alliance hardware and testing; members must perform daily system/data back-up and restore. - Performance and capacity: - System availability target: 99 percent. - Recovery time objective: two hours and 30 minutes. - RTGS capacity: around 44 transactions per minute; transactions were around 12 transactions per minute in 2014. - Peak daily RTGS transactions: 8,778 on October 27, 2015. - Recommendations: - Enhance BCP to resume critical IT systems within 2 hours; enable RTGS to complete settlement by day-end following disruption. - Monitor and publicly disclose systems availability against 99 percent target. - Conduct comparative risk analysis of secondary site; increase frequency of business continuity testing; analyze scalable capacity; set oversight expectations for critical service providers. ### Access, tiering, FMI links, efficiency and transparency - Access and participation: - RTGS membership generally provided to retail banks fulfilling eligibility requirements (SWIFT, BKS core banking accounts); at end-August 2015 there were 28 direct RTGS members. - SSS membership: 28 direct members and 17 indirect members as of end-August 2015. - Recommendation: Review access and participation requirements regularly; identify indirect participants/users responsible for significant RTGS transactions and consider RTGS membership for them subject to risk criteria. - Tiering: - No tiered participation arrangement for RTGS; tiered participation present in SSS. - FMI link: - FMI link exists between SSS and BHB; risk implications low because SSS settles on DVP1 and BHB is overseen by CBB. - Efficiency and transparency: - RTGS and SSS use SWIFT and provide efficient payment and settlement services. - Fees: - RTGS transaction fees: BD 0.400 per transaction settled from 8:00 a.m. to 1:00 p.m.; BD 0.550 per transaction settled from 1:00 p.m. onwards. - Penalty: BD 10 for every rejected/cancelled payment. - Fee for extension of RTGS-SSS operating hours: BD 50 per 15 minutes, maximum extension of 1 hour; special RTGS accommodation for replies to checks: BD 100 per 15 minutes. - SSS charges annual membership fees only; no transaction fees. - Disclosure: RTGSMR, RTGSMBOG, SSSMR, and SSSMBOG and fee schedules publicly disclosed on CBB website. - Recommendation: Publicly disclose responses to the CPMI-IOSCO Disclosure Framework. ### Authorities’ responsibilities, resourcing, and prioritized actions - Institutional responsibility: - CBB is sole regulator for Bahrain’s financial services industry and has oversight and supervisory responsibilities for FMIs. - Legal authority: CBB Law (Article 32b, Article 39, Article 111, Article 4). - Organizational resourcing (BSD staff numbers as of September 30, 2015): - Payment and Settlement Section: four staff (operates RTGS and BKS core banking systems). - Monetary Management Section: three staff (operates SSS system). - Payment System Policy and Oversight Section: two staff (oversees RTGS/SSS and important retail systems) — Head and one officer vacant as of September 30, 2015. - Monetary Policy Section: one staff (one officer vacancy noted). - CMSD Market Surveillance unit: four officials (one head, one superintendent, two analysts). - Responsibilities assessments: - Responsibility A (criteria for identifying FMIs): Partly Observed — criteria to identify FMIs for oversight not clearly defined and publicly disclosed. - Responsibility B (oversight powers and resources): Broadly Observed — powers exist; resources and separation of duties could be enhanced. - Responsibility C (disclosure of policies): Broadly Observed. - Responsibility D (application of PFMIs): Broadly Observed — PFMIs applied; formal Board adoption pending. - Responsibility E (cooperation with other authorities): Partly Observed — GCC cooperation exists; cross-border supervisory cooperation should be strengthened. - Prioritized recommendations (selected highlights and timeframes) - Legal certainty for finality and netting arrangements: Seek independent legal opinion and strengthen primary legislation. — CBB — Near-Term - Governance and reporting: Report RTGS/SSS risks quarterly to the CBB Board; develop staff succession plan; broaden PC membership. — CBB — Immediate - Comprehensive risk management framework: Develop consolidated framework covering legal, credit, liquidity, operational risks; foster cooperation among Directorates. — CBB — Immediate - Credit risk (haircuts): Review credit risk framework and apply haircuts to IDC and overnight repos between CBB and RTGS direct members. — CBB — Immediate - Liquidity concentration risk: Stress test RTGS/SSS including default of the largest participant; establish throughput rates; adopt intraday monitoring tools. — CBB — Near-Term - Business continuity and operational resilience: Enhance BCP to resume critical IT systems within 2 hours and complete RTGS settlement by day-end; publicly disclose availability vs 99 percent target; test secondary site; increase continuity testing; analyze scalable capacity; set oversight expectations for critical service providers. — CBB — Near-Term - Access and participation: Review access requirements regularly; identify large indirect participants/users and consider RTGS membership subject to risk criteria. — CBB — Near-Term - Disclosure: Publicly disclose responses to the CPMI-IOSCO Disclosure Framework. — CBB — Immediate - Timeframe definitions provided in report: - “Immediate” is within one year; “near –term” is 1–3 years; “medium-term” is 3–5 years. ### CBB response to the IMF assessment (selected points) - CBB position: - Expressed gratitude for IMF ROSC mission and commitment to follow PFMIs; will work towards implementing IMF recommendations but notes reservations where recommendations may not reflect Bahrain-specific circumstances. - Legal risk and insolvency: - CBB comments: "a licensee cannot be insolvent/bankrupt without the knowledge of the CBB. It can either be under administration or in liquidation." - CBB asserts: "In the case of liquidation, an RTGS transaction which has already settled cannot be cancelled/revoked/undone." - Measures cited: - (i) all RTGS members are retail banks supervised by the CBB; - (ii) Article 58 of the CBB Law requires licensees to notify CBB immediately of matters affecting financial position; - (iii) any licensed bank likely to become insolvent is required to immediately cease making payments in RTGS and SSS unless the CBB permits otherwise in writing. - Governance and PFMI adoption: - CBB notes Article 8(2) of CBB Law assigns Board overall policy responsibilities and states adoption of PFMIs could be done with approval of the Governor rather than formal Board resolution. - CBB is developing a policy document to publicly disclose regulatory, supervisory, and oversight policies with respect to all FMIs. - Oversight of critical service providers: - CBB response: All critical service providers located in Bahrain are licensed, regulated, supervised and overseen by the CBB; oversight expectations are established in Directives, MOUs and agreements; interdependencies are managed accordingly. - Concentration and indirect participants: - CBB notes indirect participants and other financial institutions are not permitted to provide BD payment services in Bahrain (except credit/e-money cards); wholesale banks operations in domestic market limited to residents and initial balances/transactions often with a minimum amount of BD 7 million. *Source: IMF assessment as contained in the provided Executive Summary and excerpts from chapters of _cr16170.* ### EXECUTIVE SUMMARY __________________________________________________________________________ 5 ### EXECUTIVE SUMMARY ### Major achievements and context - Since the Financial Sector Assessment Program (FSAP) of 2005, the Central Bank of Bahrain (CBB) has modernized the financial market infrastructure (FMI) to mitigate potential risks and support the wider economy. - Key milestones: - In 2007, the real-time gross settlement system and securities settlement system for government securities (which also acts as a central securities depository) were launched. - Central bank intraday credit in the payment system has been fully collateralized. - The CBB and Financial Institutions Law was promulgated on September 6th, 2006. - A new payment system policy and oversight unit was established. - The Near Real-Time Electronic Funds Transfer System (EFTS) went live in the fourth quarter of 2015. ### Overall risk profile and systemic interdependence - The real-time gross settlement (RTGS) system is highly concentrated and tightly interdependent with the securities settlement system (SSS), making risk management a top priority. - Potential risk types identified: - Legal risks arising from legal uncertainty in the event of insolvency of a participant. - Credit and liquidity risks under extreme but plausible market conditions. - Operational risks from wide-scale or major disruptions and failure of critical service providers. - Increasing interdependencies at system, institutional, and environmental levels, creating oversight challenges. ### Observance summary (RTGS and SSS) - Formal assessment results: - RTGS system: observes 6 principles, broadly observes 10 principles, and partly observes 2 principles. - SSS system: observes 8 principles, broadly observes 10 principles, and partly observes 2 principles. ### Key findings and recommendations - Legal basis - Finding: Legal basis is relatively sound. - Recommendation: Finality and netting arrangements require greater legal certainty and protection in primary legislation to strengthen participant-default rules and procedures. - Governance - Finding: Governance arrangements are clear and transparent, but gaps remain. - Recommendations: - Clarify roles and responsibilities of the Board and management. - Broaden representation in the Payments Committee. - Increase Board involvement in establishing a comprehensive risk management framework for the RTGS and SSS systems and in regular risk monitoring. - Report risks to the Board on a quarterly basis. - Implement a staff succession plan to ensure appropriate experience and skills for operational and risk management responsibilities for FMIs. - The Payments Committee should include representatives from legal, capital markets supervision, financial stability, and retail banking supervision directorates. - Comprehensive risk management framework - Finding: Risk management measures are dispersed across various technical documents. - Recommendation: Develop a consolidated risk management framework to comprehensively manage legal, credit, liquidity, operational, and other risks, including assessment of interdependencies and fostering closer cooperation among relevant Directorates. - Credit risk - Finding: Credit risk is managed with the use of high quality collateral, but exposures remain because the current policy applies no haircut. - Recommendations: - Review the credit risk management framework. - Apply haircuts to intraday credit and overnight repos conducted between the central bank and direct members of the RTGS. - Liquidity risk - Finding: Liquidity risk is well managed under normal conditions but should be tested against stress scenarios. - Recommendations: - Conduct a stress test of the default of the largest participant and affiliates in the payments and securities settlement systems. - Establish and monitor throughput rates. - Analyze and regularly report the share of liquidity usage in the RTGS from core banking accounts, intraday credit, and incoming payments. - Adopt tools to monitor intraday liquidity flows to assess sufficiency of liquidity, particularly during a stressed event. - Participant default rules and procedures - Finding: Established participant-default rules and procedures exist. - Recommendation: Improve effectiveness through greater legal certainty for finality in primary legislation and make rules precise with regular reviews and testing. - Operational risk - Finding: Operational risk is well managed but could be improved. - Recommendations: - Enhance the business continuity plan to ensure critical information technology systems can resume operations within two hours following wide scale disruptions and to enable completion of settlement by the end of the day. - Monitor and publicly disclose systems availability against the target of 99 percent. - Conduct a comparative risk analysis of the secondary site; the secondary site should be located at a geographical distance from the primary site that has a distinct risk profile. - Increase the frequency of business continuity testing, including tests between participants and the disaster recovery relocation site. - Analyze scalable capacity to ensure adequacy for increasing stress volumes. - Identify and establish oversight expectations for critical service providers located in Bahrain. - Access and tiered participation - Finding: High concentration in the payments system. - Recommendation: Manage concentration risks by identifying indirect participants or users responsible for a significant proportion of transactions; consider membership for such indirect participants or users subject to appropriate risk management criteria. ### Authorities’ responsibilities — observance and recommendations - Observance: Authorities’ responsibilities are broadly or partly observed. - Recommended actions for authorities: - Establish and publicly disclose clear criteria for identifying FMIs. - Enhance powers and resources for discharging oversight responsibilities by: - Strengthening the legal basis. - Further separating oversight and operational duties. - Filling staffing vacancies and developing succession plans and training programs. - Develop a policy document to clearly define and disclose the regulatory, supervisory, and oversight policies of the CBB with respect to all FMIs in Bahrain. - Formally adopt the Principles for FMIs by the Board, consistently apply the international standards for all FMIs in a time-bound plan, and identify and establish oversight expectations for critical service providers located in Bahrain. - Expand cooperation with overseas authorities to promote the safety and efficiency of FMIs. ### Scope, methodology, and coverage (assessment context) - Scope: - The assessment covers the RTGS and SSS systems (the SSS being also a CSD) and the CBB as the authority responsible for their oversight and supervision. - The assessment does not cover payment and securities settlement systems operated by the private sector. - Methodology: - RTGS assessed using 18 of the 24 CPMI-IOSCO Principles for FMIs applicable to payment systems. - SSS/CSD assessed using 21 of the 24 Principles applicable to securities settlement systems. - The CBB assessed against Responsibilities A to E. - The RTGS and SSS systems are technically integrated; the assessment is presented jointly. - The methodology was derived from the CPMI-IOSCO PFMI Disclosure Framework and Assessment Methodology of December 2012. - Inputs: - Prior to the mission, the CBB completed self-assessments for the RTGS and SSS systems and authorities’ responsibilities against the PFMIs, and the Questionnaire on FMIs in Bahrain. - Relevant laws, CBB Annual Reports, CBB Financial Stability Reports, and CBB RTGS and SSS regulations and business operating guidelines were reviewed. - Assessors held discussions with CBB officials and met representatives from commercial banks and Bahrain Bourse (BHB). ### Overview of FMIs in Bahrain (selected operational details) - Number and types: - There are six FMIs located in Bahrain: four payment systems and two securities settlement systems that function as central securities depositories (CSDs). - No central counterparties or trade repositories. - RTGS system: - Settles high value interbank payments and customer payments individually in real time. - Participants include 28 direct members (licensed retail banks with SWIFT network membership and SSS membership) and restricted members permitted to submit multilateral net settlement batches (MNSBs). - Operational hours on business days are from 8:00 a.m., to 2:07 p.m. - The RTGS system is integrated with the SSS. - Bahrain Cheque Truncation System (BCTS): - Operated by The BENEFIT Company (TBC) to clear checks based on images. - Customers who deposit checks at their banks before 11:30 a.m., on a business day receive check proceeds on the same day by 3:00 p.m. - BENEFIT (Bahrain Electronic Network for Financial Transactions): - Operated by TBC, mainly providing debit card based transactions including: cash withdrawals at ATMs (including GCCNET shared ATM services), debit card transactions at POS terminals (including GCCNET shared POS service), direct debits, and online e-commerce debit card transactions through the Payment Gateway (PG). - Near Real-Time Electronic Fund Transfer System (EFTS): - Enables account-to-account near real time fund transfers within 30 seconds (Fawri+). - Also offers deferred batch payments (Fawri) and electronic bill presentment and payment (Fawateer), which clear and settle multiple times during banking hours. - EFTS was launched on November 5, 2015. - Scripless Securities Settlement (SSS) System and CSD functions: - Operated by the CBB; settles primary and secondary market government securities transactions in real time on a DVP 1 basis through seamless integration with the RTGS. - There are 28 direct participants, including licensed retail banks (both conventional and Islamic), the CBB, and BHB. - There are 17 indirect members (pension funds, insurance companies, international government institutions, local and foreign financial and investment institutions, and wholesale banks). - The SSS acts as a CSD for government securities issued by the CBB in scripless form and records holdings of direct members and, at the aggregate level, their customers and indirect members. - Central Securities Depository of Bahrain Bourse (CSD-BHB): - Acts as a centralized depository for dematerialized or immobilized securities (equity and debt). - Clears and settles electronically on a DVP 2 basis the securities transactions traded at the Automated Trading System (ATS) on T+2. - Since January 2015, the CBB has provided allotment of government securities for retail investors through BHB at primary issuances/auctions; CSD-BHB has acted as a centralized depository for government securities purchased in the primary market by retail investors through BHB and listed on BHB. *Source: IMF assessment as contained in the provided Executive Summary.* ### 6. The CBB RTGS system is systemically important and has established arrangements to ### 6. The CBB RTGS system is systemically important and has established arrangements to ### CBB RTGS system — key features and statistics - Handles large-value interbank and customer payments and settles net clearing obligations from two retail payment systems privately operated by the TBC. - As of 2014, the total value of transactions settled was BD 63 billion, which was around 5 times of GDP. - The average daily value of RTGS transactions was BD 289 million at end-August 2015. - Transactions are processed and settled continuously and irrevocably in real-time. - Final settlement is executed by entries to participants’ settlement accounts held at the CBB. - Settlement basis and risk controls: - Settled on a gross basis, in real time, in central bank money, and with finality (subject to funds availability). - Participants have access to intraday credit (IDC), fully collateralized against government securities held in the SSS system and BD deposits. - Liquidity management is facilitated by a gridlock mechanism. - RTGS transactions are charged with an ascending fee schedule to encourage early submission of payment instructions. - Operational resilience: - Measures in place to ensure high system availability. - Disaster recovery relocation (DRR) site or near relocation area (NRA) supports business continuity. ### CBB Scripless Securities Settlement System (SSS) - Serves as settlement system for government securities and as a centralized securities depository; is systemically important. - Provides electronic platform for settlement of primary and secondary market transactions in government securities. - Seamless integration with RTGS enables real time settlement of securities transactions on DVP1 basis. - Enables CBB to provide short-term liquidity to required direct SSS members through collateralized securities repo (IDC, overnight or Islamic ‘repo’) against eligible collateral. - Membership: - Direct members access liquidity facilities; indirect SSS members administer SSS accounts in offline mode through the CBB. - Statistics: - As of 2014, total value of transactions settled amounted to BD 7.3 billion, which was around 58 percent of GDP. - At end-August 2015, scripless securities held in the system amounted to BD 4.2 billion. - For the first eight months of 2015, 3,151 DVP1 transactions with a value of BD 9.1 billion were settled in the SSS system. - In addition, 17 free-of-payment transactions worth a total of BD 23.9 million were settled. - Risk and fees: - Settlement risk minimized via simultaneous transfer of securities in SSS against money leg in RTGS in central bank money. - SSS has a business continuity plan (BCP) similar to RTGS. - There are no transaction fees in the SSS; direct SSS members are required to pay an annual membership fee. ### Regulatory, supervisory, and oversight structure - Legal and institutional empowerment: - CBB has oversight and supervisory responsibilities for FMIs as single regulator for Bahrain’s financial services industry. - The CBB and Financial Institutions Law of 2006 empowers the central bank to establish clearinghouses, assign management to third parties, and issue regulations regarding clearing and settlement (Part 1, Chapter 6, Article 32). - CBB Law promulgated on September 6, 2006 with Decree No. 64 established CBB as successor to Bahrain Monetary Authority. - CBB can issue regulations to payment service providers and participants to ensure compliance with sound principles; law expanded CBB powers including regulation of capital markets, offering of securities, and close-out netting. - Operational rules and guidelines: - Governing documents include: - RTGS (Membership) Regulations of 2007 - RTGS (Membership) Business Operating Guidelines of 2007 - SSSS (Membership) Regulations of 2007 - SSSS (Membership) Business Operating Guidelines of 2007 - Regulations set management, governance, membership rules, general duties; business operating guidelines specify membership types, accounts, transactions, communication procedures and standards, operational hours and sessions, settlement, IDC facility, gridlock resolution, queuing mechanisms, tariffs, and system administration. - Oversight of private-sector operators: - BCTS and ATM Clearing (operated by TBC) are subject to CBB directives, regulations, terms and conditions. - BHB (self-regulatory organization) is subject to CBB approval and relevant laws, regulations, directives, and operating rules. - CBB supervision of licensed clearing, settlement and central depository systems comprises on-site and off-site supervision per Clearing, Settlement and Central Depository Module of CBB Rulebook Volume 6. - Organizational responsibilities: - FMI oversight/supervision organized under two directorates: - Banking Services Directorate (BSD) reports to Executive Director of Banking Operations (EDBO); carries out payments and securities settlement operations and oversight. - Payments Committee (PC), appointed by CBB Governor and chaired by EDBO, responsible for regulatory and developmental work; PC comprises BSD and Information Technology Directorate (ITD) members and can appoint technical committees or invite external experts. - Capital Markets Supervision Directorate (CMSD) oversees non-government securities systems and licensing of payment service providers relating to financial institutions and capital markets; includes oversight of BHB CSD and market surveillance unit oversees BHB. ### Adoption of international standards and planned reforms - As of September 18, 2014, the CBB PC reviewed roles and responsibilities of BSD and highlighted potential conflicts of interest (e.g., BKS core banking system acting as operator, user, settlement agent, and overseer). - PC decided to adopt PFMI standards for oversight to ensure safety and efficiency of FMIs. - PC reviewed a concept paper recommending improvement to CBB’s organizational setup for policy, oversight and supervision, including: - Reasons for proposing improvement to current payment system oversight and supervision framework. - Proposal to establish an independent FMI Policy, Oversight and Supervision Unit. - Scope of oversight and supervision for the proposed unit. ### Summary assessment — observance of principles - RTGS system assessment: - Observes 6 principles. - Broadly observes 10 principles. - Partly observes 2 principles. - SSS system assessment: - Observes 8 principles. - Broadly observes 10 principles. - Partly observes 2 principles. - Has 1 non-applicable principle. - The assessment identifies issues of concern, gaps/shortcomings, recommended actions, relevant parties, and timeframes (details provided in associated tables). ### General organization (Principles 1–3) — legal and governance observations and recommendations - Legal basis: - CBB Law grants statutory responsibility and powers to operate, oversee, and regulate RTGS and SSS systems. - Membership regulations, business operating guidelines, and directives describe operational features, membership, CBB duties, collateral arrangements, and settlement finality. - CBB has disclosed legal basis to stakeholders and solicits feedback for material changes. - Potential legal risks remain: transactions settled in RTGS and SSS could potentially be revoked by court order in participant insolvency; deferred net settlement systems (BCTS, BENEFIT, and EFTS) need further legal protection. - International best practice recommendation: adopt explicit law on settlement finality to empower authorities to designate payment systems and fully protect finality and netting arrangements and eliminate ‘zero-hour rules’ in insolvency; could also be established in central bank law. - Mission recommendations: - Seek independent legal opinion on legal certainty for finality and netting arrangements. - Strengthen legal underpinnings for payments and securities settlement systems in primary legislation to protect settlement finality and netting arrangements. - Governance: - Governor must present report on CBB operations to the Board within three months following end of each financial year. - Governor receives quarterly reports on FMIs from EDBO via BSD; internal and external auditors audit RTGS and SSS operations. - PC conducts stakeholder consultations before proposing policy changes affecting FMIs. - Gaps and concerns: - Board reporting appears focused on transaction volumes and values rather than risk analysis. - Some senior officials assigned additional duties beyond FMI oversight. - As of December 20, 2015, Deputy Governor position remained vacant. - CBB Annual Report for 2012 and 2013 not publicly disclosed. - FMI risk analysis limited in scope and depth. - Mission recommendations: - Report risks relating to RTGS/SSS on a quarterly basis to the CBB Board covering legal, credit, liquidity, operational, and other related risks. - Develop a staff succession plan to ensure appropriate experience and skills for FMI operational and risk-management responsibilities. - Broaden PC membership to include representatives from legal, capital markets supervision, financial stability, and retail banking supervision directorates. ### Risk management and oversight (Principles 4–5 and 7) — credit, collateral, and liquidity - Current risk framework: - Risk management measures are contained in CBB Crisis and Incident Management Plan, CBB BCP, Recovery Strategy document, RTGS and SSS membership regulations, business operating guidelines, and directives. - PC reviews issues, recommends to Governor, and monitors implementation. - Reporting of RTGS and SSS performance is clear for transaction volumes and values, but less clear for risk-related and oversight issues affecting financial stability and public confidence. - Credit risk and collateral: - Counterparty credit risk from CBB short-term liquidity via IDC/overnight repo is mitigated by high quality local government securities and BD deposits as eligible collateral. - No haircut is currently applied to securities repo transactions conducted between CBB and RTGS members for payment and securities settlement purposes. - The CBB has an established haircut policy in accordance with Basel standards, but it is not applied to these specific repo transactions. - Size of IDC/overnight repo: - Around BD 2.21 billion for the first 9 months of 2015. - Generally between BD 1–2 billion annually for 2010–2014. - Collateral valuation and policy considerations: - High-quality collateral is only accepted for securities repo transactions, but current policy applies no haircut. - Recommendation to consider a conservative haircut to align with PFMI and central bank practices elsewhere. - Inactive government securities secondary market activities make it difficult to employ meaningful valuation policy, mark-to-market methodology, or concentration limits; CBB should review these as the securities market evolves. - Mission recommendations: - Review the credit risk management framework. - Apply appropriate haircuts to IDC and overnight repos conducted between the CBB and RTGS direct members. *Source: _cr16170 - 6. The CBB RTGS system is systemically important and has established arrangements to* ### 19. Liquidity risk is well managed under normal conditions, but should be tested against ### _cr16170 - 19. Liquidity risk is well managed under normal conditions, but should be tested against ### Liquidity risk and stress testing - Liquidity risk is well managed under normal conditions through tools such as short-term liquidity provision via automatic IDC/overnight repo, gridlock detection, and queuing of transactions. - Potential liquidity exposure during market stress is not known without sound stress testing with robust stress scenarios. - RTGS system considerations: - RTGS transaction value around BD 63 billion in 2014, almost 5 times of GDP. - Greater concentration of activity by top users: the top 5 participants account for about 70 percent of transaction values. - Recommended actions: - Stress test the RTGS/SSS systems, including the default of the largest participant and affiliates. - Establish and monitor throughput rates. - Analyze and report regularly the share of liquidity usage in the RTGS system from core banking accounts, IDC, and incoming payments. - Adopt tools to monitor intraday liquidity flows to assess sufficiency of liquidity, particularly during a stressed event. ### Settlement finality and legal certainty - RTGS transactions are settled in real time, on a gross basis, with finality and irrevocability; SSS transactions are DVP1, ensuring simultaneous gross settlement with finality. - Finality and irrevocability are established in membership business operating guidelines, but greater legal certainty is required in primary legislation. - It cannot be ruled out that a transaction settled in RTGS and SSS can be revoked by a court order in the event of insolvency of a participant. - Recommended actions: - Seek independent legal opinion on the legal certainty for finality. - Strengthen legal underpinnings for payments and securities settlement systems in primary legislation to protect settlement finality. ### Money settlements and central bank money - Money settlements are conducted in central bank money. - SSS system settles the fund leg of securities transactions in the RTGS system on DVP1 basis or through pre-funded clearing accounts in the BKS core banking system using central bank money. - The CSD-BHB does not use central bank money; use of central bank money could be considered where practical and available to limit settlement bank risk-related losses. ### Scripless securities and CSD/SSS features - The SSS system has a scripless feature and involves no physical delivery of securities; government securities have been issued in scripless or dematerialized form since June 2007. - The SSS serves as a CSD for government securities and records holdings of direct SSS members, their retail investors (at aggregate level), and indirect SSS members. - Principal risk is minimized by real time settlement of securities on DVP1 through integration of SSS and RTGS; indirect members may settle via pre-funded clearing accounts in the BKS core banking system. ### Default management - Participant-default rules and procedures exist but would be more effective with greater legal certainty for finality in primary legislation and with precise, regularly reviewed and tested procedures. - RTGS and SSS settle funds and securities in real time, on a gross and DVP1 basis, subject to funds availability. - Default procedures would include suspension or termination of the defaulted member in consultation with the respective supervision directorate. - Recommended actions: - Seek independent legal opinion on legal certainty for finality. - Strengthen legal underpinnings in primary legislation to protect settlement finality and netting arrangements. - Improve default procedures through regular reviews and testing with participants and stakeholders. ### General business, custody, and operational risk management - General business risk: - CBB owns and operates RTGS and SSS, managed on a not-for-profit basis to cover operating costs; charges are periodically reviewed. - Business risk is escalated to the PC with proposals for improvements. - Custody risk: - Custody risk is minimal; no investment risk involved. - Funds and securities under custody are subject to CBB accounting, safekeeping procedures, and internal controls; collateral consists of government securities and BD deposits. - Operational risk: - Operational risk is well managed but improvement is recommended. - Recommended actions: - Enhance the BCP to ensure critical IT systems can resume operations within two hours following wide scale disruptions; plan should enable RTGS to complete settlement by the end of the day of the disruption, even in extreme circumstances. - Monitor and publicly disclose systems availability against target of 99 percent. - Conduct comparative risk analysis of the secondary site; secondary site should be geographically distant and have a distinct risk profile. - Increase frequency of business continuity testing, including tests between participants and the DRR site. - Analyze scalable capacity adequate to handle increasing stress volumes and achieve service level objectives. - Identify and establish oversight expectations for critical service providers located in Bahrain. ### Access, tiering, and FMI links - Access and participation: - Publicly disclosed access and participation requirements for RTGS and SSS exist. - Recommended to review access and participation requirements regularly to ensure they remain objective, risk-based, and permit fair and open access. - Tiering: - No tiered participation arrangement for RTGS; tiered participation present in SSS. - Direct RTGS membership currently limited to retail banks meeting requirements such as SWIFT capabilities; clearing entities have restricted RTGS membership; other financial institutions have no RTGS membership. - Retail banks are direct SSS members; pension funds and wholesale banks are indirect SSS members. - Recommended actions: - Identify indirect participants/users responsible for a significant proportion of RTGS transactions and those whose volumes/values are large relative to the capacity of direct participants through which they access RTGS, to manage risks arising from these transactions. - Consider providing RTGS membership to such indirect participants/users subject to appropriate risk management criteria. - FMI link: - There is an FMI link between SSS and BHB; BHB is a direct SSS member and acts as a CSD for dematerialized and immobilized securities. - Risk implications are low because securities settlement takes place in the SSS on DVP1 and BHB is overseen by the CBB. ### Efficiency and transparency - Efficiency: - RTGS and SSS provide efficient and effective payment, securities settlement, and depository services. - Transaction fee or membership fee schemes are implemented for economic efficiency and cost recovery; fee levels are reviewed periodically. - Systems use SWIFT communication network and messages. - Transparency: - RTGS and SSS membership regulations, business operating guidelines, and fee schedules are publicly disclosed to participants and on the CBB website. - Documentation, training, and testing are provided to facilitate participants’ understanding of rules and system changes. - Recommended action: publicly disclose responses to the CPMI-IOSCO Disclosure Framework. ### Key statistics and ratings - RTGS transaction value: around BD 63 billion in 2014. - RTGS value relative to GDP: almost 5 times of GDP. - Concentration: top 5 participants account for about 70 percent of transaction values. - Systems availability target: 99 percent. - Table summaries (assessment categories): - RTGS System: Observed principles include 9, 12, 15, 16, 21, 22; Broadly observed include 2, 4, 5, 7, 8, 13, 17, 18, 19, 23; Partly observed include 1, 3. - CSD/SSS System: Observed principles include 9, 11, 12, 15, 16, 20, 21, 22; Broadly observed include 2, 4, 5, 7, 8, 13, 17, 18, 19, 23; Partly observed include 1, 3. ### Prioritized recommendations (selected highlights and timeframes) - Legal certainty for finality and netting arrangements: - Seek independent legal opinion and strengthen primary legislation to protect settlement finality and netting arrangements. — CBB — Near-Term - Governance and reporting: - Report risks relating to RTGS/SSS quarterly to the CBB Board; develop staff succession plan; broaden PC membership. — CBB — Immediate - Comprehensive risk management framework: - Develop a comprehensive RTGS/SSS risk management framework covering legal, credit, liquidity, and operational risks; review material risks from other entities and foster closer cooperation among Directorates. — CBB — Immediate - Credit risk from non-application of haircuts: - Review credit risk management framework and apply appropriate haircuts to IDC and overnight repos between CBB and RTGS direct members. — CBB — Immediate - Liquidity concentration risk: - Stress test RTGS/SSS including default of the largest participant; establish throughput rates; analyze and report liquidity usage shares; adopt intraday monitoring tools. — CBB — Near-Term - Default procedures: - Improve default procedures via regular reviews and testing with participants and stakeholders. — CBB — Immediate - Business continuity and operational resilience: - Enhance BCP to resume critical IT systems within 2 hours and complete RTGS settlement by day-end of disruption; publicly disclose availability against 99 percent target; analyze secondary site, increase continuity testing, analyze scalable capacity, and set oversight expectations for critical service providers. — CBB — Near-Term - Access and participation: - Review access requirements regularly; identify large indirect participants/users and consider RTGS membership for them subject to risk criteria. — CBB — Near-Term - Disclosure: - Publicly disclose responses to the CPMI-IOSCO Disclosure Framework. — CBB — Immediate - Timeframe definitions: - “Immediate” is within one year; “near –term” is 1–3 years; “medium-term” is 3–5 years. *Source: IMF assessment text in _cr16170 - 19. Liquidity risk is well managed under normal conditions, but should be tested against (chapter/section provided).* ### 37. The CBB is the sole regulator of the financial sector and has powers and resources to ### The CBB is the sole regulator of the financial sector and has powers and resources to ### Oversight powers and institutional capacity - The CBB is the sole regulator of the financial sector and has powers and resources to carry out its responsibilities in regulating, supervising, and overseeing FMIs. - The mission recommends enhancing powers and resources to effectively discharge these responsibilities, including: - strengthen the legal basis to protect settlement finality and netting arrangements, and designate FMIs that should be subject to oversight and supervision; - separate oversight and operational duties at the directorate level with clear reporting lines to avoid potential conflicts of interest; - develop a staff succession plan to ensure that the appropriate experience and mix of skills are available to discharge operational and risks management responsibilities for FMIs; - staff the vacant positions in the Payment System Policy and Oversight unit with qualified personnel; - introduce FMI-related training courses under the Bahrain Institute of Banking and Finance. ### Disclosure of policies with respect to FMIs (Responsibility C) - The CBB publicly discloses its policies with respect to the oversight of payment and settlement systems, which should be further improved. - The mission recommends developing a policy document to clearly define and disclose the regulatory, supervisory, and oversight policies of the CBB with respect to all FMIs in Bahrain. The policy document should contain: - (i) role of the CBB; - (ii) regulatory framework; - (iii) oversight objectives; - (iv) approach to risk management; - (v) oversight approach (risk-based approach, international standards, engagement and monitoring, assessing, and inducing change); - (vi) potential conflict of interest; - (vii) cooperation with domestic (where applicable) and overseas regulators. ### Application of the principles for FMIs (Responsibility D) - The CBB has applied the new international standards and should consider formal adoption by the Board. - The mission recommends: - (i) submit the PFMIs to the CBB Board for formal adoption into the legal and regulatory framework with a time-bound plan; - (ii) apply the PFMIs to the RTGS/SSS systems and all private sector FMIs consistently with a time-bound plan, and monitor follow-up actions; - (iii) identify and establish oversight expectations for critical service providers located in Bahrain. ### Cooperation with other authorities (Responsibility E) - There is development cooperation with overseas authorities with respect to FMIs, which should be expanded to promote their safety and efficiency. - Rationale and context: - The CBB acts as the single financial regulator in Bahrain, but overseas cooperation would help monitor and manage potential risks from cross-border FMI links. - Developments include cross-border linkages of ATMs across the GCC member states and ongoing plans to develop further links between RTGS systems. - The CBB is dependent on critical service providers located in foreign jurisdictions. - Recommended actions: - (i) strengthen cross-border supervisory cooperation with GCC central banks on FMIs; - (ii) develop cross-border supervisory cooperation with overseas authorities for the oversight of critical service providers. ### Ratings summary (Authorities’ Responsibilities) - Assessment category — Responsibility: - Observed: (none shown) - Broadly observed: B, C, D - Partly observed: A, E - Not observed: (none shown) - Not applicable: (none shown) ### Prioritized recommendations (excerpt) - Timeframe note: “Immediate” is within one year; “near –term” is 1-3 years; “medium-term” is 3-5 years. - Responsibility A — Criteria for identifying FMIs: - Issue: Criteria for identifying FMIs. - Recommended action: Establish clearly defined and publicly disclosed criteria to identify FMIs that should be subject to regulation, supervision, and oversight by the authorities. - Relevant party: CBB - Timeframe: Immediate - Responsibility B — Oversight powers and resources for FMIs: - Issues and recommended actions (CBB, Near-Term): - Strengthen the legal basis to protect settlement finality and netting arrangements, and designate FMIs that should be subject to oversight and supervision. - Separate oversight and operational duties at the directorate level with clear reporting lines to avoid potential conflicts of interest. - Develop a staff succession plan to ensure the appropriate experience and skills are available to discharge operational and risks management responsibilities. - Staff the vacant positions in the Payment System Policy and Oversight unit with qualified personnel. - Introduce FMI-related training courses under the Bahrain Institute of Banking and Finance. - Responsibility C — Policies with respect to FMIs: - Recommended action: Develop a policy document to clearly define and disclose the regulatory, supervisory, and oversight policies of the CBB with respect to all FMIs. - Relevant party: CBB - Timeframe: Immediate - Responsibility D — Adoption and application of the PFMIs: - Recommended actions (CBB, Near-Term): - Submit the PFMIs to the CBB Board for formal adoption into the legal and regulatory framework with a time-bound plan. - Apply the PFMIs to the RTGS/SSS systems and all private sector FMIs consistently with a time-bound plan, and monitor follow-up actions. - Identify and establish oversight expectations for critical service providers located in Bahrain. - Responsibility E — Oversight cooperation with other authorities: - Recommended actions (CBB, Immediate): - Strengthen cross-border supervisory cooperation with GCC central banks on FMIs. - Develop cross-border supervisory cooperation with overseas authorities for the oversight of critical service providers. ### Detailed assessment — Legal Basis for the RTGS and SSS systems (Principle 1) - Key consideration: An FMI should have a well-founded, clear, transparent, and enforceable legal basis for each material aspect of its activities in all relevant jurisdictions. - Material aspects and relevant jurisdictions — legal instruments and documentation: - (i) The CBB Law establishes the legal basis for the RTGS system, empowering the CBB to issue regulations on payment systems, settlement of checks, and other securities (Article 32b). - (ii) The RTGS System (Membership) Regulations (RTGSMR) of 2007 provide membership rules for the RTGS system, describing operations and management for facilitating on-line, real time settlement of government securities transactions (conventional and Islamic securities) denominated in Bahraini Dinar (BD) on the basis of delivery versus payment (DVP1) received from members. - (iii) The RTGS System (Membership) Business Operating Guidelines (RTGSMBOG) of 2007 provides details on the functioning and operations of the RTGS system. - (iv) The SSS System (Membership) Regulations (SSSMR) of 2007 provide membership rules for the SSS system, describing operations and management for facilitating on-line, real time settlement of government securities transactions (conventional and Islamic securities) denominated in BD, on the basis of delivery vs. payment (DvP1), received from the members. - (v) The SSS System (Membership) Business Operating Guidelines (SSSMBOG) of 2007 details the functioning and operations of the SSS system. - (vi) Undertakings and standing instructions signed between the CBB and members. - (vii) CBB directives and circulars issued to member banks for the efficient, secure, and robust operation of the RTGS and SSS systems and enforcement of the provisions of the CBB Law, RTGSMR, RTGSMBOG, SSSMR, and SSSMBOG. - Public availability: - The RTGSMR, RTGSMBOG, SSSMR, and SSSMBOG are publicly available in the CBB website. - Legal basis for each material aspect — provisions summarized: - Rights and responsibilities: - RTGSMR (Chapter IV) and RTGSMBOG (Clauses 5, 6, 7) establish the rights and responsibilities of the CBB and RTGS members. - SSSMR (Chapters II, III and IV) and SSSMBOG (Clauses 5, 6, 7) establish the rights and responsibilities of the CBB and RTGS members. - Participation requirements: - RTGSMBOG (Chapter 2) and RTGSMR (Clauses 8, 9, 10 and 11 of Chapter III) establish participation requirements for the RTGS system, including categories of members, procedures for admission, suspension/termination, and resignation. - SSSMBOG (Chapter 2) and SSSMR (Clauses 8, 9, 10, 13 and 14 of Chapter III) establish participation requirements for the SSS system, including categories of members, procedures for admission, suspension/termination, and resignation. - Novation arrangements: - Not applicable. The RTGS and SSS systems settle transactions on a gross basis. - Legal protection for irrevocability and finality: - RTGSMBOG (Chapter 7, Clause 2) ensures settlement finality and irrevocability of RTGS transactions. - SSSMBOG (Chapter 6, Clause 5) ensures settlement finality and irrevocability of SSS transactions. The SSS system uses the DVP1 model for securities settlement, settling both securities and funds legs on a gross basis. - Allotment, coupon/return payment and redemption relating to indirect participants are processed in offline mode. Example: for allotment, the CBB pays from its settlement account in the RTGS system and securities are credited to the trade account of the indirect member in the SSS System on DVP1 basis. The indirect member must provide funds in its call/current account before the allotment date. At settlement in the RTGS system, the respective amount is debited from the account of the indirect member in the BKS core banking system and credited to the CBB settlement account in the RTGS system. - Netting arrangements: - The RTGS System does not use netting and all transactions are settled individually. - The SSS System does not use netting and all transactions are settled individually on DVP1 basis. - Collateral arrangements: - The RTGS system settles each transaction individually in central bank funds on gross terms and no settlements are netted. The primary legal basis for collateral arrangements, particularly for repos or IDC, is provided by RTGSMBOG (Chapters 13, 14, and 15). - The SSS system uses DVP model 1 settlement. Each transaction is settled individually in central bank funds on gross terms and no settlements are netted. Accordingly, the SSS system does not require collateral to be provided by participants to ensure settlement. The primary legal basis for collateral arrangements, particularly for repos or IDC, is provided by SSSMBOG (Chapters 12, 13, and 14). - Rights and interests in financial instruments: - IDC is fully collateralized with government securities or BD deposits at the CBB. A member availing IDC has signed an undertaking and a power of attorney authorizing the CBB to debit its clearing account at the BKS core banking system and credit its RTGS settlement account to settle the IDC. - RTGSMR (Clause 13 of Chapter III) and RTGSMBOG (Clause 10 of Chapter 13) empower the CBB to suspend or terminate membership of a member that fails to reverse IDC at the end of the day. - Repurchase (repo) operations: - Legal basis references continue in SSSMBOG (Clause 1 of Chapter 5; Clauses 1, 8, and 9 of ...). *Source: IMF staff report — Kingdom of Bahrain (excerpts).* ### Chapter 6; Chapters 13 and 14) specify the rules for members to ### _cr16170 - Chapter 6; Chapters 13 and 14) specify the rules for members to ### Legal basis, enforceability, and finality (Principle 1) - Primary legal basis for the RTGS and SSS systems: - CBB Law, RTGSMR, RTGSMBOG, SSSMR, SSSMBOG, undertakings and standing instructions (contractual) signed between the CBB and members. - Rules and amendments: - RTGSMR (Clause 21) and SSSMR (Clause 21) state the CBB can change/amend them; RTGSMR, RTGSMBOG, SSSMR, and SSSMBOG have been updated/amended by directives and circulars issued by the CBB under the CBB Law. - Legal clearance and consistency: - Directives/circulars and signed agreements/power of attorney/undertakings with members are subject to legal clearance from the CBB Legal Unit and/or the Ministry of Legal Affairs. - CBB refers to relevant laws in directives/regulations/rules forming part of the RTGS and SSS legal basis. - Disclosure and consultation: - Directive circulation governed by Article 38 (c) of the CBB Law; directives become binding once circulated through means approved by the Governor. - CBB usually consults participants before issuing a directive to obtain member comments and help members prepare infrastructure/internal procedures. - Enforceability and finality within Bahrain: - RTGSMR (Chapter 1, Section 2) and SSSMR (Chapter 1, Clause 2) provide that regulations shall be binding on all members. - RTGSMR (Chapter 3, Section 13) and SSSMR (Chapter 3, Clause 13) empower the CBB to issue warnings, censure, restrict system use, suspend or terminate membership for non-compliance. - RTGS and SSS systems operate only in Bahrain; RTGSMR/RTGSMBOG and SSSMR/SSSMBOG and directives are enforceable in Bahraini jurisdiction using wide CBB powers under the CBB Law. - Irrevocability and precedent: - RTGSMBOG protect irrevocability and finality of payment and settlement; there have been no precedents of transactions being voided, reversed, or subject to stay orders under RTGSMR/RTGSMBOG. - SSSMBOG protect irrevocability and finality; up to August, 2015, no precedent cases of actions being voided, reversed, or subjected to stay orders under SSSMR/SSSMBOG. - Limitations and legal risk: - It cannot be ruled out that a transaction settled in the RTGS and SSS systems can be revoked by a court order in the event of insolvency of a participant. - Assessment and recommendation: - Key Conclusions: legal basis relatively sound, but finality and netting arrangements require greater legal certainty in primary legislation. - Assessment of Principle 1: Partly Observed - Recommendation: Strengthen the legal underpinnings for payments and securities settlement systems in primary legislation to protect settlement finality and netting arrangements. ### Governance arrangements (Principle 2) - CBB objectives and remit: - CBB Law (Articles 3 and 4) set CBB objectives, powers and duties: liaise with Ministry of Finance, implement monetary policies, maintain currency and monetary system stability, counter adverse economic conditions. - Article 3 objectives: (i) set and implement monetary, credit and other financial sector policies; (ii) provide effective central banking services to the government and financial sector; (iii) develop the financial sector and enhance confidence therein; and (iv) protect the interests of depositors and customers of financial institutions, and enhance the Kingdom’s credibility as an international financial centre. - Duties relevant for FMIs include: (i) regulate, develop and license services in Article 39 (including FMIs); (ii) exercise regulatory control over institutions providing such services; (iii) facilitate and encourage innovation in FMIs; (iv) safeguard legitimate interests of customers of licensees. - Institutional structure and accountability: - CBB is a public corporate entity with an independent budget (Article 2). - Board of Directors: 7 Directors appointed by Royal Decree for a renewable term of 4 years (Article 5); Audit Committee of 3 Board members (one represents Ministry of Finance). - Governor: day-to-day management, ministerial rank, appointed by Royal Decree for a renewable 5 year term; may be supported by Deputy Governors (Article 10). - Governor must present a report to the Board within 3 months following the end of each financial year with audited financial accounts and external auditor's report (Article 36). - National Audit Bureau reviews CBB financial operations (Article 2); internal audit reports quarterly to the Audit Committee. - CBB required to present regular reports to the Minister of Finance (Article 73). - FMI ownership and operational governance: - RTGS and SSS systems are owned and operated by the CBB. - Payment and Settlement Section of BSD operates RTGS; Monetary Management Section of BSD operates SSS; RTGS and SSS operations overseen by Payment System Policy and Oversight Section of BSD. - BSD reports FMI performance quarterly to EDBO then Governor; CBB Annual Report and Financial Stability Report contain FMI performance and are public on CBB website. - ITD provides IT infrastructure including SWIFT; PC (Payment Committee) chaired by EDBO and appointed by Governor advises on PSS policies and project implementation. - PC responsibilities and membership: - PC members: (i) Director of BSD; (ii) Director of ITD; (iii) Head of Payment and Settlement of BSD; (iv) Head of IT Planning of ITD; (v) Project Manager, Payment Systems. - PC duties include advising CBB on PSS policies; implementing regulations/measures; following project implementation; consulting stakeholders; forming working groups; ensuring training; preparing high level project progress reports; inviting related parties to meetings. - PC meets frequently to review risks, efficiency issues, and steps for further improvement; may commission studies/surveys/inspections or invite stakeholders as needed. - Oversight, audit, and disclosure: - RTGS and SSS Standing Committee (representatives of BSD, ITD and members) discuss issues and propose corrective actions. - Internal and external auditors annually review internal controls and IT applications; internal audit reports to Audit Committee; external audit reports to Governor. - CBB Law (Article 37) requires consultation on draft regulations/resolutions and publication; Article 38 allows Governor to issue directives circulated to licensees (binding once circulated). - Consultation documents, comments, and CBB responses are available on CBB website. - SWIFT Closed User Group chaired by Director of ITD; meetings twice a year or when necessary. - Key conclusions, assessment and recommendations: - Key conclusions: Governance arrangements are clear, accountable, and transparent, but gaps remain in risk analysis and reporting to the Governor, and representation in the PC. - Assessment of Principle 2: Broadly Observed - Recommendations: - Report risks relating to the RTGS and SSS systems on a quarterly basis to the Governor. - Develop a staff succession plan to ensure appropriate experience and mix of skills for operational and risk management responsibilities for FMIs. - Broaden membership in the PC to include representatives from legal, capital markets supervision, financial stability, and retail banking supervision directorates. ### Framework for comprehensive risk management (Principle 3) - Roles and responsibilities in risk management: - CBB has operational, regulatory, oversight, and supervisory roles for RTGS and SSS; CBB Law provides statutory provisions for these roles. - Regulations, directives, and operating rules of RTGS and SSS provide for managing credit, liquidity, operational, IT and other potential risks. - Risk identification, monitoring and review: - Risk management is integrated into general management and day-to-day operations, including reserve management carried out by the Reserve Management Directorate. - Internal and external auditors annually review internal controls of RTGS and SSS as part of BSD and ITD audits; IT reviews include access controls, segregation of duties, upgrades. - Potential operational vulnerabilities are identified and addressed in: - CBB Crisis and Incident Management Plan - CBB Business Continuity Plan (BCP) - CBB Recovery Strategy document - BCP establishes risk management framework for critical CBB operations including ensuring operation of RTGS and SSS in wide scale operational disruptions; BCP is tested once a year. - Authority, independence and reporting: - Chief Internal Auditor and four executive directors appointed by the Governor with Board approval; Chief Internal Auditor and external auditor audit RTGS and SSS annually and report directly to the Audit Committee and Governor respectively. - Financial Stability Directorate assesses payment system risks and publishes results in Financial Stability Report. - Assessment and implications: - The RTGS and SSS risk-management frameworks cover identification and mitigation of legal, credit, liquidity, operational, and IT risks with regular audits and continuity planning. - Specific recommendations for enhancing risk reporting scope and frequency are provided under Principle 2. *Source: _cr16170 - Chapter 6; Chapters 13 and 14) specify the rules for members to* ### Chapter IV) and SSSMR (Clause 15 of Chapter IV), the CBB ### _cr16170 - Chapter IV) and SSSMR (Clause 15 of Chapter IV), the CBB ### Operation, finality, and liquidity support - The CBB "endeavors to ensure the proper operation, control, maintenance, and security of the RTGS and SSS systems" (RTGSMR (Clause 15 of Chapter IV) and SSSMR (Clause 15 of Chapter IV)). - Irrevocability and finality of RTGS transactions are assured by the RTGSMBOG (Clause 2 of Chapter 7). - Any insolvent member as a CBB licensee is immediately required to cease RTGS operations and make any payments (as a regulated service) unless otherwise agreed in writing by the CBB (CBB Law, Article 134). - The CBB provides fully collateralized IDC and repos in the RTGS system against securities holdings with the SSS system. - Settlement of net clearing obligations (BENEFIT and BCTS MNSB files), which are non-RTGS members, are made against special deposits or balances from their CBB clearing accounts to help prevent liquidity pressures for RTGS members. - The fund leg of SSS transactions is given priority in the RTGS system against other fund transfers. ### Time-block pricing, fees, and penalties (incentives to manage participant risk) - Time block pricing is enforced: payments submitted late in the day are charged a higher processing fee than those sent earlier. - Transaction fees: - BD 0.400 per transaction settled from 8:00 a.m. to 1:00 p.m. - BD 0.550 per transaction settled from 1:00 p.m. onwards. - Penalties and charges: - BD 10 penalty for every rejected/cancelled payment. - Extension of RTGS-SSS Systems operating hours granted on request by charging a fee of BD 50 per 15 minutes, with a maximum extension of 1 hour. - RTGS accommodates a maximum time extension of one hour on the request of participating banks forwarded by the TBC, only for replying to checks, by charging a BD 100 per 15 minutes to such a bank that requested the time extension. ### Monitoring, operational risk management, and governance - RTGSMBOG and RTGSR provide measures for operational risk management; potential operational risks are identified and managed as an integral part of operations, with required IT infrastructure, contingency arrangements and BCP. - CBB directs members to manage their risks in participating in the RTGS system. - Operational responsibility: - RTGS and SSS operations are entrusted to the BSD; day-to-day practices and standards set out in the BSD Operational Manual (mandatory for operators). - The Operational Manual is usually reviewed once a year and submitted to the EDBO and then to the Governor for approval. - Monitoring capability: - The Payment and Settlement Section and the Payment System Policy and Oversight Section of the BSD monitor the RTGS System in real time to: (i) identify if transactions are settling smoothly or facing a gridlock; (ii) invoke gridlock resolution mechanisms or take appropriate action; and (iii) view queued transactions, IDC usage, rejected messages, etc. - RTGS members have an online enquiry facility to view payments, manage liquidity, and act on queued payments (re-sequencing and/or taking a repo). - Respective members receive an online alert and a SWIFT alert in case of insufficient funds to settle a net settlement file; alerts can be sent for all activities in RTGS and SSS systems as required. - Committees and oversight: - The PC (appointed by the Governor) continuously assesses, identifies, measures, monitors, proposes, and follows up on risk management measures; PC meets regularly and is chaired by the EDBO. - The IT Steering Committee (chaired by the Executive Director of Corporate Services) reviews RTGS and SSS IT upgrades and business continuity. - The BCP Committee (chaired by the Director of ITD) reviews the BCP plan and makes recommendations. - Audit and surveillance: - Day-to-day risk management of RTGS and SSS operations falls under BSD and ITD and is subject to internal and external annual audit reviews. - The Financial Stability Directorate (FSD) conducts regular financial sector surveillance covering payments and settlement; FSD submits a semi-annual Financial Stability Report (FSR). ### Risk review, interdependencies, and settlement sequencing - The PC regularly reviews material risks borne by RTGS and SSS and risks posed to members, customers, and investors; the Payments System Policy and Oversight Section collects data and conducts surveys and reports findings to the PC. - Interdependencies: - RTGS settles members’ payments and the fund legs of government securities transactions (initiated in the SSS) in real time and on a gross basis; settling an SSS transaction in RTGS is the fund leg of a DVP1 transaction and does not result in material risk to RTGS or its members. - CBB recognizes interdependency between RTGS and SSS; equal importance given to operational risk management of both FMIs; extensions of operating hours usually granted to both systems. - Clearing files and timing: - Multilateral net settlement files (MNSB) from the BCTS and BENEFIT are settled in the RTGS system once a day, at 2:00 p.m. and 9:00 a.m., respectively. - All BCTS direct participants are RTGS members. CBB acts as settlement bank for an indirect participant that is not an RTGS member and covers exposure by a deposit placed by the indirect participant at the CBB; BCTS does not allow the indirect participant to exceed the limit imposed by the CBB (equal to the value of its deposit). - Non-RTGS member balances are settled by the CBB in RTGS against their balances in their clearing accounts in the BKS core banking system; penalties apply for failure to maintain adequate funds. ### Risk management tools, IT, disaster recovery, and security requirements - Regulatory instruments: - RTGSMR, RTGSMBOG, SSSMR, SSSMBOG and directives provide tools for managing risks and specify business procedures, technical requirements and standards for IT equipment, SWIFT communication, message delivery, etc. - RTGSMR specifies CBB and member duties (Clause 15 of Chapter IV), obligations (Clause 12 of Chapter III) and liabilities (Clause 13 of Chapter III). - Member requirements for SWIFT-based implementation: - Since RTGS and SSS systems are implemented over the SWIFT IP Network, members are required to have a payment system gateway (SWIFT related hardware, software, networking, security and other products) and a disaster recovery system for RTGS under RTGSMR (Clause 12a) and SSSMR (Clause 12a of Chapter III). - RTGSMBOG (Clause 7) and SSSMBOG (Clause 7 of Chapter 1) require members to have a redundant set of the SWIFT Alliance hardware, software, networking and other products at a remote location to meet disaster recovery requirements, per IS security and IS audit policies. - Members must perform daily system/data back-up and restore on the disaster recovery system offline/on-line as per their back-up and recovery policy. - Testing, inspections, and uptime expectations: - RTGSMBOG (Clauses 4 and 5 of Chapter 18) and SSSMBOG (Clauses 4, 5 and 6 of Chapter 23) require disaster recovery and back-up facilities for the payment system gateway with minimal failures and periodic testing. - The back-up facility must ensure system availability with an uptime of about 99 percent. - RTGSMR (Clause 18) and SSSMR (Clause 18) empower the CBB to inspect a member’s premises to determine adequacy of internal controls and procedures related to security of and access to the payment system gateway and disaster recovery; if deficiencies are found, the CBB can direct immediate remediation and require written confirmation within ten days. *Source: _cr16170 - Chapter IV) and SSSMR (Clause 15 of Chapter IV), the CBB* ### Chapter III) provide for the CBB to suspend or terminate a member ### Chapter III) provide for the CBB to suspend or terminate a member ### Suspension or termination events and remedial recovery for IDC - CBB may suspend or terminate a member in the following events: - (i) failure to comply with or violation of any of its provisions as amended from time to time and also with such regulations, directives; - (ii) suspension of RTGS or SSS membership; - (iii) failure to reverse IDC (for RTGS system). - Under the RTGSMBOG (Clause 10 of Chapter 13): - the amount of credit provided by the CBB to any member to settle an IDC will be recovered by the CBB along with the penalty/fee, if any, levied by the CBB, from the respective member’s RTGS settlement account the next business day through transactions with the highest priority. - the member’s inability to repay IDC without the help from the CBB will be seriously considered and the CBB can suspend such a member from RTGS membership for frequent failures. ### Risk management framework for IDC and repo against SSS holdings and BD deposits - Framework documents and instruments: - RTGSMR, RTGSMBOG, SSSMR, SSSMBOG, and written undertakings of members. - Recovery/operational continuity: - Provision of critical operations (including RTGS) falls within the CBB Crisis and Incident Management Plan, the CBB BCP, and the CBB Recovery Strategy Documents to continue RTGS operations in a disruption/wide scale disaster. - The CBB BCP identifies disasters requiring movement of RTGS and SSS operations to the NRA or DRR sites from the primary site. - Orderly wind-down: - Since RTGS is operated by the CBB, a full range of orderly wind-down options is not applicable; CBB has powers and resources to provide RTGS as a going concern. - If CBB decides to outsource operations to any licensee, it will consider the winding up process. ### Key Conclusions and assessment for Principle 3 - The broad risk management framework comprises: - CBB Crisis and Incident Management Plan, CBB BCP, and CBB Recovery Strategy document; - RTGS and SSS membership regulations, business operating guidelines, and directives. - Oversight and reporting: - The PC reviews issues and makes recommendations to the Governor and monitors and implements CBB decisions. - Reporting of RTGS and SSS performance (transaction volumes and values) to the Governor and through the Financial Stability Report is clear; risk-related and oversight issues with financial stability implications are less clearly reported. - Assessment of Principle 3: Partly Observed - Recommendations and comments: - Develop a comprehensive risk management framework for the RTGS and SSS systems covering legal, credit, liquidity, and operational risks among others. - Review material risks to RTGS and SSS from other entities (e.g., TBC, BHB, GCC, settlement banks, critical service providers) due to interdependencies. - Develop appropriate risk-management tools to address potential risks and foster closer cooperation among relevant Directorates. - Report risks relating to RTGS/SSS systems on a quarterly basis to the CBB Board, and improve analysis of FMI risks in the Financial Stability Report. ### Source *IMF — Chapter III) provide for the CBB to suspend or terminate a member (excerpts).* ### Chapter 8 of the RTGSMBOG. ### _cr16170 - Chapter 8 of the RTGSMBOG. ### Principle 8 — Finality and irrevocability; SSS cancellation rules - Excerpts from SSSMBOG (Clauses 1–3 of Chapter 19) describe cancellation protocol: - “The members will be allowed to cancel matched transactions pending for availability of securities and future-dated matched SSS transactions (including the closing leg of Inter-bank and Islamic repo transactions) before the transaction settlement date. The completion of the cancellation transaction will result in the status of the transaction being updated to "Cancelled" and no further processing will be allowed for this transaction.’ - ‘Both the members have to separately submit cancellation requests to the SSS system, which will process the request only if the cancellation requests are matched successfully. Any unmatched cancellation requests will be cancelled at system cut-off.’ - Transactions that have been submitted for funds settlement cannot be cancelled. If the payment leg has been queued and subsequently cancelled by the RTGS system, this will result in a cancellation of the securities transaction. - Key conclusions: - RTGS transactions are settled in real time and on a gross basis and are final and irrevocable once they are settled. - Queued payments due to insufficient funds are cancelled by the RTGS System at the relevant activity cutoff. - Members may cancel/re-sequence a queued payment. - SSS transactions are settled on DVP1, ensuring simultaneous gross finality of securities and funds. - Matched transactions pending settlement cannot be unilaterally cancelled; both parties must submit matching cancellation requests. Any unmatched cancellation requests are cancelled by the SSS system at the cut-off time on value date. - Transactions submitted for funds settlement cannot be cancelled; if the payment leg is queued and later cancelled by RTGS, the securities transaction is cancelled. - Assessment: Broadly Observed - Recommendations and comments: - Seek independent legal opinion on the legal certainty for finality. - Strengthen the legal underpinnings for payments and securities settlement systems in primary legislation to protect settlement finality. - Legal risk noted: - While finality and irrevocability are established in membership business operating guidelines, greater legal certainty is required in primary legislation; it cannot be ruled out that a transaction settled in the RTGS and SSS systems can be revoked by a court order in the event of insolvency of a participant. ### Principle 9 — Money settlements (central bank money) - Key Consideration 1 findings: - Money settlements are conducted in central bank money only and in BD. - RTGS members hold settlement accounts in the RTGS System. - The fund leg of securities transactions is settled in the RTGS system (direct members having RTGS accounts) and in the BKS core banking system (indirect members) using central bank money (pre-funded by the indirect member). - Key Considerations 2–5: Not applicable (commercial bank money not used; FMI does not conduct money settlements on its own books; settlement bank agreements not applicable). - Key conclusions: - Money settlements are conducted in central bank money. - The SSS system settles the fund leg of securities transactions in the RTGS system on DVP1 basis or through pre-funded clearing accounts in the BKS core banking system, using central bank money. - Assessment: Observed - Recommendations and comments: None ### Principle 10 — Physical deliveries - Key findings: - Not applicable. The SSS System is a scripless securities settlement system and does not deal with physical securities. - Key conclusions: The SSS System is scripless and does not handle physical securities. - Assessment: Not Applicable - Recommendations and comments: None ### Principle 11 — Central Securities Depositories (CSD functions) - Safeguarding issuer and holder rights: - The CBB issues government securities in scripless form in the SSS system. - The SSS system functions as an electronic depository recording ownership and transfer of government securities among members. - Holdings of direct members (including the CBB and BHB) and indirect members are recorded in the SSS system. - The SSS provides depository services for retail investors at two levels: - Aggregate level in the SSS system: securities holdings reflected in customer accounts and non-resident accounts of direct members acting as agents/trustees; CBB directives ensure legal and beneficial ownership by customers. - Customer level in the CSD-BHB: CSD-BHB acts as centralized depository for government securities purchased in the primary market by retail investors via BHB and listed at BHB; retail investors have beneficial ownership. - CBB as a direct member has a trade account and an IDC account. - Direct SSS members: trade account, IDC account, customer account, non-resident account; required to submit customer holding information to the CBB regularly; provided intraday or day-end statements. - Since January 2015, the CBB provides allotment of government securities for retail investors through BHB at each primary issuance/auction. - Indirect SSS members: only a trade account; no online access; administer accounts through the CBB; day-end statements provided by CBB. - Prevention of unauthorized creation/deletion: - SSS system has database function for outstanding securities and creation of new securities issues; handles matured securities automatically. - Internal operational manual details staff responsibilities for creation of new securities issues. - All securities transactions must be matched and are subject to validity checks; members receive end-of-day/intraday statements for reconciliation. - Annual audits (internal and external) cover security, member administration, application controls, change control, problem management, back-up and recovery, service level agreement monitoring, period end processing, transaction processing, change management, security protocols, data system operations and disaster recovery planning. - Reconciliation: - SSS sends end-of-day statements (MT535, MT536, MT537) to the CBB and direct members for information and reconciliation; direct members can download reports; indirect members receive end-of-day statements via the CBB. - Overdrafts and debit balances: - SSSMBOG and SSSMR specify that the SSS system does not allow overdrafts and debit balances in securities accounts. - If insufficient securities to deliver, transaction is queued; any transaction remaining queued by system cut-off is automatically cancelled. - Immobilization/dematerialization: - SSS maintains securities in scripless form for book-entry transfer. - Since June 2007, CBB started issuing all conventional and Islamic government securities in scripless form; all securities issued before 2007 were dematerialized. - Custody risk protection: - Membership regulations and operating guidelines (SSSMR and SSSMBOG) set rules/procedures; contractual agreements with SSS members; in-house operational manual provided to staff. - Day-end statements provided to members for custody accounts with holdings/transactions. - Asset segregation: - SSS maintains custody accounts of direct and indirect members, including CBB and BHB. - CBB directive issued in 2012: CBB provides allotment of government securities at primary issuance/auction for retail investors through direct member banks and BHB to promote market participation; BHB records beneficial ownership at the CSD and facilitates secondary market trading at the ATS. - Direct members: online access to trade and IDC accounts, plus customer and non-resident accounts; required to submit customer holding information to CBB regularly; intraday or day-end statements provided. - Indirect members: trade account only; administer via CBB; day-end statements provided. - Other activities and risks: - SSS only provides settlement services for securities transactions in secondary and primary markets besides safekeeping. - SSS does not guarantee settlement (not a CCP) nor offer overdrafts; little credit, liquidity or market risk from such operations. - Operational risk is the more relevant risk, mitigated through rules, procedures, internal manuals, and periodic system enhancements. - Key conclusions: - CBB issues government securities in scripless form; SSS performs electronic depository and book-entry transfer functions. - SSS regulations and operating rules minimize and manage risks, ensuring integrity of securities holdings and transfers consistent with selected RSSS market-wide recommendations (PFMI, Annex C). - Assessment: Observed - Recommendations and comments: None ### Principle 12 — Exchange-of-value settlement (DVP) - Findings: - RTGS and SSS systems are seamlessly integrated to enable real time, simultaneous settlement of the funding leg in RTGS and the securities leg in SSS on DVP1 basis. - IDC and repo transactions between the CBB and direct SSS members are facilitated against eligible securities in SSS accounts. - Principal risk for direct members is eliminated provided: - (i) the seller has sufficient securities in his securities account in the SSS System for immediate delivery; and - (ii) the buyer has sufficient funds in the settlement account in the RTGS system to pay for the securities. - If seller or buyer have insufficient securities or funds, the transaction is queued pending settlement; SSS cancels unmatched current value-dated transactions by the cut off time. - For indirect SSS members, DVP1 settlement of the securities leg occurs simultaneously against settlement of the funding leg through pre-funded clearing accounts in the CBB’s BKS core banking system. - Key conclusions: - Principal risk is eliminated by real time DVP1 settlement with simultaneous settlement of securities leg in SSS and funding leg in RTGS. For indirect members, funding leg settlement is through pre-funded clearing accounts in the BKS core banking system. - Assessment: Observed - Recommendations and comments: None ### Principle 13 — Participant-default rules and procedures - Participant default arrangements: - RTGS settles in real time on a gross basis, subject to availability of funds; SSS settles on DVP1 in real time and on a gross basis. - CBB provides a fully collateralized IDC facility and a gridlock detection and resolution mechanism to help settle transactions rather than have them queued or cancelled at activity cutoff. - In case of default of an IDC in RTGS, a member can take an overnight repo to settle the IDC. - The BSD, in consultation with respective supervision directorates of the CBB, will handle issues related to a defaulted member (CBB licensee). - If a member defaults due to insolvency or failure to meet obligations in RTGS or SSS, the CBB, as operator, has the authority to suspend/terminate the member under the RTGSMR (Clause 13). - (Note: Chapter text ends at Clause 13 reference in supplied excerpt.) - Assessment and recommendations: (No explicit assessment or recommendations provided in the supplied excerpt for Principle 13 beyond description of arrangements.) *Chapter 8 of the RTGSMBOG.* ### Chapter III) and SSSMR, respectively. ### _cr16170 - Chapter III) and SSSMR, respectively. ### Identified instruments and clauses - The RTGSMR (Clause 13 of Chapter III) - SSSMR (Clause 13 of *Source: _cr16170 - Chapter III) and SSSMR, respectively.* ### Chapter III) empowers the CBB to suspend or terminate a member ### Chapter III) empowers the CBB to suspend or terminate a member ### Membership suspension/termination and continuing liabilities - Chapter III empowers the CBB to suspend or terminate a member on its failure to comply with, or their violation of, any of the membership regulations or directives as amended from time to time. - RTGSMR (Clause 13 of Chapter III) states a member will continue to be solely liable and responsible for: - (i) contents of the messages or files sent by it, even if it subsequently resigns or is suspended, or its membership has been terminated; and - (ii) customers transactions executed in the RTGS system. ### Use of financial resources and legal stance on participant defaults - According to the RTGSMBOG, RTGSMR, SSSMBOG, and SSSMR the CBB is not obliged to meet obligations on behalf of a participant that has defaulted its settlement obligations. ### Default rules and preparedness (Principle 13) — findings - The RTGSMBOG (Clause 12 of Chapter 18), SSSMBOG, and SSSMR provide the operator powers to: - call for an explanation and require an action plan to prevent future defaults; - suspend or terminate a member. - CBB can take appropriate discretionary procedures; default procedures effectively are suspension or termination of the defaulted member in consultation with the respective supervision directorate. - RTGS settles in real time, on a gross basis, and subject to funds availability — "there is no likelihood for members to face a problem of defaulting of transactions in the RTGS System." - SSS settles in real time on a DVP1 basis; default procedures would be suspension or termination of the defaulting (licensed bank) member, with the SSS operator acting on instruction from the respective supervision directorate. ### Default rules and preparedness — assessment and recommendations - Key Conclusions for Principle 13: - RTGS and SSS systems settle funds and securities transactions in real time, on a gross and DVP1 basis, and subject to funds availability. - Default procedures would be the suspension or termination of the defaulted member in consultation with the respective supervision directorate. - Assessment of Principle 13: Broadly Observed - Recommendations and comments: - Seek independent legal opinion on the legal certainty for finality and netting arrangements. - Strengthen the legal underpinnings for payments and securities settlement systems in primary legislation to protect settlement finality and netting arrangements. - Improve default procedures through regular reviews and testing with participants and other stakeholders. ### General business risk (Principle 15) — findings and assessment - The CBB is owner and operator of the RTGS and SSS systems and manages them to cover operating costs on a not-for-profit basis; charges are periodically reviewed. - Potential business risks are escalated to the PC with proposals for improvements; BSD coordinates with ITD to reduce risk and improve control systems. - Key Conclusions for Principle 15: CBB manages systems to cover operating costs; potential business risk escalation process exists. - Assessment of Principle 15: Observed - Recommendations and Comments: None ### Custody and investment risks (Principle 16) — findings and assessment - RTGS and SSS systems are owned and operated by the CBB under Article 39 of the CBB Law; assets in custody benefit from CBB accounting practices, safekeeping procedures, and internal controls (e.g., annual internal and external audits). - Both systems provide prompt access to assets; no custodian banks are used. - RTGS and SSS systems have no investment capabilities; BSD only operates the systems without any investment responsibilities. - Key Conclusions for Principle 16: Safe custody and prompt access provided by CBB; no investment risk. - Assessment of Principle 16: Observed - Recommendations and Comments: None ### Operational risk (Principle 17) — identification, controls, and findings - Operational risk-management framework comprises the Crisis and Incident Management Plan, the CBB BCP, and the Recovery Strategy document. - Operational risks identified across software, hardware, SWIFT gateway, web monitoring link, telecommunication network, databases, archiving system and security. - Roles: - BSD and ITD share operational responsibilities: BSD covers business functions; ITD covers IT infrastructure. - Staff monitoring/reporting arrangements include Help Desk (e-mail distribution group) and Payment and Settlement Section and Monetary Management Section. - Single points of failure were identified in pre-launch independent security review; online replication and data-commit-rollback mechanisms are in place. - DRR is a full-fledged DR site; data replicated in real-time; DRR configured the same as primary site. - Member requirements (RTGSMBOG, RTGSMR, SSSMBOG, SSSMR): - members must have primary and back-up facilities, qualified staff, computer and telecommunication facilities, authentication/security devices, and payment system gateway; - disaster recovery/back-up facility must be tested and ensure system availability with an uptime of around 99 percent; - CBB empowered to inspect member premises and require rectification within 10 days. - Message verification checks prevent duplication and minimize message errors. - Change control and testing: BSD and ITD conduct tests with members for SWIFT patches/system changes before implementation; internal and external audits performed annually. - System availability monitoring and incident reporting to EDBO and PC. ### Operational risk — capacity and business continuity specifics - System availability target: 99 percent during operating hours. - Recovery time objective (RTO): two hours and 30 minutes. - Capacity: - RTGS capacity improved to settle around 44 transactions per minute. - Transactions were around 12 transactions per minute in 2014. - Peak daily RTGS transactions settled: 8,778 on October 27, 2015. - Business continuity: - CBB has one primary site (head office), NRA, and DRR. - Maximum tolerable downtime objective: three hours. - BCP covers scenarios and uses a call tree; business hours are from 8:00 a.m. to 2:07 p.m.; BCP aims to ensure completion of transactions within the day in case of a widespread disaster. - NRA and DRR tested once a year; DRR is a ‘warm’ backup; time to recover operations via secondary site: around 2 hours and 30 minutes. - NRA/DRR located nearly 20 kilometers from the primary site. ### Operational risk — assessment and recommendations - Key Conclusions for Principle 17: - Operational risk management framework is comprehensive and encompasses RTGS and SSS systems. - Membership regulations prescribe primary and back-up arrangements and DRR/NRA provisions. - Recovery time objective is two hours and 30 minutes; DRR tested once a year. - Assessment of Principle 17: Broadly Observed - Recommendations and Comments: - Enhance the BCP to ensure critical IT systems can resume operations within 2 hours following wide-scale disruptions. - Design the plan to enable the RTGS system to complete settlement by the end of the day of the disruption, even in extreme circumstances. - Monitor and publicly disclose systems availability against target of 99 percent. - Conduct a comparative risk analysis of the secondary site (distinct risk profile). - Increase the frequency of business continuity testing, including tests between participants and the DRR site. - Analyze scalable capacity to handle increasing stress volumes and achieve service level objectives. - Identify and establish oversight expectations for critical service providers located in Bahrain. ### Access and participation requirements (Principle 18) — findings - RTGS membership: - Generally provided to all retail banks (conventional and Islamic) that fulfill primary eligibility requirements (participation in government securities transactions and accounts in the BKS core banking system). - TBC (operator of BCTS, BENEFIT, and EFTS) can submit MNSBs to RTGS for settlement. - Other corporations and financial institutions (e.g., wholesale banks) are not granted RTGS membership as they are not permitted to provide payment services in Bahrain. - SSS membership: - Defined in SSS membership regulation and operating guidelines (SSSMBOG, SSSMR (Chapter III)); eligibility includes conventional and Islamic retail banks subject to SWIFT membership and BKS core banking system accounts. - Membership criteria, suspension and termination rules are publicly disclosed on the CBB website. - Key Conclusions for Principle 18: - Access and participation requirements are publicly disclosed and should be reviewed regularly to ensure objectivity, fairness, and risk-based open access. - Assessment of Principle 18: Broadly Observed - Recommendations and Comments: - CBB should review access and participation requirements regularly to ensure they remain objective, risk-based, and permit fair and open access. ### Tiered participation (Principle 19) — findings and recommendations - RTGS: - At end of August, 2015 there were 28 direct members (including the CBB). No category for indirect members in RTGS. - TBC can submit MNSB files for settlement; three retail payment systems (BCTS, BENEFIT and EFTS) submit deferred settlement MNSB files to RTGS. - CBB settles net clearing obligations of a few non-RTGS members against special deposits or balances at CBB, minimizing liquidity risk. - CBB has not analyzed the total size of payments by non-RTGS members routed through RTGS; lack of analysis makes it hard to assess material risks. - SSS: - At end of August, 2015 there were 28 direct members and 17 indirect members. Direct members include CBB, BHB, and licensed retail banks (20 conventional and 6 Islamic). - Indirect SSS members administer accounts via the CBB (offline) for primary market transactions. - No material risks identified as SSS settles in real time on DVP1 basis; CBB acts on behalf of indirect members subject to funds availability. - Key Conclusions for Principle 19: - No tiered participation in RTGS; tiered participation exists in the SSS system but risk is expected to be benign since CBB is sole direct member dealing with indirect members. - Assessment of Principle 19: Broadly Observed - Recommendations and Comments: - Identify indirect participants/users responsible for a significant proportion of RTGS transactions and whose volumes/values are large relative to direct participants’ capacity. - Consider providing RTGS membership to large indirect participants/users subject to appropriate risk management criteria. ### FMIs links (Principle 20) — findings and recommendations - An FMI link exists between the SSS system and BHB, as BHB acts as a CSD for dematerialized/immobilized securities and holds government securities listed on the BHB in the SSS system. - Risk exposure is minimal: SSS settles in real time on DVP1 basis; CBB is not counterparty to SSS transactions; any credit extension by CBB to BHB will be in the form of IDC/overnight repo and fully collateralized. - The link does not allow provisional transfers of securities. - Key Conclusions for Principle 20: - The SSS–BHB link is low risk due to real time DVP1 settlement and CBB oversight of BHB. - Assessment of Principle 20: Observed - Recommendations and Comments: - CBB should continue to monitor, identify and manage link-related risks to the SSS system, especially if new FMI links are established. ### Efficiency and effectiveness (Principle 21) — findings - RTGS and SSS designed with seamless integration and SWIFT IP Network backbone to enable real time payments and DVP1 securities settlement using central bank money. - RTGS features: - Queuing of payments when insufficient funds; queued transactions settled FIFO or based on member-assigned priorities. - Fully collateralized IDC facility and gridlock detection/resolution mechanism provided. - Tools and alerts provided to members for intraday liquidity monitoring. - Time-block pricing used to incentivize early submission of payment instructions. - SSS features: - Online submission for direct members, enquiry and monitoring facilities to manage positions in real time. - Key Conclusions for Principle 21: - RTGS and SSS provide efficient and effective payment, securities settlement and depository services. - Assessment of Principle 21: Observed - Recommendations and Comments: None ### Communication procedures and standards (Principle 22) — findings - RTGS and SSS operate over SWIFT IP Network via SWIFT Alliance Gateway Server and Closed User Group (CUG). - SWIFT services used include FIN, FIN Y-Copy, INterAct, Browse and INterActive services. - All messages conform to SWIFT standards and RTGS/SSS functional specifications. Securities identified by International Securities Identification Number. - Key Conclusions for Principle 22: - Systems are based on internationally accepted communication procedures and standards (SWIFT). - Assessment of Principle 22: Observed - Recommendations and comments: None ### Disclosure of rules, procedures and market data (Principle 23) — findings - RTGSMR, RTGSMBOG, SSSMR, and SSSMBOG clearly state functionalities, roles and responsibilities; these documents and subsequent directives are disclosed to participants and on the CBB website. - CBB provides documentation, training, and testing when (i) entities apply to join; (ii) system rules or functionalities change; (iii) SWIFT changes impact systems; and (iv) RTGS system changes. - Fees: - Current RTGS membership fees and time-block pricing introduced in 2013 by directive after consultation with members. - SSS charges annual membership fees only; there are no transaction fees. - Basic data on transaction volumes are disclosed in the CBB Annual Report and the Financial Stability Report. - Key Conclusions for Principle 23: - Rules and key procedures are clear and disclosed; documentation and training provided. - Assessment of Principle 23: Broadly Observed - Recommendations and Comments: - Disclose publicly responses to the CPMI-IOSCO Disclosure Framework. ### 41. The CBB takes this opportunity to express its gratitude to the IMF for carrying out an ### The CBB takes this opportunity to express its gratitude to the IMF for carrying out an ### IMF ROSC assessment and CBB overall position - The IMF carried out an assessment of the RTGS and SSS systems on the observance of the CPMI-IOSCO PFMIs under the ROSC mission; the IMF team’s in-depth assessment "provides many valuable insights to identify areas which require further improvement, particularly the risk management framework for the systemically important RTGS and SSS systems." - The CBB is "committed to follow PFMI in its systems" and "will continue to work towards implementing the IMF’s recommendations." - The CBB states it "has a few reservations about the assessment and recommendations" where they "do not reflect circumstances specific to Bahrain," particularly concerning measures in place to observe the PFMIs and to fulfill regulatory, supervisory and oversight responsibilities for FMIs under Bahrain’s legal and single regulatory framework. ### Legal risk, finality, netting, and insolvency (Principles 1, 8, 13, Authorities Responsibility B) - The assessment stated legal risks relating to finality and netting could arise from legal uncertainty in the event of insolvency of a participant. - CBB response on Bahrain-specific arrangements: - "a licensee cannot be insolvent/bankrupt without the knowledge of the CBB. It can either be under administration or in liquidation." - "In the case of liquidation, an RTGS transaction which has already settled cannot be cancelled/revoked/undone." - Measures to address potential counterparty default include: - (i) "all RTGS members are retail banks supervised by the CBB;" - (ii) there is a requirement "under Article 58 of the CBB Law, for all licensees to notify the CBB immediately of any matter that may affect its financial position or limit its ability to meet its obligations;" - (iii) "any licensed bank likely to become insolvent is required to immediately cease making payments in the RTGS and SSS systems unless the CBB’s permits the bank in writing." ### Governance, reporting, and PFMI adoption (Principles 2, 3, Authorities Responsibility D) - The assessment noted governance arrangements are "clear and transparent, but gaps remain in the roles and responsibilities of the Board and management, and representation in the Payments Committee." - The IMF recommendations include: - (i) "reporting of risks on a quarterly basis to the Board;" - (ii) "formally adopt PMFI standards by the Board." - CBB position based on legal framework: - "According to Article 8(2) of the CBB Law, the Board is responsible for setting the overall policies relating to the financial sector." - "Accordingly, the adoption of the PFMI standards does not require the formal adoption by the Board. It could be done with the approval of the Governor." - "The periodic risk reporting also has to be made to the Governor." ### Oversight expectations for critical service providers (Principle 17, Authorities Responsibility D) - IMF recommendation: CBB should "identify and establish oversight expectations for critical service providers located in Bahrain." - CBB response: - "All critical service providers located in Bahrain are licensed, regulated, supervised and overseen by the CBB." - "The oversight expectations of the FMI’s owned/operated by critical service providers are already established in the Directives, MOUs and agreements entered between service providers and the CBB." - "The risk of interdependencies relating to such critical service providers are managed accordingly." ### Concentration risks and indirect participants (Principles 18 and 19) - IMF identified "high concentration in the payments system" and recommended identifying and managing concentration risks by identifying indirect participants responsible for a significant proportion of transactions relative to the capacity of the direct participants through which they access the RTGS system. - CBB policy and restrictions noted: - "Indirect participants of the SSS system and other financial institutions (not licensed as retail banks) that make payments through RTGS members are not allowed by the CBB to provide BD payment services (except credit/e-money cards) in Bahrain." - "Wholesale banks are not allowed to provide any BD payment services in Bahrain. They basically provide investment and merchant banking services and banking services in foreign currency to non-residents and banks in Bahrain." - "Their operations in the domestic market are limited to residents of Bahrain with transactions or initial balance having a minimum amount of BD 7 million." ### Public disclosure and PFMI application - CBB states it "currently applies the PFMIs in its oversight" of FMIs. - The CBB is "in the process of developing a policy document to publicly disclose the regulatory, supervisory, and oversight policies of the CBB with respect to all FMIs." *Source: IMF ROSC mission assessment text as presented in the supplied content unit.* --- _Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2016/_cr16170.pdf_