This Technical Note (TN) was prepared by Frédéric Hervo (external expert, Banque de France).
This TN does not cover other U.S. agencies competences in the field of payment, clearing, and settlement systems.
The four CPSIPS responsibilities are: A: the central bank should define clearly its payment system objectives and should disclose publicly its role and major policies with respect to systemically important payment systems; B: the central bank should ensure that the systems it operates comply with the core principles; C: the central bank should oversee observance with the core principles by systems it does not operate and it should have the ability to carry out this oversight; and D: the central bank, in promoting payment system safety and efficiency through the core principles, should cooperate with other central banks and with any other relevant domestic or foreign authorities.
The CPSS report on Central Bank Oversight of Payment and Settlement Systems of May 2005 has set five general principles for oversight (General oversight principle 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;” General oversight principle B: “International standards: Central banks should adopt, where relevant, internationally recognised standards for payment and settlement systems;” General oversight principle C: Effective powers and capacity: “Central banks should have the powers and capacity to carry out their oversight responsibilities effectively”; General oversight principle D: Consistency: “Oversight standards should be applied consistently to comparable payment and settlement systems, including systems operated by the central bank;” General oversight principle 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”) and five principles for international cooperative oversight, which update the 1990 Lamfalussy principles for international oversight.
See the CPSS report on “Central Bank Oversight of payment and Settlement Systems” Bank for international Settlements, Basel, 2005.
Bank charters subject to Federal Reserve supervision include Edge Act corporations and state member banks. In addition, the Federal Reserve exercises certain supervisory responsibilities under the Bank Services Company Act, covering certain bank outsourced services. The Federal Reserve has supervisory responsibilities for CLS Bank (foreign exchange settlement system), the Depository Trust Company (a central securities depository), ICE Trust U.S. (a CCP for OTC credit derivatives), Warehouse Trust (a trade repository for OTC credit derivatives), and CHIPS (a large value funds transfer system, supervised a third party service provider, see paragraph 29). The Federal Reserve also has some limited supervisory authority to examine affiliates of the Depository Trust Company, namely the National Securities Clearing Corporation (a CCP for equities and corporate securities) and the Fixed Income Clearing Corporation (a CCP for U.S. government securities); both of those CCPs are subject to regulation by the SEC.
The clearing banks are subject to prudential supervision by the relevant banking regulators.
The Board’s oversight authority over the Reserve Banks is set forth in several provisions of the Federal Reserve Act, including Section 11(a), which provides the Board authority to examine the Reserve Banks and obtain Reserve Bank records and information; Section which provides the Board’s authority to exercise general supervision of the Reserve Banks; Section 11(j), which requires the Board to order an annual independent audit of the financial statements of each Reserve Bank; and Section 21(7), which requires the Board to order an examination of each Reserve Bank at least annually.
FICC is the CCP for trades in government securities (and provides clearing services for mortgage-backed securities). NSSC is the CCP for trades in equities, corporate and municipal bonds, exchange-traded and unit investment funds. See for more details the assessment of DTC against CPSS/ISOCO Recommendations for SSS and the assessments of FICC and NSCC against the CPSS/IOSCO Recommendations for CCPs.
The assessment states that “PaymentsCo has agreed to be subject to the Comptroller’s supervision and examination. PaymentsCo also invites the Office of the Comptroller of the Currency, the Board of Governors of the Federal Reserve System, the Federal Reserve Bank of New York, the Office of Thrift Supervision, and the New York State Banking Department to conduct examinations of its information-technology operations.” OCC and Federal Reserve staff believes the statutory authority to conduct CHIPS exams is sound. Authority to enforce supervisory findings directly against the service provider (CHIPS), however, is lacking (nonetheless, the agencies have direct enforcement authority over CHIPS participants, and could limit their use of the service provider if the provider rejects supervisory findings).
For more details on the arrangements for securities clearing and settlement systems as well as an assessment of their effectiveness, see IMF assessments of DTC and Fedwire Securities against CPSS/IOSCO Recommendations for SSSs and IMF assessments of NSCC and FICC against the CPSS/IOSCO Recommendations for CCPs.
Usually referred to as “Lamfalussy principles for international cooperative oversight,” these principles which guide cooperative oversight between central banks were set out in the 1990 “Report of the Committee on Interbank Netting Schemes of the central banks of the Group of Ten countries” and updated in the 2005 CPSS report on “Central Bank Oversight of Payment and Settlement Systems.” They recommend: (i) informing other central banks that may have an interest in the prudent design and management of the cross-border and multi-currency system; (ii) assigning the primary oversight responsibility to a central bank (iii) periodically assessing the design and operation of the system as a whole to be performed by the central bank with the primary responsibility in consultation with the other central banks, (iv) leaving the determination of the adequacy of a system’s settlement and failure-to-settle procedures in a currency as a joint responsibility of the central bank of issue and the authority with primary responsibility for oversight of the system and (v) leaving scope for a central bank to discourage the use of an unsound system.