“Arab Payment Systems Integration Project – Outcome of the

Feasibility Study”

GLOBAL PAYMENT WEEK

Amsterdam, October 19-22, 2010

The World Bank

Contents

g  Introduction & Objectives g  Objectives of the project g  What are the needs? g  Main Assumptions

g  Where are we?

g  Feasibility Study g  key feasibility elements g  Main Conclusions g  Model Recommended g  Outcome of the detailed studies g  Settlement Cycle

g  Next Steps g  Strategic Phases

Introduction & Objectives Objectives of the project

g  Economic development  Reducing the need for reserves currencies currently required

with the regional trading partners   Promoting intra-region economic activities and accordingly

regional integration

g  Financial Stability   Ensuring national payment systems are compliant with

international standards and best practices   Setting up a common set of processes and procedures to

execute cross-border payments in the region  Using a common set of risk controls within the region.

Introduction & Objectives Objectives of the project (Cont …)

g  Efficiency  Creating services that are on line with users expectations

(price, timing, safety, …)  Developing a system that is highly reliable, secure and resilient

and easy for any expansion

g  Synergies and externalities  Working together to improve efficiency of the individual

markets for the common goal   Potentially reducing the need for foreign currencies by

introducing a multilateral netting scheme   Improving the security of the financial information

Introduction & Objectives What are the needs?

g  Reducing the level of reserves that each bank needs to keep in its foreign currencies accounts

g  Adding more efficiency to the risk management related to the settlement of cross-border payments by improving the reliance in central bank money instead of commercial bank money

g  Decreasing the costs of theses transactions by reducing the number of correspondent banks

g  Reducing the processing time of cross-border payments within the region

g  Reducing the number and balance of bilateral accounts maintained by some banks only for the settlement of theses transactions (ex 110 accounts for a money transfer agency)

Introduction & Objectives Main Assumptions

1.  The system will cover only intra-region cross-border payment transactions. Domestic as well as international payments with any country outside the region will not be processed by the system.

2.  The system should not require major changes to the existing infrastructure and regulatory framework of the domestic payment systems in the countries

3.  The system should be as much open and flexible as possible to allow for further expansion and widening of the project scope.

Introduction & Objectives Main Assumptions (Cont …)

4.  The system must be in conformity with all international standards and best practices, especially, the CPSS principles and Anti-Money Laundering Standards.

5.  The participation to the new system will be on voluntary basis with no restrictions to any AMF member State. However specific pre-conditions and qualifying prerequisites will be considered.

6.  Central Banks of the region are the only direct participants. Commercial banks must use the system through their Central Banks.

7.  Only regulated entities (under the supervision of CB) in each country should be allowed to use the system.

Introduction & Objectives Main Assumptions

8.  Only intra-region transactions performed through the financial system will be part of the new scheme

9.  Securities transactions will remain outside of the initial scope of the project

10.  The operational phase of the project may start with a certain number of countries which have met the participation requirements

11.  The system will be designed to support multi settlement currencies.

Feasibility Study Key feasibility elements

g  Is there a business case?

g  A sufficient degree of harmonization in the fundamental elements of the national payment systems of the participating countries in terms of: g  Sound legal and regulatory regimes g  Compliance of the domestic RTGS systems with the international

standards g  Effective oversight practice

g  Well-defined and commonly accepted objectives and design constraints

g  Lessons learned from other regional experiences

g  Stakeholders commitment to the success of the project

Feasibility Study Main Conclusions

g  Yes there is a business case, both in terms of value of the intra-regional transactions and in terms of possible value added services that could be introduced by the regional system.

g  However the degree of harmonization of the national RTGS systems currently in place is not high. only qualified countries will join the system at the initial stage.

g  The lessons learned from other regional payment integration experiences encourage the establishment of such system.

g  Most central and Commercial Banks have highly welcomed the project, however serious commitments are needed.

g  This commitment will depend on the design of the system.

Feasibility Study Model Recommended

  Centralized regional settlement:

Feasibility Study Model Recommended

Feasibility Study Model Recommended

Commercial Bank

Commercial Bank

Central Bank A

Central Bank B

Arab Regional Payment System

Clearing Settlement Agent (ARSB)

Operations & Monitoring

Any regulated entity

Any regulated entity

Networking & Messaging

ARSB Correspondent

Bank

Feasibility Study Outcome -Legal

  Legal Structure o  One corporate entity will both act as the settlement agent

and manage the ARPS o  The ARSB will have the international legal status

  Membership o  Opened to all Central Banks o  Upon participation into the ARSB Capital o  Once commonly agreed requirements on common

features of domestic RTGS are implemented o  Requirements pertinent to settlement functions should

also be satisfied

Feasibility Study Outcome - Legal

  Capital: o  Authorized capital divided into shares that have a nominal

value o  Central Banks and the AMF would hold the same number

of shares and thus would have equal ownership and voting rights

o  Central Banks will hold equal shares each

  Corporate Governance o  Similar to International organizations’ governance

structure:   General Meeting of Shareholders (Governors, corporate matters and

policy lines)   Governing (Executive) Board (managerial functions)   Senior Management Group   The AMF would act as the secretariat of the Governing Board

Feasibility Study Outcome - Legal

  Operations of the ARPS o  Membership agreement would need to be elaborated and would

include: membership criteria, working rules of the system, technical provisions and specifications, settlement accounts opening, provision of collateral, and dispute settlement mechanism

o  Agreements with third parties: either for provision of relevant services or with international institutions (FED, ECB)

o  Central Banks would empower the ARSB to undertake such third-party agreements and shall be obliged to respect them

  Oversight o  Participating Central Banks would constitute a Cooperative

Oversight Group o  MOU would be signed o  Central Banks would still continue to be responsible of the

oversight of their domestic RTGS systems.

Feasibility Study Outcome - Legal

  List of Legal measures required: o  A general MOU signed by all Central Banks of the region and the

AMF to determine the major elements of the system. This would include a minimum level of legislative and regulatory harmonization.

o  Articles of Association and Statute of the ARSB to fully regulate its corporate structure, its scope, and its governance, to be signed by funding central banks and other central banks whenever joining the system.

o  Membership agreement and all other ancillary ARSB/CB agreements

o  Third parties service agreements o  MOU by all the Central banks to constitute the Oversight

Committee.

Feasibility Study Outcome -Business

  ARPS core function – Settlement services o  Settlement deposit accounts

  USD will be the single currency settlement currency in the initial stage   All the transactions, credit lines, fees, interests will be denominated in USD   Each central bank will maintain a USD settlement account at the ARSB to fund

its payment obligations and hold its payment inflows (different from the capital account used to capitalize the ARSB)

  It is recommended for each central bank to hold a minimum deposit balance in its USD settlement account.

  Bilateral Credit limits and multilateral net debit caps could be used to mitigate any risk

o  Credit and Collateral facilities   Theses features will be implemented in the ARPS even though they will

be used only when the Governing Board decide to do so   The required minimum deposit balance is not a perfect substitute for a

settlement credit facility in the ARPS   Without a collateralized overnight credit facility, there are risks of delays in the

settlement process (unwinding) and of liquidity issues at the level of receiving commercial banks

  The Board will need to decide whether the ARSB will provide credit facility and if its will act as custody agent, in addition to type of eligible collateral securities.

Feasibility Study Outcome -Business

  ARPS core function – Settlement services o  Credit risk

  There is NO principal credit risk as long as RTGS systems are used by Central banks to initiate and process the transactions submitted to the ARPS.

o  Liquidity risk   There is a very low risk if central banks delay payments to avoid overnight

collateralized borrowing or if a central bank does not have sufficient eligible collateral to borrow the required USD fund.

o  Foreign exchange risk   The ARSB has NO FX risk exposure   There is virtually no FX risk for participating Central Banks under normal

conditions

o  Collateral risk   The risk is virtually near zero and easily manageable by the lender.

Feasibility Study Outcome -Business

  ARPS core function – Payment System Services o  Eligible Payments o  Participation in the ARPS

  Central Bank must have a CPSIPS-compliant RTGS system   CB must participate to the messaging and communication system (such as

SWIFT) selected for the ARPS   CB needs to meet financial, operational and technical requirements of the

ARSB and the ARPS   CB needs to accept and sign the membership contractual agreement   The State of the CB needs to recognize the ARSB as an international

organization   The legal regime in the State of the CB must meet the Minimum common

requirements defined in the MOU.

o  Clearing and Settlement procedures   Payment file submission   Netting process   Funds transfer process   Time line for the ARPS settlement cycle: One settlement cycle per day, same-

day settlement of all eligible payments

Feasibility Study Outcome -Business

  ARPS core function – Payment System Services o  Error, dispute and return procedures: cut-off time and rules to

correct errors, solving disputes, … o  Infrastructure requirements and technical procedures:

  Messaging and communications system: connects the ARSB and central banks for the purpose of file submission, notification of net settlement, collateral, credit and funds positions and transfers and notification of settlement completion. SWIFT might be the most efficient, secure and reliable option.

  Payment data processing system:   whether having “in-house” operation within the ARSB or let a third-

party perform the day-to day processing

  System resiliency and business continuity   Account management system: the core technical system operated within the

ARSB for its settlement banking operations in the ARPS.

o  Default and delay procedures: notification and penalties computation

Feasibility Study Outcome -Business

  Oversight of the ARPS o  Setting up a Cooperative Oversight Group:

  Participating Central Banks and the AMF   Oversight agreement

o  Defining the oversight procedures o  Reporting to the FED and the ECB of the use of the USD and the

Euro

Feasibility Study Settlement Cycle

The settlement cycle can me minimized based on the liquidity management options provided by the system

06h30 GMT 10h30 UAE

Technical opening time

Opening time for transactions

Exchange

07h GMT 11h UAE

Closing time for transactions

Exchange

12h GMT 16h UAE

13h GMT 17h UAE 08h N. York

End of day Positions

notification Technical closing time

Final Settlement & dispatching transactions

14h30 GMT 18h30 UAE

15h GMT 19h UAE

Liquidity Refunding period

Processing incoming

transactions by central Banks

Next Steps Strategic phases

  Formulating an implementation plan that begins with a detailed specification of the organizational and operational structure for the system:   Identifying the institutions that will be responsible for the general operations and

organization   Setting up the project management structure, …

  Launching the construction phase:   Specifying the technological requirements for the various processing, information

management, messaging and communications systems   Elaborating the operating procedures and interaction procedures of the various users

and service providers involved in these services

  Defining a pilot program that will test the performance of the various critical functions and organizational arrangements in the system and identify where improvements may be required. Once the pilot program is considered to be running smoothly, the system can be opened more widely.

Thank You for your attention