The National Payment Systems Oversight Framework

Bank of Uganda
June, 2021

The Bank of Uganda is committed to foster a safe and efficient payment ecosystem, which supports monetary policy and financial stability through its oversight role as provided for under the law.

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Foreword

One of the principal functions of a central bank is to be the guardian of public confidence in money, and this confidence depends crucially on the ability of the economic agents to transmit money and financial instruments smoothly and securely through the payment systems. A payment system must be safe and efficient even when the markets around them are in crisis and should not themselves be the source of such crises. This is ensured through effective oversight. The Bank of Uganda considers oversight of the National Payment Systems one of its core functions, closely related to and contributing towards the overall financial and monetary stability.

Specifically, the role of the Bank of Uganda is to ensure the safety and efficiency of the individual payment systems and the payments system as a whole. This includes the systems operated by the Bank of Uganda and those operated by private sector entities. Bank of Uganda uses as a Benchmark the Principles for the Financial Market Infrastructures issued in April 2012 by the Committee for Payments and Settlement Systems (CPSS) of the Bank for International Settlement (BIS) in collaboration with the Technical Committee of the International Organization of Securities Commission (IOSCO). The Bank in this document sets out its oversight policies and the activities to be undertaken in the conduct of oversight of the National Payment Systems.

Besides compliance with international standards, by disclosing information about oversight policy and activities, Bank of Uganda seeks to contribute towards building and maintaining confidence of the National Payment Systems and thus foster greater use of the payment systems.

In carrying out its oversight responsibility, the Bank of Uganda is guided by the National Payment Systems (NPS) Policy Framework approved by Cabinet on 22nd December 2017, The NPS Act 2020 and the Regulations thereunder. The National Payment Systems oversight mission statement is stated as:

"To maintain a safe and efficient payment ecosystem, which supports financial and monetary stability and complies with international standards".

E. Tumusiime-Mutebile (Prof.)
Governor

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Contents

• Foreword ................................................................................................................. 1
• Glossary ................................................................................................................... 3
• 1. Introduction ........................................................................................................ 4
  • 1.1. Special Definitions ........................................................................................ 4
  • Systemic risk: ..................................................................................................... 4
• 2. Authority for Bank of Uganda Oversight .......................................................... 5
• 3. Objectives of the Oversight ............................................................................... 5
  • 3.1. Scope of the Oversight .................................................................................. 5
  • 3.2. Identifying Systems for Oversight ................................................................. 6
  • 3.3. Assessment of Systemically Important Payment Systems (SIPS) ................... 6
  • 3.4. Retail Systems of prominent importance ...................................................... 8
• 4. Oversight Methodology .................................................................................... 8
  • 4.1. Authorisation ............................................................................................... 8
  • 4.2. Monitoring ................................................................................................... 8
  • 4.3. Assessment .................................................................................................. 10
  • 4.4. Inducing Change .......................................................................................... 11
• 5. Organization and Staffing for Oversight .......................................................... 12
• 6. Co-operative Oversight .................................................................................... 14
  • 6.1 General Principles for Oversight .................................................................. 14
  • 6.2 International Cooperative Oversight among Central Banks and with other authorities .......................................................................................................... 16
• 7. Conclusion ......................................................................................................... 18
• 8. Appendix I: Principles for FMIs (BIS-IOSCO: 2012) .......................................... 19
• 9. Appendix II: Responsibilities of Central Banks, Market Regulators & other Authorities ................................................................................................................. 22
• 10. Appendix III: Risks in Payment and Settlement Systems and Mitigation Measures ................................................................................................................... 22
• 11. Appendix IV: Payment and Settlement Systems Risk Assessment Matrix ........... 23
• 12. Appendix V: Payment Systems Categories ....................................................... 24
• 13. Appendix VI: Designation Criteria for Payment Systems in Uganda .................. 24
• 14. Appendix VII: List of Payment Systems Subject to Bank of Uganda Oversight .... 25
• 15. References ....................................................................................................... 25

Glossary

Abbreviation	Term	Explanation
BIS	Bank for International Settlements	The international body under whose auspices central banks and other regulatory authorities cooperate to decide global policy with regard to best practice in payments
BoU	Central Bank of Uganda	The institution that is mandated by Law to oversee Payment Systems in Uganda
COMESA	Common Market of Eastern and Africa	Since 1994 organization of independent sovereign states to co-operate in developing their natural and human resources for the good of their people.
CPSS	Committee for Payment and Settlement Systems	The BIS committee responsible for developing and promulgating best practice principles for oversight of payment and settlement systems
ECS	Electronic Clearing System	BoU Automated Clearing House
FMI	Financial Market Infrastructures	Any organization or system that provides processing, clearing and/or settlement functions for payments - these include the UNISS, ECS and CSD in Uganda as well as system operators of retail payment systems. The term FMI also applies to technical operators of payment systems.
IOSCO	International Organization of Securities Commissions	Organization that works alongside the BIS CPSS to define best practice principles for securities settlement
Lamfalussy Principles	Lamfalussy Committee of wise men Bank for International Settlements.	10 Core principles for use as universal guidelines to encourage safe and efficient operation of systemically important payment systems world-wide.
MoF	Ministry of Finance	The Ministry of Finance, Planning and Economic Development
NPSD	National Payment Systems Department	The BoU Department which oversees the Payment Systems
NPSS	National Payment and Settlement System	The national payment system (NPS) and securities settlement system (SSS) as defined by the PFMI, April 2012.
PFMI	Principles for Financial Market Infrastructures	The set of principles published by BIS in April 2012 which were assembled together by the BIS CPSS and IOSCO which provide guidance for the procedures to be employed by FMIs
REPSS	Regional Payment and Settlement System 2014	Settlement system joining Uganda, Malawi, Swaziland and Mauritius.
SIPS	Systemically Important Payments System	A payment system which if disrupted by failure, fraud or error could cause serious financial and economic damage to the country
UNISS	Uganda National Interbank Settlement System	The Real Time Gross settlement system implemented in 2005 in Uganda to settle high value interbank obligations in real time.

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1. Introduction

This oversight framework has been developed to ensure that developments in the Uganda National Payments System (NPS) and participation in regional and international systems comply with the Bank for International Settlements (BIS) Committee for Payment and Settlement Systems (CPSS)¹ Principles for Central Bank Oversight of Settlement Systems, May 2005, the International Organization on Securities Commission Organization (IOSCO) Principles for Financial Market Infrastructures (FMIs), April 2012, and other relevant CPSS and IOSCO guidelines.

The principles require that the central bank NPS oversight activities are transparent and comply with the international standards. In addition central banks should have effective powers and capacity to carry out the oversight and should cooperate with other authorities. The purpose of this document therefore, is to place into the public domain the Bank of Uganda’s (BOU’s) NPS oversight policy and practices. The disclosure of policies and practices is also expected to build confidence in the Uganda National Payment and Settlement Systems and thus foster greater use of the payment systems.

This document describes the objectives and scope of the oversight, oversight methodology, organization and staffing for oversight and how the Bank manages cross-border relationships.

The framework is divided into four main sections:

i. Objectives and scope of oversight;

ii. Oversight Methodology - authorization (licensing), monitoring, assessment and inducing change;

iii. Organization and staffing for oversight; and

iv. Co-operative oversight with other central banks, domestic and cross-border authorities.

The BoU oversight framework is in line with the BIS CPSS principles. It is also in accordance with best practices among central banks as well as the recommendations of international organizations, including the World Bank’s Global Payment Systems Survey Report 2010.

1.1. Special Definitions

Systemic risk:

Systemic risk arises in situations where the actions or inactions of individual participants affect the functioning of the entire system adversely. This is especially pronounced when participants in a system do not themselves pay all of the costs associated with the consequences of their actions, also known as negative externalities. For example:

i. In a netting system when failure of one participant to meet its obligations causes a large number of other participants to unwind transactions or to take losses, in a ‘survivors pay’ situation, potentially damaging their viability.

ii. Participants in a system like the Real Time Gross Settlement (RTGS) clearly rely on inflows of funds or securities to meet their obligations but may not consider the full impact of delaying their outgoing payments.

iii. A network operator may fail to take into account the full cost of a disruption to the system through under investment in the security and resilience systems.

¹ Effective September 2014, CPSS was renamed Committee on Payments and Market Infrastructures

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# 2. Authority for Bank of Uganda Oversight

The authority is derived from the National Payment Systems Policy Framework approved by Cabinet on the 22nd December 2017 and the National Payment systems Act 2020.

In addition as a member of the East African Community (EAC) and the Common Market of Eastern and Southern Africa (COMESA), Uganda is a participant in the East African Payment Systems (EAPS) which went live in 2013 and the Regional Payment and Settlement System (REPSS) which went live in Uganda in 2014. Participation in the REPSS and EAPS require cross-border cooperation with other COMESA and EAC regulatory agencies to achieve effective oversight.

# 3. Objectives of the Oversight

The fundamental objective of BoU Oversight is to ensure the safety and efficiency of entire payment system of the country and ultimately financial stability by monitoring payment systems operating on an on-going basis, assessing systems’ features and inducing change when necessary. Payment systems also support the central bank’s monetary policy through settlements and systemic liquidity management which supports transmission of policy actions to the economy as a whole.

The main objectives for conducting the payment and settlement systems oversight are twofold as set out below:

i. Containment of systemic and other payment system risks in order to maintain stability of the financial system by:
    a. ensuring that critical attention is given to risks reduction and management in the design and operation of payment systems;
    b. promoting the safety, security, soundness and reliability of payment systems, payment infrastructures and payment instruments used by the public; and
    c. maintaining the public’s confidence and interest in money and payment systems.

ii. Monitoring and evaluating the payment systems performance by:
    a. ensuring the effectiveness and reliability of the payment system and its conformity with legal provisions;
    b. maximizing the efficiency of payments clearing and settlement arrangements; and
    c. pursuing public interest in payment system arrangements;

## 3.1. Scope of the Oversight

The scope of payment system oversight will extend to Payment Service Providers (PSPs) and Operators of Payment Systems, both those owned by the BoU and those external to the BoU and the payment instruments. The broad scope of oversight is important to monitor all aspects of payment systems to ensure safety and efficiency so as to maintain public confidence and promote efficiency.

a. Payment services include:
    i. Services enabling cash deposits or withdrawals;

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    ii. The execution of payment transactions;
    iii. Issuance and acquisition of payment instruments;
    iv. Any other service incidental to the transfer of funds or as may be classified by the Central Bank

A payment system operator is an entity which is in charge of the operation of a payment system, whether alone or with other entities and may include a participant in the payment system, a settlement agent, a central counterparty or a clearing house.

b. The scope of payment oversight will also cover the Central Securities Depository (CSD) operated by BoU. The BoU CSD offers securities accounts and central safekeeping services for government securities for both treasury bills and treasury bonds. The objective of oversight of the BoU CSD is to ensure that the CSD is safe and efficient.

c. Through the oversight activities, the BoU ensures that the payment, clearing and settlement systems comply with the relevant Principles for the Financial Markets Infrastructure [PFMI 2012]. To meet these objectives, the BoU methodology has the following features:
    i. It is backed by law (NPS Act 2020) and the Bank has the capacity to carry out its oversight responsibilities;
    ii. The oversight policy and activities are transparent; the oversight framework is publicised, including on the BoU web-site, specifying the standards and criteria for determining applicable systems;
    iii. There is consistency in the treatment of comparable payment and settlement systems including the systems which the Bank operates and owns; and
    iv. There is cooperation with other national authorities (i.e. central banks and other regulatory agencies) and cross-border and multicurrency systems in accordance with the international standards.

## 3.2. Identifying Systems for Oversight

i. The oversight on the payment and settlement system will be risk-based. The areas which constitute potential sources of risk to the system will be given a proportionately higher share of resources and attention. Conversely, areas which are deemed to be of less significance sources of risk to the system will receive proportionately less attention. The focus therefore is on the areas of high risk.

ii. International standards require that central banks have a clear criteria for assessing whether a specific payment system will fall within their oversight scope, and that these criteria should be made public.

iii. The BoU like most central banks has adopted two definitions of the types of system to be subjected to oversight that is; Systems which are considered to be of “systemic importance” and those of “prominent importance”. The latter definition rather than the former will be applied more to retail payment systems.

## 3.3. Assessment of Systemically Important Payment Systems (SIPS)

Assessment of Systemically Important Systems will be driven by the following indicators;

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i. **Market Penetration**: Where there is no alternative system available for high volume transactions such as Electronic Clearing System (ECS) the failure of such a system would have detrimental effects on the public confidence in the financial system and the country’s currency. The level of market penetration will be determined by the BoU on the basis of statistical and business risk analysis.

ii. **Aggregate financial risks**: The BoU attaches considerable importance to the value of payments going through a system. There is a strong correlation between amounts processed, liquidity and credit risk. The Bank considers the Ugandan National Interbank Settlement System (UNISS/RTGS) to be of systemic importance. In addition any system which processes 10% or more of the value of the UNISS transaction would be considered systemically important, or as otherwise determined by the BoU.

iii. **Systemic Risk**: The failure of a participant in a payments system may have serious consequences for other participants and may adversely affect their viability. If the participant with the largest payment obligation in a payment system fails and the values processed in the system are highly concentrated among a few participants, the financial consequences for the other participants may be substantial. A high concentration of values with a few dominant players could put significant strains on the remaining participants in a system. Parameters for the level of concentration are determined by the BoU on the basis of observed flows passing through the system.

The above criteria notwithstanding, the BoU may designate a system systemically important using either criterion.

The CPSS-IOSCO Principles for FMIs provide guidance on the standards that systemically important payment systems (SIPS), central securities depositories (CSDs), securities settlement systems (SSS)² Central Counterparties (CCPs) and trade repositories (TRs)³ must observe. Observance of the principles for FMIs will enhance safety and efficiency in the payment, clearing and settlement arrangements, and more broadly, limit systemic risk and foster transparency and financial stability.

SIPS and CSDs must comply with the relevant FMI principles (Shown as appendix I). They will be subject to licensing requirements, and to a comprehensive set of oversight standards, reporting requirements, and enforcement through effective oversight mechanisms.

Non-systemically Important Systems may be subject to licensing requirements, but the BoU will reserve the discretion to require the non-SIPS to comply with the necessary standards/principles, to ensure safety and efficiency. Not all the principles will be applied to these systems, nor will each principle be addressed in full. For example, the level of security and operational reliability and the contingency arrangements for non-SIPS will be lower than for SIPS. Also the lower level of risk in such systems may not warrant obligatory settlement in central bank money as required by principle 9 of the PFMI. The non-SIPS will be subjected to a lighter set of reporting requirements. The Bank will continue to review the evolution of these systems since the designation of the systems could change overtime.

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² Although described separately in the PFMI, in market practice, as is the case in Uganda, the CSD also operates as a securities settlement system.

³ Trade repositories are centralized registries that maintain electronic databases of derivative contracts. They may also provide additional services such as the management of trade lifecycle events and downstream trade processing. CCPs and TRs do not currently exist in Uganda and are therefore not addressed in this framework.

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3.4. Retail Systems of prominent importance

Retail systems of prominent importance are not expected to pose a significant financial risk to the financial market. However, a disruption in this system could severely impact financial market operations and undermine the public confidence in the payment systems and the currency. The low financial risk means that the full policy principles of oversight would not be applied. However, the concentration of the retail payments market and the degree of penetration of a particular system will be taken into consideration. An indication of a system of prominent importance would be a quarter share/25% or more of processing in the respective retail market or if it is the only existing system of its nature processing payments through the interbank market. Bank of Uganda oversight will be extended to Prominently Important Retail Payment Systems (PIRPS); examples include Mobile Money Services by the Mobile Network Operators, Interswitch, and the Shared Banking Platform.

4. Oversight Methodology

The Central Bank’s oversight role may be broken down into: authorization/licensing, ongoing monitoring, assessing and inducing change. This is necessary in the conduct of oversight and preservation of the safety and efficiency of individual payment and settlement systems and the safety of the payment ecosystem as a whole.

4.1. Authorisation

The BOU is responsible for the authorization or licensing of all Payment Systems that are operated in Uganda. Before licensing, the BoU must be satisfied that their operations do not pose a risk to the safety and efficiency of the payment system as a whole. BoU will review the operator’s business plan, financials, projected revenue and expenses, senior management capacity, skills, risk management procedures, operational rules and procedures, agreements with participants and other factors associated with ensuring the stability of the payment system operator. The goal is to ensure that the operator has the necessary resources to safely operate a payment system in a sustainable manner with minimal risk to the participants. Included in this responsibility is the right to revoke a license and invoke sanctions or penalties for non-compliance.

Payment service providers which hold a license under the Financial Institutions Act [or under the Micro Finance Deposit-Taking Institutions Act], and which are authorised to issue or administer means of payment in accordance with such acts may be exempted from some of the licensing requirements under the NPS Act 2020.

4.2. Monitoring

The BoU applies a set of Principles for FMI as deemed relevant to each system it oversees to identify likely areas of risk. For non-SIPS and systems of prominent importance, the criteria may be less rigorous, but proportionate to the degree of risk that would be created by failure or abuses in the system operations.

Basis for monitoring

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The BoU resources are rationed according to priorities. Monitoring will be based on the assessed risk. It is those areas where risk of failure, fraud, error and other risks are significant that receive the most attention. BoU will ensure that risk factors are monitored not only on their own but also in relationship with other risks.

Box 1 Risk Reviews. As a matter of routine, the Oversight Division of the National Payment Systems Department follows a programme of risk reviews for each system. The review will include analysis of the following:

1. Qualitative information about the features of the system and its operations;
2. Quantitative information and statistics in relation to the system’s flows and the resulting risk areas for further risk mitigation measures;
3. Current level of Principles observance relative to appropriate level,
4. Current level of other Codes of Practice and system rules observance.

Sources of Information The success of monitoring operations relies heavily on accurate and timely information about the performance of the payment systems. BoU obtains the information needed about specific payment systems from a range of sources including:

Box 2 Sources of Information

1. Publicly available information on system design and performance;
2. Official system documentation (e.g. system rules, member documentation, business continuity plans and other “static” information setting out how the system operates);
3. Regular or ad hoc reporting on system activity (including volume and value of transactions, and operating performance) or on its financial position (including balance sheet and profit and loss information);
4. Internal reports of board or committee meetings or from internal auditors;
5. Self-assessments of compliance with central bank oversight policy;
6. Bilateral contacts with the system and system participants;
7. Multilateral meetings including industry group meetings or participation in committees;
8. On-site inspections;
9. Expert opinion from legal advisers and external auditors;
10. Information from other regulators; and
11. Customer feedback

Regular Reporting Monitoring is based on the information received initially from the settlement systems ,the PSPs and Systems Operators. The procedures for assessing this information must measure certain key variables that relate to value, volume and risk. BoU carries out daily monitoring of the scale of transactions across the networks by examining trends for variables such as: i. Volume of transactions ii. Value of individual transactions iii. Percentage of rejected transactions iv. Percentage of transactions queued (e.g UNISS and ACH) which has implications for banks’ liquidity control

v. Use of intra-day liquidity facilities and any difficulties in regularizing settlement accounts at end of day vi. Use of collateral and collateral executions vii. Bunching of transactions (especially tendencies to enter payments late in the day, which may indicate attempts to preserve liquidity). viii. Percentage of securities pledged in the CSD for any day’s exposure. ix. Use of the reserve facility in UNISS to protect clearing positions.

Regular meetings Regular contact between senior management of the BoU and the senior representatives of payment systems providers/operators is an important oversight tool. The meetings provide BoU with the fora to discuss policy and regulatory developments, assessment and monitoring issues arising from the Bank’s investigations and from the payment systems’ own risk reviews.

4.3. Assessment Oversight is an on-going task, particularly in a developing economy like Uganda’s where the risk parameters are constantly changing. The monitoring function provides information as to whether the policy objectives and standards are being met and whether there is cause for concern or issues that need urgent attention. The assessment represents a more extensive analysis and investigation of systems, to ascertain that their performance and status is in line with the best practice for safety and efficiency.

Information collected by the BOU is mainly used in two ways: i. Generally, the BOU uses the information to understand payment and settlement systems arrangements in the economy and to provide an informed basis to formulate appropriate policies to enhance safety and efficiency in the payments industry, in order to uphold financial stability. General research and regular monitoring contributes not only to oversight and financial stability but also to other aspects, such as monetary policy formulation and implementation. ii. Secondly, the information gathered enables the Bank to determine compliance with the best practices and the relevant laws. The Bank may use not only its own information gathering mechanisms but also information generated through self-assessments and any other sources. Under self-assessment, FMIs are required to evaluate their compliance with the applicable principles, such as the CPSS-IOSCO Principles for FMIs.

The BOU Assessment program has three aspects: i. Self-assessment This is a periodic exercise conducted by operators of FMIs monitored by the BOU. On an annual basis, the system operator is required to conduct and submit a comprehensive self-assessment of the FMI’s compliance with the applicable principles, such as the CPSS-IOSCO PFMI. Besides the annual self-assessment, interim assessments may be required following changes to the FMI’s system (upgrades, patches, etc.) or the operating environment, which impact the FMI’s status of compliance with the applicable principles. BOU will review the self-assessment reports and may engage the system operator to discuss certain aspects of the report. This also applies to the systems operated by BOU like the RTGS, ACH and CSD.

ii. Off-site analyses
Analysis of information received over a period of time will be carried out monthly, quarterly and annually for each system operator. For example, analyzing the information provided in the regular system operator reports for trends and assessing customer complaints over a period of time will be done quarterly and report presented to the BOU Payment Systems Policy Sub-Committee (PSP-SC).

iii. On-site assessment
BOU shall conduct a comprehensive assessment of each FMI against the applicable principles, in a cycle of at least 1-2 years. This assessment shall utilize, review and verify the information obtained from the FMI, including self-assessments and periodic off-site reports. The assessment may also entail on-site inspection of operations and discussions with the payment system provider/operator (management and staff). Where necessary, appropriate recommendations shall be made and follow-up reviews done.

4.4. Inducing Change
In the event that the Monitoring and Assessment procedures establish areas of concern, the BoU’s objective is to induce change. The payment system provider/operator shall be required to rectify the concerns to ensure that policy requirements and standards are met, while ensuring minimal disruption to the system as a whole, and individual users. The tools available to BoU to induce change range from moral suasion, negotiated agreements, public statements and statutory powers to enforce oversight decisions.

i. Moral Suasion
The Bank of Uganda uses dialogue⁴ and “moral suasion” backed by the publication of statistics and other results of monitoring and assessment processes to induce change. With a strong regulatory basis and a constructive relationship with the payment system participants, BOU is in a good position to dialogue with and persuade system providers/operators to make the necessary changes. Publication of performance information is also a powerful instrument in the compliance enforcement.

ii. Public statements
BOU publishes its oversight policy, primarily in the interest of transparency and accountability and to influence system operations. BOU’s oversight objectives and any specific policy requirements or standards set for certain types of systems can usefully reinforce the market’s self-discipline, for example by encouraging systems operators, their participants or other interested parties to make their own judgments about the system’s design and operation and thus creating pressure for change if weaknesses are found. The BOU may, from time to time, publish oversight assessments of particular systems to inform PSPs and system users of the degree to which those systems meet the required standards.

iii. Negotiated agreements and contracts
BOU’s ability to induce change may also be enhanced through the use of negotiated agreements or contracts with participants and other payment system providers/operators. The BoU owns and operates the Uganda National Interbank Settlement System (UNISS) and

⁴ World Bank 2010 report
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the Automated Clearing House (ACH) and therefore has agreements and contracts with other system operators/participants for clearing and settlement. As part of the terms and conditions for using the UNISS and ACH, BOU may require other systems providers/operators to undertake changes to their systems, whenever it deems as necessary.

iv. Participation in systems
Through full or part ownership, the Bank can, through voting rights or executive power, cause a system to change. The BoU owns and operates the UNISS and ACH and can therefore specify changes and enforce changes through its relationship with system users.

v. Cooperation with other authorities
Although the Bank only directly influences systems used by the authorized payment system providers/operators and participants, through cooperation with other regulators such as the Capital Market Authority (CMA) and Communications Commission (UCC). The areas of common concern for payment systems can be addressed through the cooperative oversight (Sec. 6 below)

vi. Statutory power to require change
The BoU may also use its statutory powers to require payment systems operators or payment service providers to comply with BoU oversight requirements. In addition to the powers to obtain information and conduct on-site inspections, these statutory powers include the authority to license PSPs, to use a system, to approve changes to it, system rules and procedures, to issue “cease and desist” orders and to suspend or revoke licenses and membership.

vii. Enforcement and Sanctions
In certain circumstances, non-compliance with the Bank’s orders/directives by a system provider/operator may be a subject of litigation. However, the impact of any sanction will need to be weighed against the objective of continued smooth running of the system.

5. Organization and Staffing for Oversight
   The BOU recognizes the necessity of segregating oversight responsibilities from operational responsibilities relating to the payment systems⁵.

BoU operates the UNISS/RTGS, ECS and CSD systems and has set up a Payment Systems Oversight and Policy Division (PSOP) as an independent function from the payment operations function in the National Payment Systems Department to take charge of oversight.

Assuring adequate resources
The bank has available a number of tools and methods to provide the oversight functions.
i. The bank employs suitably qualified personnel and the operations functions are separated from the oversight functions in the organization;
ii. The Bank draws on its own internal expertise from the Legal, Financial Markets, Supervision and the Internal Audit departments/directorates to support the oversight objectives;

⁵ World Bank global payment systems survey 2010
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iii. External Audits are conducted.
iv. Joint oversight activities are conducted with the EAC partner states central banks.
v. The Bank staff benefit from external training on payment systems oversight from development partners and organisations.
vi. BoU subjects itself to the Financial Sector Assessment Program by the International Monetary Fund.

Managing the relationship between oversight and operations

The BoU makes a distinction and is clear when it acts as regulator and when it acts as owner and/or operator. To this end, the National Payment Systems Department has three distinct organizational divisions; Operations, Financial Inclusion and Oversight, managed by officers at the level of Assistant/Deputy Director.

This is because there are a number of possible areas of conflict of interest:
i. Objectives of oversight and operations do not always coincide;
ii. Oversight objectives can impose additional costs on system operators and the Bank may find its systems and services in direct competition with the private sector systems that are subject to its oversight;
iii. The Bank may find that it has to choose between its interests as system owner and the oversight objectives.

The BOU Payments Systems Policy Sub-Committee [PSP-SC] is responsible for ensuring that the oversight program is carried out satisfactorily. It considers the reports of the Oversight Division and decide whether action to induce change is necessary for any of the systems under Oversight.

Organizational Arrangements

Board of Directors
Governor, D/Governor and Non-Executive Directors
↑
Strategy and Finance Committee of the Board
Quarterly Meetings to assess reports
↑
Executive Management Committee
↑
Payment Systems Policy Sub-Committee [PSP-SC]
↑
Payment Systems Oversight Division
Day to day oversight
Daily statistical and monthly monitoring to the PSP-SC
Annual Report Included in the BoU Financial Statement.

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The diagram below shows how oversight is segregated from, other BoU Systems Operation activities:

BOU Oversight activities are segregated from Operations and Support

Aim: Running the NPS smoothly and processing payments efficiently

• Operations
  • Payment Operations
    • Entering and receiving BoU’s own payments and those of its customers
  • Systems support
    • Running UNISS, ECS and CSD; Training; IT Support

Aim: Developing new systems

• Systems Development

Aim: assuring safety and efficiency of all payment systems in Uganda

• Payment Systems Oversight
  • Payment systems run by BoU
  • Payment systems not run by BoU
    • → Monitoring
    • → Assessments
    • → Authorisation
    • → Information and Reporting
    • → International principles
    • → Inducing change

BoU Payments Systems Policy Sub-Committee includes: EDF (Chair), EDS (Alternate Chair), EDR&SM, DITO, Legal Counsel, Director Banking, Director RCD, Director Currency, Director National Payments (Secretary)

6. Co-operative Oversight

6.1 General Principles for Oversight

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.

Bank of Uganda ensures transparent oversight policies to enable payment and settlement system operators to understand and observe applicable policy requirements and standards. Through transparency central banks can also demonstrate an appropriate degree of consistency of oversight approach. Transparency provides a basis for judging the effectiveness of the central bank’s policies and thus for the accountability of the central bank for the performance of its oversight.

To enhance transparency the oversight framework will be published in the BoU website and public statements will be made from time to time.

# B: International standards

Central banks should adopt, where relevant, internationally recognised standards for payment and settlement systems.

Bank of Uganda makes use of the relevant international standards concerning safety and efficiency to enhance the central bank oversight of payment and settlement systems. Such standards include the CPSS Core principles for systemically important payment systems and the CPSS-IOSCO recommendations for securities settlement systems and recommendations for central counterparties. This will make it easier for BoU to work with other central banks and make the cooperative oversight more effective.

# C: Effective powers and capacity

Central banks should have the powers and capacity to carry out their oversight responsibilities effectively.

Bank of Uganda has the powers (NPS Act 2020) to obtain information and induce change in the payment and settlement systems in line with the oversight responsibilities for those systems. BoU will use moral suasion for the day-to-day oversight together with other existing tools and statutory powers to obtain information and induce change.

Bank of Uganda as illustrated above deploys sufficient resources, with suitably qualified personnel, and an organisational structure that allows the resources to be used effectively. Those involved in carrying out oversight will need to be able to draw on the skills and expertise of other central bank functions/departments including legal, financial markets, bank supervision, audit and IT.

# D: Consistency

Oversight standards should be applied consistently to comparable payment and settlement systems, including systems operated by the central bank.

Bank of Uganda ensures consistent application of policy requirements and standards, including the systems operated by itself. As discussed under the oversight methodology BoU will indicate the criteria for determining comparability (for example, the types of instruments used by a system, the types of participants in a system, or the risk attributes of a system).

Consistency is promoted by the Bank’s desire to maintain transparency about its own policies for own systems and to ensure that the same policy requirements and standards are applied with the same rigor for comparable private sector systems. Organisational separation between the central bank’s oversight and operational functions helps to ensure the consistent application of policy requirements and standards.

# E: Cooperation with other authorities

Central banks, in promoting the safety and efficiency of payment and settlement systems, should cooperate with other relevant central banks and authorities.

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Bank of Uganda has to put in place cooperative arrangements with other authorities such as securities regulators and banking supervisors as a mechanism to ensure that the individual responsibilities of the Central Bank as the overseer of payment and settlement systems can be fulfilled more effectively through mutual cooperation.

Cooperation enhances oversight efficiency by minimising the potential duplication of effort and the burden on the overseen system. It also helps to avoid the inconsistency of policy approach that could arise if different authorities acted independently, and it reduces the possibility of gaps in oversight. One of the areas of cooperation is through the EAC Secretariat.

Cooperative oversight arrangements will be established for cross-border and multicurrency systems. In 2013 the EAC partner states implemented the East African Payments System (EAPS) through the integration of the RTGS.

## 6.2 International Cooperative Oversight among Central Banks and with other authorities

In promoting the safety and efficiency of payment systems, the BOU cooperates with other central banks and authorities.

The CPSS recommends a number of principles for cooperation between Central Banks and other authorities such as securities regulators. This can increase the efficiency and minimize duplication of effort that can be onerous for the parties concerned. They propose five (5) principles that can be applied to cross border and domestic cooperative arrangements.

Cooperation, both between domestic and cross border regulatory agencies is crucial in the achievement of effective oversight of the payment and settlement systems. All Ugandan authorities; the Bank, Capital Market Authority (CMA) and Communications Commission (UCC), are working under a framework to promote collaborative oversight of their systems.

The five principles⁶ are listed below;

### a. Notification

Each central bank that has identified the actual or proposed operation of a cross-border or multicurrency payment or settlement system should inform other central banks that may have an interest in the prudent design and management of the system.

The BoU needs to inform and be informed if there are operators in Uganda providing services for other countries and vice versa. The bank which issues the currency being processed and the Central Bank within whose jurisdiction the system is located needs to be in a cooperative oversight agreement.

### b. Primary responsibility

Cross-border and multicurrency payment and settlement systems should be subject to oversight by a central bank which accepts primary responsibility for such oversight, and there should be a presumption that the central bank where the system is located will have this primary responsibility.

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⁶ CPSS – Oversight Report- May 2005 Annex 4; Lamfalussy Principles

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The BoU and other regional Central Banks by mutual agreement will decide on the primary responsibility to apply the oversight principles as well as the assessment of the system as a whole. In the domestic situation the BoU will take responsibility.

c. Assessment of the system as a whole

In its oversight of a system, the authority with primary responsibility should periodically assess the design and operation of the system as a whole. In doing so it should consult with other relevant authorities.

Where BoU is the primary authority it will carry out a full assessment of the system on the basis of agreed standards and other functions relating to that cooperative agreement. These include:

(a) Organising an effective, efficient and clear process for cooperation,

(b) Facilitating the distribution of the information needed to satisfy the respective responsibilities of the central banks and other authorities in the arrangement,

(c) Seeking agreement on the policies and standards to apply in carrying out the assessments,

(d) Seeking consensus on issues of common interest related to risks and risk management of the system,

(e) Providing effective communication and coordination in both routine and stressful situations involving the system, and

(f) Where appropriate, using its powers and influence over the system to induce necessary change.

d. Settlement arrangements

The determination of the adequacy of a system's settlement and failure-to-settle procedures in a currency should be the joint responsibility of the central bank of issue and the authority with primary responsibility for oversight of the system.

The main factors considered where BoU holds the primary responsibility are: the soundness of the legal regime; credit and liquidity implications for a settlement disruption for the domestic market; as well as the solvency and liquidity of the settlement institution for each currency. The authority with primary responsibility should consult the other central bank on issues concerning the adequacy of the system’s settlement and failure to settle procedures for a currency or financial assets denominated therein. The Bank of Uganda will execute Memoranda of Understanding with other regional authorities clearly stating responsibilities.

e. Unsound systems

In the absence of confidence in the soundness or management of any cross-border or multicurrency payment or settlement system, a central bank should, if necessary, discourage use of the system or the provision of services to the system, for example by identifying these activities as unsafe and unsound practices.

The BoU, through its system of licensing/authorisation, will discourage the use of particular systems which it considers to be unsound. This could include disallowing the use of UNISS for settlement of certain securities systems if there is good reason to believe that they create a risk to the payment system or its participants.

The arrangements between authorities will be formalized regarding oversight of payment systems through Memoranda of Understanding.

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7. Conclusion

This Oversight Policy Framework describes how the BoU oversees the national payment system, in compliance with international standards and the relevant laws. Owing to the nature of the payment and settlement system and in compliance with the international standards, cooperative arrangements are in place with other domestic (Ugandan) regulatory agencies, other central banks and cross border regulatory agencies responsible for constituents of systems that may affect the national payment and settlement system. Ultimately, this comprehensive Oversight Policy Framework enables Uganda to confirm its international position as a jurisdiction in which best practices in financial infrastructure are observed.

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8. Appendix I: Principles for FMIs (BIS-IOSCO: 2012).

General organisation

Principle 1: Legal basis

An FMI should have a well-founded, clear, transparent, and enforceable legal basis for each material aspect of its activities in all relevant jurisdictions.

Principle 2: Governance

An FMI should have governance arrangements that are clear and transparent, promote the safety and efficiency of the FMI, and support the stability of the broader financial system, other relevant public interest considerations, and the objectives of relevant stakeholders.

Principle 3: Framework for the comprehensive management of risks

An FMI should have a sound risk-management framework for comprehensively managing legal, credit, liquidity, operational, and other risks.

Credit and liquidity risk management

Principle 4: Credit risk

An FMI should effectively measure, monitor, and manage its credit exposures to participants and those arising from its payment, clearing, and settlement processes.

Principle 5: Collateral

An FMI that requires collateral to manage its or its participants’ credit exposure should accept collateral with low credit, liquidity, and market risks. An FMI should also set and enforce appropriately conservative haircuts and concentration limits.

Principle 6: Margin

A CCP should cover its credit exposures to its participants for all products through an effective margin system that is risk-based and regularly reviewed.

Principle 7: Liquidity risk

An FMI should effectively measure, monitor, and manage its liquidity risk. An FMI should maintain sufficient liquid resources in all relevant currencies to effect same-day and, where appropriate, intraday and multiday settlement of payment obligations with a high degree of confidence under a wide range of potential stress scenarios that should include, but not be limited to, the default of the participant and its affiliates that would generate the largest aggregate liquidity obligation for the FMI in extreme but plausible market conditions.

Settlement

Principle 8: Settlement finality

An FMI should provide clear and certain final settlement, at a minimum by the end of the value date. Where necessary or preferable, an FMI should provide final settlement intraday or in real time.

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