In 2000, the International Monetary Fund (IMF) assessed Kazakhstan's compliance with the Committee on Payment and Settlement Systems' (CPSS) Core Principles for Systemically Important Payment Systems (SIPS). At the time, the IMF found two SIPSs: the Interbank System of Money Transfers (ISMT) and System of Retail Payments (SRP). In 2004, the IMF conducted a Financial System Stability Assessment (FSSA) Update of its 2000 assessment and concluded that only the ISMT is of systemic importance. The IMF's 2004 Financial Sector Assessment Program (FSAP) Update notes that the ISMT observes all Core Principles (CP) with the exception of CP 1. With regards to CP 1, the assessment finds inconsistencies between the Law on Payments and Money Transfers and the Bankruptcy Law concerning real-time finality or irrevocability of payments. However, the Kazakhstani authorities note that they do not consider the law to hinder any aspect of irrevocability. The 2004 IMF FSAP Update nonetheless recommends that a clause be inserted into the Bankruptcy Law to strengthen the irrevocability of payments. According to the National Bank of Kazakhstan's (NBK) 2007 Financial Stability Report, the bulk of non-cash transactions, 98.5 percent, are processed through the ISMT system. In their 2003 report, the NBK and the CPSS indicate that to closely monitor and contain any systemic and/or liquidity risks, the NBK supervises the ISMT payments system .The same report notes that payment systems in Kazakhstan are governed by the Law on the National Bank of Kazakhstan and the Law on Banks and Banking Activity in the Republic of Kazakhstan.

General Overview

A 2004 report by the IMF titled "Republic of Kazakhstan: Financial Sector Assessment Program Update -- Detailed Assessments and Updates of Financial Sector Standards and Codes" (hereafter referred to as the 2004 FSAP Update) notes that the Interbank System of Money Transfers (ISMT) observes all the Core Principles for Systemically Important Payment Systems (SIPS) promulgated by the Committee on Payment and Settlement Systems (CPSS) with the exception of core principle (CP) 1, for which case the report states no explicit compliance level. The assessment finds inconsistencies between the Law on Payments and Money Transfers and the Bankruptcy Law concerning real-time finality or irrevocability of payments. However, the Kazakhstani authorities note that they do not consider the law to hinder any aspect of irrevocability. The 2004 FSAP Update nonetheless recommends that a clause be inserted into the Bankruptcy Law to strengthen the irrevocability of payments. According to the 2004 FSAP Update, the IMF had undertaken an assessment of the ISMT and the System of Retail Payments (SRP) in 2000. At the time of the 2000 assessment, the IMF deemed both these systems to be systemically important and found that most of the deficiencies identified were related to the SRP. However, in another 2004 IMF report titled "Republic of Kazakhstan: Financial System Stability Assessment -- Update including Reports on the Observance of Standards and Codes on the following topics: Banking Supervision and Anti-Money Laundering and Combating the Financing of Terrorism" (hereafter referred to as the 2004 FSSA Update), the IMF notes that the SRP is no longer recognized as a SIPS.

According to the National Bank of Kazakhstan's (NBK) 2007 Financial Stability Report, "the ISMT is a real time gross settlement (RTGS) system that provides uninterrupted settlement of remittances between banks-participants of the system within an operational day and is intended for large and high-priority payments in the country" (p. 71). The same report indicates that, in 2007, the ISMT accounted for 98.5 percent of the total value of non-cash payments in the country. Further, the value of payments in the ISMT in the first 10 months of 2007 rose by almost 64 percent in comparison to the same period the previous year. ISMT has been operational in Kazakhstan since 1996. It was initially called the System of Large Payments (SLP), and the name was changed to ISMT in 2000. At that time, all requirements from international financial institutions concerning the gross settlement system were met. The ISMT's objectives are to process large and high priority funds in the national currency and ensure the irrevocability and finality of the transactions. The ISMT system can handle five to seven transactions per second. In the event that funds are insufficient at the time a participant places a payment order, the request is placed in the queue. The payment orders in the queue are processed according to priority codes. The queued payment orders are processed in the order of their priority and following first-in-first-out (FIFO) principles.

The SRP system, according to NBK's 2007 report, processes retail and small payments and carries them out on a net basis. Transaction fees for the clearing system are substantially lower than tariffs for the ISMT system. Its low tariff cost makes it economically effective. The system is used for payments that NBK considers not urgent, such as budget payments and social transfers. The risk management system associated with SRP allows for fewer participants, but the number has increased as more banks in all regions of the country demand membership to the SRP.

The ISMT payments system in Kazakhstan, according to a 2003 report "Payment Systems in Kazakhstan" commissioned by the Bank for International Settlements and generated by the NBK and the CPSS (hereafter referred to as the NBK and CPSS report), is governed by the Law on the National Bank of the Republic of Kazakhstan (the NBK Law) and the Law on Banks and Banking Activity. The law governing payments and money transfers was enacted in mid 1998 with the objective to improve the legal foundation that regulates the operation of the payments system.

According to its website, Kazakhstan Interbank Settlement Center (KISC) is the operator of the payment systems in the country that include the ISMT, the SRP, and the Banking Messages Exchange System. KISC provides for the effective, solid, and secure operation of the nation's payment systems, and actively participates in the formation of the NBK strategy in the area of interbank payments, money transfers, and clearing. KISC also improves and frequently updates its information technologies to remain in line with the latest international practices. Further, the operator provides a secure information exchange service between participants. Along with the KISC, the NBK manages the ISMT and the SRP, in cooperation with the KISC while the KISC operates them both. The legal basis for these systems is stipulated in agreements between the KISC and participants in the payment systems. All banks and non-bank institutions are allowed to become participants in the payment systems as long as they have accounts at the NBK.

The Principles

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

II

The IMF's 2004 FSAP Update asserts that the ISMT system observes all principles with the exception of this one. The assessment finds inconsistencies between the Law on Payments and Money Transfers and the Bankruptcy Law concerning real-time finality or irrevocability of payments. However, the authorities noted that they did not consider the law to hinder any aspect of irrevocability. The report recommends that a clause be inserted into the Bankruptcy Law to strengthen the irrevocability of payments. However, there is little information publicly available regarding Kazakhstan's actual compliance with this principle.

The ISMT payments system in Kazakhstan, according to the 2003 NBK and CPSS report, is governed by the NBK Law and the Law on Banks and Banking Activity. The NBK establishes and approves all rules and regulations related to payment systems. The same report indicates that Article 48 of the NBK Law gives the bank legal right to organize, coordinate, and regulate the operation of payment systems. In addition, Article 8 of the same Law instructs all banks and their clients to comply with the regulations issued by the NBK on payments and money transfers, banking activities, and accounting. The 2003 NBK and CPSS report notes that the legal foundation for the establishment and operation of the ISMT system is provided by three contracts: contracts between participants and the NBK, between the NBK and the KISC, and between the participants and the KISC.

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's 2004 FSAP Update indicates that the ISMT system observes this principle. The 2003 NBK and CPSS report notes that the legal foundation for the establishment and operation of the ISMT system is provided by three contracts: contracts between participants and the NBK, between the NBK and the KISC, and between the participants and the KISC.

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

The IMF's 2004 FSAP Update notes that the ISMT system observes this principle. The 2003 report by NBK and CPSS notes that in an effort to manage credit and liquidity risks, the NBK closely monitors the positions of the participants based on the information from the KISC. The KISC sends information electronically and in real time during operational hours, pertaining to the current balance of each participant in the ISMT, the turnover of debit and credit transfers, and the total amount of payment orders in the queue. Liquidity in the ISMT system can be managed in three ways: (1) participants can transfer funds from their correspondent account at the NBK to the ISMT account, if there is any remaining balance; (2) participants can obtain funds by borrowing from other banks using the money market; and (3) the system's participants can take advantage of the credit facility provided by the NBK .

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

According to the IMF's 2004 FSAP Update, the ISMT system observes this principle. According to the 2003 NBK and CPSS report, the ISMT system is an RTGS system and settlements cleared through the ISMT system are final and irrevocable. The KISC website indicates that in the event there are insufficient funds to cover one particular settlement, the transaction is shifted to a waiting queue until funds are available to process the payment. Although it is rarely used, the ISMT system, according to the 2003 NBK and CPSS report, maintains a gridlock resolution mechanism whereby the system checks the queue frequently. When there is gridlock, it executes multilateral netting of the payment orders involved in the gridlock.

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

The ISMT is an RTGS system and as such this principle is inapplicable to it.

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 2004 FSAP Update mentions that the ISMT system observes this principle. According to the KISC's website, there are 54 direct participants in the ISMT system and it is required that each payment system participant has a corresponding account in the NBK.

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

According to the IMF's 2004 FSAP Update, the ISMT system observes this principle. The report also observes that security issues rose during a 2003 assessment, but the Payment System Department of the NBK remedied to it by conducting inspections to ensure that security procedures in place are being applied. However, the FSAP Update recommends that the authorities duly sanction participants who do not adhere to security guidelines . According to its website, KISC, the Kazakh payment system operator, aims "to provide an effective, stable and secure functioning of payment system."

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

FC

Per the IMF's 2004 FSAP Update, the ISMT system observes this principle. The 2003 NBK and CPSS report on Kazakhstan's payment systems notes that reforms undertaken in 1994 by the NBK helped facilitate payments between banks and clients. NBK's efforts helped improve "the operational efficiency, reliability, speed and timeliness of the payment transactions along with the simultaneous risk reduction and devolvement of a favorable climate for using various payment instruments" (p. 1). KISC's website describes KISC as a payment system operator which helps provide for an effective, reliable, and secure operating of the payment system. The operator provides access to SWIFT which is responsible for accurate and timely message delivery.

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

FC

According to the IMF's 2004 FSAP Update, the ISMT system observes this principle. The NBK and CPSS in their 2003 report indicate that the NBK and the KISC together manage the two payment systems in the country: the ISMT and the SRP. However, only KISC operates both systems. Bank and non-bank institutions are allowed to participate in the payment systems if they have accounts at the NBK. The IMF's 2004 FSAP Update notes that the regulations for licensing payment service providers have changed with the establishment of the Agency of the Republic of Kazakhstan on Regulation and Supervision of Financial Markets and Financial Organizations (FSA). To request a license an applicant must now submit an application to the FSA that it then submits to the NBK for review.

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

FC

The IMF's 2004 FSAP Update mentions that the ISMT system observes this principle. The NBK and CPSS 2003 report indicates that Article 48 of the Law on the National Bank gives the legal right to the NBK to organize, coordinate, and regulate the operation of payment systems. In addition, Article 8 of the same Law instructs that all banks and their clients comply with the regulations issued by the NBK on payments and money transfers, banking activities and accounting. The IMF's FSAP Update concludes that the NBK has maintained high standards of transparency and has been forthcoming about its policy targets by releasing public statements and briefing the mass media. The NBK, according to its website, reports to the President of Republic of Kazakhstan and coordinates its activity with the Government of Kazakhstan. In their 2003 report, the NBK and the CPSS indicate that the KISC, the operator of the payment systems, is a subsidiary of the NBK and its activities are regulated by the NBK.

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.

II

The 2003 NBK and CPSS report notes that the Law on the National Bank grants the NBK primarily responsible for conducting monetary policy; defining the order, system, and method of payment systems; and managing them. The NBK also ensures the expedient and smooth transfer of funds between banks in the local currency, Kazakh tenge . The 2003 NBK and CPSS report asserts that Article 48 of the Law on the National Bank provides the legal power to NBK to organize, coordinate, and regulate the operation of payment systems. Specifically, the law defines these roles as follows: (1) making rules and regulations concerning payments and (or) funds transfers, and basic requirements for payment instructions; and (2) controlling the order and terms of cash transactions . According to the IMF's 2004 FSAP Update, the NBK has maintained high standards of transparency as the NBK has been more forthcoming about its policy targets by releasing public statements and briefing the mass media. Despite the above descriptive information, however, there is little information publicly available regarding Kazakhstan's actual compliance with this principle.

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

II

There is little information publicly available regarding Kazakhstan's compliance with this principle. In their 2003 report, the NBK and the CPSS indicate that to closely monitor and contain any systemic and/or liquidity risks, the NBK supervises the ISMT payments system as well as money movements from the account of the participant to its position in the system in a real time mode.

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.

II

There is little information publicly available regarding Kazakhstan's compliance with this principle.

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.

II

The NBK notes on its website that in order to increase cooperation, it maintains a certain level of dialogue with the central banks of Commonwealth of Independent States (CIS) countries in general, as well as with departments that oversee payment systems, and commercial banks. However, there is little information publicly available regarding Kazakhstan's compliance with this principle.