Spain
Financial Sector Assessment Program: Detailed Assessment of the CPSS Core Principles for Systemically Important Payment Systems

The assessment of the Systemically Important Payment System (SIPS) in Spain against the Committee on Payment and Settlement Systems (CPSS) Core Principles was undertaken as part of the Financial Sector Assessment Program (FSAP). It assesses the Observance of Core Principles for Systemically Important Payment Systems (CPSIPS) of the IMF and the World Bank. It reviews the discussions of the staffs of the Banco de España (BE) and commercial banks. It analyzes the self assessment by the BE and the assessment of the Euro Large-Value Payment System against the core principles published by the European Central Bank.

Abstract

The assessment of the Systemically Important Payment System (SIPS) in Spain against the Committee on Payment and Settlement Systems (CPSS) Core Principles was undertaken as part of the Financial Sector Assessment Program (FSAP). It assesses the Observance of Core Principles for Systemically Important Payment Systems (CPSIPS) of the IMF and the World Bank. It reviews the discussions of the staffs of the Banco de España (BE) and commercial banks. It analyzes the self assessment by the BE and the assessment of the Euro Large-Value Payment System against the core principles published by the European Central Bank.

I. The CPSS Core Principles

A. General

1. The assessment of the Systemically Important Payment System (SIPS) in Spain against the Committee on Payment and Settlement Systems (CPSS) Core Principles covered one system: Servicio de Liquidación del Banco de España—SLBE (a Real-Time Gross Settlement System—RTGS).1 It did not assess Spain’s link to the Trans-European Automated Real-Time Gross Settlement Express Transfer system (TARGET).2 The assessment was undertaken by Marylin Choy (Central Bank of Peru) as part of the Financial Sector Assessment Program (FSAP) in June—July 2005.

2. The methodology for the assessment was derived from the Guidance Note for Assessing Observance of Core Principles for Systemically Important Payment Systems (CPSIPS) of the IMF and the World Bank of August 2001.

3. The assessment involved discussions with members of the staff of the Banco de España (BE) and meetings with commercial banks. Counterparties met during the assessment were very cooperative and provided all the necessary information.

4. The assessment benefited from a self assessment by the BE and the assessment of the Euro Large-Value Payment System against the core principles published by the European Central Bank. It was based also on relevant laws and regulations of the BE and on information available on the website of the BE.

B. Market Structure

5. At end-2004, the financial sector included 346 credit institutions, of which 136 were commercial banks (75 national and 61 foreign), 47 saving banks (cajas), 83 credit cooperatives, 79 specialized credit institutions, and the state-owned Instituto de Crédito Oficial (ICO)3

Cashless payment instruments

6. Direct debits for recurrent payments such as utilities and other services, are the most important cashless means of payment in number of transactions. As average payment is low, they are less important relative to the total value of payments. The payment order is issued by the creditor, with prior authorization from the debtor to charge his account. A payment invoice is sent to the debtor who can reject the payment in case it is incorrect.

7. Debit cards allow the owner to make payments with direct charge to his account through an ATM or POS. The receiver’s account is credited the next day. There are around 1,400 debit and credit cards per 1,000 people. There are three nets of suppliers: Sociedad Española de Medios de Pago (SEMP), Sistema 4B, and Euro6000 managed by the Confederación Española de Cajas de Ahorro (CECA). Payments by debit cards, and other paperless payments in general, are also increasing in number.

8. Table 1 indicates that:

  • Checks are still important in value but their importance is declining relative to the use of electronic means of payments.

  • Electronic transfers from current and savings accounts to pay salaries, subsidies and pensions constitute the most important means of payment in value.

  • Although in general not of extended use, there are other means of payments such as prepaid cards, commercial cards, post office payments, and e-money.

Table 1.

Indicators of Use of Various Cashless Payment Instruments—Volume of Transactions

(In millions)

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Source: Banco de España

Excludes interbank large value transfers.

Table 2.

Indicators of Use of Various Cashless Payment Instruments—Value of Transactions

(In billions of euros)

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Source: Banco de España.

Excludes interbank large value transfers

C. Payment Systems Infrastructure

Legal framework

9. Law 41/1999 of November 12, also known as the Settlement Finality Law, provides the general legal framework for the payment and securities settlement system. The law clearly states the irrevocability and finality of a payment order and recognizes the legal validity of clearing agreements. It also establishes the procedures and consequences of legal insolvency of a participant in a payment system, and covers the clearing agreements, the transfer orders and the collateral deposited in the system. The law also establishes expeditious proceedings for the execution of collateral in case of default. Insolvency proceedings do not have retroactive effects on payment orders and collateral that have been put through the payment system.

10. Law 24/1988, Law of the Securities Market, issued on July 28, 1988, and modified among others, by Law 37/1998 of November 16 and Law 44/2002 of November 22, govern the securities settlement systems.

11. Other legislation, such as Law 16/1989, Defense of Competition Law, of July 17 and modified by Law 52/1999 of December 28, and Law 26/1988, Discipline and Intervention of Credit Entities Law, apply to the payment systems in aspects related to competition and consumer protection.

12. Specific regulations and circulars issued by the BE govern the payments system. Access criteria, prices, operational timetable and calendar, and access to intraday credit, among other issues, are covered by these regulations.

13. Law 13/1994, on Bank of Spain Autonomy, establishes that the BE must promote the well functioning and stability of the financial system and of the payment system, and entitles BE to regulate and operate clearing and settlement systems. The Law empowers the BE with the oversight function of the payment and settlement systems, and provides that it may gather information and documentation to evaluate the system’s efficiency and reliability (Law 2/2004 of December 27). The BE can suspend the decisions adopted by the entity managing a payment system when it considers that those decisions are prejudicial to the payment system, and can take any necessary measures.

14. The National Securities Market Commission (Comisión Nacional del Mercado de Valores, CNMV), created by Law of the Securities Market, is in charge of the oversight of the securities settlement systems.

Recent reform

15. Spain used to have three payment systems: two for large value and one for small payments. The large value payment systems were: the Gross Settlement System of Spain (Servicio de Liquidación del Banco de España—SLBE) managed by the central bank, and the Interbank Payment System (Servicio Español de Pagos Interbancario—SEPI). The SEPI was a private clearing house for large value payments in euros, domestic and cross border, managed by the Servicio de Pagos Interbancarios (SPI). Small value payments were processed through the National Electronic Clearing System (Sistema Nacional de Compensación Electrónica—SNCE), managed by the BE.

16. A reform of the payment system was introduced in December 2004. The SPI was reorganized and legally transformed into a new private company called Sociedad Española de Sistemas de Pago, S.A. (SESP) and its functions as a large value payment system manager were eliminated (thus the SLBE is the only large value payment system). The SNCE is no longer managed by the central bank. The SESP is in charge of the management of the SNCE, and is overseen by the BE who approves the rules of the system.

17. The guiding principle was to establish separate systems for large and retail payments. All payments above €50,000 channeled through the SEPI are now processed by the SLBE and smaller value payments are made through the SNCE.

Large-value payment system

18. There is one large-value interbank payment system: the Servicio de Liquidación del Banco de España (SLBE). It is the only systemically important payment system, given the high individual value payments it handles and that it is used for the settlement of the transactions of all relevant systems, like the stock exchange and the low-value payment system.

19. The SLBE is a Real-Time Gross Settlement (RTGS) system owned, operated, and controlled by the BE. It is the Spanish component of the TARGET, and settles both domestic and cross-border operations. It was created in 1997 with the transformation of the Servicio Telefónico del Mercado de Dinero (STMD).

Legal aspects

20. The SLBE is one of the payment systems legally recognized by the Settlement Finality Law. Therefore, payment orders processed by this system are irrevocable and have finality, there is not retroactivity in case of insolvency (“zero hour”) and the BE has rights over the collateral pledged in the system in case of default.

21. The BE regulates the SLBE through circulars, technical applications (Aplicaciones Técnicas), and communications. Circulars are published in the Official Gazette (Boletín Oficial del Estado) and at Banco de España’s website.

22. The manual of the SLBE is contained in Circular 5/1990 and its modifications. This Circular includes the contract of acceptance of the rules and regulations of the system. The Manual addresses issues such as access conditions and criteria, fees, sanctions, operation timetable, procedures to access the intraday credit and for cross-border payments, among others. It also establishes that a foreign participant should present to the BE legal opinions obtained in its jurisdiction about its capacity to comply with its obligations under system rules.

23. Circular 3/2000, in accordance with Law 41/1999, establishes that payment orders communicated cannot be modified or cancelled by the participant. Once the participant’s account is debited in real time, the payment order is irrevocable. The legal framework therefore is sound and contains clear rules and procedures both for normal operations and for the case of insolvency of a participant.

Participants

24. The SLBE is an open system with participation of credit institutions established in any European Euro Area country, and investment service institutions that are subject to prudential supervision. Treasury departments of central and regional governments and clearing houses such as the stock exchanges and IBERCLEAR, that are subject to oversight, also participate in this system.

25. There are 184 direct participants (33 branches of foreign institutions) and 36 indirect participants in the system. Direct participants have to open a centralized account on the books of Banco de España (RTGS account) for the settlement of transactions, and can act both on their own behalf and on behalf of their customers.

26. Direct participants must be registered at the BE, must have adequate financial strength and must meet other technical and operational criteria. These requirements are included in the manual of the SLBE.

Table 3.

SLBE: Transactions and Participants

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Source: Banco de España.

Operational proceedings

27. The SLBE settles domestic and cross border transfers, secondary market operations, multilateral clearing systems and monetary operations. It also matches interbank operations and transactions with public debt securities. The main operations in volume are those related to public debt transactions, followed by cross-border transfers. National transfers and money market operations are next in importance followed by the clearing house settlements.

28. Payment orders are processed one by one in real time, debiting and crediting the accounts in the central bank, provided that sufficient funds or collateral are available in the debit account. In case of insufficient funds, orders go to a queue which has a bypass FIFO management. Priority of orders is managed by the participants. Once funds are received, the first transaction in the queue is settled unless its value exceeds the funds received. In this case, the system will search for a transaction in the queue that can be settled.

29. Intraday credit is available either via repo operations or pledge, with no charge. Specific assets and securities with a minimum rating are accepted as collateral for the intraday facility, according to the criteria of the Eurosystem. Securities are blocked in IBERCLEAR or other depositaries in favor of the BE. The central bank can suspend the intraday facility under circumstances of systemic risk (e.g., insolvency of a participant).

30. The SLBE has liquidity optimization mechanisms in case of gridlock. Bilateral netting is performed automatically during the session when the account does not have enough funds for a payment and before sending residual payment orders to the queue. Multilateral netting is executed by the manager of the system in case it is necessary for example, to settle all the pending operations at the end of the session.

31. A settlement timetable for the different multilateral netting systems allows participants to manage liquidity with a view to avoiding failures in the settlement of ancillary systems.

32. Participant institutions also have the possibility to use a new “liquidity reservation facility,” to assure funds for specific payments. This facility allows participants voluntarily to put aside funds to assure availability for specific payments. It is recommended that the BE monitor the use of this facility to avoid possible discrimination against certain payments that may have to wait until the end of the day to be settled and to make sure that it does not unduly prevent the central bank from debiting accounts during the day.

33. At the end of the day, orders not settled and still in the queue are cancelled. If a participant is not able to undo the intraday facility, this credit becomes overnight, using the standing facility of the Eurosystem.

34. The communication system is by SWIFT or through an “online” connection to a BE computer. All external communication lines are encrypted and have a security access system. Remote access is allowed to entities outside Spain. There is a backup site in an external center that allows recovery of the system in less than two hours. The BE has contingency plans for emergency situations that are tested regularly.

35. The SLBE operates from 7:00 to 18:00. Charges and fees in the SLBE are based on cost recovery. There is a monthly charge of € 500 and a fee of € 0.50 for domestic transfers.

36. The SLBE is a modern and efficient RTGS system. It is expected to be replaced by TARGET 2 when the latter is introduced in 2007.

Retail payments system

37. Retail payments are processed by the SNCE, created by Real Decreto 1369/1987. The SESP manages the system. It is recognized as a payment system falling under the Settlement Finality Law. Transactions are not exposed to any retroactive actions and settlement agents are protected in case of insolvency of one of the participants.

38. In 1990 the first ACH began to operate, clearing only checks. The SNCE has grown rapidly since 2001 and it is the only electronic clearing house for retail payment instruments, such as paper checks, traveler’s checks, direct debits, credit transfers, bill of exchange, and gas checks.4 These instruments are operated by several clearing sub-systems, according to a governing law.

39. The SNCE falls under the classification of Prominent Important Payment System (PIPS) in the Eurosystem standard considering the market penetration criteria, the aggregate financial risks and the domino effect risk. It is not a Systemically Important Payment System due to the low value of the transactions (the daily average value of transactions is around € 6 billion compared with €305 billion cleared the SLBE). The result of the multilateral clearing is low relative to participant liquidity.

40. Commercial banks, saving banks, and credit cooperatives can be members of the SNCE. There are two forms of participants: direct and indirect participants. A direct participant takes part in the exchange stage of the clearing and settlement process, acting on its own behalf or representing indirect participants. There are 25 direct participants and 202 indirect participants.

41. The SNCE is based on the bilateral exchange of information by electronic means using private virtual network and STP processes. There is a truncation agreement among the participants so that 99.5 percent of the clearing is done without physical exchange of documents.

42. Each pair of institutions report their bilateral net balances to the BE. If no discrepancies are found in the bilateral exchange of information in each subsystem, a multilateral net position is calculated. The settlement takes place through the SLBE on the accounts that the participants hold at the BE by first debiting short participant’s accounts before crediting the long ones. Payments over €50,000 are transmitted to the BE to be settled one by one.

43. Each subsystem has its own timetable for communications. In general, the cycle begins in T, followed by bilateral exchange of information, and settlement takes place in T+1. Settlement is considered final. There is no cost for participating in the SNCE except for connectivity and a software license fee.

D. Main Findings

44. The BE is an important player in the payment system and has a well established and cooperative relationship with the financial sector. Its role and responsibilities are clearly defined in the law, including the oversight function.

45. The legal framework is sound. The Settlement Finality Law is fully enforceable. Irrevocability and finality are clearly defined in the law and in the regulations of the system, and they are also ensured even in the event of insolvency of a participant. The relevant rules and regulations of the SLBE system are contained in a number of documents issued and modified by the BE. Although rules and regulations address all the relevant aspects of the system, they are contained in a number of circulars which are quite difficult to follow, so it is recommended that the BE consolidates its payment circulars to improve readability and transparency for participants. BE staff has indicated that efforts in this direction are in progress.

46. The infrastructure for clearing and settlement of payments is well developed, modern and functional. The SLBE has systems that offer protection against liquidity and credit risks, such as queuing mechanisms, intraday credit and bilateral and multilateral algorithms. The needs of the users are accounted for in the development of the payment infrastructure. The introduction of the liquidity reservation facility is an example of requirements fulfilled by the BE. However, the BE should monitor the use of this facility to avoid possible discrimination against certain payments that may have to wait until the end of the day to be settled and to make sure that it does not unduly prevent the central bank from debiting accounts during the day.

47. There are contingency plans to assure continuity in the SLBE. However, the procedures in the manual of the SLBE should give clearer guidance on the expected behavior of participants in case of emergency situations. For instance, the procedures in case of failure of the platform of a participant or the SLBE should be clearly established. Although the BE conducts regular testing of the contingency plan with the cooperation of system participants, it is recommended to establish that participants have in place clear internal policies and procedures, and carry out operating audits. A periodic review of the IT infrastructure by participants to avoid operational risks is recommended. The distance of the external backup center from the main site should also be evaluated to make sure that it is sufficient in case of events such as natural disasters or terrorism.

48. The BE complies with its oversight function to ensure the safety and efficiency of payment systems. Oversight is based on data analysis, the analysis of payment instruments and new developments and self-assessment under international standards, among other aspects. As a result of its oversight activities the BE produces statistics and reports. It is recommended that this material be disseminated and published periodically.

Table 4.

Practice-by-Practice Assessment of Observance of CPSS Core Principles for SIPS and Central Bank Responsibilities in Applying the CPs—The SLBE

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Table 5.

Summary Observance of CPSS Core Principles and Bank Responsibilities in Applying the CPs—The SLBE

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Table 6.

Recommended Action Plan to Strengthen The SLBE5

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Authorities’ response to the assessment

49. The authorities thank the IMF team and the assessor for all the work undertaken and welcome its assessment, with which it is in broad agreement. The minor shortcomings pointed out in the assessment, that do not prevent the full observance of the Core Principles, have been addressed by the authorities and appropriate measures are being implemented to tackle the issue in the first half of 2006. Given Banco de España’s membership to the Eurosystem, some issues mainly to improve the payment system’s business continuity, are being tackled collectively.

1

This assessment was carried out by Marilyn Choy (Manager, Technical Affairs, Central Bank of Peru). The assessment took place from June 22 to July 1, 2005.

2

The overall assessment of TARGET (Trans-European Automated Real-Time Gross Settlement Express Transfer) was part of the CPSS assessment for the euro-area payment system conducted in November 2001 (see IMF Country Report No. 01/195); the assessment of transparency of monetary policy for the euro area was completed at the same time.

3

Source: Statistical Bulletin of Banco de España 2004 (September 2005).

4

Gas checks are payment orders on a customer’s current account for payments at gas stations.

5

All CPSS principles were rated as observed. The recommended actions are relatively minor measures that could be taken to make the SLBE even more robust.

Spain: Financial Sector Assessment Program: Detailed Assessment of the CPSS Core Principles for Systemically Important Payment Systems
Author: International Monetary Fund