In 2002 the International Monetary Fund (IMF) conducted a Financial System Stability Assessment (FSSA) of Latvia's payment systems in which it identified two systemically important payment systems (SIPS) namely SAMS and EKS, and found that both these SIPS largely complied with the Bank for International Settlement's Core Principles for Systemically Important Payment Systems (CPSIPS). Subsequently, in 2004 the Bank of Latvia conducted a self-assessment of its payment systems and defined only SAMS to be systemically important and EKS was categorized as systemically prominent. According to the results of the 2004 self assessment, SAMS, the real-time gross settlement (RTGS) system fully complies with all the Core Principles (CPs), except CP VIII and V. In the case of Core Principle VIII, SAMS fell short of full compliance since the maintenance costs for SAMS does not reflect the commission for the SAMS payment orders, and CP V is not applicable as SAMS is a gross settlement system. The Bank of Latvia's role in supervising the country's payment systems are outlined in "Bank of Latvia's Payment Systems Policy," according to a European Central Bank Blue Book report published in 2002.

General Overview

The International Monetary Fund, in a 2002 Financial System Stability Assessment (FSSA), determined that Latvia had two Systemically Important Payment Systems (SIPS) - the Automated Interbank Payment System (SAMS) and the Electronic Clearing System (EKS), both of which largely complied with the Bank for International Settlement's (BIS) Core Principles for Systemically Important Payment Systems (CPSIPS). Subsequently, in 2004 the Bank of Latvia (BoL) conducted a self-assessment of its payment systems that defined only SAMS to be systemically important and classified EKS as a systemically prominent system. According to the results of this 2004 self assessment, SAMS fully complies with all the Core Principles (CPs), except CP VIII and CP V. For CP VIII, according to the 2004 BoL self-assessment, SAMS was found deficient in that "the commission for the SAMS payment orders does not reflect directly the system maintenance costs" (p. 12) and thus a level of full compliance was not assigned. CP V is not applicable, as SAMS is a gross settlement system (BoL 2004).

The Bank of Latvia is the country's central bank and, as such, it oversees the functioning of SAMS and EKS (ECB 2002). The "Bank of Latvia's Payment Systems Policy." which appears on the BoL website, outlines the Bank's role and objectives with regard to payment systems in Latvia, namely, to "establish and maintain a secure and effective payment system." In its 2004 self assessment, the BoL states that the central bank "performs the oversight of 1) systemically important payment systems; 2) retail payment systems and 3) payment instruments" (p. 3).

A 2002 report by the European Central Bank (ECB) noted that SAMS is a real-time gross settlement (RTGS) system that was introduced in September 2000, and replaced the Electronic Funds Transfer System (EFTS) and the Interbank Gross Settlement System (IGSS) systems for performing large-value and urgent interbank transfers. The 2002 ECB reports that SAMS is designed for large volume, urgent payments related to inter-bank market transactions, open market and other Bank of Latvia monetary policy operations.

In the BoL's 2004 report, the EKS is described as "an interbank retail payment system with a low possibility of substitution and with important financial and prominent domino effect relative ration," (p.19). "However," the Bank notes, "in view of the small value of the processed payments and in comparison with the turnover set by the ECB methodology for systemically important systems these risks were assessed as insignificant" (p.19).

Latvian legislation establishing the legal basis for the SAMS operation includes the Law on the Bank of Latvia, the Law on Credit Institutions, the Civil Law of the Republic of Latvia and the Law on Settlement Finality in Payment and Financial Instrument Settlement Systems. According to the 2002 ECB report, in 2000, Latvia amended its regulations on the operation of interbank and securities settlement systems to include EC Directive 98/26/EC requirements on Settlement Finality in Payment and Securities Settlement systems. Furthermore, in order to implement EC Directive 97/5/EC on Cross-Boarder Credit Transfers, the Bank of Latvia amended the Regulation for Credit Transfers (pp. 160-161).

The International Monetary Fund's (IMF) 2002 FSSA found, however, that there was a degree of legal uncertainty on "the finality of settlements and netting enforceability, as well as, the rights of holders of collateral securities, in the event of the insolvency of the provider" (p.33). The 2004 self assessment of the BoL adds that the Law on Settlement Finality in Payment and Financial Instrument Settlement Systems provides for "the netting and settlement finality, their legal power in the systems and the right to dispose at their own discretion, of the collateral which has been provided in relation to their participation in the system or transactions with the central bank including in the case of insolvency proceedings of a system participant" (pp. 6-7).

The Principles

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

FC

According to the IMF's 2002 FSSA, Latvia had two systemically important payment systems -- SAMS and EKS -- both of which largely complied with the BIS's Core Principles for systemically important payment systems. Subsequently, in 2004, the Bank of Latvia conducted a self-assessment of its payment systems and defined only SAMS to be systemically important and EKS was classified as a systemically prominent system. A 2005 Financial Stability Report by the BoL also only mentions SAMS as being of systemic importance. According to the results of the 2004 self assessment, both SAMS and EKS fully complies with this Principle.

The 2002 IMF FSSA noted that there was a degree of legal uncertainty on "the finality of settlements and netting enforceability, as well as the rights of holders of collateral securities, in the event of the insolvency of the provider" (p.33). However, the 2004 self assessment of the BoL states that the Law on Settlement Finality in Payment and Financial Instrument Settlement Systems provides for "the netting and settlement finality, their legal power in the systems and the right to dispose at their own discretion, of the collateral which has been provided in relation to their participation in the system or transactions with the central bank including in the case of insolvency proceedings of a system participant" (pp. 6-7).

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 2002 FSSA reported that Latvia had two systemically important payment systems -- SAMS and EKS -- both of which largely complied with the BIS's Core Principles for systemically important payment systems. Subsequently, in 2004 the Bank of Latvia conducted a self-assessment of its payment systems and defined only SAMS to be systemically important, whereas EKS was classified as a systemically prominent system. A 2005 Financial Stability Report by the BoL also only mentions SAMS as being of systemic importance. According to the results of the 2004 self assessment, both SAMS and EKS fully complies with this Principle.

The IMF's 2002 FSSA reported that "the system's rules and procedures are clear and allow participants to understand the system's impact on each of the financial risks they incur through participation in it," adding that "the procedures for the management of credit risks and liquidity risks are defined clearly and specify the respective responsibilities of the system operator and the participants" (p. 33). Furthermore the BoL's 2004 report indicates that the participants are also informed of any amendments made to SAMS regulations, which are subsequently approved by the Association of Latvian Commercial Banks, which represents banks registered in Latvia.

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 2002 FSSA reported that Latvia had two systemically important payment systems -- SAMS and EKS -- both of which largely complied with the BIS's Core Principles for systemically important payment systems. Subsequently, in 2004 the Bank of Latvia conducted a self-assessment of its payment systems and defined only SAMS to be systemically important, whereas EKS was classified as a systemically prominent system. A 2005 Financial Stability Report by the BoL also only mentions SAMS as being of systemic importance. According to the results of the 2004 self assessment, SAMS fully complies with this Principle and the EKS was not assessed against this Principle as it was not defined as an SIPS by the BoL in 2004.

The 2002 IMF FSSA concluded that the procedures for the management of credit risks and liquidity risks are "defined clearly and specify the respective responsibilities of the system operator and the participants" (p. 33).

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 FSSA reported that Latvia had two systemically important payment systems -- SAMS and EKS -- both of which largely complied with the BIS's Core Principles for systemically important payment systems. Subsequently, in 2004 the Bank of Latvia conducted a self-assessment of its payment systems and defined only SAMS to be systemically important, whereas EKS was classified as a systemically prominent system. A 2005 Financial Stability Report by the BoL also only mentions SAMS as being of systemic importance. According to the results of the 2004 self assessment, SAMS fully complies with this Principle and the EKS was not assessed against this Principle as it was not defined as an SIPS by the BoL in 2004.

Although the 2002 IMF FSSA found that SAMS fulfills the criteria for principle IV under normal circumstances, found, legal uncertainty afflicts netting and settlement finality in retail payment systems (p. 33). However, the 2004 self assessment of the BoL states that the Law on Settlement Finality in Payment and Financial Instrument Settlement Systems provides for "the netting and settlement finality, their legal power in the systems and the right to dispose at their own discretion, of the collateral which has been provided in relation to their participation in the system or transactions with the central bank including in the case of insolvency proceedings of a system participant" (pp. 6-7).

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.)

FC

The IMF's 2002 FSSA reported that Latvia had two systemically important payment systems -- SAMS and EKS -- both of which largely complied with the BIS's Core Principles for systemically important payment systems. Subsequently, in 2004 the Bank of Latvia conducted a self-assessment of its payment systems and defined only SAMS to be systemically important, whereas EKS was classified as a systemically prominent system. A 2005 Financial Stability Report by the BoL also only mentions SAMS as being of systemic importance. According to the results of the BoL's 2004 self assessment, this Principle is not applicable to SAMS as it is a gross settlement system and EKS was not assessed against this Principle as it was not defined as an SIPS by the BoL in 2004.

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 FSSA reported that Latvia had two systemically important payment systems -- SAMS and EKS -- both of which largely complied with the BIS's Core Principles for systemically important payment systems (CPSIPS). The IMF specified that "assets used for settlement are claims on the central bank" (p. 33). Subsequently, in 2004 the Bank of Latvia conducted a self-assessment of its payment systems and defined only SAMS to be systemically important, whereas EKS was classified as a systemically prominent system. A 2005 Financial Stability Report by the BoL also only mentions SAMS as being of systemic importance. According to the results of the 2004 self assessment, SAMS fully complies with this Principle and the EKS was not assessed against this Principle as it was not defined as an SIPS by the BoL in 2004..

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

CP

The IMF's 2002 FSSA reported that Latvia had two systemically important payment systems -- SAMS and EKS -- both of which largely complied with the BIS's Core Principles for systemically important payment systems (CPSIPS). Subsequently, in 2004 the Bank of Latvia conducted a self-assessment of its payment systems and defined only SAMS to be systemically important, whereas EKS was classified as a systemically prominent system. A 2005 Financial Stability Report by the BoL also only mentions SAMS as being of systemic importance. According to the BoL's 2004 self assessment, both SAMS and EKS fully complies with this Principle.

The 2002 IMF FSSA found that Latvia's SAMS and EKS "ensure a high degree of security and operational reliability" (p. 33). SAMS is regulated by the "Action Plan of the Payment System Department in an Emergency," (p. 11) which, according to the Bank of Latvia 2004 report, is supposed to guarantee interbank funds transfers in the 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.

CP

The IMF's 2002 FSSA reported that Latvia had two systemically important payment systems -- SAMS and EKS -- both of which largely complied with the BIS's Core Principles for systemically important payment systems. Subsequently, in 2004 the Bank of Latvia conducted a self-assessment of its payment systems and defined only SAMS to be systemically important, whereas EKS was classified as a systemically prominent system. A 2005 Financial Stability Report by the BoL also only mentions SAMS as being of systemic importance. According to the BoL's 2004 self assessment, SAMS was found deficient in that "the commission for the SAMS payment orders does not reflect directly the system maintenance costs" (p. 12) and thus a level of full compliance was not assigned for this Principle. However, the 2002 IMF FSSA found that Latvia's SAMS and EKS "seem to be efficient for participants and the economy," and that they "provide sophisticated, low risk payment facilities for banks and, indirectly, for all payment system users" (p. 33).

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

FC

The IMF's 2002 FSSA reported that Latvia had two systemically important payment systems -- SAMS and EKS -- both of which largely complied with the BIS's Core Principles for systemically important payment systems. Subsequently, in 2004 the Bank of Latvia conducted a self-assessment of its payment systems and defined only SAMS to be systemically important, whereas EKS was classified as a systemically prominent system. A 2005 Financial Stability Report by the BoL also only mentions SAMS as being of systemic importance. According to the results of the BoL's 2004 self assessment, both SAMS and EKS fully complies with this Principle. Furthermore, the IMF's 2002 FSSA noted that "the objective criteria for being a participant in SAMS and EKS are defined in the 'Regulation for Interbank Settlements Effected by the Bank of Latvia'" (p. 33). The report also states that "the regulation is publicly available in paper form and on the BoL's website (p. 33).

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

FC

The IMF's 2002 FSSA reported that had two systemically important payment systems -- SAMS and EKS -- both of which largely complied with the BIS's Core Principles for systemically important payment systems. Subsequently, in 2004 the Bank of Latvia conducted a self-assessment of its payment systems and defined only SAMS to be systemically important, whereas EKS was classified as a systemically prominent system. A 2005 Financial Stability Report by the BoL also only mentions SAMS as being of systemic importance. According to the results of the 2004 self assessment, both SAMS and EKS fully complies with this Principle. The 2002 IMF FSSA noted that "SAMS and EKS are owned and managed by the BoL" and that "management of the BoL approves all changes concerning payment system and relevant regulations" (p. 33). The National Payment Consultative Council was established via a 1997 agreement entered into by the BoL and with leading Latvian commercial banks.

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.

EN

The 2002 IMF FSSA states that "major policies with respect to the payment system oversight were not publicly disclosed. The ability to carry out the oversight responsibility is not clear" (p.33). However a 2002 ECB report indicates that BoL's Payment Systems Policy" does define the BoL's role and objectives with regard to payment systems in Latvia. Furthermore, the 2002 ECB report noted that the BoL oversees retail payment systems, evaluates systemic risks, and provides consultations on risk reduction.

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

FC

In its 2004 self-assessment the BoL reported that it, "ensures the operation of SAMS, a large-value payment gross settlement system" (p.4). The report further indicates that as SAMS is defined as a SIPS and the BoL oversees SAMS in line with the Bank for International Settlements Core Principles for Systemically Important Payment Systems.

The IMF's 2002 FSSA found that "the BoL has explicit legal responsibility for the Latvian payment system," adding that "the basic approach of the BoL to payment system policy is that it should develop and run the most important payment systems" (p. 31).

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.

EN

According to its 2004 self-assessment, the BoL "mostly performs oversight of systemically important payment systems, thus considerably reducing risks throughout the payment system and ensuring a safe and efficient payment environment for its participants and the entire financial system (p.4). The IMF's 2002 FSSA adds that "the BoL has explicit legal responsibility for the Latvian payment system. The basic approach of the BoL to payment system policy is that it should develop and run the most important payment systems" (p. 31).

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

According to a 2002 ECB report, the Bank of Latvia works with the Financial and Capital Markets Commission and the two agencies have signed an agreement allowing them to exchange information in order to more efficiently oversee payment systems (p. 162). However, there is insufficient information publicly available as to Latvia's compliance with this Principle.