In 2002, when the International Monetary Fund (IMF) conducted an assessment of the payment systems in Hungary, it considered three systems: the large-value payment system (VIBER), the retail payment system called the Interbank Clearing System (ICS), and the securities settlement system (KELER). All three were deemed systemically important payment systems (SIPS) by the assessors. According to more recent information provided by the Central Bank of Hungary (Magyar Nemzeti Bank, or MNB) in its 2007 Report on Financial Stability, these system continue to be the prominent players in Hungary's payment infrastructure. The 2007 European Central Bank (ECB) report on payment systems in non-Euro countries also describes ICS as a SIPS. VIBER, as the large-value system in the country, is of systemic importance by default. The 2002 IMF report concluded that VIBER and ICS comply with the Core Principles for Systemically Important Payment Systems (CPSIPS) as defined by the Committee for Payment and Settlement Systems (CPSS). The only deficiency recorded was with KELER, which does not fall under the purview of this standard. Furthermore, the 2002 IMF report indicated that the MNB complies with all its payment system oversight responsibilities. VIBER is a real-time gross settlement system (RTGS) and, according to the 2007 report by the MNB, it accounts for the largest share of volume of payment transactions in the country. In its 2002 report, the IMF noted that the legal basis for the payment and settlement systems in the country is provided in the Central Bank Act. According to the ECB report, the Act gives the MNB the legal authority to establish payment systems and to oversee and monitor payment and securities clearing and settlement systems.

General Overview

The 2007 report by the European Central Bank (ECB) titled "Payment and Securities Settlement Systems in the European Union: Non-Euro Area Countries" refers to three systemically important payment systems (SIPS) in Hungary. These are the large-value interbank payment system, VIBER; the retail payment system, the Interbank Clearing System (ICS); and the securities settlement system, KELER. The 2007 "Report on Financial Stability" by the Central Bank of Hungary (Magyar Nemzeti Bank, or MNB) also identifies these systems as SIPS. The International Monetary Fund (IMF) conducted an assessment of these three systems in 2002, and concluded that VIBER and the ICS comply with the Core Principles for Systemically Important Payment Systems (CPSIPS) as defined by the Committee for Payment and Settlement Systems (CPSS). The report also notes that the MNB fulfills its oversight responsibilities.

VIBER is a real-time gross settlement (RTGS) system operated by the MNB since 1999. According to the 2007 ECB report "the system is open to domestic credit institutions and Hungarian branches of foreign credit institutions, the MNB, the State Treasury, KELER, the Magyar Posta and, via remote access, to credit institutions registered in the European Economic Area" (p. 204). The system handles transactions regardless of their value. Per the 2007 ECB report, "VIBER's operating rules are set out in the terms and conditions for the settlement accounting and VIBER services of the MNB" (p. 204). The ICS is the country's retail payment system and is operated by the MNB and GIRO Zrt. The ECB report states that even though the ICS is a retail payment system, it is important enough to be designated a SIPS. The ICS is a deferred gross payment system and operates according to its general terms of contract, applicable standards, manuals, and other internal rules. Transaction volume in 2006, according to the 2007 ECB report, was 809.4 and 204,068 (in thousands) for VIBER and ICS respectively. The value of payments, in billions of Euros, was 2957.82 and 234.18 for VIBER and ICS respectively. Hungarian law requires each financial institution to join, directly or indirectly, either VIBER or the ICS. In its 2005 Financial System Stability Assessment (FSA), the IMF notes that VIBER and ICS are closely related. The ICS processes the bulk of payments overnight, when VIBER is closed. The systems are interdependent as they both operate using gross settlement covering different time windows. This interdependence, according to the IMF's 2005 assessment, can cause inefficiencies.

The main law governing the smooth functioning of payment systems in the country is Act LVIII of 2001 on the MNB. This Act defines the MNB's oversight tasks regarding payment and securities clearing and settlement systems in order to ensure that the payment system functions smoothly. Other laws relating to payment systems in Hungary are: (1) Act CXII of 1996 on credit institutions and financial undertakings (the Banking Act); (2) Act CXX of 2001 on the capital markets; (3) Act XXIII of 2003 on settlement finality in payment and securities settlement systems, which fully implements the regulations of Directive 98/26/EC on settlement finality; (4) Act XXXV of 2004 on specialized credit institutions issuing electronic money; and (5) Act XV of 2003 on the prevention and combating of money laundering. Apart from these Acts, there are several Decrees by the government that relate to payment systems in the country. According to the 2007 ECB report, "the MNB has clearly defined its payment system objectives and publicly disclosed its role and major policies with respect to systemically important payment systems" (p. 196). The MNB continuously monitors the functioning of SIPS and ensures these systems comply with international standards through regular analysis and assessments, per the ECB report.

Cash still is still dominant as a means of payment, although the share of electronic means of payments is steadily growing. Other than the MNB, other institutions that play a role in the payment infrastructure in Hungary are the Hungarian Financial Supervisory Authority (Pénzügyi Szervezetek Állami Felügyelete, or PSZÁF), the Office of Economic Competition, the Hungarian Banking Association, the Hungarian State Treasury, and the Hungarian Post Office (Magyar Posta).

The Principles

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

FC

As noted in the IMF's 2002 assessment, VIBER and the ICS comply with the CPSIPS. The report notes that Hungary's legal foundation for payment systems is "satisfactory." However, an improved legal basis for multilateral netting is still lacking. The same report indicates that sections of the Acts on the MNB govern the establishment, operation, and membership of the different payment and settlement systems. The IMF assessment spells out the role and responsibilities of the MNB. Through Act LVIII of 2001 on the MNB, the MNB provides settlement facilities and acts as a system provider. The rights and obligations of the system operator and of the participants are based on contractual arrangements.

The main law governing the smooth functioning of payment systems in the country is Act LVIII of 2001 on the MNB. The 2007 ECB report stated that this Act defines the basic tasks of the MNB with regard to "the oversight of payment and securities clearing and settlement systems to ensure the effective and smooth functioning of the payment system" (p. 196). Other laws relating to payment systems in Hungary are: (1) Act CXII of 1996 on credit institutions and financial undertakings (the Banking Act); (2) Act CXX of 2001 on the capital markets; (3) Act XXIII of 2003 on settlement finality in payment and securities settlement systems, which fully implements the regulations of Directive 98/26/EC on settlement finality; (4) Act XXXV of 2004 on specialized credit institutions issuing electronic money; and (5) Act XV of 2003 on the prevention and combating of money laundering. Apart from these Acts, there are several Decrees by the government that relate to payment systems in the country.

II. 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.

FC

The IMF in its 2002 assessment concluded that the VIBER and the ICS comply with the CPSIPS. The report noted that "all operating rules regarding the Large Value Payment System... are set out in bilateral contracts and a rule book, which is available on the NBH website. This information includes membership criteria, responsibilities of the participants, collateral arrangements, etc.," adding that "all rules, liabilities and responsibilities regarding Interbank Giro System are laid down in uniform bilateral contracts. The general terms of these contracts and possible variations are published in the Official Gazette of the Ministry of Finance" (p. 57).

III. 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.

FC

As noted in the IMF's 2002 assessment, VIBER and the ICS comply with the CPSIPS. Liquidity risks are very low according to the IMF's 2002 report. ICS and VIBER complement each other, as the ICS is operational during the night, when the VIBER system is closed. Per the 2002 IMF report, with the implementation of the 2001 Capital Markets Act, Hungarian legislation fully aligned itself with the Treaty of Maastricht which obliges central banks in the European Monetary Union to cover all credit transactions by taking adequate collateral. Further, according to the 2007 ECB report, "since VIBER is an RTGS system settling in central bank money with immediate finality, participants are not exposed to liquidity and credit risks regarding the payments settled" (p. 206). The 2007 ECB report notes that "as the ICS settles on a gross basis in the MNB's accounting system, participants are not exposed to credit and liquidity risks regarding the batches settled" (p. 210).

IV. 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.)

FC

The IMF's 2002 assessment concluded that the VIBER and the ICS comply with the CPSIPS and payments made in both systems are irrevocable and final.

V. 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.)

II

Per the IMF's 2002 report, the VIBER and the ICS comply with the CPSIPS. The report also indicated that the ICS does not use multilateral netting and VIBER is a RTGS system and hence this principle is not applicable to both principles.

VI. 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.

FC

The IMF's 2002 assessment concluded that the VIBER and the ICS comply with the CPSIPS.

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

FC

The IMF's 2002 assessment concluded that the VIBER and the ICS comply with the CPSIPS. The report also noted that VIBER meets the security levels set for the European TARGET system, which meets the CPSIPS requirements. Per the same report, the ICS system runs its own communication network with computer to computer links. Adequate protocols in place ensure authentication prior to sending payments. In addition, both a back-up and a remote site are available in case of an emergency.

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

FC

As noted in the IMF's 2002 assessment the VIBER and the ICS comply with the CPSIPS. The IMF noted in its 2002 assessment that "the VIBER system is efficient and practical to its users" (p. 57), while the ICS system can be time constrained as it cannot be opened before VIBER is closed. According to the ECB report, MNB's pricing policy of the VIBER payments system aims to cover full cost recovery. The central bank charges a flat fee of HUF 350 (€1.39) per transaction. There are no membership fees or other seasonal charges. ICS members are charged HUF 20 (€0.08) per transaction, and members with low transactional volume are charged a minimum monthly fee of HUF 140,000 (€556.06).

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

FC

As noted by the IMF's 2002 assessment, the VIBER and the ICS comply with the CPSIPS. According to the report, the participation criteria for Hungary's payment systems are fully published, and a reputable auditing firm must verify that the applicants meet all requirements.

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

FC

The IMF's 2002 assessment concluded that the VIBER and the ICS comply with the CPSIPS. According to the assessment, Hungary meets this requirement as governance is provided and information related to it is available on MNB's website. The IMF noted that governance by the MNB is documented in the MNB publication 'Role of the MNB in Ensuring the Smooth Functioning of Payments Systems, and in the Regulation of Payments Services.'

A. 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.

FC

The 2002 IMF assessment noted that the MNB complies with this principle. The report added that the MNB's responsibilities with regard to payment systems are found in the Constitution of the Republic of Hungary, the MNB Act, and the Credit Institutions Act. The MNB has the power to "regulate payment services, oversee domestic payment systems, and provide settlement facilities" (p. 59). The 2007 ECB report states that the MNB has "clearly defined its payment system objectives and publicly disclosed its role and major policies with respect to systemically important payment systems" (p. 196).

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

FC

The 2002 IMF assessment noted that the MNB complies with this principle. According to the report, the MNB closely monitors Hungary's SIPS to ensure that they comply with the Core Principles. Per the 2007 ECB report, "the MNB ensures that its own payment system, VIBER complies with internationally agreed standards by incorporating them into the system's operating rules and regularly overseeing operations" (p. 196).

C. 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.

FC

The 2002 IMF assessment noted that the MNB complies with this principle. According to the report, the MNB closely monitors Hungary's SIPS to ensure that they comply with the Core Principles. The 2007 ECB report notes that among the MNB's main oversight responsibilities is to conduct regular assessments of the payment systems to ensure that these systems comply with international standards.

D. 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.

FC

The 2002 IMF assessment noted that the MNB complies with this principle.