Niklaus Blattner: The task of overseeing payment and securities settlement
systems
Introductory remarks by Mr Niklaus Blattner, Vice-Chairman of the Governing Board of the Swiss
National Bank, at the end-of-year media news conference, Zurich, 12 December 2003.
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With the revised National Bank Law, the National Bank receives an explicit mandate to contribute to
the stability of the financial system. This is, in particular, laid down specifically in the Law in the task of
overseeing payment and securities settlement systems.
Why does the National Bank oversee payment and securities settlement systems?
By overseeing payment and securities settlement systems, the National Bank is supporting the
security and efficiency of financial market infrastructures in Switzerland. In doing so, it is helping to
ensure the stability of the financial system as a whole. This stability is essential to successful monetary
policy in particular, and to the economic efficiency of Switzerland in general.
The importance of a market economy's financial system derives from the function that it fulfils. The
financial system is responsible for the allocation of financial resources and risks, as well as
intermediation between savers and investors. A financial system can be described as stable if it
performs these tasks efficiently and its markets and institutions prove themselves to be
shock-resistant.
Another part of a stable financial system are secure financial market infrastructures. These include,
specifically, payment systems and systems for the clearing and settlement of financial instruments
(securities settlement systems).
Deficient payment and securities settlement systems might potentially trigger a crisis in the system. An
operational or technical system failure can delay transaction settlement so severely - or even prevent it
for such a long period - that widespread credit or liquidity problems among financial institutions result.
In particularly serious cases, the financial institutions concerned, and perhaps even the financial
markets, are no longer able to perform their role in the economy or can do so to only a limited extent.
Yet on the other hand, payment and securities settlement systems also play a major part in preventing
the transfer of payment or delivery problems from one participant to the others. Such difficulties might
also trigger a chain reaction which could jeopardise the entire system. This makes the architecture of
payment and securities settlement systems all the more important, because it determines their
capacity to limit the transfer of weaknesses.
Secure and efficient financial market infrastructures are especially important to the Swiss economy,
which has a large financial sector and generates significant payment flows. Their significance is
illustrated by the relevant figures: every day, sums amounting to around 180 billion Swiss francs pass
between financial institutions via Swiss Interbank Clearing System (SIC), Switzerland's most important
payment system. With a system of this scale it is easy to imagine that problems with the clearing or
settlement of transactions might jeopardise the stability of the financial system as a whole.
I would like here to outline how the Swiss National Bank can help to ensure more efficient and more
reliable financial market infrastructures through its oversight of payment and securities settlement
systems. I would, however, like to make one key point right away: state intervention in, or regulation
of, financial market infrastructures is justified only if it must be assumed that the private sector will not
necessarily perform these functions of its own accord in a manner that is best for the economy.
In reality, when designing a system its operators and participants will probably consider the direct
costs that they would bear themselves in the event of a system failure or the withdrawal of a
participant. However, the remaining costs that are not borne directly by the parties involved in the
event of a system crisis tend to be forgotten in management calculations. It cannot be ruled out, then,
that operators and participants take less account of the security of a system than would be necessary
from the perspective of the broader economy. It is a classic problem of market failure. The sense and
purpose of overseeing payment and securities settlement systems is to give due consideration to the
externalities that would be neglected by the private sector and to ensure that financial market
infrastructures provide the optimum degree of reliability from the point of view of the national economy.
The oversight of payment and securities settlement systems in practice
In future, the National Bank will be taking a risk-oriented approach, i.e. we will deploy our resources in
those specific areas in which the risks are particularly high. The National Bank Law stipulates a
three-tier oversight process. The first tier is an obligation on the part of operators of payment and
securities settlement systems to provide statistical information. The National Bank will use the data it
collects to gain an overview of the breadth and importance of the systems and instruments for the
clearing and settlement of payments and securities trades that are available in Switzerland. The
second tier
is a more wide-ranging disclosure obligation that is imposed upon the operators of
securities settlement systems and those payment systems which process payments in excess of 25
billion Swiss francs a year. With payment systems of this size and larger, the National Bank will look in
greater detail into the extent to which they might jeopardise the stability of the financial system. Finally,
the National Bank Law provides for powers on the part of the National Bank to impose minimum
requirements on systemically important financial market infrastructures as a third tier of oversight.
Detailed implementation provisions for oversight will be laid down in an ordinance to be issued by the
National Bank. In early November 2003, the National Bank submitted a consultation draft of this
ordinance to interested parties. The draft itself can be found on our website.
I would now like briefly to address three central points connected with oversight: which systems should
be overseen by the National Bank? What minimum requirements should the operators of these
systems fulfil? And finally: how will collaboration with other regulatory and supervisory authorities -
especially the Swiss Federal Banking Commission (FBC) - be structured?
Oversight focuses on systems which might constitute a threat to the stability of the Swiss financial
system. The question of the systems to which this applies cannot be answered in precise terms. The
ordinance lists a number of criteria that we will consider when assessing the systemic importance of
an infrastructure. In addition to the type, number and monetary volume of the transactions that are
cleared or settled via a system, the outcome of the assessment will depend, for example, on the other
financial market infrastructures with which a system is linked, and whether or not the clearing and
settlement of transactions can be diverted temporarily to another system in the event of a failure in the
first system. The latter option alleviates the problem somewhat. Given these and other criteria, it can
be assumed that the group of systems overseen by the National Bank will be composed first and
foremost of those payment and securities settlement systems that are part of what is known as the
Swiss value chain. These are the interbank payment system Swiss Interbank Clearing (SIC), the
SECOM securities settlement system and x-clear, the central counterparty. In addition, however, the
multi-currency payment system Continuous Linked Settlement (CLS), which is used to settle foreign
exchange transactions, may also be classified as systemically important. Closer investigation will
reveal whether or not this group will be expanded to include yet more systems, such as that operated
by Postfinance.
The National Bank's main points of reference in respect of the minimum requirements that the
operators of these systems must fulfil are two internationally recognised standards: the "Core
Principles for Systemically Important Payment Systems" and the "Recommendations for Securities
Settlement Systems".
Like the two standards just mentioned, the National Bank's minimum requirements are target-oriented
i.e. the system operator in question is largely free to determine how it will achieve the required state of
affairs. The minimum requirements are aimed at two aspects of the reliability of payment and
securities settlement systems in particular. The first of these relates to the technical and operational
security of a system. The system itself may not be the cause of a crisis. Specific emphasis is placed
on a lasting guarantee of virtually uninterrupted system availability. The regular review and testing of
emergency plans and procedures is part of this. However, the minimum standards also call for
measures to protect the integrity and confidentiality of data as well as the traceability of transactions.
The second aspect of the minimum requirements concerns risk management and the architecture of
payment and securities settlement systems, i.e. the rules and procedures by which transactions are
cleared or settled. Structures must be in place to prevent weaknesses in the financial system, such as
payment or delivery difficulties on the part of a system participant, spreading in an uncontrolled fashion
to other participants. In this context, the focus is, for example, on requirements relating to the payment
instruments used, the irrevocability of transactions that have already been settled (finality), and on
instruments and procedures to limit credit and liquidity risks.
Collaboration with other authorities
The National Bank is not the only institution which actively endeavours to secure the stability of the
financial system. There is also contact with other authorities. One of these points of contact arises
from the fact that, for example, the operator of SECOM (SIS Sega Intersettle AG) holds a bank licence
and is therefore subject to supervision by the FBC. The FBC will still be the regulatory body
responsible for the institution itself, while the National Bank will handle the oversight of the system
operated by this institution. A parallel situation exists in the case of x-clear, which is operated by SIS
x-clear AG - also regulated, as a bank, by the FBC. The FBC and the National Bank coordinate their
activities and avoid overlaps.
A further point of contact with other authorities exists in the case of financial market infrastructures that
are of systemic importance to Switzerland but are operated abroad and thus cannot be overseen
directly by the National Bank. From the present perspective this applies in particular to the foreign
exchange settlement system CLS. Here too, close collaboration between the primary supervisory
authority, the Federal Reserve Bank of New York, the National Bank and the other central banks
involved is essential.
In addition, the National Bank is considering cooperating with private sector auditors. In the same way
as the FBC, which works with private-sector auditors in conducting its supervisory activities, the
National Bank intends to use a dual system in which certain examinations may be carried out by
private auditing companies. There is a particular need for such an approach in those areas in which
very specific specialist knowledge is required, such as in the assessment of information security.
Concluding remarks
Two further points in conclusion: firstly, it must be emphasised that the oversight of payment and
securities settlement systems is a new task for the National Bank only where securities settlement is
concerned. As the bank of banks, it already helps to shape financial market infrastructures and limit
the systemic risks inherent in them. In both segments, however, the new Law gives the National Bank
a more forceful range of instruments that will allow it to act more effectively and more transparently.
Secondly, it would be wrong to assume that the explicit mandating of the National Bank to oversee
payment and securities settlement systems is in response to any fundamental concerns about the
reliability of Switzerland's financial market infrastructures. On the contrary - we believe that the Swiss
financial centre has infrastructures that function better than most and come out very well in an
international comparison of security and efficiency. By overseeing payment and securities settlement
systems, the National Bank is helping to ensure that it will remain so in the future.