On Amendments and Additions to Certain Regulatory Legal Acts of the National Bank of the Kyrgyz Republic on Risk Management and Oversight of the Payment System

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Date created: 2019-09-06

Resolution of the Board of Directors of the National Bank of the Kyrgyz Republic dated September 2, 2019 No. 2019-P-14/46-3-(PS)

On Amendments and Additions to Certain Regulatory Legal Acts of the National Bank of the Kyrgyz Republic on Risk Management and Oversight (Oversight) of the Payment System

In accordance with Articles 20 and 68 of the Law of the Kyrgyz Republic "On the National Bank of the Kyrgyz Republic, Banks and Banking Activities", the Board of Directors of the National Bank of the Kyrgyz Republic resolves:

1. Amend and add to the following regulatory legal acts of the National Bank of the Kyrgyz Republic (attached):

• Resolution of the Board of Directors of the National Bank of the Kyrgyz Republic "On Approval of the 'Policy on Oversight (Oversight) of the Payment System of the Kyrgyz Republic' dated July 15, 2015 No. 38/4";
• Resolution of the Board of Directors of the National Bank of the Kyrgyz Republic "On Approval of the 'Policy on Risk Management in the Payment System of the Kyrgyz Republic' dated June 15, 2016 No. 25/8".

2. The Legal Department shall:

• publish this resolution on the official website of the National Bank of the Kyrgyz Republic;
• after official publication, submit this resolution to the Ministry of Justice of the Kyrgyz Republic for inclusion in the State Register of Regulatory Legal Acts of the Kyrgyz Republic.

3. This resolution shall enter into force upon the expiration of fifteen days from the date of official publication.

4. Payment system operators, payment organizations, and commercial banks shall align their activities with the requirements of this resolution by December 1, 2019.

5. The Department for the Development of the State Language and Document Management shall bring this resolution to the attention of relevant structural subdivisions, regional departments, and the National Bank's office in the Batken Region.

6. The Payment Systems Department shall bring this resolution to the attention of commercial banks, payment system operators, and payment organizations of the Kyrgyz Republic.

7. Control over the implementation of this resolution is entrusted to the Board Member of the National Bank of the Kyrgyz Republic overseeing the Payment Systems Department.

Acting Chairman N. Zhenish

Appendix to the Resolution of the Board of Directors of the National Bank of the Kyrgyz Republic dated September 2, 2019 No. 2019-P-14/46-3-(PS)

Amendments and Additions to Certain Regulatory Legal Acts of the National Bank of the Kyrgyz Republic on Risk Management and Oversight (Oversight) of the Payment System

1. Amend and add to the Resolution of the Board of Directors of the National Bank of the Kyrgyz Republic "On Approval of the 'Policy on Oversight (Oversight) of the Payment System of the Kyrgyz Republic' dated July 15, 2015 No. 38/4" the following amendments and additions:

in the Policy on Oversight (Oversight) of the Payment System of the Kyrgyz Republic, approved by the aforementioned resolution:

Chapter 2 "Terms and Definitions" shall be worded as follows:

"Chapter 2. Terms and Definitions For the purposes of this Policy, terms and definitions established by the Laws of the Kyrgyz Republic "On the National Bank of the Kyrgyz Republic, Banks and Banking Activities", "On the Payment System of the Kyrgyz Republic" and the Regulation "On Non-Cash Settlements in the Kyrgyz Republic" are used. The following terms and definitions are also used in this Policy: New payment systems – systems that are only being created and/or have just begun to operate within the territory of the Kyrgyz Republic and have not yet received a license/registration with the National Bank. Significant payment system – a system that contributes to maintaining public confidence in the national currency as a means of cash and non-cash payment and settlement, and which meets the criteria for significance established by the National Bank. Other payment systems – payment systems not falling under the categories of systemically important, significant, or national payment systems. Payment service – a service for accepting payments, transferring funds, and conducting settlements. Payment infrastructure – the aggregate of equipment, technologies, and procedures for providing access to and operations with payment instruments, as well as for processing, clearing, and settling payments, which constitute and ensure the operational basis of the system. Critical service provider – a legal entity, resident or non-resident of the Kyrgyz Republic, providing services related to information and telecommunications technologies, message exchange, whose operational failures may adversely affect the uninterrupted operation of systemically important and significant payment systems, potentially causing a "domino effect" for payment systems and banks operating within the territory of the Kyrgyz Republic. Systemically important payment system – a payment system in which:

1. operational and technical failures may cause serious disruptions in the banking system or the financial system as a whole;

2. the insolvency of one participant may lead to liquidity risk for other participants and payment systems, as well as systemic risk in the financial system as a whole ("domino effect"). Correspondent relationship system – a system enabling cross-border payments and providing other services to users based on agreements (agency agreements) for maintaining correspondent accounts between financial-credit organizations of different countries. Efficiently operating payment system – a system whose rules and technical infrastructure promote the development of business activity by users (legal and natural persons) and which allows reducing operators' costs, thereby increasing the investment attractiveness of providing payment and settlement services."

Paragraph 5 shall be worded as follows: "5. The main objective of oversight (oversight) of the payment system of the Kyrgyz Republic is to ensure stable operation of the country's financial system and reduce the probability of systemic risk ("domino effect") in the payment system, enhance efficiency and uninterrupted operation of payment systems, convenience and reliability of payment instruments, protect the interests of payment service consumers, and maintain confidence in the national currency as a means of cash and non-cash settlement."

in Paragraph 6:

• in the first paragraph, the word "national" is deleted;
• sub-paragraph "b" shall be worded as follows: "б) uninterrupted payments and settlements – guarantee of payment execution from payer to payee within the timeframes and on terms defined by legislation, and refund of funds in case of non-execution of settlement by the payment system in an amount determined by legislation;"
• sub-paragraph "c" is supplemented with the word "to users" after the words "provision of access";

Paragraph 7 shall be worded as follows: "7. To achieve the objective of oversight (oversight) of the payment system, the National Bank performs the following tasks: a) establishes procedures and monitors the operation of the payment system of the Kyrgyz Republic, including:

• receiving information from payment system operators, organizations providing payment and settlement services, banks issuing electronic money, critical service providers, and participants of payment systems;
• analyzing the operation of individual payment systems in accordance with regulatory legal acts of the National Bank; b) influences payment system operators, participants, banks issuing electronic money to activate their activities in improving the payment system and preventing systemic risk or dishonest operations, including by:
• adopting regulatory legal acts defining the conditions and procedures for organizing and operating payment systems;
• participating in decisions by the governing body of the payment system operator;
• applying enforcement measures to payment system operators, participants, and banks issuing electronic money."

Paragraph 9 shall be worded as follows: "9. The objects of oversight (oversight) of the payment system of the Kyrgyz Republic are payment systems operating within the territory of the Kyrgyz Republic."

Paragraph 10 shall be worded as follows: "10. The National Bank determines the list of systemically important, significant, and national payment systems and critical service providers in the Kyrgyz Republic based on monitoring of the payment system. The list of systems for publication is determined by the Payment System Committee of the National Bank."

Paragraph 11 shall be worded as follows: "11. The National Bank exercises control over:

• the use of payment instruments;
• the operation of the technical infrastructure of the payment system of the Kyrgyz Republic (SWIFT and MCS service bureaus)."

Paragraph 12 shall be worded as follows: "12. The National Bank exercises oversight (oversight) of the payment system of the Kyrgyz Republic on a continuous basis in the form of a cyclically repeating process across three main directions: a) monitoring the operation of the payment system and infrastructure based on collecting and analyzing qualitative and quantitative information; b) assessing the operation of systemically important and significant payment systems for compliance with established standards, including Principles for Financial Market Infrastructures (PFMI) and analyzing the efficiency of individual payment systems. When new payment systems/services emerge, the National Bank assesses them at the creation stage in accordance with regulatory requirements; c) taking measures aimed at improving payment systems."

in Paragraph 13:

• the third paragraph shall be worded as follows: "- a system, in case of financial risks, operational or technical failures at individual stages of payment flow, is capable of causing systemic risk and transmitting systemic disruptions to other financial system participants ("domino effect");"
• in the sixth paragraph, the word "financial" is replaced with "payment";

Paragraph 14 shall be worded as follows: "14. A payment system is recognized as significant if at least one of the following criteria applies to it:

• the system processes not less than 35% of the quantity and/or volume of payments by type of payment systems during the first five months of the reporting half-year;
• not less than 50% of commercial banks of the Kyrgyz Republic and/or 3 systemically important banks (significant banking system participants) are connected to the system, and/or payment systems through which not less than 25% of the quantity and/or volume of payments/transfers pass, depending on the type;
• the system has integration with payment systems occupying a 1/3 share of the market by type; and/or both of the following criteria:
• the coverage degree of the peripheral and agent network is not less than 35% of all peripheral devices and agents in the Kyrgyz Republic during the first five months of the reporting half-year;
• the system processes not less than 10% of the volume and/or quantity of all state budget payments during the first five months of the reporting half-year;"

Paragraph 15-1 shall be worded as follows: "15-1. A legal entity is recognized as a critical service provider based on status if at least three of the following criteria apply to it:

• processes/routes not less than 25% of the quantity and/or volume of payments/transfers by currency during the first five months of the reporting half-year;
• connected to more than 25% of all peripheral devices and/or agents in the Kyrgyz Republic;
• serves not less than 35% of commercial banks, through which not less than 25% of the quantity and/or volume of payments pass depending on type;
• interconnected with banking system participants – has integration/serves at least 2 significant banking system participants;
• interconnected with payment systems – has integration with payment systems through which not less than 25% of the quantity and/or volume pass in aggregate depending on type;
• processes not less than 25% of transactions using bank payment cards during the first five months;
• processes not less than 25% of the quantity of transactions using electronic money and/or serves not less than 25% of electronic wallet holders during the first five months;
• processes not less than 25% of the total quantity of money transfers during the first five months."

in Paragraph 16:

• the first paragraph shall be worded as follows: "Monitoring the operation of payment systems involves the oversight body conducting the following activities:"
• sub-paragraph "a" shall be worded as follows: "a) collection and analysis of regular statistical reporting prepared by operators or participants (if the operator is not a resident), banks issuing electronic money, providing quantitative characteristics of operation, including:
• volume and quantity of daily payments per month;
• quantity and volume of payments attributed to the five largest participants (concentration coefficient);
• payments by payment instruments, currencies, types of systems;
• payments by participants/agents;
• incidents, abnormal situations, and unauthorized transactions;
• volume and quantity of payments by purpose;
• payments not accepted for processing with reasons indicated;
• other data;"
• sub-paragraph "c" shall be worded as follows: "c) conducting meetings and discussions with senior management of the operator, participants, and critical service providers to discuss the current state of the payment system;"
• in sub-paragraphs "d" and "e", the words "provision of access" are replaced with "access";
• sub-paragraph "g" shall be worded as follows: "g) access to the results of inspection checks regarding the activities of supervised organizations as operators and participants, as well as critical service providers and banks issuing electronic money;"
• sub-paragraph "h" shall be worded as follows: "h) access, established in accordance with regulatory acts of the National Bank, to conclusions of external and internal auditors examining the activities of operators/participants, critical service providers, banks issuing electronic money;"
• in sub-paragraph "k", the words "analysis of sources" are replaced with "monitoring of information";

the fifth paragraph of Paragraph 17 is recognized as having lost force;

The Policy is supplemented by Paragraph 17-1 as follows: "17-1. The operation of critical service providers is assessed for compliance with the standards specified in Appendix 3 to this Policy. The assessment may be conducted by the critical service provider with subsequent submission of results to the National Bank, or independently by the National Bank in direct connection with the critical service provider."

the fifth paragraph of Paragraph 22 shall be worded as follows: "- Participation in systems. If payment systems are recognized as systemically important or national, the National Bank may decide to participate in system management through share ownership under the same conditions as other owners."

Paragraph 23 is recognized as having lost force;

Paragraph 24 is supplemented with the following sentence: "After receiving an assessment, a payment system operator must develop, approve in accordance with the National Bank, and submit a plan for implementing assessment recommendations, as well as report quarterly to the National Bank on the implementation of this plan according to established periodicity."

Paragraph 26 is supplemented with the words "banks issuing electronic money," after "payment systems";

in Appendix 3:

• in the questionnaire title, "providers of critical services" is replaced with "critical service providers";
• the second sentence of Recommendation 1 shall be worded as follows: "A critical service provider (hereinafter – service provider) is recommended to identify and manage significant operational and financial risks inherent in its services, and ensure the effectiveness of risk management processes."

2. Amend and add to the Resolution of the Board of Directors "On Approval of the Policy on Risk Management in the Payment System of the Kyrgyz Republic" dated June 15, 2016 No. 25/8 the following amendments and additions:

in the Policy on Risk Management in the Payment System of the Kyrgyz Republic, approved by the aforementioned resolution:

Paragraph 2 is recognized as having lost force;

Paragraph 3 shall be worded as follows: "3. This Policy is aimed at organizing the risk management process arising in the activities of payment system participants, to maintain the reliability and efficiency of the payment system through identification, assessment, analysis, monitoring, prevention, and mitigation of risks."

Paragraph 4 shall be worded as follows: "4. This Policy defines the main objectives, tasks, and principles of risk management in the payment system, methods of organization, and ways to reduce the probability of adverse consequences arising from disruptions in uninterrupted operation."

Paragraph 5 shall be worded as follows: "5. To implement this Policy, participants of payment systems holding a National Bank license develop instructions and procedures for measures aimed at minimizing risks and making management decisions regarding the regulation of payment systems operating within the Kyrgyz Republic."

Chapter 2 "Terms and Definitions" shall be worded as follows: "Chapter 2. Terms and Definitions Uninterrupted operation of the payment system – organization and ensuring of payment system operations to prevent violations of legislation, payment system rules, concluded contracts and agreements, use of information-communication technologies, technical maintenance during participant interaction, as well as restoring proper operation in case of violations. Risks in the payment system – probability of adverse events specified in Chapter 4, as well as other risks that may negatively affect or improperly fulfill the objectives, tasks, and functions of the payment system. Payment system components – payment systems designed for interbank payments and settlements (large-value payment system, retail payment systems), and other interconnected technologies through which payments and settlements are conducted under payment system rules. Retail payment system – a system designed for processing retail and regular payments of participants, which do not require immediate final settlement. Divided into interbank retail payment systems and other retail payment systems. FIFO (first in first out) – processing sequence principle, where payments are processed sequentially upon arrival and according to established priorities. Delivery Versus Payment (DVP) – settlement principle guaranteeing that final transfer of one asset occurs immediately and only if the final transfer of another asset occurs. Assets may be currency, securities, or other financial instruments. Payment Versus Payment (PVP) – settlement principle providing that final transfer of one foreign currency occurs only if the final transfer of another foreign currency or currencies occurs. Straight Through Processing (STP) – continuous, fully automated data and payment processing process. Manual intervention is excluded at all stages through information exchange standards between automated systems and their full interaction. Primary payment data may be formed by automated systems or manual input, but subsequent transmission and processing occur fully automatically, except for erroneous/rejected payments requiring possible manual intervention."

Paragraph 7 shall be worded as follows: "7. Achieving risk management objectives in the payment system involves performing the following tasks:

• forecasting adverse events that may disrupt uninterrupted operation;
• facilitating stable payment system operation;
• preventing and averting risks;
• identifying and revealing risks and determining causes;
• prioritizing risks;
• containing risks;
• assessing risk levels and degree of influence;
• continuous monitoring and analysis of risks;
• organizing timely elimination of risk consequences and creating recovery mechanisms;
• determining ways to achieve and maintain acceptable risk levels;
• ensuring information interaction among participants to implement risk reduction measures;
• developing and implementing counter-risk measures, making management decisions on payment system regulation;
• prompt response of risk management to changing market conditions for payment infrastructure services."

the first sentence of Paragraph 8.1.1 shall be worded as follows: "Payments and settlements conducted in the National Bank's large-value payment system are irrevocable for the paying bank at the moment of debiting its account, and final – at the moment of crediting the receiving bank's account opened in the National Bank."

Paragraph 8.1.2 shall be worded as follows: "8.1.2. Payments and settlements conducted through interbank retail payment systems are irrevocable for the paying bank at the moment of final settlement of net positions in the National Bank's large-value payment system."

the first sentence of Paragraph 8.1.3 shall be worded as follows: "A payment becomes irrevocable and final for the client-payer at the moment of receiving the payment document and notification from the paying bank regarding acceptance for execution and debiting of the client's account."

The Policy is supplemented by Paragraph 8.1.4 as follows: "8.1.4. Payments and settlements conducted through other retail payment systems are irrevocable for the payer at the moment of receiving notification from the payment system operator regarding acceptance"