Regulation on Minimum Requirements for a Settlement Bank

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Appendix to the Resolution of the Board of the National Bank of the Kyrgyz Republic dated March 31, 2023 No. 2023-P-14/21-2-(PS)

REGULATION "On Minimum Requirements for a Settlement Bank"

(As amended by the Resolution of the Board of the National Bank of the Kyrgyz Republic dated March 27, 2024 No. 2024-P-14/13-7-(PS))

Chapter 1. General Provisions

1. This Regulation "On Minimum Requirements for a Settlement Bank" (hereinafter - the Regulation) defines the minimum requirements for a commercial bank to conduct activities as a settlement bank of a payment system operator/payment organization (hereinafter - the Settlement Bank), operating on the basis of licenses issued by the National Bank of the Kyrgyz Republic (hereinafter - the National Bank).

2. The purpose of this Regulation is to ensure the final settlement by Settlement Banks for:

• payments in favor of third parties, accepted by payment organizations and processed through large-value and retail payment systems;
• payments of international/local payment systems, completed within the territory of the Kyrgyz Republic with settlement banks/data centers of international payment systems.

3. This Regulation applies to payment system operators/payment organizations that are residents of the Kyrgyz Republic, as well as commercial banks connected to a local/international payment system. Final settlements through electronic money systems are regulated by the Regulation "On Electronic Money in the Kyrgyz Republic".

4. The payment system operator/payment organization makes a decision on the selection of a Settlement Bank in accordance with the requirements established by this Regulation and internal documents.

5. Based on the concluded Agreement between the Settlement Bank and the payment system operator/payment organization, the Settlement Bank, as a participant of interbank systems, ensures timely settlements for payments processed in the large-value or retail payment system of the payment organization/payment system operator.

6. The Settlement Bank, in cases provided for by contractual relations, ensures the conduct of final settlements in any currencies for payments within local/international payment systems of other countries, completed within the territory of the Kyrgyz Republic, through its correspondent account system and based on a settlement agreement concluded with the settlement bank of a local/international payment system of another country and/or the operator of a local/international payment system of another country in accordance with the rules of the local/international payment system.

7. A bank may provide Settlement Bank services to multiple payment system operators/payment organizations based on concluded agreements.

8. A payment system operator/payment organization may choose multiple settlement banks and bear independent responsibility for liquidity management on accounts in settlement banks to fulfill its obligations for payments in favor of third parties.

9. The operator of a significant payment system (hereinafter - SP) and a systemically important payment system (hereinafter - SIP), in addition to the main Settlement Bank, is recommended to have one or two reserve settlement banks to ensure continuity and uninterrupted settlements. Criteria for having one or two reserve settlement banks must be established by the SP/SIP operator in internal documents approved by the board of directors (or executive body if no board exists), based on an internal risk assessment for uninterrupted system operation. Risk assessment must be agreed upon by the risk manager (if any) and approved by the board of directors (or executive body). If the significance criterion of a payment system participant changes to SP or SIP, the participant must make a corresponding decision on the necessity of having one or two reserve settlement banks within 6 (six) months from receiving notification from the National Bank regarding the significance criterion. Requirements for a reserve Settlement Bank are identical to requirements for a Settlement Bank.

10. The Settlement Bank, within contractual relations, ensures and guarantees the conduct of final settlements in any currencies for payments within local/international payment systems of another country, completed within the territory of the Kyrgyz Republic, through its correspondent account system and based on a settlement organization agreement concluded with the settlement bank of a local/international payment system of another country and/or the operator of a local/international payment system of another country and/or the operator of a local payment system in accordance with the rules of the local payment system approved by the board of directors (or executive body), and the local/international payment system of another country, and in accordance with the legislation of the Kyrgyz Republic.

10-1. The rules of the local payment system operator/Agreement between the settlement bank and the persons specified in paragraph 3 of this Regulation must include a clause on providing the Settlement Bank with information/data on daily limits for the volume of payments for all types of operations, including in the electronic commerce environment of the local payment system operator in foreign currency, and on the nature of operations performed. The Settlement Bank analyzes daily limits for the volume of payments for all types of operations, including in the electronic commerce environment of the local payment system operator in foreign currency.

11. The Settlement Bank and the payment system operator/payment organization ensure primary and reserve communication channels and integration between their systems in accordance with information security requirements for commercial banks of the Kyrgyz Republic.

11-1. All relationships not specified by this Regulation between the local payment system operator and the operator of a local/international payment system of another country and their participant banks and settlement banks, including their liability, rights, and obligations, are established by the legislation of the Kyrgyz Republic and corresponding rules of the local payment system and local/international payment system of another country, corresponding internal regulatory documents, as well as agreements and/or contracts between them.

Chapter 2. Requirements for a Settlement Bank

12. A settlement bank may be a commercial bank holding a license from the National Bank to conduct banking operations for:

• processing payments and transfers on behalf of clients and correspondent banks, as well as their cash services;
• issuing, purchasing, paying, accepting, storing, and confirming payment instruments (checks, letters of credit, promissory notes, and other documents), including credit and payment cards;
• conducting operations on foreign currency accounts for clients and purchasing (exchanging) foreign currency on behalf of the client.

13. A settlement bank for payment system operators/payment organizations must meet the following minimum requirements:

1. be a participant of the Gross Real-Time Settlement System (hereinafter - GRTSS) and the Batch Clearing System (hereinafter - BCS), with a settlement bank for an interaction operator being sufficient to be a direct participant of only GRTSS;
2. be a participant of an international interbank financial messaging system (e.g., SWIFT) and/or have financial messaging channels with a settlement bank for operators of local/international payment systems of other countries;
3. Deemed repealed;
4. Deemed repealed;
5. Deemed repealed;
6. not be in the process of liquidation, under direct banking supervision, or under temporary administration.

14. A settlement bank for a local payment system operator, integrated with a local/international payment system of another country, in addition to the requirements established in paragraph 13 of this Regulation, must meet the following minimum requirements:

1. conduct banking activities in the Kyrgyz Republic market for at least 5 (five) years;
2. be a direct participant of an international payment system for which it plans to become a settlement bank, and/or be a participant of a local payment system within which an inter-system integration project with local/international payment systems of other countries is implemented;
3. be a participant of the National Bank's Automated Trading System;
4. have correspondent relations with settlement banks/agents of operators of local/international payment systems of other countries;
5. have an external auditor's opinion confirming that accounting and reporting comply with established standards of accounting and financial reporting for the last two years.

Chapter 3. Functions of a Settlement Bank

15. A settlement bank that has concluded an agreement with a payment system operator/payment organization performs the following functions:

• ensures sufficient liquidity on a correspondent account opened at the National Bank for processing its own payments and payments processed by participants of the payment system operator's/payment organization's system;
• includes a reserve for the payment system operator/payment organization on a daily basis in the calculation of the reserve for retail payment systems, established daily in GRTSS on a correspondent account at the National Bank;
• includes a reserve for payment organizations, with which the bank has concluded agreements on performing settlement bank functions, in the calculation of the reserve for the insurance (guarantee) fund;
• opens a settlement account, primary for the payment system operator's/payment organization's system, on which funds for payments in favor of third parties are accumulated, and the deduction of funds from this account is conducted exclusively in favor of third parties, payment recipients, and/or for final settlements on net debit positions. The payment system operator/payment organization is not entitled to conduct any other operations through this account;
• establishes, if necessary, a requirement for opening a reserve account and creating a reserve on this account in case of insufficient funds in the primary settlement account of the payment system operator's/payment organization's system. The reserve amount may be calculated based on an assessment of required liquidity over a specific period;
• upon instruction from the payment system operator/payment organization, ensures timely transfer of funds to banks where recipients' accounts are opened, through interbank payment systems;
• promptly informs about the completion/non-completion of final settlements for payments processed in the payment system operator's/payment organization's system;
• for international/local payment system payments completed within the territory of the Kyrgyz Republic, conducts settlements with a settlement bank/agent of an international payment system in any currency in accordance with contract/agreement terms. In turn, receives reimbursement in national currency equivalent through GRTSS or in foreign currency based on a concluded agreement between the settlement bank and participant(s) of the local payment system operator's/payment organization's system, in accordance with local payment system rules;
• receives funds from a settlement bank of a local/international payment system of another country for operations of this payment system within the territory of the Kyrgyz Republic and ensures timely crediting of corresponding amounts in accordance with local payment system rules to correspondent accounts of participants of this system at the National Bank through GRTSS;
• assumes currency risks in case of unfavorable changes in foreign exchange rates.

Chapter 4. Obligations of a Settlement Bank

16. A settlement bank is obligated to:

• meet the requirements established in Chapter 2 of this Regulation, as well as ensure compliance with all assumed obligations;
• avoid liquidity shortages on the correspondent account at the National Bank, as well as payment delays and queues, in accordance with GRTSS requirements (where applicable);
• have an active plan approved by the Settlement Bank's Board for ensuring business continuity in terms of uninterrupted settlements;
• ensure primary and reserve messaging channels with settlement banks of payment systems integrated with operators' payment system systems;
• guarantee timely settlements with participant banks of the payment system, as well as with a settlement bank of a local/international payment system integrated with this system;
• set tariffs not higher than the bank's existing tariffs for corporate cash and settlement services and/or as agreed by the parties;
• develop and approve a Methodology for calculating and maintaining sufficient liquidity on the correspondent account at the National Bank and in other banks, in fulfillment of paragraph 6 requirements of this Regulation, for final settlements, as well as a step-by-step procedure for conducting settlements with another settlement bank of a local/international payment system integrated with this system, as well as with participants of this system;
• conduct external audits of information systems in accordance with the requirements of the Regulation "On Minimum Requirements for External Audits of Banks and Other Non-Bank Financial-Credit Organizations Licensed by the National Bank of the Kyrgyz Republic", approved by the Resolution of the Board of the National Bank dated June 15, 2017 No. 2017-P-12/25-2-(NPA);
• A settlement bank of an SP or SIP, integrated with a local/international payment system of another country, must, upon agreement, provide the operator of a local payment system/payment organization with a portfolio of state securities or National Bank securities with a maturity of at least 3 (three) months (excluding the pledged portfolio), or a bank guarantee, or another instrument for timely payment and settlement by the payment system operator/payment organization. At the same time, the aforementioned guarantee instruments in total must amount to no less than the average daily value of turnovers for the integrated local/international payment system of another country with the local operator's payment system (sum of turnovers for each day of the previous month/number of days in the previous month when payments were made), for which agreements on settlement bank services are concluded. The calculation of the average monthly turnover value is performed by the payment system operator/payment organization once a month based on data for the previous month, and by the 5th day of the following month after the reporting month, the corresponding information is sent to the National Bank and commercial bank for further use by the commercial bank – settlement bank during the reporting month.

Chapter 5. Requirements for an Agreement

17. An agreement between a payment system operator/payment organization and a settlement bank, in addition to cash and settlement service contract terms, must at least contain the following information:

• rights and obligations of the parties;
• liability of the parties;
• procedure and deadlines for settlements;
• information exchange procedure during settlements;
• by mutual consent, the amount of deposited funds held by a payment system operator/payment organization to guarantee final settlements and the procedure for their use;
• notification procedure in case of abnormal situations, procedure and deadline for settlements during abnormal situations;
• dispute resolution procedure;
• payment terms (tariffs, commissions, and remuneration, etc.);
• contract termination procedure and conduct of final settlements;
• the agreement may contain other terms.

Chapter 6. Final Provisions

18. The parties may terminate the agreement at any time in cases and in the manner provided by the contract, as well as upon finding non-compliance with established requirements of the legislation of the Kyrgyz Republic and concluded agreements, provided that all settlement obligations are discharged.

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