Enacted Summary

The Real-Time Gross Settlement (RTGS) System, the FGM Netting System, and the Securities Settlement System are the three systemically important payment systems in Iceland. In 2001, the International Monetary Fund (IMF) evaluated the RTGS system and the FGM system in its Financial System Stability Assessment (FSSA) on Iceland, and found that the RTGS system “observed” or “largely observed” five out of the ten Core Principles for Systemically Important Payment Systems (CPSIPSs) promoted by the Committee on Payment and Settlement Systems (CPSS), while the FGM system “observed” or “largely observed” four of the ten CPSIPSs. The other principles were either materially not observed or not observed by Iceland. Similarly, the assessment found that the country did not observe the requirements for central bank responsibilities. In its 2001 report, the IMF recommended that the Central Bank of Iceland (CBI) and the Financial Supervisory Authority (FME) clarify their respective supervision and oversight roles of the payment systems; the CBI be empowered to issue payment system rules and regulations; payment system access criteria be published; adequate collateral be required for CBI lending to banks; and risk management be strengthened. In 2003 the IMF updated its FSSA and observed that the CBI has been assigned oversight responsibility over payment systems and rules-making powers by the 2001 Central Bank Act. The CBI has also strengthened RTGS risk management, required sufficient collateral security, and coordinated with the FME regarding system oversight and supervision. As the IMF comments in its latest 2008 FSSA update, Iceland has followed the recommendations set forth in the 2001 IMF FSSA and corrective actions for the payment system have been broadly implemented.

General Overview

The International Monetary Fund (IMF) evaluated Iceland’s payment systems in its Financial System Stability Assessment (FSSA) in 2001, and updated the assessment in 2003 and again in 2008. The 2001 IMF assessment found that Iceland’s real-time gross settlement (RTGS) system “observed” or “largely observed” (p. 63) five out of the ten Core Principles for Systemically Important Payment Systems (CPSIPSs) promoted by the Committee on Payment and Settlement Systems (CPSS), while Iceland’s net settlement system (FGM) “observed” or “largely observed” (p. 63) four of the ten CPSIPSs. The IMF recommended that the Central Bank of Iceland (CBI) and the Financial Supervisory Authority (FME) clarify their respective supervision and oversight roles of the payment systems; the CBI be empowered to issue payment system rules and regulations; payment system access criteria be published; adequate collateral be required for CBI lending to banks; and risk management be strengthened. The 2001 IMF report notes that “a number of initiatives have been taken, which indicates that all principles are likely to be observed by the end of 2001” (p. 60). The 2003 IMF Update notes that Article 4 of the 2001 Central Bank Act assigns the CBI with oversight responsibility over payment systems and rules-making powers. The CBI has strengthened RTGS risk management, required sufficient collateral security, and coordinated with the FME regarding system oversight and supervision. Moreover, a 2008 IMF FSSA update on Iceland states that payment systems have been further enhanced “with rules to help participants monitor their risks and with tools to manage central bank risks” (p. 32). The 2008 IMF report comments that IMF’s 2001 FSSA recommendations are followed and “corrective actions for the payment system have been broadly implemented” (p. 32).

According to the CBI website and its 2008 annual report, there are currently three systemically important payment systems in Iceland: the Real-Time Gross Settlement System, the FGM Netting System, and the Securities Settlement System. Administered by the CBI, the RTGS system is the largest and most important of the three. It settles payments between participants or financial institutions in amounts of 10 million Icelandic krónur or more. The transactions are carried out through participants’ central bank accounts in real time, given that there is sufficient balance in these accounts. The FGM Netting system processes retail payments which are less than 10 million Icelandic krónur and is administrated by Fjölgreidslumidlun. The FGM operates 24 hours a day and transmits payments between financial institutions and their customers. The Securities Settlement System is administered by the Icelandic Securities Depository and handles the settlement of securities transactions. The final settlement from both the FGM and Securities Settlement systems takes place through the RTGS system. The CBI acts as an overseer and settlement provider for all three systems. The CBI website states that systemically important payment systems in Iceland are expected to comply with international and domestic requirements, including the 10 Core Principles for Systemically Important Payment Systems, European Union law and directives on payment intermediation, as well as the Icelandic regulatory framework.

Based on the results of the World Bank’s Global Payment Systems Survey 2008, Cirasino and Garcia’s 2008 report, “Measuring Payment System Development,” evaluates Iceland's compliance with four distinct sub components which are broadly based on the Committee on Payment and Settlement Systems' CPSIPSs. The four components of the Cirasino and Garcia assessment are (1) the legal and regulatory framework; (2) large-value payment systems; (3) retail payment systems; and (4) the enabling environment for the payment system oversight function. The first component, the legal and regulatory framework, covers Core Principle (CP) I and to some extent CP II. The second component large-value payment systems "is based on two subcomponents: (a) system design and key policy decisions that affect the safety, soundness and efficiency of the system; and, (b) the actual usage of the large-value system in terms of the share of the settlement throughput that flows through the system being rated versus other systems that process large-value payments" (p. 5). This component addresses aspects of CP III through CP X. The third component consists of two sub-components: (a) infrastructure and policy, and (b) extensiveness and inherent efficiency of retail payment instruments used. The fourth component basically focuses on the Central Bank's payment system oversight function. The 2008 report by Cirasino and Garcia concludes that Iceland achieves a "high level of development” (p. 23) for component one, and “medium-high levels of development” (p. 31 & p. 51) for component two and four. The third component for retail payment system is rated “medium-high level of development” (p. 41) for its infrastructure and policy, and “high level of development” (p. 43) for its extensiveness and inherent efficiency.

Based on European Union Directive 98/26/EC on Settlement Finality in Payment and Securities Settlement Systems, the Act on the Security of Transfer Orders in Payment Systems of 1999 sets forth in detail the CBI’s rules on the operations of netting systems and the RTGS system. The 2008 World Bank report states that legal provisions in Iceland cover all major areas, such as: (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 of 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 (p. 6). These provisions apply to all systemically important payment systems in the country.

The CBI issued the Rules on the Central Bank of Iceland Real-Time Gross Settlement System and the Rules on the Activities of Netting Systems in 2003, and both sets of rules were reviewed in 2007 and again in end 2008. A 2008 World Bank publication notes that Iceland released new regulations for payment systems in April 2007, reformed its retail payment system in April 2007 from being bilateral to multilateral and improved statistics from the system, as well as reformed its securities settlement system to incorporate new European settlement feature. These reforms are aimed to reduce systemic risk, improve the overall efficiency of the payment system, provide better payment and settlement services for the market, and respond to technological innovations. At the time of the World Bank report, the legal framework's reform was in “implementation” (p. 253), and for the securities settlement system, “requirements/functionalities have been defined” (p. 274) and the system is under development.

As mentioned above, by virtue of Article 4 of the 2001 Central Bank Act, the CBI carries out systemic oversight and supervision of payment systems, including setting system rules and requirements. The CBI and the Financial Supervisory Authority have clarified the division of tasks and their respective roles in payment system supervision through a cooperation agreement. The Financial Supervisory Authority ensures that individual participants in payment systems meet set requirements. Meanwhile, the Icelandic Banks' Data Centre (RB) carries out the technical operation and provides software services for all three systemically important payment systems.

The 2008 World Bank publication mentions that in exerting payment system oversight, the central bank cooperates with other relevant authorities through regular meetings, exchange of opinions and views, regular information exchanges, prior notice of regulatory action, joint inspections, or on an informal/ad-hoc basis. Cooperation with relevant authorities is ensured through a formal mechanism, such as a memorandum of understanding or requirement of law. The central bank holds regular meetings with senior levels of stakeholders to discuss strategic issues for payment systems; the central bank also consults stakeholders on particular operational issues on a bilateral basis or through creating an ad-hoc task force or working group. Further, on its website the CBI states that it closely cooperates with other Nordic countries and the European Union Member States. According to the CBI website "several Icelandic financial institutions, in addition to the Icelandic Securities Depository, have applied for access to TARGET2, and it is expected that the Icelandic banking system will become a member of the TARGET2 system by year-end 2008. This will give Icelandic financial institutions and the Icelandic Securities Depository access to monetary settlement of securities transactions in euros." Similarly, the website states that "the Icelandic Securities Depository and the Central Bank of Iceland are auditing members [of TARGET2-Securities] and can follow the progress of the project indirectly."

According to the CBI website, electronic instruments, cash, and checks are the most common payment instruments in Iceland. The 2008 report by Cirasino and Garcia indicates that check systems are not used commonly for large-value payments in Iceland, and that the RTGS system processes over 90 percent of total value settled through the RTGS system and the check system combined. The total turnover (deposits and withdrawals) in the RTGS system in 2008 was 164,978 billion Icelandic krónur, or 1,300 billion USD. Four Icelandic financial institutions applied for and were granted membership of the RTGS system in 2008, bringing the total number of RTGS system participants to 10 (including the Central Bank), mentions the CBI’s 2008 Annual Report.

The Principles

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

There are three systemically important payment systems in Iceland: the Real-Time Gross Settlement System, the FGM Netting System, and the Securities Settlement System. The 2001 IMF FSSA finds that both the RTGS system and the FGS system “observed” (p. 63) Principle I. The 2008 report by Cirasino and Garcia concludes that Iceland achieves a "high level of development” (p. 23) for the legal and regulatory framework component for payment systems.

Based on Directive 98/26/EC on Settlement Finality in Payment and Securities Settlement Systems, the Act on the Security of Transfer Orders in Payment Systems of 1999 sets forth the CBI’s rules on the operations of netting systems and the RTGS system in detail. The 2008 World Bank report states that legal provisions in Iceland 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 of 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 (p. 6). These provisions apply to all systemically important payment systems in the country.

The CBI issued the Rules on the Central Bank of Iceland Real-Time Gross Settlement System and the Rules on the Activities of Netting Systems in 2003, and both sets of rules were reviewed in 2007 and again in end 2008. A 2008 World Bank publication notes that Iceland released new regulations for payment systems in April 2007, reformed its retail payment system in April 2007 from being bilateral to multilateral and improved statistics from the system, as well as reformed its securities settlement system to incorporate new European settlement feature. These reforms are aimed to reduce systemic risk, improve the overall efficiency of the payment system, provide better payment and settlement services for the market, and respond to technological innovations. At the time of the World Bank report, the legal framework's reform was in “implementation” (p. 253), and for the securities settlement system, “requirements/functionalities have been defined” (p. 274) and the system is under development.

IIII. 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.

There are three systemically important payment systems in Iceland: the Real-Time Gross Settlement System, the FGM Netting System, and the Securities Settlement System. The 2001 IMF FSSA found that Principle II was “materially non-observed” (p. 63) by the RTGS system and the FGS system. The IMF recommended that payment system rules be published and adequate collateral be required for CBI lending. The 2003 IMF FSSA update notes that sufficient collateral is now being required. Moreover, the CBI issued the Rules on the Central Bank of Iceland Real-Time Gross Settlement System and the Rules on the Activities of Netting Systems in 2003, and both sets of rules were reviewed in 2007 and again in end 2008. Further, the 2008 IMF report notes that Iceland has incorporated the FSSA's 2001 recommendations and “corrective actions for the payment system have been broadly implemented” (p. 32). The CBI website states that systemically important payment systems in Iceland are expected to comply with international and domestic requirements, including the 10 Core Principles for Systemically Important Payment Systems, European Union law and directives on payment intermediation, as well as the Icelandic regulatory framework. Nevertheless, none of the publicly available sources since the 2001 assessment directly address Iceland's compliance with this principle.

IIIII. 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.

The 2001 IMF FSSA found that Principle III was “materially non-observed” (p. 63) by the RTGS system and the FGS system. Same as for Principle II, the IMF suggested that payment system rules be published and adequate collateral be required for CBI lending. The 2003 IMF FSSA update notes that sufficient collateral is now being required. Moreover, the CBI issued the Rules on the Central Bank of Iceland Real-Time Gross Settlement System and the Rules on the Activities of Netting Systems in 2003, and both sets of rules were reviewed in 2007 and again in end 2008. The 2008 report by Cirasino and Garcia observes that Iceland exhibits “medium-high level of development” (p. 31) in the assessment's large-value payment systems component for payment systems. This component, to some extent, covers the requirements of this principle. Further, the 2008 IMF report notes that Iceland has incorporated the FSSA's 2001 recommendations and “corrective actions for the payment system have been broadly implemented” (p. 32). Nevertheless, none of the publicly available sources since the 2001 assessment directly address Iceland's compliance with this principle.

The 2008 World Bank report notes that sources of liquidity in the RTGS system are provided by: (1) opening balances and funds received from other participants during the day, and (2) current account overdrafts. To control credit risk exposure in the system, the CBI requires high quality collateral in all cases. In the case that intraday liquidity is not repaid at the end of the operational day, the central bank will seize the collateral, and transform the intraday credit into overnight credit at market rates. If a participant does not have enough balance (and/or credit) in its current account to process new payments, the payment order is rejected immediately.

ENIV. 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 FSSA found that Principle IV was “observed” (p. 63) by the RTGS system and not observed by the FGS system. The IMF report noted that “decision to change the FGM settlement time to the day of value [was] expected before end September 2001” (p. 63). The CBI website states that presently transactions in the FGM system is settled in the RTGS system on banking days at 8:30 and 17:00. The 2008 report by Cirasino and Garcia observes that Iceland exhibits “medium-high level of development” (p. 31) in the assessment's large-value payment systems component for payment systems. This component, to some extent, covers the requirements of this principle.

ENV. 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 2001 IMF FSSA found that Principle V was not applicable to the RTGS system and “materially not observed” (p. 63) by the FGS system. The IMF report noted that the requirement was to be met at the end of 2001. The CBI website states that the FGM system is settled in the RTGS system on banking days at 8:30 and 17:00. The 2008 IMF report notes that Iceland has incorporated the FSSA's 2001 recommendations and “corrective actions for the payment system have been broadly implemented” (p. 32). The 2008 report by Cirasino and Garcia observes that Iceland exhibits “medium-high level of development” (p. 31) in the assessment's large-value payment systems component for payment systems. This component, to some extent, covers the requirements of this principle.

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.

The 2001 IMF FSSA found that Principle VI was “observed” (p. 63) by both the RTGS system and the FGS system.

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

The 2001 IMF FSSA found that Principle VII was “largely observed” (p. 63) by both the RTGS system and the FGS system. The IMF report recommended that the contingency arrangements be tested regularly. The 2008 IMF FSSA update notes that IMF’s 2001 FSSA recommendations are followed and “corrective actions for the payment system have been broadly implemented” (p. 32).

The 2008 World Bank publication on payment systems worldwide indicates in its appendix that, in Iceland’s large value payment systems, routine procedures are in place for periodic data back-ups. Data storage media is kept in sites other than the main processing site and back-up servers have been deployed at the main processing site. A fully equipped alternate processing site exists. The report also notes that the CBI 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. The CBI’s 2008 Financial Stability report notes that “in recent years, increased emphasis has been placed on contingency matters related to payment intermediation, and contingency exercises have been held in accordance with this sharpened focus” (p. 79).

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

The 2001 IMF FSSA found that Principle VIII was “largely observed” (p. 63) by both the RTGS system and the FGS system. The IMF report noted that the systems seemed to be “efficiently organized” (p. 62), but since the CBI guaranteed the settlement of the payment system, the systems did not meet the efficiency criteria in full. This guarantee of settlement of the CBI was expected to disappear at the end of 2001. The 2008 IMF report notes that Iceland has incorporated the FSSA's 2001 recommendations and “corrective actions for the payment system have been broadly implemented” (p. 32). In addition, the CBI’s 2008 Financial Stability report notes that “the tariff for the RTGS system has been revised, and fees now cover all costs for the operation of the system” (p. 43).

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

The 2001 IMF FSSA found that Principle IX was not observed by either the RTGS system nor the FGS system. The IMF recommended that the access criteria be published. According to the appendix of the 2008 World Bank publication on payment systems worldwide, there is an explicit access/exclusion policy for payment systems in Iceland; access is granted on the basis of institutional standing and the fulfillment of a set of objective criteria; and formal rules exist to allow the operator to exclude a participant timely. Further, the 2008 IMF report notes that Iceland has incorporated the FSSA's 2001 recommendations and “corrective actions for the payment system have been broadly implemented” (p. 32). Nevertheless, the source does not directly address Iceland's compliance with this principle.

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

The 2001 IMF FSSA found that Principle X was not observed by either the RTGS system nor the FGS system. The IMF recommended that the CBI should define clearly its payment system objectives, and that information about the system should be made public. As an update, a 2003 IMF report notes that Article 4 of the 2001 Central Bank Act assigns the CBI with oversight responsibility over payment systems and rules-making powers. Moreover, a 2008 IMF FSSA update on Iceland states that “transparency has been improved with information about systems and central bank oversight” (p. 32). The 2008 IMF report notes that Iceland has incorporated the FSSA's 2001 recommendations and “corrective actions for the payment system have been broadly implemented” (p. 32). Nevertheless, none of the publicly available sources since the 2001 assessment directly address Iceland's compliance with this principle.

IIA. 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.

In its 2001 FSSA, the IMF concluded that the CBI does not observe this principle. The report stated that the CBI should define clearly its payment system objective, make sure the payment systems comply with all 10 principles, and clarify with the FME their respective roles in the payment system. As an update, a 2003 IMF report notes that Article 4 of the 2001 Central Bank Act assigns the CBI with oversight responsibility over payment systems and rules-making powers. The CBI has strengthened RTGS risk management, required sufficient collateral security, and coordinated with the FME regarding system oversight ad supervision. Moreover, a 2008 IMF FSSA update on Iceland states that payment systems have been further enhanced “with rules to help participants monitor their risks and with tools to manage central bank risks” (p. 32). The 2008 IMF report notes that Iceland has incorporated the FSSA's 2001 recommendations and “corrective actions for the payment system have been broadly implemented” (p. 32). Nevertheless, none of the publicly available sources since the 2001 assessment directly address Iceland's compliance with this principle.

The 2008 World Bank report notes that there is a specific department within the central bank responsible for payment system oversight, and payment system oversight is distinguished from payment system operational tasks through organizational means or independent reporting lines. Moreover, a formal assessment methodology is in preparation to be used by the CBI in its regular assessment of the payment systems. The 2008 assessment by Cirasino and Garcia observes that Iceland exhibits a "medium-high level of development" with the assessment's payment system oversight component. This component to some extent covers the requirements of this principle.

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

The 2001 IMF FSSA report recommended that the CBI should make sure the payment system complies with all 10 principles. The 2008 assessment by Cirasino and Garcia observes that Iceland exhibits a "medium-high level of development" with the assessment's payment system oversight component. This component to some extent covers the requirements of this principle. However, the above information does not explicitly address Iceland’s compliance with this principle. Further, the CBI website states that systemically important payment systems in Iceland are expected to comply with international and domestic requirements, including the 10 Core Principles for Systemically Important Payment Systems, European Union law and directives on payment intermediation, as well as the Icelandic regulatory framework.

ENC. 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 2008 World Bank report notes that the BCI’s payment system oversight is performed over all systemically important funds transfer systems and relevant payment systems in the country, regardless of whom the operator of such systems is. The 2008 assessment by Cirasino and Garcia observes that Iceland exhibits a "medium-high level of development" with the assessment's payment system oversight component. This component to some extent covers the requirements of this principle. Further, the CBI website states that systemically important payment systems in Iceland are expected to comply with international and domestic requirements, including the 10 Core Principles for Systemically Important Payment Systems, European Union law and directives on payment intermediation, as well as the Icelandic regulatory framework.

END. 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 2008 World Bank publication mentions that in exerting payment system oversight, the central bank cooperates with other relevant authorities through regular meetings, exchange of opinions and views, regular information exchanges, prior notice of regulatory action, joint inspections, or on an informal/ad-hoc basis. Cooperation with relevant authorities is ensured through a formal mechanism, such as a memorandum of understanding or requirement of law. The central bank holds regular meetings with senior levels of stakeholders to discuss strategic issues for payment systems; the central bank also consults stakeholders on particular operational issues on a bilateral basis or through creating an ad-hoc task force or working group. Further, on its website the CBI states that it closely cooperates with other Nordic countries and the European Union Member States. The 2008 assessment by Cirasino and Garcia observes that Iceland exhibits a "medium-high level of development" with the assessment's payment system oversight component. This component to some extent covers the requirements of this principle.