Framework for Oversight of Payment Systems in Zimbabwe (April 2016)

NATIONAL PAYMENT SYSTEMS DEPARTMENT
FRAMEWORK FOR
OVERSIGHT OF PAYMENT SYSTEMS
IN ZIMBABWE

ABSTRACT
This document has been compiled for the benefit of payment systems operators, participants and users. Its purpose is to provide insight on the Reserve Bank of Zimbabwe’s oversight role in the Zimbabwean payment systems. It outlines the principles the Reserve Bank of Zimbabwe (the Bank) applies in assessing the infrastructure and operations of existing and new payment systems. The objective is to make all stakeholders aware of what is required to operate a payment system in a safe, sound and secure manner. ACKNOWLEDGEMENT Oversight of payment systems is as a core function of the central bank. In developing this Framework, the Bank has incorporated material from leading standard setting institutions such as the Bank for International Settlement (BIS) Committee of Payment and Market Infrastructures (CPMI), World Bank and Financial Action Task Force (FAFT) in the area of oversight of payment systems. More importantly, we continue to benefit from the ongoing collaboration with key stakeholders, locally, regionally and internationally in ensuring the development of payment systems.

TABLE OF CONTENTS

1. INTRODUCTION ................................................................................................................................4

2. PURPOSE OF OVERSIGHT FRAMEWORK.................................................................................4

3. DEFINITIONS......................................................................................................................................5

4. LEGAL BASIS......................................................................................................................................6

5. OVERSIGHT FUNCTION OBJECTIVES .......................................................................................7

6. SCOPE OF OVERSIGHT...................................................................................................................8

7. RISKS IN PAYMENT SYSTEMS......................................................................................................9

8. OVERSIGHT APPROACHES .........................................................................................................10
   RISK BASED APPROACH..….......................................................................................................................10
   STANDARD BASED APPROACH…...............................................................................................................10
   COMBINATION OF STANDARD BASED AND RISK BASED APPROACHES……................................................11

9. OVERSIGHT TOOLS .......................................................................................................................11
   Off-site analysis…......................................................................................................................................11
   On-Site Inspection….…. ............................................................................................................................12
   MORAL SUASION…....................................................................................................................................12
   DIRECTIVES…............................................................................................................................................13

10. OVERSIGHT ACTIVITIES .............................................................................................................13
    MONITORING….….....................................................................................................................................13
    ASSESSING……. ........................................................................................................................................13
    INDUCING CHANGE…… ............................................................................................................................13

11. OVERSIGHT COOPERATION.......................................................................................................14
    INTERNAL ……..........................................................................................................................................14
    LOCAL…....................................................................................................................................................14
    REGIONAL AND INTERNATIONAL ……. .....................................................................................................14
    ANNEXURE I: PRINCIPLES FOR FINANCIAL MARKET...............................................................15
    INFRASTRUCTURES (PFMIS)................................................................................................................15
    ANNEXURE II: RESPONSIBILITIES OF CENTRAL BANKS, MARKET REGULATORS,
    AND OTHER RELEVANT AUTHORITIES FOR FINANCIAL MARKET................................16
    INFRASTRUCTURES ................................................................................................................................16
    ANNEXURE III: THE CPMI, BIS GENERAL PRINCIPLES FOR....................................................17
    OVERSIGHT (MAY 2005) .........................................................................................................................17
    ANNEXURE IV: RISKS IN PAYMENT SYSTEMS..............................................................................18

12. INTRODUCTION
    1.1 The Reserve Bank of Zimbabwe (Bank) has a statutory obligation to foster
    financial stability through the creation of an enabling environment which does not stifle innovation. This is largely attained through the Bank’s oversight of payment, clearing and settlement systems.
    1.2 The Bank also aims to enhance public confidence by ensuring that monetary
    value is transmitted smoothly and securely through robust payment systems.
    1.3 The Bank recognises that payment systems, if not effectively regulated, can
    be channels for transmission of shocks and risks in the financial system that ultimately affect economic performance. Payment systems are also prone to abuse and can be conduits for financial crimes which include terrorism financing and money-laundering among others, hence the need for Central Bank oversight.

13. PURPOSE OF OVERSIGHT FRAMEWORK
    2.1 The purpose of this Framework is to:
    2.1.1 Provide guidance on the Central Bank Payment System oversight function to
    payment systems providers, participants, users and other stakeholders thus;
    2.1.2 Outline the scope of the oversight function which is expected to benefit
    stakeholders.
    2.1.3 Improve awareness on payment system oversight requirements premised on
    the need to manage risks inherent in payment systems.
    2.1.4 Enhance the effective governance of payment systems which should provide
    impetus for effective regulation of payment systems.

2.1.5 Assist the Bank on the day-to-day oversight activities thus creating an
avenue for enhancing skills and techniques in payment systems oversight and supervision.
2.2 The Oversight Framework should be read in conjunction with the National
Payment Systems (NPS) Act, Recognition Criteria of payment systems, and any other related laws, regulations, directives and guidelines.
3. DEFINITIONS
3.1 Large value payment system (LVPS) - a funds transfer system through
which large-value and high-priority funds transfers are made between participants in the system for their own account or on behalf of their customers.
3.2 Participant: a party who participates in a payment transfer system. This
generic term refers to an institution which is identified by a transfer system (e.g. by a bank identification number) and is allowed to send payment orders to the system or which is bound by the rules governing the payment transfer system.
3.3 Payment System- A set of instruments, procedures, and rules for the
transfer of funds between or among participants; the system includes the participants and entity operating the arrangement.
3.4 Payment System Oversight- is a Central Bank function whereby the
objectives of safety and efficiency are promoted by monitoring existing and planned systems, assessing them against these objectives and, where necessary, inducing change.

3.5 Payment system operator or provider - an entity that operates a payment
network and/or payment infrastructure.
3.6 Primary supervisory authority –A Central Bank in the jurisdiction within
which a payment system is hosted from or mainly operating from (in terms of incorporation, management and operations). In consultation with other relevant central banks and supervisory authorities it could be agreed that another authority would undertake the primary responsibility for oversight.
3.7 Proprietary payment system - a funds transfer system which handles
transactions which are not accepted as a means of payment by other undertakings.
3.8 Public Interest Objectives” - governance arrangements of the National
Payment System that are clear, transparent, promote the safety and efficiency of the financial market infrastructure while supporting the stability of the broader financial system, other relevant public interest considerations and goals of relevant stakeholders.
3.9 Retail payment system- a funds transfer system which handles a large
volume of payments of relatively low value.
4. LEGAL BASIS
4.1 World-over, central banks play the regulatory, administrative, surveillance,
participant and settlement agent roles in payment systems.
4.2 The Bank is therefore best placed to regulate, facilitate, coordinate,
persuade, and encourage system operators and participants to act in a collectively conducive manner.

4.3 The Reserve Bank of Zimbabwe Act and National Payment Systems Act
specifically mandate the Bank to maintain the financial and technical integrity of payment systems and promote safe and efficient payment, clearing and settlement systems, hence the Bank’s oversight role is an integral part of its wider responsibilities for ensuring stability of the financial system.
4.4 In carrying out its oversight mandate, the bank will also be guided by
international best practice and standards to which it fully subscribes, including:
(a) The Bank for International Settlements (BIS) Committee on Payment and Market Infrastructures’ (CPMI) 24 Principles for Financial Market Infrastructures (PFMIs). The 24 Principles mainly focus on the risk management in payment systems, legal, governance, transparency, access criteria and efficiency issues among others (Refer to Annexure1); (b) BIS CPMI five responsibilities of regulators (Annexure II); (c) BIS CPMI General Principles for Oversight (Annexure III).
5. OVERSIGHT FUNCTION OBJECTIVES
5.1 The Bank’s oversight function seeks to ensure effective risk management in
payment systems design and operation.
5.2 The Bank intends to achieve, inter alia, the following oversight objectives:
5.2.1 Safety - to develop and promote secure payment systems;

5.2.2 Efficiency - to promote timely and affordable payment arrangements;
5.2.3 Reliability - to build confidence of the transacting public in payment
systems;
5.2.4 Stability - to ensure orderly performance of payment systems;
5.2.5 Transparency - to ensure openness and fairness across the entire payment
systems value chain;
5.2.6 Consumer protection- to ensure that payment system operators and
participants are operating responsibly, not prejudicing the clients and ensuring that customers get redress on their complaints;
5.2.7 Prevention of market abuse- to ensure that nefarious activities and anti￾competitive practices are not permitted in the payment system which will
cause uncontrollable damage and compromise the integrity of payment systems;
5.2.8 Compliance- to promote the operation of payment systems in line with
relevant legislation, international best practices and standards; and,
5.2.9 Accessibility- to ensure that payment systems are extended to all users
without prejudice.
6. SCOPE OF OVERSIGHT
6.1 The Bank’s oversight interest in payment systems is premised on the need to
ensure that financial stability, inclusion, intermediation and consumer protection issues are addressed consistently and systematically.

6.2 The Bank’s oversight scope covers large value payment systems (LVPS) and
retail payment systems such as cheques, cards, and mobile, among others, also known as system wide important payment systems (SWIPS).
6.3 Oversight focuses on both Systemically Important Payment Systems (SIPS)
such as the Real Time Gross Settlement (RTGS) system and other retail payment systems. This Framework shall therefore apply to:
(a) Payment systems operating in Zimbabwe; (b) Prospective and current payment, clearing and settlement systems infrastructure providers, participants and users; (c) Payment, clearing and settlement systems, access devices and channels; and (d) The governance structures, market practices, rules and procedures of a payment system.
7. RISKS IN PAYMENT SYSTEMS
7.1 Risk is a potential that events expected or unanticipated, may have an
adverse effect on an institution’s economic and social performance.
7.2 The risks in payment systems include: legal, liquidity, credit, settlement,
systemic, operational, compliance, strategic, and reputational among others (Refer to Annexure IV).
7.3 All sound risk management programs to be put in place by providers and
participants in the payment system should have several common fundamentals which include: risk identification, measurement, monitoring and adequate risk mitigation measures.

8. OVERSIGHT APPROACHES
   8.1 The Bank, in conducting its oversight activities, uses the risk based approach,
   standard based approach or a combination of the two.
   Risk Based Approach..….
   8.2 Risk based oversight is a forward-looking approach that allocates resources
   based on risk characteristics of a payment system.
   8.3 It involves an assessment of risks posed by a particular system and activities
   posing the highest risk receive the most resources and time. This ensures that oversight attention remains properly focused on payment systems exhibiting greatest weaknesses or adverse trends.
   8.4 Risk-based oversight entails moving away from a rigid rule-based style of
   regulation to one which is more reliant on the overseer’s discretion and professional judgement depending on probability of risk occurrence. Standard Based Approach….
   8.5 Individual systems are regularly assessed to ensure compliance to
   international best practice and standards.
   8.6 Pursuant to that, the Bank will apply the relevant internationally recognised
   standards and guidelines such as those by the BIS CPMI and International Organisation of Securities Commissions (IOSCO); in particular the 24 Principles for Financial Market Infrastructures (Refer to Annexure I). In addition the Central Bank may from time to time formulate its own standards and guidelines in line with the market requirements.

Combination of Standard based and Risk based approaches……
8.7 The Central Bank may also use a combination of Standard Based and Risk
Based Approaches and differences occur in the degree of application of either approach.
9. OVERSIGHT TOOLS
9.1 To ensure effective oversight, a number of tools will be used by the Bank
and include:
Off-site analysis….
9.2 The following are offsite sources of information:
(a) Publicly available information on system design and performance; (b) Official system documentation, for example system rules, member documentation, business continuity plans, procedures and process flows; (c) Continuous monitoring, regular and ad hoc reporting on system activity: this includes volumes and values of transactions and operating performance or its financial position (including balance sheet and profit and loss information); (d) Internal board reports, committee meetings, and internal audit reports; (e) Self-assessments by system operators and participants of their compliance with RBZ oversight policy; (f) Engagement with providers, participants and other key stakeholders; (g) Expert opinion from the RBZ’s legal advisors and external auditors including external audit reports; and, (h) Customer feedback on system performance and participants’ behaviour/conduct.

9.3 To preserve confidentiality, oversight information obtained from the system
and settlement institution of a recognized system during the course of oversight is subject to official secrecy requirements as set out in section 21 (Preservation of Secrecy) of the National Payment Systems Act and may not be disclosed by the Bank to third parties except in the circumstances set out in sections 21(2) and (3) of the same Act. On-Site Inspection….…
9.4 The on-site examination will complement the Bank’s off-site review and
provides the Bank with the opportunity to assess first-hand information on how a recognized system is operated, managed and controlled.
9.5 On-site examinations focus on issues identified through off-site review
process that either present high risks or where control process deficiencies are noted.
9.6 The frequency of on-site examination varies from system to system. The
Bank will on and ongoing basis conduct on-site examinations as part of its oversight functions. Moral Suasion…..
9.7 Engagements with the system operators and participants with a view to
encouraging adoption and implementation of the Bank’s preferred policy position. This tool has the advantage that it encourages the Bank to present a clear and convincing case for change.
9.8 Through this policy dialogue, the Bank will also seek to encourage self￾regulation by payment systems providers and participants as this would

complement the Bank’s oversight role especially with regard to determining access rules and managing market failures. Directives…..
9.9 The Bank may, from time to time, issue further policy guidelines and
directives as provided for in the National Payment Systems Act, among other regulatory requirements to ensure stability of the national payment system.
10. OVERSIGHT ACTIVITIES
Monitoring….…
10.1 The oversight function entails checking and getting information about
existing and potential payment systems. The overseers need to have information on the design and operation of the systems, including regular updates on any changes to the systems. Assessing…….
10.2 The monitoring activity described above provides information which is then
used to evaluate and analyse the systems or participants against existing statutes, standards and policy requirements adopted by the Bank. Inducing Change……
10.3 Having monitored and assessed systems and participants’ conduct, the Bank
may make the following recommendations:
10.3.1That no further action is required; or 10.3.2There is a requirement for change which will be enforced to ensure compliance.

11. OVERSIGHT COOPERATION
    Internal ……
    11.1 The Bank will foster and ensure regular cooperation among its functions
    responsible for payment systems oversight, bank supervision, financial intelligence unit and exchange control, among others, to avoid regulatory arbitrage, duplication of functions and ensuring information sharing. Local……...
    11.2 The Bank will collaborate and cooperate with other regulators, government
    agencies and bodies involved in the financial stability agenda and financial market infrastructures value chain supervision. These include among others Insurance and Pensions Commission (IPEC), Securities and Exchange Commission of Zimbabwe (SECZ), Postal and Regulatory Authority of Zimbabwe (POTRAZ) and Deposit Protection Corporation (DPC). Regional and International …….
    11.3 The Bank cooperates with other Central Banks as well as regulatory bodies
    regionally and internationally to achieve its oversight objectives.
    11.4 Additionally, the Bank will rely on cooperative oversight arrangements with
    the primary supervisory authority of any recognised cross border system operating in Zimbabwe.

ANNEXURE I: PRINCIPLES FOR FINANCIAL MARKET INFRASTRUCTURES (PFMIS)

ANNEXURE II: RESPONSIBILITIES OF CENTRAL BANKS, MARKET REGULATORS, AND OTHER RELEVANT AUTHORITIES FOR FINANCIAL MARKET INFRASTRUCTURES Responsibility A: Regulation, supervision, and oversight of FMIs Responsibility B: Regulatory, supervisory, and oversight powers and resources Responsibility C: Disclosure of objectives and policies with respect to FMIs Responsibility D: Application of principles for FMIs Responsibility E: Cooperation with other authorities

ANNEXURE III: THE CPMI, BIS GENERAL PRINCIPLES FOR OVERSIGHT (MAY 2005) General Oversight Principle Explanation A Transparency Central Banks should set out publicly their oversight policies, including the policy requirements or standards for systems and the criteria for determining which systems these apply to. B International Standards Central Banks should adopt, where relevant, internationally recognised standards for payment, clearing and settlement systems. C Effective Powers and Capacity Central Banks should have the powers and capacity to carry out their oversight responsibilities effectively. D Consistency Oversight standards should be applied consistently to comparable payment and settlement systems, including systems operated by the Central Bank. E Cooperation with other Authorities Central Banks, in promoting the safety and efficiency of payment and settlement systems, should cooperate with other central banks and relevant authorities.

ANNEXURE IV: RISKS IN PAYMENT SYSTEMS
Credit Risk The risk that a counterparty or participant in a clearing and settlement system will not settle an obligation for full value, either when due or at any time thereafter. Custody Risk The risk of loss of securities held in custody occasioned by the insolvency, negligence or fraudulent action of the custodian or of a sub-custodian. General Business Risk Refers to any potential impairment of the financial condition (as a business concern) of an FMI due to declines in its revenues or growth in its expenses, resulting in expenses exceeding revenues and a loss that must be charged against capital. Such impairment may be a result of adverse reputational effects The risk that your overall business strategy and plan will be ineffective leading to failure to meet revenue targets. Legal Risk In general, the risk of loss because of the unexpected application of law or regulation or because a contract cannot be enforced. For clearing and settlement systems, it means the risk that a party will suffer a loss because the relevant laws or regulations do not support the rules of such a system, the performance or related settlement arrangements, or the property rights and other interests held through the clearing and settlement systems. Legal risk also arises if the application of the relevant laws and regulations is unclear. Liquidity Risk The risk that a counterpart or participant will not settle an obligation for full value when due. Liquidity risk does not

imply that a counterpart or participant is insolvent since it may be able to settle the required debit obligation at some unspecified time thereafter Money Creation Risk Refers to the risk associated with electronic money in which additional value is manufactured/created on the system without being backed by a bank corresponding actual cash holding. Operational Risk the risk that deficiencies in information systems or internal controls and result in unexpected losses; or the risk of a human error or a breakdown of some components of the hardware, software or communication systems that are crucial to the settlement process of a clearing and settlement systems. Pre-settlement Risk (replacement cost risk) The risk that a counterpart or participant in a clearing and settlement systems to an outstanding transaction for completion at a future date will fail to perform on the contract or agreement during the life of the transaction. The resulting exposure is the cost of replacing the original transaction at current market price and is also known as replacement cost risk. Risk factor A variable that affects the value of financial instruments or an entire portfolio. The most common market risk factors are interest rates, foreign exchange rates, equity prices and commodity prices. Strategic risk Strategic risk is current and prospective risk to capital arising from adverse business decisions, improper implementation of

decisions or lack of responsiveness to industry changes. This risk is a function of the compatibility of the institution’s goals, business strategies and resources deployed to accomplish these goals, and the quality of implementation. The institution’s internal characteristics must be evaluated against the impact of economic, technological, competitive, regulatory, and other environmental changes. Systemic Risk The risk that the failure of one participant in a transfer (payment) system (or in the financial markets) to meet its required obligations will cause other participants or financial institutions to be unable to meet their obligations (including settlement obligations in a transfer system) when due. Such a failure may cause significant liquidity or credit problems and, as a result, might threaten the stability of financial markets" (Bank for International Settlement). Technology Risk Failure to plan for the entire lifecycle of the use of technologies and the selection of technological standards to ensure continuity and stability of payment systems. ooo000ooo