Latvijas Banka and other national central banks of the Eurosystem conduct the oversight of all euro area payment and securities settlement systems in accordance with one of the Eurosystem's core tasks, i.e. to promote smooth functioning of payment systems.The primary oversight objective of the European Central Bank and national central banks is to ensure efficient and safe payment systems in the European Union via assessing the existing and planned payment systems, providing advice and recommending changes.
Latvijas Banka in cooperation with other central banks of the Eurosystem performs oversight of payment and securities settlement systems in compliance with the Eurosystem Oversight Policy Framework.
Oversight of large-value payment systems
Large-value (systemically important) payment systems form the backbone of the euro area market infrastructure. The main focus of oversight is precisely on these systems, thereby mitigating systemic risk in the entire financial system.
The Eurosystem has four systemically important payment systems:
– TARGET2 (operated by the Eurosystem));
– CORE(FR) (operated by STET – a joint initiative of six major French banks).
TARGET2-Latvija, a component system of TARGET2, operates in Latvia and is monitored by Latvijas Banka within TARGET2 oversight carried out by the Eurosystem. Latvijas Banka engages in the preparation of an assessment of the TARGET2 system. Within working groups of the European System of Central Banks, Latvijas Banka also provides support for compilation and analysis of the overall data of the TARGET2 system.
Oversight of securities settlement systems
To promote smooth operation of payment systems, the oversight of securities settlement is also required. Majority of payments are executed using securities collateral and other financial collateral accounted in securities settlement and clearing systems. Problems in these systems could cause disruptions in operation of payment systems and complicate the implementation of the Eurosystem's monetary policy.
The Eurosystem has:
– 22 securities settlement systems (operated by securities depositaries or central banks);
– 17 financial instrument clearing systems (operated by central counterparties).
Latvijas Banka along with other national central banks of the Eurosystem oversees
the TARGET2-Securities settlement platform used by securities depositories across all euro area countries. The Latvian securities market intends to join the TARGET2-Securities platform in September 2017. In the meantime, the Latvian Central Depository will continue to ensure operation of the securities settlement system DENOS in Latvia. Latvijas Banka performs oversight of DENOS.
Oversight of retail payment systems
Retail payment systems process a large volume of customer retail payments (money transfers and card payments). Although such systems are usually not systemically important, their smooth operation is significant for a wide range of natural and legal entities. These systems, compared with the systemically important payment systems, are subject to less stringent oversight requirements.
25 retail payment systems operated by the private sector or central banks are located in the euro area.
Such systems are overseen by the central bank of the country in which the respective payment system operates. Other participants of the Eurosystem make mutual comparison of oversight assessments of these systems. Latvijas Banka oversees two retail payment systems in Latvia, i.e. the Electronic Clearing System of Latvijas Banka which executes money transfers (SEPA credit transfers) in line with SEPA requirements and the Card Settlement System (operated by First Data Latvia Ltd.) that ensures mutual clearing and settlement of card payments.
Oversight of payment instruments
Eurosystem oversight powers also include the oversight of the payment instruments which form an integral part of a payment system. A high level of safety and efficiency is required for their extensive use to ensure the public's confidence in the euro and foster economic development.
In order to facilitate more efficient SEPA payments, SEPA credit transfer and SEPA direct debit (the payment of invoices initiated by a service provider from an account of a service recipient) schemes have been set up. A scheme is a set of rules and standards ensuring that its participants, i.e. providers of payment services, process SEPA payments under equal conditions. In a similar vein, international card organisations have established schemes for card payments in Europe to make processing of card payments more efficient. Oversight of payment instruments is ensured by applying oversight requirements to the above payment instrument schemes.
Latvijas Banka and other national central banks of the Eurosystem perform oversight of payment instruments. Customers in Latvia carry out SEPA credit transfers and make card payments, but SEPA direct debit payments are not widely used. Latvijas Banka compiles and analyses Latvia's payment statistics
At the end of 2016, Latvijas Banka has published "Latvijas Banka's Review of Social Costs of Retail Payment Instruments in Latvia in 2014". According to a uniform European methodology, it compiles data on costs incurred by traders, providers of services and financial institutions to make it possible for the public, i.e. natural and legal entities, to make payments for goods and services in Latvia.
Catalyst of changes
A central bank in its capacity as payment system operator, account service provider, participant of payment and settlement systems, overseer of payment systems and sometimes as overseer of payment market participants accumulates valuable experience about operation of payment systems and can provide substantial support to their development. The catalyst function is substantial. Central banks, including Latvijas Banka, provide educational and consultancy support in relation to functioning and development of a payment system. Acting as catalysts, the central banks of the Eurosystem cooperate closely with market participants and public institutions which ensure operation and servicing of payment systems, carry out monitoring of market participants, ensure the development of the regulatory framework and its application in the area of payments. The establishment of SEPA and active work by the Euro Retail Payments Board to promote coordination and development of the European payment market serve as examples of this cooperation.
Latvijas Banka has been creating an infrastructure of instant payments through facilitating development of innovative payment instruments and integration of the Latvian payment market into the euro area. The above infrastructure will provide access to the instant payment facility in a 24/7/365 regime in autumn 2017.
To address issues of payment market development, Latvijas Banka cooperates actively with the Financial and Capital Market Commission, Ministry of Finance of the Republic of Latvia, Consumer Rights Protection Centre, Association of Commercial Banks of Latvia, Association of Latvian Payment Services and Electronic Money Institutions, Latvian Chamber of Commerce and Industry, Latvian Merchant Association and Latvian Food Retailers Association.