CENTRAL BANK OF KENYA

KEPSS ASSESSMENT AGAINST THE PFMI PRINCIPLES - DECEMBER 2024

CENTRAL BANK OF KENYA

KEPSS ASSESSMENT AGAINST THE PFMI PRINCIPLES - DECEMBER 2024

Responding institution Central Bank of Kenya
Jurisdiction(s) in which the FMI Kenya
operates
Authority regulating, supervising, The Central Bank of Kenya
or overseeing the FMI
Date of the Disclosure is September 2024
The Disclosure can be found at www.centralbank.go.ke
Assessment by Banking & Payment Services Department of the Central Bank
of Kenya
Reviewed by IMF AFRITAC East Technical Assistant team lead by Carel Hugo
and Faith Stewart
For Further information, please Director,
contact
Banking & Payment Services Department
Central Bank of Kenya
NAIROBI
Tel: +254 2861502
Version Initial report v1.3
DOCUMENT CONTROL
Date Released Version Remarks
December 2024 1.0 First Self-assessment conducted for KEPSS FMI
against CPSS and IOSCO’s Principles for Financial
Market Infrastructure.
The assessment was conducted on the Kenya Electronic Payments and Settlement System
(KEPSS), Kenya’s Real-Time Gross Settlement System (RTGS), to assess its compliance with the
Principles for Financial Market Infrastructures (PFMI) published by the Committee on Payment
and Settlement Systems (CPSS) of the Bank for International Settlements (BIS) and the IOSCO
(full) in April 2012.
CENTRAL BANK OF KENYA

KEPSS ASSESSMENT AGAINST THE PFMI PRINCIPLES - DECEMBER 2024

GLOSSARY
The abbreviations used in this report have the meaning as detailed below:
Abbreviations Terms
BAC Bank Audit Committee
BPSD Banking & Payment Services Department
BSD Bank Supervision Department
CBK Central Bank of Kenya
CCP Central Counter Parties
CDSC Central Depository and Settlement Corporation
CMA Capital Markets Authority
CSD Central Securities Depository
COMESA Common Market for Eastern and Southern Africa
CPMI Committee on Payment and Market Infrastructure
CPSS Committee on Payment and Settlement Systems
DPD Digital Payment Services Division
DRC Disaster Recovery Centre
EAPS East African Payment System
EFT Electronic Funds Transfers
FMI Financial Market Infrastructure
IAD Internal Audit Division
IARMD Internal Audit & Risk Management Department
ILF Intraday Liquidity Fund
IMS Information Management System
IT Information Technology
ITD Information Technology Department
IOSCO International Organization of Securities Commissions (IOSCO)
KBA Kenya Bankers Association
KEPSS Kenya Electronic Payment & Settlement System
LVPS Large Value Payment System
LVRPS Low Value Retail Payment Systems
MAC East Africa Monetary Affairs Committee
MFI Micro-Finance Institutions
MOU Memorandum of Understanding
NPS National Payment System
NACH Nairobi Automated Clearing House
OLF Overnight Loan Facility
PFMI Principles of Financial Market Infrastructure
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KEPSS ASSESSMENT AGAINST THE PFMI PRINCIPLES - DECEMBER 2024

POCAMLA Proceeds of Crime and Anti-Money Laundering Act
REPSS Regional Payment & Settlement System
RMCD Risk Management & Compliance Division
RMC Risk Management Committee
RTGS Real Time Gross Settlement System
RTO Recovery Time Objective
SIPS Systemically Important Payment Systems
SSS Securities and Settlement Systems
SWIFT Society for Worldwide Interbank Financial Telecommunication
TR Trade Repository
CENTRAL BANK OF KENYA

KEPSS ASSESSMENT AGAINST THE PFMI PRINCIPLES - DECEMBER 2024

Table of Contents
CENTRAL BANK OF KENYA

KEPSS ASSESSMENT AGAINST THE PFMI PRINCIPLES - DECEMBER 2024

List of Tables
Chartes and Figures
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KEPSS ASSESSMENT AGAINST THE PFMI PRINCIPLES - DECEMBER 2024

Preface
In its role as the operator of the Kenya Electronic Payments and Settlement System (KEPSS)
Real-Time Gross Settlement (RTGS) system, which facilitates the settlement of domestic
transactions in Kenya, the Central Bank of Kenya (CBK) publishes this first KEPSS assessment
report. The assessment has been conducted based on the Principles for Financial Market
Infrastructures (PFMI) issued by the Committee on Payments and Market Infrastructures
(CPMI) – previously the Committee on Payment and Settlement Systems (CPSS) − of the
Bank for International Settlements (BIS) and the Technical Committee of the International
Organization of Securities Commissions (IOSCO) in a publication titled Principles for financial
market infrastructures published in April 2012.
The report outlines the observance of the PFMI based on the status of the operations of the
KEPSS -RTGS as of 31 December 2022. The report is based on the methodology set out in the
associated Disclosure Framework and Assessment Methodology and has been compiled in
line with the disclosure framework outlined in Principle 23 of the PFMI.
As the process relating to compliance with the PFMI and adherence to the disclosure
framework matures, the CBK expects to achieve full transparency in discharging its obligations
for the benefit of all stakeholders. The next self-assessment will be undertaken in 2026 in line
with a BIS requirement that a self-assessment against financial market infrastructure (FMI)
principles be conducted every two years. A revised report will then be published to disclose the
updated status of compliance with the PFMI.
Banking & Payment Services Department
Central Bank of Kenya
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KEPSS ASSESSMENT AGAINST THE PFMI PRINCIPLES - DECEMBER 2024

I: EXECUTIVE SUMMARY
1.1 Background
The CBK hereby publishes its self-assessment of the real-time gross settlement system (RTGS),
the Kenya Electronic Payment and Settlement System (KEPSS) against the Principles for
Financial Market Infrastructures (PFMI), the international risk management standards for
systemically important financial market infrastructures (FMIs). The PFMI was published by
the Committee on Payment and Settlement Systems (CPSS) of the Bank for International
Settlements (BIS) and the Technical Committee of the International Organization of Securities
Commissions (IOSCO) in April 2012. This Publication is the Central Bank of Kenya’s (CBK)
disclosure and assessment of the RTGS services against the principles for financial Markets
Infrastructures (PFMI). The assessment assesses the RTGS services as at December 2022. This is
the first assessment the Bank has completed for publication. Consistent with the objectives of
the PFMI, the assessment has been completed by the Bank in its role as operator of the RTGS
services, and not as a user of those services, or in its broader roles as supervisor.
The principles are designed to broadly apply to all systemically important FMIs. However,
settlement systems at central banks differ from other FMIs in a number of ways. Central banks
are inherently sound; they have an exclusive right to issue the means of payment and do not
face liquidity risk vis-à-vis other system participants. Central banks, as creatures of statute, also
play other important roles in society in areas such as monetary policy and financial stability.
This has implications for; inter alia, FMI governance and organizational structure. These
considerations affect the assessment against specific principles, some of which do not apply,
or are applied differently to central bank operated FMIs.
The CBK derives its mandate to provide payment and settlement services and ensure the
safety and efficiency of the payment system from the Central Bank of Kenya Act [Amended,
2015] and the National Payment System Act [2011] (NPS Act). The KEPSS, a systemically
important payment system (SIPS) is owned and operated by the CBK. It constitutes the
backbone of the payment infrastructure, settling high-value, time-critical payments across
participants’ settlement accounts maintained in the central bank. Transactions are settled
individually; in real-time, provided the payer’s account has sufficient funds, thus mitigating
settlement risk. The types of risks that arise in, or are borne by the KEPSS include operational
risk, legal risk, liquidity risk and reputational risk. Risk management is conducted in line with
the CBK’s Risk Management Policy.
KEPSS is Kenya’s high-value payments system, which is used by banks and other payment
service providers to settle their payment obligations on a real-time gross settlement (RTGS)
basis. The Bank seeks to ensure effective oversight of KEPSS by separating its operational and
oversight functions, as well as by producing transparent assessments against international
standards.
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KEPSS ASSESSMENT AGAINST THE PFMI PRINCIPLES - DECEMBER 2024

1.2 Sumary of the Assessment
The Central Bank of Kenya hereby publishes its self-assessment for 2022 of the Bank’s
settlement system, the Kenya Electronic Payment System and Setllement (KEPSS) against
the Principles for Financial Market Infrastructures (PFMIs) formulated by CPMI/IOSCO and
published in April 2012. The assessment was performed by the Banking and Payment Services
Department (BPSD), in particular the Oversight and Compliance Section (OC) team that
worked closely with, and drew on information provided by KEPSS Services OpertionsTeamthe functional area to which the system ownership of KEPSS has been assigned. In addition,
feedback was sought from other departments within the Bank, including the Information
Technology (IT) Department responsible for providing technology services for KEPSS, Financial
Markets Department (FMD), Legal Services Department (LSD), and the Internal Audit and
Risk Management (IARMD) of the CBKAn internal assessment against the principles has been
performed previously, but this is the first assessment to be published.
This assessment was carried out against the Principles for Financial Market Infrastructures
(PFMIs) and is based on the methodology set out in the associated Disclosure Framework
and Assessment Methodology. The objective of publishing this assessment is to increase the
transparency over the Bank’s management of the RTGS services, and increase visibility over
the associated governance, operations, and risk management framework among a broad
audience. The audience includes current and prospective RTGS account holders and other
market participants, authorities, and the general public. The assessment also serves to facilitate
the implementation and ongoing observance of the PFMIs. This public disclosure does not
include information that is to the Bank and legally privileged or restricted for
security reasons.
The principles are designed to broadly apply to all systemically important financial
infrastructures. This assessment is based on all the principles relevant to the Bank’s RTGS
services. Some principles are relevant only to characteristics associated with specific types of
FMIs, and hence were not considered relevant to KEPSS services. No specific issues of concern
have been identified that warrant immediate action. However, changes will continue to be
monitored as the legal basis for KEPSS is constantly evolving, and new solutions are continually
being developed in response to threats and emerging risks. Compliance with the principles will
therefore be subject to ongoing review in line with the recommendations.
Currently, the Bank considers KEPSS as the only domestic systemically important payment
system for which an assessment against international principles is necessary. The assessment
includes a description of the KEPSS operations and describes how, as an operator the CBK
complies with each Principle applicable to the FMI. This view reflects the fact that KEPSS
processes an aggregate value of Kenyan shillings payments that is high relative to other
payment systems and mainly handles time-critical and high-value payments.
The assessment observed that seven (7) of the 24 principles are not considered relevant to the
settlement of payments at the Bank (nos. 6, 10, 11, 12, 14, 20 and 24), while the remaining 17 are
considered relevant. Of the 17, KEPSS observes elven (11) principles, and six (6) principles were
broadly observed. The table below summarizes the findings of the assessment.
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KEPSS ASSESSMENT AGAINST THE PFMI PRINCIPLES - DECEMBER 2024

Table 1: Summary of the Findings
Level of Observance Assessment of Principle
Observed Principles 2-Governance, 4 – Credit risk, 7 – Liquidity, 8 – Settlement finality, 9 –
Money settlements, 15 – General business risk, 16 – Custody and investment risks,
18 –Access and participation requirements, 19 – Tiered participation arrangements, 21-Efficiency and effectiveness, 22-Communication procedures, and standards
Broadly Observed Principles: 1–Legal basis, 3 Framework for the comprehensive management of
risks, 5 – Collateral, Principle 13 –Participant-default rules and procedures, 17- Operational risks and 23 – Disclosure of rules, key procedures, and market data
Partially Observed N/A
Not Observed N/A
Not Applicable Principles 6 –Margin, 10 – Physical deliveries, 11 – Central securities depositories,
12 – Exchange-of-value settlement systems, 14 – Segregation and portability, FMI
links 20 and 24 – Disclosure of market data by trade repositories
Table 2. Rating system
In its assessment, the assessor has applied the rating system used in the CPMI-IOSCO
Disclosure Framework. Under this framework, observance of each of the applicable Principles
is rated according to the following scale:
Observed Any identified gaps and shortcomings are not issues of concern and are minor,
manageable and of a nature that the FMI could consider taking them up in the
normal course of its business.
Broadly Observed The assessment has identified one or more issues of concern that the FMI
should address and follow up on in a defined timeline.
Partially Observed The assessment has identified one or more issues of concern that could become serious if not addressed promptly. The FMI should accord a high priority
to addressing these issues.
Not Observed The assessment has identified one or more serious issues of concern that warrant immediate action. Therefore, the FMI should accord the highest priority to
addressing these issues.
Not Applicable The principle does not apply to the type of FMI being assessed because of the
legal, institutional, structural, or other characteristics of the FMI.4
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2: GENERAL BACKGROUND OF THE FMI
2.1. General Description of the FMI and the Market it Serves.
The National Payment Systems (NPS) in Kenya is a widespread concept which not only
entails systems to clear payments (cheque, electronic and card payments) between banks,
but also encompasses the total payment process. This includes all the systems, mechanisms,
institutions, agreements, procedures, rules, and laws that come into play from the moment
an end user issues an instruction to pay another person or a business, to the final settlement
between banks at the CBK. The NPS therefore enables transacting parties to exchange value
to conduct business efficiently. The key role players within the Kenyan NPS are recognized in
different layers of participation – from the highly regulated participants, consisting of KEPSS
settlement participants (settlement banks), payment services providers (PSPs) that do not
have settlement accounts may be sponsored by settlement participants, and this process is
managed outside the KEPSS system as the system only caters for direct participation.
The KEPSS system is at the core of the systems for payment clearing and settling in Kenya and
settles on a prefunded basis in central bank money. Payments and transfers between banks
and/or CBK are settled with finality when they are posted to banks’ accounts in KEPSS. Final
and irrevocable settlement is achieved by simultaneous crediting and debiting commercial
banks and Micro-finance bank accounts held at Central Bank of Kenya. Payments are
directly entered into the KEPSS, delivered via SWIFT. A majority of payments is included in
daily clearings between banks and the net positions are settled bilaterally to their respective
accounts at a settlement bank. CBK is the ultimate settlement bank.
KEPSS also plays a role in the settlement of interbank payment obligations arising from net
settlement systems, for example, those relating to cheques, and cards transactions arising
from the Low Value Settlement Service. However, the purpose of this Assessment is limited
to its interaction with the core (wholesale) KEPSS system. An internal assessment against
the principles was performed previously in 2017, but this is the first self-assessment to be
published.
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KEPSS ASSESSMENT AGAINST THE PFMI PRINCIPLES - DECEMBER 2024

The chart below illustrates the key features of the Kenyan payment system.
2.2. General Organization of the FMI
Settling payments in KEPSS is one of the Bank’s core tasks as central bank. The CBK Board of
Directors has ultimate responsibility for settlement operations and formulates the strategy for
the development of the National Payments System and the policies for its safety and efficiency.
In accordance with the Central Bank Act, the Governor is responsible for the management of
the Bank and is therefore ultimately responsible for the operation of KEPSS.
The diagram depicting the governance structure of the BPSD is illustrated below:
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KEPSS ASSESSMENT AGAINST THE PFMI PRINCIPLES - DECEMBER 2024

Figure 1: Structure of the Banking and Payments Department and other Departments
As indicated in the above diagram, the responsibility for day-to-day settlement operations
and development initiatives is delegated to the system ownership, which has been delegated
to a dedicated KEPSS Service Operations Section under the Banking and Payment services
Department (BPSD). The day-to-day tasks performed by the section include the operation of
the settlement of payments, the management and development of the system solutions used
and administrative tasks such as following up of agreements with external service providers,
risk analyses and management reporting, and contingency plans and exercises. The Oversight
and Compliance Section is responsible for ensuring that operational risk assessments are
conducted and that the FMI complies with the risk management process as outlined in the
Group Risk Management Policy.
2.3. Legal and Regulatory Framework
A well-established legal framework primarily based on rules, operating procedures, contractual
agreements, laws, and regulations supports the settlement service. The CBK Act mandates the
CBK to oversee the supervise and regulate the NPS and to ensure its safety, soundness, and
efficiency. The NPS Act provides the legal framework for the payment system, which includes
the management, administration, operation, regulation, and supervision of the payment,
clearing and settlement systems in the Republic of Kenya. KEPSS’s legal arrangements are
based on a contractual basis through several bilateral agreements which are meant to provide
legal certainty for each material aspect of its activities. The participants Agreement to settle
through KEPSS is signed by each participant and the CBK as the KEPSS operator. The KEPSS
Service Agreement is executed by the CBK as the operator of the KEPSS system.
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KEPSS ASSESSMENT AGAINST THE PFMI PRINCIPLES - DECEMBER 2024

2.4. KEPSS System Design and Operations
KEPSS is the real-time gross settlement (RTGS) system where Kenya’s large value payments
are conducted. The KEPSS system is owned and operated by the CBK and was implemented
on July 29, 2005. The RTGS system is systemically important and has established arrangements
to manage financial and operational risks. Apart from handling large-value interbank and
customer payments, it settles the net clearing obligations from the retail payment systems
privately operated.
Final settlement of financial obligations between participants is executed by entries to their
settlement account held at the CBK. Credit and liquidity risks are managed for participants as
transactions are settled (subject to funds availability) on a gross basis, in real time, in central
bank money, and with finality. KEPSS participants have access to intraday liquidity facilities
(ILF), which is fully collateralized against government securities held in the CSD system and
Bank Deposits. (BD). Liquidity management is also facilitated by a gridlock mechanism. To
encourage the early submission of payment instructions, RTGS transactions are charged with
an ascending fee schedule. Operational disruptions are managed with measures to ensure
high system availability, while the disaster recovery site (DRS) site or near site (NS) helps to
ensure business continuity.
Apart from handling large-value interbank and customer payments, the system is also used
for the settlement of obligations arising from the other payment streams such as – Electronic
Funds Transfers, Government payments, online internet banking automated clearinghouse,
the Automated Clearing House (ACH) for checks and electronic funds transfers (EFTs) and
licensed payment switch service providers.
The NACH is owned by the commercial banks through the Kenya Bankers Association
(KBA). Credit and liquidity risks associated with this system are managed for participants as
transactions are settled (subject to funds availability and settlement is done in real time, in
central bank money, and with finality. Participation in the NACH is open to commercial banks
and microfinance banks that are licensed under the Banking Act.
2.4.1. Settlement Schedule
The KEPSS settlement schedule is based on five days a week, eight hours a day settlement
system. KEPSS is closed on weekends (i.e., Saturday and Sunday) as well as on Kenyan public
holidays. KEPSS system is available to participants in 2 windows, the 1st window runs from 8.25
AM to 4.00 PM. This enables the participants to submit all payment instructions for settlement.
The 2nd window runs from 4.00 PM to 4.30 PM and only enables participants to normalize their
accounts to settle outstanding obligations and for Cash Reserve Ratio (CRR) purposes. A HelpDesk Service manage by the Payment System Operations Section is provided by the CBK to
support participants and address any issues arising from the days’ business operations.
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KEPSS ASSESSMENT AGAINST THE PFMI PRINCIPLES - DECEMBER 2024

2.4.2. FMI Performance Statistics
The KEPSS continues to record increased activity in both the volume and value of transactions.
For FY2021/22, KEPSS processed 6.7 million transaction messages valued at Ksh.35.5 trillion,
compared to 6.1 million transaction messages valued at Ksh.34.7 trillion in FY2020/21 (Figure
2 below). Direct settlements through KEPSS by commercial banks accounted for an average
of 99.0 per cent of the total activity through KEPSS while the Net Settlement Instruction (NSI)
activity through the NACH to KEPSS accounted for an average 1.0 per cent.
Figure 21 KES Volume and Value of transactions processed by KEPSS
For public consumption, the CBK publishes statistics on the CBK website on the value and the
number of instructions settled in KEPSS on monthly basis.
2.4.3. Operational Reliability
A key operational target is for KEPSS to be available to its members at a minimum of 99.99 per
cent of the time. Availability is measured relative to the total number of hours that the system
is normally open for settlement. In 2022, KEPSS availability was at 100.00 per cent due to the
high uptime system architecture design implemented during the system upgrade exercise.
2.4.4. Collateral Management
The system provides for automated liquidity provision by providing loans secured by financial
instruments reserved in the KEPSS system. Acceptable financial instruments are Government
securities in the form of Treasury bills and Bonds. Collateral is automatically pledged for
securing KEPSS loans, on the conditions determined by the CBK from time to time to facilitate
settlement through the KEPSS system if there is a shortage of funds in a bank’s settlement
account. The Bank provides intraday credit through the Intraday Liquidity Facilities (ILF). If
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KEPSS ASSESSMENT AGAINST THE PFMI PRINCIPLES - DECEMBER 2024

a participant fails to repurchase the collateral at the end of the day, the ILF is converted into
an overnight loan with a penalty. The facility is available only to KEPSS participants who have
entered a Master Repurchase Agreement (REPO) with the CBK.
2.4.5. FMI Fees and Charges
The processing periods are based on the processing window in which the processing was
done. KEPSS operational costs are highlighted in the KEPSS rules and procedures under
Schedule E. The cost is recovered from the participants through an annual maintenance
transaction fee, settlement charges and penalties as highlighted in Schedule E of the KEPSS
Rules and Procedures
2.4.6. Settlement finality
All transactions settled in KEPSS are deemed final and irrevocable. The NPS Act, which was
enacted in 2011 and operationalised vide the NPS Regulations in 2024, provides an explicit basis
for settlement finality in its section 9. In case of bankruptcy, clearing and settlement through
KEPSS will be processed under the rules of the system and shall not be revoked, reversed,
modified, stopped, or set aside.
2.4.7. KEPSS Interface
KEPSS interfaces with two regional payment systems, (1) the East African Payment System
(EAPS) which facilitates cross border payments in the East African Community (EAC) and
(2), the Regional Payment and Settlement System (REPSS) which provides payment and
settlement for transactions within the COMESA region. For EAPS, the participant central banks
that include Kenya, Uganda, Tanzania and Rwanda prefund their accounts in the other central
banks in the settlement currencies of the participant EAC Partner States’ local currencies i.e.,
Kenya Shillings (KES), Ugandan Shillings (UGX), Tanzanian Shillings (TZS) and Rwandese Franc
(RWF), in their RTGS systems. For REPSS, clearing takes place at each participating central
bank where the participants maintain prefunded accounts in the settlement currencies of the
system i.e. the US Dollar (USD) and the Euro (EUR). The REPSS is a net deferred settlement
system with the final settlement-taking place at the Bank of Mauritius. The oversight and
support arrangements for REPSS is provided by the COMESA Clearing House (CCH), which is
currently based in Harare, Zimbabwe. CCH acts as the Secretariat for the REPSS User Group
that is actually charged with the oversight of REPSS and reports any recommendations from
the User Group to COMESA Committee of Governors for ratification and final decision making
2.4.8. Reporting
A comprehensive set of reports are available in the KEPSS system. Some of the reports
covering KEPSS include
a. Monthly Economic Review – This is to track performance of KEPSS on a monthly basis
b. Financial Stability Report – A report that captures the future trends and risks in KEPSS
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2.4.9. KEPSS Operations and Support
KEPSS has a fully dedicated Business and Technical KEPSS HELPDESK teams that are
available to monitor the system during business hours and address any issues that may arise in
the course of business. These teams ensure the following:
1. Business Validation:
a) All KEPSS processors are up and running.
b) Possible system errors are escalated and attended to
c) Message flows from or to KEPSS are monitored.
d) Incidents reported to the KEPSS technical support team are resolved and escalated as
per operations procedures if need be
e) Problems reported by any of the participants are promptly attended to.
2. Technical Validation:
a) Technical reports are prepared and submitted when required
b) Technical problems are identified and attended to by the KEPSS IT support team
c) SWIFT connections are up and running
3. DETAILED ASSESSMENT REPORT
3.1 Assessment of KEPSS against the Principles PFMIs
The Assessment focuses on KEPSS’s role as a wholesale RTGS system. In its assessment, BPSD
has applied the rating system used in the CPMI-IOSCO Disclosure Framework. For each PFMI,
the assessment has explained and commented on the regulations, arrangements, procedures
and measures relevant to KEPSS and an overall assessment of how the principle is observed
has been provided. The structure with key considerations and associated questions is retained.
The principles, guidance, key considerations, and questions from the PFMI document are
included in italics. Where the answers to multiple questions in the same area are identical,
the answers are identical, or reference is made to the reply to a related question. This is to
make the report easier to read. Under the Disclosure Framework, observance of each of the
applicable Principles is rated according to the following scale:
Principle 1: Legal Basis
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Assessment Rating Principle 1 is Considered to be Broadly Observed.
As a robust legal
basis for an FMI’s
activities in all relevant
jurisdictions is critical
to an FMI’s overall
soundness, this
principle should be
reviewed holistically
with the other
principles.
An FMI should have
a well-founded,
clear, transparent,
and enforceable
legal basis for each
material aspect of
its activities in all
relevant jurisdictions
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Material Aspects and Relevant Jurisdictions
Q.1.1.1: What are the material aspects of the FMI’s activities that require
a high degree of legal certainty (for example, rights and interests in
financial instruments; settlement finality; netting; interoperability;
immobilization and dematerialization of securities; arrangements
for DvP, PvP or DvD; collateral arrangements (including margin
arrangements); and default procedures)?
The material aspects of the System, as well as the rights and obligations
between the Bank and the participants regarding funds transfers under the
Systems, are set out by the Bank in the KEPSS rules and Procedures which
stipulate that the rights and obligations arising from them are governed by
Kenyan laws. The laws, rules and procedures provide a clear and enforceable
legal basis for the settlement of transfers in KEPSS and for the use of collateral
to mitigate credit risk. The material aspects of KEPSS’s activities requiring
legal certainty are rights and interests in financial instruments, collateral
arrangements and settlement finality and netting arrangements.
Material Aspects
The material aspects of the KEPSS that require a high degree of legal certainty
include:
i) The mandate to provide the settlement service and powers to issue
regulations, instructions, rules, procedures, and other similar regulatory
instruments to participants. The CBK, as the KEPSS operator, has set
out regulations to specify both access and exit criteria for participants.
Financial institutions or other institutions that would like to participate
in the system must meet the qualifications as specified in the KEPSS
Rules and Procedures.
ii) Legal recognition of electronic funds transfers and the ordering of
such transfers via electronic means. In the court of law in Kenya,
an electronic payment transaction made is binding based on the
contractual relationship between the operator of a payment system
and its participants. This is covered under the Kenya Communication
and Information’s Act that provides the legal framework for the use
and recognition of electronic signatures as evidence for payment
transactions in a court of law.
iii) Settlement finality irrevocability of payments settled through the KEPSS
system. The timing of final settlement of payments is set out in Section
3.2 of the KEPSS RULES and Procedures pursuant to Section 9 (2) and (3)
of the NPS Act. The KEPSS Rules and Procedures specify that a payment
order is regarded as entered in KEPSS and settled with finality when it
has been
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Key Consideration 1.1 iv) debited from or credited to one of the bank’s accounts in CBK, the bank
or a third party may not recall the payment order after this time.;
The legal basis should
v) The rights to assets (financial instruments) that are used as collateral for
provide a high degree
loans provided in the KEPSS.
of certainty for each
material aspect of an
vi) Netting - Although all settlement instructions within the system are
FMI`s activities in all
processed on a gross basis, netting arrangements are also relevant to
relevant jurisdictions.
the KEPSS as their potential unwinding in the event a KEPSS participant
with a net debit position from a netting arrangement is unable to settle,
has the potential to disrupt other aspects of settlement in KEPSS.
Q.1.1.2: What are the relevant jurisdictions for each material aspect of the
FMI’s activities?
The relevant jurisdiction for each material aspects of the FMI’s activities
is established through the legal foundation of the Central Bank of Kenya
Act, Cap. 49 (CBK Act), the Payment Systems Act 2011 (NPS Act), and the
confirmation of participation agreement that all participants of KEPSS sign
binding themselves to the operating rules and procedures. The bi-lateral
Agreement for KEPSS Service Usage signed by participants legally binds
participants with the KEPSS’s rules and operating procedures. The CBK
operates the KEPSS system within Kenya for payments in Kenya shillings and
the Kenyan law governs the Terms and Conditions for participating in KEPSS.
Its real-time settlement services do not extend to international jurisdictions.
Legal Basis for each Material Aspect
Q.1.1.3: How does the FMI ensure that its legal basis (that is, the legal
framework and the FMI’s rules, procedures, and contracts) provides
a high degree of legal certainty for each material aspect of the FMI’s
activities in all relevant jurisdictions?
The KEPSS system is governed by different rules and regulations in terms of
the Acts, legislation, directives, circulars, policies, government gazettes and
internationally recognized standards (i.e. SWIFT message standards). Predefined contracts are endorsed between the FMI operator and the direct
participants. As illustrated under Q.1.1.2, the following provide the legal basis
for the FMI activities:
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Key Consideration 1.1 The CBK Act
The legal basis should
The CBK Act mandates the CBK to oversee the supervision of the NPS to
provide a high degree
ensure its safety, soundness, and efficiency. The CBK Act was amended
of certainty for each
in 2005 to clarify the role and responsibility of the CBK in the domestic
material aspect of an
payment system. Following this amendment, the role and responsibility
FMI`s activities in all
of the CBK were entrenched in law as described in Section 4A 1(d) that
relevant jurisdictions.
empowers the Bank to “formulate and implement such policies as best
promote the establishment, regulation and supervision of efficient and
effective payment, clearing and settlement systems” This provided the
Bank with the basis and authority/mandate to discharge its functions as a
monetary authority and/or as overseer of payment systems thereby making
oversight of payment systems an integral part of the wider responsibilities for
monetary and financial stability. The Bank’s objective is to promote the good
of the people of Kenya by maintaining monetary and financial stability. This
objective informs the operation of the KEPSS services and ensures that the
Bank places a high priority on the safety and efficiency of the KEPSS services.
NPS Act
The NPS Act, 2011 was enacted in 2011 and operationalised in 2014 through
the NPS Regulations. The Act provides the legal framework for the payment
system that includes the designation, settlement finality, regulation, and
supervision of the payment, clearing, and settlement systems. The Act further
prescribes a dispute resolution mechanism among participants, gives validity
to, protects netting arrangements (Section 16 of the NPS Act) in the event
of the liquidation or winding up of a participant, and provides a clear legal
basis regarding when settlement finality occurs. The NPS Act furthermore
provided for the regulatory and supervisory powers of the CBK to manage and
control payment system risks. Although the Act provides for the formation of a
Payment System Management Body (PSMB), this has not been established.
KEPSS Service Agreements
The basis of this agreement is that the CBK, while performing its functions
as the Central Bank of Kenya, shall provide the KEPSS participant with a
facility to settle financial obligations through the KEPSS system. The service
agreement is entered into prior to the participant go-live in the KEPSS system.
The purpose is to record the contractual terms and conditions applicable to
the parties (KEPSS participant and the CBK) in the provision of the payment
settlement services by the CBK to the participant and the utilization of the
facilities provided by the CBK
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Key Consideration 1.1 to the participant; thus, each creating a legally binding relationship to receive
KEPSS system services.
The legal basis should
provide a high degree The KEPSS service agreement stipulates where settlement instructions
of certainty for each should be delivered, and the process followed for settlement. It also contains
material aspect of an settlement procedures as well as finality and irrevocability. The Operational
FMI`s activities in all Manual and SLA, which is an addendum to the KEPSS service agreement,
relevant jurisdictions. specifies the technical and business requirements.
Service Level Agreements (SLAs)
To document the roles and responsibilities, an SLA is entered into by the BPSD
with each of the following internal departments within the CBK:
a. Information Technology Department (ITD);
b. Financial Markets Department (FMD);
c. Bank Supervision Department (BSD); and
d. Internal Audit & Risk Management Department (IARMD)
The SLAs provide for the BPS to share or receive services from these
departments in order to deliver a robust and reliable KEPSS service to the
industry.
a) For an FMI that is a CSD, how does the CSD ensure that its legal basis
supports the immobilization or dematerialization of securities and the
transfer of securities by book entry?
This is not applicable to the KEPSS system.
b) For an FMI that is a CCP, how does the CCP ensure that its legal basis
enables it to act as a CCP, including the legal basis for novation, open
offer or other similar legal device? Does the CCP state whether novation,
open offer or other similar legal device can be revoked or modified? If yes,
in which circumstances?
This is not applicable to the KEPSS system.
c) For an FMI that is a TR, how does the TR ensure that its legal basis
protects the records it maintains? How does the legal basis define the
rights of relevant stakeholders with respect to access, ity, and
disclosure of data?
This is not applicable to the KEPSS system.
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Key Consideration 1.1 d) For an FMI that has a netting arrangement, how does the FMI ensure
that its legal basis supports the enforceability of that arrangement?
The legal basis should
provide a high degree This is not applicable to the KEPSS system as it settles on a gross settlement
of certainty for each basis.
material aspect of an
e) Where settlement finality occurs in an FMI, how does the FMI ensure
FMI`s activities in all
that its legal basis supports the finality of transactions, including those of
relevant jurisdictions.
an insolvent participant? Does the legal basis for the external settlement
mechanisms the FMI uses, such as funds transfer or securities transfer
systems, also support this finality?
The timing of final settlement of payments is set out in Section 9 (2) (3) of the
NPS Act and Section 11.1 and 11.2 and 11.3 of the KEPSS Rules and Procedures.
The KEPSS Rules and Procedures specifies that Payment instructions in
KEPSS are deemed to be final and irrevocable once the Forwarding bank’s
account is debited and the Executing bank account is credited with the
amount specified in the payment instruction and once a payment has been
settled across the KEPSS accounts, the Forwarding bank shall not have an
ability to cancel the payment. It is not possible to revoke a payment order that
has been finalized.
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Key Consideration 1.2: Q.1.2.1 How has the FMI demonstrated that its rules, procedures, and
contracts are clear and understandable?
An FMI should have
rules, procedures, and The Bank’s legal documentation for the RTGS services is clear,
contracts that are understandable, and consistent with the Kenyan law. The FMI operator is
clear, understandable, readily available to provide consultation on any issues that are not clear. The
and consistent with rules (and any amendment thereto) are formulated to address any concerns
relevant laws and the participants or the public may have, which in turn reduces uncertainty
regulations. and misinterpretation of the rules.The legal basis for the CBK’s activities
includes certain rules, operating procedures, and contractual agreements
with which participants in the settlement service are required to abide. The
material aspects of the activities in which the Bank engages in providing the
settlement service are supported by these rules and contractual provisions
which, together with relevant laws and regulations in the Kenyan jurisdiction,
establish the terms upon which the settlement service is provided to its
participants. The FMI operator is readily available to provide consultation on
any issues that are not clear.
The FMI collaborates with stakeholders regarding any rules, procedures
and contracts to ensure that they understand and agree to them. KEPSS
participants are consulted prior to the implementation of new rules. The
FMI operator CBK LSD are involved in drafting and implementing rules and
procedures and reviewingof the contracts and ensuring they comply with
Kenyan laws. In addition, KEPSS Operational User Manual is provided to the
KEPSS participants to guide and supplement the KEPSS legal documentation.
These provide clear and understandable descriptions of the KEPSS services
consistent with its legal frameworks.
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Key Consideration 1.2: Q.1.2.2 How does the FMI ensure that its rules, procedures, and contracts
are consistent with relevant laws and regulations (for example, through
An FMI should have
legal opinions or analyses)? Have any inconsistencies been identified
rules, procedures, and
and remedied? Are the FMI’s rules, procedures and contracts reviewed or
contracts that are
assessed by external authorities or entities?
clear, understandable,
and consistent with Consistency of Rules and Procedures with Relevant Laws
relevant laws and
The assumption of agreements and formulation of rules for KEPSS take place
regulations.
in consultation with legal experts at the Bank. Where necessary, external
experts are consulted. The KEPSS Terms and Conditions refer to relevant
legislation setting out important rules on the settlement of payments at
the Bank. In the event of changes, the agreements, rules, and terms are
updated accordingly. The KEPSS system owner has first-line responsibility
for rules, procedures, and agreements for KEPSS being consistent with
relevant laws and regulations that make up the legal basis for KEPSS. The
participants submit an annual report (Schedule H) to the Bank on the status
of compliance.
The role of the Oversight and Compliance (OC) Section of BPSD at the Bank
is to help ensure that the Bank does not incur public sanctions, financial
loss or loss of reputation because of failure to comply with applicable laws,
regulations, and internal rules. The OC Section is to support the system owner
and take second-line responsibility by identifying, assessing, monitoring, and
reporting on the risk of non-compliance with applicable rules. As a third line
of defence, KEPSS’s operations are audited by the Internal Audit Unit on the
basis of a set audit plan. It is the auditor who decides which issues in KEPSS
are to be reviewed in each audit. In addition, KEPSS is subject to supervision
by the Bank’s external auditor, who may also be engaged to review specific
issues in KEPSS. To-date there have not been any inconsistencies identified
with the relevant laws and regulations
Q.1.2.3 Do the FMI’s rules, procedures and contracts have to be
approved before coming into effect? If so, by whom and how?
The FMI regulations are governed by the NPS Act. The KEPSS Rules and
Procedures and the relevant laws, directives, and circulars issued by the
CBK are subject to legal clearance from the CBK Legal department. For the
purposes of this documentation, these regulations can be considered as
FMI rules of participation and are binding to the CBK, KEPSS, participants.
Amendments to the rules and procedures are made pursuant to guidelines
provided under section 16.1 (b) of the KEPSS Rules and Procedures in
consultation with the participants and all stakeholders.
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Key Consideration 1.3: Q.1.3.1: How does the FMI articulate the legal basis for its activities to
relevant authorities, participants and, where relevant, participants’
An FMI should be able
customers?
to articulate the legal
basis for its activities The Bank articulates the legal basis for its activities in the KEPSS Terms &
to relevant authorities, Conditions as well as its contracts with the participants and the documents
participants, and governing the Bank’s provision of settlement arrangements. All documents
where relevant, are governed by and enforceable under, Kenyan law. The documentation
participants` is clearly set out and made available to relevant stakeholders, with most
customers, in a clear documents available on the Bank’s website. When a participant opens a
and understandable settlement account or commences the use of the KEPSS, the Bank notifies
way. the participant in writing or through its website of rules pertaining to the
Systems. Such rules are also published on the Bank’s website. In addition,
when amending the rules due to IT system improvements or changes in the
surrounding environment, the Bank notifies participants of the amendment
in writing or through its website, and thus participants are in a position to
easily access the latest information.
Vision and Strategy Document
The CBK conveys the NPS’s vision and strategy to the public, considering
new and complex challenges faced by the NPS stakeholders. The first
Kenyan National Payment System Framework and Strategy document
was developed in the year 2004, prior to the implementation of the KEPSS
system in July 2005. With most of the envisaged strategies being successfully
implemented, the strategy document was reviewed, refined, and adjusted for
future developments to create a vision and strategy for the period 2021-2025.
This was published in 2022. This document contains a high-level vision and
strategies to maintain a world-class payment system and meet domestic and
regional payment system requirements. In this document, new objectives
and strategies have been developed and its purpose was to provide highlevel strategic guidance and direction for the payment system for the next
five (5) years from 2021 up-to 2025. In this document, new objectives and
strategies have been developed which includes to:
a) facilitate a payments system that meet the diverse needs of users and
support the country’s development agenda.
b) ensure payments systems that are secure through influencing
industry and global standards and adopting safe technologies.
c) power an ecosystem based on collaboration leading to the launch of
premier and globally leading innovations.
d) implement a supportive policy and regulatory framework that
is firmly enforced across all existing and emerging players. At a
high level, the legal basis for KEPSS is articulated in a clear and
understandable manner on the CBK’s website.
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Key Consideration 1.4: Enforceability of Rules, Procedures, and Contracts
An FMI should have Q.1.4.1 How does the FMI achieve a high level of confidence that the rules,
rules, procedures procedures, and contracts related to its operations are enforceable in
and contracts that all relevant jurisdictions identified in key consideration 1 (for example,
are enforceable in all through legal opinions and analyses)?
relevant jurisdictions.
The rules, procedures and agreements concerning KEPSS are formulated,
There should be
approved, and entered into in accordance with the legal basis for the Bank’s
a high degree of
activities as a settlement Bank. The Bank’s contracts with account holders
certainty that actions
are governed by and enforceable under, Kenyan law. the FMI is subject to
taken by the FMI
the legal foundation for the payment system in Kenya. The documentation
under such rules and
is reviewed regularly and in advance of any changes to KEPSS to ensure they
procedures will not
remain enforceable and provide robust legal protection. All the agreements
be voided, reversed or
or contracts between the FMI and the participants are reviewed by all parties
subject to stays.
before they are signed to ensure they are enforceable.
Degree of Certainty for Rules and Procedures
Q.1.4.2: How does the FMI achieve a high degree of certainty that its rules,
procedures and contracts will not be voided, reversed or subject to stays?
Are there any circumstances in which an FMI’s actions under its rules,
procedures or contracts could be voided, reversed or subject to stays? If
so, what are those circumstances?
The KEPSS Rules and Procedures section 8.1 and 8.2 establish the rights and
responsibilities of the CBK and RTGS members. KEPSS’s legal arrangements
are based on a contractual basis through several bilateral agreements
which are meant to provide legal certainty for each material aspect of its
activities. The participants Agreement for the operation of KEPSS is signed
by each participant and the CBK as the KEPSS operator. The KEPSS Service
Agreement is executed by CBK as the operator of the KEPSS system.
The CBK is clear on what is expected to qualify as a participant in KEPSS.
The KEPSS rules and procedures clearly states the rules and legislative
requirements that a new entrant should adhere to. All new entrants must
comply with the standards adopted as prescribed in the KEPSS rules and
procedures document. No actions under its rules, procedures or contracts
could be voided, reversed or subject to stays as participants are required to
execute the “Agreements for participation” agreeing to be irrevocably bound
by it and its Rules and Procedures and undertake user acceptance tests to
determine systems compatibility and user capabilities to Participant in KEPSS
(section 3.3) prior to being on boarded.
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Q.1.4.3: Has a court in any relevant jurisdiction ever held any of the FMI’s
relevant activities or arrangements under its rules and procedures to be
unenforceable?
No court has ever held any of the KEPSS activities under its rules and
procedures to be unenforceable. In addition, there has been no precedent
transactions settled in KEPSS being challenged in a court.
Key Consideration 1.5: Q.1.5.1: If the FMI is conducting business in multiple jurisdictions, how does
the FMI identify and analyze any potential conflict-of-laws issues? When
An FMI conducting
uncertainty exists regarding the enforceability of an FMI’s choice of law in
business in multiple
relevant jurisdictions, has the FMI obtained an independent legal analysis
jurisdictions should
of potential conflict-of-laws issues? What potential conflict of-laws issues
identify and mitigate
has the FMI identified and analyzed? How has the FMI addressed any
the risks arising from
potential conflict-of- laws issues?
any potential conflict.
CBK does not conduct business as a settlement bank in multiple jurisdictions.
This key consideration is not therefore considered relevant for KEPSS.
However, KEPSS has two modules, EAPS and REPSS, which handle
payments routed within East Africa and the COMESA regions, respectively.
The settlement of these cross-border transactions is based on pre-funded
accounts domiciled in the CBK. For EAPS, an MOU for EAC Central Banks on
currency convertibility and repatriations (signed off in 2014) is in place. REPSS
is implemented as a module of KEPSS, and a participation agreement is in
place, which highlights obligations of direct and indirect participants.
Key Conclusion The Bank has implemented appropriate and robust legal coverage for the
RTGS services. The Bank draws on in-house legal experts and external legal
services when necessary to produce legal documentation and to review any
legal agreements that the Bank enters into as operator of KEPSS services.
Where there exists a risk for legal certainty, the Bank commissioned legal
opinions to help assess the potential legal risk and to consider any appropriate
mitigants.
The laws, rules and procedures provide a clear and enforceable legal basis for
the settlement of transfers in KEPSS and for the use of collateral to mitigate
credit risk. Internal or external legal experts are involved when concluding or
amending agreements concerning KEPSS. This provides an assurance that
CBK’s interests will be addressed in a legally sound manner and that the
agreement takes account of the formal requirements of laws, regulations
and other rules and procedures. CBK’s activities as a settlement bank offer
participants a high degree of legal certainty.
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Principle 2: Governance
Assessment Rsting Principle 2 is Considered to be Observed.
An FMI should have governance arrangements that are clear and transparent, promote the
safety and efficiency of the FMI, and support the stability of the broader financial system, other
relevant public interest considerations and the objectives of the relevant stakeholders.
In reviewing this principle, it should be noted that if an FMI is wholly owned or controlled by another
entity, the governance arrangements of that entity should also be reviewed to ensure that they do not
have adverse effects on the FMI’s observance of this principle. As governance provides the processes
through which an organisation sets its objectives, determines the means for achieving those objectives
and monitors performance against those objectives, this principle should reviewed holistically with the
other principles.
Special guidance issued by CPMI/IOSCO in August 2015 specifies that in cases where an FMI is
operated as an internal function of the central bank, key considerations 3 and 4 are not intended
to constrain the composition of the central bank’s governing body or that body’s roles and
responsibilities.
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Key Consideration FMI’s Objectives
2.1:
Q.2.1.1: What are the FMI’s objectives, and are they clearly identified? How
An FMI should have does the FMI assess its performance in meeting its objectives?
objectives that
place high priority The NPSD supports the mission of the CBK by ensuring the overall effectiveness
on the safety and and integrity of the NPS. The mission of the BPSD within the Bank is to ensure
efficiency of the the safety and efficiency of the NPS in the country. As such BPSD plays a
FMI and explicitly significant role in supporting the role of the banks in maintaining financial
support financial stability of the country. The Bank’s mission informs the operation of the KEPSS
stability and other services and ensures that the Bank places a high priority on the safety and
relevant public efficiency of the FMI services. The objective of the Bank’s settlement system
interests. (KEPSS) is secure and efficient settlement of payments between banks with
an account at the Bank. The settlement system must comply with relevant
international standards and requirements for critical infrastructure.
KEPSS was developed to enhance financial stability by removing credit and
settlement risks and to also provide a net settlement service to several retail
payment systems. This removes the risks associated with net obligations settled
in commercial bank money. The Bank supports its financial stability objectives
by providing a reliable, resilient, and responsive system for high value Kenya
shillings payments and settlement. To ensure that the KEPSS services contribute
towards monetary and financial stability, and, where appropriate, support other
relevant public interest considerations, the Bank regularly engages with various
stakeholders and users and consults on material changes to the KEPSS services.
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Q.2.1.2 How do the FMI’s objectives place a high priority on safety and
efficiency? How do the FMI’s objectives explicitly support financial stability
and other relevant public interest considerations?
The design of KEPSS ensures that there is no build-up of settlement exposures
associated with high-value transactions, which in turn promotes the stability
of Kenya’s financial system. Reflecting the critical importance of KEPSS to the
Kenyan financial system, the Bank aims to operate KEPSS at an extremely high
standard of availability and resilience, and to ensure that its settlement services
continue to evolve to meet the changing needs of the broader payments system.
In support of financial stability, the Bank has formulated risk management
policies to manage risks in a coordinated, comprehensive, and systematic
manner, consistent with international standards and best practices.
The FMI manages risks with the aim of achieving the safety and efficiency of the
NPS by ensuring that the settlement of financial obligations in the economy
takes place in central bank money which therefore underpins financial stability
and supports the safety and efficiency of the NPS.
Key Consideration Q.2.2.1 What are the governance arrangements under which the FMI’s board
2.2: of directors (or equivalent) and management operate? What are the lines of
responsibility and accountability within the FMI? How and where are these
An FMI should
arrangements documented?
have documented
governance Governance Arrangements
arrangements
that provide clear The management and operation of the KEPSS services sits within the Bank
and direct lines of and is subject to the Bank’s standard governance arrangements such as the
responsibility and Oversight by the Oversight and Compliance section of BPSD. The CBK Board
accountability. provides strategic leadership for the KEPSS infrastructure and supports the
These delivery of the Bank’s mission to promote the good of the people of the Republic
arrangements of Kenya by maintaining monetary and financial stability. It also seeks to
should be disclosed promote efficiency, innovation, and competition in the payment space wherever
to the owners, that can be safely done without impairing stability.
relevant authorities,
participants and, Section 10 of the CBK Act vests executive and advisory authority at the Bank
at a more general in the Board of Directors (the Board). This means that the Board oversees
level, the public. the Bank’s operations and manages its resources, unless specifically stated
otherwise in law. Section 12 A (5) of the CBK Act gives the Board powers to
delegate authority to the Governor or specific committees, and the Board
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has done so in a number of areas in the form of both general and specific
powers. To this end, the Board has delegated the monitoring of the KEPSS
risk management framework, risk tolerance and risk profiles to the BAC, SubCommittee of the Board chaired by an external member of the Board. The
governance arrangements for the Board and the Sub-Committee are set out in
the Board Charter. As operator of KEPSS, the Bank is accountable for the end-toend risk management of the KEPSS services. The Board supports this through
the oversight of all risks that could impact the resilience of the payment system.
The Governor may delegate any of his powers to other officers of the Bank
(section 13 (5). The decisions affecting day-to-day operations, and the
development of KEPSS are delegated to the Director of BPSD. The Head of
BPSD reports to the Governor. Ultimately, the Governor is accountable to the
operations of the FMI and through the Governor to the Board.
A separate Governance, Oversight and Compliance (OC) section within BPSD is
responsible for overseeing the governance system, operational risk management
and compliance. OC helps ensure that the Operations of KEPSS does not incur
public sanctions, financial loss or loss of reputation because of failure to comply
with applicable laws, regulations and internal rules and procedures. OC is also
to identify, assess, monitor, and report on the risk of non-compliance with the
KEPSS rules and procedures that the Bank is required to observe, and to advise
on following up this risk.
The Bank’s Information Technology (IT) provide technology and infrastructure
support services to the operation of KEPSS while the Internal Audit is charged
with assessing the Bank’s internal control, procedures and other matters that
are important for the Bank’s operations, based partly on the Regulation on Risk
Management and Internal Control at CBK.
The Board, the Governor and other line managers are informed about KEPSS’s
settlement activities through regular management reporting, which also covers
risk assessments, incidents, and compliance. Monthly reports are also prepared
and distributed to the Governor and line management. A separate annual report
is submitted to the Board for information.
Information about the organization and management of the CBK and the
delegation of responsibilities at the Bank is available on the Bank’s website and
in the CBK Annual report. The information disclosed includes the composition of
the Bank’s Board of Directors and the organization of the Bank’s departments.
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Lines of Responsibility and Accountability
Q.2.2.2 For central bank-operated systems, how do governance
arrangements address any possible or perceived conflicts of interest? To
what extent do governance arrangements allow for a separation of the
operator and oversight functions?
The management, operation and oversight of the FMI is currently located under
the same department and therefore the managers of these functions report to
the same Head of department. The functions are domicile at the BPSD. The head
of the BPSD is assisted by a deputy director who is the head of the division that
is responsible for the management, operations, and the oversight of the NPS.
Although the operations and oversight functions of the FMI are domicile in the
same department within the CBK, each function is headed by a senior manager
each with a separate job description with assigned delegation and areas of
responsibility. The Governance structure of BPSD is depicted under section 2.2 of
this assessment report.
The Bank is currently in the process of reviewing the NPS act and Regulations
and it is expected that the revised regulatory framework for the NPS will provide
for an improved governance arrangement between the operator and the
overseer of the FMI.
Q.2.2.3 How does the FMI provide accountability to owners, participants, and
other relevant stakeholders?
The operations and management of the KEPSS system are governed through
the SLAs, KEPSS service agreements entered into with each participating bank,
settlement agreements and SLAs with relevant internal departments. Internally
within CBK, the system operator reports to management on settlement
activities in KEPSS through monthly, quarterly, and annual reports. Participants
in KEPSS receive daily system reports on settlement activities including volumes
and values. Other external stakeholders have access to monthly (volumes and
Values) and annual reports published on the CBK website. A Treasury Managers’
Group is also established to allow the FMI to engage participants on any matter
that impacts on the FMI operations.
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Disclosure of Governance Arrangements
Q.2.2.4 How are the governance arrangements disclosed to owners, relevant
authorities, participants and, at a more general level, the public?
The CBK is the owner and operator of the FMI and therefore no other external
owners exist. The governance arrangement is available on the Bank’s website
and is published in the CBK Annual Report, but no specific reference is made to
FMI governance. The information about the organization and management of
CBK includes the composition and tasks of the Bank’s Board of Directors, and
the organization of the Bank’s departments. This self-assessment allows the FMI
to disclose its governance arrangements.
Key Consideration Roles and responsibilities of the CBK Board
2.3:
Q.2.3.1 What are the roles and responsibilities of the FMI’s board of directors
The roles and (or equivalent), and are they clearly specified?
responsibilities of
The Board of Director’s roles and responsibilities are set out in the CBK Act,
an FMI`s board of
which vests executive and advisory authority in the Board of Directors of the
directors should be
Bank. The CBK’s Board is a single body that functions in terms of the CBK Act
clearly specified,
and a Board Charter. The terms of reference of all committees and the Board
and there should
Charter are reviewed on a regular basis. The governance framework established
be documented
for the Board outlines the following requirements and responsibilities: (i)
procedures for
composition and membership of the Board; (ii) Board and organizational
its functioning,
matters; (iii) Board committees and their terms of reference; and (iv) policies
including
and procedures relating to corporate governance. As specified in the CBK
procedures to
Act, the Board is responsible for the management of the CBK’s affairs and for
identify, address,
the formulation of policies, providing independent oversight for the overall
and manage
management and strategy of the Bank and the use of its resources.
member conflicts of
interest. The board
As the CBK owns and operates the KEPSS, KEPSS management and operations
should review
fall under its governance structure and is therefore subject to the risk
both its overall
management, audit, and decision-making processes of the CBK and Board
performance and
direction.
the performance of
its individual board In line with the CBK Act, the role of the Board is explicitly limited to that of
members regularly. corporate governance. The CBK Board is ultimately responsible for overseeing
and monitoring the risk management processes established for the CBK,
including FMI operations. The responsibility and accountability for FMI
operations rest with the Governor, deputy governor and relevant committees
established by the Board of Directors Board.
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Q.2.3.2: What are the board’s procedures for its functioning, including
procedures to identify, address and manage member conflicts of interest?
How are these procedures documented, and to whom are they disclosed?
How frequently are they reviewed?
The Board has robust procedures in place to manage conflicts to ensure the
integrity and impartiality of the Board’s decision making. All Board members
must declare (In line with Article 12 (5): guidelines issued by the Minister of
Finance) their interests (personal. Business and financial). These includes Board
members whose roles within the Bank’s executive could give risk to specific
potential conflicts. The Chair informs the Board of any interest which may give
rise to an actual or potential conflicts and, the Board agrees the appropriate
manner to manage that conflict.
Q.2.3.3: Describe the board committees that have been established to
facilitate the functioning of the board. What are the roles, responsibilities,
and composition of such committees?
The CBK Act provides that the Board may, by resolution either generally or in
any particular case, delegate to any committee of the Board or to any member
thereof, or to any officer, employee or agent of the Bank the exercise of any of
the powers or the performance of any of the functions or duties of the Board
under this Act or any other written law. The relevant Committees that have
been established include (i) the Monetary Policy Committee (MPC) (ii) Audit
Committee (iii) Human Resources Committee that performs advisory role to the
bank’s Board.
Monetary Policy Committee (MPC)
Monetary Policy Committee (MPC) established under Section 4D of the Central
Bank of Kenya (Amendment) Act 2008 comprises the:
(i) Governor who is the Chairman (ii) The Deputy Governor who is the Deputy
Chairperson (iii) Two (2) members appointed by the Governor from the CBK. Of
the two members a) one shall be a person with executive responsibility within
the Bank for monetary analyses and b) one shall be a person with responsibility
within the Bank for monetary policy operations and Four (iv) external members
appointed by the Cabinet Secretary for The National Treasury (v) Principal
Secretary for the National Treasury or his Representative. External members
of the MPC are appointed for an initial period of three (3) years each and may
be reappointed for another final term of three (3) years. The Committee is
responsible for formulating monetary policy.
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Audit Committee
The role of the Committee is to assist the Board in fulfilling its oversight
responsibilities for internal control systems, risk management, financial
reporting process, the audit process and, as appropriate, the CBK’s process for
monitoring compliance with laws and regulations as they relate to financial
reporting. The Committee comprise of four (4) members who are all nonexecutive directors.
The Committee’s mandate on Internal Audit covers review of the activities and
resources of the internal audit function, including the effectiveness, standing
and independence of the internal audit function within the Bank. It also covers
review of the internal audit plan and follow up of the implementation of internal
audit findings and recommendations. The Audit Committee reports to the Board
of Directors on the standing and independence of the internal audit function
within the Bank. The Audit Committee also reports to the Board of Directors on
internal audit scope, approach, and deliverables.
Human Resource Committee (HRC)
The HRC of the Board comprises of four (4) non-executive directors and its
role is as an advisory role to the Bank’s Board in the fulfilment of the following
oversight responsibilities:
a) Monitor the formulation and implementation of Human Resources Policies in
the Bank.
b) In relation to staff matters, they ensure the Bank’s compliance with the
Kenyan Constitution, Laws of Kenya, CBK regulations and its own code of
conduct.
c) Perform any other Human Resources related functions as assigned by the
Board.
d) Monitor the implementation of Board resolutions relating to the HRC of the
Board
Review of Performance
Q.2.3.4: What are the procedures established to review the performance
of the board as a whole and the performance of the individual board
members?
Although there is no performance review on each individual member of the
Board, in practice, the members, who are experts in the area of payment systems
or related areas, have actively provided important information and made
comments on various subjects in each meeting.
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Key Consideration Q.2.4.1: To what extent does the FMI’s board have the appropriate skills and
2.4: incentives to fulfil its multiple roles? How does the FMI ensure that this is
the case?
The board should
contain suitable All directors, except the Governor are non-executive directors. The appointment
members with criteria for the members of the Board are specified under Article 11 (7) of the
appropriate skills CBK Act provides that a person shall be appointed as Director if he/she is
and incentives to knowledgeable or experienced in monetary, financial, banking, and economic
fulfil its multiple matters or other disciplines relevant to the functions of the Bank. As at the time
roles. This typically of the assessment, the Board members comprised of seven (7) members. All the
requires the directors except the Governor are non-Executive and are therefore independent
inclusion of non- of management and free from any business or other relationship, which could
executive board interfere with the exercise of their independent oversight. The Bank publishes
members. the names and biographies of all the Board members on the Bank’s website and
the CBK Annual reports.
Under the terms of the CBK Act, the Directors, are appointed by the President
of the Republic of Kenya with the approval of Parliament. Since KEPSS is
owned by the Bank, and is not operated as a separate legal entity, the skills
and qualifications of the Governor reflect the Bank’s broader responsibilities.
The Bank has human resources policies and practices in place to help in the
development appropriate skills and have the appropriate incentives. These
policies are described in Key Consideration 2.5.
Q.2.4.2: What incentives does the FMI provide to board members so that
it can attract and retain members of the board with appropriate skills?
How do these incentives reflect the long-term achievement of the FMI’s
objectives?
The directors’ terms of office are prescribed in the CBK Act. All the Board
members are appointed for a term of four (4) years each and are eligible for
reappointment for a term of four (4) years provided that no Board member holds
office for more than two (2) terms. Board members are appointed at different
times so that the respective expiry dates of the members’ terms of office shall
fall at different times. The aim is to ensure continuity in the CBK’s governance
structure.
Members of the Board of Directors need to deal with the full range of CBK’s
activities and are not normally appointed specifically on the basis of skills
relating to the Bank’s role as a settlement bank. There are therefore no special
mechanisms or incentives to recruit members of the Board with expertise in
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payment systems and settlement services. Members with a background in the
bank sector may nevertheless be familiar with the payment system and KEPSS.
The preparation of management reports and annual reports for KEPSS gives the
Board relevant information about settlement activities and an opportunity to
discuss related issues.
Q.2.4.2: What incentives does the FMI provide to board members so that
it can attract and retain members of the board with appropriate skills?
How do these incentives reflect the long-term achievement of the FMI’s
objectives?
See Q.2.4.1.
Q.2.4.3: Does the board include non-executive or independent board
members? If so, how many?
All directors, except the Governor and the deputy governor are non-executive
directors. This is a requirement prescribed by the CBK Act.
Q.2.4.4: If the board includes independent board members, how does the
FMI define an independent board member? Does the FMI disclose which
board member(s) it regards as independent?
An independent board member is deemed as any director that is not involved
in the day-to-day management and operations of the CBK. Membership of the
Board of Directors is public knowledge through the publication of appointments,
CBK’s annual report and information on the Bank’s website.
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Key Consideration Roles and Responsibilities of Management
2.5:
Q.2.5.1: What are the roles and responsibilities of management, and are they
The roles and clearly specified?
responsibilities
As the Chief Executive Officer, the Governor, is ultimately responsible for the
of management
management of the Bank, including the operation of KEPSS. The roles and
should be clearly
responsibilities of the Governor are set out in the CBK Act. The management
specified. An FMI`s
team of the FMI contributes to a sound and efficient payment system that meets
management
the requirements of the NPS. The team is therefore responsible for monitoring
should have
developments in the settlement environment and making strategic decisions
the appropriate
on the future developments of the settlement system. System ownership and
experience, mix
operational responsibility for KEPSS are assigned to BPSD and are executed by
of skills, and the
the KEPSS Operations team.
integrity necessary
to discharge their
The Bank has a statutory Internal Audit Unit which reports to the Board of
responsibilities for
Directors and its Borad Audit Committee, which consists of four external
the operation and
members of the Board. Internal Audit is charged with assessing the Bank’s
risk management
of the FMI.
internal control, procedures and other matters that are important for the Bank’s
operations, based partly on the Regulation on Risk Management and Internal
Control at the Bank. Internal Audit performs regular audits of KEPSS.
Other departments that play a role in the operation of the KEPSS system include
the Internal Audit & Risk Management Department, Legal Department, and the
Information Technology (IT) Department and Financial Markets Department
(FMD).
Q.2.5.2: How are the roles and objectives of management set and evaluated?
The instrument of delegation of powers sets out line functions that are
delegated to the respective departments. The management team of BPSD
is therefore responsible for monitoring developments in the settlement
environment and making strategic decisions on the future developments
of the settlement system. The operations team is responsible for the dayto-day operations and monitoring of the FMI. Performance of staff charged
with responsibilities in this area is evaluated based on a formal performance
contract. The Bank has formal job descriptions and performance management
arrangements to help clarify the expectations of staff who are also subject to the
Code of Conduct for CBK Staff.
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Experience, Skills, and Integrity
Q.2.5.3: To what extent does the FMI’s management have the appropriate
experience, mix of skills and the integrity necessary for the operation and
risk management of the FMI? How does the FMI ensure that this is the case?
The roles and responsibilities of the management of the day-to-day operation of
KEPSS sits at the delegated chain of authority and has the appropriate integrity,
skills and experience to operate the KEPSS services. \Training is provided where
individual knowledge gaps are identified. Managers in the functional area
responsible for the management and operations of KEPSS services are typically
employees with broad range of experience and skills. Leaving them well placed
to understand the relevant risks.
The Bank has a formal process for assessing performance. The Bank’s Human
Resources (HR) Department owns the Bank’s recruitment, training, competency,
and retention strategies. Succession planning is in place to maintain staffing and
experience levels. Job descriptions indicate educational requirements as well as
skills and competencies required to manage the FMI. System. Performance is
evaluated based on action plans, budget follow-up and ongoing governance.
Q.2.5.4: What is the process to remove management if necessary?
The CBK has a robust performance management system which allows for
management to be assessed annually. A disciplinary process is in place to
manage any misconduct by the management or any other employees of the
Bank.
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Key Consideration Risk Management Framework
2.6:
Q.2.6.1: What is the risk management framework that has been established
The board should by the board? How is it documented?
establish a clear
documented risk Generally, the Bank seeks to keep its exposure to risk low and aims to have
management a control environment and risk culture that supports this. There is a very low
framework that tolerance for operational risks, which impact business-critical functions such
includes the FMI`s as the operation of the KEPSS services. Consistent with these arrangements,
risk tolerance the Bank’s Board is responsible for setting the KEPSS risk tolerances, The
policy, assigns Board is responsible for the supervision of the affairs of the CBK, lay down
responsibilities and policies and exercise its powers to achieve the CBK statutory objectives. One
accountability for of the main objectives is to eliminate risks and ensure monetary and financial
risk decisions, and system stability. Accordingly, risk management is an integral part of the general
addresses decision management of tasks and day-to-day operations of the Bank.
making in crises
and emergencies. The Bank’s enterprise-wide governance arrangements include a clear and
Governance documented risk management framework. BAC is responsible for monitoring
arrangements the KEPSS risk management framework, risk tolerance and risk profile.
should ensure BAC also seeks to ensure that, where relevant the KEPSS risk management
that the risk framework will operate in a manner that is aligned with the Bank-wide risk
management and management framework. BAC is responsible for escalating to the Board if it has
internal control concerns of whether the risk management framework is fit for purpose.
functions have
Risk monitoring is performed through continuous monitoring of the RTGS
sufficient authority,
services; periodic reporting to the Board and executive management; regular
independence,
penetration testing and other testing; and regular updates on vulnerabilities. The
resources, and
internal auditor and the external auditor annually review the internal controls
access to the board.
of the KEPSS system as a part of the BPSD audit. Additionally, they review IT
applications, including access controls, segregation of duties, upgrades etc. as a
part of the ITD audit. The internal audit findings are reported to the BPSD and
ITD for their comments and then reported to the Audit Committee. The external
auditor reports are submitted to the Governor and are reviewed by the Audit
Committee.
Q.2.6.2: How does this framework address the FMI’s risk tolerance policy,
assign responsibilities and accountability for risk decisions (such as limits on
risk exposures), and address decision-making in crises and emergencies?
The CBK Group Risk Management Policy sets out the non-financial risk tolerance
of the CBK Group. Risk tolerance is approached from an impact and a likelihood
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perspective. From the impact perspective, the risk tolerance is set so that
operations should be performed to minimize the potential risk impact inherent
in the operations, while from the likelihood perspective, the risk tolerance
requires a lower residual risk likelihood where the potential risk impact is higher.
The Risk Management Policy is complemented by a Risk Appetite Statement,
which provides an outline of the Bank’s appetite for and approach to managing
its most significant risks, including strategic, financial, people and operational
risks.
The responsibilities for risk management of the FMI rest with BPSD. However,
the Board is ultimately responsible for directing and monitoring the entire
process of risk management as well as forming its own opinion on the adequacy
and effectiveness of the process. The business continuity plan for the FMI sets
out escalation and crisis management procedures to manage operational risks.
Q.2.6.3: What is the process for determining, endorsing, and reviewing the
risk management framework?
According to the CBK Group Risk Management Policy, the RMCD is responsible
for developing, maintaining, and promoting an appropriate risk management
policy, framework, approach, and culture as well as methodologies, processes,
and support systems. This Risk Management Policy is reviewed by RMCD
annually by the RMCD and further developed in line with external requirements,
internal needs and tabled for RMC and BAC’s consideration and approval by the
Bank’s board.
The FMI has developed an Operational Risk Management (ORM) framework
which allows for the proactive management of operational risks in all risk areas
including the FMI environment. This ORM framework is reviewed and approved
by BPSD, management that is responsible for managing the FMI. The CBK’s BCP
establishes the risk management framework for critical operations of the CBK,
which include ensuring the operation of the KEPSS system in the event of wide
scale operational disruptions. The BCP is tested at least twice a year covering
various anticipated scenarios.
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Authority and Independence of Risk Management and Audit Functions
Q.2.6.4: What are the roles, responsibilities, authority, reporting lines and
resources of the risk management and audit functions?
Risks arising to the operation of its RTGS responsibilities fall within the Bank‐
wide risk management framework. The Risk Management and Compliance
Division (RMCD) is responsible for maintaining an overview of material risks
and ensuring that the Governor is kept adequately always informed about the
Bank’s risk situation. RMCD is also responsible for the Bank’s risk management
framework being implemented and further developed in accordance with
external and internal requirements. The Division checks that principles and
guidelines for risk management are complied with.
The CBK has delegated the coordinating responsibility of risk management
to the RMCD whose responsibility is to collect the risk registers from all the
business areas. BPSD is the first line of defence, and is the business function
responsible for RTGS delivery and also owns the RTGS risks, developing and
delivering the end-to-end risk management framework and implementing
controls as appropriate. The function is in control of deploying internal risk
policies, tools, and methods to effectively manage risks.
A Bank-wide second line function is responsible for defining the Bank’s overall
risk management framework, as well as providing tools and tasks to the first line
of defence is the Risk Management and Compliance Division
(RMCD). The function reports to the Deputy Governor, through the RMC and
the risk function has a direct reporting line to the BAC. The BAC provides
recommendations to the Board on the adequacy and timelines of the proposed
response to risk-based audit assessments. It also reviews whether the Bank’s
Internal Audit program of review adequately reflects the key risks to RTGS and
provides sufficient assurance on the activities of the first and second lines of
defence and make recommendations to the Board based on this.
The Bank’s third line (Internal Audit) provides assurance that the RTGS risk
management framework is robust and that internal controls are appropriate and
effective. The Internal Audit Division (IAD) is to assess the Bank’s internal control,
procedures and other aspects that are important to the Bank’s operations.
Internal Audit’s role is to support the Board of directors’ in following up the
Bank’s operations by providing independent assessments and advice on the
Bank’s governance, risk management and internal control. Internal Audit bases
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its assessments and advice on observations from audit projects and knowledge
from monitoring the Bank’s operations. The IAD submits a report on risk
management and internal control to the Board at least annually.
Q.2.6.5: How does the board ensure that there is adequate governance
surrounding the adoption and use of risk management models? How are
these models and the related methodologies validated?
As stated above, RMD is responsible for developing, maintaining, and promoting
an appropriate risk management policy, framework, approach, and culture as
well as methodologies, processes, and support systems. All these are approved
by the Board.
Key Consideration Identification and Consideration of Stakeholder Interests
2.7:
Q.2.7.1: How does the FMI identify and take account of the interests of the
The board should FMI’s participants and other relevant stakeholders in its decision-making in
ensure that the relation to its design, rules, overall strategy, and major decisions?
FMI`s design,
Important aspects of the rules for settlement activities, such as requirements
rules, overall
for system solutions, account terms and contingency solutions, are formulated
strategy and major
after obtaining opinions from the participants and other relevant players in the
decisions reflect
financial sector. This takes place through organized forums, formal consultations,
appropriately
or a combination of both. The Bank engages in routine cooperation with KEPSS
the legitimate
members and consults on all material changes to operational arrangements, for
interests of its
example through regular KEPSS Treasury Managers forums which are held on
direct and indirect
quarterly basis.
participants and
other stakeholders.
Policy decisions that affect KEPSS are also communicated to the public through
Major decisions
media releases. Major decisions and the reasons for them are also explained
should be
in the CBK Annual Report. When there are major changes in KEPSS policies,
clearly disclosed
the CBK will notify participants in advance to gather their opinions before
to relevant
finalizing its decision. In the recent past, during the migration to the New
stakeholders and,
Generation Kenya Electronic Payment and Settlement System (NG-KEPSS)
where there is
several workshops and training sessions were conducted by the CBK to disclose
a broad market
new major features of the systems to the participants and to get their input and
impact, the public.
comments for considerations.
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Q.2.7.2: How does the board consider the views of direct and indirect
participants and other relevant stakeholders on these decisions; for
example, are participants included on the risk management committee, on
user committees such as a default management group or through a public
consultation? How are conflicts of interest between stakeholders and the
FMI identified, and how are they addressed?
Matters of strategic, operational, or financial importance to participants in the
settlement system, such as the procurement of system and operating solutions,
are submitted to the Board of Directors for consideration. In addition, The KUG
meetings provide a platform for the FMI to discuss any issues that impact on the
stakeholders. The FMI can also convene special meetings to discuss any issue
that has an impact on the stakeholders. Various forms are available, including
the quarterly Treasury Managers forums held with participants to discuss issues
affecting the NPS and FMI operations. Where there are conflicts of interest
between the system owner for KEPSS and external stakeholders, this will be
made clear in the presentation of the matter. CBK relies on transparency and
consultation to mitigate these conflicts of interest.
The participants and the Kenya Bankers Association (KBA) is also consulted
before formulating policies and regulations on issues which have a major impact
on them. In addition, the CBK calls for meetings and/or makes press releases to
announce major decisions or new developments/ implementations of payment
system projects to the public.
Disclosure
Q.2.7.3: To what extent does the FMI disclose major decisions made by the
board to relevant stakeholders and, where appropriate, the public?
The CBK consult with interested parties and consider their comments or views
before finalizing any regulations and resolutions that have general application
(where applicable). The Bank’s Board of Directors decisions on key issues
will be made known to relevant stakeholders directly through meetings and
consultation and otherwise through news items and documentation made
available to the public on the CBK’s website.
Some of the information disclosed on the CBK website includes the mandate,
mission, objectives, and functions of the CBK, the Board structure, the role of
the NPS as well as the role and responsibilities of the CBK, published under
payments. The CBK maintains the ity of its FMI members; hence,
member information is published on a secure site.
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Key Conclusion The CBK is governed by the laws of the Republic of Kenya, thus the settlement
service is supported by a well-established legal foundation primarily based on
rules, operating procedures, contractual agreements, laws, and regulations.
The KEPSS system is subject to the governance arrangements as per the NPS
Act, which is driven by the mission statement of the BPSD, as well as the clearly
defined NPS industry’s objectives. The CBK acts as overseer of the NPS and
BPSD has the responsibility for implementing the framework and strategy
agreed to by the CBK and the banking industry. The BPSD strives to reduce and
manage the risks in the NPS by promoting compliance to accepted international
best practice relevant for payment systems and is primarily focused on the
domestic NPS. These elements place a high priority on the safety and efficiency
of the FMI and support financial stability. Promoting a safe and efficient
payment system is one of the main objectives of the CBK and thus governs
its operation of the payment system. As a result, the public interest aspects of
operating a large value payment system are integrated into the work of the Bank
Additionally, the KEPSS system is operated and managed under robust policies
and controls, which allows for strategic and operational risk management
within the FMI. The governance arrangements clearly specify the roles and
responsibilities of the CBK Board. According to the CBK Act, the Board shall be
responsible for the corporate governance of the CBK by ensuring compliance
with principles of good corporate governance as well as adopting rules and
determining policies for the sound accounting, administration and functioning
of the Bank. The Governor and the deputy governors are responsible for policy
issues and the day-to-day management of the bsnk.
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Principle 3: Framework for the Comprehensive Management of Risk
Assessment Rating Principle 3 is Considered to be Broadly Observed.
An FMI should have a sound risk management framework for comprehensively managing legal,
credit, liquidity, operational and other risks.
In reviewing this principle, an assessor should consider how the various risks, both borne by and posed
by the FMI, relate to and interact with each other. As such, this principle should be reviewed holistically
with the other principles.
Key Consideration 1. Risks that arise in or are borne by the FM
An FMI should have Q.3.1.1: What types of risk arise in, or are borne by, the FMI?
risk management
The CBK has operational, regulatory, oversight, and supervisory roles with
policies, procedures
respect to the KEPSS-RTGS system. The CBK Law provides the required legal
and systems that
provision to perform these statutory roles. The regulations, directives, and
enable it to identify
operating rules of the KEPSS system provide for managing potential risks born
measure, monitor
by the FMI. The types of risk arising in, or borne by, the FMI include systemic
and manage the
risk, operational risk, settlement risk, legal risk, liquidity risk, credit risk and
range of risks that
reputational risk.
arise in or are
borne by the FMI.
Risk Management Policies, Procedures, and Systems
Risk management
frameworks should Q.3.1.2: What are the FMI’s policies, procedures, and controls to help
be subject to periodic identify, measure, monitor and manage the risks that arise in or are borne
review. by the FMI?
The Bank’s risk management framework is set out under Key Consideration 2.6.
The framework provides a methodology for identifying, assessing, responding
to and following up risks. Risk identification and assessment are to be
performed quarterly and in the event of: - Serious incidents, including failures
of established controls - Start-up of major projects - Major changes in Central
Banking Operations’ duties, IT systems or other infrastructure, or organisation
structure - Major changes to regulatory conditions - Significant external events
that may affect Central Banking Operations.
The Bank’s Internal Audit Division reports to the bank’s Board and has the main
purpose of helping the Bank achieve its objectives by checking that there is
adequate and effective management of material risks in the organisation, and
that appropriate and satisfactory internal controls are conducted. The RMCD
coordinates and facilitates continual risk management activities, which include
the reporting of risk incidents, monitoring the implementation of action plans
to mitigate identified residual risks, and implementing and monitoring key risk
indicators
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The RMCD coordinates and facilitates continual risk management activities,
which include the reporting of risk incidents, monitoring the implementation
of action plans to mitigate identified residual risks, and implementing and
monitoring key risk indicators. The risk assessment will be performed by
departmental line management responsible for processes. A risk owner
will be defined for each risk. Risks for KEPSS and changes in the risk profile
are compiled in a consolidated report prepared by RMCD to management
following the end of each quarter.
Risk Management Systems
Q.3.1.3 What risk management systems are used by the FMI to help
identify, measure, monitor and manage its range of risks?
The management of potential risks for the FMI is done as a part of the
risk management framework of the Bank. Strategic and operational risk
assessments are conducted on an annual basis to identify potential risks.
Emerging risks are also recorded as and when identified by the FMI. Strategic
and operational risk registers assist in recording, monitoring, and reporting
strategic and operational risks. These registers are updated at least on a
quarterly basis to ensure that action plans identified for implementation are
reviewed for reporting. Comprehensive change management processes are
implemented to assist with the management of risks. A crisis management
procedure is in place to assist with managing any emergencies or operational
disruptions. SLAs are completed with relevant stakeholders to manage risks
emanating in their environment and in the FMI operations.
BPSD also uses the call logging system to record operational incidents reported
that might affect the smooth functioning of FMI operations and the system
also provides error log and control log reports that identify problems and
controls in the system.
Review of Risk Management Policies, Procedures and Systems
Q.3.1.5: What is the process for developing, approving, and maintaining risk
management policies, procedures, and systems?
The FMI aligns its processes and systems with the CBK Group Risk
Management Policy and, where required, works together with the RMCD to
develop, and maintain risk management systems and processes. Procedures
are developed by the BPSD’s operations and approved by the departmental
management team. These procedures are regularly updated and audited by
both the CBK’s external and internal auditors
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The Bank’s Risk Management Policy requires that BPSD reviews and updates
its risks and controls continuously, including after any major change to the
Department’s risk environment, to reflect any changes in risks and controls that
have occurred. As part of this process, any residual risks identified in the Risk
Register that are outside of risk appetite or agreed tolerance levels must be
appropriately escalated by the risk owner including the identification of actions
to return residual risks to within risk appetite.
The Risk Management Policy is reviewed annually or more frequently if there
is a major change to the Bank’s risk management framework. Changes to the
Policy are approved by the Bank’s Board.
Q.3.1.6: How does the FMI assess the effectiveness of risk management
policies, procedures, and systems
The effectiveness of the risk management is assessed through audit reports
and monthly operations reports.
The current risk management framework has been designed in consultation
with the various Units of the Bank, including the KEPSS system owner. The
effectiveness of the risk management is assessed through audit reports and
monthly operations reports.
The FMI aligns its processes and systems with the CBK Enterprise Risk
Management Policy and, where required, works together with the RMCD
The current risk management framework has been designed in consultation
with the various Units of the Bank, including the KEPSS system owner. The
effectiveness of the risk management is assessed through audit reports and
monthly operations reports.
The FMI aligns its processes and systems with the CBK Enterprise Risk
Management Policy and, where required, works together with the RMCD
The FMI aligns its processes and systems with the CBK Enterprise Risk
Management Policy and, where required, works together with the RMCD
to develop, and maintain risk management systems and processes. These
processes and procedures are regularly updated and audited by both the CBK’s
external and internal auditors.
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Q.3.1.7: How frequently are the risk management policies, procedures and
systems reviewed and updated by the FMI? How do these reviews take into
account fluctuation in risk intensity, changing environments and market
practices?
In line with the CBK Group Risk Management Policy, strategic and operational
risk self-assessments are conducted on an annual basis to identify new
risks, and review and assess existing controls. The general principles for risk
management at the Bank require risk management to be a continuous
process designed to detect, assess, manage, and follow up risk in such a way
that it remains within the Board’s tolerance limit. Risk management processes
are to be updated regularly and developed further so that they meet the
requirements of the Internal Control Guidelines and internationally recognized
standards.
The Bank, in operating KEPSS, reviews the material risks that it bears from, and
poses to, other entities. This is done in the context of its ongoing review of risks,
and its processes for identifying risks associated with major changes to its risk
environment, such as new activities or system changes. This is also part of the
Bank’s change management framework (see Key Consideration 17.1). The tools
used to manage risks from other entities include service level agreements,
customer support packages and documented operational and contingency
procedures (see Key Consideration 17.7)
Key Consideration 2 Q.3.2.1: What information does the FMI provide to its participants and,
where relevant, their customers to enable them to manage and contain
An FMI should
the risks they pose to the FMI?
provide incentives
to participants and, A number of terms and conditions must be met for participants in KEPSS
where relevant, to have their payment orders settled, including requirements for the
their customers to format of the payment order and to have sufficient funds in their accounts.
manage and contain These requirements are set out in the Terms and Conditions for Account
the risks they pose to Management, Collateralisation and Participation in KEPSS, which all
the FMI. participants must accept. The KEPSS Terms and Conditions also specify the
participants’ responsibilities. The daily operating schedule for KEPSS shows the
times that scheduled settlements take place. This information is available on
the CBK website pages for payments.
Each participant in KEPSS has access to its account through an Internet-based
solution (KEPSS- Online) and can monitor movements in its own account
in KEPSS during the day. The information for each account is continuously
updated, including information on available liquidity. This enables participants
to manage their liquidity risk. Participants may also submit payment orders for
settlement at a later time.
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KEPSS ASSESSMENT AGAINST THE PFMI PRINCIPLES - DECEMBER 2024

The KEPSS Terms and Conditions contain user management requirements
for the use of KEPSS Online by each participant. Each participant is to have a
security officer who is authorised to manage the participant’s users of KEPSS
Online, and there is a requirement that the number of users must be restricted
to those who actively use the solution or will need to use it in a contingency
situation..
Q.3.2.2: What incentives does the FMI provide for participants and, where
relevant, their customers to monitor and manage the risks they pose to the
FMI?
All account holders in KEPSS are subject to prudential supervision. Each
participant agrees to observe the rules and procedures that apply to accounts
held at the Bank and participation in KEPSS by signing both a declaration of
collateral and a request to open an account, deposit collateral and participate
in KEPSS. The reputation of the Bank or other participants may be damaged if
a participant breaches its obligations in a way that inflicts risk for KEPSS, such
as poor liquidity management resulting in insufficient funds for the settlement
of a clearing.
The Bank may impose fees to make it clear to participants that some types
of incident are particularly undesirable, including incorrect submission of
payment orders to the Bank. If a participant defaults significantly on its
obligations under the KEPSSTerms and Conditions, the Bank may suspend or
terminate its account
Q.3.2.3: How does the FMI design its policies and systems so that they
are effective in allowing their participants and, where relevant, their
customers to manage and contain their risks?
The KEPSS system is designed to provide real-time settlement with high levels
of efficiency and security. This ensures predictability for participants and their
customers. The division of responsibilities between the Bank and participants
in KEPSS is clarified in the KEPSS Rules and Procedures. Participants have
direct access to information from their accounts in KEPSS through statements
of account via SWIFT and through KEPSS Online. This also enables them to
monitor the status of the securities they have pledged as collateral for loans
from the Bank and the collateral value these have in KEPSS.
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KEPSS ASSESSMENT AGAINST THE PFMI PRINCIPLES - DECEMBER 2024

Key Consideration 3: Q.3.3.1: How does the FMI identify the material risks that it bears from and
poses to other entities as a result of interdependencies? What material
An FMI should
risks has the FMI identified?
regularly review
the material risks Material Risks
it bears from and
Material risks identified include liquidity and system availability, external
poses to their
suppliers of ICT operating services, system solutions. Reliance on SWIFT as the
entities as a result of
only message network carrier might pose a material risk to the FMI operations.
interdependencies
and develop
Q.3.3.2: How are these risks measured and monitored? How frequently
appropriate risk
does the FMI review these risks?
management tools
to address the risks. The BPSD participates in the review of strategic and operational risks,
facilitated by the RMCD, on an annual basis.
Risk Management Tools
Q.3.3.3: What risk management tools are used by the FMI to address the
risks arising from interdependencies with other entities?
The NPS call logging system is used to log and manage any identified risks.
Controls, action plans and changes to the processes and procedures are
updated when new risks relating to FMI operations are identified. The system
is also monitored and supported throughout the business day. The FMI’s BCP
document is reviewed annually to ensure risks are mitigated by processes and
procedures. A contingency application is in place to determine participants’
settlement balances when an incident occurs. In addition, before new or
upgraded ICT solutions are taken into use, thorough testing is conducted
together with external parties where relevant. KEPSS has developed an
extensive framework for testing such changes with set test scenarios.
When it comes to international players such as SWIFT, the authorities where
these organizations are headquartered take the lead in supervising their
operations. The Belgian central bank is the oversight authority for SWIFT. SWIFT
is the main channel for payment orders and other communication between
banks and KEPSS, and the Bank conducts detailed testing of new versions of
software and other infrastructure for SWIFT before they are taken into use.
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KEPSS ASSESSMENT AGAINST THE PFMI PRINCIPLES - DECEMBER 2024

Q.3.3.4: How does the FMI assess the effectiveness of these risk
management tools? How does the FMI review the risk management tools it
uses to address these risks? How frequently is this review conducted?
The RMCD is responsible for the review of this risk management tool. The IAD
conducts audits on tools used by the BPSD for effectiveness and adequacy.
Contingency procedures are continuously revised and improved in the
light of experience from incidents, disruptions, and exercises. There is also
regular internal and external auditing of KEPSS, which often also covers risk
management.
Key Consideration 4: Scenarios that may prevent an FMI from providing critical operations and
services.
An FMI should
identify scenarios Q.3.4.1: How does the FMI identify scenarios that may potentially prevent
that may potentially the FMI from providing its critical operations and services? What scenarios
have been identified as a result of these processes?
prevent it from being
able to provide its
The risk analysis for KEPSS has identified a number of scenarios that could
critical operations
result in the disruption of settlement functions. The FMI BCP details various
and services as scenarios that may prevent the FMI from providing its critical operations
a going concern and services. The scenarios are identified as part of the business impact
and assess the assessment conducted with the specialized operational risk function in the
effectiveness of a full RMCD. Among other things, the scenarios identified include the loss of the
range of options for primary information and communications technology (ICT) infrastructure, loss
recovery or orderly of facilities, and the unavailability of monitoring and support personnel.
wind-down. An FMI
Q.3.4.2: How do these scenarios take into account both independent and
should prepare
related risks to which the FMI is exposed?
appropriate plans for
its recovery or orderly The risks are managed in line with service agreements established between
wind-down based the FMI and related structures.
on the results of that
Recovery or Orderly Wind-down Plans
assessment. Where
applicable, an FMI Q.3.4.3: What plans does the FMI have for its recovery or orderly windshould also provide down?
relevant authorities
This is not applicable to the KEPSS System.
with the information
needed for purposes
Q.3.4.4: How do the FMI’s key recovery or orderly wind-down strategies
of resolution
enable the FMI to continue to provide critical operations and services?
planning.
This is not applicable to the KEPSS System
Q.3.4.5: How are the plans for the FMI’s recovery and orderly wind-down
reviewed and updated? How frequently are the plans reviewed and
updated?
This is not applicable to the KEPSS System.
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KEPSS ASSESSMENT AGAINST THE PFMI PRINCIPLES - DECEMBER 2024

Key Conclusion The Bank as a whole has a clear high level risk management model operating
with a standard “three lines of defence” model. The risk management
framework includes the operational risk arising from the Bank’s delivery of
KEPS services. A Board-approved risk tolerance statement defines the nature
and extent of risks (including operational risk) that the Bank is willing to
accept for KEPSS. The Board determines the strategy for managing risk and
risk tolerance that apply to the KEPSS services. This is codified through a local
end-to-end risk management framework that includes setting a tighter level
than that of the wider Bank due to the critical operational nature of the KEPSS
services.
The Board takes the lead in setting a strong risk management culture and
relies on sound governance structure to ensure its risk management strategy
is implemented through frameworks, policies and risk reporting. The Board
approves the risk tolerances on an annual basis, or whenever there is a
significant change to KEPSS.
The risk management framework established for the Bank is used for KEPSS.
This framework and its application are based on nationally and internationally
recognized risk management principles. The framework provides guidance in
identifying, assessing, handling, and reporting risks. The risk analysis for KEPSS
is designed, reviewed, and updated in line with this framework.
Principle 4: Credit Risk
Assessment Rating: Principle 4 is Considered to be Observed.
An FMI should effectively measure, monitor, and manage its credit exposures to participants
and those arising from its payments, clearing and settlement processes. An FMI should maintain
sufficient financial resources to cover its credit exposure to each participant fully with a high
degree of confidence.
Because of the extensive interactions between the financial risk management and financial resources
principles, this principle should be reviewed in the context of Principle 5 on collateral, Principle 6 on
margin and Principle 7 on liquidity risk, as appropriate. This principle should also be reviewed in the
context of Principle 13 on participant default rules and procedures, Principle 23 on disclosure of rules,
key procedures and market data, and other principles, as appropriate
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KEPSS ASSESSMENT AGAINST THE PFMI PRINCIPLES - DECEMBER 2024

Key Consideration Q.4.1.1: What is the FMI’s framework for managing credit exposures,
4.1 including current and potential future exposures, to its participants and
arising from its payment, clearing and settlement processes?
An FMI should
establish s robust The Bank does not become a counterparty to individual funds settlements
framework to between participants. However, since the Bank, with the aim to ensure smooth
manage its credit settlement of funds under the System, extends credit in the form of ILF/OLF
exposures to its to the participants it has authorized to use such a facility when requested, it
participants and the is exposed to the credit risk of the borrower until the facility is repaid. In order
credit risk arising to borrow from the Bank, a participant must comply with the Terms and
from its payments, Conditions for Account Management, Collateralization and Participation in
clearing and the Bank’s Settlement System (KEPSS) and have pledged approved collateral
settlement processes. in favour of the Bank. Therefore, in providing the ILF, the Bank requires the
Credit exposure may participant to pledge, in advance, eligible collateral in an amount sufficient to
arise from current cover the lending and manages the amount of credit extended to keep the
exposures, potential credit extension within the value of the pledged collateral.
future exposures or
both. Based on its existing credit risk management framework, the CBK manages
such risk by accepting only high-quality government securities (Treasury
bills and bonds) and Bank Deposits kept with the Bank. The Reserves are
the principal source of liquidity held at the Bank and in the unlikely event
that a credit risk materialized, the Bank could use these reserves to cover
any shortfall. As described under Principle 5, the eligible collateral the Bank
accepted for the use of the intraday facility is managed under a robust
framework. Through these measures, the Bank manages the risk of losses
from current and potential future exposures so that they are sufficiently low.
All banks participating in KEPSS that are eligible for intraday liquidity are
subject to appropriate prudential supervision by BSD..
Q.4.1.2: How frequently is the framework reviewed to reflect the changing
environment, market practices and new products?
The framework is reviewed on an ad hoc basis, as and when required.
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KEPSS ASSESSMENT AGAINST THE PFMI PRINCIPLES - DECEMBER 2024

Key Consideration Q.4.2.1: How does the FMI identify sources of credit risk? What are the
4.2: sources of credit risk that the FMI has identified?
An FMI should
The key credit exposure from the Bank’s operation of KEPSS is through
identify sources of
intraday liquidity provision. The nature of RTGS settlement fully eliminates
credit risk, routinely
credit risk between account holders. As settlement occurs in real-time, there
measure, and
are no intraday exposures built up between RTGS account holders through use
monitor credit
of KEPSS. KEPSS requires sufficient liquidity to be in place before settlement
exposures and use
can take place. No direct credit risks are posed to the Bank from settlement
appropriate riskacross accounts in KEPSS.
management tools
to control these risks.
The Bank, as operator of KEPSS, neither guarantees transfers to meet payment
obligations, nor allows overdrafts that would permit payments to settle if the
account holder lacks liquidity. This is understood by KEPSS account holders
and reflected in the relevant legal documentation. In addition, there are
system checks built into the KEPSS system that prevent account holders from
becoming overdrawn.
Q.4.2.2: How does the FMI measure and monitor credit exposures? How
frequently does and how frequently can the FMI recalculate these
exposures? How timely is the information?
The FMI was designed with a capability to grant loans subject to the available
collateral value. The collateral value is revalued per the current market
value on daily a basis. This function is automated to ensure optimum credit
allowance protection.
Q.4.2.3: What tools does the FMI use to control identified sources of credit
risk (for example, offering an RTGS or DvP settlement mechanism, limiting
net debits or intraday credit, establishing concentration limits, or marking
positions to market on a daily or intraday basis)? How does the FMI
measure the effectiveness of these tools?
Settlement through the RTGS is provided on a gross basis and it limits the
intraday credit risk. In KEPSS, payments between participants are settled
in real time. There is therefore no time difference between acceptance/
verification and settlement of a payment order. This applies both to individual
payments and to clearings from NACH. Each participant’s available credit in
KEPSS is updated on a daily basis.
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KEPSS ASSESSMENT AGAINST THE PFMI PRINCIPLES - DECEMBER 2024

Key Consideration Coverage of Exposures to each Participant
4.3:
Q.4.3.1: How does the payment system or SSS cover its current and,
A payment system or where they exist, potential future exposures to each participant? What
SSS should cover its is the composition of the FMI’s financial resources used to cover these
current and, where exposures? How accessible are these financial resources?
they exist, potential
As indicated in key considerations 1 to 3 above, credit risk is limited to the
future exposures to
KEPSS system due to the prefunding requirement and collateralized loans.
each participant fully
Only banks registered in terms of the Banks Act or the Micro Finance Act, may
with a high degree
clear and settle in the KEPSS system. Settlement of the cash leg of securities
of confidence using
settlement in KEPSS is based on all participants in the settlement having
collateral and other
sufficient funds for their payment obligations in the form of deposits or
equivalent financial
available credit at CBK. To provide security for the settlement each participant
resources. In the case
sets aside an amount in its account in CBK to cover its payment obligations.
of a DNS payment
This procedure helps reduce the risk in each securities settlement.
system or DNS
SSS in which there
In KEPSS payment orders are settled immediately after they are received. This
is no settlement
applies both to individual payments and to payment obligations in clearings
guarantee but where
submitted by the clearinghouse (NACH). KEPSS does not aggregate payments
its participants face
during the day for subsequent settlement. Potential credit exposures in net
credit exposure
settlements are nevertheless discussed under Q.4.3.3 and Q.4.3.4 below:
arising from its
payment, clearing ACH agreements govern the clearing of payment instructions between
and settlement participants. The CBK will manage any liquidity and credit issues that may
processes, such an arise from NACH settlements in terms of the circumstances and conditions
FMI should maintain that prevail at the time.
at a minimum,
Q.4.3.2: To what extent do these financial resources cover the payment
such sufficient
system’s or SSS’s current and potential future exposures fully with a high
resources to cover
degree of confidence? How frequently does the payment system or SSS
the exposures of the
evaluate the sufficiency of these financial resources?
two participants and
their affiliates that
The only credit exposure relates to the provision of loans against collateral that
would create the
is described in key consideration 1 above.
largest aggregate
credit exposure in the The credit risk assumed by the Bank in providing liquidity to KEPSS members
system. is mitigated by purchasing high-quality securities under repo and having
appropriate collateral policies in place. In KEPSS, payment orders are settled
immediately after they are received. This applies both to individual payments
and to payment obligations in clearings submitted by the clearing houses
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KEPSS ASSESSMENT AGAINST THE PFMI PRINCIPLES - DECEMBER 2024

KEPSS does not aggregate payments during the day for subsequent
settlement. Potential credit exposures in net settlements are nevertheless
discussed under Q.4.3.3 and Q.4.3.4 below.
Q.4.3.3: If the payment system or SSS is a DNS system in which there is no
settlement guarantee, do its participants face credit exposures arising
from the payment, clearing and settlement processes? If there are credit
exposures in the system, how does the system monitor and measure these
exposures?
The FMI is an RTGS system and DNS requirements do not apply. The only credit
exposure relates to the provision of loans against collateral, which is described
in key consideration 1 above. Net settlements in KEPSS are carried out if, and
only if, all participants have sufficient funds to cover their payment obligations
in the form of deposits or loans from the Bank. Any loans from the Bank must
be secured against collateral that is approved in advance. The Bank monitors
participants’ credit positions, especially if loans are not repaid on the same day
and so become interest-bearing overnight loans.
Q.4.3.4: If the payment system or SSS is a DNS system in which there is no
settlement guarantee and has credit exposures among its participants, to
what extent does the payment system’s or SSS’s financial resources cover,
at a minimum, the default of the two participants and their affiliates that
would create the largest aggregate credit exposure in the system?
The FMI is an RTGS system and DNS requirements do not apply. The only credit
exposure relates to the provision of loans against collateral, which is described
in key consideration 1 above. Participants in the settlement of payments in
KEPSS are not exposed to any credit risk vis-à-vis the Bank as settlement bank.
Net settlements are performed only if all participants have sufficient funds to
cover their payment obligations. In the event of the insolvency of one or more
participants, the account(s) will be blocked from making or receiving any new
payments.
Key Consideration Key considerations 4-6 not applicable as they concern CCPs in trades in
4.4, 4.5 and 4.6 financial instruments and have not been assessed for KEPSS.
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KEPSS ASSESSMENT AGAINST THE PFMI PRINCIPLES - DECEMBER 2024

Key Consideration Allocation of Credit Losses
4.7:
Q.4.7.1: How do the FMI’s rules and procedures explicitly address any credit
An FMI should losses it may face as a result of any individual or combined default among
establish explicit its participants with respect to any of their obligations to the FMI? How do
rules and procedures the FMI’s rules and procedures address the allocation of uncovered credit
that address fully losses and in what order, including the repayment of any funds an FMI
any credit losses it may borrow from liquidity providers?
may face because
The Bank’s most important insurance against losses on loans to participants
of any individual
in KEPSS is the right to realize the collateral that each participant has pledged
or combined
for loans. This right is set out in the KEPSS Terms and Conditions. The authority
default among its
to release the collateral is assigned to the system owner for KEPSS. This will
participants with
protect or minimize the amount of credit losses by CBK. Otherwise, the Bank
respect to any of
as central bank has an unlimited supply of liquidity and does not need to
their obligations to
borrow from others.
the FMI. These rules
and procedures
Replenishment of Financial Resources
should address how
potentially uncovered Q.4.7.2: What are the FMI’s rules and procedures on the replenishment of
credit losses would be the financial resources that are exhausted during a stress event?
allocated, including
As described under Key Consideration 1, the Bank manages credit exposures
the repayment of any
arising from both current and potential future exposures so that they are
funds the FMI may
sufficiently low. As such, it does not adopt rules for the allocation of uncovered
borrow from liquidity
credit losses stemming from a participant’s default among the participants
providers. These
under the System.
rules and procedures
should also indicate
the FMI`s process
to replenish any
financial resources
that the FMI may
employ during the
stress event, so that
the FMI can continue
to operate in a safe
and sound manner.
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KEPSS ASSESSMENT AGAINST THE PFMI PRINCIPLES - DECEMBER 2024

Key Conclusion KEPSS is designed to provide Real Time Gross Settlement (RTGS) mechanism
in order to mitigate credit risk between participants. As a general principle, the
FMI is an RTGS system that operates strictly on a prefunded principle; that is,
settlement will only take place if there are sufficient funds in the settlement
accounts at the Bank. The CBK, as provider of ILF, may be exposed to credit risk
arising from failure of participant to repay their ILF at the end of day.
Credit risk arising in KEPSS is well managed through the rules on collateral for
loans and procedures for monitoring that there is always adequate collateral
for outstanding loans. Each participant’s available credit is updated on a daily
basis. The Bank, as operator of KEPSS is not exposed to any material current
or future credit exposures other than through the provision of liquidity against
collateral, which is secured against the very highest quality collateral.
The CBK credit risk management framework and associated processes ensure
that the modest residual credit risk exposures arising from participation in
the KEPSS system are mitigated and kept at a minimal level by the CBK. The
KEPSS Rules and Procedures also state that the Bank has a right to realize the
collateral immediately if a participant defaults on a loan. Procedures for how
the collateral is to be realized have been put in place.
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KEPSS ASSESSMENT AGAINST THE PFMI PRINCIPLES - DECEMBER 2024

Principle 5: Collateral
Assessment Rating: Principle 5 is Considered to be Boadly Observed.
An FMI that requires collateral to manage its or its participants` credit exposure should
accept collateral with low credit, liquidity and market risks. An FMI should also set and enforce
appropriately conservative haircuts and concentration limits.
Because of the extensive interactions between the financial risk management and financial resources
principles, this principle should be reviewed in the context of Principle 4 on credit risk, Principle 6 on
margin, and Principle 7 on liquidity risk, as appropriate. This principle should also be reviewed in the
context of Principle 14 on segregation and portability, Principle 16 on custody and investment risk, and
other principles, as appropriate.
Key Consideration Q.5.1.1: How does the FMI determine whether a specific asset can be
5.1: accepted as collateral, including collateral that will be accepted on
an exceptional basis? How does the FMI determine what qualifies
An FMI should
as an exceptional basis? How frequently does the FMI adjust these
generally limit the
determinations? How frequently does the FMI accept collateral on an
assets it accepts as
exceptional basis, and does it place limits on its acceptance of such
collateral to those
collateral
with low credit,
liquidity, and market The Bank provides intraday credit for liquidity purposes in order to settle
risks. obligations in KEPSS. Acceptable collateral monitored to secure ILF/OLF is
drawn from very high-quality collateral in the form of government securities
(treasury bills and bonds) with very low credit, liquidity, and market risks. This
collateral is automatically utilized for securing KEPSS loans, on the conditions
determined by the Bank from time to time, in order to facilitate settlement
through the KEPSS system if there is a shortage of funds in a bank’s settlement
account. As the Bank only accepts the very heist quality collateral, the default of
an account holder should not impact the value of collateral and wrong-way risk
is largely mitigated.
Q.5.1.2: How does the FMI monitor the collateral that is posted so that the
collateral meets the applicable acceptance criteria?
All securities that the Bank has approved as collateral is stated in the CBK Act
that is available on the Bank’s website. KEPSS monitors posted collaterals to
ensure that they meet the acceptance criteria. When participants transfer their
securities to the Bank for use of liquidity facilities of KEPSS, these collaterals
will be verified against the eligible collateral list as specified by the KEPSS
Rules and Procedures for ILF. Eligibility of posted securities will be rechecked
again every time before conducting a repo transaction and granting ILF to
participants. The CBK’s collateral acceptance criteria focus on the issuers of
debt instruments; at present, only the highest quality collaterals issued by the
Government are accepted.
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KEPSS ASSESSMENT AGAINST THE PFMI PRINCIPLES - DECEMBER 2024

Q.5.1.3: How does the FMI identify and mitigate possible specific wrong-way
risk – for example, by limiting the collateral it accepts (including collateral
concentration limits)?
The CBK mitigates possible specific wrong-way-risk by limiting acceptable
collaterals to be mainly government securities in the form of Treasury
bills and bonds. These bonds’ values do not have explicit correlation with
financial institutions’ credit quality; thus, default of a financial institution
should not affect the value of these collaterals. In other words, there is low
likelihood of wrong-way risk. The rules contain various limits in order to reduce
concentration risk. For example, the Bank does not accept collateral in the
form of securities issued by banks and other financial institutions, or bonds,
and short-term paper issued by companies in which banks and other financial
institutions collectively have a direct or indirect holding of more than a third.
Key Consideration Valuation Practices
5.2:
Q.5.2.1: How frequently does the FMI mark its collateral to market, and does
An FMI should it do so at least daily?
establish prudent
The market value of financial instruments is revalued on a daily basis. These
valuation practices
values are received from FMD.
and develop haircuts
that are regularly Q.5.2.2: To what extent is the FMI authorized to exercise discretion in
tested and take into valuing assets when market prices do not represent their true value?
account stressed
market conditions. There is no value limit on intraday liquidity generation. Such credit is, however,
limited by the value of collateral that each participant holds, subject to
appropriate haircuts. Haircuts are designed to be sufficient to cover intraday
price movements. It is FMD’s responsibility to ensure that the collateral values
are sufficient to cover the CBK against any credit losses, and this clause is set
out in the SLA between FMD and the BPSD.
Haircutting Practices
Q.5.2.3: How does the FMI determine haircuts?
The Bank takes only the very highest quality collateral. The CBK currently does
not apply haircuts to collateral taken from the provision of short-term liquidity
through ILF or overnight repo, a practice which is in line with its operating
guideline for the RTGS system. The amount of collateral taken is based on the
face value of the asset, with no daily mark-to-market or any concentration
limits. While the provision of intraday liquidity can have monetary and financial
stability benefits, the Bank must also protect its balance sheet. Reserves are the
principal source of liquidity held at the Bank. In the unlikely event that a credit
risk materialized, the Bank could use these reserves to cover any shortfall.
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KEPSS ASSESSMENT AGAINST THE PFMI PRINCIPLES - DECEMBER 2024

Q.5.2.4: How does the FMI test the sufficiency of haircuts and validate its
haircut procedures, including with respect to the potential decline in the
assets’ value in stressed market conditions involving the liquidation of
collateral? How frequently does the FMI complete this test?
These haircuts are determined by FMD. For a further detailed discussion on
haircuts, see Principle 7 below. The SLA between FMD and the FMI addresses
communication on when the sufficiency tests are to be conducted and have
been conducted. The sufficiency of haircuts is considered when the rules in
general are reviewed. Haircuts may also be adjusted in response to particular
events, stress or uncertainty in financial markets.
Key Consideration Q.5.3.1: How does the FMI identify and evaluate the potential procyclicality
5.3: of its haircut calibrations? How does the FMI consider reducing the need
for procyclical adjustments – for example, by incorporating periods of
In order to reduce
stressed market conditions during the calibration of haircuts?
the need for procyclical adjustments, FMD is responsible for the identification and evaluation of the potential
an FMI should procyclicality of haircut calibrations. The Bank generally applies haircuts that
establish stable and are calibrated to include periods of stressed market conditions. Haircuts are
conservative haircuts calibrated to capture stressed market conditions. This ensures that haircuts
that are calibrated are set at stable and conservative levels and reduces the need for procyclical
to include periods haircut adjustments during periods of stress. Currently, there is a standing
of stressed market agreement between the FMI operator and FMD; therefore, any discussions to
conditions, to the identify and evaluate the haircut calibrations must be communicated to the
extent practicable FMI operator.
and prudent.
Key Consideration Q.5.4.1: What are the FMI’s policies for identifying and avoiding
5.4: concentrated holdings of certain assets in order to limit potential adverse
price effects at liquidation? What factors (for example, adverse price
An FMI should
effects or market conditions) are considered when determining these
avoid concentrated
policies?
holdings of certain
assets where this Consistent with the CPMI-IOSCO guidance on the Application of the Principles
would significantly to Central Bank FMIs, the Bank is not constrained with regards to the assets it
impair the ability to accepts as eligible collateral in its lending operations. FMD determines policies
liquidate such assets for identifying and avoiding concentrated holdings for the CBK in the execution
quickly without of its monetary policy.
significant adverse
price effects.
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KEPSS ASSESSMENT AGAINST THE PFMI PRINCIPLES - DECEMBER 2024

Q.5.4.2: How does the FMI review and evaluate concentration policies
and practices to determine their adequacy? How frequently does the FMI
review and evaluate these policies and practices?
FMD determines policies for identifying and avoiding concentrated holdings
for the CBK in the execution of its monetary policy. The FMI operator is not
responsible for the review or evaluation of such policies; however, the FMI must
comply with the policies to enforce participants’ compliance. There is no need
for concentration limit since the accepted collaterals have low credit, liquidity,
and market risk. KEPSS can, therefore, liquidate the collaterals quickly without
any significant adverse price effects.
Key Consideration Q.5.5.1: What are the legal, operational, market and other risks that the
5.5 FMI faces by accepting cross-border collateral? How does the FMI mitigate
these risks?
An FMI that accepts
cross-border This is not applicable to the KEPSS system, as the FMI does not accept crosscollateral should border collateral.
mitigate the risks
Q.5.5.2: How does the FMI ensure that cross-border collateral can be used in
associated with its
a timely manner?
use and ensures that
the collateral can
This is not applicable to the KEPSS system, as the FMI does not accept crossbe used in a timely
border collateral.
manner.
Key Consideration Collateral Management System Design
5. 6
Q.5.6.1: What are the primary features of the FMI’s collateral management
An FMI should system?
use a collateral
Main aim of the Bank’s system for managing banks’ collateral for loans is to
management
minimize the risk of the Bank suffering losses on loans to banks, while still
system that is
ensuring that banks are able to borrow sufficiently from the Bank to enable
well designed and
the conduct of monetary policy and the settlement of payments. The seamless
operationally flexible.
integration between the RTGS and CSD system provides the channel through
which collateralized lending can be conducted by the CBK to provide shortterm liquidity to direct RTGS members if needed. KEPSS, through its linkage
with the CSD provides the functionality to pledge and release collateral
for loans extended by the CBK to fund settlement accounts. The process is
managed by FMD.
The system is set up for real-time collateralization with immediate updating
of the available credit in each bank’s account in KEPSS. The banks themselves
pledge the bulk of the securities they use as collateral in favor of the Bank in
their own account in the central securities depositories.
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KEPSS ASSESSMENT AGAINST THE PFMI PRINCIPLES - DECEMBER 2024

Participants do not have the right themselves to reduce holdings pledged in
favor of the Bank directly in the central securities depositories. The process
is automated to release the collateralized securities after reversal of the ILF
amounts to the Bank. This is done after the execution of KEPSS Initial Cut Off.
Q.5.6.2: How and to what extent does the FMI track the reuse of collateral
and its rights to the collateral provided?
When securities have been pledged to the Bank in a separate account in each
depository, the Bank has full rights of disposal over the collateral but is not
the owner of the securities. The reuse of securities as collateral vis-à-vis other
parties is not therefore possible, as the Bank’s rights to the securities must be
indisputable. This is regulated by the KEPSS Terms and Conditions and in the
agreements with the central securities depositories.
Operational flexibility
Q.5.6.3: How and to what extent does the FMI’s collateral management
system accommodate changes in the ongoing monitoring and
management of collateral?
The KEPSS system has functionality that allows participants to obtain
information on their collateral available on the FMI. The system is parameterdriven, and all changes need to be authorized. . If the estimated value of a
certain FI changes during monitoring, the collateral management system is
modified to include new parameters taking such changes into account, and
the parameters can be activated immediately if necessary.
Q.5.6.4: To what extent is the collateral management system staffed to
ensure smooth operations even during times of market stress?
The aforementioned features of the collateral management system is
performed automatically, using parameters set by the CBK and relevant
standing instructions from RTGS members to the CBK. This minimizes the
requirement for manpower and manual intervention. Other situations may
require access to internal ICT expertise from the supplier of operating services
and within the Bank, as well as system expertise from the external software
suppliers.
CENTRAL BANK OF KENYA

KEPSS ASSESSMENT AGAINST THE PFMI PRINCIPLES - DECEMBER 2024

Key Conclusion The general principle for the Bank is that all participants must have collateral
in the KEPSS system. To secure any loans in the KEPSS system, collateral in
the form of government securities, Treasury bills and bonds are utilised. These
assets are claims on the government and therefore they carry minimal or no
liquidity or credit risk. By requiring the very highest quality collateral, the Bank
ensures the collateral it accepts has deep and liquid markets. Each settlement
participant enters into a KEPSSsettlement agreement with the KEPSS. In
terms of this agreement, the participant relinquishes the collateral to the Bank,
as security for the proper and timeous performance by the participant of all
its obligations which it may incur to the Bank arising from the participant’s
utilisation of the kepss system.
FMD is responsible for the safekeeping of collateral reserved for use in KEPSS.
This is managed through an SLA with FMD. The Bank has a comprehensive
regulatory framework and the collateral for loans to KEPSS participants is
monitored continuously.The CBK has established the operational procedures
and BCP to ensure that the collateral management system has smooth
operations during stressed conditions. The Bank has a comprehensive
regulatory framework and the collateral for loans to KEPSS participants is
monitored continuously.
Principle 6: Margin
A CCP should cover its credit exposures to its participants for all products through an effective
margin system that is risk based and regularly reviewed.
This principle does not apply since it only applies to CCPs.
Principle 7: Liquidity Risk
Assessment Rating: Principle 7 is Considered to be Observed.
An FMI should effectively measure, monitor, and manage its liquidity risk. An FMI should
maintain sufficient liquid resources in all relevant currencies to effect same-day, and where
appropriate, intraday and multiday settlement of payment obligations with high degree of
confidence under a wide range of potential stress scenarios that should include, but not be
limited to, the default of the participant and its affiliates that would generate the largest
aggregate liquidity obligation for the FMI in extreme but plausible market conditions
Because of the extensive interactions between the financial risk management and financial resources
principles, this principle should be reviewed in the context of Principle 4 on credit risk, Principle 5
on collateral and Principle 6 on margin, as appropriate. This principle should also be reviewed in the
context of Principle 8 on settlement finality, Principle 13 on participant default rules and procedures,
Principle 23 on disclosure of rules, key procedures and market data, and other principles, as
appropriate
CENTRAL BANK OF KENYA

KEPSS ASSESSMENT AGAINST THE PFMI PRINCIPLES - DECEMBER 2024

Key Consideration Q.7.1.1: What is the FMI’s framework for managing its liquidity risks, in all
7.1: relevant currencies, from its participants, settlement banks, nostro agents,
custodian banks, liquidity providers and other entities?
An FMI should have
a robust framework The KEPSS system is a single currency system that settles only in Kenyan
currency (shillings). The FMI has not identified any liquidity risk as a settlement
to manage its
system because KEPSS settles instructions on a gross basis. As central bank,
liquidity risks from
the Bank has the exclusive right to issue Kenyan currency (shillings) and as
its participants,
such it has an unlimited supply of Kenyan currency and does not have any
settlement banks,
liquidity risk vis-à-vis the participants in KEPSS. Nor can the Bank therefore
nostro agents,
incur liquidity risk from other parties.
custodian banks,
liquidity providers However, there is a potential for liquidity risk to arise in a RTGS environment
and other entities. as it settles each transaction individually. To manage such liquidity risk, the
CBK provides fully collateralized ILF/OLF for direct members. In addition, the
RTGS system has a gridlock detection and resolution mechanism (bilateral
and multilateral) which is triggered by the system every 5 seconds for settling
queued payment transactions. Gridlock can also be triggered manually when
the need arises.
Participants are also encouraged to process their payments early in the day
using the throughput guidelines provided. The system’s pricing is designed
around two windows with the first window Initial Cut-Off (ICO) being the
cheapest (at Kshs.50 per transaction) to encourage early funding and
settlement of payments. The second window attracts a fee of Ksh.140 per
transaction for interbank payments made after the ICO. This serves as an
incentive to encourage the early submission of interbank payment instructions
as provided in Schedule E of the KEPSS Rules and Procedures.
In the event of operational disruption, there may be situations where the
Bank is unable to make liquidity available for the settlement of payments in
KEPSS. In this case, there will be an operational risk with consequences for
participants’ access to liquidity. It is the responsibility of the participant to
ensure sufficient liquidity is available for all its settlement obligations.
Q.7.1.2: What are the nature and size of the FMI’s liquidity needs, and the
associated sources of liquidity risks, that arise in the FMI in all relevant
currencies?
Given its role as central bank and exclusive right to issue Kwnyan currency,
(shillings), the Bank itself can cover its liquidity needs in relation to KEPSS.
Payments in foreign currency are not settled in KEPSS.
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KEPSS ASSESSMENT AGAINST THE PFMI PRINCIPLES - DECEMBER 2024

Q.7.1.3: How does the FMI take into account the potential aggregate
liquidity risk presented by an individual entity and its affiliates that may
play multiples roles with respect to the FMI?
The Bank does not have any liquidity risk vis-à-vis participants in its
settlement system, and participants do not have any liquidity risk vis-à-vis
the Bank. Participants in KEPSS do, however, have liquidity risk vis-à-vis other
participants in KEPSS. This applies both directly between two participants and
indirectly between banks that act as settlement banks for others. This does not,
however, mean that the Bank as settlement bank incurs liquidity risk in KEPSS.
As a central bank-operated system, KEPSS does not have liquidity needs or
hold liquidity in its name. It is the responsibility of the participant to ensure
sufficient liquidity is available for all its settlement obligations.
A successful settlement depends on sufficient funds or collateral available
in the system. Therefore, the responsibility lies with the participant to ensure
that there is enough liquidity to ensure settlement regardless of any other
additional roles the participant has in the system.
Key Consideration Q.7.2.2: How does the FMI use those tools to identify, measure and monitor
7.2: its settlement and funding flows on an ongoing and timely basis, including
its use of intraday liquidity?
An FMI should have
effective operational Settlement and funding streams in KEPSS are monitored, analyzed, and
and analytical tools reported as set out under Q.7.2.1. As central bank, the Bank has a particular
to identify, measure responsibility to informing external stakeholders and the general public about
and monitor its its operations. Information from KEPSS is used in a variety of analyses and
settlement and publications from the Bank. From a participant’s perspective, the intraday
funding flows on an collateralization measures provide ample opportunities for banks to effect
ongoing and timely settlement in real time.
basis, including
The KEPSS system facilitates transfers of interbank funds and allows banks
its use of intraday
to monitor their settlement exposures through the position monitor with a
liquidity.
single view of participants’ liquidity position. This improves the overall risk
management in the interbank settlement system and enables the CBK to
improve the settlement risk management and, therefore, reduce the potential
for crises. Banks are allowed to utilize their available cash reserve balance
fully during the day for intraday liquidity, but the banks still must meet the
requirements for their cash reserve holdings over the monthly maintenance
period. Any movements against the cash reserve ratio (CRR) are recorded in
the KEPSS system.
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KEPSS ASSESSMENT AGAINST THE PFMI PRINCIPLES - DECEMBER 2024

Key Consideration 3 Q.7.3.1: How does the payment system or SSS determine the amount of
liquid resources in all relevant currencies to effect same day settlement
A payment system
and, where appropriate, intraday or multiday settlement of payment
or SSS, including one
obligations? What potential stress scenarios (including, but not limited
employing a DNS
to, the default of the participant and its affiliates that would generate
mechanism, should
the largest aggregate payment obligation in extreme but plausible
maintain sufficient
market conditions) does the payment system or SSS use to make this
liquid resources in all
determination?
relevant currencies
to effect same-day The KEPSS system has various system tools and measures to ensure sufficient
settlement and, liquidity is generally available for same-day settlement of transactions.
where appropriate, However, at present there is no stress test program with viable stress scenarios
intraday or multiday in place, which makes it difficult to be certain with a high degree of confidence
settlement of that there is still adequate liquidity for same-day settlement under extreme
payment obligations but plausible market conditions. KEPSS is a single currency system that trades
with a high degree in Kenyan (shillings) currency.
of confidence under
Q.7.3.2: What is the estimated size of the liquidity shortfall in each currency
a wide range of
that the payment system or SSS would need to cover?
potential stress
scenarios that should
KEPSS is a single currency system that trades in Kenyan (shillings) currency.
include, but not be
The KEPSS system will not have to cover any estimated liquidity shortfall. In
limited to, the default
the event of a liquidity shortfall, the decision to provide additional liquidity will
of the participant
be made by the Governor of the CBK after taking into consideration the advice
and its affiliates that
of BSD and close liaison with National Treasury and the Minister of Finance, if
would generate the
applicable. In such extreme cases, the CBK, following the lender-of-last-resort
largest aggregate
principle, will bear the credit risk and not KEPSS.
payment obligation
in extreme but
plausible market
conditions
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KEPSS ASSESSMENT AGAINST THE PFMI PRINCIPLES - DECEMBER 2024

Key Consideration Key consideration does not apply to the KEPSS.
7.4:
A CCP should
maintain sufficient
liquid resources
in all relevant
currencies to settle
securities-related
payments, make
required variation
margin payments,
and meet other
payment obligations
on time with a high
degree of confidence
under a wide range
of potential stress
scenarios.
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KEPSS ASSESSMENT AGAINST THE PFMI PRINCIPLES - DECEMBER 2024

Key Consideration Key Consideration 5-7 are not applicable.
7.5:
The KEPSS system is owned and operated by the CBK. Any liquidity needs
For purposes of from the system to pay for the obligations arising from day-to-day business
meeting its minimum will be met by the Bank. As for participant’s liquidity needs to settle payments,
liquid resource the CBK also provides short-term liquidity to direct KEPSS members through
requirement, an collateralized lending in the form of ILF/overnight repo.
FMI`s qualifying
Size and composition of qualifying liquid resources
liquid resources
in each currency
Q.7.5.1: What is the size and composition of the FMI’s qualifying liquid
include cash at the
resources in each currency that is held by the FMI? In what manner and
central bank of issue
within what time frame can these liquid resources be made available to
and at creditworthy
the FMI?
commercial banks,
committed lines of The KEPSS system as an FMI does not have liquidity needs or hold liquidity
credit, committed in its own name. Liquidity is held for each participant’s own account in the
foreign exchange system. Thus, it is the responsibility of the participant to ensure sufficient
swaps, and liquidity is available for all its settlement obligations.
committed repos,
Availability and coverage of qualifying liquid resources
as well as highly
marketable collateral
Q.7.5.2: What prearranged funding arrangements has the FMI established
held in custody and
to convert its readily available collateral and investments into cash? How
at investments that
has the FMI established that these arrangements would be highly reliable
are readily available
in extreme but plausible market conditions? Has the FMI identified any
and convertible
potential barriers to accessing its liquid resources?
into cash with prearranged and highly The KEPSS system as an FMI does not have liquidity needs; therefore, no
reliable funding potential barriers to access liquid resources have been identified.
arrangements,
Q.7.5.3: If the FMI has access to routine credit at the central bank of issue,
even in extreme but
what is the FMI’s relevant borrowing capacity for meeting its minimum
plausible market
liquid resource requirement in that currency?
conditions. If an FMI
has routine credit at
This is not applicable to the KEPSS system as an FMI.
the central bank of
issue, the FMI may Q.7.5.4: To what extent does the size and the availability of the FMI’s
count such access as qualifying liquid resources cover its identified minimum liquidity resource
part of the minimum requirement in each currency to effect settlement of payment obligations
requirement to on time?
the extent it has
This is not applicable to the KEPSS system as an FMI
collateral that is
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KEPSS ASSESSMENT AGAINST THE PFMI PRINCIPLES - DECEMBER 2024

Key Consideration Size and composition of supplemental liquid resources
7.6:
Q.7.6.1: What is the size and composition of any supplemental liquid
An FMI may
resources available to the FMI?
supplement its
qualifying liquid This is not applicable to the KEPSS system as an FMI.
resources with
other forms of liquid Availability of supplemental liquid resources
resources. If the FMI
does so, then these Q.7.6.2: How and on what basis has the FMI determined that these assets
liquid resources
are likely to be saleable or acceptable as collateral to obtain the relevant
should be in the form
currency, even if this cannot be reliably prearranged or guaranteed in
of assets that are
extreme market conditions?
likely to be saleable
or acceptable as
This is not applicable to the KEPSS system as an FMI
collateral for lines of
credit, swaps, repos
Q.7.6.3: What proportion of these supplemental assets qualifies as
on an ad hoc basis
potential collateral at the relevant central bank?
following a default,
even if this cannot be
This is not applicable to the KEPSS system as an FMI.
reliably prearranged
or guaranteed in
Q.7.6.4: In what circumstances would the FMI use its supplemental liquid
extreme market
resources in advance of, or in addition to, using its qualifying liquid
conditions. Even if
resources?
FMI does not have
access to routine
This is not applicable to the KEPSS system as an FMI.
central bank credit,
it should still take
Q.7.6.5: To what extent does the size and availability of the FMI’s
account of what
supplemental liquid resources, in conjunction with its qualifying liquid
collateral is typically
accepted by the resources, cover the relevant liquidity needs identified through the FMI’s
relevant central stress test program for determining the adequacy of its liquidity resources
bank, as such assets (see key consideration 9)?
may be more likely to
be liquid in stressed This is not applicable to the KEPSS system as an FMI.
circumstances.
An FMI should
not assume the
availability of
emergency central
bank credit as part of
its liquidity plan.
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KEPSS ASSESSMENT AGAINST THE PFMI PRINCIPLES - DECEMBER 2024

Key Consideration Use of liquidity Providers
7.7:
Q.7.7.1: Does the FMI use a liquidity provider to meet its minimum required
An FMI should qualifying liquidity resources? Who are the FMI’s liquidity providers? How
obtain high degree
and on what basis has the FMI determined that each of these liquidity
of confidence
providers has sufficient information to understand and to manage their
through rigorous
associated liquidity risk in each relevant currency on an ongoing basis,
due diligence, that
including in stressed conditions?
each provider of its
minimum required This is not applicable to the KEPSS system as an FMI.
qualifying liquid
resources, whether Reliability of Liquidity Providers
a participant of the
FMI or an external Q.7.7.2: How has the FMI determined that each of its liquidity providers has
party, has sufficient the capacity to perform on its commitment in each relevant currency on
information to an ongoing basis?
understand and
This is not applicable to the KEPSS system as an FMI.
to manage its
associated liquidity
Q.7.7.3: How does the FMI take into account a liquidity provider’s potential
risks and that it
access to credit at the central bank of issue?
has the capacity
to perform as
This is not applicable to the KEPSS system as an FMI.
required under its
commitment. Where Q.7.7.4: How does the FMI regularly test the timeliness and reliability of its
relevant to assessing
procedures for accessing its liquid resources at a liquidity provider?
a liquidity provider`s
performance This is not applicable to the KEPSS system as an FMI.
reliability with
respect to a
particular currency,
a liquidity provider`s
potential access
to credit from the
central bank of issue
may be taken into
account. An FMI
should regularly
test its procedures
for accessing its
liquid resources at a
liquidity provider.
CENTRAL BANK OF KENYA

KEPSS ASSESSMENT AGAINST THE PFMI PRINCIPLES - DECEMBER 2024

Key Consideration Q.7.8.1: To what extent does the FMI currently have, or is the FMI eligible
7.8: to obtain, access to accounts, payment services and securities services at
each relevant central bank that could be used to conduct its payments
An FMI with access
and settlements, and to manage liquidity risks in each relevant currency?
to central bank
accounts, payment This is not applicable to the KEPSS system as an FMI.
services or securities
Q.7.8.2: To what extent does the FMI use each of these services at each
services should use
relevant central bank to conduct its payments and settlements and to
these services, where
manage liquidity risks in each relevant currency?
practical, to enhance
its management of
This is not applicable to the KEPSS system as an FMI.
liquidity risk.
Q.7.8.3: If the FMI employs services other than those provided by the
relevant central banks, to what extent has the FMI analyzed the potential
to enhance the management of liquidity risk by expanding its use of
central bank services?
This is not applicable to the KEPSS system as an FMI.
Q.7.8.4: What, if any, practical or other considerations to expanding its use
of relevant central bank services have been identified by the FMI?
This is not applicable to the KEPSS system as an FMI.
CENTRAL BANK OF KENYA

KEPSS ASSESSMENT AGAINST THE PFMI PRINCIPLES - DECEMBER 2024

Key Consideration 7.9: Stress Test Program
An FMI should
Q.7.9.1: How does the FMI use stress testing to determine the amount
determine the amount
and test the sufficiency of its liquid resources in each currency? How
and regularly test the
adequacy of its liquid frequently does the FMI stress test its liquid resources?
resources through
rigorous stress testing. This is not applicable to the KEPSS system as an FMI.
An FMI should have clear
procedures to report the
Q.7.9.2: What is the process for reporting on an ongoing basis the results of
results of the stress tests
to appropriate decision the FMI’s liquidity stress tests to appropriate decision-makers at the FMI,
makers at the FMI and for the purpose of supporting their timely evaluation and adjustment of
to use these results to
the size and composition of the FMI’s liquidity resources and liquidity risk
evaluate the adequacy
of and adjust its liquidity management framework?
risk management
framework. In This is not applicable to the KEPSS system as an FMI.
conducting stress
testing, an FMI should
Stress Test Scenarios
consider a wide range
of relevant scenarios.
Q.7.9.3: What scenarios are used in the stress tests, and to what extent do
Scenarios should
include relevant peak they take into account a combination of peak historic price volatilities,
historic price volatilities, shifts in other market factors such as price determinants and yield curves,
shifts in other market
multiple defaults over various time horizons, simultaneous pressures in
factors such as price
determinants and yield funding and asset markets, and a spectrum of forward-looking stress
curves, multiple defaults scenarios in a variety of extreme but plausible market conditions?
over various time
horizons, simultaneous
This is not applicable to the KEPSS system as an FMI as a liquidity stress test
pressures in funding
and asset markets, and has not been carried out.
a spectrum of forwardlooking stress scenarios Q.7.9.4: To what extent do the scenarios and stress tests take into account
in a variety of extreme
the FMI’s particular payment and settlement structure (for example, realbut plausible market
time gross or deferred net; with or without a settlement guarantee; DVP
conditions. Scenarios
should also take into model 1, 2 or 3 for SSSs), and the liquidity risk that is borne directly by the
account the design and FMI, by its participants, or both?
operation of the FMI,
include all entities that
This is not applicable to the KEPSS system as an FMI as a liquidity stress test
might pose material
liquidity risks to the FMI, has not been carried out.
and where appropriate,
cover multiday periods. Q.7.9.5: To what extent do the scenarios and stress tests take into account
In all cases, an FMI
the nature and size of the liquidity needs, and the associated sources of
should document its
supporting rationale liquidity risks that arise in the FMI to settle its payment obligations on
for, and should have time, including the potential that individual entities and their affiliates
appropriate governance
may play multiples roles with respect to the FMI?
arrangements relating
to, the amount and form
This is not applicable to the KEPSS system as an FMI as a liquidity stress test
of total liquid resources it
maintains. has not been carried out.
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KEPSS ASSESSMENT AGAINST THE PFMI PRINCIPLES - DECEMBER 2024

Review and Validation
Q.7.9.6: How frequently does the FMI assess the effectiveness and
appropriateness of stress test assumptions and parameters? How does the
FMI’s stress test programme take into account various conditions, such as
a sudden and significant increase in position and price volatility, position
concentration, change in market liquidity and model risk, including a shift
of parameters?
This is not applicable to the KEPSS system as an FMI.
Q.7.9.7: How does the FMI validate its risk management model? How
frequently does it perform this validation?
This is not applicable to the KEPSS system as an FMI.
Q.7.9.8: Where and to what extent does the FMI document its supporting
rationale for, and its governance arrangements relating to, the amount
and form of its total liquid resources?
This is not applicable to the KEPSS system as an FMI.
CENTRAL BANK OF KENYA

KEPSS ASSESSMENT AGAINST THE PFMI PRINCIPLES - DECEMBER 2024

Key Consideration Same-day Settlement
7.10:
Q.7.10.1: How do the FMI’s rules and procedures enable it to settle payment
An FMI should obligations on time following any individual or combined default among
establish explicit
its participants?
rules and procedures
that enable the The KEPSS system is owned and operated by the CBK and settles transactions
FMI to effect same on a gross basis and in real-time during system operating hours. Various
day, and where system tools and measures are in place to facilitate RTGS members to monitor
appropriate, intraday and manage their payment flows in order to facilitate same day settlement of
and multiday
payment transactions.
settlement of
payment obligations Q.7.10.2: How do the FMI’s rules and procedures address unforeseen and
on time following potentially uncovered liquidity shortfalls and avoid unwinding, revoking or
any individual
delaying the same-day settlement of payment obligations?
or combined
default among The main rule for the settlement of payments in KEPSS is that sufficient funds
its participants. are required in the form of deposits or available credit for a payment obligation
These rules and to be settled. In the event of insufficient funds for gross settlements, payment
procedures should orders will be queued and cancelled if still unsettled at end-of-day.
address unforeseen
and potentially A clearing from NACH will be queued in the event of insufficient funds at one
uncovered liquidity or more settlement banks. There are set deadlines for covering each clearing.
shortfalls and If these deadlines are not met, the clearing will be rejected by KEPSS. NACH
should aim to avoid will then calculate a new clearing without the participant that has insufficient
unwinding, revoking
funds and send this to KEPSS for settlement. The new clearing will be settled
or delaying the same
in KEPSS slightly later than normal. Payments taken out of a clearing will be
day settlement of
included in the next clearing, even if the next clearing is not conducted before
payment obligations.
the following bank day.
These rules and
procedures should
Replenishment of Liquidity Resources
also indicate the
FMI`s process to Q.7.10.3: How do the FMI’s rules and procedures allow for the replenishment
replenish any liquid of any liquidity resources employed during a stress event?
resources it may
employ during a The CBK imposed transaction fees on RTGS participants and membership fees
stress event, so that in part to recover operational and maintenance charges of the CBK for the
it can continue to system. The KEPSS rules and procedures set out actions that may be taken in
operate in a safe and KEPSS in the event of a member default (see Principle 13). Since the Bank does
sound manner. not assume liquidity risk as operator of KEPSS, the requirement to establish
rules and procedures to address unforeseen and potentially uncovered liquidity
shortfalls and replenish any liquid resources does not apply.
CENTRAL BANK OF KENYA

KEPSS ASSESSMENT AGAINST THE PFMI PRINCIPLES - DECEMBER 2024

Key Conclusion As a central bank, the Bank does not itself bear any liquidity risk in relation to
its settlement activities, and participants in KEPSS do not have any liquidity risk
vis-à-vis the Bank as settlement bank. Participants in KEPSS may nevertheless
incur liquidity risk as a result of errors or problems at other participants in
settlement or in the event of operational disruption in KEPSS. Since KEPSS
is a critical FMI, such problems will impact on the Bank over and above the
risk that the Bank itself is exposed to. This risk is adequately addressed by the
KEPSS Terms and Conditions and the requirements made of participants. In
addition, the Bank has operational and analytical tools to identify, measure
and monitor its settlement and funding streams on an ongoing and timely
basis, including the use of intraday liquidity.
The Settlement in the KEPSS system is based on the pre-funding principle in
terms of which any interbank fund transfer will be affected only if sufficient
funds are available in the paying bank’s settlement account. In providing a
settlement service, liquidity and market risks are linked. The CBK, in its wider
mandate, endeavors to promote financial stability by managing the liquidity
needs of the banking system as a whole. It also contributes to the development
and efficiency of the domestic financial markets, particularly the interbank
market.
Principle 8: Settlement
Assessment Rating: Principle 8 is Considered to be Observed.
An FMI should provide clear and certain final settlement, at a minimum by the end of the value
date. Where necessary or preferable, an FMI should provide final settlement intraday or in real
time.
In reviewing this principle, it should be noted that this principle is not intended to eliminate failures
to deliver in securities trades. The occurrence of non-systemic amounts of such failures, although
potentially undesirable, should not by itself be interpreted as a failure to satisfy this principle. This
principle should be reviewed in the context of Principle 9 on money settlements, Principle 20 on FMI
links, and other principles, as appropriate.
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KEPSS ASSESSMENT AGAINST THE PFMI PRINCIPLES - DECEMBER 2024

Key Consideration Point of Settlement Finality
8.1:
Q.8.1.1: At what point is the settlement of a payment, transfer instruction or
An FMI`s rules and other obligation final, meaning irrevocable and unconditional? Is the point
procedures should of settlement finality defined and documented? How and to whom is this
clearly define the information disclosed?
point at which
The point of time when the funds settlements under the System are final is
settlement is final.
stipulated in the KEPSS rules and procedures. The settlement of payment
instructions between KEPSS participants and the CBK via KEPSS accounts
is final and irrevocable once the relevant accounts have been appropriately
debited and credited. This means that once payments are settled between
banks they cannot be revoked, even by a liquidator. Therefore, the point of
finality is the point at which both relevant accounts have been appropriately
debited and credited upon successful settlement.
This information is disclosed to all participants and the public under the KEPSS
Rules and Procedures Section 6 and the NPS Act section 9 (2) and (3) and states
that (2) A settlement that has been effected by payment of money or by means
of an entry to the credit of the account maintained by a settlement system
participant in the Central Bank settlement system or a designated payment
system shall be final and irrevocable. (3) An entry to or payment out of the
account of a designated payment system participant to settle a payment
or settlement obligation in a designated payment system shall be final and
irrevocable.
Q.8.1.2: How does the FMI’s legal framework and rules, including the
applicable insolvency law(s), acknowledge the discharge of a payment,
transfer instruction or other obligation between the FMI and its
participants, or between participants?
Payment instructions in KEPSS are deemed final and irrevocable once the
sending participants account is debited and the receiving participant is
credited with the amount specified in the payment instruction. Payments are
settled in real time, according to their priority and any queued payments due
to insufficient funds are cancelled by the KEPSS System at the relevant activity
cutoff. Members have the option to cancel/re-sequence a queued payment
(Clause 7.2 of the KEPSS Rules & Procedures).
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KEPSS ASSESSMENT AGAINST THE PFMI PRINCIPLES - DECEMBER 2024

Q.8.1.3: How does the FMI demonstrate that there is a high degree of legal
certainty that finality will be achieved in all relevant jurisdictions (for
example, by obtaining a well-reasoned legal opinion)?
Payments are settled in KEPSS exclusively in Kenyan currency (shillings) on the
basis of Kenyan law. Settlement finality is described and protected in the NPS
Act. This is supported with explicit reference in the KEPSS service agreement
and the settlement agreement.
Finality in the case of Links
Q.8.1.4: How does the FMI ensure settlement finality in the case of linkages
with other FMIs?
This is not applicable to the KEPSS system. CBK has not established links with
other FMIs beyond standard SWIFT-based communication to receive payment
orders, send confirmation of settlement and exchange other types of messages.
This principle is not considered to be relevant to KEPSS.
Key Consideration Final Settlement on the value date
8.2: Q.8.2.1: Is the FMI designed to complete final settlement on the value date
(or same day settlement)? How does the FMI ensure that final settlement
An FMI should
occurs no later than the end of the intended value date?
complete final
settlement no KEPSS is a real-time settlement system with immediate settlement of all
later than end of payment orders provided that there are sufficient funds for each payment and
value date, and the payment order meets the applicable formal and technical requirements. All
preferably intraday valid payments are settled on the value date.
or in real time, to
reduce settlement Q.8.2.2: Has the FMI ever experienced deferral of final settlement to the
risk. An LVPS or SSS next business day that was not contemplated by its rules, procedures or
should consider contracts? If so, under what circumstances? If deferral was a result of the
adopting RTGS or FMI’s actions, what steps have been taken to prevent a similar situation in
multiple -batch the future?
processing during
the settlement date.
Since the current system solution for KEPSS was set into operation in 2009,
there have been no situations where payment orders have been deferred to the
next business day due to errors at the Bank.
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KEPSS ASSESSMENT AGAINST THE PFMI PRINCIPLES - DECEMBER 2024

Intraday or Real-Time Final Settlement
Q.8.2.3: Does the FMI provide intraday or real-time final settlement? If so,
how? How are participants informed of the final settlement?
Payments in KEPSS are settled in real time. After the settlement of each
individual payment, a message is sent automatically to the paying bank
confirming that the payment order has been executed. After the settlement of
clearings, confirmation is sent to the clearinghouse. Each participant can also
monitor all activities in their account during the day.
Q.8.2.4: If settlement occurs through multiple-batch processing, what is
the frequency of the batches and within what time frame do they operate?
What happens if a participant does not have enough funds or securities
at the settlement time? Are transactions entered in the next batch? If so,
what is the status of those transactions and when would they become
final?
At present, clearings from ACH, dhowCSD, PESALINK, card switches,
(Interswitch and Kenswitch) CDSC for securities are settled in KEPSS each day.
The net settlements are distributed throughout the day on the basis of a fixed
operating schedule. The RTGS provides settlement of payment instruction
in real-time. Payment instructions may be submitted to RTGS for settlement
between 8:25am and 4:30pm Monday to Friday. All other pending transactions
of the value-date are cancelled at system closure. However, KEPSS allows
participants to queue future-dated transactions.
The operating schedule for KEPSS is published in KEPSS Rules and Procedures.
If one or more participants have insufficient funds for their payment obligations
in a net settlement, the clearing will not be settled in KEPSS. A clearing from
NACH will be queued in KEPSS until all participants have sufficient funds to
cover their payment obligations.
Q.8.2.5: If settlement does not occur intraday or in real time, how has the
LVPS or SSS considered the introduction of either of these modalities?
Settlement of all payments in KEPSS takes place in real time throughout the
day.
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KEPSS ASSESSMENT AGAINST THE PFMI PRINCIPLES - DECEMBER 2024

Key Consideration Q.8.3.1: How does the FMI define the point at which unsettled payments,
8.3: transfer instructions or other obligations may not be revoked by a
participant? How does the FMI prohibit the unilateral revocation of
An FMI should
accepted and unsettled payments, transfer instructions or obligations after
clearly define the
this time?
point after which
unsettled payments, Payment instructions in KEPSS are deemed final and irrevocable once the
transfer instructions sending participants account is debited and the receiving participant is
or other obligations credited with the amount specified in the payment instruction. As provided in
may not be revoked the NPS Act, any credit payment that settles in KEPSS is irrevocable and may
by a participant. not be withdrawn by the paying bank. As provided in the NPS Act, any credit
payment that settles in KEPSS is irrevocable and may not be withdrawn by the
paying bank. It is not possible to reverse an order once it has been settled in
KEPSS. This is due to the fact that KEPSS participants have no ability to amend
or withdraw settlement instructions submitted to the KEPSS system.
Q.8.3.2: Under what circumstances can an instruction or obligation
accepted by the system for settlement still be revoked (for example, queued
obligations)? How can an unsettled payment or transfer instruction be
revoked? Who can revoke unsettled payment or transfer instructions?
KEPSS Rules and Procedures are distributed directly to all participants and
are publicly available on CBK’s web pages. To have an account at the Bank, a
participant must accept the KEPSS Terms and Conditions.
If there are insufficient funds for a payment order, it will be queued in the
settlement system until there are sufficient funds in the account. Queued
payment orders may be deleted by the remitter or the Bank at the remitter’s
request. If there are messages queued in a sub-account when it is closed, the
order is automatically rejected at the end of the settlement day. Banks can
delete or reprioritize payment orders directly via KEPSS Online. A participant
may request return of a payment from a receiving party by using any available
means of communication open to it.
Q.8.3.3: Under what conditions does the FMI allow exceptions and
extensions to the revocation deadline?
The Bank has no rules or procedures permitting participants in KEPSS to revoke
payment orders that have been settled.
Q.8.3.4: Where does the FMI define this information? How and to whom is
this information disclosed?
The rules on settlement, queuing due to insufficient funds and the handling of
unsettled payment orders are set out in the KEPSS Rules and Procedures. The
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KEPSS ASSESSMENT AGAINST THE PFMI PRINCIPLES - DECEMBER 2024

Key Conclusion KEPSS is a real-time settlement system where settlement finality is clearly
defined. Settlement of funds transfers in the KEPSS is achieved in real-time and
is final and irrevocable once the sending participants account is debited and
the receiving participant is credited with the amount specified in the payment
instruction. Payments are settled in real time, according to their priority and any
queued payments due to insufficient funds are cancelled by the RTGS System
at the relevant activity cutoff. As discussed under Principle 1, the settlement of
payment instructions by banks in the KEPSS system is final and irrevocable,
even in the event that a settlement participant becomes subject to insolvency
proceedings.
The transaction settled in the KEPSS is protected under Section 9 (1) (2) and (3)
of the NPS Act, 2011 and cannot be cancelled or revoked.
Principle 9: Money Settlements
Assessment Rating: Principle 9 is Considered to be Observed.
An FMI should conduct its money settlements in central bank money where practical and
available. If central bank money is not used, an FMI should minimize and strictly control the
credit and liquidity risks arising from the use of commercial bank money
This principle should be reviewed in the context of Principle 8 on settlement finality, Principle 16 on
custody and investment risks, and other principles, as appropriate.
Key Consideration 9.1: Q.9.1.1: How does the FMI conduct money settlements? If the FMI conducts
settlement in multiple currencies, how does the FMI conduct money
An FMI should
settlement in each currency?
conduct its money
settlements in Settlement in KEPSS occurs in central bank money. It is a single currency
central bank money, settlement system in the domestic Kenyan currency (shillings).
where practical and
Q.9.1.2: If the FMI does not settle in central bank money, why is it not
available, to avoid
used?
credit and liquidity
risks.
Settlement in KEPSS occurs in central bank money.
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Key Consideration 9.2: Q.9.2.1: If central bank money is not used, how does the FMI assess
the credit and liquidity risks of the settlement asset used for money
If central bank money
settlement?
is not used, an FMI
should conduct its This is not applicable as it relates to where commercial bank money rather
money settlements than central bank money is used for settlement. Settlement in KEPSS occurs
using a settlement in central bank money.
asset with little or no
credit or liquidity risk.
Q.9.2.2: If the FMI settles in commercial bank money, how does the FMI
select its settlement banks? What are the specific selection criteria the
FMI uses?
This is not applicable as it relates to where commercial bank money rather
than central bank money is used for settlement. Settlement in KEPSS occurs
in central bank money/
Key Consideration 9.3: Q.9.3.1: How does the FMI monitor the settlement banks’ adherence to
criteria it uses for selection? For example, how does the FMI evaluate the
If an FMI settles in
banks’ regulation, supervision, creditworthiness, capitalization, access to
commercial bank
liquidity and operational reliability?
money, it should
monitor, manage and This is not applicable as it relates to where commercial bank money rather
limit its credit and than central bank money is used for settlement. Settlement in KEPSS occurs
liquidity risks arising in central bank money.
from the commercial
settlement banks.
Q.9.3.2: How does the FMI monitor, manage and limit its credit and
In particular, an FMI
liquidity risks arising from the commercial settlement banks? How does
should establish and
the FMI monitor and manage the concentration of credit and liquidity
monitor adherence
exposures to these banks?
to strict criteria for
its settlement banks This is not applicable as it relates to where commercial bank money rather
that take account of, than central bank money is used for settlement. Settlement in KEPSS occurs
among other things, in central bank money.
their regulation,
supervision,
Q.9.3.3: How does the FMI assess its potential losses and liquidity
creditworthiness,
pressures as well as those of its participants if there is a failure of its
capitalization, access
largest settlement bank? Settlement in SAMOS occurs in central bank
to liquidity and
money.
operational reliability.
Settlement in KEPSS occurs in Central Bank money
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Key Consideration Q.9.4.1: If an FMI conducts money settlements on its own books, how does
9.4: it minimize and strictly control its credit and liquidity risks?
If an FMI conducts Settlement instructions are settled across the KEPSS accounts. This means
money settlements that participants are exposed to some credit and liquidity risk with respect to
on its own books, it the funds due to them from other participants.
should minimize and
However, these risks are limited due to the design of the KEPSS system, which
strictly control its
uses carefully tested KEPSS system-administered algorithms to ensure the
credit and liquidity
efficient use of funds during settlements. Therefore, it is the responsibility of
risks.
the participants to monitor their respective positions as determined by their
exposure. The KEPSS system is a prefunded system and therefore liquidity is
managed by participants.
Key Consideration 9.5: Q.9.5.1: Do the FMI’s legal agreements with its settlement banks state
when transfers occur, that transfers are final when affected, and that
An FMI`s legal
funds received are transferable?
agreements with any
settlement banks This is not applicable as it relates to an FMI conducting money settlement on
should state clearly its own books, where money settlement is conducted in commercial bank
when transfers on the money.
books of individual
settlement banks are
Q.9.5.2: Are funds received transferable by the end of the day at the
expected to occur,
latest? If not, why?
that transfers are
to be final when All funds are transferred immediately, in real time and always before the end
effected, and that of the day.
funds received should
The settlement agreement through KEPSS provides that once the sending
be transferrable as
participant’s account is debited and the receiving participant’s is credited
soon as possible, at a
with the amount specified in the payment instruction, settlement is deemed
minimum by the end
final and irrevocable.
of the day and ideally
intraday, in order to
enable the FMI and
its participants to
manage credit and
liquidity risks.
Key Conclusion The FMI is owned and operated by the central bank. All settlements in KEPSS
are conducted in central bank money by debiting and crediting banks and
other participants’ accounts in the Bank. Payment instructions are settled
across the books of the CBK and payment is made to and from the CBK
via the central bank accounts the CBK has allocated to each participating
settlement participant.
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KEPSS ASSESSMENT AGAINST THE PFMI PRINCIPLES - DECEMBER 2024

Principle 10: Physical Deliveries
An FMI should clearly state its obligations with respect to the delivery of physical instruments or
commodities and should clearly identify, monitor and manage risks associated with such physical deliveries.
This is not applicable to the KEPSS system. The key considerations concern how central
securities depositories and CCPs conduct the transfer of rights to financial instruments,
commodities etc. from seller to buyer. Principle 10 is not therefore considered to apply to the
Bank’s activities as a settlement bank for payment obligations.
Principle11: Central Securities Depositories
A CSD should have appropriate rules and procedures to help ensure the integrity of securities
issues, minimize, and manage risks associated with the safekeeping and transfer of securities. A
CSD should maintain securities in a demolished or dematerialized form for their transfer by book
entry.
This is not applicable to the KEPSS system.
Principle is not applicable. This principle has six key considerations which all concern the
management of securities in central securities depositories. This principle is not considered
relevant to KEPSS as a settlement system for the cash leg of securities settlement.
Principle 12: Exchange-of-Value Settlement Systems
If an FMI settles transactions that involve the settlement of two linked obligations, it should eliminate principal risk by conditioning the final settlement of one obligation upon the final settlement
of the other.
Principle is not applicable. CBK is the settlement bank for the cash leg of securities settlement
at CSDC and at the CBK-operated CSD. These settlements are based on ownership of financial
instruments transferred from seller to buyer when, and only when, the associated payment
obligations have been settled. This principle therefore applies to these systems, not to the
KEPSS.
Principle 13: Participant-Default Rules and Procedures
Assessment Rating: Principle 13 is Considered to be Broadly Observed.
An FMI should have effective and clearly defined rules and procedures to manage a participant
default. These rules and procedures should be designed to ensure that the FMI can take timely
action to contain losses and liquidity pressures and continue to meet its obligations.
Because of the extensive interactions between the default management principles as they apply to
CCPs, this principle needs to be reviewed in the context of Principle 14 on segregation and portability.
This principle should also be reviewed in the context of Principle 4 on credit risk, Principle 7 on liquidity
risk, Principle 23 on disclosure of rules, key procedures and market data, and other principles, as
appropriate
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Key Consideration Participant default rules and procedures
13.1:
Q.13.1.1: Do the FMI’s rules and procedures clearly define an event of default
An FMI should have (both a financial and an operational default of a participant) and the
default rules and method for identifying a default? How are these events defined?
procedures that
The Bank does not become a counterparty to individual funds transfers between
enable the FMI to
the participants. Moreover, as described under Principle 4, the Bank manages
continue to meet its
credit risks arising from credit extension to participants in the form of ILF/OLF
obligations in the
by requiring them to pledge eligible collateral, so that losses from a participant
event of participant
default are sufficiently low.
default and that
address the
Identifying a default event
replenishment of
The KEPSS system settles transactions in real time, on a gross basis, subject to
resources following
availability of funds. The CBK provides a fully collateralized ILF and a gridlock
a default.
detection and resolution mechanism to help settlement of transactions rather
than them being queued for a long time or cancelled at the respective activity
cutoff. In the case of a default of an ILF in the RTGS system, a member can take
an overnight repo to settle the ILF.
The BPSD, in consultation with the respective supervision department (BSD) of
the CBK, will handle any issues related to a defaulted member (CBK licensee).
Since the RTGS system settles transactions 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. However, if a member defaults
due to an insolvency event or a failure to meet its obligation in the RTGS system,
the Bank, as the operator of the KEPSS system, has the authority to suspend a
member that is unable to meet its settlement obligations. By permitting swift
and decisive action in this way, it allows the Bank to minimize the potential for a
member default to disrupt settlement in the system more widely.
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Q.13.1.2: How do the FMI’s rules and procedures address the following key
aspects of a participant default:
a) the actions that the FMI can take when a default is declared.
The KEPSS system has been designed with the functionality to immediately
suspend a participant temporarily or permanently. The CBK may suspend a
participant from taking part in the payment settlement services if it determines,
in good faith, based on the information available to it, that the Participant’s
financial and / or operating conditions introduces significant disruption risks
affecting the stability of the system or interests of CBK or other Participants in
KEPSS. The Bank is also the prudential supervisor of all KEPSS account holders.
Internal guidance and processes facilitate the sharing of supervisory judgments
and information with other areas of the Bank such as BSD as and when
necessary.
b) the extent to which the actions are automatic or discretionary.
The procedures followed and actions taken by the Bank are established and
published in the KEPSS Terms and Conditions. Beyond this, there may be a need
to use discretion in relation to concrete issues in each case.
The KEPSS system’s settlement and payment processes, algorithms, risk
controls and procedures ensure efficient settlement. The system will always
dispatch failed payment results to the defaulting participant as the originator of
the settlement instruction to notify whether the settlement was successful or
had failed. If a particular settlement instruction is not funded, it will be discarded
by the system due to insufficient funds and a penalty charge will automatically
be imposed.
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KEPSS ASSESSMENT AGAINST THE PFMI PRINCIPLES - DECEMBER 2024

c) changes to normal settlement practices.
In the case where a batch of settlements cannot be settled due to the
participant having insufficient funds in its settlement account, the CBK shall
ascertain the reason for the failure to fund the settlement account and contact
the participant. The participant shall be informed by the CBK of the seriousness
of the failure to fund and be instructed to explore all avenues to obtain the
necessary funds to settle the batch within the time frames as agreed at that
point between the CBK and the participant.
Any payment instructions received in the KEPSS system submitted by the
participant (regardless of whether the underlying transaction is scheduled or
batched) will not be eligible for settlement. These pending instructions will
be rejected by the system when released. All KEPSS participants that have
unsettled payment instructions with the suspended participant are made aware
of the suspended payment instructions. In case of a settlement failure due to
the temporary mismanagement of a participant’s position, normal settlement
practices still apply. It is the responsibility of the participant to resend such
settlement instruction within the correct settlement time frames.
d) the management of transactions at different stages of processing.
The participant’s account in KEPSS will generally be blocked to low priority
outgoing payments if a high priority payment is pending due to insufficient
funds. The settlement of transactions can be rearranged only within the same
priority range to ensure low value payments are settled ahead of high values.
e) the expected treatment of proprietary and customer transactions and
accounts.
The Bank does not involve itself directly in the participant’s customer
relationships.Participating banks are responsible for meeting their contractual
and regulatory obligations to other participants and the CBK. Each participant
is obliged to ensure that it can meet its payment and settlement obligations
timeously, and that its systems and procedures are adequate to ensure that
failure thereof will not jeopardize the payments system. The obligations
have been incorporated in various rules and agreements such as the KEPSS
settlement agreement and service agreement. bankruptcy proceedings and on
the procedures that the Bank has established
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f) the probable sequencing of actions.
The sequence of actions depends on the decision on public administration or
in the KEPSS Terms and Conditions. Procedures are in place that address the
sequence of events, which are documented in the KEPSS Operations Manual.
g) the roles, obligations and responsibilities of the various parties, including
non-defaulting participants; and
The roles, obligations and responsibilities of the parties directly and indirectly
involved are set out in legislation and in in the KEPSS Rules Procedures. It
is generally the CBK’s policy to suspend if the participant has failed to meet
its obligations (default) as soon as it has learned of, and is reasonably able to
confirm, the event. The prompt suspension of such a participant upon such
confirmation protects the CBK from legal risk, provides certainty to participants
in the payment and settlement service, enables counterparties to plan their own
respective contingency measures, and protects the CBK from potentially costly
and disruptive litigation.
h) The existence of other mechanisms that may be activated to contain the
impact of a default.
This is not applicable to the KEPSS system.
Use of financial resources
be secured against collateral, and the Bank has the right to cover its claims
through realization of collateral. Beyond these rules, no special rules or
procedures have been drawn up for the order in which financial resources may
be used. If the KEPSS system fails to draw funds from the participant’s liquid
assets, a total bank default will then occur.
Q.13.1.5: How do the FMI’s rules and procedures address the replenishment
of resources following a default?
For the same reasons as mentioned under Q.13.1.3 and Q.13.1.4, no special rules or
procedures have been drawn up for replenishing resources used in a situation
where a participant in KEPSS is placed under public administration or subject to
bankruptcy proceedings.
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Key Consideration Q.13.2.1: Does the FMI’s management have internal plans that clearly
13.2: delineate the roles and responsibilities for addressing a default? What are
these plans?
An FMI should
be well prepared The KEPSS Operational Manual and the curatorship guidelines have clearly
defined procedures should a participant default. The CBK has in place plans
to implement
to manage a participant default and allows for the suspension of the relevant
its default rules
participant from the KEPSS system. The KEPSS system’s functionality allows
and procedures,
for the immediate suspension of a participant at any point in the operational
including any
timeline. The KEPSS Operational Manual have clearly defined procedures should
appropriate
a participant default. However, currently the FMI has not implemented a “failure
discretionary
to settle mechanism(FTS)” to address risks thay may cause delay or desruptions
procedures provided
by a participant bank settling for a third party who may not be able to fulfill its
for in its rules. obligation to one or more participants as outlined in its contract with the third
party. The argument has always been that KEPSS has an inbuilt FTS mechanism
to mitigate this risk.
Q.13.2.2: What type of communication procedures does the FMI have in
order to reach in a timely manner all relevant stakeholders, including
regulators, supervisors and overseers?
The Bank has detailed procedures in place that set out the operational steps
to be taken in response to an insolvency event affecting a KEPSS member. If a
participant in KEPSS is placed under public administration or into bankruptcy,
the Bank will inform other participants and players submitting payment orders
for settlement in KEPSS about how the settlement of payments in KEPSS will be
managed. The following modalities of communication may be employed:
i. Call the participants when there are pending transactions queued on the
KEPSS system.
ii. Immediate communication happens via telephone calls.
iii. Email broadcasts to the KEPSS treasury managers user group.
iv. Circular letters to all CEOs of participants and other relevant stakeholders
such as other regulators.
v. Public media pronouncements such as press briefings.
However, the Bank does not have a formally documented framework setting
out the Bank’s decision-making and crisis-management arrangements in the
event of a KEPSS member default, including consultation arrangements with
other authorities and with industry, and the roles of relevant executives in this
process.
Q.13.2.3: How frequently are the internal plans to address a default
reviewed? What is the governance arrangement around these plans?
The internal contingency procedures are reviewed when there are changes
to the regulatory framework or the system solutions for KEPSS and based on
experience from exercises testing these procedures. Responsibility for the
procedures rests with the system owner for KEPSS, BPSD.
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Key Consideration Q.13.1.1: Do the FMI’s rules and procedures clearly define an event of default
13.3: (both a financial and an operational default of a participant) and the
method for identifying a default? How are these events defined?
An FMI should
publicly disclose The legal framework for placing banks or other financial institutions under
key aspects of its public administration or into bankruptcy is established in national legislation.
default rules and Upon joining the KEPSS system as a settlement participant, the participant
procedures. agrees to abide by the settlement rules and procedures as outlined in the
service and settlement agreements. As discussed in detail under Principle 7, the
CBK maintains committed liquidity facilities for each participating bank in the
KEPSS system and will draw on its liquidity facilities in the event of a ‘default’ by
granting the bank a collateralised loan in order to satisfy its payment obligations
to its beneficiary bank in the system. If the KEPSS system fails to draw funds
from the participant’s liquid assets, a bank default will then occur (as detailed
under Principle 7)
Q.13.3.2: How are the key aspects of the FMI’s participant default rules and
procedures made publicly available? How do they address:
These default rules are stipulated in the settlement agreement signed by
participants.
a) the circumstances in which action may be taken.
This is not applicable to the KEPSS system.
b) who may take those actions?
This is not applicable to the KEPSS system.
c) the scope of the actions which may be taken, including the treatment of
both proprietary and customer positions, funds, and assets.
This is not applicable to the KEPSS system.
d) the mechanisms to address an FMI’s obligations to non-defaulting
participants; and
This is not applicable to the KEPSS system.
e) where direct relationships exist with participants’ customers and the
mechanisms to help address the defaulting participant’s obligations to its
customers?
This is not applicable to the KEPSS system.
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KEPSS ASSESSMENT AGAINST THE PFMI PRINCIPLES - DECEMBER 2024

Key Consideration Q.13.4.1: How does the FMI engage with its participants and other relevant
13.4: stakeholders in the testing and review of its participant default procedures?
How frequently does it conduct such tests and reviews? How are these test
An FMI should
results used? To what extent are the results shared with the board, risk
involve its
committee and relevant authorities?
participants and
other stakeholders Currently no testing is being done for default procedures.
in testing and
Q.13.4.2: What range of potential participant default scenarios and
review of the FMI`s
procedures do these tests cover? To what extent does the FMI test the
default procedures,
implementation of the resolution regime for its participants?
including any close
out procedures.
Since the KEPSS system settles transactions in real time, on a gross basis, and
Such testing and
subject to funds availability, there is no likelihood for members to face a problem
review should
of defaulting of transactions in the RTGS System.
be conducted at
least annually or
following material
changes to the rules
and procedures to
ensure that they
are practical and
effective.
CENTRAL BANK OF KENYA

KEPSS ASSESSMENT AGAINST THE PFMI PRINCIPLES - DECEMBER 2024

Key Conclusion The KEPSS system settle funds and securities transactions in real time, on a
gross basis subject to funds availability. The actions the Bank can take if an
RTGS account holder, default is set out in the KEPSS Terms & Conditions and the
KEPSS Operations Manual. In the event that a default event does occur, there
should be no material adverse effect on the Bank’s ability to meet its obligations
as operator of the RTGS services. Settlement does not complete in KEPSS unless
there are sufficient funds. The likelihood and magnitude of any credit losses to
the Bank are minimized (see Principle 4 – Credit risk).
The settlement risk design ensures that a bank has sufficient funds to satisfy
its payment obligations relating to settled settlement instructions. The
settlement rules and relevant procedures clearly define the roles, obligations
and requirements with respect to participation in the KEPSS system, outline
participant default management when these requirements are not met,
define actions the CBK may take to mitigate the impact of a default, and detail
the probable sequencing of actions and the tools for managing resulting
liquidity pressures and, if necessary, containing and allocating any losses. To
ensure relevant participants are aware of, and operationally capable of, taking
the steps required for managing a default in the KEPSS system, the CBK has
implemented applicable settlement measures to facilitate the understanding
and management of potential participant default impacts.
Contingency procedures are reviewed regularly as they are updated and in
line with changes in the formal regulatory framework and experience from
incidents, contingency situations and exercises. However, the Bank has not
developed and implemented a failure to settle mechanism to address the risk
posed by failure to settle the NSI files.
Principle 14: Segregation and Portabilit
A CCP should have rules and procedures that enable the segregation and portability of positions
of a participant’s customers and the collateral provided to the CCP with respect to those positions.
Principle 14 concerns CCPs in trades in financial instruments and is not therefore considered
not relevant to KEPSS.
Principle 15: General Business Risk
CENTRAL BANK OF KENYA

KEPSS ASSESSMENT AGAINST THE PFMI PRINCIPLES - DECEMBER 2024

Assessment Rating: Principle 15 is Considered to be Broadly Observed.
An FMI should identify, monitor and manage its general business risk and hold sufficient liquid
assets funded by equity to cover potential general business losses so that it can continue
operations and services as a going concern if those losses materialize. Further, liquid net assets
should at all times be sufficient to ensure a recovery or orderly wind-down of critical operations
and services.
This principle should be reviewed in the context of Principle 3 on the framework for the comprehensive
management of risks, Principle 21 on efficiency and effectiveness, and other principles, as appropriate.
Key Consideration Q.15.1.1: How does the FMI identify its general business risks? What general
15.1: business risks has the FMI identified?
An FMI should have The Bank has an enterprise-wide risk framework for monitoring and managing
robust management risks. General business risk associated with the management and operation
and control systems of the KEPSS services is managed within this framework. As set out under
to identify, monitor, Key Consideration 2.6, the Bank takes a coordinated approach to identifying,
and manage general assessing, and managing risk at both an enterprise and business level.
business risks,
A key component of the Bank’s framework for managing general business
including losses from
risk is its budgeting and accounting processes, which allow it to monitor,
poor execution of
manage and control its operating expenses, including those arising from the
business strategy,
operation of KEPSS. The Bank’s financial accounts are also subject to audit by
negative cash flows,
the Australian National Audit Office. Audit reports are reviewed by the Audit
or unexpected and
Committee.
excessively large
operating expenses.
Q.15.1.2: How does the FMI monitor and manage its general business risks
on an ongoing basis? Does the FMI’s business risk assessment consider the
potential effects on its cash flow and (in the case of a privately operated
FMI) capital?
There is a formal SLA between the CBK’s BPSD and FMD.
The KEPSS services are provided by the central bank. General business risk
from settlement operations in KEPSS is considered part of other risks within
the CBK’s risk management framework. This includes risk (and economic
cost) from the introduction of new system and operating solutions, the risk
of damages (reputational risk) in the event of errors that result in losses for
participants, and the risk of additional costs if external suppliers cease to
supply the CBK or maintain the KEPSS infrastructure. These SLAs clearly state
the responsibilities between the BPSD and the FMD in order to manage and
monitor general business risks that may arise.
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KEPSS ASSESSMENT AGAINST THE PFMI PRINCIPLES - DECEMBER 2024

Key Consideration It should be noted that since the services are provided by the central bank,
15.2: key considerations 2 to 5 are not applicable. The requirement to hold ringfenced liquid net assets funded by equity to cover business risk and support
An FMI should hold
a recovery or wind-down plan does not apply to the central bank, given the
net liquid assets
central bank’s inherent financial soundness. The CBK has a robust framework
funded by equity so
to identify, monitor and manage its general business risks under the overall risk
that it can continue
management framework, as discussed under Principles 3 and 17.
operations and
services as a going Q.15.2.1: Does the FMI hold liquid net assets funded by equity so that it can
concern if it incurs continue operations and services as a going concern if it incurs general
general business business losses?
losses. The amount
This is not applicable to the KEPSS system.
of net liquid assets
funded by equity
Q.15.2.2: How does the FMI calculate the amount of liquid net assets funded
an FMI should
by equity to cover its general business risks? How does the FMI determine
hold should be
the length of time and associated operating costs of achieving a recovery
determined by its
or orderly wind-down of critical operations and services?
general business
risk profile and This is not applicable to the KEPSS system or FMI.
the length of time
required to achieve
a recovery or orderly
wind-down, as
appropriate of its
critical operations
and services if such
action is taken.
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KEPSS ASSESSMENT AGAINST THE PFMI PRINCIPLES - DECEMBER 2024

Key Consideration Recovery or orderly wind-down plan
15.3:
Q.15.3.1: Has the FMI developed a plan to achieve a recovery or orderly
An FMI should wind-down, as appropriate? If so, what does this plan take into
maintain a viable consideration (for example, the operational, technological and legal
recovery or wind- requirements for participants to establish and move to an alternative
down plan and arrangement)?
should hold sufficient
This is not applicable to the KEPSS system.
net liquid assets
funded by equity
Resources
equal to at least six
months of current Q.15.3.2: What amount of liquid net assets funded by equity is the FMI
operating expenses. holding for purposes of implementing this plan? How does the FMI
These assets are in determine whether this amount is sufficient for such implementation?
addition to resources Is this amount at a minimum equal to six months of the FMI’s current
held to cover operating expenses?
participant defaults
This is not applicable to the KEPSS system.
or other risks covered
under the financial
Q.15.3.3: How are the resources designated to cover business risks and
resources principles.
losses separated from resources designated to cover participant defaults
However, equity held
or other risks covered under the financial resources principles?
under international
risk-based capital This is not applicable to the KEPSS system.
standards can be
Q.15.3.4: Does the FMI include equity held under international risk-based
included where
capital standards to cover general business risks?
relevant and
appropriate to avoid
This is not applicable for the KEPSS system or FMI.
duplicate capital
requirements. Q.15.4.1: What is the composition of the FMI’s liquid net assets funded by
equity? How will the FMI convert these assets as needed into cash at little
or no loss of value in adverse market conditions?
This is not applicable for the KEPSS system or FMI.
Q.15.4.2: How does the FMI regularly assess the quality and liquidity of
its liquid net assets funded by equity to meet its current and projected
operating expenses under a range of scenarios, including in adverse
market conditions?
This is not applicable for the KEPSS system or FMI.
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KEPSS ASSESSMENT AGAINST THE PFMI PRINCIPLES - DECEMBER 2024

Key Consideration Q.15.4.1: What is the composition of the FMI’s liquid net assets funded by
15.4: equity? How will the FMI convert these assets as needed into cash at little
or no loss of value in adverse market conditions?
Assets held to cover
general business This is not applicable for the KEPSS system or FMI.
risk should be of
Q.15.4.2: How does the FMI regularly assess the quality and liquidity of
high quality and
its liquid net assets funded by equity to meet its current and projected
sufficiently liquid in
operating expenses under a range of scenarios, including in adverse
order to allow the
market conditions?
FMI to meet current
and projected
This is not applicable for the KEPSS system or FMI.
operating expenses
under a range of
scenarios, including
in adverse market
conditions.
Key Consideration Q.15.5.1: Has the FMI developed a plan to raise additional equity? What are
15.5: the main features of the FMI’s plan to raise additional equity should its
equity fall close to or fall below the amount needed?
An FMI should
maintain a viable This is not applicable for the KEPSS system or FMI.
plan for raising
Q.15.5.2: How frequently is the plan to raise additional equity reviewed and
additional equity
updated?
should its equity fall
close to or below the
This is not applicable for the KEPSS system or FMI.
amount needed.
This plan should be Q.15.5.3: What is the role of the FMI’s board (or equivalent) in reviewing and
approved by the approving the FMI’s plan to raise additional equity if needed?
board of directors
This is not applicable for the KEPSS system or FMI.
and updated
regularly.
Key Conclusion It is important to note that since the KEPSS services are provided by the
central bank, key considerations 2 to 5 are not applicable. The requirement
to hold ring-fenced liquid net assets funded by equity to cover business risk
and support a recovery or wind-down plan does not apply to the central bank,
given the central bank’s inherent financial soundness. The CBK has a robust
framework to identify, monitor and manage its general business risks under
the overall risk management framework, as discussed under principles 3 and 17
Principle 16: Custody and Investment Risks
Assessment Rating Principle 16 is Considered to be Broadly Observed.
An FMI should safeguard its own and its participants` assets and minimize the risk of loss on
and delay in access to these assets. An FMI`s investments should be in instruments with minimal
credit, market and liquidity risks. CENTRAL BANK OF KENYA 99
KEPSS ASSESSMENT AGAINST THE PFMI PRINCIPLES - DECEMBER 2024

This principle should be reviewed in the context of Principle 4 on credit risk, Principle 5 on collateral,
Principle 7 on liquidity risk, and other principles, as appropriate.
Key Consideration 16.1: Participant default rules and procedures
An FMI should hold Q.16.1.1: If the FMI uses custodians, how does the FMI select its
its own assets and custodians? What are the specific selection criteria the FMI uses,
its participants` including supervision and regulation of these entities? How does the FMI
assets at supervised monitor the custodians’ adherence to these criteria?
and regulated
The KEPSS itself has no assets, though the CBK has the rights to financial
entities that have
instruments pledged as collateral for its lending under the ILF/OLF. These
robust accounting
securities are held in the CSD operated by the CBK. Pledged securities are
practices, safekeeping
segregated in the CSD records and cannot be sold or otherwise utilized by
procedures and
a participant until the CBK releases the pledge following repayment of any
internal controls that
loan.
fully protect these
assets.
Q.16.1.2: How does the FMI verify that these entities have robust
accounting practices, safekeeping procedures, and internal controls that
fully protect its and its participants’ assets?
The Bank monitors collateralization continuously. If errors are detected in the
pledging of collateral or release of pledged securities, this is followed up and,
where appropriate, the participant in KEPSS that pledged the security. The
BPSD and FMD have an SLA in place which governs the relationship between
the two functions
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KEPSS ASSESSMENT AGAINST THE PFMI PRINCIPLES - DECEMBER 2024

Key Consideration Q.16.2.1: How has the FMI established that it has a sound legal basis to
16.2: support enforcement of its interest or ownership rights in assets held in
custody?
An FMI should have
prompt access to The Bank takes full legal ownership of collateral that is placed with it under
its assets and the the terms and conditions for KEPSS participation. Each participant that joins
assets provided by the KEPSS system is strictly required to sign the KEPSS service agreement.
participants, when This agreement, among other things, outlines the cession requirement
required. governing the ownership of the financial instruments pledged as collateral
by the participant in the KEPSS system against a loan provided to facilitate
settlement.
During the KEPSS business hours, the Bank provides immediate access
to funds held in RTGS and the ability to settle in real-time. The securities
the Bank holds against the provision of ILF can be on demand if the Bank
considers that the collateral is not required to cover any exposure. The
cession can only be lifted once all the obligations, liabilities and monies owed
to or payable by the participant have been irrevocably paid and discharged
in full. Each participant that joins the KEPSS system is strictly required to sign
the KEPSS service agreement.
Q.16.2.2: How does the FMI ensure that it has prompt access to its assets,
including securities that are held with a custodian in another time zone
or legal jurisdiction, in the event of participant default?
Securities that participants in KEPSS pledge as collateral in favor of the Bank
are registered in separate collateral accounts for this purpose. The collateral
accounts are managed by the Bank, and the collateral is released only if it
is not in use. The collateral must be always available to the Bank under the
agreements with each central securities depository and each participant as
pledgor.
Key Consideration Q.16.3.1: How does the FMI evaluate and understand its exposures to its
16.3: custodian banks? In managing those exposures, how does it take into
account the full scope of its relationship with each custodian bank? For
An FMI should evaluate
instance, does the FMI use multiple custodians for the safekeeping of its
and understand
assets to diversify exposure to any single custodian? How does the FMI
its exposures to its
monitor concentration of risk exposures to its custodian banks?
custodian banks,
taking into account This is not applicable to the KEPSS system, as it does not have custodian
the full scope of its banks.
relationship with each.
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KEPSS ASSESSMENT AGAINST THE PFMI PRINCIPLES - DECEMBER 2024

Key Consideration Investment Strategy
16.4:
Q.16.4.1: How does the FMI ensure that its investment strategy is
An FMI`s investment consistent with its overall risk management strategy? How and to whom
strategy should does the FMI disclose its investment strategy?
be consistent with
its overall risk This is not applicable to the KEPSS system.
management strategy
Q.16.4.2: How does the FMI ensure on an ongoing basis that its
and fully disclosed
investments are secured by, or there are claims on, high-quality obligors?
to its participants,
and investments
This is not applicable to the KEPSS system.
should be secured
by, or be claims on,
Risk Characteristics of Investments
high quality obligors.
These investments Q.16.4.3: How does the FMI consider its overall exposure to an obligor in
should allow for quick choosing investments? What investments are subject to limits to avoid
liquidation with little, the concentration of credit risk exposures?
if any, adverse price
effect. This is not applicable to the KEPSS system.
Q.16.4.4: Does the FMI invest participant assets in the participants’ own
securities or those of its affiliates?
This is not applicable to the KEPSS system.
Q.16.4.5: How does the FMI ensure that its investments allow for quick
liquidation with little, if any, adverse price effect?
This is not applicable to the KEPSS system.
KEPSS is a settlement system where participants pledge assets – primarily
securities – as collateral for loans from the Bank. The pledged securities
are registered in separate collateral accounts and may not be withdrawn
etc. without the Bank’s consent. The participant remains the owner of the
pledged securities. The Bank does not reinvest assets pledged as collateral
for loans. Key consideration 4 is therefore not considered relevant to KEPSS.
Key Conclusion The KEPSS system has its own collateral management system that fully
controls the use of collateral in the system. The CBK is a direct participant
with direct control over the financial instruments lodged with the CSD.
Principle 17: Operational Risk
Assessment Rating Principle 17 is Considered to be Broadly Observed.
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KEPSS ASSESSMENT AGAINST THE PFMI PRINCIPLES - DECEMBER 2024

An FMI should identify the plausible sources of operational risk, both internal and external, and
mitigate their impact through the use of appropriate systems, policies, procedures and controls.
Systems should be designed to ensure a high degree of security and operational reliability and
should have adequate, scalable capacity. Business continuity management should aim for timely
recovery of operations and fulfilment of the FMI`s obligations, including in the event of a widescale or major disruption.
This principle should be reviewed in the context of Principle 20 on FMI links, Principle 21 on efficiency
and effectiveness, Principle 22 on communication standards and procedures, and other principles, as
appropriate.
Key Consideration Operational Risk Management Framework for KEPSS
17.1: Q.17.1.1: What are the FMI’s policies and processes for identifying the
plausible sources of operational risks? How do the FMI’s processes idenAn FMI should estabtify plausible sources of operational risks, whether these risks arise from
lish a robust operainternal sources (for example, the arrangements of the system itself,
tional risk-manageincluding human resources), from the FMI’s participants or from external
ment framework with
sources?
appropriate systems,
policies, procedures
Operational risk management for the Bank’s settlement system has been
and controls to identidesigned on the basis of the risk management framework for the Bank’S
fy monitor and manOperations. The aim of the framework is for the Bank to assess continuously
age operational risks.
which material risks it faces in respect of its operations, and whether there are
appropriate systems for managing these risks. Under the risk management
framework, risks are identified in order to map and assess those that could
prevent the achievement of objectives at different levels. Within the context
of the Bank’s risk management framework, the end-to-end KEPSS risk management framework has been created which highlights appropriate systems,
policies, and controls in place to identify, monitor and manage risks that may
impact the operation of the KEPSS services.
The framework provides the FMI with a framework to identify core processes
and implement controls to mitigate potential residual risks. The CBK has put
in place policies, processes, and controls to manage or mitigate any potential
operational risks. These arrangements include a service level agreement with
ITD to manage systems, processes, and risks by ensuring that the FMI’s operational reliability objectives, namely availability, recovery time and recovery
point objectives are met. Redundancy and disaster recovery (DR) systems and
processes, including business continuity arrangements, were established to
ensure that the FMI is robust and resilient.
The operational risk management function allows the FMI to proactively manage operational risk by monitoring day-to-day operations and introducing
new controls or mitigation strategies. Operational risk management is therefore a continues process entrenched in the daily operations of the FMI.
Q.17.1.2: What sources of operational risks has the FMI identified? What
single points of failure in its operations has thCeE FNMTIR iAdLe nBtAifiNeKd ?OF KENYA

KEPSS ASSESSMENT AGAINST THE PFMI PRINCIPLES - DECEMBER 2024

Key Consideration Roles, Responsibilities, and Framework
17.2:
Q.17.2.1: How has the board of directors defined the key roles and responAn FMI board of di- sibilities for operational risk management?
rectors should clearly
The Bank manages the operational risks arising from KEPSS through its risk
define the roles and
management framework, the governance of which is set out under Key Conresponsibilities for
sideration 2.6. Under this framework, operational risk policies are developed
addressing operaand approved by the CBK Board, with oversight from the Risk Management
tional risk and should
Committee. The roles and responsibilities for operational risk management
endorse the FMI`s
are clearly defined in the CBK Group Risk Management Policy. When it comes
operational risk manto roles and responsibilities, risk management is to organised in such a way as
agement framework.
to ensure the necessary delegation of duties and independence between risk
Systems, Operational
management in line management (first line of defence) and defined complipolicies, procedures,
ance and risk management functions (second line of defence). The Internal
and controls should
Audit supports the Board in following up the Bank’s activities by providing
be reviewed, audited,
independent assessments and advice on the Bank’s governance, risk manand tested periodically
agement and internal control (third line of defence).
and after significant
changes.
Q.17.2.2: Does the FMI’s board explicitly review and endorse the FMI’s operational risk management framework? How frequently does the board
review and endorse the FMI’s operational risk management framework?
Risk management for KEPSS is based on the framework for enterprise risk
management for the Bank. The CBK is a central bank and, as such, the FMI
operation is not the only or main business of the Bank. The operational risk
management, as outlined in the CBK Group Risk Management Policy provides for a high-level framework that is approved by the Board. According to
this policy, the Board is ultimately responsible for directing and monitoring
the total process of risk management as well as forming its own opinion on
the adequacy and effectiveness of the process.
The RMCD coordinates the entire risk management process in the CBK Group
for reporting to the Board.and relevant risk oversight structures. The FMI
operational risk management function provides a proactive risk management process established specifically for FMI operations. The CBK Group Risk
Management framework is to be assessed annually and developed further in
line with external requirements, internal needs and developments in the field
Policy is reviewed annualy by the RMCD and is presented to the RMC and
BAC for consideration and submission to the Board for approval.
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KEPSS ASSESSMENT AGAINST THE PFMI PRINCIPLES - DECEMBER 2024

Key Consideration Q.17.3.1: What are the FMI’s operational reliability objectives, both qualita17.3: tive and quantitative? Where and how are they documented?
An FMI should have The main operational reliability objective is to settle payment orders continuclearly defined op- ously during KEPSS’s opening hours using the ordinary operating and backup
erational reliability solutions. The agreements with suppliers of system, operating and commuobjectives and should nication solutions for KEPSS contain stringent requirements for IT availability
have policies in place and stable provision of individual services.
that are designed to
The FMI’s qualitative and quantitative operational reliability objectives inachieve those objecclude the availability of the system, the recovery time objective (RTO) and the
tives.
recovery point objective In the event of severe disruption the main objective
is to settle payment orders continuously during KEPSS opening hours using
the ordinary operating and backup solutions. when necessary, manual procedures.
Q.17.3.2: How do these objectives ensure a high degree of operational reliability?
Given the importance of the KEPSS to financial stability, the Bank targets
availability of KEPSS settlement to 99.99 percent during operating hours.
Sound, efficient and secure settlement of payments is important for the
Bank’s role in the society and has management’s attention. The necessary
resources are made available to achieve this objective.
Q.17.3.3: What are the policies in place that are designed to achieve the
FMI’s operational reliability objectives to ensure that the FMI takes appropriate action as needed?
The Bank has staffing and operational procedures for continuous monitoring
of settlement in KEPSS during the day. This allows for issues to be followed
up immediately in line with internal procedures and taken up with external
participants and suppliers on the basis of agreed procedures. All incidents
are logged on the FMI’s call logging application, analyzed for root causes, and
reported to the relevant internal and external stakeholders.
Severe incidents are escalated to periodic management meetings with
suppliers. The procedures for managing non-conformances are updated on
the basis of experience from incidents and non-conformances from ongoing
operations, exercises and where otherwise deemed necessary.
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KEPSS ASSESSMENT AGAINST THE PFMI PRINCIPLES - DECEMBER 2024

Key Consideration Q.17.4.1: How does the FMI review, audit and test the scalability and ade17.4: quacy of its capacity to handle, at a minimum, projected stress volumes?
How frequently does the FMI conduct these reviews, audits and tests?
An FMI should ensure
that it has scalable The framework for enterprise risk management at the Bank, including operacapacity adequate tional risk management, is subject to auditing by the Bank’s external auditor
to handle increasing where this is relevant for the audit of the financial statements. When introstress volumes and to ducing changes and upgrades, the systems are tested with a much higher
achieve its service- lev- number of transactions than normal. Stress testing of the system is done prior
el objectives. to any implementation of a new system or process in the production environment, based on historical maximum volumes as well as projected volumes,
considering the data available at the time. The KEPSS hardware infrastructure
was upgraded and tested in June 2020.
Q.17.4.2: How are situations where operational capacity is neared or exceeded addressed?
The KEPSS system capacity has been improved to settle around 125,000 transactions per hour compared to 7,500 transactions per hour prior to go-live of
the upgraded KEPSS system (New-Generation) in 2020. The current capacity
has not been fully utilized indicating that the current operational capacity is
sufficient for now. BPSD as the operator of the system has a real-time monitoring tool to keep track of the number of transactions against the maximum
capacity.
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KEPSS ASSESSMENT AGAINST THE PFMI PRINCIPLES - DECEMBER 2024

Key Consideration Q.17.5.1: What are the FMI’s policies and processes, including change
17.5: management and project management policies and processes, for addressing the plausible sources of physical vulnerabilities and threats on
An FMI should have
an ongoing basis?
comprehensive physical and information Physical Security
security policies that
address all potential The RTGS systems is operated from the CBK head office, which has high
vulnerabilities and physical access controls. The CBK is an organ of the state and as such the
threats. CBK’s security is subject to external oversight and review by official entities.
IT Policies and procedures protect RTGS Information. The KEPSS system use
SWIFT where transactions are authenticated and encrypted. Audit logs are
monitored on a regular basis. KEPSS is certified against the ISO27001 information security standard. The CBK has a set of comprehensive building and
information security policies to address potential risks.
The CBK Group Security Policy and related framework provide a framework
within which physical and information security risks are managed in the FMI.
These allow for the management of physical security, namely facilities, which
include assets and processes; information security in any form (i.e. written,
spoken and electronic) as well as security for staff, contractors, and visitors.
Cyber resilience in relation to both KEPSS and the Bank’s operations more
broadly is overseen by the Risk Management Committee as part of the Bank’s
enterprise-wide risk management framework. Cyber security practices are
informed by domestic and international best practice, to mitigate Cyber Security Incidents. To support the Bank’s information security, there is a dedicated
Information Technology Security Team within the ITD that is headed by a
senior Manager, Payment Systems.
Q.17.5.2: Do the FMI’s policies, processes, controls and testing appropriately take into consideration relevant international, national and industry-level standards for physical security?
Activities relating to policies, processes, controls and testing of physical security for KEPSS take place in close collaboration with specialist units in this area.
Relevant national and international requirements and standards serve as a
basis for physical security requirements and are adjusted in line with assessed
threats and risks. The CBK Group’s security function complies with relevant
legislation in terms of physical, personnel and information security. Security
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KEPSS ASSESSMENT AGAINST THE PFMI PRINCIPLES - DECEMBER 2024

Key Consideration Objectives of Business Continuity Plan
17.6:
Q.17.6.1: How and to what extent does the FMI’s business continuity plan
An FMI should have reflect objectives, policies and procedures that allow for the rapid recova business continuity ery and timely resumption of critical operations following a wide-scale or
plan that addresses major disruption?
events posing a signifThe continuity plan for KEPSS is designed to ensure continuous settlement
icant risk of disrupting
of payment orders even when there is disruption in the ordinary operating
operations, including
solutions. CBK has in place a Business Continuity Policy which aims to provide
events that cause a
a framework for the effective management of a BCM programme. This policy
widespread or major
allows each department, including the FMI, to establish a BCP which is spedisruption. The plan
cific and appropriate to its own operations. The FMI’s BCP is specific on all the
should incorporate
FMI’s business critical business processes, ICT applications used, the critical
the use of a secondtime period during which these processes are required, interdependencies
ary site and should be
and the amount of time required to recover these processes.
designed to ensure
that critical inforThe operational disruptions catered for in the FMI’s BCP cover any situation
mation technology
or incident that has a major or worst-case impact on the continuity of the
systems can resume
identified critical business processes and reputation of the FMI. The BCP in
operations within two
place defines the roles and responsibilities of the recovery team, including
hours following disrupgovernance arrangements, to clarify the level of authority required to invoke
tive events. The plan
the plan. Operational procedures are documented to support the recovery of
should be designed
the FMI’s critical business processes. The RTO for the FMI’s critical business
to enable the FMI to
processes for all major business processes is set for two hours during primary
complete settlement
and secondary time.
by end of day of the
disruption, even in For the communication solution SWIFT, there are also procedures for reportcase of extreme cir- ing critical issues such as problems with the system solution, hardware or
cumstances. The FMI communication lines. The Bank has an extended user support agreement
should regularly test with SWIFT to ensure priority treatment and access to resources at SWIFT to
these arrangements. deal with issues
Design of Business Continuity Plan
Q.17.6.2: How and to what extent is the FMI’s business continuity plan
designed to enable critical IT systems to resume operations within two
hours following disruptive events, and to enable the FMI to facilitate or
complete settlement by the end of the day even in extreme circumstances?
The continuity plan for KEPSS is designed to ensure continuous settlement of
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Key Consideration Risks to the FMI’s own Operations
17.7:
Q.17.7.1: What risks has the FMI identified to its operations arising from its
An FMI should identify, key participants, other FMIs, and service and utility providers? How and
monitor and manage to what extent does the FMI monitor and manage these risks?
the risks that key parThe greatest risks for KEPSS relate to threats to IT systems in the financial
ticipants, other FMIs,
sector and critical infrastructure, and the use of external suppliers of critical
and service and utility
services. The sources of operational risks in the KEPSS operations that have
providers might pose
been identified include the Telecommunications (international and domesto its operations. In adtic), loss of SWIFT (international and domestic), loss of infrastructure, power
dition, an FMI should
failures, payment processing system failures and loss of key human resources
identify, monitor and
have been identified as sources of operational risks in the FMI operations.
manage the risks its
operations might pose
Participants are required to log any new changes relating to their payment
to other FMIs.
and settlement systems with the FMIs. Testing is required for these changes
and progress is monitored by the FMI. Participants are also required to provide implementation and back-out plans for changes that are introduced in
their systems. The risk in KEPSS is monitored constantly through surveillance
of day-to-day operations with registration and follow-up of incidents and contingencies. These risk assessments are reviewed and updated quarterly and in
the event of significant changes to KEPSS or the regulatory framework..
Q.17.7.2: If the FMI has outsourced services critical to its operations, how
and to what extent does the FMI ensure that the operations of a critical
service provider meet the same reliability and contingency requirements
they would need to meet if they were provided internally?
The agreement with each provider of services that are critical to KEPSS emphasizes requirements for stable and reliable performance. This includes each
system’s technical availability, contingency procedures and the registration,
follow-up and reporting of problems. The requirements are based on national
rules for critical infrastructure and international recommendations for settlement systems at central banks. Service level agreements with penalty clauses
are in place with service providers to protect critical services. To address the
risks to KEPSS from critical dependencies on utility providers, the Bank has
put in place a number of controls:
• each site has an uninterruptable power supply and a backup power
generator system.
• regular testing of backup arrangements
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Key Conclusion The CBK has in place an operational risk function that provides for a systematic, structured and transparent approach to managing operational risks
in the FMI. Operational risk in the FMI is mitigated through the system and
processes’ design and architecture, which provides for system integrity and
security, and the availability of FMI operations. The KEPSS system has a high
degree of operational reliability due to the resilience of the technical architecture and infrastructure, which enables the FMI to render settlement services
to the participating institutions.
The continuity plan for KEPSS covers events where there is a risk of disruption
to the operation of the settlement system. Access to an enhanced contingency solution in the SWIFT network means that data from payment messages
can provide the basis for the settlement of payments in a situation where the
ordinary operating and backup solutions are out of action. This contingency
solution has a risk profile that is distinct from that of the primary and secondary solutions. Failures and disruption at external players such as banks and
clearing systems may result in delays and disruption in KEPSS and in the payment system as a whole. The risk to KEPSS in such cases relates to efficient
and appropriate contingency management for the settlement of payments.
As such there is need for the bank to implement a failure to settle mechanism
to mitigate the risks that may be pose by these external players.
The Bank has however, not conducted an evaluation of the accounts of all
critical service providers such as KENEX to ensure preparedness for possible
financial problems and to take action in good time to ensure stable operation
of KEPSS.
Principle 18: Access and Participation Requirements
Assessment Rating Principle 18 is Considered to be Observed.
An FMI should have objective, risk based and publicly disclosed criteria for participation, which
permit fair and open access.
In reviewing this principle, it should be noted that FMIs are subject to the constraints of local laws
and policies of the jurisdiction in which the FMI operates, and those laws may prohibit or require the
inclusion of certain categories of financial institutions. This principle should be reviewed in the context
of Principle 19 on tiered participation arrangements, Principle 21 on efficiency and effectiveness, and
other principles, as appropriate
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Key Consideration Participation Criteria and Requirements
18.1:
Q.18.1.1: What are the FMI’s criteria and requirements for participation
An FMI should allow (such as operational, financial and legal requirements)?
for fair and open
access to its services, The management of the NPS by the CBK includes the provision of
including by direct participation access to the industry and ensures that requirements are set
and, where relevant, and adhered to. Categories for service providers in the NPS include nonindirect participants clearing banks, clearing banks, settlement banks and third-party payment
and other FMIs, based service providers. This environment is well organised and well regulated. Only
on reasonable risk clearing and settlement banks are allowed to participate in this area. The
related participation KEPSS system does not allow for indirect participants. Participating banks
requirements. can be settlement banks for Third Party payment service providers such as
the payment switches. For this kind of arrangements, the seetlement bank
assumes full responsibility for the settlement in KEPSS. The participant’s
exposure is not directly visible in the KEPSS system.
Participants are subject to all applicable laws and the regulatory framework
of the NPS. The initial and continuing eligibility requirements for direct
participation in the KEPSS system are objective and expressly set out and
approved by the regulatory structure as discussed in Principle 1. The access
criteria for KEPSS are applied transparently across all participants who
must meet the laid down access criteria. At present, KEPSS membership
is generally provided to all licensed commercial and microfinance banks
provided they fulfill the primary eligibility requirements specified in the
KEPSS Rules and Procedures and in the starter pack for participation, which
is disseminated as a participant handbook to participants of the NPS. The
criteria is designed to permit fair and open access based on the goal of
protecting the integrity of the settlement and payment processes, and
mitigating any relevant risks associated with participation in the KEPSS
system.
The CBK is empowered to designate a settlement system as a designated
settlement system in terms of section 3 of the NPS Act, 2011. Such designation
may be made if the (a) the payment system poses systemic risk; (b) the
designation is necessary to protect the interest of the public; or (c) such
designation is in the interest of the integrity of the payment system.
Q.18.1.2: How do these criteria and requirements allow for fair and open
access to the FMI’s services, including by direct and, where relevant,
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Key Consideration Justification and Rationale of Participation Criteria
18.2:
Q.18.2.1: How are the participation requirements for the FMI justified in
An FMI`s participation terms of the safety and efficiency of the FMI and its role in the markets it
requirements should serves, and tailored to and commensurate with the FMI’s specific risks?
be justified in terms
of the safety and The Bank proactively seeks to provide fair and open access to a broad range
efficiency the FMI of institutions. Participation is open to all licensed commercial banks that
and the markets it that have met its eligibility criteria. The Bank has expanded the perimeter of
serves, be tailored to the type of institutions eligible for access to include institutions such as nonand commensurate bank microfinance that have qualified to be direct participants having met
with the FMI`s specific the set criteria.
risks and be publicly
disclosed. Subject The Bank looks to ensure that access is available as widely as possible, while
to maintaining ensuring the integrity of the system and its role regarding maintaining
acceptable risk control monetary and financial stability. The Bank publishes the access criteria for
standards, an FMI settlement account under the KEPSS Rules and Procedures published on the
should endeavor to CBK website. To become a KEPSS Direct Participant, an applicant must meet
set requirements the definition of a “participant” as defined in the NPS ACT, 2011.
that have the least
restrictive impact Q.18.2.2: Are there participation requirements that are not risk-based but
on access that required by law or regulation? If so, what are these requirements?
circumstances permit.
To hold an account at the Bank and participate in the settlement of
payments in KEPSS, participants must meet objective, formal requirements
that include holding a license to carry on business as a bank or micro-finance
bank. All the participation requirements defined by the NPS Act, the starter
pack and the KEPSS Operations Manual are intended to mitigate risk.
Q.18.2.3: Are all classes of participants subject to the same access
criteria? If not, what is the rationale for the different criteria (for example,
size or type of activity, additional requirements for participants that act
on behalf of third parties, and additional requirements for participants
that are non-regulated entities)?
All participants in the KEPSS system must be a bank or microfinance bank
or designated settlement participant, as stipulated in the NPS Act. No
unregulated entities participate in KEPSS.
Least Restrictive Access
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Key Consideration Monitoring Compliance
18.3:
Q.18.3.1: How does the FMI monitor its participants’ ongoing compliance
An FMI should with the access criteria? How are the FMI’s policies designed to ensure
monitor compliance that the information it uses to monitor compliance with participation
with its participation criteria is timely and accurate?
requirements on
The Bank continuously monitors the settlement of payments in KEPSS
an ongoing basis
and participants’ use of the settlement system and their accounts. Nonand have clearly
conformances are registered and followed up both with each participant
defined and publicly
and as a source of experience for assessing the suitability of the participation
disclosed procedures
criteria. This continuous monitoring and registration of non-conformances
for facilitating the
helps ensure that the Bank has up-to-date and accurate information about
suspension and orderly
participants’ compliance with the criteria.
exit of a participant
that breaches, or
It is the responsibility of the participant to ensure that its systems are
no longer meets,
adequate to operate the transactions contemplated in the services and
the participation
its back-up systems are an adequate alternative to its systems upon the
requirements.
occurrence of a disaster event. Each participant is obliged to ensure that it is
able to meet its settlement obligations timeously, and that its systems and
procedures are adequate to ensure that failure thereof will not jeopardize the
payments system.
Q.18.3.2: What are the FMI’s policies for conducting enhanced
surveillance of, or imposing additional controls on, a participant whose
risk profile deteriorates?
Payment orders from a participant in KEPSS are executed only if the
participant has sufficient funds to cover the payment in the form of deposits
or available credit. Payment orders without sufficient funds will not be
executed. Where this is part of a clearing, the clearing will be rejected after
a set time and the clearinghouse will need to calculate a new clearing
result that can be settled. The Bank plays a variety of roles in the financial
system, including supervision and analysis of banks’ financial position and
liquidity in the money market. Should this supervision pick up anything that
may be significant for the Bank as settlement bank, this will be reported
internally through established notification and information procedures. If
this information may be significant for KEPSS, the Bank may contact the
participant to obtain further details.
The BPSD oversight framework includes the monitoring of participants
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Key Conclusion The terms and criteria for holding an account at the Bank, participating in
KEPSS, and taking out loans are set out clearly in publicly disclosed rules and
procedures. The same applies to the procedures for terminating an account.
The rules, which are publicly available, define the requirements for initial and
continuing participation in the KEPSS system. Upon joining, participants are
continually monitored for compliance with the regulatory framework. Failure
to abide by these regulations could result in suspension from the system.
Participation in KEPSS is open to a financial institution or any entity/
institution approved by the CBK, provided it meets all the eligibility criteria
and conditions. KEPSS has fair and open access criteria with an aim to
promote risk management capability, system stability and efficiency as well
as financial stability. The CBK examines and monitors KEPSS participants’
ongoing compliance by performing an annual review of KEPSS compliance
requirements of all approved participants.
Principle 19: Tiered Participation Arrangements
Assessment Rating Principle 19 is Considered to be Observed.
An FMI should identify, monitor and manage the material risks to the FMI arising from the tiered
participation arrangements.
This principle should be reviewed in the context of Principle 14 on segregation and portability, Principle
18 on access and participation requirements, and other principles, as appropriate.
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Key Consideration Tiered participation arrangements
19.1:
Q.19.1.1: Does the FMI have any tiered participation arrangements? If so,
An FMI should describe these arrangements.
ensure that its rules,
The KEPSS system provides only for direct settlement banks but allows for
procedures and
settlement iof clearings from clearinghouse (NACH), payment switches (debit
agreements allow
and credit cards) and individual banks’ such as microfinance banks that are
it to gather basic
not participating members that use other member banks to settle payments
information about
in KEPSS through the submission of the NSI files..
indirect participation
in order to identify,
Q.19.1.2: How does the FMI gather basic information about indirect
monitor and manage
participation? Which information is collected and how frequently is it
any material risks
updated?
to the FMI arising
from such tiered The CBK’s bank models is not designed to cater for indirect participation.
participation KEPSS has contractual agreements with the direct participants and has
arrangements. no relationship with the third-party participants; thus, KEPSS has neither
obligations towards nor interaction with any third-party arrangements.
Therefore, an indirect participant’s exposure is not visible in KEPSS as the
direct participant assumes full responsibility for the settlement in KEPSS.
(Refer to Principle 18, key consideration 1). For this reason, the FMI does not
collect any third-party information through settlement (i.e. when KEPSS
processes a settlement instruction where a participant is settling on behalf of
the customer, the customer information is removed and KEPSS receives only
the direct participant’s information).
Risks to the FMI
Q.19.1.3: How does the FMI evaluate its risks arising from these
arrangements?
The risk to the Bank from tiered participation in KEPSS is mainly related
to the risk to settlement banks participating directly in the settlement
of payments in KEPSS. It will be the settlement bank that identifies and
manages risks that arise from the settlement of payments for clearing system
(NACH) and payment switches. If the settlement bank is unable to discharge
its obligations this can cause disruption in the payment system that could
also affect the settlement of payments in KEPSS. There are no contingency
measures address such disruptions. The Bank should consider implementing
a “failure to settle mechanisms”.
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Key Consideration Q.19.2.1: How does the FMI identify material dependencies between direct
19.2: and indirect participants that might affect the FMI?
An FMI should The risk to KEPSS from dependencies between direct and indirect
identify material participants in KEPSS is assessed as part of the regular review of the risk
dependencies picture for KEPSS. In principle, tiered participation does not pose any risks of
between direct and significance for the settlement of payments in KEPSS. It is difficult to identify
indirect participants any material dependencies between direct participants and third-party
that might affect the participants that will affect the KEPSS system or other participants through
FMI. their settlement in KEPSS as these third parties do not have any contractual
agreements with KEPSS, and all payment instructions take place only
between the FMI and the KEPSS participant. Therefore, it is the responsibility
of the settlement bank to manage credit risk exposure to the third-party
entity’s obligations.
Key consideration Q.19.3.1: Has the FMI identified
19.3:
a) the proportion of activity that each direct participant conducts on
An FMI should identify behalf of indirect participants in relation to the direct participants’
indirect participants capacity,
responsible for a b) direct participants that act on behalf of a material number of indirect
significant proportion participants,
of transactions c) indirect participants responsible for a significant proportion of
processed by the turnover in the system, and
FMI and indirect d) indirect participants whose transaction volumes or values are large
participants whose relative to the capacity of the direct participant through which they
transaction volumes access the FMI to manage risks arising from these transactions?
or values are large
KEPSS does not currently monitor any of the mentioned criteria relating to
relative to the
indirect participants because it does not keep records of such participants.
capacity of the direct
participants through
As part of its role as the licensing body for interbank systems, and of its
which they access
responsibility for promoting an efficient payment system and financial
the FMI in order to
stability, the Bank assesses structural developments in direct and tiered
manage the risks
participation in the settlement of payments. Some direct participants offer
arising from these
tiered participation in several types of settlement. This applies particularly to
transactions.
banks which is the settlement bank for third paty service providers such as
payment switches and NACH..
Q.19.3.2: What risks to the FMI arise, and how does the FMI manage these
risks arising from key indirect participants?
The settlement bank accepts the settlement risk and, is required to ensure
that the obligations arising from the clearing of third party are settled;
therefore, only the settlement bank is managed by the FMI. Monitoring
should be performed between the settlement bank and third-party entities in
respect of indirect exposures.
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Key consideration Q.19.4.1: What are the FMI’s policies for reviewing its rules and procedures
19.4: in order to mitigate risks to the FMI arising from tiered participation?
An FMI should How frequently is this review conducted?
regularly review
KEPSS does not currently monitor any indirect participants because it does
risks arising from
not keep records of such participants.
tiered participation
arrangements and
Q.19.4.2: What criteria does the FMI use to determine when mitigating
should take mitigating
actions are required? How does the FMI monitor and mitigate its risks?
action when
appropriate. KEPSS does not currently monitor any indirect participants because it does
not keep records of such participants.
Key Conclusion There is no tiered participation in the KEPSS system. All participants are direct
members, and they are licensed commercial and microfinance banks that
have fulfilled the membership requirements. There is no category for indirect
members. The retail payment payment systems i.e te clearing system and
payment switches (debits and redit cards) are given access to submit net
settlement files (NSI) to the RTGS system for settlement purpose only through
participating member banks contractual agreements with the third parties.
Failures and disruption at such external players may result in delays and
disruption in KEPSS and in the payment system as a whole. The risk to KEPSS
in such cases relates to efficient and appropriate contingency management
for the settlement of payments.
Principle 20: FMI links
An FMI that establishes a link with one or more FMIs should identify, monitor and manage link
related risks.
Principle is not applicable.
The Bank has not established links with other FMIs beyond standard SWIFT-based
communication to receive payment orders, send confirmation of settlement and exchange
other types of messages. This principle is not considered to be relevant to KEPSS.
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Principle 21: Efficiency and Effectiveness
Assessment Rating Principle 21 is Considered to be Observed.
An FMI should be efficient and effective in meeting the requirements of its participants and the
markets it serves.
This principle should be reviewed in the context of Principle 17 on operational risk, Principle 18 on
access and participation requirements, Principle 22 on communication procedures and standards, and
other principles, as appropriate.
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Key Consideration: Q.21.1.1: How does the FMI determine whether its design (including its
21.1: clearing and settlement arrangement, its operating structure, its delivery
systems and technologies, and its individual services and products)
An FMI should be
is taking into account the needs of its participants and the markets it
designed to meet
serves?
the needs of its
participants and The Bank’s strategy is to concentrate its activities as a settlement bank on
the markets it ensuring efficient and secure settlement of payments between banks. The
serves, in particular, Bank has implemented a modern real-time settlement system. The payment
with regard to settlement service is specifically designed to effectively and efficiently
choice of a clearing improve and address settlement risk in the Kenyan national payment systems.
and settlement In its efforts to ensure improve efficiency and effectiveness of the system, the
arrangement; Bank upgraded the system to a modern real-time settlement system the Newoperating structure; Generation KEPSS settlement system in June 2020.
scope of products
The responsibility of operating the KEPSS system has been delested to BPSD.
cleared, settled or
While providing and maintaining an efficient payment settlement service
recorded; and use
through the KEPSS system, the CBK also facilitates the improvement of
of technology and
operational standards and straight through processing, and helps to reduce
procedures.
the need for reconciliation among its participants. The aim of the KEPSS
system is also to significantly reduce the amount of post-settlement workflow
as the validations required and algorithms used reduces duplicates, failed
payments and unaccountable claims.
The SWIFT network is the main channel for communication with banks and
clearinghouses on payment instructions and settlement confirmations.
Banks can monitor movements in their accounts in real time and can submit
payment orders via the proprietary solution KEPSS Online solution.
Q.21.1.2: How does the FMI determine whether it is meeting the
requirements and needs of its participants and other users and continues
to meet those requirements as they change (for example, through the use
of feedback mechanisms)?
The interbank clearing systems are organised and operated by the banking
industry and participants in the securities market, i.e. NACH, CSD. The
Bank, the banking industry and other stakeholders in the payment system
collaborate on the operation and development of settlement and clearing
systems. When there is a new initiative or system development due to a
change in payment environment or new edge of technology, the CBK will
discuss with relevant stakeholders to exchange views and insights. Moreover,
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Key Consideration Q.21.2.1: What are the FMI’s goals and objectives as far as the effectiveness
21.2: of its operations is concerned?
An FMI should have The objective of KEPSS is secure and efficient settlement of payments
clearly defined goals between banks that have an account at the CBK. The settlement system must
and objectives that comply with relevant international standards and requirements for critical
are measurable and infrastructure. Payment orders are to be settled continuously during KEPSS’s
achievable, such as opening hours using the standard operating and backup solutions. In the
in areas of minimum event of severe disruption, the objective is for all payment orders to be settled
service levels, risk on the same day with the help of an enhanced contingency solution
management
The strategy of the Bank includes a mission statement for the bank’s
expectations and
operation of KEPSS services consistent with the Bank’s overall mission. This
business priorities.
sets out that the purpose of the services is to deliver; the Bank’s monetary
and financial stability mission by providing a resilient, well-run and responsive
RTGS infrastructure that enables access to central bank money accounts
and payment services, and the Bank’s financial stability mission by providing
a reliable, resilient and responsive system for high value Kenya shillings
payments.
Q.21.2.2: How does the FMI ensure that it has clearly defined goals and
objectives that are measurable and achievable?
The qualitative objectives for the operation of KEPSS can be measured
through monitoring of operations, recording, and reporting of incidents and
disruptions, measurement of the technical availability of system solutions
(uptime) and achievement of the recovery time objective following a
disruption.
Q.21.2.3: To what extent have the goals and objectives been achieved?
What mechanisms does the FMI have to measure and assess this?
Since the current core system for KEPSS was implemented on July 29, 2005,
there has been only rare and short-lived disruption in the settlement of
payments. There has also been stable operation of other key KEPSS systems
such as the communication solution SWIFT and the system for collateral
for loans. In the case of KEPSS Online, which gives participants access to
information on their accounts in KEPSS and allows them to submit payment
orders, some users have at times experienced dropped connections, forcing
them to log in again. Operational stability is monitored and reported
continuously. Incidents and non-conformances are followed up internally, with
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Key Consideration Q.21.3.1: What processes and metrics does the FMI use to evaluate its
21.3: efficiency and effectiveness
An FMI should Participants’ understanding of the risks associated with participating in
have established KEPSS depends largely on their own internal risk assessments which they
mechanisms for are required to perform under the rules that apply to them as financial
the regular review institutions. The documentation of rules and operational procedures for KEPSS
of its efficiency and also forms part of the basis for this understanding. Participants may contact
effectiveness. the Bank directly with questions in this context. All new participants must also
complete a course in KEPSS Online, which provides Internet-based access to
information from their own accounts. A user guide to KEPSS Online has been
prepared which also contains some information on contingency procedures.
Courses and training are provided at participants’ request and as required.
There is also healthy contact with all the participants on matters concerning
the settlement of payments and management of non-conformances. KEPSS
also receives external audit on Information System covering IT governance,
business continuity management, network and server management and
software quality assurance.
Q.23.3.2: Is there evidence that the means described above enable
participants’ understanding of the FMI’s rules, procedures and the risks
they face from participating in the FMI?
The most important evidence that the documentation and training for
participants result in a good understanding of participation in KEPSS is that
the settlement of payments has been stable and lived up to expectations for
many years. Occasionally, there are issues that may be due to participants
failing to follow applicable routines and procedures in KEPSS, but there are
rarely any significant problems. Experience shows that participants generally
comply with the applicable rules and procedures. Understanding of the rules
is supported by joint exercises to test contingency procedures and joint fora
for exchanging information and opinions.
Q.23.3.3: In the event that the FMI identifies a participant whose
behaviour demonstrates a lack of understanding of the FMI’s rules,
procedures and the risks of participation, what remedial actions are
taken by the FMI?
If the Bank detects a lack of understanding of the rules and procedures for
KEPSS, it will get in touch with one of the participant’s designated contacts to
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