Sweden
Financial Sector Assessment Program Update: Detailed Assessment of Observance on CPPS Core Principles for Systemically Important Payment (RIX)

The Riksbank (RB) has conducted a formal self-assessment of the RIX system's observance of the Core Principles in the context of the IMF Financial Sector Assessment Program, which describes the role of Riksbank-Funds Transfer System (RIX) in maintaining the stability of the Swedish financial system. Riksbank’s Funds Transfer System (RIX) provides facilities for real-time gross settlement (RTGS) in central bank money of Swedish kronor (SEK) payment transactions. The assessment points to opportunities for further improvements in the legal basis and in clearly defining and publicly disclosing its major policies.

Abstract

The Riksbank (RB) has conducted a formal self-assessment of the RIX system's observance of the Core Principles in the context of the IMF Financial Sector Assessment Program, which describes the role of Riksbank-Funds Transfer System (RIX) in maintaining the stability of the Swedish financial system. Riksbank’s Funds Transfer System (RIX) provides facilities for real-time gross settlement (RTGS) in central bank money of Swedish kronor (SEK) payment transactions. The assessment points to opportunities for further improvements in the legal basis and in clearly defining and publicly disclosing its major policies.

I. Summary Assessment

1. This assessment was undertaken in March 2011in the context of an IMF Financial Sector Assessment Program (FSAP) mission covering, inter alia, the Core Principles for Systemically Important Payment Systems (CPSIPS).1 This assessment covers the Riksbank’s Funds Transfer System (RIX), providing facilities for real-time gross settlement (RTGS) in central bank money of Swedish kronor (SEK) payment transactions.

2. Sveriges Riksbank (the Riksbank, shortly RB) has conducted a formal self-assessment of the RIX system’s observance of the Core Principles (CP). This assessment was made available to the mission. The RB also provided a large number of documents relevant for the assessment. Extensive meetings were held with officials from the RB, supplemented by discussions with officials from the Ministry of Finance (MoF), the Swedish Banker’s Association (SBA), and four RIX participants (two banks and two institutions providing clearing or settlement services).

3. The Committee on Payment and Settlement Systems’ (CPSS) Report on CPSIPS Part I and II and an IMF and World Bank guidance note were used when assessing the RIX system. The logistical support and warm hospitality of the officials of RB as well as the constructive and informative discussions with all other parties are greatly appreciated.

II. Institutional Arrangements

4. The RB’s responsibilities in respect to the payments system and its various components are formulated in very general terms in the Sveriges Riksbank Act. According to the act, the RB has a task to promote a safe and efficient payment system, which has been interpreted as a task to look after the stability of the Swedish financial system. To this end, safe and efficient financial market infrastructures play a critical role and the RB’s role as an overseer of the payments system therefore derives from this task. The Riksbank Act also states that the RB may make available systems for settlement of payments and, in other ways, participate in the settlement of payments. The RB runs the funds transfer system called RIX.

5. Finansinspektionen (FI) is the Swedish financial supervisory authority. FI is responsible for the supervision of companies operating in the credit, insurance, and securities markets. This includes the supervision of all clearing organizations and payment systems, except for RIX, which is operated and overseen by the RB. Contribution to the stability and efficiency of the Swedish financial sector is part of FI’s overall objective. FI reports to the MOF.

6. The MoF has responsibility in relation to legislation that makes the financial system efficient and stable. The MoF also follows developments in the financial markets and business sector so as to be able to assess the need for new legislation or amendments to existing laws. Much of the legislation in the financial markets area is the European Union (EU) legislation. The EU goal is to establish a single market for financial services.

7. The Swedish Competition Authority, Konkurrensverket, is a state authority with a mandate to safeguard and facilitate competition and to supervise public procurement in Sweden. A new Competition Act entered into force on November 1, 2008. This act is based on the competition rules of the European Union.

8. The Swedish National Debt Office (SNDO), Riksgälden, is an agency reporting to the MoF and its responsibilities include central government cash management, managing central government debt, and providing state guarantees and loans. Additionally, the SNDO is responsible for the deposit insurance and investment schemes and government support to banks. The SNDO participates in the RIX system as the government agency responsible for the processing and management of government payments.

9. The Swedish Consumer Agency, Konsumentverket, is the government agency responsible for consumer protection issues, including those related to the payment system. In practice, the agency’s role in the payment systems field mainly concerns the debit and credit card sector, where guidelines have been formulated and negotiated with the card-issuing companies.

10. In the private sector, the SBA, Svenska Bankföreningen, has standing committees which discuss and coordinate issues concerning the processing of payments and regulatory and technical aspects of payment systems. One example is that within the framework of this association, the participants in RIX (excluding the public entities) enter into agreements with one another about cut-off times and the processing of payments. The association is also owner of a retail payment system (credit transfer) in Sweden, the Data Clearing System, which is operated by Bankgirocentralen BGC AB (BGC).

11. The Swedish banking sector is highly concentrated, with the four largest commercial banks accounting for almost three-quarters of household and corporate lending and an even higher proportion of payment activities in 2010. Foreign banks are allowed to operate in Sweden through branches as well as through subsidiaries. There are 27 foreign banks represented on the Swedish market, almost all through branches.

III. The Payment Infrastructure in Sweden

12. The RB owns and runs the funds transfer system named RIX. RIX started operating in 1990. In February 2009, the technical system and the technical platform were replaced with a new system delivered by the Italian firm Società Interbancaria per l’Automazione - Società per i Servizi Bancari (SIA-SSB). RIX is open from 7:00 a.m. until 5:00 p.m. and has 24 participants.

13. The Swedish Central Securities Depository (CSD), Euroclear Sweden, operates the Securities Settlement System (SSS). Equities, bonds, and money market instruments are all dematerialized and handled in book-entry form in an in-house developed system.

14. NASDAQ OMX runs the Swedish stock exchange, the derivatives exchange, and the electronic inter-dealer exchange for certain government bonds. This same entity acts as the central counterparty (CCP) for derivatives and repo transactions.

15. A second CCP, the European Multilateral Clearing Facility (EMCF), was introduced in the Swedish equity market in 2009. EMCF (licensed in the Netherlands) acts as a CCP in the clearing of cash equity transactions on the NASDAQ OMX exchanges in Stockholm, Copenhagen and Helsinki and on some other multilateral trading platforms operating in the Nordic countries.

Figure 1.
Figure 1.

Sweden: The Main Market Infrastructure Components

Citation: IMF Staff Country Reports 2011, 285; 10.5089/9781463903565.002.A001

Source: Riksbank.
Table 1.

Sweden: Systemically Important Payment Systems 2010

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Source: Riksbank.
Figure 2.
Figure 2.

Sweden: Payment Flows in the Swedish Financial Infrastructure 2009

(Indicative value in SEK billion per day)

Citation: IMF Staff Country Reports 2011, 285; 10.5089/9781463903565.002.A001

Source: Riksbank.

16. There is one major retail payment system in Sweden. Bankgirocentralen (BGC) offers Automated Clearing House (ACH) services with settlements occurring at participants accounts in RIX. BGC provides services for several payment products and schemes. The large majority of clearing positions are settled on a bilateral gross basis between the participants concerned.

IV. The Functioning of the RIX System

17. In RIX, payments are processed as follows: a payment message (MT 103 or MT 202) is submitted to the SWIFT network. This message is held in the FIN Y-Copy service and a settlement request (MT 096) containing a subset of the original message is forwarded to the RTGS, via the RTGS CBT. On reaching the RTGS, all payment messages pass through a procedure consisting of the following six stages:

  • In the first step, the payment instruction is interpreted. This means that the information in the instruction is simplified in certain cases or it can be complemented in accordance with set rules;

  • In the second step, validation of the payment instruction takes place. Validation means checking that the payment instruction complies with the format requirements and applicable specifications in the system;

  • In the third step, RIX checks whether any special conditions are attached to the payment instruction. If the payment instruction is conditional (future time, future event or activation), it will be placed in the RIX Conditional Release Mechanism (CRM);

  • In the fourth step, it will be checked whether the recipient is subject to Stop Receiving and whether the paying RIX participant is subject to Stop Paying and whether bilateral limits are registered. In cases where bilateral limits are registered, whether a paying RIX participant’s bilateral limit on the recipient participant would be exceeded by the transfer is checked;

  • In the fifth step, certain renewed validation is made of the payment instructions, which have been placed in the CRM; and

  • In the sixth step, the transfer is effected. Before the transfer is effected by RIX, there is always a check of sufficient funds of the account which is to be debited. Then, the sender’s account is debited and the recipient’s account credited. Once settlement has taken place, the SWIFT FIN-Copy Service is notified by a (MT 097) message, which in turn releases the original payment message to the receiver—the latter will know that funds have been received with intraday finality. If subscribing to SWIFT FIN-Copy notifications, the sending party will be notified about the settlement by means of a (MT 012) message sent by SWIFT. Additional notifications can be received directly from RIX if subscribed for.

18. RIX participants have a number of tools available to manage their liquidity and payment flows. A participant can choose to immediately settle a transaction via its principal account real-time settlement mechanism (RTM) or to use one of the five liquidity optimization mechanisms (LOMs) that exist. Liquidity can be transferred flexibly between the principal account and LOMs and between LOMs.

19. All LOMs have queuing facilities. Priorities can be assigned to payments (the range of priorities available varies and is separately defined for each LOM)—such priorities can be changed if the payment gets into a queue. Time codes can be assigned to a payment, indicating either the first or latest time for settlement. Payments sent to the principal account are settled only if sufficient funds are available, otherwise the payment is rejected (no queuing).

20. Most payments are settled in the RIX-LOM. There are also LOM for special types of transaction: BGC-LOM (retail settlement), VPC-LOM (securities), OMX-LOM (CCP) and CLS-LOM (foreign exchange). Liquidity can be reserved for individual LOM and conditions can be set for how settlement is to take place.

21. For the RIX-LOM and BGC-LOM, settlement can take place with the help of optimization procedures (“Gridlock Buster”). This is done by utilizing queued incoming payments in bilateral or multilateral off-setting (in each case the included payments will be settled gross in a logical block where either all or none of the payments are settled). For other LOMs the mechanism is primarily used to reserve liquidity for a special settlement cycle or time-critical payments.

Table 2.

Sweden: RIX Payments Statistics 2005–2010

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Source: Riksbank.

22. Via a special interface, RIX Online participants can see their own transactions and position. It is also possible to see queued transactions and to change the priority of a queued payment. Information on collateral and intraday liquidity can also be obtained via the same function.

23. RIX participants are responsible for the management of their liquidity in the RIX system. In a Settlement Agreement (a voluntary Code of Conduct), participants have agreed on the times during the day when different types of payment are to be settled. The Settlement Agreement also stipulates the liquidity that users must as a minimum maintain for settlement of their transactions.

24. A special feature of RIX is that special settlement accounts have been outsourced to Euroclear Sweden in view of allowing integrated delivery-versus-payment (DvP) settlement of securities and cash (in central bank money) in the Euroclear Sweden system. It is also possible to generate intraday credit in the Euroclear Sweden system, subject to the same rules and procedures as applied by RB. The arrangement is tightly controlled by RB.

25. RB has not made banks subject to a reserve requirement and, thus, banks aim to have a zero balance with the central bank overnight (as at mid-March 2011 the banking sector is some SEK 11 billion long vis-à-vis RB—the latter makes fine-tuning operations each afternoon). To meet their liquidity needs for affecting payments, participants can obtain intraday credit from the central bank, free of interest against eligible collateral.

26. Intraday credit is provided by means of account overdrafts. Collateral delivered to RB are held in a pool—in a system called COLIN (which is closely interfaced with RIX); the value of the pool (daily mark-to-market and valuation) sets the maximum credit limit in RIX. Collateral can, where necessary, be added or substituted quickly.

27. Eligible collateral can be delivered to RB via Euroclear Sweden and via Euroclear Bank (also via links set up by the latter and approved by the Eurosystem). Subject to entering into an agreement with RB, participants from Denmark and Norway can make use of a so-called Scandinavian Cash Pool (SCP) and pay domestic currency cash to the RB’s account with their local NCB (possibly generated against collateral with the central bank concerned); participants may also deposit euros in RB’s account with the Deutsche Bundesbank. Once advised, RB assigns (daily) such currencies a collateral value (subject to haircuts) for credit in SEK in RIX.

28. The stock of eligible assets is very large (only some 1.7 percent of the eligible collateral is held with the central bank). Moreover, the current collateral framework would allow further assets to be added to the list, should a participant request to do so. RB accepts, subject to a rating threshold, debt instruments issued in OECD countries or currencies.

29. There is a good flow of payments throughout the day. The majority of payments are settled in accordance with the “Agreement on domestic settlement and netting between participants in the RIX system.” This includes times at which different types of clearing balances must be settled, which means that participants can plan and forecast when different types of payment will be made. The intraday pattern of payment is shown in Figure 3.

Figure 3.
Figure 3.

Sweden: RIX Traffic—Cumulative Intraday Distribution

(Average for period March 7–11, 2011)

Citation: IMF Staff Country Reports 2011, 285; 10.5089/9781463903565.002.A001

Source: Riksbank.

30. With regard to payments in RIX, payment flows are concentrated, with the four biggest banks accounting for some 75 percent of both value and volume processed.

31. Under the principles applied for pricing in the RIX system, the system must achieve full cost recovery (including such as fixed and running costs, capital cost, and overhead cost). RB covers 5 percent of total RIX costs; the rest is collected from participants. Moreover, 75 percent of the cost of the collateral processing system, COLIN, must be paid by the participants.

32. There is a one-off entry fee of SEK 125,000, a fixed monthly fee of SEK 70,000 for all participants, and an additional fixed fee of SEK 10,000 for all those who wish to receive credit. The transaction fee is SEK 4.50. In addition, to recover cost, it has been agreed with participants that a monthly sum of SEK 2,650,000 is shared between those institutions with a domestic income above SEK 1 billion. This sum is distributed on the basis of a “key” received once a year from the SBA.

V. Changes and Reforms in Process

33. Since the current RIX system has only been operational for some two years, there are not yet any plans for major changes.

34. There are two independent developments under way that may impact RIX in the future. First, there are considerations being made in RB regarding a possible outsourcing (to a third party) of all information technology (IT) operations—this would affect the location of primary and secondary sites and possibly their staffing. Second, RB together with some other central banks are engaged in a initiative by SWIFT to create a business continuity solution/service for payment systems using SWIFT communication, however, this work is still at an early stage.

VI. Main Findings—Summary

35. The mission conducted an assessment of the RIX system relative to the CPSIPS and confirmed a high degree of observance of these principles. The mission’s assessment points to opportunities for further improvements in the legal basis and in clearly defining and publicly disclosing its major policies with respect to systemically important payment systems to ensure full adherence to the CP.

36. Legal foundation (CP I). There is a generally sound legal basis and clear documentation for the system, with contractual force. Nevertheless, there are some very problematic uncertainties regarding finality and collateral security in Swedish legislation. The Settlement Finality and the Financial Collateral Directives have been transposed into Swedish legislation in a way deviating from what is foreseen in the directives. As a result, there is now certainty as regards netting, finality, and collateral for transactions completed before the opening of bankruptcy or reorganization procedures of a participating entity. However, there are uncertainties regarding the treatment of funds transfers and collateral transactions completed after, but within the same business day of such a court decision.

37. Understanding and management of risks (CPs II–III). As RIX is an RTGS system with central bank money as settlement asset, credit risk does not arise for participants in the system. RB is subject to credit risk to the extent it provides credit to participants; however, this risk is mitigated by it requiring collateral (subject to daily valuation and the application of haircuts) for any credit provided. As a result, the main financial risk to which participants are exposed is liquidity risk. To manage liquidity during the day, participants can obtain intraday credit from RB and they have a number of tools available in the system to control their payment flows.

38. Settlement (CPs IV–VI). Individual payments are settled on real-time gross basis in the RIX RTM module or in liquidity-saving mode (but still gross) in one of the five LOMs Settlement of payments takes place on a first-in first-out (FIFO) basis, but in a queue situation, settlement is in accordance with “FIFO- next first fit bypass.” Payments are settled with immediate finality.

39. Security and operational reliability and contingency arrangements (CP VII). RIX is a stable and reliable system with a good track record as regards availability. RIX security objectives and policies are documented, implemented, and tested. RIX operational and technical procedures are extensively documented in system documentation. There are two operational centers for RIX, although within limited geographical distance and with no guarantee that there will in all circumstances be staff available to operate the secondary site. Data is replicated in real-time and there is network redundancy between the two sites. There are technical back-up procedures to handle different types of operational interruption in the system. RB regularly organizes contingency testing exercises. Crisis management procedures are set out in a manual defining decisions, responsibilities and roles played by different actors.

40. Whereas the RB currently has a business recovery requirement of four hours, in view of increased national and international interdependencies, it may wish to consider moving to a more stringent requirement (such as two hours, as used in some major economies or currency areas).

41. Efficiency and practicality of the system (CP VIII). RIX being a state-of-the-art system, following experience from two years of live operation, its technical operation and business and liquidity management features have been welcomed with satisfaction by its users. There is a good flow of payments throughout the day. Whereas RB has adopted a full cost recovery principle, which is in line with best practice, participants’ overall cost (bank internal cost + fixed fees + transaction fee) for making a payment in RIX is relatively high.

42. Criteria for participation (CP IX). Access rules to payment and SSS represent an important element in the overall safety and efficiency management of such systems. They provide potential participants advance information, besides on technical matters, on type and regulatory arrangements for the institutions they would face as a participant in the system. The rules for participation in RIX are clear, objective, documented, and publicly available.

43. Governance of the payment system (CP X). The RB owns and operates the RIX system. Internal governance arrangements are clearly defined and documented. Documentation providing relevant information on the system and its operations is readily available both internally and to users; it is complete and is being kept up-to-date. The operational and oversight functions of RB are clearly separated. Two external structures ensure users are appropriately involved in issues related to the system and its further development: the RIX Council and the RIX User Group. Many regular monitoring reports are shared with the users—including those on availability and cost recovery. The RB also regularly conducts a customer satisfaction survey.

44. Central Bank responsibilities in applying the CPSIPS. As regards the RB’s oversight function, information published in 2001 gave an insight into the rationale for oversight, some information on the oversight work and the oversight standard applied. At the time, this was in line with good practice. However, since then, the financial system has gone through a fundamental evolution and become more complex. To provide for transparency and clarity, it will be beneficial to lay out and publish up-to-date and comprehensive information on the RB’s oversight objectives and policies, scope of oversight, standards applied and methodologies used, as well as on the distribution of responsibilities and work between the RB and FI.

45. For a number of years, all systemically important systems have been subject to annual oversight assessments, which have been published in full on RB’s website. Moreover, new systems, products or functions are also subject to an oversight review, but informally, before their going live. It should be considered to make the proactive reviews more formal and to inform the public of their existence and provide high-level information on the outcome. Formalizing change assessments could also allow for a move to somewhat lower frequency for the conduct of work-intensive, full-scale assessments.

46. RB lacks formal legal powers in relation to payment, clearing and settlement activities that are not operated by itself, therefore, as regards arrangements operated by other parties it can only use moral suasion in its endeavors to achieve its policy objectives. It would be desirable to provide in the statute the right to issue regulations (applicable to any relevant parties or activities) in conjunction with the RB’s critical payment, clearing and settlement system responsibility, arising from its central banking functions, which inherently underpin monetary policy and financial system stability.

47. As the Mission’s assessment points to opportunities for improved observance on several aspects of the relevant recommendations by the CCP, the RB and FI are encouraged to take more straightforward positions if and when they identify areas of concern in their assessments of market infrastructures, or in the event identified shortcomings would not be addressed within an appropriate period of time.

48. Moreover, oversight assessments of the RIX system are conducted by the RB alone, while those of other key infrastructures are conducted jointly with FI. The cooperation is guided by a high-level Memorandum of Understanding (MoU) between the two, which, however, could be further specified so as to clarify the division of responsibilities in view of avoiding overlaps or gaps in the assessment work.

49. Each recommendation was assessed on a qualitative basis based on a five-fold assessment categorization: observed, broadly observed, partly observed, non-observed, and not applicable. The categorization follows the guidelines in the assessment methodology. As a general principle a recommendation is considered observed whenever all assessment criteria are generally met without any significant deficiencies. A recommendation is considered broadly observed whenever only minor shortcomings are found, which do not raise major concerns and when corrective actions to achieve full observance with the recommendation are scheduled and realistically achievable within a prescribed period of time. A recommendation is considered partly observed whenever the shortcomings are sufficient to raise doubts about the ability to achieve observance within a reasonable time frame. A recommendation is considered non-observed whenever major shortcomings are found in adhering with the assessment criteria. Whenever a recommendation is assessed to be broadly, partly, or non-observed, suggestions are proposed for achieving full observance. Additional suggestions are made to go beyond observance and follow best practice. A recommendation is considered not applicable whenever it is judged not to apply given the structural, legal, and institutional conditions.

Table 3.

Sweden: Summary Observance of the CPSIPS and Central Bank Responsibilities in Applying the CPs

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Table 4.

Sweden: Detailed Assessment of Observance of CPSS Core Principles for SIPS and Central Bank Responsibilities in Applying the CPs—RIX

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Table 5.

Sweden: Summary Observance of CPSS Core Principles and Central Bank Responsibilities in Applying the CPs—RIX

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VII. Recommended Actions and Authorities’ Response to the Assessment

Recommended actions

50. The mission conducted an assessment of the RIX system relative to the CPSIPS and confirmed a high degree of observance of these principles. The mission’s assessment points to opportunities for further improvements in the legal basis and in clearly defining and publicly disclosing its major policies with respect to systemically important payment systems to ensure full adherence to the CP. Furthermore, while the mission’s assessment points to observance of a CP or central bank Responsibility in areas other than the above, attention should nevertheless be paid to the following issues.

Table 6.

Sweden: Recommended Actions to Improve Observance of CPSS Core Principles and Central Bank Responsibilities in Applying the CPs—RIX

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Authorities response

51. The Swedish authorities welcome the detailed assessment of the RIX system conducted by the IMF. We highly appreciate the insights and suggestions for improvements and overall we share the views expressed. The Swedish authorities would like to extend the following comments to some of the views highlighted in the assessment.

Core Principle 1–Legal foundation

52. As mentioned in the assessment, several authorities have highlighted perceived shortcomings in current law, and the Ministry of Finance is looking for a way to address these issues at first opportunity.

Core Principle VII–Operational risk

53. The Swedish authorities agree that the demands on security, operational reliability and contingency must be extremely high due to the RIX system’s importance for the Swedish financial market. However, the demands must be feasible and in accordance with the central bank’s size and resources. But in line with the recommendation from the IMF, improvements may be made and the Swedish authorities will request the operator of the RIX system to include the recommendations from the IMF in their current analysis on how the contingency arrangements for RIX can be strengthened.

Central banks responsibility A in applying the Core Principles

54. The Swedish authorities agree with the recommendations and work has been initiated that aims to make the oversight of the financial infrastructure more efficient and clear. The aim of such work is to publish a paper with comprehensive information regarding the Riksbank’s oversight role and to describe the roles of the Riksbank and Finansinspektionen.

1

This assessment was prepared by Tom Kokkola (European Central Bank).

Sweden: Financial Sector Assessment Program Update: Detailed Assessment of Observance on CPPS Core Principles for Systemically Important Payment (RIX)
Author: International Monetary Fund
  • View in gallery

    Sweden: The Main Market Infrastructure Components

  • View in gallery

    Sweden: Payment Flows in the Swedish Financial Infrastructure 2009

    (Indicative value in SEK billion per day)

  • View in gallery

    Sweden: RIX Traffic—Cumulative Intraday Distribution

    (Average for period March 7–11, 2011)