Circular BCL 2001/163 of 23 February 2001 — The Central Bank's Supervision of Payment and Securities Settlement Systems in Luxembourg

Luxembourg, 23 February 2001

To all operators of payment systems and securities settlement systems

CIRCULAR BCL 2001/163

The Central Bank's Supervision of Payment and Securities Settlement Systems in Luxembourg

Ladies and Gentlemen,

The Law of 12 January 2001, published in the Official Journal Mémorial A-no 16 of 6 February 2001, comprises, on the one hand, the transposition into national law of the European Directive on "Settlement Finality" and, on the other hand, the establishment of procedures for authorization and supervision of payment and securities settlement systems involving the Banque centrale du Luxembourg.

I. The BCL's Competence in System Supervision

The BCL's competence in this matter stems from its participation in the European System of Central Banks (ESCB) as well as from provisions of national law.

The Treaty establishing the European Community (the "Treaty") and the Statutes of the ESCB and the European Central Bank (the "Statutes") grant central banks competence in the supervision of systems. This competence is based particularly on the following provisions:

• Article 105.2 of the Treaty and Article 3 of the Statutes, according to which the "basic tasks of the ESCB shall be: … to promote the smooth operation of payment systems";

• Article 105.5 of the Treaty, which provides that the "ESCB shall contribute to the smooth conduct of policies pursued by the competent authorities relating to the prudential supervision of credit institutions and the stability of the financial system".

• Article 22 of the Statutes, according to which the "ECB and national central banks may provide facilities, and the ECB may make regulations, to ensure efficient and sound clearing and payment systems within the Community and with other countries."

Article 47-1 of the amended Law of 5 April 1993 on the financial sector (hereinafter "the 1993 Financial Sector Law") provides that:

"Without prejudice to the tasks and competences conferred on the European System of Central Banks by the Treaty establishing the European Community and by the Statutes of the European System of Central Banks and of the European Central Bank, as well as those attributed to the Banque centrale du Luxembourg, the Commission [for the supervision of the financial sector (CSSF)] shall be the competent authority for the prudential supervision of payment systems and securities settlement systems authorized by the Minister. … ."

It follows from Article 34-3 of the amended Law of 5 April 1993 on the financial sector that payment systems and securities settlement systems governed by Luxembourg law, which have the Banque centrale du Luxembourg or any other entity belonging to the European System of Central Banks as a participant, are not subject to authorization by the Minister and to the supervision of the CSSF. On the other hand, "these systems are deemed authorized by operation of law in Luxembourg from the date of their notification to the European Commission by the Banque centrale du Luxembourg."

It follows that systems in which the BCL or another ESCB entity participates fall under the exclusive competence of the BCL.

The absence of such participation in a system does not, however, ipso facto exclude any competence of the BCL with regard to that system. The BCL remains competent to exercise joint supervision with the CSSF over that system, provided that such competence results from one of the tasks assigned to the ESCB.

The national legislature has not organized the BCL's supervisory mission. Its approach is to leave it to the Central Bank to organize its supervisory mission itself. Like the Community Directive 98/26/EC, which it transposes, the Law of 12 January 2001 does not distinguish between the nature of the system in question; the BCL's competence covers both payment systems and securities settlement systems.

The BCL participates in the LIPS-Gross (Luxembourg Interbank Payment System-Real-Time Gross Settlement System) and LIPS-Net (Luxembourg Interbank Payment System-Real-Time Net Settlement System) payment systems as the settlement agent for these systems and as a direct participant for its own payments.

The BCL also participates in the clearing and settlement system for securities transactions operated by Clearstream Banking S.A. (Clearstream).

Clearstream is the national central securities depository with which securities transferred as collateral to the BCL by counterparties, as well as securities held by the BCL on behalf of other ESCB central banks, are deposited. Furthermore, the BCL uses Clearstream in the context of its reserve management.

For the LIPS-Gross, LIPS-Net, and the securities settlement system operated by Clearstream, the BCL enjoys exclusive supervisory competence, without prejudice to the prudential control exercised by the competent authority.

The BCL exercises shared competence with the CSSF regarding the supervision of electronic money transfer systems and electronic fund transfer systems linked to the use of bank cards.

II. The Exercise by the BCL of its System Supervision Mission

1. Systems under Shared Competence between the BCL and the CSSF

For Luxembourg law systems in which there is no participation by a Eurosystem central bank, authorization lies with the Minister. However, the BCL must be consulted beforehand on systemic risk aspects pursuant to Article 34-5 of the amended Law of 5 April 1993 on the financial sector.

The BCL's consultation is also required in the event of withdrawal of authorization by the Minister or authorization by the Minister for modification by participants of the agreement serving as the basis for their system. This consultation presupposes that the BCL has in-depth knowledge of the proposed activity as well as the operators and other participants in the system.

The BCL exercises its competence in accordance with the international and European standards and recommendations mentioned below.

2. Systems under the Exclusive Competence of the BCL

a) Notification by the BCL

The BCL is responsible for notifying systems under its exclusive competence to the European Commission. It informs the CSSF to enable it to maintain a complete official register of authorized systems in Luxembourg, as provided for by the Law of 12 January 2001.

Pursuant to Article 34-3 of the amended 1993 Financial Sector Law, the BCL notified the European Commission on 12 February 2001 of the LIPS-Gross, LIPS-Net, and the securities clearing and settlement system operated by Clearstream.

These systems therefore benefit from the protection regime provided for in Directive 98/26/EC on settlement finality.

b) Supervision of Systems by the BCL

Supervision by the BCL of systems under its competence necessarily implies supervision of system operators and, where applicable, settlement bodies and clearing houses.

The BCL ensures that systems comply with standards or recommendations established at the international level among central banks and ensures compliance with rules in this area adopted by the Governing Council of the European Central Bank (ECB).

These standards and recommendations mainly include those issued by the Committee on Payment and Settlement Systems (CPSS) at the Bank for International Settlements, approved by the Governing Council of the European Central Bank (ECB), those issued by the European Central Bank itself and its predecessor, the European Monetary Institute (EMI):

CPSS:

• Core principles for systemically important payment systems (January 2001)
• Recommendations for securities settlement systems (Joint report of the CPSS-IOSCO Joint Task Force on Securities Settlement systems), (January 2001)
• Report of the Committee on Interbank Netting Schemes of the Central Banks of the Group of Ten Countries (the "Lamfalussy report") (November 1990)

ECB:

• Report on electronic money (August 1998)
• Role of the Eurosystem in the field of payment system oversight (June 2000)

EMI

• Report on prepaid cards (May 1994)
• Standards for the use of EU securities settlement systems on ESCB credit operations (January 1998)

The basic texts cited in point 2 will be communicated to system operators and made available on the website of the issuing authority as well as on the BCL's website.

It is incumbent on system operators to inform the Central Bank of their activities and to consult it on any significant matter. System operators must in particular transmit to the Central Bank all useful information, including statutory documents and other official documents, statistics (the precise requirements for which will be defined in a subsequent circular), and other financial and corporate information, including that relating to shareholding.

System operators must immediately inform the Central Bank of any incident and any project for public communication.

The BCL issues recommendations, general or specific, aimed at promoting the soundness or efficiency of systems.

3. External Relations

The BCL wishes to coordinate its supervisory mission with that exercised by the CSSF.

The need for such cooperation also stems from the new Article 47-1 of the 1993 Financial Sector Law, which specifies that the CSSF has within its remit the supervision of the operational and financial stability of systems to ensure financial stability as a whole, an objective that the Treaty also confers upon the ESCB.

In the area of payment systems, such cooperation between the BCL and the CSSF will be organized pursuant to the Memorandum of Understanding drawn up between the Eurosystem central banks and the banking supervisory authorities of Member States.

The Law of 12 January 2001 provides for the information of the BCL by the CSSF in the event of the opening of insolvency proceedings against a Luxembourg participant in a system authorized in Luxembourg (new Article 61-4 of the 1993 Financial Sector Law). Conversely, and in accordance with applicable legal provisions, the BCL will communicate to the competent authorities within the Eurosystem the data necessary for the effective exercise of supervision.

4. Establishment of the Supervisory Framework

From an organizational standpoint, the BCL has set up an interdepartmental unit responsible for the supervision of payment systems and securities settlement systems. This unit prepares a document describing the precise framework of the Bank's supervisory activity as well as the standards applied in this matter. The Central Bank will consult system operators subject to its competence on the practical conditions of the supervisory measures it intends to adopt.

5. Contact Persons

Each system operator is requested to designate one or more contact persons, duly authorized to deal with the BCL in the context of its system supervision mission.

The Central Bank designates as the contact person for the application of this circular: Mr. Norbert Goffinet, Head of the Financial System Stability and Supervisory Authorities Relations Section (tel: 47 74 4246 fax: 47 74 4910 e-mail: sg@bcl.lu)

Serge KOLB
Andrée BILLON
Yves MERSCH

General Director