CPSS-IOSCO public information about Clearing Service.Austria

Logistik für Wertgestionierung und Transportkoordination Gesellschaft m. b. H. Results of the 2013 System Assessment CPSS-IOSCO public information about Clearing Service.Austria

Assessment Procedure The assessment was performed by the Austrian payment system oversight authority. Information including 89 documents was provided for the period between January 10th, 2013, and September 20th, 2013. In addition, workshops were held on March 19th, April 9th and May 7th, 2013. The data status is limited to September 20th, 2013. General Overview The GSA has operated Clearing Service.Austria (CS.A) since November 18th, 2011. The purpose of the clearing service is to process noncash interbank retail payments and domestic payment transaction messages. The core function of the system is to accept national interbank retail payments in defined formats, to process them, and to prepare and proceed with settlements. This means accepting payment orders from Austrian sending banks, and directly transferring them to Austrian receiving banks via CS.A. The individual payment orders are netted; only the net balances are settled. This method reduces both the number of transactions and the amount of liquidity required for settlement. CS.A is a payment system recognized under the Finality Act. Clearing positions are settled with finality in central bank money. I. SYSTEM OVERVIEW System Operator The GSA, which is headquartered at Garnisongasse 15, 1090 Vienna, Austria, operates CS.A. The OeNB holds most of the GSA s nominal capital (almost 90%); the remaining 10% are held by stakeholder banks. Company Background of GSA The GSA is a cash logistics provider operating across Austria. It operates as a one-stop supplier of cash solutions; cash-in-transit services are purchased from third parties. The GSA is 90% owned by the OeNB; the remaining 10% are held by 46 other proprietors. Costs are assigned among participants using the cost allocation procedure. Page 2 of 14

Organizational Structure Two executive managers are responsible for the operational management of the GSA. The organization chart below shows the GSA s internal structure: Chart 1 Organization Chart (Source: www.geldservice.at) Supervisory Board The Supervisory Board is bound to comply with the provisions of the Articles of Association and the decisions of the General Meeting. The members of the Supervisory Board are appointed by decision of the proprietors in the General Meeting. Supervisory Board meetings are called by the chair or the deputy chair and take place at least four times a year. Page 3 of 14

The management and the Supervisory Board of the GSA are supported by advisory committees the Advisory Board, FACS (the expert working group) and TACS (the technical working group) on issues related to CS.A. The following chart shows how these bodies interact. Supervisory Board Submission and approval of decisions Management Strategic advice Advisory Board Operational advice Submission of documents FACS Submission of documents TACS Chart 2 Advisory Bodies Clearing Service Advisory Board and Related Working Groups The Advisory Board supports the operation and further development of CS.A and issues recommendations to the management and the Supervisory Board. It acts as an expert and strategic working group that draws on specialists to develop and coordinate proposals to improve day-to-day operations and to promote the development of CS.A. Depending on the areas of responsibility to which they pertain, the proposals of the Advisory Board are submitted either to the management or to the Supervisory Board of the GSA for consideration and adoption. The Advisory Board coordinates the annual release plans and is in charge of proposals for developing new CS.A products. The Advisory Board comprises one representative each from BAWAG P.S.K., 3 Banken Gruppe, ERSTE Bank & Sparkassen, Raiffeisen Bankengruppe, UniCredit Bank Austria AG, Volksbank, OeNB, GSA and one representative to cover all credit institutions not directly represented. The Advisory Board meets at least twice a year and may be convened more frequently by the chair. Page 4 of 14

FACS The Clearing Services Expert Working Group FACS is tasked with discussing relevant expert issues, describing changes and analyzing problems through the cooperation of its members. The documents prepared by FACS are submitted to the Advisory Board as a basis for further decisions. Each of the banks participating in CS.A sends a representative to FACS meetings, which take place every four weeks. TACS The Clearing Services Technical Working Group TACS is tasked with discussing relevant technical issues, describing changes and analyzing problems through the cooperation of its members. TACS documents are submitted to FACS for further decision. Each of the banks participating in CS.A sends a representative to TACS meetings, which take place every two weeks. A general exchange of views on issues takes place between TACS and FACS. II. Description of System Operation Overview Clearing means the mutual netting and settlement of claims and liabilities. For this purpose, CS.A accepts payment orders from participating credit institutions. Centralized settlement greatly simplifies the clearing procedure. Chart 3 Clearing Payments are settled by offsetting, i.e. netting, the mutual obligations of participants in the system. This means that only the remaining net amount has to be settled between participants. Page 5 of 14

Transmission of Payment Orders Data, i.e. payment orders, are received and sent through CS.A in the form of files with defined formats. 1 File Bulk Bulk Bulk Payment Payment Payment Payment Payment Payment Chart 4 Relationship between Files Bulks Individual Payment Orders Every file consists of one or more bulks containing one or more individual payment orders. Validation of the Incoming Payment Orders Immediately after a payment order has been received, the files are validated by the system (checked for syntax errors, etc.). After validation, the system sends a confirmation message in which the participant is informed whether the batch delivered can be processed or whether errors have occurred, and if so, which ones. III. Cutoffs (Determination of Final Balances) Cutoffs for Payment Orders with Value Date D At the cutoff times (C1, C2, C3, C5 see chart 5) each participant s short or long position is calculated by netting. This final balance is the basis for settlement, which is debited or credited to the participant s TARGET2 account in the next settlement cycle. Moreover, the system automatically checks whether the participant has sufficient liquidity for settlement. The breakdown into several cutoff times serves to distribute the clearing load and takes participants liquidity management needs into account. Payment orders that are to be settled on the same day must be delivered by C5 at the latest. Any payment messages that are delivered later than that, are processed on the next business day 2 and the value date is automatically adjusted accordingly. 1 SEPA and EDIFACT. 2 Date on which interbanking transactions are performed; not every calendar day is a business day. Page 6 of 14

Prevalued Payment Orders Payment orders may also be delivered with a future value date. Such orders are warehoused until the processing cycle or processing date. Credit orders and debit orders are handled differently: Credit orders are transferred to the recipient at the cutoff time at which the final balance is determined and collaterized. If the respective participant does not have the required liquidity at the first cutoff time at which the final balance would be determined and collaterized (i.e. C4 at 2:30 p.m. at D-1), processing is moved to the next cutoff time, at 3:00 p.m. on the value date at the latest (i.e. C5 at D). By contrast, debit orders are always forwarded to the recipient at the cutoff time directly following the delivery of the order and providing the relevant selectivity (i.e. independently of value date D). The forwarded debit order is only included in the determination of final balances and their collateralization at the last cutoff time at D-1 (i.e. at C7 at 10:00 p.m.). In both cases, however, settlement is always at the value date. The chart below shows the time sequence: Chart5 Clearing Process during a Business Day: Overview of Cutoff Times Page 7 of 14

Settlement The net positions are sent to the settlement agent for settlement. Once the settlement system has successfully given the CS.A confirmation of the transfer of the net positions, the payment orders which have been received are considered final (irrevocable under the Finality Act). The TARGET2 3 system is used as the platform for the execution of settlement. In TARGET2, every direct participant uses a main account and a subaccount. Settlement in TARGET2 is performed by using the Ancillary System Interface (ASI) 4. Various procedures may be used within the ASI. CS.A uses procedure 6, 5 which allows settlement on dedicated accounts without being influenced by other payment procedures. To use this procedure, a TARGET2 subaccount must first be established for every direct participant. Processing follows settlement cycles (see chart 6): All processing cycles carried out during clearing and settlement, are closed once a day. The chart below illustrates the daily schedule for procedure 6: OPEN DAYLIGHT PROCEDURE Execution of Standing Orders 07:15 a.m. OPEN CYCLE Settlement of C4, C6, C7, C1 CLOSE CYCLE 08:00 a.m. OPEN CYCLE Settlement of C2 CLOSE CYCLE 09:00 a.m. OPEN CYCLE Settlement of C3 CLOSE CYCLE 12:45 p.m. OPEN CYCLE Settlement of C5 CLOSE CYCLE 03:00 p.m. CLOSE DAYLIGHT PROCEDURE Liquidity on subaccounts is retransfered 04:00 p.m. Close Night Time Procedure 07:05 a.m. Open Night Time Procedure Chart 6 Daily Settlement Schedule, Overview of Settlement Cycles Open Daylight Procedure: The required liquidity is transferred from the main accounts to the participants subaccounts. To this end, participants may set up standing orders, i.e. payment orders with a set amount. 3 Trans-European Automated Real-time Gross Settlement Express Transfer System; the second generation of the Eurosystem s real-time gross settlement system that has been in operation since 2007. The participants accounts are on the part of the TARGET2 platform which is used by the OeNB. 4 TARGET2 provides the ASI for specific participants, e.g. retail payment systems. The ASI makes it possible to send numerous payment orders to TARGET2 via SWIFT (in XML format). In a next step, TARGET2 processes all payment orders in a file one by one. 5 The ASI offers six different procedures: 1 Liquidity transfer, 2 Real-time settlement, 3 Bilateral settlement, 4 Standard multilateral settlement, 5 Simultaneous multilateral settlement, 6 Settlement on dedicated liquidity accounts. As procedure 6 makes it possible to settle on dedicated accounts (the subaccounts) without being influenced by other payment processes, CS.A uses this procedure. During settlement, a set of accounts (the subaccounts of CS.A participants) is exclusively available to the clearing service. Once settlement has been completed, the participants may use the remaining liquidity. Page 8 of 14

Open Cycle: Liquidity on the subaccounts is blocked. Settlement: the debit/credit positions determined by CS.A are entered on the participants subaccounts. Close Cycle: Liquidity on the subaccounts is unblocked. Close Daylight Procedure: Liquidity remaining on the subaccounts is transferred back to the main accounts. Several cycles are run in procedure 6. During the first cycle at 8:00 a.m., the night and D-1 cutoffs (C4, C6, C7 and C1) are settled; participants net positions per cutoff time are sent to TARGET2. The next cycles are during the D cutoff times C2, C3 and C5 at 9:00 a.m., 12:45 p.m. and 3:00 p.m., respectively; these serve to settle payment orders at the respective cutoff times. Between the individual cycles, participants may use current orders to transfer liquidity between their main accounts and their subaccounts. IV. Summary per Principle 6 Article 44a of the Federal Act on the Oesterreichische Nationalbank (Nationalbank Act) assigns the task of payment systems oversight to the OeNB. In its capacity as the public authority responsible for payment systems oversight, the OeNB, under constitutional law, is not bound by any instructions. The OeNB carries out its oversight function under the framework provided by the oversight policies set out by the Governing Council of the ECB, which are based on Article 127 (2) of the Treaty on the Functioning of the European Union as well as Articles 3 and 22 of the Statute of the ESCB and of the ECB. The main oversight objectives are to prevent system failure and to safeguard the efficiency and security of market infrastructures. On the basis of this authorization, the payment systems overseer assessed CS.A in 2013. In cooperation with the authority performing the assessment, Principles 6, 10, 11, 12, 14, 16, 20 and 24 were deemed not to be relevant for Clearing Service.Austria. Only the main information is presented in the summary of the assessment results. Principle 1. Legal basis An FMI 7 should have a well-founded, clear, transparent, and enforceable legal basis for each material aspect of its activities in all relevant jurisdictions. Summary The legal basis of CS.A draws on pertinent legal provisions and contractual agreements between the GSA and CS.A participants as well as between the GSA and the OeNB. These agreements are available on the GSA s website or on request. Especially areas requiring a high degree of legal certainty (participants rights, finality, netting, realization of collateral, 6 Principles for financial market infrastructures, http://www.bis.org/publ/cpss101a.pdf. 7 Financial market infrastructure. Page 9 of 14

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. 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. 4. Credit risk An FMI should effectively measure, monitor, and default procedures, liability, jurisdiction) are principally governed by the agreements cited. The Terms and Conditions of CS.A are clear and comprehensible; they have not resulted in any disputes between the GSA and CS.A participants. The payment systems oversight authority has recognized CS.A under the terms of the Finality Act. The governance arrangements of the GSA / CS.A are clearly defined and cover the role and composition of the Supervisory Board and of committees, the management structure, reporting lines between management and the Supervisory Board, the ownership structure, internal governance policy (TACS, FACS, Advisory Board), and processes for ensuring performance accountability. In line with the relevant Austrian laws, the performance of the Supervisory Board of the GSA is not assessed. As a rule, Supervisory Board decisions are not published. If decisions concern issues of public interest, an announcement is posted on the website or the media are informed. (see also principle 23 on disclosure rules) Risk management is an independent staff unit which reports directly to management. Reporting to the Supervisory Board includes information on risk management at least once a year. For the assessment of the risk management frameworks, see Principle 3. Mechanisms have been put in place to enable direct participants to be involved in the decision-making process of the Supervisory Board (TACS, FACS, Advisory Board). Risk management at the GSA is very basic. Measures to manage risk are essentially limited to IT issues and operational risk management. Other types of risk, such as legal risk, liquidity risk, etc., have remained largely unaddressed. The IT contingency handbook of the GSA is currently available only as a draft. Weaknesses of the IT infrastructure which have been identified, as well as risks caused by the dependence on downstream external systems, have partly tolerated without any measures being taken to correct these weaknesses (see also Principle 17 on operational risk). Although no formal decision has been taken to use the OeNB s ORION handbook (Risk and Crisis Management Handbook), de-escalation processes and cross-organizational crisis coordination processes are applied in line with the ORION framework. There is no credit risk for CS.A: Transactions are settled only if sufficient liquidity is available on the Page 10 of 14

manage its credit exposures to participants and those arising from its payment, clearing, and settlement processes. An FMI should maintain sufficient financial resources to cover its credit exposure to each participant fully with a high degree of confidence. 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. 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. 8. Settlement finality An FMI should provide clear and certain final settlement, at a minimum by the end of the value date. respective SSP subaccounts. Any overdrafts must be sufficiently collateralized before settlement (blocking of amounts or securities or a hybrid blocking arrangement on accounts). The settlement agent performs settlement via TARGET2 and settles balances resulting from clearing. The settlement agent offers CS.A the usage of liquidity per counterparty within a framework secured by collateral. The settlement agent is responsible for collateralization and control of collateralization. The securities used as collateral are deposited in the securities accounts that the participants hold with the settlement agent. The settlement agent is responsible for monitoring compliance of the deposited securities with the Terms and Conditions of the Oesterreichische Nationalbank Governing Monetary Policy Operations and Procedures. The purpose of these Terms and Conditions is to implement the Guideline of the ECB on monetary policy instruments and procedures of the Eurosystem. The guideline describes the securities ( eligible assets ) accepted as collateral. The list of eligible assets is updated daily on the ECB s website. If collateral has to be realized, the measures applicable in the event of a default on monetary policy-related refinancing operations are to be taken. The settlement agent is the interface between CS.A and the securities depository and is thus the main contact for the GSA. CS.A is not subject to liquidity risk, as only successfully collateralized transactions are settled. If collateralization should not be possible because the amount of liquid funds on the TARGET2 subaccount or on the HOAM.AT account is insufficient, or because the amount of securities in the custody account is insufficient, in a first step, the sent credit instructions of the illiquid participant are removed from the settlement process. If liquidity is still insufficient to cover the transaction after the payment in question has been removed, the debit instructions addressed to that participant are also removed. CS.A may also use an operating tool to monitor transactions itself. Most of the data delivered by the operating tool are also used to draw up statistics. Direct participants may also use a monitoring tool to review their messages, liquidity positions or other details relevant to messaging or settlement. CS.A is recognized under the Finality Act. The Finality Act determines that the defined moment of final settlement of transactions is determined by the rules of the system. This legally defined moment is laid Page 11 of 14

Where necessary or preferable, an FMI should provide final settlement intraday or in real time. 9. Money settlements An FMI should conduct its money settlements in central bank money where practical and available. If central bank money is not used, an FMI should minimise and strictly control the credit and liquidity risk arising from the use of commercial bank money. 13. Participant-default rules and procedures An FMI should have effective and clearly defined rules and procedures to manage a participant default. These rules and procedures should be designed to ensure that the FMI can take timely action to contain losses and liquidity pressures and continue to meet its obligations. 15. General business risk An FMI should identify, monitor, and manage its general business risk and hold sufficient liquid net assets funded by equity to cover potential general business losses so that it can continue operations and services as a going concern if those losses materialise. Further, liquid net assets should at all times be sufficient to ensure a recovery or orderly wind-down of critical operations and services. 17. Operational risk An FMI should identify the plausible sources of operational risk, both internal and external, and mitigate their impact through the use of appropriate systems, policies, procedures, and controls. Systems should be designed to ensure a down in the Terms and Conditions of CS.A. Settlement is performed four times a day in CS.A. The settlement process, settlement times, delivery times, etc. are precisely defined in the user manual and in the Terms and Conditions of CS.A. Principle 9 is only of limited relevance for CS.A, as transactions are settled exclusively in central bank money. The rules and procedures governing participant default are sufficiently documented (user manual, contingency manual, Terms and Conditions) and are available online to participants authorized to access GSA s wiki. In addition, the general eligibility criteria contain relevant information. CS.A has designated contacts for various contingency scenarios in the Austrian (AUT) contingency manual, which is currently being prepared. The rules and processes applicable to participant defaults are not published but available to participants only. There is no testing plan on how to deal with system or participant default. There is no detailed analysis of business risk or how to manage it. A cost allocation procedure applies to 85% of business cases (i.e. the costs are allocated to CS.A participants at the end of the year in accordance with their reported planned volume), which means that the proprietors would bear any unforeseen losses. Furthermore, the GSA rules out a major setback in sales, as minimum purchase volumes have been agreed with participants and only a limited shortfall below these thresholds is permissible. Company-wide retained earnings (not specifically earmarked for CS.A) are being made. Earnings will be retained until an amount of EUR 7 million is reached, a figure which is taken from the cash logistics area and which is based on the hypothetical loss of a security shipment. However, there are no calculations showing how long GSA would survive on its net liquid assets in various scenarios, or whether an orderly wind-down (for which no plans have been drawn up) would be possible. Processes to manage operational risk have been defined above all for the IT service provider to whom IT operations and IT development have been outsourced. The data center of the IT service provider is therefore certified to the international ISO/IEC 27001 standard, which guarantees that the defined Page 12 of 14

high degree of security and operational reliability and should have adequate, scalable capacity. Business continuity management should aim for timely recovery of operations and fulfilment of the FMI s obligations, including in the event of a wide-scale or major disruption. 18. Access and participation requirements An FMI should have objective, risk-based, and publicly disclosed criteria for participation, which permit fair and open access. 19. Tiered participation arrangements An FMI should identify, monitor, and manage the material risks to the FMI arising from tiered participation arrangements. 21. Efficiency and effectiveness An FMI should be efficient and effective in processes and guidelines are applied and that regular reviews and audits are performed. No regular reviews of CS.A s security concept or CS.A-specific security checks are provided for; reviews are performed ad hoc on order of the GSA. To prevent a single point of failure, CS.A is operated at two separate locations with redundant capacity of all critical components. Nevertheless, concrete operational goals have been defined (restart times in the event of hardware failures, benchmarks for cutoff times). The system hardware has sufficient capacity to handle peak activity volumes. Basic volume and overload tests are conducted to verify that capacity is sufficient. Moreover, appropriate tools are used to monitor the utilization rates of the IT environment reserved for CS.A use 24 hours every business day. The business continuity plan is based above all on the redundant capacity of all critical components at a secondary site. Business continuity tests are conducted within the framework of the IT service provider s contingency plan. At the organizational level, the GSA conducts business continuity tests itself. A business continuity handbook for participants with descriptions of the procedures for various crisis events is in the making. Participation requirements and suspension and orderly CS.A exit procedures are defined in the Terms and Conditions of the GSA for CS.A and in the user manual. They are objective and risk-based and therefore allow fair and open access for participants. The GSA, the settlement agent and the IT service provider all monitor compliance with participation requirements. CS.A offers the possibility of indirect participation and accessibility through routing. Data on indirect participants are submitted by way of the primary data form, and if an indirect participant has its own technical connection to CS.A, it is subject to the same fit and proper tests as well as connectivity tests as the connections of direct participants. The only difference between such indirect participants and direct participants is, in that case, that settlement is performed via the associated direct participant. CS.A keeps statistics on the transmission, processing, and settlement volumes of direct and indirect participants that show the relative importance of indirect participants. CS.A also maintains an overview of the number of indirect participants per direct participant. The market requirements for CS.A were identified by survey prior to system development and have been Page 13 of 14

meeting the requirements of its participants and the markets it serves. documented in specifications. Extensions of functionality within the framework of release management are also reported in this document. 22. Communication procedures and standards An FMI should use, or at a minimum accommodate, relevant internationally accepted communication procedures and standards in order to facilitate efficient payment, clearing, settlement, and recording. 23. Disclosure of rules, key procedures, and market data An FMI should have clear and comprehensive rules and procedures and should provide sufficient information to enable participants to have an accurate understanding of the risks, fees, and other material costs they incur by participating in the FMI. All relevant rules and key procedures should be publicly disclosed. Information about market developments is gleaned from available statistics and findings from working groups. CS.A uses the most widely used technologies (SWIFT and Connect:Direct) to receive and transmit data and for the interaction of participants with the system (Internet browser and SWIFTNet Browse). The internationally standardized SEPA format (ISO 20022) and specifically Austrian versions of the internationally standardized EDIFACT format are supported. General rules, a description of procedures in CS.A as well as CS.A participants and the GSA s rights and obligations are laid down mainly in the GSA s Terms and Conditions for CS.A (GB CS.A) and in the user manual, including its annexes, which represent part of the Terms and Conditions. Wiki and e-mail serve to disseminate information to participants. The rules on cost assignment (cost allocation procedure) and the service charges scheme are not published for the general public. General information about Clearing Service.Austria is available on the GSA s website at http://www.geldservice.at. Page 14 of 14