Compliance in Progress Summary

The Czech Express Real-Time Interbank Gross Settlement (CERTIS) is the Czech Republic's only payment system and, therefore, the country's sole systemically important payment system (SIPS). The system processes both retail and large-value transactions, according to a 2001 assessment conducted by the International Monetary Fund (IMF) and the World Bank (WB). The IMF/WB report, however, referred to the CERTIS system as the Clearing and Settlement Center of the Czech National Bank (CNB). The same report indicated that, as of 2001, the Czech Republic observed seven of the nine applicable Core Principles for SIPS as promulgated by the Committee on Payment and Settlement Systems, since Core Principle V is not applicable in the Czech context,. The country 'largely observed' the remaining two principles, with only minor shortcomings. The IMF/WB report also noted that all four principles regarding the central bank responsibilities were largely observed by the CNB. A new generation of CERTIS, which increases capacity and lowers operational costs, was introduced in late 2006, and the country continues to make progress in implementing the Single Euro Payment Area project. A 2007 report by the European Central Bank affirmed the CERTIS system's importance in the Czech Republic and noted that the Payment System Act and the Banks Act are the main laws governing payment systems in the country. Although the CERTIS system is currently the only existing payment system, the Payment System Act allows for the establishment of other payment systems in the country.

General Overview

In their 2001 report, the International Monetary Fund (IMF) and the World Bank (WB) concluded that the Czech Republic observed seven of the nine applicable Core Principles for Systemically Important Payment Systems (CPSIPS) as promulgated by the Committee on Payment and Settlement Systems (CPSS). Based on the IMF/WB's assessment, Core Principle V is not applicable in the Czech context, and the country 'largely observed' the remaining two principles with only minor shortcomings. The same report also noted that all four principles regarding the central bank responsibilities were being largely observed by Czech National Bank (CNB). The Czech Express Real-Time Interbank Gross Settlement (CERTIS) system is owned and operated by the CNB. According to a 2007 report by the European Central Bank (ECB) titled "Payment and Securities Settlement Systems in the European Union: Non-Euro Area Countries,” CERTIS is the only interbank payment system that processes interbank payments in the local currency, the Czech Koruna. CERTIS is therefore the only recognized systemically important payment system of the country. CERTIS draws its legal framework from the Payment System Act and the Banks Act.

In an effort to meet the increasing demand on CERTIS' capacity and reduce operational costs, according to the CNB's 2006 Financial Stability Report, a newer more upgraded version of CERTIS was introduced and became operational in November 2006. This upgrade has allowed for a reduction in fees for participants and decrease in the risk of system overload. The new system processes up to one million transactions per hour, compared to the old system's capacity of 400,000 transactions. Finally, the introduction of the new system did not disturb or change the data transfer format for banks. According to the CNB’s 2008/2009 Financial Stability Report, the number of transactions processed through CERTIS amounted to 411 million in 2007 and 436 million in 2008. This represented an average daily turnover of 697 billion Koruna and 644 billion Koruna, respectively. representing 151,537 billion Koruna. The average daily number of transactions has increased steadily since 2002. The same report also states that CERTIS ran smoothly throughout 2008.

All oversight responsibilities for payments system are carried out by the CNB, which has the legal power to supervise and license newly introduced payments systems, according to the 2007 ECB report. The Czech payment system is governed by the 2002 act, also known as the Payment System Act. This act, which came into effect on January 1, 2003, regulates transfers of funds, electronic payment instruments, and payment systems. There are three parts to the act. The first component oversees the transfers of funds in the local currency within the country. The second part governs the use of electronic payment instruments and spells out the legal definitions of an "electronic payment instrument," an "electronic money instrument," and "electronic money." The last component supervises the establishment of payment systems and rights of participants involved, regardless of the currency. The Banks Act was amended in 2007 to make it compliant with the European Union's (EU) regulatory environment with regard to the banking sector. One of the major changes stemming from the new amendment is that banks are no longer required to process their interbank payments exclusively through the CERTIS system. The 2007 ECB report notes that amendments to various laws related to the payment system (Civil Code, Commercial Code, Bankruptcy Act, and the Act on International Civil Law and Civil Procedure) became effective in early January 2003.

The CERTIS system, according to the 2007 ECB report, is based on the following principles: real-time gross settlement (RTGS); settlement of interbank payments in the local currency, regardless of the amount; settlement in central bank money on accounts held at CNB; direct participation by banks and by savings and credit cooperatives; and the irrevocability and finality of all transactions accepted by the system. Uncovered transactions are neither settled nor rejected, but held in a queue (with two priority levels); no overdrafts are permitted. The 2007 ECB report lists two types of payment mechanisms: cash payments and non-cash payments. Cash payments (banknotes or coins) are available and distributed at banks, post offices, and via ATMs. There is a range of instruments for non-cash payments, some of which are credit transfers, direct debits, checks, and payment cards (debit cards). According to the CNB's 2006 Financial Stability Report, the Single Euro Payment Area (SEPA), which is a voluntary initiative of commercial banks, will allow participants "to execute any euro payment transfer from a bank account or by card under the same conditions as in the existing national payment systems" (p. 37). Implementation of the project has started in the Czech Republic and has been broken into several steps covering the period 2008-2010 at which point the country expects to be SEPA-compatible.

The Principles

CPI. The system should have a well-founded legal basis under all relevant jurisdictions.

The 2001 IMF/WB assessment on payment systems concluded that the Czech payment system largely observes this principle. The report observed that the Payment Systems Act, which at the time was soon expected to be passed, would incorporate such requirements as: (1) irrevocable settlement; (2) a proper bankruptcy policy; and (3) provide licensing and oversight capabilities for the CNB for private interbank payment mechanisms. The 2002 Payment System Act has been effective since 2003 and has aligned the Czech payments system with the requirements of the EU, according to the 2007 ECB report. There are three parts to the act. The first component oversees transfers of funds in the local currency within the territory of the country. The second part governs the use of electronic payment instruments and spells out the legal definitions of an "electronic payment instrument," an "electronic money instrument" and "electronic money." The last component supervises the establishment of payment systems and rights of participants involved, regardless of the currency. The Banks Act was amended to make it compliant with the EU regulatory environment.

The 2008 World Bank report by Cirasino and Garcia observes that the Czech Republic exhibits a “high level of development” (p. 23) in its legal and regulatory framework on payment systems. The World Bank’s 2008 payment systems snapshot notes in its appendix that legal provisions in the Czech Republic cover: (1) clarity of timing of final settlement especially when there is an insolvency; (2) legal recognition of (bilateral and multilateral) netting arrangements; (3) recognition of electronic processing payments; (4) the non-existence of any zero hour or similar rules; (5) enforceability of security interests provided under collateral arrangements and of any relevant repo agreements; and (6) protection from third-party claims of securities and other collateral pledged in a payment system.

FCII. The system's rules and procedures should enable participants to have a clear understanding of the system’s impact on each of the financial risks they incur through participation in it.

According to the 2001 IMF/WB assessment on payment systems, the Czech Republic fully observes this principle. The report noted that all transactions processed in the Czech payment system are final and irrevocable. The country's payment system has a modern and advanced infrastructure that reduces the systemic risk involved in payment transfers. Regardless of the legal or financial status at the time a bank sends a transfer, that transaction is protected and covered by deposits retained at the CNB or high quality securities pledged to the CNB.

FCIII. The system should have clearly defined procedures for the management of credit risks and liquidity risks, which specify the respective responsibilities of the system operator and the participants and which provide appropriate incentives to manage and contain those risks.

According to the 2001 IMF/WB assessment on payment systems, the Czech Republic fully observes this principle. The report indicated that credit risk as a result of a transfer channeled through the CERTIS system is nonexistent and there are no liquidity risks as all transfers are final and irrevocable.

The World Bank’s 2008 payment systems snapshot notes in its appendix that sources of liquidity in the CERTIS system are provided by: (1) opening balances and funds received from other participants during the day; (2) participants’ entire reserve requirements balance during the day; and (3) credit granted by CERTIS, either in the form of a loan or a repo. To control credit risk exposure in the system, high quality collateral is required in all cases. In the case that intraday liquidity is not repaid at the end of the operational day, the central bank transforms intraday credit into overnight credit at penalty rates. If a participant does not have enough balance (and/or credit) in its current account to process new payments, the payment order will go into a queue for later processing.

FCIV. The system should provide prompt final settlement on the day of value, preferably during the day and at a minimum at the end of the day. (Systems should seek to exceed the minima included in this Core Principle.)

The 2001 IMF/WB assessment on payment systems concluded that the payment system in the country fully observes this principle. Since the CERTIS system is a RTGS system, each incoming transfer automatically generates a credit in the settlement account of the receiving bank. According to the 2007 ECB report, payments are processed only when CERTIS is able to confirm that the sending bank's account has sufficient funds to cover the transaction. If there are insufficient funds to cover a payment, the transaction is placed in the "hold queue" and information related to queued payments is transmitted to the sending bank. Information about queued payments is accessible for the bank in question to monitor and correct the problem.

IIV. A system in which multilateral netting takes place should, at a minimum, be capable of ensuring the timely completion of daily settlements in the event of an inability to settle by the participant with the largest single settlement obligation. (Systems should seek to exceed the minima included in this Core Principle.)

The only payment system in the country is the CERTIS system, which is an RTGS system. Therefore, this principle does not apply to the Czech Republic.

FCVI. Assets used for settlement should preferably be a claim on the central bank; where other assets are used, they should carry little or no credit risk and little or no liquidity risk.

According to the 2001 IMF/WB assessment on payment systems, the Czech Republic fully observes this principle. The report noted that "the assets used for settlement are claims on the central bank" (p. 163).

FCVII. The system should ensure a high degree of security and operational reliability and should have contingency arrangements for timely completion of daily processing.

According to the IMF/WB's 2001 assessment, the Czech Republic fully observes this principle and there is a high degree of security in the country's payment system. The report further noted that security procedures and contingency plans are frequently reviewed and tested by the authorities.

The 2008 report by Cirasino and Garcia observes that the Czech Republic exhibits a “medium-high level of development” (p. 31) in its system design as it relates to safety, soundness, and efficiency of the system. The World Bank’s 2008 payment systems snapshot indicates in its appendix that for the Czech Republic’s large value payment systems, routine procedures are in place for periodical data backups. Data storage media is kept in sites other than the main processing site and a fully equipped alternate processing site exists. The report also notes that the CNB has documented a formal business continuity plan, which includes procedures for information dissemination and for crisis management, and the business continuity arrangements are regularly tested.

FCVIII. The system should provide a means of making payments which is practical for its users and efficient for the economy.

According to the IMF/WB's 2001 assessment, the Czech Republic observes this principle. The report noted that the per-transaction fee set by the CNB is low. According to the 2007 ECB report, fees are set to cover in part the operational cost of CERTIS. As of the time of writing of the ECB report, the per-transaction fee was very low for a payment processed during the first half of the accounting day and very high for transactions coming in at the end of the day, 0.008 euro and up to 3.53 euro, respectively. However, according to the CNB’s 2008 Annual Report, fees were reduced at the beginning of 2008, though the report did not say by how much.

The World Bank’s 2008 payment systems snapshot indicates in its appendix that CERTIS fees aim to fully recover operational and investment costs, and that the investment costs are estimated to be recovered in five years.

FCIX. The system should have objective and publicly disclosed criteria for participation, which permit fair and open access.

According to the IMF/WB's 2001 assessment, the Czech payment system fully observes this principle. Direct and full participation is allowed in CERTIS. The 2007 ECB report states that participants are of two types: direct participants and third parties. The direct participants are generally banks, domestic or subsidiaries of foreign banks, which hold a license to operate in the Czech Republic. As of early 2007, there were 39 such banks in the country and each has one interbank payment account with the CNB, where the interbank payment system is housed. The second type of participant, third parties or non-bank financial institutions, can submit and/or request payments from CERTIS to transfer funds between direct participants, with the permission of the latter. According to the appendix of the World Bank’s 2008 payment systems snapshot, access to the Czech payment system is granted on the basis of institutional standing, and formal rules exist to allow the central bank to exclude a participant.

CPX. The system's governance arrangements should be effective, accountable and transparent.

According to the 2001 IMF/WB assessment, the Czech Republic largely observes this principle. The report noted that there is clear disclosure of information on the system, and decisions are made only after consultations with a standing committee of the Czech Banking Association. Important decisions are properly communicated to the system's participants. The same report suggested that "the CNB should publish aggregate information on its emergency support to troubled banks, and should provide adequate legal protection for its officials while they are performing payment-related duties" (p. 164).

CPA. 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.

The 2001 IMF/WB assessment gave the Czech Republic a single assessment of “largely observed” for Principles A through D. The report noted that "the monetary and payment system objectives of the central bank are [set] in Section 2 of the National Bank Act" (p. 164). According to the 2007 ECB report, Article 98 of the Constitution states that the CNB's principal objectives are price stability and the obligation to regulate the payment system. Article 2(2) of the Act on the Czech National Bank gives the CNB various legal powers, including the administration of payments and clearing between banks and the efficiency of payment systems. The recommendation made in the 2001 IMF/WB assessment was for the authorities to produce a "well-designed booklet on the [payment system, which] should be written for a wide audience in the Czech Republic and abroad" (p. 164). The World Bank’s 2008 payment systems snapshot indicates in its appendix that the CNB’s payment system objectives only include the safety and efficiency of relevant payment systems.

CPB. The central bank should ensure that the systems it operates comply with the Core Principles.

The 2001 IMF/WB assessment gave the Czech Republic a single assessment of “largely observed” for Principles A through D. CERTIS, which is operated by the CNB, either observes or largely observes all relevant Core Principles.

The World Bank’s 2008 payment systems snapshot indicates in its appendix that oversight is performed over all systemically important payment systems, which in the Czech Republic’s case is only CERTIS. Meanwhile, the 2008 World Bank report by Cirasino and Garcia observes that the Czech Republic exhibits a “medium-low level of development” (p. 51) in its payment system oversight.

CPC. The central bank should oversee compliance with the Core Principles by systems it does not operate and it should have the ability to carry out this oversight.

The 2001 IMF/WB assessment gave the Czech Republic a single assessment of “largely observed” for Principles A through D. There are presently no other systemically important payment systems in the country, which makes this principle inapplicable to the Czech Republic, according to the report. Under the Payment System Act, according to the 2007 ECB report, the CNB has the jurisdiction to oversee the CERTIS system in addition to any newly introduced payment systems, which would have to be licensed by the CNB.

CPD. 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 2001 IMF/WB assessment gave the Czech Republic a single assessment of “largely observed” for Principles A through D. According to the report, the CNB maintains a dialogue with officials from the ECB regarding the country's progress on its payments system for accession to the EU. The report also noted that the Czech authorities have a good functioning relationship with the officials of the U.S. CHIPS system. The World Bank’s 2008 payment systems snapshot indicates in its appendix that Czech cooperation with relevant authorities occurs mostly in an ad hoc/informal basis.