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PAYMENT SYSTEMSR E P O R T

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R E P O R T

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PAYMENT SYSTEMSR E P O R TR E P O R T

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PAYMENT SYSTEMSR E P O R TR E P O R T

Ki­ad­ja:­Ma­gyar­Nem­ze­ti­Bank

Fe­le­lős­ki­adó:­Hergár­Eszter

1054­Bu­da­pest,­Sza­bad­ság­tér­9.

www.mnb.hu

ISSN­2064-9045­(print)

ISSN­2498-7085­(on-line)

Payment SyStemS RePoRt • June 2016 3

Ki­ad­ja:­Ma­gyar­Nem­ze­ti­Bank

Fe­le­lős­ki­adó:­Hergár­Eszter

1054­Bu­da­pest,­Sza­bad­ság­tér­9.

www.mnb.hu

ISSN­2064-9045­(print)

ISSN­2498-7085­(on-line)

Pursuant to Act CXXXIX of 2013 on the Magyar Nemzeti Bank, the primary objective of Hungary’s central bank is to achieve and maintain price stability. One of the main responsibilities of the Magyar Nemzeti Bank (MNB) as set forth in the Act on the Magyar Nemzeti Bank is to promote the smooth execution of payments and to facilitate the reliable and efficient functioning of the payment and settlement systems. The sound and smooth functioning of payments and the payment and settlement systems are essential for the execution of real economic and financial transactions.

The purpose of this Report is to present a comprehensive review of trends in the field of payments and the operation of the overseen payment and settlement systems, the main risks and the measures taken by the MNB to fulfil the responsibilities above. In publishing this report, the MNB wishes to contribute to enhancing the transparency of its activities in relation to payment and settlement systems and the execution of payments, while also endeavouring to enhance financial literacy and thus raise awareness about payment-related issues.

The analyses in this Report were prepared by the Directorate Financial Infrastructures of the MNB, under the general direction of Director Lajos Bartha. The Report was approved for publication by the Financial Stability Board at its meeting on 24 May 2016. Contributors: Patrik Gergely Balla, Dániel Béres, László Bodnár, Judit Brosch, Éva Divéki (editor), Miklós Fenyvesi, Gábor József Harkácsi, Bence Illés, Tamás Ilyés, László Kajdi, Miklós Luspay (Head of Department), Milán Mészárovics, Beáta Kovács-Papp, Cecília Pintér (chief editor), Kristóf Takács, Lóránt Varga (Head of Department).

The key messages of the study as well as the Report were discussed and valuable advice on the finalisation of the document was provided at the meetings of the Financial Stability Board on 8 March 2016 and 24 May 2016, and at the Monetary Council meeting on 10 May 2016.

The MNB staff relied primarily on information relevant to 2015, although in a forward-looking manner the Report also analyses the ongoing developments observed in the course of 2016.

Payment SyStemS RePoRt • June 2016 5

Contents

Key messages 7

1 Introduction 13

2 Operation of the domestic payment system 14

2.1­Payment­service­developments­ 16

2.1.1­Turnover­of­main­payment­instruments­ 16

2.1.2­Efficiency­of­domestic­payments­in­international­comparison­ 18

2.1.3­Changes­in­the­pricing­of­retail­payment­services­and­costs­for­retail­customers­ 19

2.2­Developments­in­2015­relating­to­financial­infrastructures­ 21

2.2.1­Inclusion­of­the­forint­in­the­CLS­system,­experiences­regarding­the­operation­so­far­ 21

2.2.2­Impact­of­the­higher­cycle­frequency­of­the­ICS­intraday­clearing­ 22

2.2.3­Migrating­paper-based­credit­transfers­to­intraday­clearing­ 23

2.2.4­New­services­of­the­KELER­Group­ 23

2.2.6­Results­of­Post­Office­development­projects­in­2015­ 24

2.3­Operation­of­financial­infrastructures­ 25

2.3.1­Service­continuity­risk­of­financial­market­infrastructures­ 25

2.3.2­Clearing­and­settlement­risk­in­VIBER­and­the­ICS­ 28

2.3.3­Clearing­and­settlement­risk­in­KELER­ 34

2.3.4­Clearing­and­settlement­risk­in­KELER­CCP­ 34

2.3.5­System­operational­interdependency­risk­ 38

2.4­Comprehensive­oversight­assessments­in­2015­ 39

2.5­Findings­of­payment­inspections­ 40

3 Developments in Hungarian and international regulation affecting payments and financial infrastructures in Hungary 42

3.1­Progress­in­the­transposition­of­the­Payment­Accounts­Directive­ 43

3.2­Preparation­for­SEPA­end-date­ 44

3.3­Key­changes­in­the­renewed­Payment­Services­Directive­ 46

3.4­Additional­regulatory­changes­affecting­the­execution­of­payments­ 47

4 Ongoing and upcoming developments of the financial infrastructure 48

4.1­Possibilities­of­implementing­an­instant­payment­system­ 49

4.2­Gradual­phase-out­of­overnight­clearing­ 52

4.3­Introduction­of­the­intraday­clearing­and­settlement­of­bank­card­payments­ 53

4.4­KELER’s­accession­to­T2S­ 54

5 Security issues in payment transactions 56

5.1­Fraud­related­to­electronic­payment­transactions­ 57

5.2­Cyber­risk­ 61

5.3­Publication­of­SecurePay­recommendations­ 62

5.4­Payment­malfunctions­in­2015­ 63

6 Glossary 65

Payment SyStemS RePoRt • June 2016 7

Key messages

The use of electronic payment methods continued to grow in 2015, with significant progress achieved in the area of contactless card technology.

The­number­of­credit­transfer­and­direct­debit­transactions­continued­to­increase­at­a­similar­pace­as­in­recent­years,­rising­by­2–3­per­cent,­but­payment­card­purchases­proved­to­be­the­fastest­growing­payment­method.­This­process­was­boosted­by­the­spreading­of­contactless­cards­and­compatible­payment­terminals,­which­provided­consumers­with­an­electronic­alternative­for­quick,­convenient­payments­even­in­the­case­of­retail­transactions.­In­payment­card­turnover,­online­(primarily­e-commerce)­ card-not-present­ transactions­ demonstrated­ the­most­dynamic­growth,­although­they­still­comprise­only­a­small­part­of­total­card­transactions.

In 2015, the efficiency of Hungarian payment system increased considerably by international standards.

All­ three­ indicators­ measuring­ the­ level­ of­ development­ of­ credit­transfers,­electronic­purchases­and­electronic­bill­payments­increased­in­2015.­The­share­of­electronic­payment­methods­in­retail­purchases­rose­by­2.6­percentage­points,­thanks­to­the­sharp,­20­per­cent­increase­in­the­annual­turnover­of­payment­card­purchases.­As­a­result­of­the­dynamic­growth­in­payment­card­turnover­in­recent­years,­the­indicator­has­improved­by­5.7­percentage­points­since­2012,­representing­a­50­per­cent­increase.­There­was­a­robust,­8­percentage­point­increase­in­the­share­of­electronic­bill­payments­in­the­past­year.­Owing­to­the­positive­developments,­one­third­of­utility­bills­and­other­service­charges­are­now­paid­electronically.

Doubling the number of intraday clearing cycles in the Interbank Clearing System (ICS) operated by GIRO Zrt. and extending the operating hours from September 2015 accelerated domestic payment transactions further, to a degree that was also perceivable by customers.

From­the­autumn­of­2015,­the­number­of­ intraday­clearing­cycles­ in­the­ ICS­ rose­ from­five­ to­ ten,­which­means­ that­credit­ transfers­are­now­cleared­in­the­system­in­hourly­cycles.­As­a­result,­the­amounts­transferred­are­credited­to­beneficiaries’­accounts­faster­than­ever.­As­expected,­owing­to­the­higher­cycle­frequency,­the­number­and­value­of­transactions­cleared­in­individual­cycles­have­essentially­halved,­which­facilitated­a­more­even­distribution­of­ intraday­transaction­turnover.­Although­the­first­cycle­now­starts­an­hour­earlier,­the­highest­number­of­transactions­is­still­processed­in­this­cycle,­as­it­is­responsible­for­clearing­all­(typically­household)­credit­transfers­initiated­after­the­end­of­the­previous­business­day.­The­extension­of­the­operating­hours­of­the­ICS­by­half­an­hour­in­the­afternoon­primarily­benefits­corporations,­leaving­mo-re­time­to­execute­their­payment­transactions.­The­introduction­of­the­ten­cycles­and­hence­the­more­evenly­distributed­transaction­turnover,­reduced­potential­clearing­and­settlement­risks,­as­ICS­members­need­less­liquidity­to­settle­their­positions.

MAGYAR NEMZETI BANK

PAYMENT SYSTEMS REPoRT • JuNE 20168

As of 1 January 2016, all credit transfers denominated in HUF submitted on paper to credit institutions for interbank clearing are processed in the intraday clearing system of the ICS.

From­the­beginning­of­2016,­not­only­electronic,­but­also­paper-based­credit­transfers­must­be­submitted­to­the­intraday­clearing­system.­Thus,­in­addition­to­the­credit­transfers­of­the­Hungarian­State­Treasury,­at­present,­only­debit­transactions­are­cleared­in­the­overnight­system.­The­medium-term­objective­of­the­MNB­is­to­ensure­that­all­payment­transactions­are­processed­in­the­more­state­of­art­system,­instead­of­overnight­clearing.

On 16 November 2015, the Hungarian forint was included in the CLS system as a settlement currency, whereby the forint became the first currency in the region to join the leading financial infrastructure of the international foreign exchange market.

The­inclusion­of­the­forint­in­the­CLS­system­was­preceded­by­two­years­of­intensive­preparations­and­development­work­on­the­part­of­both­the­MNB­and­Hungarian­foreign­exchange­market­participants.­The­use­of­CLS­may­significantly­reduce­the­probability­of­situations­where­–­as­in­September­2008­–­international­foreign­currency­financing­becomes­inaccessible­ for­Hungarian­banks.­Therefore,­ the­MNB­made­ it­clear­that­it­expects­the­banking­sector­to­use­the­system­actively.­Turnover­settled­in­CLS­has­been­on­the­rise­since­the­inclusion­of­the­forint­and­the­MNB­expects­further­growth­for­2016.

As in previous years, the operation of the overseen financial market infrastructures was highly reliable in 2015, supporting the functioning of money and capital markets safely and efficiently.

Developments­implemented­in­domestic­financial­market­infrastructures­in­2015­improved­the­efficiency­of­the­systems­without­any­undesired­increase­in­operational­risks.­The­availability­of­VIBER­(the­Hungarian­RTGS)­ and­ the­ ICS­ improved­ compared­ to­ the­ previous­ year,­ but­deteriorated­slightly­in­the­case­of­KELER­and­KELER­CCP.­In­respect­of­transactions­processed­in­the­payment­systems,­in­2015­the­clearing­and­settlement­execution­time­shortened­compared­to­2014.

Participants of the systems adjusted quickly and adequately to the effects exerted by the modification of monetary policy instruments and by the MNB’s Self-Financing Programme on the liquidity of financial market infrastructures.

There­was­ sufficient­ liquidity­ in­ the­financial­market­ infrastructures­for­the­smooth­execution­of­payments­both­at­system­level­and­on­an­individual­bank­basis.­The­liquidity­of­system­members­was­shaped­by­several­events­in­2015.­However,­thanks­to­adjustments­in­member-level­liquidity­management,­this­did­not­increase­the­level­of­clearing­and­settlement­risks.­As­a­result­of­the­MNB’s­Self-Financing­Programme­and­the­modification­of­monetary­policy­instruments,­participants­raised­the­aggregate­level­of­pledged­collateral,­including­the­liquidity­available­for­payment­transactions­(intraday­credit­line).­With­respect­to­collateral,­the­share­of­government­bonds­exhibited­the­most­marked­increase­in­2015,­growing­to­72­per­cent­after­a­24­percentage­point­expansion.­On­the­whole,­the­participants­of­day-to-day­liquidity­management­used­the­available­ intraday­credit­ lines­more­actively,­taking­advantage­of­the­credit­for­longer­periods­and­to­a­somewhat­greater­degree­than­before,­which­partly­reflects­the­effect­of­the­fixed,­2­per­cent­reserve­requirement­applicable­to­all­members­as­of­1­December.­As­a­result­of­the­measure,­the­current­account­balance­of­participants­decreased­on­average;­consequently,­they­needed­to­rely­on­their­intraday­credit­lines­more­strongly­for­the­smooth­execution­of­payments.

KEy­MESSAGES

Payment SyStemS RePoRt • June 2016 9

In the first half of 2015, the risk management framework of KELER CCP successfully averted the spill-over of the defaults of brokerage firms subjected to supervisory measures to the rest of the capital market participants.

In­the­wake­of­the­broker­defaults­at­the­beginning­of­the­year,­defaults­in­the­markets­cleared­by­KELER­CCP­rose­both­in­terms­of­number­and­aggregate­value­compared­to­2014.­Thanks­to­the­prudent­risk­manage-ment­rules­of­KELER­CCP,­the­defaults­did­not­spill­over­to­other­market­participants.­At­the­same­time,­KELER­CCP­did­not­sustain­any­losses­in­managing­the­series­of­defaults.­Likewise,­despite­the­insolvency­of­certain­capital­market­participants,­clearing­and­settlement­risks­did­not­arise­across­the­infrastructure.

Clearing and settlement risks in the markets cleared by KELER CCP were not exacerbated even by the shorter settlement deadline of domestic and foreign securities traded on the Budapest Stock Exc-hange.

In­line­with­European­securities­markets,­pursuant­to­the­rule­adopted­on­6­October­2014,­spot­securities­transactions­conducted­on­the­Buda-pest­Stock­Exchange­must­be­settled­no­later­than­the­second­business­day­(T+2)­following­the­trading­day,­instead­of­the­previously­stipulated­third­business­day­(T+3).­After­analysing­the­data­of­the­nine­months­preceding­and­following­the­adoption­of­the­new­rule,­it­was­found­that­the­change­expedited­the­settlement­of­securities­transactions,­while­the­reduction­of­the­period­available­for­settling­the­transactions­–­as­expected­–­had­no­major­impact­on­the­number­and­value­of­defaults.

According to the regulatory inspections conducted in 2015, institutions providing payment services essentially complied with regulations; however, the MNB called for measures and imposed fines on a number of occasions with respect to the violations detected.

In­ general,­ the­ payment­ inspections­ conducted­ in­ 2015­ found­ that,­despite­being­essentially­compliant,­all­inspected­credit­institutions­had­committed­violations­ to­ various­degrees.­ Inspections­ conducted­at­22­institutions­found­violations­of­regulations­ in­176­cases.­Key­violations­involved­ failure­ to­ provide­ information,­ inadequate­ rectification­ of­payment­transactions­and­inappropriate­ liability­and­loss­allocation.­ In­consideration­of­the­severity­of­the­violations­identified,­the­MNB­imposed­fines­on­8­ credit­ institution­amounting­ to­a­ total­of­HUF­90.3­million.

Regulatory changes affecting domestic payment transactions and financial market infrastructures are intended to enhance modern payment services and to ensure safer access to the services concerned.

The­Payment­Accounts­Directive­announced­in­2014­is­to­be­transposed­into­Hungarian­law­by­the­autumn­of­2016.­As­a­result,­the­pricing­of­retail­payment­services­will­become­more­transparent­and­comparable,­customers­will­have­easier­access­to­basic­and­low-cost­payment­services,­and­account­switching­between­service­providers­will­become­simpler.­Moreover,­a­new­Payment­Services­Directive­was­announced­in­January­2016,­which­is­to­be­transposed­into­Hungarian­law­within­two­years.

By 31 October 2016, payment ser-vice providers operating in Hun-gary and their customers must comply with the requirements of the EU regulation applicable to credit transfers and direct debits in euro.

From­ that­ date,­ credit­ transfers­ and­ direct­ debits­ in­ euro­must­ be­executed­ in­ accordance­ with­ the­ common­ standards­ and­ technical­requirements­ of­ the­ regulation­ commonly­ referred­ to­ as­ the­ “SEPA­End­ Date­ Regulation”.­ The­ preparation­ of­ Hungarian­ participants­ is­progressing­at­an­adequate­pace;­at­ the­end­of­2015,­nearly­85­per­cent­of­euro­credit­ transfers­met­ the­relevant­ requirements.­One­of­the­most­ challenging­ rules­ of­ the­ Regulation­ determines­ that­ after­the­deadline,­payment­service­providers­must­ensure­the­use­of­SEPA­message­formats­in­all­cases­where­a­corporation­or­public­authority­initiates­or­receives­individual­credit­transfers­or­individual­direct­debits­which­are­not­ transmitted­ individually­but­are­bundled­ together­ for­transmission.­Payment­ service­providers­may­be­allowed­ to­provide­their­customers­with­conversion­services­to­SEPA­standards­only­with­limitations,­subject­to­specific­conditions.­Another­important­rule­of­the­Regulation­stipulates­that­payment­service­providers­may­not­require­their­users­to­indicate­the­business­identifier­code­of­the­beneficiary’s­bank­(“BIC­code”)­upon­initiating­the­credit­transfer.

MAGYAR NEMZETI BANK

PAYMENT SYSTEMS REPoRT • JuNE 201610

Establishing the basic infrastructure for instant payment services is considered to be one of the most crucial developments affecting Hungarian payment system, which will enable the use of payment solutions that are much faster than the currently available electronic payment services and can be used 24 hours a day.

With­ a­ view­ to­ accelerating­ the­ execution­ of­ payment­ transactions­even­further­and­to­broaden­the­potential­use­of­electronic­payment­methods,­in­2015­the­MNB­commenced­preparations­for­developing­the­infrastructure­for­instant­payments.­This­may­have­a­profound­effect­on­the­functioning­of­the­existing­payment­systems­and­entails­extremely­complex­payment­system­developments,­both­on­the­part­of­banks­and­on­the­part­of­the­central­systems.­The­new­payment­system­will­enable­payment­transactions­to­be­executed­within­a­few­seconds­every­day­of­the­year,­twenty-four­hours­a­day,­and­electronic­payment­will­be­an­option­in­numerous­situations­where­so­far­only­cash­payment­has­been­possible.­In­the­case­of­private­individuals,­person-to-person­payments­and­in­retail­payments,­new­payment­solutions­may­emerge,­and­the­possibility­of­prompt­execution­may­curb­the­distrust-driven­incentive­to­use­cash­in­the­corporate­sector.­In­addition,­the­new­basic­infrastructure­may­promote­the­development­of­new,­innovative­payment­solutions,­which,­ on­ the­ one­ hand,­ will­ improve­ the­ competitiveness­ of­ the­Hungarian­banking­sector­in­the­long­run­and,­on­the­other­hand,­will­simplify­ the­market­ entry­ of­ new­ participants­ providing­ innovative­services.

With more frequent daily clearing of forint payment card transactions, merchants may receive the amounts of payment card purchases faster than before, which may encourage the expansion of the card acceptance infrastructure.

One­ of­ the­ fundamental­ goals­ of­ the­ MNB’s­ payment­ system­developments­ is­ to­ accelerate­ payment­ transactions,­ including­ the­clearing­of­card­purchases.­In­the­case­of­the­most­dynamically­growing­electronic­ payment­ method,­ payment­ card­ purchases,­ merchants­accepting­payment­cards­generally­cannot­collect­the­value­of­purchases­until­1­or­2­days­after­the­transaction.­This­is­a­serious­lag­compared­to­credit­transfers,­which­have­been­processed­in­intraday­clearing­system­for­the­past­4­years;­therefore,­accelerating­the­crediting­to­merchants’­payment­accounts­is­clearly­justified.­To­that­end,­GIRO­Zrt.­has­launched­a­ project­ to­ commence­ preparations­ for­ developing­ a­ multi-cycle­intraday­ clearing­ process­ for­ transactions­ executed­ by­ domestically­issued­payment­cards­in­the­Hungarian­card­acceptance­network.

In 2015, the KELER Group continued to implement its institutional development strategy, assigning key priority to taking advantage of international business opportunities. The Gro-up is expected to join TARGET2-Securities – the common, pan-European settlement infrastructure – in 2017.

KELER­Ltd.­and­KELER­CCP­Ltd.­–­in­which­the­MNB­holds­a­direct­and­an­indirect­majority­ interest,­respectively­–­continued­to­expand­the­range­ and­quality­ level­ of­ its­ services­ in­ 2015.­During­ the­ year,­ the­KELER­Group­expanded­its­customer­base­primarily­in­the­energy­mar-ket­and­the­gas­market,­establishing­partnerships­with­larger­actors­in­the­region.­It­also­introduced­new­services,­such­as­an­order­routing­platform­(WARP)­supporting­the­distribution­and­settlement­of­open-ended­investment­fund­units,­and­its­Trade­Reporting­service,­which­facilitates­the­discharge­of­the­reporting­obligations­prescribed­by­Eu-ropean­regulations.­KELER­Ltd.­continued­its­preparations­for­ joining­the­common­pan-European­securities­settlement­platform,­TARGET2-Securities­(T2S)­on­6­February­2017.

KEy­MESSAGES

Payment SyStemS RePoRt • June 2016 11

Cyber risk is an increasing threat worldwide, and also impacts financial market infrastructures; addressing this issue, therefore, is of key significance.

Addressing­the­issue­of­cyber­risk­is­considered­to­be­one­of­the­most­significant­challenges­of­our­time,­as­cyber­attacks­on­financial­market­infrastructures­–­due­to­their­central­role­in­the­financial­sector­–­also­carry­systemic­risks.­Recognising­the­problem,­numerous­international­organisations,­including­BIS-IOSCO,­have­drawn­up­recommendations­regarding­ the­ containment­of­ cyber­ risk.­ The­MNB­has­ also­offered­a­ number­ of­ proposals,­ with­ respect­ to­ the­ relevant­ application­guidelines.­ The­adaptation­and­ implementation­of­ the­ international­recommendations­ into­ the­ Hungarian­ oversight­ methodology­ is­ in­progress.

The ratio of payment card fraud to total turnover remains low, despite the fact that fraud associated with domestically issued payment cards and with the Hungarian acceptance network increased in the past period.

Payment­card­turnover­increased­dynamically­in­the­past­period­with­an­inevitable­increase­in­payment­card­fraud.­At­the­same­time,­the­number­of­fraud­cases­and­the­value­of­losses­sustained­remained­low­relative­to­total­turnover­and­also­by­European­comparison.­Based­on­the­European­Central­Bank’s­card­fraud­report­published­in­July­2015,­according­to­data­available­for­2013,­Hungary­has­the­lowest­rate­of­fraud­from­an­issuing­perspective.­Thanks­to­consumer­protection­regulations,­customers­bore­only­11­per­cent­of­all­fraud­losses.

Payment SyStemS RePoRt • June 2016 13

1 Introduction

One of the main responsibilities of the Magyar Nemzeti Bank (MNB) as set forth in the Act on the Magyar Nemzeti Bank is to promote the smooth execution of payments and the reliable and efficient functioning of the payment and settlement systems.­ The­broader­use­of­ fast,­ secure­and­cost-efficient­electronic­payment­methods­by­economic­agents­would­save­significant­resources­ in­payment­transactions­at­the­level­of­the­society,­which­would­have­a­beneficial­effect­on­the­competitiveness­and­the­ growth­ rate­ of­ the­ economy.­ In­ order­ for­ this­to­ occur,­ however,­ it­ must­ be­ possible­ to­ simply­and­ safely­ use­ electronic­ payment­ instruments­alongside­ cash­ in­most­ payment­ situations,­ at­ low­and­transparent­costs.­Moreover,­it­is­also­essential­to­ensure­that­Hungarian­financial­market­infrastructures­support­ the­ execution­ of­ the­ real­ economic­ and­financial­ transactions­ initiated­by­ economic­ agents­by­providing­high­quality­services­in­accordance­with­regulations.­Consequently,­oversight­of­the­payment­and­settlement­systems­is­a­key­responsibility­of­the­central­bank.­The­ reliability,­efficiency­and­ liquidity­management­ of­ the­ systems­ and­ the­ relevant­interdependent­services­are­monitored­and­analysed­in­a­risk-based­oversight­framework.

The MNB fundamentally acts as a catalyst in improving efficiency: it prepares, analyses and uses the tools of active coordination and dialogue to create conditions where stakeholders take into consideration the interests of society in making their decisions.­The­more­extensive­use­of­electronic­

payment­instruments­may­have­a­number­of­positive­effects­ on­ the­ Hungarian­ economy.­ It­ can­ help­ to­improve­ the­ efficiency­ of­ payments,­ reduce­ the­resource­ requirement­of­ transactions­and­suppress­the­shadow­economy,­all­of­which­in­turn­promotes­economic­growth.­In­addition­to­its­role­as­a­catalyst,­the­MNB­also­ regulates­ the­execution­of­payments­and­ can­ thus­ influence­ the­ market­ of­ payment­services­via­requirements­laid­down­in­decrees­issued­by­ the­Governor­of­ the­MNB.­Compliance­with­ the­requirements­set­out­in­decrees­and­in­the­Act­on­the­Provision­of­ Payment­ Services­ is­monitored­by­ the­MNB.

The­first­part­of­this­Report­presents­current­trends­in­the­development­of­Hungarian­payment­methods,­changes­ affecting­ the­ efficiency­ of­ payments­ and­the­ pricing­ of­ services,­ and­ developments­ related­to­ the­ operation­ and­ oversight­ of­ the­ Hungarian­financial­ market­ infrastructures.­ The­ findings­ of­payment­ inspections­ are­ also­ described­ in­ this­part­of­the­Report.­ In­addition,­from­2015,­the­first­part­ provides­ an­ overview­ of­ the­ main­ results­ of­the­ developments­ implemented­ in­ payment­ and­settlement­systems­in­the­previous­year.­The­second­part­of­the­Report­discusses­ in­detail­ three­priority­subjects­ related­ to­ the­Hungarian­ financial­market­infrastructures:­current­issues­in­relevant­Hungarian­and­ international­regulatory­activities,­ongoing­and­pending­developments­affecting­the­financial­market­infrastructures,­ and­ security­ issues­ relevant­ to­payment­systems.

Payment SyStemS RePoRt • June 201614

2 Operation of the domestic payment system

The smooth execution of payments and the reliable, efficient operation of financial infrastructures are essential for the execution of real economic and

financial transactions.­Payments­ in­central­bank­or­commercial­bank­money,­and­transactions­affecting­securities­ and­ other­ financial­ instruments­ require­

Chart 1Overview of the Hungarian financial infrastructure (2015)

Type oftransaction

credittransfer4

domesticpayment cardtransactions

HUF 10,199 Bn5

postalinpayment to

paymentaccount

FX transactionssettled in CLS

(HUF leg)

OTC market

spot stockexchange

derivativestock

exchange

Legend:financial transactions(gross) financial settlement

securities settlementsecurities transactions(gross)

directdebit4

Interbank ClearingSystem (retail

payment system, ICS)*

payment cardclearing systems

Postal ClearingCentre

CLS

KELER GroupKELER Group

Clearing

HUF 420Bn

HUF 16,823Bn1

HUF 1.1 Bn2

HUF 74,124 Bn3

HUF89,788 Bn

HUF833,657 Bn

HUF2,190 Bn

HUF 1,549 Bn

HUF 2,190 Bn

netHUF 772 Bn

HUF 157,190 Bn

HUF 851Bn

HUF 195 Bn

gross HUF2,383 Bn

HUF157,190 Bn6

HUF2,601 Bn6

HUF2,763 Bn6

N/A

Settlement

securities leg cash leg

MNBProprietary

homeaccounting

system

VIBER*(RTGS)

1 Transactions settled in the overnight clearing system, in which transactions differing from direct debit and credit transfers are also settled.2 Transactions settled in the second cycle of the overnight clearing system (due to queuing or late submission).3 Electronic credit transfers settled in the intraday clearing system as from 2nd of July 2012.4 On-us transactions are not included. 5 Only the interbank part of total payment card transactions is cleared in the payment card clearing systems.6 Securities transactions (gross)* Overseen systems

OPERATION­OF­THE­DOMESTIC­PAyMENT­SySTEM

Payment SyStemS RePoRt • June 2016 15

centralised­systems­for­the­clearing­and­settlement­of­ transactions.­ The­ Hungarian­ Real-Time­ Gross­Settlement­System­(commonly­referred­to­as­VIBER)­is­operated­by­the­MNB.­Its­primary­purpose­is­the­settlement­ of­ large-value,­ time-critical­ money­ and­capital­ market­ transactions­ between­ participants­and­on­behalf­of­their­customers­and­of­the­related­financial­ infrastructures.­ The­ Interbank­ Clearing­System­ (ICS)­ is­ a­ domestic,­ retail­ gross­ payment­system­operated­by­GIRO­ Zrt.­ (GIRO),­ offering­ two­clearing­methods:­ intraday­ and­ overnight­ clearing.­GIRO­performs­the­clearing­of­payment­transactions,­

while­ the­MNB,­as­settlement­agent,­ is­ responsible­for­ settlement.­ The­ clearing­ of­ card­ transactions­is­ performed­ in­ the­ systems­ of­ international­ card­companies­(Visa,­MasterCard),­while­postal­payment­instruments­ are­ typically­ cleared­ in­ the­ Postal­Clearing­ Centre.­ Members­ of­ the­ KELER­ Group,­the­ central­ securities­ depository­ (KELER)­ and­ the­central­counterparty­(KELER­CCP),­are­responsible­for­securities­clearing­and­settlement­services,­and­the­registration­of­domestically­issued­securities­(Chart­1).­ The­ oversight­ activity­ of­ the­ MNB­ covers­ the­operations­of­VIBER,­the­ICS,­KELER­and­KELER­CCP.

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PAYMENT SYSTEMS REPoRT • JuNE 201616

2.1 Payment service developments

2.1.1 TURNOvER Of MAIN PAyMENT INSTRUMENTS

Similar to recent years, the turnover of electronic payment methods increased in 2015, and this growth was primarily reflected in the turnover of payment cards1 (Chart­ 2).­ In­ the­ second­half­ of­the­ year,­ the­ number­ of­ payment­ card­ purchases­rose­ by­ more­ than­ 20­ per­ cent­ in­ year-on-year­terms.­ Credit­ transfer­ turnover­ increased­ by­ 2­ per­cent­and­as­a­result,­the­number­of­credit­transfers­exceeded­300­million­ transactions­ during­ the­ year.­At­around­2.5­per­cent,­the­ increase­ in­direct­debit­transactions­ was­ comparable­ to­ recent­ years.­ The­number­of­cash­withdrawals­decreased­by­more­than­1­million­compared­to­2014,­and­the­number­of­such­transactions­was­close­to­117­million­during­the­year.

The number of customers holding payment accounts remained largely the same.­ As­ in­ recent­ years,­

the­ moderate­ decline­ in­ the­ number­ of­ payment­accounts­ continued,­ presumably­mainly­ associated­with­customers’­ cost­ rationalisation.­The­decline­ in­the­number­of­accounts­typically­affected­customers­holding­ more­ than­ one­ account,­ and­ according­to­ the­MNB’s­ consumer­ surveys,2­ the­ ratio­ of­ the­banked­ population­ did­ not­ change­ considerably.­The­continuous­increase­in­the­number­of­accounts­accessible­through­the­internet­was­consistent­with­the­trend­of­the­previous­period,­and­the­ratio­of­these­accounts­approached­80­per­cent.3

The number of online merchant outlets rose by almost 25 per cent in 2015.­While­ the­ number­ of­payment­cards­remained­less­than­9­million­in­2015,­the­ number­ of­ physical­merchant­ outlets­ (82,500)­rose­by­9­per­ cent­ compared­ to­ the­previous­year,­and­the­number­of­merchant­POS­terminals­(101,000)­also­ increased­by­more­than­7­per­cent.­Compared­to­the­total­number­of­retail­stores,4­the­number­of­merchants­accepting­payment­cards­rose­dynamically:­while­payment­cards­were­accepted­ in­37­per­cent­of­stores­in­2010,­this­ratio­had­risen­to­53­per­cent­by­the­end­of­2014.­The­number­of­online­merchant­outlets­exhibited­the­strongest­growth:­by­the­end­of­2015,­it­had­risen­by­more­than­one­quarter­compared­to­the­previous­year,­but­this­still­only­represents­9­per­cent­of­all­merchant­outlets.

The turnover of payment card purchases – the most popular electronic payment method – grew even more noticeably than in previous years (Chart­3).­In­the­second­half­of­2015,­the­growth­in­the­turnover­of­card­purchases­exceeded­20­per­cent­year-on-year,­both­in­terms­of­transaction­number­and­value.­The­total­value­of­nearly­430­million­payment­transactions­executed­during­the­year­was­HUF­3,200­billion,­which­means­ an­ average­ value­ of­ almost­ HUF­ 7,500­ per­transaction.­Card-not-present­purchases,­completed­mainly­ on­ the­ internet,­ rose­ by­more­ than­ 34­ per­

1­­Detailed­payment­statistics­are­included­in­the­payment­table­set­available­on­the­MNB’s­website:­http://www.mnb.hu/en/statistics/statistical-data-and-information/statistical-time-series/xiv-payment-systems/payment-data

2­­Ilyés­–­Varga:­Show­me­how­you­pay,­and­I­will­tell­you­who­you­are­–­Socio-demographic­determinants­of­payment­habits.­Financial­and­Economic­Review,­Vol.­14­(2),­June­2015,­pp.­26–61.

3­­Published­at­the­end­of­2015,­the­short­video­entitled­“Let’s­pay­via­Internetbank!”­presents­useful­information­about­the­procedure­of­internet­banking:­https://www.youtube.com/watch?v=o4-GubRR4yI&nohtml5=False

4­Source:­HCSO­http://www.ksh.hu/docs/hun/xstadat/xstadat_eves/i_okk016.html

Chart 2Turnover of main transaction types related to payment accounts(2010–2015)

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Credit transferCard paymentDirect debitCash withdrawal

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OPERATION­OF­THE­DOMESTIC­PAyMENT­SySTEM

Payment SyStemS RePoRt • June 2016 17

cent,­which­is­almost­double­the­increase­observed­in­the­turnover­of­physical­points­of­sale.­However,­the­turnover­of­online­points­of­sale­remains­low­relative­to­total­payment­card­turnover:­it­ is­5.5­per­cent­in­terms­of­number­and­over­8.5­per­cent­ in­terms­of­value.­According­to­the­expanded­payment­table­set,­in­which­the­MNB­also­publishes­flow­data­by­card­type,­payments­with­debit­cards­account­for­almost­85­per­cent­of­total­card­turnover,­both­in­terms­of­the­number­of­transactions­and­their­value.

Cash withdrawals with payment cards rose slightly in number but somewhat more noticeably in value (Chart­3).­After­the­decline­in­the­number­of­payment­card­cash­withdrawals­ in­ recent­years,­ there­was­a­moderate­increase­in­2015,­while­the­value­of­cash­withdrawals­ was­ up­ 7­ per­ cent.­ Accordingly,­ the­average­value­of­cash­withdrawal­transactions­with­payment­cards­rose­to­HUF­63,000.­At­the­same­time,­cash­withdrawal­ turnover­ varies­widely­ depending­on­individual­cash­withdrawal­methods.­The­average­value­of­ATM­transactions,­which­account­for­96­per­cent­of­ the­population’s­ cash­withdrawals­ by­ card,­was­less­than­HUF­59,000­during­the­year,­compared­to­cash­withdrawals­at­the­POS­terminals­installed­at­branches­–­a­preferred­method­in­the­corporate­sector­–­which­amounted­to­HUF­185,000­on­average.

The most prominent change affecting payment cards in the past year was the spread of contactless card technology, which provides the means for simpler, faster and more convenient payments­ (Chart­ 4). Thanks­to­the­rapid­development­of­the­contactless­payment­ infrastructure,­ the­number­ of­ contactless­cards­grew­by­nearly­30­per­cent,­while­the­number­of­contactless­enabled­POS­terminals­rose­by­almost­38­ per­ cent.­ As­ a­ result,­ at­ the­ end­ of­ 2015­ 53.6­per­ cent­ of­ all­ cards­ and­ 62.5­ per­ cent­ of­ all­ POS­terminals­were­compatible­with­the­new­technology.­Although­contactless­cards­support­much­faster­and­far­more­convenient­payments­than­before,­the­ratio­of­ contactless­ transactions­ to­ the­ total­ turnover­of­card­purchases­still­ lags­substantially­behind­the­level­of­development­of­the­infrastructure.­In­2015,­a­ remarkable­ increase­ was­ seen­ compared­ to­ the­previous­year:­the­turnover­of­contactless­purchases­surged­ by­ 60­ per­ cent­ (62.7­ per­ cent­ in­ terms­ of­volume­and­59.8­per­cent­in­value).­As­a­result,­nearly­one­third­of­all­transactions­are­completed­using­this­technology,­accounting­for­18­per­cent­of­their­total­value.5­As­the­average­value­of­contactless­purchases­(HUF­ 3,600)­ represents­ one­ half­ of­ all­ purchase­transactions,­and­these­transactions­may­have­thus­presumably­replaced­numerous­cash­payments.­Data­indicate­that­customers­not­only­used­the­contactless­

Chart 3Annual growth rate of transactions with payment cards issued in Hungary (year-on-year)(2010–2015)

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Chart 4Spread of contactless card technology in the Hungarian payment card system (2012–2015)

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Ratio of contactless POSsRatio of contactless cardsRatio of the number of contactless paymentsRatio of the value of contactless payments

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5­­Released­at­the­end­of­2015,­the­short­video­entitled­“Pay­more­often­with­your­payment­card!”­is­intended­to­promote­the­use­of­contactless­card­payments:­https://www.youtube.com/watch?v=r60hl3DpvKy&nohtml5=False

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PAYMENT SYSTEMS REPoRT • JuNE 201618

technology­in­situations­where­they­would­have­paid­by­card­in­the­past­in­any­case;­apparently,­the­new­solution­has­also­begun­to­replace­their­previous­cash­transactions.

2.1.2 EffICIENCy Of dOMESTIC PAyMENTS IN INTERNATIONAL COMPARISON

In 2015, all indicators measuring the efficiency of Hungarian payment system increased compared to the previous year­ (Table­1). All­ three­ indicators­measuring­ the­ development­ of­ credit­ transfers,­electronic­ purchases­ and­ electronic­ bill­ payments­increased­in­2015.­It­is­the­ratio­of­credit­transfers­to­GDP­where­Hungarian­payment­transactions­are­most­in­line­with­the­European­level.­The­annual­value­of­credit­transfers­initiated­by­Hungarian­bank­customers­is­almost­15­times­higher­than­Hungarian­GDP,­while­the­ corresponding­European­average­ is­ around­17.­The­growth­rate­of­this­indicator­is­modest,­showing­a­moderate­increase­compared­to­the­previous­year.

Owing to the rising turnover of payment card purchases, significant progress has been made in respect of the share of electronic payment methods in retail purchases.­ The­ “electronic­ payment­ of­retail­ purchases”­ indicator­ was­ up­ 2.6­ percentage­points,­ reflecting­ a­ substantial,­ 20­per­ cent­ annual­increase­in­the­turnover­of­payment­card­purchases.­

Nevertheless,­ compared­ to­ the­ European­ average­of­30­per­cent,­there­is­still­room­for­improvement.­As­a­result­of­the­dynamic­increase­in­payment­card­turnover­in­recent­years,­the­indicator­has­improved­by­5.7­percentage­points­since­2012,­which­translates­into­a­50­per­cent­increase.­The­spread­of­contactless­card­technology­may­also­have­played­an­important­role­in­this­development.

There was a robust, 8 percentage point increase in the share of electronic bill payments.­Of­ all­ three­indicators­under­review,­bill­payments­demonstrated­the­largest­lag­in­comparison­to­the­European­average.­This­ can­ be­ mainly­ explained­ by­ the­ restrained­use­ of­ the­ direct­ debit­ payment­ method­ and­ the­popularity­of­postal­inpayment­money­orders­(yellow­cheques)­ and­ postal­ bill­ inpayment­ orders­ (white­cheques)­ among­ the­ Hungarian­ population,­ which­is­considered­to­be­a­Hungarian­peculiarity.­Recent­developments­ implemented­by­ the­Hungarian­Post­Office,­in­particular,­the­favourable­terms­of­the­use­of­bank­cards­in­case­of­postal­order­payments­brought­a­significant­positive­change­in­this­regard.­Owing­to­the­positive­developments,­one­ third­of­utility­bills­and­other­service­charges­are­now­paid­electronically­compared­to­the­previous­ratio­of­one­fourth.­With­rising­ card­ payment­ turnover­ and­ the­ increasingly­widespread­use­of­innovative­payment­solutions,­this­positive­change­may­continue­or­even­accelerate.

Table 1Changes in indicators measuring the level of development of Hungarian payment system compared to the EU

Indicator Calculation method Hungary European Union

2012 2013 2014 2015 2014

Credit­transfers Annual­value­of­credit­transfers­/­GDP 13.61 13.61 14.41 14.8 17.0

Electronic­payment­of­retail­purchases

Annual­value­of­payments­made­by­payment­cards­and­other­electronic­solutions­/­Annual­household­consumption

11.8% 13.0% 14.9% 17.5% 30.4%

Electronic­payment­of­utility­bills­and­other­service­charges

Estimated­annual­value­of­direct­debits­and­other­electronic­bill­payments­/­Estimated­annual­value­of­bill­payments

23.5% 24.3% 25.4% 33.6% 70%2

Source: MNB, ECB1 Deviation from previously published data due to data supplier modifications.2 Estimated value based on the data supply of individual EU Member States, per capita core direct debit figures and the study of Deutsche Bank (2005).

OPERATION­OF­THE­DOMESTIC­PAyMENT­SySTEM

Payment SyStemS RePoRt • June 2016 19

The­past­few­years­brought­about­several­important­technical­and­technological­innovations­in­the­area­of­payment­services,­especially­with­regard­to­certain­payment­solutions.­However,­previous­surveys­by­the­MNB­reveal­that­most­consumers­basically­have­reservations­about­innovative­payment­solutions.­Users­of­payment­services­only­begin­fully­taking­advantage­of­new­or­payment­solutions­which­are­new­to­them­after­they­have­gathered­sufficient­information­about­ their­ functioning.­With­ the­publication­of­ three­ short­ informative­ videos,­ the­MNB­wished­ to­ contribute­ to­enriching­this­knowledge.

The­film­entitled­“Pay­more­often­with­your­payment­card!”­provides­information­on­the­advantages­of­payment­card­use,­how­to­ request­ the­contactless­payment­cards­ introduced­ in­ recent­years,­how­and­ in­what­ situations­ to­use­contactless­cards.https://www.youtube.com/watch?v=r60hl3DpvKy&list=PLvWrKQkxKDHvv4DI5phEeL_LDuylHICpg&index=13

Most­of­ the­payment­developments­ implemented­ in­the­past­years­were­ intended­to­offer­various­options­ for­the­payment­of­utility­bills­and­other­service­charges.­The­short­film­entitled­“How­to­pay­your­bills­with­your­payment­card?”­presents­these­new­bill­payment­methods.https://www.youtube.com/watch?v=ar6uGpB3b9Q&index=14&list=PLvWrKQkxKDHvv4DI5phEeL_LDuylHICpg

Although­it­has­been­possible­to­do­finances­online­via­internet­banking­access­for­many­years­now,­online­banking­has­not­yet­become­truly­widespread­for­lack­of­sufficient­information.­The­short­film­entitled­“Let’s­pay­via­Internetbank!”­is­meant­to­provide­assistance­in­understanding­internet­banking­payment­option­and­the­steps­of­its­use.https://www.youtube.com/watch?v=o4-GubRR4yI&list=PLvWrKQkxKDHvv4DI5phEeL_LDuylHICpg&index=15

Box 1Short films on payment transactions

2.1.3 CHANGES IN THE PRICING Of RETAIL PAyMENT SERvICES ANd COSTS fOR RETAIL CUSTOMERS

Average costs for retail customers have remained essentially the same in the past two years, to a great degree reflecting the low inflation environment (Chart­ 5). The­ payment­ pricing­monitoring­ system­developed­ by­ the­ MNB­ has­ been­ monitoring­ the­changes­in­retail­payment­services­since­2012.­After­the­steep­increase­in­service­fees­in­2013,­the­charges­perceived­ by­ customers­ moderated­ considerably­after­the­introduction­of­two­free­cash­withdrawals­per­month­ in­2014.­According­to­detailed­data,­the­pricing­of­payment­services­stabilised­from­the­second­half­ of­ 2014;­ most­ service­ providers­ maintained­their­previous­fees,­while­those­raising­their­charges­typically­adjusted­their­fees­to­the­prevailing­inflation­rate.­At­the­beginning­of­2016,­the­average­monthly­payment­ costs­ of­ retail­ customers­was­HUF­ 1,650,­which­is­broadly­in­line­with­the­level­observed­at­the­end­of­2015.

Chart 5Changes in average monthly payment costs for retail customers(Oct. 2012 – Jun. 2016)

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AveragePensionerStudentUnder average income customerAverage income customerAbove average income customer

At the beginning of 2015, the payment pricing monitoring system of the MNB was expanded both with respect to data content and in terms of the number of account packages reported by payment service providers. Previously reported account packages indicate that payment costs did not change considerably after the methodological changeover; the difference between the two time series is fully attributable to the difference in the calculation method.

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PAYMENT SYSTEMS REPoRT • JuNE 201620

Looking at the range of payment services, cash withdrawal fees rose slightly further in 2015, but this increase was not as pronounced as the price changes seen in the previous years. The­ detailed­ payment­pricing­ monitoring­ system­ distinguishes­ between­several­domestic­and­international­cash­withdrawal­options.­The­results­gleaned­from­the­system­reveal­that­ the­ charges­ imposed­ on­ customers­ are­ only­moderately­ higher­ than­ in­ 2014­ (Charts­ 6­ and­ 7).­That­notwithstanding,­the­cash­withdrawal­costs­of­customers­who­failed­to­submit­a­request­for­the­free­cash­withdrawal­option­are­still­high.­The­annual­costs­of­payment­cards­remained­stable­ in­the­past­year,­

but­they­vary­widely­among­the­various­payment­card­types.­The­average­level­of­account­management­fees­was­roughly­the­same­in­2015­as­in­2014.­By­contrast,­estimated­ for­ the­ full­ range­ of­ customers,­ credit­transfer­ charges­declined­overall.­ The­main­ reason­for­this­is­the­fact­that,­thanks­to­the­methodological­changeover­ mentioned­ above,­ the­ MNB­ can­ now­also­monitor­ charges­ associated­ with­ accounts­ no­longer­offered­by­payment­service­providers.­Some­of­these­phased-out­account­packages­were­low-cost­or­complimentary­at­the­outset;­therefore,­they­were­less­ affected­by­ the­ fee­ increase­ that­ followed­ the­introduction­of­the­financial­transaction­duty.

Chart 6Average payment costs per customer for various types of services(Nov. 2012 - Mar. 2016)

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Chart 7Changes in the pricing of main service types(Dec. 2012 - Feb. 2016)

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n. 2

013

Aug

. 201

3 O

ct. 2

013

Dec

. 201

3 Fe

b. 2

014

Apr

. 201

4 Ju

n. 2

014

Aug

. 201

4 O

ct. 2

014

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. 201

4 Fe

b. 2

015

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. 201

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n. 2

015

Aug

. 201

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ct. 2

015

Dec

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5 Fe

b. 2

016

Note: 1 December 2012 = 100 per cent

OPERATION­OF­THE­DOMESTIC­PAyMENT­SySTEM

Payment SyStemS RePoRt • June 2016 21

2.2 Developments in 2015 relating to financial infrastructures

2.2.1 INCLUSION Of THE fORINT IN THE CLS SySTEM, ExPERIENCES REGARdING THE OPERATION SO FAR

On 16 November 2015, the Hungarian forint was the first country in the Central European region to join the international foreign exchange settlement system operated by CLS.6 As­a­result­of­the­inclusion,­the­Hungarian­legal­tender­joined­the­currencies­of­Australia,­South­Africa,­the­United­States,­the­United­Kingdom,­ the­ euro­ area,­ Hong­ Kong,­ Israel,­ Japan,­Canada,­South­Korea,­Mexico,­Norway,­Switzerland,­Sweden,­ Singapore­ and­New­Zealand­ to­ become­ a­settlement­currency­ in­a­system­that,­ in­view­of­ its­risk­ and­ liquidity­ management­ solutions,­ can­ be­rightfully­ regarded­ as­ the­ leading­ infrastructure­for­ the­ international­ foreign­exchange­market.­ The­inclusion­project­ launched­by­ the­MNB­and­CLS­ in­January­2014­was­completed­in­less­than­two­years,­demonstrating­the­extraordinary­commitment­of­the­project­organisation­and­decision-makers.­During­the­lifetime­of­the­project,­the­Financial­Stability­Board­of­the­MNB­and­the­Board­of­Directors­of­CLS­passed­a­decision­of­support­on­two­occasions,­ in­October­2014­and­ in­November­2015,­based,­ in­both­cases,­on­the­achievements­of­the­preceding­project­phases.­With­the­inclusion­the­settlement­risk­associated­with­FX­transactions­involving­the­forint­can­be­managed­efficiently,­which­further­improves­the­stability­of­the­Hungarian­ banking­ sector.­ According­ to­ the­MNB’s­expectations,­ recourse­ to­ the­ system­will­ increase­continuously­in­the­coming­years­as­an­increasingly­broad­ range­ of­ Hungarian­ and­ foreign­ FX­ market­participants­decide­to­channel­their­forint­transactions­into­the­CLS­settlement­service.­Accordingly,­the­MNB­will­ continue­ to­monitor­ the­ accession­ aspirations­and­the­results­of­Hungarian­stakeholders,­and­it­will­maintain­ its­expectation­that­an­ increasing­number­of­Hungarian­market­participants­build­up­their­own­direct­or­indirect­access­to­the­system.

Thanks to the inclusion of the forint, CLS offers to Hungarian banks a solution for the eventuality of such market turbulences where access to international foreign exchange markets becomes problematic. With­CLS­membership,­ the­Hungarian­market­gained­access­to­such­a­new­tool­that­could­become­ extremely­ important­ in­ crisis­ situations­similar­ to­ that­ experienced­ in­ September­ 2008.­Operating­ in­ an­ open­ economy,­ domestic­ banks­process­ a­ substantial­ volume­ of­ foreign­ currency­transactions,­and­ their­viability­greatly­depends­on­the­foreign­currency­liquidity­accessible­through­their­foreign­partner­banks.­In­the­event­of­a­downgrade­of­a­country’s­risk­rating,­foreign­partners­may­shun­the­domestic­banks­of­the­country­concerned,­with­potentially­ severe­ consequences­ for­ the­ foreign­currency­ liquidity­ position­ of­ the­ institutions.­ In­such­ situations,­ satisfying­ demand­ for­ foreign­currency­would­be­less­difficult­–­if­at­all­–­for­a­CLS­member­bank;­indeed,­the­reduced­foreign­exchange­settlement­risk­associated­with­the­CLS­membership­would­automatically­ensure­a­more­ favourable­ risk­rating­ for­ the­ bank.­ The­ advantage­ of­ using­ the­system,­therefore,­becomes­the­most­apparent­in­the­event­of­market­turbulences;­at­the­same­time,­it­also­improves­efficiency­in­a­calm­market­environment­as,­thanks­to­the­multilateral­net­settlement­principle,­the­system­reduces­the­level­of­liquidity­required­for­the­settlement­of­banks’­foreign­exchange­turnover­and­increases­the­foreign­exchange­turnover­that­can­be­settled­with­the­given­liquidity­level,­i.e.­it­improves­the­trading­potential.­On­the­whole,­the­CLS­system­guarantees­ efficient­ bank­ operations­ in­ a­ normal­foreign­exchange­market­environment­and­enables­normal­bank­operations­ to­ continue­ in­ a­ turbulent­FX­market­environment,­the­significance­of­which­is­clearly­underscored­by­the­events­of­2008.

Thanks to banks’ participation, forint turnover settled via the CLS system shows a steady increase, but the service is still not being used to its full potential.

6­­See:­Balla­–­Pintér:­Az­MNB­és­a­CLS­új­eszközt­ad­a­hazai­devizapiac­kezébe­(The­MNB­and­CLS­offer­the­Hungarian­foreign­exchange­market­a­new­instrument).­Parts­1­and­2:­ http://www.mnb.hu/letoltes/balla-gergely-patrik-pinter-cecilia-az-mnb-es-a-cls-uj-eszkozt-ad-a-hazai-devizapiac-kezebe.pdf http://www.mnb.hu/letoltes/balla-gergely-patrik-pinter-cecilia-az-mnb-es-a-cls-uj-eszkozt-ad-a-hazai-devizapiac-kezebe-2-resz.pdf

MAGYAR NEMZETI BANK

PAYMENT SYSTEMS REPoRT • JuNE 201622

Maximising its use would be of utmost significance for the national economy. On­16­November­2015,­a­limited­circle­of­banks­began­to­use­the­new­service­and­initial­experiences­confirm­that­the­infrastructure­cooperation­fully­meets­both­security­and­operational­expectations,­and­ is­prepared­ for­ the­ integration­of­additional­market­participants.­Between­16­November­2015­and­31­March­2016,­the­daily­value­of­the­forint­transactions­ settled­ in­CLS­ amounted­ to­USD­336.6­million­on­average,­and­on­the­busiest­day,­the­gross­volume­ settled­ in­ the­ system­peaked­ at­USD­ 850.9­million­(Chart­8).­The­average­value­of­the­netting­effect­was­67­per­cent­in­the­review­period,­which­means­that­only­33­per­cent­of­gross­positions­were­needed­to­be­covered­by­real­forint­liquidity­on­average.­In­view­of­the­multilateral­netting­principle,­this­percentage­is­expected­to­grow­ in­ line­with­ the­rising­coverage­of­market­participants;­consequently,­it­is­also­in­the­interest­of­market­actors­already­participating­in­the­system­ to­ encourage­ their­ partners­ to­ use­ the­ CLS­service.­In­the­near­future,­therefore,­the­MNB­expects­an­increase­in­the­forint­turnover­settled­in­the­CLS­as­a­combined­result­of­market­and­central­bank­incentives.

2.2.2 IMPACT Of THE HIGHER CyCLE fREqUENCy Of THE ICS INTRAdAy CLEARING

Doubling the number of intraday clearing cycles in the ICS and extending the operating hours from September 2015 accelerated domestic payment transactions to a degree that was also perceivable by customers.­In­its­capacity­as­a­regulator,­developer,­

overseer­and­owner,­the­MNB­strives­to­continuously­develop­the­payment­system.­Since­the­introduction­of­intraday­credit­transfers,­the­MNB­has­monitored­the­ functioning­ of­ the­ new­ system­ and­ the­ actual­execution­ time­ of­ the­ transactions­ processed.­Analyses­ indicated­ that­ even­ though­ 4­ hours­ are­legally­available­for­the­execution­of­credit­transfers,­with­ 5­ settlement­ cycles­ a­ day,­ the­ value­ of­ credit­transfers­was­ credited­ to­ the­beneficiary’s­ account­within­ 2­ hours­ on­ average.­ Of­ these­ two­ hours,­however,­credit­transfers­spent­one­hour­waiting­to­be­cleared.­Based­on­these­experiences­and­considering­that­the­MNB­indicated­its­intention­to­increase­the­number­of­cycles­upon­the­introduction­of­intraday­clearing­already,­from­7­September­2015­the­speed­of­credit­transfers­accelerated­further.­Owing­to­the­implementation­ of­ the­ development­ the­ number­of­intraday­clearing­cycles­rose­from­5­to­10,­which­means­ that­ credit­ transfers­are­now­cleared­ in­ the­system­at­hourly­ intervals­ (Chart­ 9).­ The­ increased­frequency­ of­ the­ clearing­ cycles­ also­modified­ the­operating­hours­of­the­system.­The­first­cycle­starts­an­hour­earlier,­which­primarily­benefits­retail­customers­by­ensuring­the­earlier­execution­of­the­credit­transfers­submitted­after­the­end­of­the­previous­business­day.­The­extension­of­ the­operating­hours­of­ the­ ICS­by­half­an­hour­in­the­afternoon,­in­turn,­is­beneficial­for­corporations,­ leaving­more­time­for­executing­their­financial­transactions.­Similarly,­the­number­of­further­payments­ that­ can­be­executed­ from­the­ incoming­credit­ transfers­during­ the­same­day­ is­on­ the­rise,­which­ has­ improved­ the­ efficiency­ of­ the­ financial­management­of­the­corporate­sector.­In­addition,­the­waiting­time­may­decrease­for­transactions­following­the­execution­of­payments­ (e.g.­purchase­and­sale,­acceptance­of­goods);­therefore,­payment­by­credit­transfer­may­often­become­a­favourable­alternative­to­cash­payments.

Chart 8Daily gross forint turnover settled in the CLS system versus the related net forint turnover settled in vIBER (USD)(17 November 2015 – March 2016)

– 100,000,000 200,000,000 300,000,000 400,000,000 500,000,000 600,000,000 700,000,000 800,000,000 900,000,000

– 100,000,000 200,000,000 300,000,000 400,000,000 500,000,000 600,000,000 700,000,000 800,000,000 900,000,000

USD USD

Gross daily turnoverNet daily turnover settled in VIBERAverage gross daily turnoverAverage net daily turnover

17 N

ov. 2

015

24 N

ov. 2

015

1 D

ec. 2

015

8 D

ec. 2

015

15 D

ec. 2

015

22 D

ec. 2

015

29 D

ec. 2

015

5 Ja

n. 2

016

12 Ja

n. 2

016

19 Ja

n. 2

016

26 Ja

n. 2

016

2 Fe

b. 2

016

9 Fe

b. 2

016

16 F

eb. 2

016

23 F

eb. 2

016

1 M

ar. 2

016

8 M

ar. 2

016

15 M

ar. 2

016

22 M

ar. 2

016

29 M

ar. 2

016

Chart 9Clearing cycles in the intraday system of the ICS from 7 September 2015

1. cycle06:00 07:00 08:00 09:00 10:00 11:00 12:00 13:00 14:00 15:00 16:00 17:00 18:00

2. cycle3. cycle4. cycle5. cycle6. cycle7. cycle8. cycle9. cycle

10. cycle

ClearingSending phase

Receiving phase

Source: GIRO Zrt.

OPERATION­OF­THE­DOMESTIC­PAyMENT­SySTEM

Payment SyStemS RePoRt • June 2016 23

The frequency of clearing cycles was increased smoothly and its effects are beneficial for the payment system. The­hour-long­dead­time­between­two­cycles­was­eliminated:­in­practice,­credit­transfers­accelerated­and­may­even­reach­the­beneficiaries­in­as­little­as­one­hour.­While­the­higher­cycle­frequency­did­not­change­the­performance­of­the­system,­deadlines­became­tighter.­As­expected,­without­giving­rise­ to­capacity­problems,­this­improved­the­liquidity­of­the­system,­essentially­reducing­the­number­and­value­of­individual­cycles­by­half­(Chart­10),­which­resulted­in­a­more­even­distribution­of­the­intraday­transaction­turnover.­ The­first­ cycle­now­starts­ an­hour­earlier­and­ it­ continues­ to­process­ the­highest­number­of­transactions,­ as­ it­ is­ responsible­ for­ clearing­ all­ –­typically­retail­–­credit­transfers­initiated­after­the­end­of­the­previous­business­day.­In­terms­of­value,­the­largest­portion­of­the­turnover­is­still­concentrated­in­the­last­few­cycles;­however,­because­of­the­sharp­fall­in­the­turnover­value­of­individual­cycles­(Chart­10),­participants­require­less­liquidity­for­the­execution­of­the­cycles.­This­significantly­decreases­the­clearing­and­settlement­risk­that­arises­from­the­fact­that­raising­funds­for­high-turnover­cycles­toward­the­end­of­the­day­may­be­difficult­if­the­given­participant­has­failed­to­accurately­estimate­its­daily­liquidity­need­.

2.2.3 MIGRATING PAPER-BASEd CREdIT TRANSfERS TO INTRAdAy CLEARING

As of 1 January 2016, all forint denominated credit transfers submitted on paper to credit institutions for interbank clearing are processed in the intraday clearing system of the ICS.­ After­ the­ introduction­of­intraday­ clearing­ system­ in­ 2012,­ only­ paper-based­credit­transfers,­debit-type­transactions­and­the­credit­transfers­of­the­Hungarian­State­Treasury­remained­in­the­overnight­clearing­system.­In­2015,­yet­another­step­was­made­toward­migrating­all­ transactions­from­the­overnight­clearing­system­to­ the­quicker,­more­state-of-art­intraday­clearing­system.­At­present,­in­addition­to­the­credit­transfers­of­the­Hungarian­State­Treasury,­only­ debit­ transactions­ are­ cleared­ in­ the­ overnight­system.­Importantly,­however,­even­though­transactions­submitted­on­paper­are­now­cleared­in­a­faster­system,­the­ statutory­ 4-hour­ rule­ remains­ applicable­ only­ to­electronically­submitted­credit­transfers.­ICS­members­began­to­migrate­their­credit­transfers­to­the­intraday­clearing­system­(Chart­11)­ahead­of­the­deadline;­thus,­apart­from­some­random­exceptions,­essentially­all­credit­institutions­had­completed­ the­migration­by­ the­pre-defined­deadline.­The­migration­affected­around­800,000­transactions­each­month,­which­roughly­corresponds­to­the­daily­turnover­of­the­intraday­clearing­system.

2.2.4 NEw SERvICES Of THE KELER GROUP

As in previous years, in 2015 the KELER Group introduced and made widely available several new services, including the settlement of investment fund units, supporting the discharge of reporting

Chart 10Monthly breakdown of the number of transactions (top chart) and value (bottom chart) processed in intraday clearing for each cycle (2015)

0 1,000 2,000 3,000 4,000 5,000 6,000

0 1,000 2,000 3,000 4,000 5,000 6,000

Thousand pieces Thousand pieces

0 200 400 600 800

1,000 1,200 1,400 1,600 1,800 2,000

0 200 400 600 800 1,000 1,200 1,400 1,600 1,800 2,000

HUF Billion

765

43

21

8910

Cycles:

HUF Billion

Jan.

201

5

Feb.

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Apr

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2015

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2015

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Chart 11Number of credit transfers processed in overnight clearing in a monthly breakdown (2015)

0 200,000 400,000 600,000 800,000 1,000,000 1 200,000

0 200,000 400,000 600,000 800,000

1,000,000 1 200,000

Pieces Pieces

Janu

ary

Febr

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ch

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embe

r

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embe

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MAGYAR NEMZETI BANK

PAYMENT SYSTEMS REPoRT • JuNE 201624

obligations, the issue of LEI codes, and also participated in international service provision.­The­KELER­Group­is­committed­to­improving­service­levels­and­keeping­up­with­industry­trends­in­its­provision­of­ domestic­ and­ international­ services.­ Among­ its­new­services­offered­in­the­domestic­market,­special­mention­should­be­made­of­WARP,­a­routing­platform­introduced­ at­ the­ end­ of­ 2014­ for­ supporting­ the­distribution­and­clearing­of­open-ended­investment­fund­ units,­ and­ its­ Trade­ Reporting­ service,­ which­facilitates­the­discharge­of­the­reporting­obligations­prescribed­by­European­regulations.­In­addition­to­the­ability­of­the­latter­to­meet­the­reporting­requirements­prescribed­by­Regulation­(EU)­No­648/2012­(EMIR)7­for­derivative­transactions­(from­2016),­this­service­is­also­suitable­for­supporting­data­supplies­on­the­exchange-traded­transactions­of­the­wholesale­energy­market­as­specified­ in­Regulation­(EU)­1227/2011­(REMIT).­Moreover,­as­an­intermediary,­the­KELER­Group­also­continued­to­assist­in­code­applications­for­the­legal­entity­ identifiers­ (LEI)­ required­ for­ the­discharge­of­reporting­obligations.­As­regards­international­service­provision,­on­the­one­hand,­developments­were­based­on­the­decades­of­operational­experience­acquired­by­the­KELER­Group­and,­on­the­other­hand,­on­the­competition-boosting­effect­of­European­regulatory­and­infrastructure­efforts.­KELER­CCP­has­transformed­its­clearing­system­to­a­multi-currency­system­and­is­now­prepared­to­provide­services­to­its­newly­acquired­clients­not­only­in­HUF­and­EUR,­but­also­in­GBP­or­USD.­The­need­for­this­move­arose­from­the­fact­that­KELER­CCP­–­as­a­general­ clearing­member­ service­provider­–­already­provides­services­to­selected­clients­on­the­Austrian,­German,­French,­Czech,­Slovakian,­Serbian,­Dutch,­Belgian­and­UK­energy­exchanges.

2.2.5 THE MAGyAR NEMzETI BANK PURCHASEd A MAjORITy INTEREST IN THE BUdAPEST STOCK ExCHANGE

At the end of 2015, the Magyar Nemzeti Bank acquired a majority interest in the Budapest Stock Exchange. As a result, the most important financial infrastructures of Hungary are now controlled by the MNB.8 On­20­November­2015,­the­MNB­signed­a­Share­Purchase­Agreement­with­Austrian­CEESEG­AG­and­Oesterreichische­Kontrollbank­AG­which­together­held­a­68.8­per­cent­ownership­share­in­the­Budapest­

Stock­Exchange­ (BSE).­As­a­ result­of­ the­ transaction,­the­central­bank­ raised­ its­ stake­ in­BSE­ to­75.75­per­cent.­ The­MNB’s­ acquisition­ of­ a­ qualified­ majority­in­ the­ BSE­ was­ intended­ to­ develop­ the­ Hungarian­stock­exchange­and,­by­opening­up­new­markets­and­involving­new­ issuers,­ to­create­an­adequately­sized,­efficiently­ operating­ capital­ market.­ Through­ stock­market­transparency,­this­contributes­to­the­structural­development­of­ the­Hungarian­financial­ system;­and­moreover,­it­may­ensure­that,­besides­bank­loans,­the­option­of­capital­market­borrowing­is­available­in­the­Hungarian­market­in­healthier­proportions­than­today.­The­renewed­institutional­strategy­of­BSE­is­aimed­at­the­introduction­of­new­services,­and­it­also­places­emphasis­on­reinforcing­the­global­relationship­network­and­on­cooperating­with­the­relevant­market­participants.

2.2.6 RESULTS Of POST OffICE dEvELOPMENT PROjECTS IN 2015

Data available confirmed the forecast that the developments implemented in recent years by Magyar Posta Zrt. (Hungarian Postal Service) and the Magyar Posta Group in the area of payment services facilitate the widespread use of electronic bill payments.9 In­Hungary,­most­ utility­ and­other­ regular­ bills­ are­ still­paid­via­postal­payment­services­using­postal­inpayment­money­ orders­ (yellow­ cheques)­ and­ postal­ bill­inpayment­orders­(white­cheques).­In­2015,­customers­paid­215­million­yellow­and­white­cheques­via­Magyar­Posta­Zrt.­with­a­ total­value­of­HUF­2,190­billion.­Of­this,­10.3­million­yellow­and­white­cheques­amounting­to­ HUF­ 97­ billion­ were­ paid­ as­ electronic­ purchase­transactions­completed­with­payment­cards­at­newly­installed­ POS­ terminals­ at­ post­ offices,­ and­ 650,000­cheques­ were­ paid­ through­ other,­ contemporary­channels­ (e.g.­ mobile­ application,­ bill­ inpayment­machines)­with­ a­ total­ value­ of­more­ than­HUF­ 6.5­billion­in­2015.­Of­the­utility­and­other­bills­presented­electronically­by­the­service­of­Díjnet­Zrt.,­a­member­of­the­Magyar­Posta­Group,­1.8­million­bills­amounting­to­HUF­16.1­billion­were­paid­through­one­of­the­payment­options­available­on­the­service.­Considering,­however,­that­the­option­of­payment­through­payment­card­as­purchase­transactions­via­POS­terminals­has­only­been­available­since­mid-2015,­in­2016­the­contribution­of­Magyar­Posta­to­the­spread­of­the­electronic­payment­of­service­bills­is­expected­to­be­even­greater­than­in­2015.

7­­Regulation­(EU)­No­648/2012­of­the­European­Parliament­and­of­the­Council­of­4­July­2012­on­OTC­derivatives,­central­counterparties­and­trade­repositories.

8 ­http://www.mnb.hu/sajtoszoba/sajtokozlemenyek/2015-evi-sajtokozlemenyek/ismet-nemzeti-tulajdonban-a-magyar-tozsde­ http://www.mnb.hu/sajtoszoba/sajtokozlemenyek/2015-evi-sajtokozlemenyek/megkezdte-munkajat-a-nemzeti-tulajdonba-kerult-tozsde-uj-vezetese

9­ Source:­ https://www.posta.hu/aktualitasok/Bejottek_a_csekkfejlesztesek­ and­ https://www.posta.hu/aktualitasok/Egyre_tobben_dijneteznek

OPERATION­OF­THE­DOMESTIC­PAyMENT­SySTEM

Payment SyStemS RePoRt • June 2016 25

2.3 Operation of financial infrastructures

In 2015, in terms of value and volume, the turnover of the overseen systems fell by 10 per cent on average compared to the previous year. The GDP-proportionate annual turnover amounted to 44.48 times the amount of annual GdP (Table 2).­In­2015,­the­ICS­and­KELER­CCP­saw­an­increase­in­turnover,­while­turnover­for­VIBER­and­KELER­declined. During­the­year,­ the­value­and­volume­of­the­ ICS­turnover­reached­ the­ highest­ level­ observed­ since­ the­introduction­of­the­service.­The­3.5­per­cent­growth­in­the­volume­of­transactions­is­consistent­with­the­growth­rate­of­the­real­economy.­The­increase­in­the­number­of­transactions­of­direct­debits­doubled­the­number­of­individual­credit­transfers,­as­the­number­of­settled­direct­debits­increased­in­the­wake­of­the­phase-out­of­foreign­currency­loans,­but­due­to­the­rise­ in­wage-type­ payments,­ the­ number­ of­ direct­credits­ also­ increased.­ The­ aggregate­ turnover­ of­KELER­CCP­increased­in­2015­(by­6­per­cent),­with­the­most­salient­growth­observed­in­the­case­of­clearing­services­provided­in­relation­to­derivative­markets.­The­fall­in­total­value­of­turnover­in­VIBER­(5.6­per­cent)­and­in­KELER­(38­per­cent)­can­be­mainly­attributed­to­the­decline­in­the­transactions­involving­securities­issued­by­the­MNB­as­a­result­of­the­phasing-out­of­the­MNB­bill.­In­addition,­as­regards­turnover­in­KELER,­transactions­submitted­on­a­DvP­and­on­a­FoP­basis­both­ declined­ in­ terms­ of­ transaction­number­ and­

value.­As­opposed­to­the­decline­in­the­value­of­VIBER­transactions,­transaction­volume­was­up­5.7­per­cent,­mainly­reflecting­an­increase­in­customer­transactions,­two-week­and­three-month­central­bank­deposits­and­transactions­ related­ to­ the­ doubled­ clearing­ cycle­frequency­of­the­ICS­intraday­clearing.

As in previous years, operation of the overseen systems was highly reliable in 2015, supporting the safe and efficient functioning of money and capital markets.­ As­ an­ overseer,­ the­ MNB­ continuously­monitors­ the­ risk­ exposure­ of­ financial­ market­infrastructures.­In­this­context,­it­monitors,­assesses­and­analyses­service­continuity­risk,­clearing­and­settlement­risk­and­system­operational­interdependency­risk,­as­well­ as­ changes­ in­ other­ criteria­ affecting­ efficient­operations.­ The­ requirements­ laid­ down­ in­ the­new­ international­ principles­ (PFMI)­ have­ been­ also­integrated­into­the­evaluation­methodology.

2.3.1 SERvICE CONTINUITy RISK Of fINANCIAL MARKET INfRASTRUCTURES

Numerous developments were implemented in the payment systems in 2015, which improved the efficiency of the systems without any undesired increase in operational risks.­ The­ availability­ of­

Table 2Turnover and main figures of the payment and securities settlement systems (2014–2015)

Overseen systems Volume (thousands)

Value (HUF thousand billion)

Turnover/GDP Participants (2015)

2014 2015 2014 2015 2014 2015 Direct participant

Indirect participant

vIBER 1,392 1,472 1,322.6 1,248.4 41.47 37 46 114

ICS Overnight clearing

158,288 160,492 16.8 16.8 0.53 0.49 38 158

Intraday clearing

155,326 173,847 66.35 74.1 2.08 2.2 38 158

KELER CSd 747.2 538 253.4 156.2 7.95 4.63 273 n.a.

KELER CCP 1,533.5 1,689.7 5 5.3 0.16 0.16 106 n.a.

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PAYMENT SYSTEMS REPoRT • JuNE 201626

VIBER­ and­ the­ ICS­ improved­ compared­ to­ the­previous­year,­but­deteriorated­slightly­in­the­case­of­KELER­and­KELER­CCP.­Operational­risks­rose­slightly­in­ the­overseen­systems­overall,­mainly­because­of­the­ increasing­number­of­ incidents,­ the­severity­of­incidents­perceivable­by­customers,­and­the­growing­number­of­operating­hour­extensions.

As in previous years, vIBER demonstrated a high degree of reliability in 2015; the risk of service continuity decreased slightly compared to 2014.­As­opposed­ to­ previous­ years,­ the­monthly­ availability­ratio­of­the­core­settlement­service­did­not­drop­below­the­99.7­per­cent­level­expected­by­the­international­and­domestic­oversight­practice­in­any­month­of­the­year­ (Chart­12).­The­number­of­outages­of­ the­core­settlement­service­did­not­change­compared­to­2014,­but­the­individual­–­and­hence,­the­aggregate­–­duration­of­ incidents­ fell­by­almost­four­fifths.10 In­2015,­two­incidents­caused­notable­interruptions­in­the­service.­In­the­first­case,­VIBER­was­down­for­27­minutes­due­to­a­server­shutdown,­as­a­result­of­which­the­service­opened­ later­ in­ the­morning.­As­regards­the­second­incident,­although­settlement­ in­the­central­account­management­system­of­VIBER­was­uninterrupted,­the­system­failed­to­send­response­messages­to­participants­and­the­ancillary­systems­for­11­minutes.­The­operators­of­the­system­prepared­a­detailed­report­outlining­the­lessons­ from­ the­ incidents­ –­mainly­ with­ regard­ to­post-incident­systems­audits­–­and­in­this­context,­they­

defined­a­number­of­tasks­to­prevent­the­emergence­of­a­similar­situation­in­future.

In the ICS, both overnight and intraday clearing platforms functioned with high reliability throughout the year, but in 2015 the risk of service continuity increased somewhat. Thanks­to­performance-improving­IT­developments­ implemented­during­ the­year,­both­clearing­ platforms­of­ the­ ICS­ processed­ transactions­with­high­speed­and­adequate­efficiency.­The­number­of­incidents­declined­compared­to­the­previous­year,­and­the­emerging­incidents­were­quickly­corrected­by­GIRO.­The­ two­ incidents­occurring­ in­2015­–­one­of­which­

10­­On­balance,­in­2015­the­aggregate­duration­of­incidents­resulting­in­the­outage­of­core­settlement­services­decreased­by­152­minutes.­The­time­between­the­start­and­the­end­ (recovery)­of­ incidents­also­decreased­compared­to­2014,­with­ the­ longest­downtime­ lasting­ for­27­minutes­compared­to­163­minutes­in­the­previous­year

Chart 12Monthly availability ratio of the core settlement service in vIBER (left-hand chart) and aggregate duration of outages of the core settlement services in minutes (right-hand chart) (2013–2015)

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extension of operating hours

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Chart 13Impact of overnight and intraday clearing incidents on availability (2013–2015)

98.8 99.0 99.2 99.4 99.6 99.8 100.0

98.8 99.0 99.2 99.4 99.6 99.8

100.0 Per cent Per cent

ICS intraday clearingICS intraday clearing SLA (99.80%)ICS overnight clearingICS overnight clearing SLA (99.90%)

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Payment SyStemS RePoRt • June 2016 27

affected­the­intraday,­the­other­the­overnight­clearing­cycle­–­did­not,­or­only­slightly­reduced­the­level­of­the­service­(Chart­13).­As­there­have­been­no­incidents­since­September­2015,­ the­higher­cycle­ frequency­did­not­exacerbate­the­operational­risk.

The service continuity risk of KELER increased slightly compared to previous years; however, KELER continued to operate with a high degree of reliability. The­ availability­ of­ KELER’s­ services­ to­ customers­deteriorated­compared­to­2014,­as­it­failed­to­meet­the­expected­99.9­per­cent­ level­ in­ four­months­of­the­ year­ (Chart­ 14).­ This­ can­ be­ attributed­ to­ the­moderate­increase­compared­to­2014­in­longer-lasting­incidents­affecting­the­information­technology­systems­supporting­business­operations.­These­incidents­were­quickly­corrected­by­KELER.­At­the­same­time,­KELER­has­taken­numerous­measures­to­avoid­the­repeated­occurrence­of­the­corrected­malfunctions­in­the­future.­The­ replacement­ of­ KELER’s­ account­management­system­–­which­has­been­postponed­to­2016­due­to­some­ issues­ emerging­ during­ implementation­ –­ is­expected­ to­ contribute­ to­ improving­ the­ harmony­of­ KELER’s­ fragmented­ IT­ architecture­ by­ replacing­several­existing­systems­currently­in­use.

The availability of KELER CCP’s business operations decreased somewhat compared to previous years, but its level of service provision remained high.­There­is­a­mutual­outsourcing­agreement­between­KELER­

and­KELER­CCP.­Under­the­agreement,­the­information­technology­infrastructure­required­for­the­provision­of­central­counterparty­services­ is­operated­by­KELER.­Consequently,­the­higher­number­and­longer­duration­of­the­incidents­affecting­the­information­technology­system­of­KELER­compared­to­2014­exerted­an­impact­on­ the­ business­ operations­ of­ KELER­ CCP­ as­ well,­which­ led­to­ its­ failure­to­meet­the­expected­99.96­per­cent­availability­level­in­four­months­of­the­year­(Chart­15).

The execution time of the clearing and settlement of transactions in the payment systems became faster in 2015 in comparison to 2014, and it continued to meet the expected efficiency requirements.­One­important­element­in­the­execution­time­of­payment­orders­is­the­speed­at­which­VIBER­processes­the­transactions.­Measuring­the­execution­time­of­VIBER­transactions­is­based­on­the­time­stamps­on­SWIFT­messages.11 In­ 2015,­ in­ addition­ to­ interbank­ and­ customer­transactions,­measurement­was­extended­ to­ credit­line­modifications­and­the­queries­and­commands­(e.g.­transaction­cancellation)­of­participants­as­well.­In­the­case­of­sufficient­collateral,­interbank­and­customer­transactions,­ the­ cash­ leg­ settlement­ of­ securities­transactions­ and­ the­ margin­ calls­ of­ ICS­ intraday­clearing­ are­ executed­ in­ 15­ seconds­ on­ average.­The­ time­ requirement­ of­ credit­ line­ modifications­was­ higher­ than­ this­ (4­ minutes),­ given­ that­ the­collateral­assessment­module­of­ the­client­account­

Chart 14Availability of KELER’s central securities depository (2013–2015)

98.4 98.6 98.8 99.0 99.2 99.4 99.6 99.8 100.0

98.4 98.6 98.8 99.0 99.2 99.4 99.6 99.8

100.0 Per cent Per cent

201320142015KELER SLA (99.90%)

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Chart 15Availability of the KELER CCP central counterparty (2013–2015)

Per cent Per cent

201320142015KSZF SLA (99.96%)

97.8 98.0 98.2 98.4 98.6 98.8 99.0 99.2 99.4 99.6 99.8

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11­­The­method­measures­the­time­elapsed­between­the­time­stamp­of­the­ individual­transaction­received­by­the­MNB­via­SWIFT­and­the­time­stamp­of­the­response­message­sent­via­SWIFT­following­the­transaction’s­settlement­in­VIBER­(confirming­settlement).

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PAYMENT SYSTEMS REPoRT • JuNE 201628

management­system­of­the­MNB­is­also­involved­in­the­process.­Responses­to­VIBER­participants’­inquiries­were­ received­ within­ 17­ seconds­ on­ average,­ and­cancellations­ take­ about­ the­ same­ time.­ After­ the­introduction­of­the­10­cycles,­the­average­execution­time12­of­a­clearing­cycle­dropped­by­30­per­cent­to­7­minutes­ compared­ to­ the­previous­period­ (Chart­16).­The­significant­acceleration­can­be­attributed­to­the­improved­performance13­of­the­clearing­turnover­system­on­the­back­of­the­changes­implemented­and­to­the­fact­that­the­number­of­transactions­cleared­in­a­given­cycle­has­been­greatly­reduced­by­the­higher­cycle­frequency.­In­2015,­each­phase­of­the­clearing­process­ was­ reduced.­ Determining­ the­ collateral­required­for­the­execution­of­the­transactions­received­for­the­given­cycle­in­VIBER14­did­not­take­longer­than­a­minute­and­a­half­even­in­the­cycle­with­the­highest­number­of­ transactions,­which­ implies­a­30-second­improvement­ compared­ to­ 2014.­ Following­ the­collection­of­the­collateral,­the­results­related­to­the­clearing­of­the­cycle­were­available­for­ICS­participants­more­than­30­seconds­earlier,­and­the­receipt­of­the­results­did­not­take­longer­than­16­minutes­even­in­the­ cycle­with­ the­highest­number­of­ transactions.­Obviously,­ the­ time­ requirement­ of­ these­ phases­depends­on­the­number­of­transactions­processed­in­the­given­cycle.­The­maximum­execution­time­barely­exceeded­30­minutes­even­during­the­cycle­processing­the­largest­number­of­transactions.

2.3.2 CLEARING ANd SETTLEMENT RISK IN vIBER ANd THE ICS

The liquidity in vIBER and the ICS is essentially determined by the same factors; any changes in these factors equally affect both systems and their participants.­The­direct­participants­of­both­systems­are­largely­the­same,­given­that­clearing­in­the­ICS­is­settled­in­VIBER­on­the­participants’­payment­accounts­held­with­ the­MNB.­Consequently,­participants­use­the­same­liquidity­for­the­execution­of­payments­in­both­ systems:­ their­ available­ account­ balance­ and­the­intraday­credit­line­provided­against­their­security­portfolios­pledged­to­the­MNB.

2.3.2.1 Effect of the factors determining the liquidity of vIBER and ICS participants

Thanks to the quick and adequate adjustment of the participants of the financial infrastructures to the changing monetary policy instruments of the MNB, there was sufficient liquidity for the execution of payment transactions both at the system level and

Chart 16Time requirement of the ICS intraday clearing process after the introduction of higher cycle frequency (2015)

Determining thecollateralrequired

Booking of thecollateral in

VIBER

Availability ofresults relatedto the clearing

of the cycle

the average execution time of a clearing cycle: 7 minutes(of which other interim execution time: 1.5 minutes)

0.6 minute 1.6 minute 3.3 minute

12­­The­average­execution­time­of­a­cycle­is­the­duration­between­the­receipt­of­the­last­transaction­for­the­given­cycle­and­the­bank’s­receipt­of­the­results.

13­Compared­to­the­previous­1­million­transactions,­3­million­transactions­can­be­now­settled­during­a­cycle.14­­Clearing­ in­ the­ ICS­ is­considered­executed­when­the­debit­balance­of­ the­participant­ is­booked­on­ its­payment­account­with­ the­MNB.­This­booking­is­based­on­the­collateral­amount­which­determines­the­amount­to­be­debited­to­the­payment­account­of­a­participant­for­its­turnover­in­a­given­cycle.­This­collateral­amount­must­be­available­on­the­VIBER­accounts­of­the­participants­as­liquidity.

Chart 17Turnover, current account balance, actual and potential liquidity of vIBER participants, and the maximum utilisation of intraday credit lines (MICL) in the system (2013–2015)

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Two-week deposits placed at the MNBTrhee-month deposits placed at the MNBAverage of maximum utilisation of intraday credit lines (right-hand scale)

Current account balanceLiquidity (current account balance and credit line)TurnoverPotential liquidity (liquidity and the potential eligible collateral available for pledging)

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OPERATION­OF­THE­DOMESTIC­PAyMENT­SySTEM

Payment SyStemS RePoRt • June 2016 29

on an individual bank basis; as a result, clearing and settlement risk did not increase in any of the payment systems.­The­liquidity­positions­of­payment­system­ participants­ were­ shaped­ by­ a­ number­ of­events­ in­ 2015,­ including­ the­ transformation­ of­the­MNB’s­monetary­ policy­ instruments­ under­ the­Self-Financing­ Programme,­ the­modification­ of­ the­interest­ rate­corridor,­ the­ introduction­of­a­fixed,­2­per­cent­required­reserve­ratio­applicable­to­all­VIBER­members,­ the­ increase­ in­ the­ number­ of­ the­ ICS­intraday­clearing­cycles­and­the­addition­of­the­forint­to­CLS.­As­a­continuation­of­the­MNB’s­Self-Financing­Programme,­ on­ 23­ September­ 2015­ the­monetary­policy­instruments­were­changed,­and­­the­new,­three-month­ deposit­ became­ the­ main­ monetary­ policy­instrument­of­the­MNB,­replacing­the­previous­two-week­deposit.­At­the­same­time,­the­MNB­introduced­a­HUF­1,000­billion­cap­on­two-week­deposit­holdings.­As­was­the­case­with­the­two-week­deposit,­the­three-month­deposit­is­not­counted­among­the­instruments­eligible­ as­ central­ bank­ collateral;­ therefore,­ it­ still­cannot­be­used­for­payment­purposes.­As­a­result­of­the­fixed,­2­per­cent­required­reserve­ratio­introduced­under­ the­ MNB’s­ Self-Financing­ Programme­ and­applicable­ to­all­members­as­of­1­December­2015,­on­average,­participants­now­hold­a­smaller­account­balance­on­their­payment­accounts­at­the­MNB.­To­offset­ the­ reduction,­ the­ participants’­ securities­holdings­ to­ be­ pledged­ as­ collateral­ increased­ in­value.­This­adjustment­process­ led­ to­a­continuous­increase­in­the­level­of­potential­liquidity15­until­the­end­of­2015,­and­as­early­as­the­second­half­of­2015,­it­ already­ surpassed­VIBER­ turnover.16­ The­ level­ of­potential­liquidity­may­be­raised­on­a­weekly­basis­by­maturing­three-month­deposits­and­by­the­two-week­deposits­still­held­in­the­system,­if­–­instead­of­being­rolled­over­–­they­are­placed­in­instruments­eligible­as­central­bank­collateral.­Although­both­the­three-month­and­the­two-week­deposit­holdings­are­part­of­ the­ assets­ held­ on­ participants’­ balance­ sheets,­they­cannot­be­turned­into­potential­intraday­liquidity­promptly,­and­accordingly,­these­holdings­cannot­cover­an­ad-hoc­rise­ in­ intraday­ liquidity­needs­until­they­mature.­The­potential­liquidity­level­of­participants,­including­their­stock­of­deposits­placed­with­the­MNB,­stayed­steadily­within­the­range­of­HUF­10,000–11,000­billion­(Chart­17).

As members of the payment systems raised their securities holdings available as collateral continuously throughout 2015, the collateral available for payment transactions increased compared to the previous year (Chart­ 18).­ The­pledging­of­ securities­ peaked­ after­the­ transformation­of­monetary­policy­ instruments­in­ September­ 2015,­ when­ participants­ shifted­ a­substantial­ portion­ of­ the­ liquidity­ released­ from­their­two-week­bills­to­government­bonds.­Therefore,­by­December­2015­the­share­of­government­bonds­in­the­pool­of­available­collateral­ jumped­to­72­per­cent­from­48­per­cent­recorded­at­the­beginning­of­the­ year­ (Chart­ 19,­ right-hand­ chart).­ The­ ratio­ of­collateral­ available­ as­ intraday­ credit­ line­ to­ total­pledged­ collateral­ holdings­moved­ in­ the­ range­ of­53–63­per­cent­throughout­201517­(Chart­19,­left-hand­chart)­and,­owing­to­the­pledging­of­securities,­by­the­end­of­the­year­the­available­credit­line­rose­to­HUF­1,500­billion­from­the­HUF­1,000­billion­recorded­at­the­beginning­of­2015,­which­was­sufficient­for­the­smooth­execution­of­VIBER­turnover­(Chart­18).

15­­From­the­perspective­of­payment­systems,­potential­liquidity­is­the­sum­of­the­account­balance­of­the­VIBER­participant’s­payment­account­held­with­the­MNB,­the­intraday­credit­line­provided­against­the­securities­pledged­by­the­participants­to­the­central­bank,­and­other,­additionally­available­securities­on­the­credit­institution’s­balance­sheet­that­may­optionally­be­pledged.

16­By­December­2015,­the­stock­of­securities­available­to­pledge­as­additional­collateral­in­the­system­approached­HUF­4,000­billion.17­­A­substantial­portion­of­the­pledged­securities­still­constitutes­the­collateral­pledged­to­secure­various­loans­granted­by­the­MNB­(e.g.­under­the­FGS).

Chart 18Impact of changes in the FGS and the monetary policy instruments on collateral available in the payment systems (2013–2015)

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MAGYAR NEMZETI BANK

PAYMENT SYSTEMS REPoRT • JuNE 201630

As a result of higher cycle frequency in intraday clearing, the more even and efficient distribution of intraday turnover contributed to the further reduction of clearing risk. In­ 2015,­ up­ until­ the­introduction­of­10-cycle­processing,­the­debit­turnover­of­intraday­clearing­accounted­for­2–4­per­cent­of­the­liquidity­available­in­the­system­at­any­given­moment­on­average.­As­a­result­of­the­higher­cycle­frequency,­however,­ the­ liquidity­ available­ in­ the­ system­proved­to­be­even­more­ample,­which­can­be­mainly­attributed­ to­ the­ steep­decline­ in­ the­ value­ of­ the­transactions­processed­in­the­last­cycles.­Therefore,­from­ September­ 2015­ this­ ratio­ dropped­ below­ 2­per­ cent­on­ average.­As­ in­ previous­ years,­ in­ 2015­the­ debit-to-liquidity­ ratio­ tended­ to­ rise­ primarily­on­tax­payment­days­and­during­the­traditional­year-end­ spikes­ in­ turnover.­ Before­ the­ introduction­ of­the­ higher­ cycle­ frequency­ the­ ratio­ exceeded­ the­average­by­10–18­per­cent­and­by­6­per­cent­after­the­switchover.­It­was­only­in­December­–­which­was­an­unprecedented­peak­in­terms­of­monthly­volume18­–­that,­similar­to­the­previous­year,­the­ratio­of­debits­to­total­liquidity­was­close­to­16­per­cent.

2.3.2.2 Liquidity management of vIBER and ICS members

The active, efficient liquidity management of payment system participants, i.e. the adequate intraday allocation of the liquidity needed for the execution of outgoing transactions, continues to be extremely significant for the mitigation of clearing and settlement risk.­The­extent­to­which­members­rely­on­their­account­balance­and­credit­ line­ in­the­execution­of­payment­transactions­depends­on­their­respective­liquidity­management­strategy­and­asset­size,­the­stock­of­securities­on­their­balance­sheets­available­ as­ eligible­ collateral­ and­ the­ level­ of­ the­required­reserve­ratio.

The available account balance is influenced by the level of the reserve ratio; therefore, after the elimination of the optional reserve ratio, participants raised their credit lines for the execution of payment transactions. In­2015,­before­the­introduction­of­the­fixed,­2­per­cent­reserve­ratio,­some­members­chose­a­higher­reserve­ratio­(typically­4–5­per­cent)­in­the­

Chart 19Pledged securities and their distribution by type (right-hand chart) and the ratio of credit line to the total pledged security collateral (left-hand chart) (2013–2015)

50556065707580859095100

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Removal of the MNB bill fromthe pool of eligible collateral

Changes in monetarypolicy instruments

Launch ofthe FGS

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Ratio of collateral pledged and available as intraday credit line for the execution of payments vs. total of pledged security portfolio (without the FGS-related loans accepted as collateral) (right-hand scale)

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18­31­million­transactions­were­cleared­in­the­system.

OPERATION­OF­THE­DOMESTIC­PAyMENT­SySTEM

Payment SyStemS RePoRt • June 2016 31

optional­reserve­requirement­regime­with­a­view­to­improving­their­liquidity­position,­thereby­increasing­their­ account­ balances.­ This­ option­ was­ generally­preferred­ by­ two­ types­ of­ participants:­ those­who­have­large­turnover­compared­to­their­balance­sheet­totals,­ and­ those­ who­ do­ not­ or­ hardly­ ever­ use­intraday­credit­lines.19­As­a­result­of­the­fixed,­2­per­cent­ reserve­ ratio­ required­ from­ December­ 2015,­participants­ previously­ opting­ for­ a­ higher­ reserve­ratio­ now­ tend­ to­ hold­ a­ smaller­ account­ balance­on­ their­ payment­ accounts­ held­with­ the­MNB­on­average.­Since­the­MNB­does­not­pay­interest­on­the­portion­of­ the­account­balance­above­ the­required­reserve,­holding­excess­reserves­would­generate­losses­for­ them.­ The­ reduced­ reserve­ ratio­ level­ affected­11­members.­Most­of­them­adjusted­to­the­change­by­raising­their­respective­credit­ lines,­which­ led­to­a­ spike­ in­ collateral­ pledging­ for­ intraday­ credit­ in­December­2015.

Although in 2015 the maximum utilisation of intraday credit lines (MICL)20 did not change noticeably compared to the previous period, system participants tended to utilise their credit lines in their liquidity management more actively and for longer durations than in the previous year.­The­MICL­is­still­considered­low­(6–16­per­cent)­at­systemic­level;­in­fact,­it­even­declined­ somewhat­ (by­ 2­ per­ cent)­ compared­ to­the­previous­year­(Chart­17).­On­an­individual­bank­basis,­the­MICL­figures­are­still­widely­distributed;­in­general,­banks­with­high­turnover­tend­to­have­high­MICL­values.­However,­while­the­MICL­values­of­the­3­participants­with­the­largest­turnover­range­between­45–66­per­cent­on­average­annually,­more­than­half­of­the­participants­do­not­or­only­seldom­use­their­respective­intraday­credit­line.­In­2015,­the­average­value­of­the­utilisation­of­intraday­credit­lines­was­up­11­per­cent­(HUF­26­billion)­compared­to­the­previous­year.­In­addition­to­MICL,­valuable­information­can­be­gained­ about­banks’­ liquidity­ position­by­ analysing­the­extent­to­which­members­utilise­their­credit­lines­and­the­duration­of­the­utilisation­during­the­day.­In­2015,­the­duration­of­participants’­utilisation­of­their­respective­credit­lines­for­liquidity­purposes­rose­by­20­minutes­on­average.­It­is­typically­participants­with­the­ largest­ turnover­ and­ those­with­ high­ turnover­relative­to­balance­sheet­totals­which­use­their­credit­

lines­actively­during­10–40­per­cent­of­the­operating­hours­ of­ VIBER.­ Since­ there­ was­ only­ a­ negligible­increase­in­this­ratio­compared­to­2014,­in­their­case,­the­ transformation­of­monetary­policy­ instruments­and­accelerated­FGS­disbursements­did­not­prompt­a­significant­change­in­the­use­of­credit­lines.­A­90­per­cent­credit­ line­utilisation­rate­–­which­might­point­to­ overstretched­ liquidity­ management­ and­ thus­higher­clearing­and­settlement­ risk­–­was­ recorded­only­for­3­to­12­minutes­on­average­during­the­day­for­banks­actively­using­their­credit­line.­This­is­consistent­with­the­values­observed­in­the­previous­year.­Active­recourse­to­credit­lines­is­primarily­characteristic­of­domestic­banks;21­five­of­these­banks­used­their­credit­lines­for­a­duration­6–16­per­cent­longer­than­in­the­previous­ year.­ There­was­no­ change­ in­ the­ case­of­active­users­among­the­branch­offices:22­the­utilisation­of­ their­ credit­ lines­was­ similar­ to­ last­ year.­ In­ the­past­year,­on­a­given­day,­participants­used­intraday­credit­lines­actively­until­1:30­pm­and­from­5:00­pm­until­the­closing­of­VIBER­on­average.­The­utilisation­rate­declined­gradually­in­the­afternoon­hours­before­activity­recovered­once­again­in­all­groups­from­4:00­pm,­especially­in­the­last­hour­preceding­the­closure­of­client­operating­hours.­At­this­point,­in­addition­to­setting­the­end-of-day­closing­positions,­participants­also­ needed­ to­ provide­ liquidity­ for­ the­ execution­of­ the­ last­cycle­of­ the­ ICS­ intraday­clearing,­which­

Chart 20Utilisation of intraday credit lines on a given day based on the vIBER participant’s business entity type (2015)

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Domestic banksIncluding all VIBER-particpants, except the central bankBranch offices

19­­In­2015,­ three­participants­opted­ for­a­higher­ reserve­ ratio­ compared­ to­prior­years;­all­of­ them­were­counted­among­members­with­ large­turnovers.

20­­Credit­line­utilisation­shows­the­portion­of­the­total­available­intraday­credit­line­a­bank­has­used­on­a­given­business­day.­The­lowest­intraday­current­account­balance­is­compared­to­the­available­credit­line­and­as­such,­it­is­considered­to­be­a­snapshot.

21­Domestic­banks­are­VIBER­participant­banks­and­specialised­credit­institutions.22­This­category­includes­VIBER­participant­branch­offices­inside­and­outside­of­the­EU.

MAGYAR NEMZETI BANK

PAYMENT SYSTEMS REPoRT • JuNE 201632

23­­Previously,­the­interest­rate­corridor­was­+/–­100­basis­points­wide­around­the­central­bank­base­rate.­After­the­transformation­of­the­monetary­policy­instruments­in­September­2015,­the­interest­rate­corridor­became­asymmetric­with­a­lower­bound­of­125­basis­points­and­an­upper­bound­of­75­basis­points.­In­March­2016,­in­addition­to­the­key­policy­rate,­the­structure­of­the­interest­rate­corridor­changed­again.­The­lower­bound­remained­125­basis­points,­but­the­upper­bound­was­lowered­from­75­to­25­basis­points.­As­a­result­of­the­changes,­the­overnight­deposit­inte-rest­rate­turned­negative,­and­since­the­interest­rate­on­the­overnight­loan­provided­by­the­central­bank­was­also­reduced,­the­O/N­loan­became­a­much­cheaper­instrument.

explains­the­more­active­use­of­their­credit­lines.­In­the­first­hour­following­the­opening­of­VIBER,­branch­offices­ tend­ to­use­ their­ credit­ lines­more­actively;­after­this­period,­utilisation­by­domestic­banks­is­more­prominent­until­about­3:00­pm.­At­the­same­time,­the­intraday­ credit­utilisation­of­branch­offices­ is­more­evenly­distributed­(Chart­20).

In 2015, there was an increase in the number of cases where banks using their credit lines were forced to use overnight collateralised loans at the closure of vIBER, and the value of these loans also increased significantly.­ VIBER­ participants­ must­consider­whether­ they­wish­ to­maintain­ their­ free­overdraft­facility­even­after­the­closure­of­VIBER.­ If­they­do,­they­are­granted­an­overnight­collateralised­loan­by­the­MNB­automatically.­This­could­either­be­a­conscious­decision,­or­the­result­of­pressure­when­the­bank­is­unable­to­repay­the­overdraft­used­during­the­day­despite­its­best­intentions.­In­addition,­in­2015­the­change­in­the­structure­of­the­interest­rate­corridor23 may­ also­ have­ contributed­ to­ the­ growth­ in­ O/N­borrowings­and­their­value.­As­a­result­of­the­change,­the­ overnight­ loan­ granted­ by­ the­ MNB­ became­cheaper.­In­2015,­2.5­times­more­O/N­collateralised­loans­were­granted­than­in­2014,­with­a­parallel­22­per­cent­increase­in­value.­Similar­to­last­year,­two­thirds­of­ the­ loans­were­ granted­ towards­ the­ end­ of­ the­month;­moreover,­on­high-turnover­tax­payment­days­the­group­of­participants­requesting­O/N­collateralised­loans­changed­significantly­in­2015­in­the­sense­that­even­from­the­group­of­the­10­participants­generating­the­ largest­ turnover,­more­members­requested­the­loan­than­in­the­previous­year.­In­2015,­the­value­of­loans­granted­to­participants­with­the­largest­turnover­rose­ fivefold,­ but­ the­ average­ value­ of­ the­ loans­increased­only­by­10.76­per­cent­in­their­case.

due to the extension of the operating hours of vIBER in August, the timing of transactions temporarily shifted to later hours.­The­transaction­timing­behaviour­of­the­participants­regularly­adjusts­to­ the­ most­ significant­ changes­ affecting­ liquidity­management.­From­the­aspect­of­transaction­timing,­one­of­the­most­important­changes­in­2015­was­the­modification­ of­ VIBER’s­ operating­ hours­ in­ August.­The­opening­of­the­system­1­hour­earlier­–­at­7:00­am­

instead­of­8:00­am­–­prompted­minor­realignments.­Turnover­realignments­prompted­by­the­change­in­the­morning­opening­time­are­most­perceivable­during­the­early­hours­–­10:00­am,­noon­and­2:00­pm.­As­regards­afternoon­and­evening­hours,­however,­the­cumulated­turnover­percentages­are­roughly­consistent­with­pre-August­levels.­However,­after­the­introduction­of­the­higher­cycle­frequency­in­September­2015,­intraday­liquidity­needs­arose­even­more­“spread­out”­over­time;­ as­ a­ result,­ the­ timing­ of­ payment­ turnover­reverted­ to­ the­ level­observed­before­August­ in­all­time­periods­under­review­(Chart­21).

2.3.2.3 queuing in vIBER, roll-over of transactions between intraday clearing cycles in the ICS due to insufficient liquidity

In 2015, the annual distribution of queuing in vIBER was steady, but in the last third of the year after the transformation of key policy instruments, there was a spike in the number of days when queuing occurred, and the time spent queuing also increased. Nevertheless,­this­only­slightly­elevated­the­level­of­clearing­ and­ settlement­ risk,­ as­ the­ phenomenon­

Chart 21Timing of turnover in vIBER (what portion of total daily turnover is completed until a specific point in time) (2013–2015)

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Turnover executed by 10:00 amTurnover executed by 12:00 noonTurnover executed by 2:00 pmTurnover executed by 4:00 pmTurnover executed by 5:00 pm

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OPERATION­OF­THE­DOMESTIC­PAyMENT­SySTEM

Payment SyStemS RePoRt • June 2016 33

mainly­ affected­ participants­ not­ managing­ their­credit­lines­at­all.­Transactions­initiated­by­a­bank­will­be­placed­ in­a­queue­until­sufficient­ funds­become­available­ for­ execution.­ Queuing­ in­ itself­ does­ not­necessarily­indicate­a­liquidity­problem;­it­is­a­natural­part­ of­ the­ operation­ of­ the­ RTGS­ system.­ The­monitoring­ of­ queuing­ is­ particularly­ important­ in­understanding­ the­ individual­ liquidity­management­habits­of­banks.­In­2015,­queuing­occurred­on­more­than­90­per­ cent­of­ business­ days,­which­means­ a­30­per­cent­increase­compared­to­the­previous­year.­On­these­days,­transactions­remained­in­the­queue­for­ 1­ hour­ and­ 20­ minutes­ on­ average;­ however,­occasionally,­on­2­per­ cent­of­ the­business­days­ (6­days),­the­time­spent­in­queuing­jumped­to­5–7­hours­on­average­ (Chart­22).­Partly­ reflecting­ the­various­liquidity­management­practices­of­banks,­ there­are­significant­ differences­ among­ VIBER­ participants­in­ terms­ of­ the­ duration­ of­ queuing.­ Based­ on­ its­own­ decision,­ a­ participant­may­ pledge­ additional­securities,­may­ rely­more­ heavily­ on­ the­ financing­role­of­ incoming­items,­or­may­choose­to­leave­the­transaction­ in­ the­queue.­Of­ the­banks­with­a­high­monthly­queuing­frequency,­the­transactions­of­those­with­ higher­ credit­ line­ utilisation­ figures­ –­ and­ an­active­liquidity­management­policy­–­tended­to­spend­less­time­–­20–60­minutes­per­day­on­average­–­in­the­queue.­By­contrast,­queuing­took­longer­–­0.5–3.25­hours­ on­ average­ –­ for­ participants­who­ have­ less­active­liquidity­management­and­do­not­take­recourse­to­the­credit­line­available.­On­some­settlement­days­in­2015,­queuing­took­an­extremely­long­time­–­over­7–8­hours­–­for­certain­participants,­as­a­result­of­a­

conscious­ decision­ on­ the­ part­ of­ the­ participants­concerned.­As­the­VIBER­turnover­of­these­participants­is­ small,­ their­ lengthy­ queuing­ did­ not­ increase­clearing­and­settlement­risk­ in­the­system,­because­they­did­not­give­rise­to­liquidity­problem­for­any­other­participant.­In­2015,­there­were­no­gridlocks­in­VIBER.

Transaction roll-overs between the ICS intraday clearing cycles increased in 2015 both in terms of number and value, primarily because of the delayed adjustment of the banks concerned to the need to provide liquidity on an hourly basis after the change in the frequency of cycles.­ In­2015,­the­number­of­transactions­ rolled­over­was­up­50­per­ cent,­while­the­value­of­these­transactions­rose­by­28­per­cent.­However,­75­per­cent­of­all­roll-overs­–­which­account­for­70.8­per­cent­of­the­total­value­of­roll-overs­–arose­in­the­last­third­of­the­year.­This­period­overlaps­both­with­the­introduction­of­the­higher­cycle­frequency­and­ with­ the­ transformation­ of­ monetary­ policy­instruments.­On­ closer­ examination,­ the­ steep­ rise­in­ the­number­of­ transactions­ rolled­over­was­ less­influenced­ by­ the­ transformation­ of­ the­monetary­policy­ instruments;­ it­can­be­much­more­attributed­to­ the­ insufficient­ adjustment­ of­ the­ participants­concerned­to­the­need­of­the­hourly­liquidity­provision­after­the­increase­in­the­frequency­of­cycles.­The­roll-over­ of­ transactions­ between­ two­ cycles­ does­ not­lead­ to­ the­ violation­ of­ the­ 4-hour­ rule­ even­ after­the­introduction­of­the­10-cycle­clearing;­therefore,­participants­can­take­better­advantage­of­this­option.24 Although­roll-overs­across­three­cycles­only­occurred­after­the­cycle­increase,­in­their­case,­depending­on­

Chart 22Average daily duration of queues (2015)

Between 1 – 3 hoursMore than 3 hours

Between 15 minutes – 1 hourLess than 15 minutes

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Chart 23Ratio of roll-overs to total roll-overs before and after the cycle increase (2015)

Roll-over across two cycles – after the cycle increaseRoll-over across one cycle – after the cycle increaseRoll-over across one cycle – before the cycle increase

Roll-over across three cycles – after the cycle increase

25%

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24­­The­ratio­of­roll-overs­affecting­a­single­cycle­rose­from­25­per­cent­to­60­per­cent­and­in­the­case­of­roll-overs­affecting­two­cycles­from­0­to­11­per­cent.

MAGYAR NEMZETI BANK

PAYMENT SYSTEMS REPoRT • JuNE 201634

25­­If­system­participants­monitor­their­liquidity­in­VIBER­on­a­continuous­basis­and­realise­that­they­do­not­have­sufficient­liquidity­for­the­execution­of­the­ICS­cycle,­they­have­an­opportunity­to­increase­their­liquidity­by­pledging­additional­collateral­during­the­day,­provided­that­they­have­sufficient­securities­on­their­balance­sheets­to­pledge.­

26­Delivery­versus­Payment­(see:­Glossary)27­Delivery­versus­Delivery­(see:­Glossary).28­Free­of­Payment­–­(see:­Glossary).29­Principles­of­Financial­Market­Infrastructure.

the­ time­ of­ receipt­ of­ the­ transaction,­ the­ 4-hour­rule­may­have­been­ violated­ (Chart­ 23).­ Roll-overs­between­cycles­affected­13­banks,­but­77­per­cent­of­all­roll-overs­were­related­to­5­banks.­Most­of­these­banks­could­have­avoided­the­roll-over­by­pledging­additional­securities;­thus,­in­their­case,­the­roll-over­clearly­resulted­from­a­liquidity­management­error,25­despite­the­fact­ that­they­had­monitored­and­used­more­ actively­ their­ credit­ limits­ since­ September­2015,­following­introduction­of­the­mandatory­2­per­cent­ reserve­ ratio.­ Of­ all­ roll-overs,­ 18­ rolled-over­transactions­ were­ attributable­ to­ actual­ liquidity­shortage.­Even­if­the­affected­participants­had­opted­for­the­net­funds­parameter­–­the­optional­liquidity­improvement­tool­provided­by­the­ICS­–­they­would­not­have­had­sufficient­liquidity­to­avoid­the­roll-over.

2.3.3 CLEARING ANd SETTLEMENT RISK IN KELER

for the most part, the cash leg of securities transactions is still settled in central bank money, which is consistent with international requirements and is associated with moderate settlement risk. KELER­matches­ the­transactions­of­market­participants­completed­outside­of­the­regulated­market­(OTC­transactions)­and­performs­settlement­with­respect­to­markets­cleared­by­KELER­CCP.­At­KELER,­securities-related­transactions­may­be­settled­ on­ a­ DvP,26­ DvD27­ and­ FoP28­ basis,­ whereby­KELER­reduces­its­credit­risk.­KELER­complies­with­the­PFMI’s29­provisions­on­ international­ requirements­as­OTC­transactions­–­which­comprise­99­per­cent­of­the­turnover­without­FoP­transactions­–­are­settled­on­a­DvP­basis­and,­for­the­most­part,­the­cash­leg­of­the­transaction­ is­executed­by­using­central­bank­money­(96.9­per­cent­of­the­total­value).­Accordingly,­settling­the­cash­leg­of­securities­transactions­is­still­associated­with­ moderate­ settlement­ risk.­ In­ KELER,­ both­ the­number­and­value­of­the­transactions­submitted­on­a­DvP­and­on­an­FoP­basis­declined­compared­to­2014.

2.3.4 CLEARING ANd SETTLEMENT RISK IN KELER CCP

In 2015, consolidated turnover increased in the markets cleared by KELER CCP.­ In­ relation­ to­selected,­capital,­commodity­and­gas­markets,­KELER­

CCP­ provides­ clearing­ services­ to­ the­ Budapest­Stock­Exchange­(BSE),­EuroMTS,­the­Central­Eastern­European­Gas­Exchange­(CEEGEX)­and­FGSZ­Natural­Gas­ Transmission­ Ltd.­ Apart­ from­ the­ gas­ market,­turnover­ increased­ in­ all­ markets­ cleared­ by­ the­central­counterparty­compared­to­2014.­An­upturn­in­market­turnover­boosts­the­collateral­requirement­as­well;­ thus,­ the­netting­performed­by­ the­central­counterparty­ can­mitigate­ participants’­ settlement­risk­ in­an­environment­of­growing­ turnover.­At­ the­same­time,­settlement­risk­intensifies­in­line­with­the­increase­in­turnover­by­nature.

The turnover of the markets cleared as general clearing members increased dynamically in 2015. As­ an­ energy­market­ clearing­member,­ KELER­ CCP­provides­non-clearing­member­services­for­the­spot­and­futures­products­traded­in­the­markets­cleared­by­the­German-based­European­Commodity­Clearing.­As­regards­the­spot­markets,­turnover­was­up­44.94­per­cent,­while­the­turnover­of­the­derivative­market­rose­ by­ 349.46­ per­ cent­ in­ 2015­ compared­ to­ the­previous­year.­The­growth­can­be­attributed­ to­ the­expansion­ of­ KELER­ CCP’s­ non-clearing­ member­

Chart 24Turnover in the markets cleared by KELER CCP(2014–2015)

–

5

10

15

20

25

30

35

40 45 50

–

50

100

150

200

250

300

350

Jan.

Fe

b.M

ar.

Apr

.M

ayJu

neJu

lyA

ug.

Sep.

Oct

.N

ov.

Dec

.Ja

n.

Feb.

Mar

.A

pr.

May

June

July

Aug

.Se

p.O

ct.

Nov

.D

ec.

2014 2015

HUF Billions HUF Billions

Non-clearing member services on ECC markets – Turnover on spot energy markets (right-hand scale)Non-clearing member services on ECC markets – Turnover on derivative energy markets (right-hand scale)Markets cleared as a CCP – Turnover on derivative capital markets (left-hand scale)Markets cleared as a CCP – Turnover on spot capital market (left-hand scale)Markets cleared as a CCP – Turnover on spot energy markets (left-hand scale)

OPERATION­OF­THE­DOMESTIC­PAyMENT­SySTEM

Payment SyStemS RePoRt • June 2016 35

activity­in­the­energy­market.­The­value­of­derivative­(futures)­trading­grew­almost­3.5-fold­and­since­this­was­accompanied­by­an­increase­in­the­value­of­the­open­contract­stock,30­the­credit­risk­of­KELER­CCP­also­increased­(Chart­24).

In 2015, KELER CCP modified its risk management methodology on several occasions. Pursuant­to­the­provisions­of­EMIR­and­PFMI,­KELER­CCP­is­required­to­ review­ all­ documents­ and­models­ affecting­ risk­management­on­an­annual­basis.­As­in­previous­years,­KELER­CCP­completed­the­review­in­2015­as­well,­and­the­findings­were­presented­to­the­Risk­Management­Committee­of­KELER­CCP­in­all­cases.

In the wake of the broker defaults at the beginning of the year, defaults in the markets cleared by KELER CCP rose both in terms of number and aggregate value compared to 2014. Thanks to efficient risk management rules, however, the defaults did not spill over to other market participants. In­the­case­of­the­markets­cleared­by­KELER­CCP,­the­fundamental­goal­ is­ to­execute­all­ transactions­ received.­To­ that­end,­ the­ central­ counterparty­ operates­ a­ clearing­membership­ and­ a­ guarantee­ system.­ If­ a­ clearing­member­has­insufficient­funds­or­securities­to­settle­a­transaction­when­it­becomes­due,­KELER­CCP’s­default­management­procedure­is­activated.­In­this­procedure,­

the­ central­ counterparty­ makes­ arrangements­ to­suspend­the­trading­license­of­the­defaulting­clearing­member­and­begins­collecting­the­available­collateral.­Depending­ on­ the­ nature­ of­ the­ transaction,­ the­default­ can­ be­ a­ financial­ default­ or­ a­ securities­leg­ default.­ In­ 2015,­ there­ were­ fourteen­ (mainly­securities­leg)­defaults,­amounting­to­a­total­value­of­HUF­1,880­million.­These­failures­were­coupled­with­emergency­measures­on­one­occasion.­The­defaults­affected­seven­clearing­members­and­four­markets.­Overall,­the­number­of­defaults­was­75­per­cent­higher­than­in­2014,­stemming­from­financial­defaults­related­to­the­broker­defaults­ in­the­first­quarter­and­from­insufficient­securities­leg­liquidity­in­the­second­half­of­the­year.­In­2015,­the­total­value­of­defaults­was­up­ 10.3­ per­ cent­ compared­ to­ the­ previous­ year,­but­ it­was­still­far­ lower­than­the­value­recorded­in­the­ years­ preceding­ 2014.31­ Evidently,­without­ the­failures­attributable­to­the­broker­defaults,­the­value­of­defaults­in­2015­would­have­been­far­lower­than­in­the­previous­three­years­(Chart­25).­Nevertheless,­thanks­ to­ the­ prudent­ risk­ management­ rules­ of­KELER­ CCP,­ the­ financial­ defaults­ were­ managed­without­any­effects­on­ the­ capital­market,­without­spilling­ over­ to­ other­market­ participants,­ and­ the­central­ counterparty­ did­ not­ sustain­ any­ losses.­There­were­ no­ defaults­ in­ the­ gas­ and­ the­ energy­ market.

Chart 25defaults in the markets cleared (guaranteed) by KELER CCP (2012–2015)

1

17

9 8 10

1 4

0 2 4 6 8

10 12 14 16 18 20

0 2 4 6 8 10 12 14 16 18 20

2012 2013 2014 2015

Number of occasions Number of occasionst

Securities leg defaultDefault in contribution to default funds

Financial leg default

2012 2013 2014 2015

Securities leg defaultDefault in contribution to default funds

Financial leg default

4,0604,0605,2885,288

1,7031,703 1,1551,155

6565

725725

0 1,000 2,000 3,000 4,000 5,000 6,000

0 1,000 2,000 3,000 4,000 5,000 6,000

HUF Millions HUF Millions

30­In­the­case­of­futures­products,­the­value­of­yet­unclosed­positions.31­The­total­value­of­defaults­was­HUF­1,703­million­in­2014,­HUF­5,353­million­in­2013­and­HUF­4,095­million­in­2013.

MAGYAR NEMZETI BANK

PAYMENT SYSTEMS REPoRT • JuNE 201636

32­­On­the­BETa­Market­of­the­Budapest­Stock­Exchange,­investors­have­an­opportunity­to­trade­in­foreign­equity.­The­trading­is­performed­in­forint;­thus­access­is­given­to­the­shares­of­numerous­European­large­corporations­issued­in­foreign­currency­without­the­costs­of­foreign­exchange­conversions.

33­­Pursuant­ to­Regulation­ (EU)­No­909/2014­of­ the­European­Parliament­and­of­ the­Council­ (CSDR),­ in­ the­case­of­ transactions­ in­ transferable­securities­executed­on­trading­venues,­the­settlement­date­shall­be­no­later­than­on­the­second­business­day­after­the­trading­takes­place.­Before­the­adoption­of­the­regulation,­transactions­executed­in­the­Equity­Segment­of­the­Budapest­Stock­Exchange­and­on­the­BETa­market­had­been­settled­on­the­third­business­day­following­the­trade­(T+3­rule).

34­February­201535­The­previous­name­of­the­Trading­Platform­was­“Balancing­Platform”.

Clearing­and­settlement­risks­in­the­markets­cleared­by­KELER­CCP­were­not­exacerbated­even­by­the­shorter­settle-ment­deadline­for­domestic­and­foreign­securities­trading. In­line­with­European­securities­markets,­pursuant­to­the­T+2­rule­adopted­on­6­October­2014,­spot­securities­contracts­concluded­in­the­Equity­Segment­of­the­Budapest­Stock­Exchange­and­on­the­BETa­market32­must­be­settled­no­later­than­the­second­business­day­(T+2)­following­the­trading­day,­instead­of­the­previously­stipulated­third­business­day­(T+3).33­The­introduction­of­the­rule­is­related­to­harmoni-sation­efforts­concerning­the­securities­clearing­and­settlement­market,­which­assign­a­higher­priority­to­the­simplifi-cation­of­cross-border­securities­transactions­and­to­strengthening­market­competition­between­the­central­securities­depositories­operating­in­the­European­Union.­In­addition,­the­standardisation­of­the­settlement­period­was­a­prereq-uisite­for­the­2015­launch­of­the­TARGET2-Securities­(T2S)­pan-European­securities­settlement­platform.­At­the­same­time,­before­the­adoption­of­the­rule,­there­had­been­concerns­that­the­shorter­settlement­period­may­increase­the­partner­risk­of­the­affected­securities­transactions,­leaving­less­time­for­obtaining­the­funds­or­securities­required­for­settling­the­transaction.­After­analysing­the­data­for­the­nine­months­preceding­and­following­adoption­of­the­new­rule,­it­was­found­that­performance­on­the­second­settlement­day­following­the­trading­day­expedited­the­settlement­of­securities­transactions,­while­the­reduction­of­the­period­available­for­settling­the­transactions­–­as­expected­–­had­no­significant­impact­on­the­number­and­value­of­defaults.­Therefore,­the­new­rule­did­not­increase­the­clearing­and­settlement­risk­of­the­infrastructure.­Although­there­was­a­rise­in­the­average­number­and­value­of­defaults­after­6­October­2014,­the­reason­for­the­increase­is­not­related­to­the­adoption­of­the­rule,­given­that­the­first­major­default­occurred­only­ in­ the­ fourth­month34­ following­migration,­when­one­of­ the­brokerage­ firms­affected­by­ the­broker­defaults­was­unable­to­discharge­its­obligations­due­to­liquidity­problems­and­the­suspension­of­its­operating­license­(Chart­26).­Although­the­events­related­to­the­broker­defaults­largely­contributed­to­the­elevated­default­values­fol-lowing­6­October­2014,­migration­to­the­T+2­rule­had­no­bearing­on­the­events.

In­addition­to­stock­exchange­securities­transactions,­the­settlement­cycle­of­the­Trading­Platform35­used­for­trades­related­to­natural­gas­and­gas­transportation­capacities­was­also­shortened­in­2015,­which­also­did­not­generate­an­increase­in­clearing­and­settlement­risk.­For­risk­management­purposes,­KELER­CCP­reduced­the­settlement­cycle­of­

Box 2Correlation between the shortening of settlement periods and defaults

Chart 26Number and value of defaulted securities transactions before and after migration to the T+2 rule

1 1 1 1 2 1 13 4

1 10 1 2 3 4 5

0 1 2 3 4 5

Number of occasions Number of occasions

Number of occasionsAverage number of defaults in nine months preceding and following the adoption of the T+2 rule

Jan.

201

4 Fe

b. 2

014

Mar

. 201

4 Ap

r. 20

14

May

. 201

4 Ju

n. 2

014

Jul.

2014

Au

g. 2

014

Sep.

201

4 O

ct. 2

014

Nov

. 201

4 De

c. 2

014

Jan.

201

5 Fe

b. 2

015

Mar

. 201

5 Ap

r. 20

15

May

. 201

5 Ju

n. 2

015

ValueAverage number of defaults in nine months preceding and following the adoption of the T+2 rule

33 44 8787

790790

509509309309

694694

7373

511511

50500

200 400 600 800

1000

0 200 400 600 800 1000

HUF Millions HUF Millions

Jan.

201

4 Fe

b. 2

014

Mar

. 201

4 Ap

r. 20

14

May

. 201

4 Ju

n. 2

014

Jul.

2014

Au

g. 2

014

Sep.

201

4 O

ct. 2

014

Nov

. 201

4 De

c. 2

014

Jan.

201

5 Fe

b. 2

015

Mar

. 201

5 Ap

r. 20

15

May

. 201

5 Ju

n. 2

015

OPERATION­OF­THE­DOMESTIC­PAyMENT­SySTEM

Payment SyStemS RePoRt • June 2016 37

In 2015, there was a need for intra-day clearing on three occasions, with two of these resulting from the extreme exchange rate volatility prompted by the decision of the Swiss central bank.­KELER­CCP­calculates­technical­prices­for­all­instruments­relying­on­data­related­to­trades­and­offers­received­in­real­time.­ The­ calculation­ of­ real-time­ technical­ prices,­as­ well­ as­ real-time­ position­ management­ and­assessment­enable­KELER­CCP­to­order,­in­case­of­a­pre-defined­price­movement,­ intra-day­ clearing­ for­risk­management­purposes­to­reduce­the­probability­of­defaults.­ In­2015,­ it­applied­ intra-day­clearing­ in­the­case­of­three­instruments.­On­15­January,­because­of­the­unexpected­elimination­of­the­exchange­rate­cap­on­ the­Swiss­ franc,­ the­prices­of­CHF/HUF­and­EUR/CHF­maturities­on­the­financial­futures­market­were­not­ consistent­with­market­ prices;­ therefore,­based­ on­ the­ theoretical­ delivery­ prices­ intra-day­clearing­was­ordered.­In­addition,­in­the­case­of­the­EUR/USD­exchange­ rate,­ due­ to­ the­ long­weekend­of­the­20­August­2015­national­holiday,­base­prices­reflected­the­closing­status­on­19­August.­However,­global­events37­gave­rise­to­significant­changes­during­the­ long­ weekend,­ and­ prices­ on­ 24­ August­ were­drastically­different­from­those­recorded­on­19­August.­As­a­result,­the­price­movement­exceeded­the­clearing­limit­ in­EUR/USD­and­therefore­on­24­August­2015­intra-day­clearing­was­ordered.

due to the violation of trading limits, 2015 saw an increase in the number of calls for additional financial collateral. At the same time – as was the case in 2014 – there was no need to impose supplementary margin. In­ guaranteed­ capital­markets,­ various­mechanisms­have­been­put­in­place­for­managing­the­clearing­and­settlement­ risks­stemming­ from­the­ insolvency­of­a­clearing­member.­ If­ necessary,­ the­ clearing­ right­ of­the­ affected­ clearing­ member­ may­ be­ suspended,­while­ in­ less­ extreme­ cases­ the­participant­may­be­ordered­to­provide­additional­financial­collateral­and­to­pay­supplementary­margin.­In­2015,­there­were­no­instances­ of­ supplementary­ margin­ being­ imposed­in­the­capital­market­due­to­clearing­members’­non-compliance­ with­ applicable­ capital­ requirements.­However,­additional­financial­collateral­was­ordered­on­eight­occasions­in­2015,­which­exceeds­the­three­cases­recorded­in­2014­by­a­large­margin.­Of­the­additional­financial­collateral­imposed,­six­cases­were­related­to­the­stock­exchange­derivatives­market­and­two­cases­to­the­equity­segment­of­ the­spot­market.­The­vast­majority­of­the­measures­were­required­because­of­the­participants’­violation­of­the­market­position­limit­and­the­individual­capital­position­limit.38­Compared­to­2014,­in­2015­the­number­of­defaults­rose­significantly­in­ the­capital­markets;­however,­ the­ increased­risks­did­not­warrant­the­imposition­of­additional­financial­collateral­due­to­repeated­default.­Additional­financial­

36 The­ cycle­ in­which­ the­ cumulated­monthly­ net­ purchase­ price­ payment­ obligation­ is­ to­ be­ settled­ begins­ on­ the­ first­ settlement­ date­ of­ the­following­month.

37­­The­considerable­weakening­of­USD­was­attributable­to­general­expectations­about­the­slowdown­of­the­Chinese­economy,­the­sharp­decline­in­the­exchange­rate­induced­by­the­panic­sentiment­in­the­Chinese­equity­markets­and­by­the­pricing-out­effects­of­the­postponement­of­the­anticipated­Fed­interest­rate­hike­from­September­to­December­2015.

38­­Market­position­limit:­In­the­case­of­capital­markets,­if­a­clearing­member’s­own­net­market­position,­that­of­its­principals,­non-clearing­members­or­an­individual­principal­reaches­or­exceeds­5­per­cent­of­the­open­contract­stock­for­the­product­concerned,­or­if­the­contract­value­of­the­futures­net­market­position­of­a­CEEGEX­Clearing­Member­reaches­or­exceeds­20­per­cent­of­total­market­open­interest,­KELER­CCP­is­entitled­to­impose­additional­financial­collateral.­Capital­position­limit:­For­the­derivative­positions­of­derivative­clearing­members­and­CEEGEX­physical­futures­clearing­members­KELER­CCP­applies­capital­position­limits­as­specified­in­its­General­Business­Rules.­If­the­clearing­member­reaches­or­exceeds­the­limit­that­can­be­obtained­against­the­deposit­of­additional­financial­collateral,­KELER­CCP­may­suspend­the­clearing­right­of­the­clearing­member.

the­Trading­Platform­from­15­days­to­5­days.­Consequently,­as­of­1­April­2015­participants­have­5­calendar­days­to­settle­their­cumulated­monthly­net­purchase­price­payment­obligations,­instead­of­the­previous­15­calendar­days.36 The­measure­greatly­contributed­to­mitigating­the­risks­of­KELER­CCP,­as­the­tighter­settlement­deadline­allows­partic-ipants’­insolvency­to­be­detected­earlier­and­thus­insolvent­member­may­be­prevented­from­further­trading­within­a­shorter­timeframe.­At­the­same­time,­as­is­the­case­with­stock­exchange­securities­transactions,­the­shortening­of­the­duration­of­the­settlement­cycle­may­increase­the­partner­risk­associated­with­transactions­executed­on­the­Trading­Platform,­as­the­application­of­the­earlier­15-day­settlement­cycle­ leaves­more­room­for­participants­to­obtain­the­required­ liquidity,­thereby­supporting­the­ liquidity­planning­of­members­ in­buyer­positions.­ In­2015,­there­were­no­defaults­in­the­case­of­the­Trading­Platform;­in­other­words,­the­reduction­of­the­duration­of­the­settlement­cycle­did­not­increase­the­clearing­and­settlement­risk­of­the­trades­concluded­on­the­Platform.

MAGYAR NEMZETI BANK

PAYMENT SYSTEMS REPoRT • JuNE 201638

collateral­and­supplementary­margin­were­provided­as­required­in­every­case.

Clearing and settlement risk in gas markets decreased in 2015 compared to the previous year.­As­is­the­case­with­guaranteed­capital­markets,­in­energy­markets­the­ central­ counterparty­ is­ also­ entitled­ to­ impose­additional­ financial­ collateral­ and­ supplementary­margin­requirements­or­suspend­the­clearing­right­of­the­clearing­member.­In­the­gas­markets,­KELER­CCP­ordered­four­clearing­members­to­pay­supplementary­margin­for­violation­of­the­capital­requirement­on­four­occasions­in­2015,­which­points­to­a­moderation­in­the­related­clearing­and­settlement­risks­compared­to­the­previous­year,­as­similar­measures­were­taken­on­five­occasions­in­2014.­In­addition­to­these­supplementary­margins,­additional­financial­collateral­was­imposed­in­one­case­in­2015­due­to­the­participant’s­failure­to­comply­with­its­reporting­obligation.­This­also­implies­that­risks­declined­compared­to­2014,­when­two­such­cases­occurred.

2.3.5 SySTEM OPERATIONAL INTERdEPENdENCy RISK

As a result of operating hour extensions, system operational interdependency risk increased slightly in 2015 compared to the previous year, but owing to the robust operation of the systems, it remained at a low

level throughout 2015.­Monitoring­system­operational­interdependence­ risks­ in­ the­ domestic­ financial­market­infrastructure­(VIBER,­ICS­and­the­securities­clearing­and­settlement­system)­is­important­because­fundamental­ liquidity-related­ interdependencies­between­ the­ systems­ may­ give­ rise­ to­ contagion.­A­problem­arising­ in­one­system­might­spill­over­to­the­ rest­of­ the­systems,­as­ in­ the­case­of­domestic­payment­ transactions­ the­ various­ interdependent­steps­ in­ the­ clearing­ and­ settlement­ process­ are­sometimes­performed­by­different­financial­market­infrastructures.­ In­ addition,­ the­ cash­ leg­ liquidity­of­ participants­ relies­ on­ the­ same­ collateral­ in­ the­systems,­while­the­pledged­security­collateral­ensuring­the­ liquidity­ of­ the­ payment­ systems­ is­ managed­by­ KELER­ Central­ Securities­ Depository.­ In­ VIBER,­system­operational­ interdependency­ risk­ remained­unchanged­on­the­side­of­the­ICS­in­2015­compared­to­the­previous­year,­as­GIRO­requested­the­extension­of­operating­hours­upon­the­request­of­ICS­participants­about­as­many­times­as­in­2014.­System­operational­interdependency­risk­in­VIBER­increased­on­KELER’s­side,­due­to­an­increase­in­the­number­of­requested­operating­hours­extensions­due­to­a­technical­problem­at­KELER.­Moreover,­on­one­occasion­in­2015,­KELER­was­unable­to­send­SWIFT­messages­for­128­minutes;­consequently,­ it­ was­ also­ unable­ to­ send­ DVP­transactions­ and­ credit­ line­modification­messages­during­this­period.

OPERATION­OF­THE­DOMESTIC­PAyMENT­SySTEM

Payment SyStemS RePoRt • June 2016 39

2.4 Comprehensive oversight assessments in 2015

Based on the comprehensive oversight assessments, the operation of the Hungarian financial market infrastructures was safe, efficient and transparent in the past two years, thereby supporting the operation of the domestic money and capital market and hence, strengthening financial stability.­For­the­fifth­time­in­2015,­comprehensive­oversight­assessments­were­ conducted­ for­ all­ four­ overseen­ systems.­ In­line­with­ international­ procedures,­ the­assessment­began­ with­ a­ questionnaire-based­ survey­ with­ a­focus­ on­ self-assessment,­ internal­ interviews­ with­systems­ operators­ and­ evaluation­ of­ the­ supplied­information,­ data­ and­ findings­ of­ internal­ audits.­The­comprehensive­assessments­are­consistent­with­international­practice.­Indeed,­in­2014­the­assessment­methodology­was­updated­to­adopt­the­international­requirements­ for­ financial­ market­ infrastructures­(Principles­for­Financial­Market­Infrastructures­[PFMI,­BIS-IOSCO]).­Since­the­modification­of­the­international­methodology­increased­the­number­of­principles­and­key­considerations­examined­in­the­assessment,­the­

assessment­of­2015­does­not­exactly­correspond­to­that­performed­in­2012.­ In­respect­of­the­overseen­systems,­in­most­cases­the­assessment­rating­of­each­principle­(e.g.­operational­risk,­governance,­legal­basis,­efficiency­and­effectiveness)­was­assigned­as­broadly­observed­or­observed.39­Based­on­the­assessments,­in­the­MNB’s­opinion­there­is­room­for­improvement­in­all­systems,­especially­as­it­relates­to­comprehensive­management­of­risks­(including­comprehensive­risk­assessment­ and­ planning),­ updating­ system­ rules­and­procedures,­ cost­ calculation­methodology­ and­operational­risk.­As­regards­the­latter,­areas­to­improve­include­authorisation­management,­key-person­risk,­change­ management­ and­ business­ continuity.­ In­the­ context­of­ the­assessments,­ the­MNB­–­as­ the­overseer­ –­ formulated­ recommendations­ for­ the­overseen­systems­aimed­at­the­further­improvement­of­ operational­ reliability­ and­ efficiency.­ Based­ on­the­ recommendations,­ systems­ operators­ have­drawn­up­action­plans­and­their­implementation­is­in­ progress.

39­­Assessments­are­based­on­a­scale­of­four­ratings;­accordingly,­based­on­the­verification­of­compliance­with­specific­principles,­the­subject­can­be­qualified­as­observed,­broadly­observed,­partly­observed­or­not­observed.­Certain­topics­are­not­relevant­to­some­of­the­systems;­those­cases­were­not­rated.

MAGYAR NEMZETI BANK

PAYMENT SYSTEMS REPoRT • JuNE 201640

40­Act­LXXXV­of­2009­on­the­Pursuit­of­the­Business­of­Payment­Services.41­MNB­Decree­No­18/2009­(VIII.­6.)­on­payment­services­activities.

Table 3Inspections conducted by the MNB in numbers(2011–2015)

2011 2012 2013 2014 2015

Number­of­payment­inspections

Bank 9 8 11 9 7

Cooperative­credit­institution 6 9 8 13 15

Payment­institution — — — 1 —

Number­of­findings 134 125 118 174 176

Number­of­measures 78 113 107 122 99

Number­of­fines Bank 2 — 2 2 10

Cooperative­credit­institution 5 4 4 6 7

Payment­institution — — — 0 0

Total: 7 4 6 8 17

Amount­of­fines(in­million­HUF)

Bank 17 — 3,2 35 103,5

Cooperative­credit­institution 4,4 3,2 20,4 27,5 15,2

Payment­institution — — — 0 0

Total: 21,4 3,2 23,6 62,5 118,7

2.5 Findings of payment inspections

According to the on-site inspections conducted in 2015, compliance was generally observed at the credit institutions inspected, but a number of violations were detected which affected a broad range of customers. By­ reinforcing­ the­ compliance­ of­ credit­ institutions­and­other­payment­service­providers­with­regulations,­payment­ inspections­ contribute­ to­ the­ reliable­ and­compliant­ operation­ of­ the­ financial­ intermediary­system,­ the­ predictability­ of­ payment­ processes­ for­customers,­and­hence,­the­efficient­delivery­of­services­to­customers.­Similar­ to­ the­previous­year,­ the­MNB­conducted­scheduled­inspections­at­22­credit­institutions­in­2015,­verifying­compliance­with­the­provisions­of­the­Act­on­Payment­Services40­and­of­the­MNB­Decree.41 The­MNB­conducted­scheduled­inspections­at­four­credit­institutions­with­significant­payment­turnover,­at­three­credit­institutions­with­smaller­turnover­(including­the­

branch­ of­ a­ European­Union­ credit­ institution)­ and,­within­ the­ sector­ of­ cooperative­ credit­ institutions,­at­15­cooperative­banks­with­a­sizeable­turnover.­The­inspections­found­violations­of­legal­regulations­in­176­cases.­Each­ inspection­was­concluded­with­a­call­ for­measures,­and­in­consideration­of­the­severity­of­the­violations­identified,­the­MNB­imposed­fines­on­eight­credit­ institutions­ amounting­ to­HUF­ 90.3­million­ in­total.­ This­ amount­was­ augmented­ by­ an­ additional­amount­of­HUF­24.2­million­ in­fines­ imposed­ in­ the­context­of­inspections­carried­over­from­2014­and­by­fines­amounting­to­HUF­4.2­million­levied­on­three­credit­institutions­in­relation­to­inadequate­implementation­of­the­measures­prescribed­in­the­context­of­inspections­performed­in­2014.­As­a­result,­the­total­fines­imposed­by­the­MNB­in­2015­amounted­to­HUF­118.9­million­(Table­3).

OPERATION­OF­THE­DOMESTIC­PAyMENT­SySTEM

Payment SyStemS RePoRt • June 2016 41

The most frequent infringements involved the violation of the Act on Payment Services in respect of the provision of prior and follow-up information, and of the MNB Decree in respect of making the amount of the payment transaction available to the beneficiary. Pursuant­ to­ the­ provisions­ of­ the­ Act­ on­ Payment­Services,­customers­must­receive­information­on­the­fees­and­charges­payable­by­ the­customer.­The­ fees­announced­must­be­presented,­ in­an­itemised­form,­in­ the­ subsequent­ information­ (account­ statement)­sent­ to­ customers,­ provided­ that­ there­ have­ been­such­transactions.­The­inspections­revealed­that­credit­institutions­failed­to­meet­the­requirement­of­providing­prior­and­subsequent­information­to­customers­in­many­cases.­Another­frequent­error­was­that­the­payment­account­was­opened­in­the­absence­of­the­documents­prescribed­by­law.­After­improving­in­the­previous­year,­failure­ to­credit­ immediately­and­value­date­ related­deficiency­were­on­ the­ rise­again,­and­ in­2015­ they­remained­the­most­frequent­violations­in­respect­of­the­MNB­Decree.­Since­the­relevant­provisions­have­been­in­effect­for­a­long­period­of­time,­the­MNB­continues­to­impose­tighter­sanctions­in­the­case­of­such­violations (Chart­27).

Chart 27Non-compliance cases in payments (2011–2015)

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Number of payment inspectionsNon-compliant acceptance and registering receipt time of payment ordersDelay in settlement of payment orders or rejectionsNon-compliant queuing or partial paymentFailure to credit immediately, value date related deficiencyFailure to notify clientsInformation requirements (from 2014)Conclusion of contract, account opening (from 2014)Rectification of payment transactions (from 2014)Execution of official transfer orders (from 2014)

Payment SyStemS RePoRt • June 201642

3 Developments in Hungarian and international regulation affecting payments and financial infrastructures in Hungary

Regulated­and­supervised­payment­services­provided­to­ customers­ contribute­ to­ improving­ consumer­confidence­ and­ hence­ promote­ the­ further­advancement­ of­ electronic­ payment­ services.­ This­chapter­ outlines­ the­ Hungarian­ and­ international­regulatory­ developments­ affecting­ payments­ and­financial­ infrastructures­ in­ Hungary.­ It­ summarises­progress­made­ in­the­transposition­of­the­Payment­

Accounts­ Directive,­ calls­ attention­ to­ preparations­for­the­SEPA­End-Date­Regulation,­presents­the­most­important­changes­of­the­renewed­Payment­Services­Directive,­discusses­the­changes­affecting­commercial­cards­pursuant­to­the­European­Union­Regulation­on­interchange­fees­for­card-based­payment­transactions­and­ the­ regulatory­ amendments­ prompted­ by­ the­establishment­of­national­utility­services.

Payment SyStemS RePoRt • June 2016 43

DEVELOPMENTS­IN­HUNGARIAN­AND­INTERNATIONAL­REGULATION­AFFECTING­PAyMENTS...

3.1 Progress in the transposition of the Payment Accounts Directive

Although details of the Hungarian regulation serving the transposition of the Payment Accounts directive42 are not yet available, a provisional national list of the most representative services linked to a payment account and subject to a fee has been prepared. Moreover, the EBA has already commenced negotiations with regard to the Union-level standardised terms of glossary, the fee information document and the statement of fees.­ Upon­ transposition­of­ the­ Payment­Accounts­Directive,­pursuant­to­the­authorisations­to­be­granted­in­the­Act­on­Credit­Institutions43­and­in­the­Act­on­Payment­ Services,44­ the­provisions­of­ the­Directive­will­be­ incorporated­ into­government­decrees.­The­government­ decrees­ to­ be­ drafted­by­ the­Ministry­for­National­Economy­will­define­the­detailed­rules­of­ payment­ accounts­with­basic­ features,­ payment­account­switching­and­the­information­to­be­provided­with­respect­to­the­fees­related­to­payment­accounts­held­for­consumers.45­In­accordance­with­the­Payment­Accounts­ Directive­ and­ with­ the­ involvement­ of­payment­service­providers­and­consumer­protection­organisations,­by­18­September­2015­the­MNB­had­prepared­ a­ provisional­ national­ list­ of­ the­ most­representative­services­linked­to­a­payment­account­

and­subject­to­a­fee.­The­list­is­composed­of­20­items.­According­to­the­provisional­national­lists­drafted­by­the­Member­States,­EBA­is­to­propose­standardised­Union-level­ terms­ and­ definitions­ (i.e.­ a­ glossary),­which­ will­ assist­ consumers­ in­ understanding­ the­content­of­ individual­ services.­ Simultaneously,­ EBA­has­commenced­developing­the­technical­standards­regarding­ the­ fee­ information­ document­ and­ the­statement­ of­ fees.­ Prior­ to­ the­ conclusion­ of­ the­payment­ account­ framework­ contract,­ the­ fee­information­document­ is­expected­ to­provide­clear­and­understandable,­ex­ante­information­to­consumers­regarding­the­fees­to­be­charged­for­the­service.­Once­the­service­ linked­ to­ the­payment­account­ is­being­used,­ service­ providers­ are­ required­ to­ provide­ a­statement­of­fees­free­of­charge­and­at­least­annually,­to­ inform­consumers­of­all­ the­ fees­ charged­ in­ the­relevant­period,­using­the­standardised­terminology.­EBA­has­already­commenced­consultations­regarding­these­ documents.­ The­ development­ of­ the­ so-called­ comparison­ website­ operated­ by­ the­ MNB­is­ in­ progress­ to­ ensure,­ in­ a­ consistent­ format,­comparability­ of­ the­ fees­ linked­ to­ the­ payment­accounts­charged­by­each­payment­service­provider,­in­the­standardised­terminology­mentioned­above.

42­­Directive­2014/92/EU­of­the­European­Parliament­and­of­the­Council­on­the­comparability­of­fees­related­to­payment­accounts,­payment­account­switching­and­access­to­payment­accounts­with­basic­features.

43­Act­CCXXXVII­of­2013­on­Credit­Institutions­and­Financial­Enterprises.44­Act­LXXXV­of­2009­on­Providing­Payment­Services.45­As­of­the­date­of­submission­of­this­Report,­the­details­of­the­scheduled­regulation­were­not­available.

MAGYAR NEMZETI BANK

PAYMENT SYSTEMS REPoRT • JuNE 201644

3.2 Preparation for SEPA end-date

By 31 October 2016, both payment service providers operating in Hungary and payment service users must comply with the EU requirements for credit transfers and direct debits in euro.­The­requirements­set­out­in­the­SEPA­End-Date­Regulation­aim­to­enable­customers­of­payment­service­providers­to­execute­euro­payment­transactions­with­safety,­speed­and­efficiency­similar­to­ domestic­ payments.­ SEPA­ is­ based­ on­ common­technical­standards­and­payment­schemes,­of­which­SEPA­credit­transfer­(SCT)­was­introduced­in­2008­and­SEPA­direct­debit­(SDD)­in­2009.­Under­the­Regulation,­euro­area­Member­States­were­expected­to­complete­migration­to­the­common­payment­schemes­by­August­2014.­Non-euro­area­countries­are­required­to­complete­the­migration­later,­by­the­end­of­October­2016.

Importantly, full migration to common European payment schemes not only affects payment service providers: payment service users, and in particular corporate customers generating the highest euro turnover, must also be involved in the effort.­From­the­end-date,­credit­transfers­and­direct­debits­in­euro­must­be­executed­ in­accordance­with­ the­common­standards­ and­ technical­ requirements­ (ISO­ 20022­XML)­of­ the­SEPA­End-Date­Regulation.­One­of­ the­most­challenging­rules­of­the­Regulation­states­that­after­the­deadline,­payment­service­providers­must­ensure­that­when­a­payment­service­user­–­which­is­

not­a­consumer­or­a­microenterprise­(a­corporation­or­ public­ authority)­ –­ initiates­ or­ receives­ euro-denominated,­individual­credit­transfers­or­individual­direct­debits­bundled­together­for­transmission,­only­SEPA-formatted­ messages­ can­ be­ used.­ Payment­transactions­must­ be­ transmitted­ from­end­ to­ end­according­ to­ SEPA­ standards,­ and­ payment­ service­providers’­are­only­allowed­to­offer­their­customers­conversion­services­to­SEPA­standards­with­limitations,­separately­of­the­payment­chain­and­subject­to­specific­conditions.

Payment service providers must also ensure that a payment order submitted in euro is also executed according to the international bank account number (IBAN) specified in the order.­Until­now,­customers­were­ required­ to­ submit­ these­ types­ of­ payment­orders­ to­ their­payment­ service­providers­ together­with­IBAN­and­the­bank­identifier­code­(BIC).­Pursuant­to­the­End-Date­Regulation,­as­of­the­end-date,­in­non-euro­area­countries,­payment­service­providers­cannot­require­their­customers­during­payment­transactions­to­provide­the­BIC­of­the­payer’s­or­the­payee’s­bank­for­the­execution­of­the­transaction.­This­also­poses­a­challenge­for­payment­service­providers,­considering­that­at­present­they­ensure­the­routing­of­payment­orders­to­the­payment­service­provider­of­the­payee­on­the­basis­of­the­BIC­code.

The­BIC­(business­identifier­code)­is­a­standard­approved­by­the­International­Organisation­for­Standardisation­for­the­identification­of­banks.­The­standard­specifies­the­structure­and­elements­of­the­identifier­code­for­the­automation­of­international­payments.­The­code­consists­of­8­or­11­digits­and­its­purpose­is­to­transmit­international­payment­orders­to­banks.

IBAN­(international­bank­account­number)­is­the­international­identifier­of­payment­accounts.­It­unambiguously­identifies­an­individual­payment­account,­the­elements­of­which­are­specified­by­the­International­Organisation­for­Standardisation­(ISO).­In­Hungary,­it­is­a­series­of­numbers­containing­28­characters,­and­it­is­generated­in­accordance­with­Annex­No­1­to­Decree­No­18/2009­(VIII.­6.)­of­the­Governor­of­the­Central­Bank­on­the­Execution­of­Payment­Transactions­as­follows:

•­­the­first­two­digits­comprise­the­country­code­of­Hungary­in­accordance­with­ISO­3166:­HU;

•­­the­third­and­fourth­digits­comprise­the­check­digit,­for­which­the­algorithm­is­laid­down­in­the­European­Committee­for­Banking­Standards­(ECBS)­under­the­procedures­relating­to­the­creation­of­the­IBAN;

Box 3The bank identifier code (BIC) and the international bank account number (IBAN)

Payment SyStemS RePoRt • June 2016 45

DEVELOPMENTS­IN­HUNGARIAN­AND­INTERNATIONAL­REGULATION­AFFECTING­PAyMENTS...

In order to ensure timely migration, the MNB continuously monitors the progress of SEPA preparation.­In­2015,­a­SEPA­migration­working­group­was­set­up­within­ the­ framework­of­ the­Hungarian­Banking­Association,­which­published­an­information­booklet46­ on­ SEPA­ migration­ for­ payment­ service­providers­ and­ presented­ its­ contents­ at­ the­ SEPA­Forum.­ It­ also­ approved­ a­ communication­plan­ for­raising­awareness­among­stakeholders.­In­cooperation­with­ the­ MNB,­ the­ Banking­ Association­ inquired­about­the­progress­of­payment­service­providers­in­a­questionnaire-based­survey.

Although the progress of Hungarian payment service providers is adequate, additional efforts are needed to ensure full migration of payment system participants to the execution of euro-denominated payment transactions according to SEPA requirements. Most­banks­with­the­largest­payment­turnover­began­preparations­for­the­comprehensive­application­of­SEPA­payment­requirements­even­before­2016,­while­the­rest­of­the­payment­service­providers­commenced­the­process­in­the­first­or­second­quarter­of­2016.­According­to­the­data­supplies­of­payment­service­ providers­ requested­ by­ the­ MNB,­ at­ the­end­of­2015­75­per­ cent­of­ the­euro-denominated­credit­transfers­processed­by­Hungarian­banks­were­performed­ in­ accordance­ with­ SEPA­ requirements­(Chart­28).­Based­on­the­MNB’s­estimates,­the­current­

status­of­the­migration­is­even­more­favourable­–­85­per­cent­for­SEPA­credit­transfers­at­the­end­of­2015­–­once­ large-value­ (e.g.­TARGET2)­and­other,­euro-denominated­credit­transfers­affecting­non-European­countries­ are­ excluded­ from­ the­ statistics­ (where­transmission­as­per­SEPA­requirements­is­technically­unfeasible­ in­ any­ case).­ As­ only­ one­ Hungarian­payment­service­provider­has­joined­the­SEPA­direct­debit­(SDD)­scheme­so­far,­the­MNB­does­not­publish­data­in­this­regard.

Chart 28Ratio of SEPA credit transfers (SCT) to total euro credit transfers47

(2011–2015)

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46 http://www.bankszovetseg.hu/hirek-aktualitasok/2016-november-1-tol-egyseges-euro-fizetesi-szabalyok-es-szabvanyok-az-unio-minden-­tagallamaban-3691

47­­While­the­MNB­requested­data­supplies­from­payment­service­providers­regarding­the­application­of­SEPA­payment­methods­semi-annually­until­the­end­of­2013,­from­2014­the­data­supply­is­to­be­provided­on­a­quarterly­basis.­

•­­digits­ 5–28­ comprise­ the­ domestic­ payment­ account­ number­ (if­ the­ payment­ account­ number­ contains­ only­ 16­characters,­the­last­8­digits­of­the­IBAN­shall­all­be­zeros).

Characters­5–28­of­the­IBAN­contains­the­domestic­payment­account­number­which­is­created,­in­accordance­with­the­same­Annex­of­the­Decree,­as­follows:

•­­the­first­eight­characters­comprise­the­routing­code;­the­first­three­digits­of­the­routing­code­comprise­the­credit­institution­identification­code­(issued­by­the­MNB­at­the­request­of­the­payment­service­provider),­ indicating­the­account­holding­payment­ service­provider,­where­ the­next­ four­digits­ indicate­ the­branch­or­ the­ location­of­ the­payment­account­of­the­payment­service­provider.­The­eighth­digit­is­a­check­digit;

•­­digits­9–16­or­9–24­comprise­the­identification­number­of­the­payment­account.­The­check­digit­is­the­16th­digit­if­the­full­length­of­the­payment­account­number­is­16­characters­or­the­24th­digit­if­the­account­number­contains­24­characters.­If­the­account­number­contains­24­digits,­the­16th­digit­may­be­freely­used;

•­­the­check­digits­verify­the­preceding­digits­and­are­calculated­on­the­basis­of­a­special­algorithm­specified­by­the­Decree.

MAGYAR NEMZETI BANK

PAYMENT SYSTEMS REPoRT • JuNE 201646

3.3 Key changes in the renewed Payment Services Directive

Having assessed the application and results of the Payment Services directive adopted in 2007, European Union legislators decided to elaborate a directive which is more aligned with contemporary requirements and trends as well as encourages the use of innovative, electronic payment solutions. Entering­ into­ force­in­ 2018,­ the­ amendments­ of­ Hungarian­ legislation­in­ accordance­ with­ the­ renewed­ Payment­ Services­Directive­promulgated­ in­December­2015­establish­a­legal­ framework­ for­ the­market­ entry­ of­ enterprises­providing­innovative­electronic­services,­strictly­regulate­the­ protection­ of­ customers’­ personalised­ security­credentials­ used­ in­ electronic­ payment­ transactions,­and­introduce­a­number­of­provisions­for­extending­and­strengthening­the­existing­rights­of­consumers.

The renewed Payment Services directive provides the means for the provision of innovative electronic services in a regulated and supervised framework. In­ recent­ years,­ several­ new­ enterprises­ providing­payment-related­ services­ have­ emerged:­ payment­initiation­service­providers,­through­which­a­customer­shopping­online­can­submit­to­ its­account-servicing­payment­service­provider­payment­orders­to­the­credit­of­the­merchant’s­account,­and­account­information­service­providers­which,­by­offering­an­online­inquiry­option,­ simultaneously­ display­ the­ account­ activity­on­ all­ of­ the­ account­ holder’s­ payment­ accounts.­Both­ of­ these­ new­ services­ require­ the­ use­ of­ the­customers’­ personal­ security­ credentials,­ which­ –­given­the­current­absence­of­the­relevant­regulations­–­ poses­ severe­ security­ risks­ and­ raises­ serious­consumer­protection­questions­especially­in­relation­to­information­technology­security­and­responsibility.­With­that­in­mind,­the­new­Directive­is­also­applicable­to­these­services­and­permits­their­provision­only­to­licensed­and­supervised­payment­institutions,­subject­to­ adequate­ IT­ security,­ customer­ information­ and­responsibility­requirements.

with a view to improving the safety and reliability of electronic payment services and consumers’ confidence in the use of such services, the new

directive imposes tight security, risk management and authentication requirements on payment service providers.­ Payment­ service­ providers­ are­required­to­develop­and­maintain­a­framework­for­risk­mitigation­measures,­control­mechanisms­and­incident­management­ procedures­ designed­ to­ manage­ and­safeguard­against­operational­and­security­risks­related­to­the­payment­services­provided.­In­order­to­prevent­fraud,­unauthorised­access­to­customers’­personalised­security­credentials­and­financial­data­as­well­as­their­fraudulent­use,­payment­service­providers­are­required­to­use­strong­customer­authentication­(see­Chapter­4.3)­when­customers­access­their­payment­accounts­online­or­initiate­payment­transactions­electronically.

The new Payment Services directive also introduces provisions strengthening and extending consumers’ rights and reducing their liabilities.­One­of­the­most­important­ changes­ is­ that­ the­ scope­ of­ the­ new­Directive­is­extended­to­payment­transactions­in­all­currencies48­and,­in­the­case­of­payment­transactions­involving­countries­outside­of­the­EEA,­to­the­part­of­the­given­payment­transaction­that­is­carried­out­within­the­EEA.­A­favourable­change­affecting­consumers­is­the­extension­of­the­right­to­terminate­the­framework­contract­free­of­charge­if­the­framework­contract­is­in­force­for­at­least­6­months­instead­of­the­previous­12,­thereby­facilitating­switching­between­payment­service­ providers.­ Cardholder­ consumers­ may­ be­obliged­to­bear­the­losses­relating­to­any­unauthorised­payment­transactions­resulting­from­the­use­of­a­lost­or­stolen­payment­ instrument­up­to­a­maximum­of­EUR­50­ instead­of­ the­existing­EUR­150.­When­ the­exact­amount­of­a­card-based­payment­transaction­is­not­known,­the­account­servicing­payment­service­provider­may­block­funds­on­the­cardholder’s­payment­account­only­if­the­cardholder­has­given­consent­to­the­exact­amount­of­the­funds­to­be­blocked­and­those­funds­shall­be­released­without­undue­delay­upon­the­actual­execution­of­payment.­Provisions­of­the­new­Payment­Services­Directive­must­be­transposed­into­the­national­legislation­of­Member­States­by­no­later­than­13­January­2018.

48­­The­rule­is­not­applicable­to­some­provisions­that­are­explicitly­related­to­payment­transactions­executed­within­the­European­Economic­Area­(EEA)­in­the­currency­of­a­EEA­Member­State­(e.g.­certain­execution­times).

DEVELOPMENTS­IN­HUNGARIAN­AND­INTERNATIONAL­REGULATION­AFFECTING­PAyMENTS...

Payment SyStemS RePoRt • June 2016 47

3.4 Additional regulatory changes affecting the execution of payments

Maintaining the higher interchange fees applicable to commercial cards is only warranted over the long term if it makes a considerable contribution increasing commercial card turnover and if the growth rate of company card turnover exceeds the growth rate of retail card turnover by a large margin. From­the­beginning­of­2016,­the­Hungarian­regulation­effective­from­early­2014­is­no­ longer­applicable­to­commercial cards.­Consequently,­card­companies­or­payment­ service­ providers­ are­ now­ free­ to­ charge­any­amount­of­interchange­fees­in­this­card­category,­which­means­that­the­interchange­fees­applicable­to­commercial cards­may­rise­several-fold­in­comparison­to­those­applied­to­retail­cards.­This­practice,­in­turn,­may­ raise­ the­ costs­ of­ merchants­ accepting­ card­payments­ irrespective­of­the­fact­that­the­turnover­of­ company­ card­ purchases­ accounted­ for­ only­ 8­per­ cent­ of­ the­ value­ of­ total­ domestic­ purchases­in­2015.­ It­should­be­stressed­that­under­European­regulations,­neither­the­card­schemes,­nor­payment­service­providers­can­oblige­merchants­to­accept­the­cards­operating­with­unregulated­ interchange­ fees;­accordingly,­Hungarian­merchants­may­also­refuse­to­accept­commercial cards.­Although­a­mass­rejection­of­ commercial cards­ cannot­ be­ expected­ initially,­in­ the­ long­ run,­ once­merchants­begin­ to­perceive­the­losses­generated­by­these­cards,­card­rejections­may­ become­ more­ widespread,­ which­ would­ be­

detrimental­to­the­future­of­the­domestic­payment­card­market.­Therefore,­the­commercial card­market­should­be­closely­monitored­to­identify­the­effects­of­the­regulatory­change­as­soon­as­possible.

If the entity of the public utility service provider changes after the national public utility service is put in place, payers will not need to submit a new mandate for direct debit or modify the old mandate. In­2015,­parallel­to­the­revocation­of­the­universal­service­licenses­of­a­number­of­utility­companies­involved­in­gas­supply­services,­the­Hungarian­Energy­and­Public­Utility­Regulatory­ Authority­ appointed­ another­ company­–­ under­ the­ professional­ control­ of­ Első­ Nemzeti­Közműszolgáltató­ Zrt.­ –­ to­ service­ the­ customers­ of­these­providers.­Similar­changes­can­be­expected­ in­the­future­in­other­public­utility­sectors­as­well.­Since­a­large­portion­of­the­customers­constituting­the­new­customer­base­of­the­national­public­utility­service­had­used­direct­debit­to­pay­the­old­service­providers­for­public­utilities,­after­the­switchover­of­service­providers­a­significant­number­of­customers­would­have­had­to­modify­their­mandates­for­direct­debit­without­a­change­in­legislation.­For­a­smooth­provider­switchover,­several­regulations49­have­been­amended­to­ensure­that­the­previously­ submitted­ direct­ debit­mandates­ remain­effective­ irrespective­ of­ the­ change­ in­ beneficiary­service­provider.

49­Act­LXXXV­of­2009­on­the­Provision­of­Payment­Services­and­other­sectoral­laws.

Payment SyStemS RePoRt • June 201648

4 Ongoing and upcoming developments of the financial infrastructure

Developments­affecting­the­payment­and­settlement­systems­ facilitate­ the­ efficient,­ quick­ and­ safe­execution­ of­ payment­ transactions.­ Developments­scheduled­ in­ the­ area­ of­ domestic­ payment­transactions­may­set­ in­motion­a­­dimensional­shift­within­the­next­few­years:­in­2015­work­commenced­on­developing­ the­ concept­ for­ an­ instant­ payment­

system­ in­ Hungary.­ The­ developments­ and­ related­innovative­payment­solutions­will­soon­offer­electronic­alternatives­to­cash­payment­at­a­growing­number­of­locations­in­numerous­payment­situations,­improving­the­efficiency­of­the­execution­of­payments­society-wide­and­hence,­increasing­the­level­of­development­of­the­economy.

ONGOING­AND­UPCOMING­DEVELOPMENTS­OF­THE­FINANCIAL­INFRASTRUCTURE

Payment SyStemS RePoRt • June 2016 49

4.1 Possibilities of implementing an instant payment system

The further improvement of the Hungarian payment system and the competitiveness of the Hungarian economy may be bolstered by implementing a payment system that works every day of the year, twenty-four hours a day and provides the means for the execution of the vast majority of payment transactions within seconds. The­new­instant­payment­system­will­enable­domestic­banks­to­offer­innovative­payment­ solutions­ to­ a­ wide­ range­ of­ customers,­while­ with­ open­ access­ to­ the­ fast­ and­ modern­infrastructure,­new,­non-bank­participants­entering­the­payments­market­will­be­capable­of­creating­payment­services­competing­with­banking­products.­By­using­a­system­that­can­be­considered­advanced­even­by­international­standards,­initiating­electronic­payment­transactions­will­become­quick­and­simple­for­a­broad­range­of­customers.­As­a­result,­electronic­payment­will­become­possible­in­numerous­situations­where­currently­there­is­no­real­alternative­to­cash­payment;­in­ addition,­ new­ technical­ solutions­ will­ become­widespread­even­in­the­Hungarian­payments­market­much­faster­than­before,­paving­the­way­to­innovative­payment­solutions­(such­as­mobile­payment­services).­In­ some­ situations,­ already­ existing­ electronic­payment­ solutions­ –­ such­ as­ electronic­ payment­solutions­ currently­operating­with­ the­ involvement­of­international­card­brands­–­may­also­be­replaced­by­ services­ built­ on­ the­ new­ system;­ moreover,­ a­vast­ array­ of­ payment­ transactions­ linked­ to­ the­state­may­ become­ electronised­ easily­ at­ low­ cost.

The currently used electronic payment solutions can typically only be applied in a limited number of payment situations; extending their scope to additional payment situations can only be generally achieved by increasing the complexity of the infrastructure.­This­is­because­the­operational­logic­of­basic­electronic­payment­methods50­is­built­on­limited­communication­potentials­and­as­such,­it­barely­takes­advantage­ of­ the­modern­ communication­ and­ data­transmission­ services­ which­ have­ become­ broadly­available­at­low­cost­in­recent­years.­Therefore­–­and­also­owing­to­the­often­complicated­infrastructures­–­these­payment­solutions­can­provide­limited­support­to­

innovation­in­the­area­of­payment­transactions­and­as­a­result,­they­often­give­rise­to­payment­solutions­that­are­not­interoperable­with­each­other.­The­execution­time­ of­ interbank­ transactions­ also­ lags­ behind­ the­speed­warranted­by­the­level­of­development­of­the­existing­IT­and­communications­infrastructure.­And­with­the­appearance­of­new,­innovative­service­providers,­in­ the­next­ few­years­banks­may­find­ themselves­ in­fierce­competition­with­new­market­participants­even­in­Hungary,­which­could­ jeopardise­the­bulk­of­their­revenues­from­payment­services.

In order to prevent the emergence of a fragmented market structure and to support the creation of efficient payment solutions, there is a need to establish a central basic infrastructure that supports the operation of innovative payment services. The­ instant­ payment­ system­ to­ be­ established­should­ be­ capable­ of­ supporting­ the­ possibility­ of­electronic­ payment­ in­ as­many­payment­ situations­as­ possible.­ The­ service­ should­ also­ ensure­ access­to­the­system­at­low­cost­and­with­minimal­technical­entry­restrictions­on­the­side­of­the­payer­and­on­the­side­of­the­payee­alike.­ In­addition­to­replacing­the­low-value­credit­ transfer­and­direct­debit­ turnover,­the­ new­payment­ service­ should­ be­ also­ aimed­ at­facilitating­a­ competitive­environment­ for­ cash­use­and­for­the­rest­of­the­electronic­payment­solutions­in­ as­ many­ cases­ as­ possible.­ To­ ensure­ broad-based­usability,­it­is­important­to­have­the­ability­to­identify­the­participants­of­the­transaction­not­only­by­account­number­but­also­with­ the­use­of­other­unique­ identifiers;­ to­transfer­payment­ information­to­ stakeholders­ through­ numerous­ channels;­ to­ensure­that­the­amount­paid­is­immediately­credited­to­ the­ beneficiary’s­ account;­ and­ to­ ensure­ that­both­ the­ payer­ and­ the­ payee­ are­ automatically­notified­of­successful­execution­of­the­transaction.­In­implementing­the­instant­payment­service,­in­addition­to­ ensuring­ the­ interoperability­ of­ the­ payment­services,­ efforts­ should­ be­ made­ to­ encourage­competition­between­payment­service­providers­and­other­ payment­ market­ participants.­ If­ the­ instant­payment­system­is­ implemented­with­that­ in­mind,­

50­Credit­transfers,­direct­debits­and­payment­card­transactions.

MAGYAR NEMZETI BANK

PAYMENT SYSTEMS REPoRT • JuNE 201650

it­may­enable­current­participants­of­the­payments­market­ to­provide­ competitive­ services­ in­ the­ long­run.­Moreover,­ implementation­of­ the­ system­may­foster­ the­ emergence­ of­ new­ market­ participants­whose­ solutions­ would­ be­ interoperable­ with­ the­solutions­already­available­in­the­market­and­provide­their­services­without­the­creation­of­new,­overlapping­infrastructures­(Chart­29).

The objective of implementing the instant payment system is to create a continuously available basic infrastructure which, on the one hand, supports the execution of payment transactions between the payer and the payee within seconds and, on the other hand, facilitates the emergence of innovative payment solutions and the ancillary services through its flexible message processing capability.­ In­ line­with­the­expectations­of­the­European­Central­Bank­and­ the­ ERPB,­ the­ instant­ payment­ service­ should­be­ implemented­ in­ such­ a­ layered­ model,­ where­any­market­participant­can­create­ its­own­payment­service­based­on­the­central­clearing­and­settlement­infrastructure.­While­they­would­compete­with­one­another­ with­ respect­ to­ the­ range­ and­ quality­ of­the­services­provided,­thanks­to­the­use­of­the­basic­infrastructure­ and­ the­ common­ standards,­ they­would­ be­ interoperable­ with­ each­ other.­ Services­built­on­the­instant­payment­system­can­be­divided­into­two­parts:­a­basic­and­an­additional­service­level­(Chart­30).­The­basic­service­should­be­the­same­for­all­payment­service­providers.­In­the­context­of­the­basic­service,­the­amount­sent­by­the­payer­should­reach­the­payee­within­five­seconds­at­the­latest­in­

such­a­way­that­it­is­promptly­available­for­use­by­the­payee.­This­requirement­should­be­equally­satisfied­in­ the­ case­of­ transactions­ initiated­or­ received­by­the­customers­of­indirect­members­and­in­the­case­of­intrabank­transactions.­As­regards­additional­services,­however,­ there­ is­ ample­ room­ for­ competition­between­market­participants;­indeed,­building­on­the­basic­infrastructure­numerous­services­can­be­created­that­could­extend­the­basic­payment­services­or­even­link­additional­services­to­them.­

Implementation of the instant payment system contributes strongly to improving the efficiency of the domestic payment infrastructure, thereby supporting the competitiveness of the economy. Use­of­the­instant­payment­system­benefits­all­actors­of­ the­ economy­ in­ numerous­ ways.­ Owing­ to­ the­speed­of­the­transactions­and­the­additional­services­made­ available­ by­market­ participants,­ in­ addition­to­the­currently­available­cash­payment­option­retail­customers­will­be­enabled­to­use­electronic­payment­methods­ in­ new­ payment­ situations.­ This­ affects­retail­ and­bill­ payment­ situations,­ as­well­ as­direct­electronic­payments­between­individuals­alike.­Retail­participants­may­benefit­from­such­electronic­payment­options­where­electronic­payments­can­be­accepted­at­ low­ cost,­ and­ merchants­ receive­ consideration­for­ the­ transactions­ completed­ at­ the­ moment­ of­the­purchase.­Corporations­benefit­ from­ the­ faster­processing­of­transactions­as­this­could­eliminate­the­lack­of­confidence­between­corporations,­which­has­frequently­been­the­underlying­cause­of­participants’­preference­ for­ cash.­ As­ regards­ the­ government,­currently­cash-based,­government-related­transactions­can­be­electronised­and­new­solutions­may­emerge,­allowing­ government­ participants­ to­ receive­ data­supplies­regarding­economic­events.

Chart 29Relationship between main payment situations and the instant payment service

Time critical payments

Electronic payment solutions

Instant payment system

Overnight clearing system

Intraday clearing system

Payment card systems

Payment infrastructures

Direct debit

Credit transfer

Purchase withpayment card

Instantpayment

Government payments

Bill payments

E-commerce payments

Purchase at the physical space

Person-to-person payments

Chart 30Structure of the services provided in the instant payment system

• Alternative data entry solutions• New submission channels• Additional services linked to payments

• Processing of payment transactions between payment accounts in a few seconds

• Identification of the participants of the transaction with alternative identifiers• Expanding the payment possibilities

Basic service

Secondary accountidentifiers

Additionalservices

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Payment SyStemS RePoRt • June 2016 51

For the broad-based use of instant payment services, the use of secondary account identifiers should also be enabled; indeed, these identifiers could significantly simplify the payment process in numerous payment situations.­With­a­system­supporting­secondary­account­identifiers,­identifiers­frequently­used­by­the­customers­at­present­(e.g.­phone­number,­email­address)­can­be­linked­to­account­numbers.­This­means,­for­instance,­the­ability­ to­ initiate­an­ instant­ credit­ transfer­ via­a­mobile­phone­application,­just­by­entering­or­selecting­the­phone­number­of­ the­beneficiary.­The­database­supporting­the­secondary­account­ identifiers­should­be­set­up­in­such­a­way­that­any­identifier­contained­in­the­database­can­be­linked­to­the­identifiers­of­payment­accounts­or­to­the­identifiers­of­the­account­manager­service­providers.­In­addition,­the­registered­secondary­identifiers­should­be­available­in­every­service­used­by­the­customers.

The basic infrastructure of the clearing and settlement service should be designed in such a way that it does not increase the cost and resource requirement of the liquidity management of participating payment service providers significantly. With­ that­ in­mind,­ the­basic­infrastructure­ can­be­designed­ in­ two­ways.­On­ the­one­hand,­it­would­be­possible­to­process­the­clearing­of­instant­payment­transactions­in­GIRO­Zrt.­and­their­interbank­settlement­in­VIBER­real­time,­at­transaction­level­ by­ using­ an­ infrastructure­ operating­ non­ stop­and,­on­the­other­hand,­it­is­also­possible­to­operate­the­ instant­payment­system­with­prefunding,­where­payment­service­providers­could­participate­in­the­real­time­clearing­operated­by­GIRO­up­to­the­level­of­their­liquidity­set­aside­in­advance,­while­the­transactions­would­be­settled­in­VIBER­in­cycles­(Chart­31).

whichever option is chosen, priority should be assigned to the effects on banks’ liquidity position and, in order to reduce liquidity management costs, the application of transaction limits may be required. Importantly,­if­transaction­limits­are­set,­it­should­be­mandatory­to­submit­transactions­below­the­limit­to­the­instant­clearing­system.­Depending­on­the­exact­operation­of­ the­clearing­and­settlement­solutions,­individual­ transaction­ limits­ can­be­ set­ at­ lower­ (a­few­million­forints)­or­higher­(up­to­as­high­as­HUF­100­million)­values.­ In­ the­ instant­clearing­scheme,­besides­ the­ application­ of­ transaction­ limits,­ risks­associated­with­the­execution­of­instant­payments­can­be­mitigated­further­by­the­continuous­recalculation­of­the­participants’­net­positions.­Another­risk-mitigating­option­could­be­the­shortening­of­the­periods­between­the­settlement­of­the­transactions.­This­option­would­lower­ the­ total­ value­of­ the­ transactions­ that­have­been­ executed­ between­ customers­ already­ but­are­yet­ to­be­settled­between­the­payment­service­providers.­This­could­be­resolved,­on­the­one­hand,­by­the­instant­settlement­of­transactions­or,­if­the­cyclical­settlement­ option­was­ chosen,­ by­ increasing­ cycle­ frequency.

In line with the decision of the financial Stability Board, in May 2016 the MNB initiated a broad-based consultation with all stakeholders in the implementation of the instant payment system to ensure the availability of all important information as decisions are made on the operational details of the system.­In­this­context,­the­MNB­had­assessed­and­presented­in­detail­to­the­stakeholders­several­possible­implementation­models.­Essentially,­the­operation­of­the­clearing­and­the­settlement­levels­constitutes­the­main­difference­between­the­possible­models,­but­the­service­ level­ is­ the­same­for­all­models.­Whichever­model­ is­used­in­the­ implementation­of­the­ instant­payment­system,­key­priority­should­be­assigned­to­the­management­of­direct­debits­and­credit­transfers­initiated­in­batch;­moreover,­a­detailed­assessment­is­needed­regarding­options­for­the­possible­continuing­operation­of­low-value­clearing­systems­parallel­to­the­instant­payment­system.­The­volume­of­transactions­excluded­ from­ the­ instant­ payment­ system­ due­ to­the­application­of­limits­may­also­have­an­impact­on­the­location­at­which­transaction­types­with­smaller­turnover­should­be­processed.­It­is­important­to­avoid­more­than­one­small-value­payment­system­operating­in­parallel­with­the­ instant­payment­system,­as­this­may­be­detrimental­to­the­efficiency­of­the­domestic­payment­ transactions­ and­ may­ generate­ higher­operational­costs­for­payment­service­providers.

Chart 31Selected theoretical models of the instant payment system

Funding on RTGSaccountPrefunding

Cyclic settlement Instant settlement

Instant clearing Instant clearing

Instant messaging Instant messaging

Instant paymentservice

Instant paymentservice

c) Instantsettlement

b) Instantclearing

MAGYAR NEMZETI BANK

PAYMENT SYSTEMS REPoRT • JuNE 201652

4.2 Gradual phase-out of overnight clearing

In order to support the efficiency of government payments, the MNB wishes to achieve that the individual and batch credit transfers of the State Treasury are executed – similar to the credit transfers in the sector of credit institutions – in a quick, state of art intraday clearing system. When­credit­transfers­are­shifted­to­intraday­clearing­from­overnight­clearing,­migrating­the­batch­credit­transfers­of­the­Treasury­will­be­one­of­the­most­important­tasks,­given­that­certain­bulk­payments­–­e.g.­pensions,­social­allowances­–­are­typically­concentrated­on­specific­days.­Therefore,­on­these­days­an­extremely­high­volume­of­transactions­will­ need­ to­ be­ cleared­ quickly,­ with­ the­ values­of­ the­ payment­ orders­ credited­ to­ the­ payment­account­of­the­beneficiaries.­The­need­to­phase­out­

credit­ transfers­ from­ overnight­ clearing­ prompted­the­ introduction­ of­ GIRO’s­ early­ morning­ clearing­cycle­and­primarily,­this­cycle­will­be­responsible­for­the­ processing­ of­ the­ batch­ credit­ transfers­ of­ the­Hungarian­State­Treasury.­Thanks­to­the­early­morning­clearing­cycle,­beneficiaries­will­be­able­to­receive­the­payments­no­later­than­the­usual­hour.­The­MNB,­GIRO­and­ the­credit­ institutions­have­made­preparations­for­introducing­the­0th­clearing­cycle;­ its­scheduled­launch­ at­ the­ beginning­ of­ 2017­ depends­ on­ the­Treasury’s­preparedness.­After­migration,­only­debit-type­payment­transactions­will­ remain­ in­overnight­clearing;­options­for­their­future­clearing­and­location­will­need­to­be­assessed­during­the­implementation­of­the­instant­payment­service.

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Payment SyStemS RePoRt • June 2016 53

4.3 Introduction of the intraday clearing and settlement of bank card payments

It is the expectation of the MNB to introduce, similar to credit transfers, the intraday clearing and settlement of domestic payment card transactions. One­of­the­fundamental­goals­of­the­MNB’s­activities­to­ develop­ payment­ systems­ is­ to­ accelerate­ the­clearing­ of­ payment­ transactions,­ including­ card­purchases.­In­line­with­that,­the­intraday­clearing­of­credit­transfers­was­introduced­in­2012­and­the­cycle­frequency­was­doubled­during­2015.­However,­in­the­case­of­payment­card­purchases,­which­ is­the­most­popular­ and­ most­ dynamically­ growing­ electronic­payment­ method,­ the­ value­ of­ the­ purchases­ is­generally­ not­ credited­ to­ the­merchants’­ accounts­until­1­or­2­days­after­execution­of­the­transaction.­The­extension­of­intraday­clearing­and­settlement­to­card­payments­paves­the­way­for­the­further­expansion­of­

the­card­acquirer­infrastructure,­offering­even­more­locations­where­cash­payments­can­have­an­electronic­alternative.

In line with the expectations of the MNB, GIRO has commenced work on examining the clearing options of domestic payment card transactions.­The­European­regulation­on­interchange­fees­provides­an­opportunity­for­taking­over­the­clearing­of­domestic­payment­ card­ transactions­ from­ the­ international­card­brands.­The­regulation­sets­forth­numerous­new­provisions­regarding­business­rules.­In­this­context,­the­clearing­of­card­transactions­needs­to­be­separated­from­tasks­related­to­card­scheme­functions,­which­will­also­open­up­the­possibility­of­market­competition­for­the­processing­activity.

MAGYAR NEMZETI BANK

PAYMENT SYSTEMS REPoRT • JuNE 201654

4.4 KELER’s accession to T2S

In line with the revised migration plan, KELER is scheduled to join the TARGET2-Securities (T2S), the new pan-European securities settlement platform, in the fourth wave, on 6 february 2017. Central­ securities­ depositories­ participating­ in­ the­project­ can­migrate­ to­ the­European­ infrastructure­launched­on­22­June­2015­in­five­waves­at­near­six-month­intervals­between­June­2015­and­September­2017.­ In­ the­autumn­of­2015,­ the­Euroclear­Group­–­ one­of­ the­ largest­ central­ securities­ depositories­of­ the­ European­ market­ –­ indicated­ that­ due­ to­uncertainties­ around­ its­ scheduled­ migration­ in­March­2016,­ it­wished­to­ join­the­system­at­a­ later­point.­After­having­discussed­the­potential­impact­of­the­Euroclear­Group’s­delay,­decision-making­bodies­of­the­T2S­project­decided­that­several­depositories,­including­KELER,­would­ join­the­platform­one­wave­

later.­Therefore,­instead­of­12­September­2016,­the­Hungarian­depository­will­join­T2S­on­6­February­2017.­KELER­has­conducted­consultations­with­Hungarian­securities­ market­ participants­ regarding­ the­ delay­of­ the­ Hungarian­ migration­ and,­ in­ line­ with­ the­project­ requirements,­ it­ prepared­ a­ new­migration­plan,­taking­into­account­the­modified­deadlines­for­the­system­tests­relevant­to­the­Hungarian­market.­Since­ the­ MNB­ decided­ not­ to­ make­ the­ forint­available­on­ the­platform­as­a­ settlement­ currency­for­ the­ time­ being,­ after­ the­ accession­ of­ KELER,­T2S­will­primarily­serve­as­a­settlement­platform­for­Hungarian­securities­traded­in­euro.­Meanwhile,­the­Hungarian­depository­will­serve­as­an­access­point­for­Hungarian­clients­wishing­to­invest­in­other­European­countries­and­for­foreign­clients­wishing­to­invest­in­ Hungary.

As­a­result­of­the­largest­European­infrastructure­development­project­in­recent­years,­the­TARGET2-Securities­(T2S)­pan-European­securities­settlement­platform­was­launched­on­22­June­2015.­On­this­day,­the­central­depositories­of­Greece,­ Romania,­Malta­ and­ Switzerland­went­ live,­ followed­ shortly­ by­ their­ Italian­ counterpart­ on­ 31­ August.­ In­accordance­with­the­migration,­the­respective­depositories­of­Portugal­and­Belgium­also­completed­their­migration­process­on­29­March­2016­and­as­a­result,­by­April­2016­seven­European­central­depositories­had­access­to­the­most­modern­infrastructure­of­Europe­that­supports­the­efficient­settlement­of­the­securities­transactions­of­participating­depositories,­thereby­reducing­the­costs­of­cross-border­transactions­and­improving­the­appeal­and­competitiveness­of­the­European­securities­market.­By­using­the­system,­through­a­single­link­–­its­own­national­depository­–­a­Euro-pean­investor­can­gain­access­to­the­securities­selection­and­partners­of­all­participating­depositories­without­having­to­ build­ costly­ correspondent­ accounts­ in­ the­ desired­ countries.­ This­may­ contribute­ to­ creating­ an­ environment­where­Europe­is­in­the­position­to­act­as­a­single­securities­market­both­for­national­and­for­international­investors.

Before­the­launch­of­T2S,­when­a­Portuguese­investor­wished­to­purchase­Greek­securities,­it­had­to­have­a­contact­with­ the­ local­ depository­where­ the­Greek­ securities­were­ registered.­ This­ contact­was­manifested­ in­ a­ direct­ or­indirect­system­membership,­and­the­membership­fee­increased­the­costs­of­holding­the­securities.­Accordingly,­an­investment­service­provider­with­a­wide­product­selection­needed­to­build­correspondent­account­contacts­with­all­affected­depositories,­which­ultimately­increased­–­through­the­service­providers’­costs­–­the­costs­of­the­end­investor­as­ well.­ Recognising­ the­ fact­ that­ the­ maintenance­ costs­ of­ the­ resulting­ overlapping­ networks­ reduces­ the­competitiveness­of­the­European­capital­market­both­for­European­and­non-European­investors,­the­European­Central­Bank­launched­the­T2S­project­to­mitigate­the­redundancy.­The­new­infrastructure­creates­shorter­access­routes­by­offering­depositories­a­ simpler­connectivity­option­and­a­common­settlement­mechanism­with­an­opportunity­ for­standardised­business­operations.­Consequently,­central­depositories­assume­responsibility­for­building­international­correspondent­ accounts,­ but­ thanks­ to­ the­ technical­ solutions­ of­ T2S­ and­ the­ supporting­ European­ regulation,­establishing­the­background­infrastructure­for­a­single­European­capital­market­will­be­less­of­a­challenge­for­them.­

Box 4Launch of T2S and the expected impact of KELER’s migration on central bank collateral management

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Payment SyStemS RePoRt • June 2016 55

According to the assessment of the European Central Bank, KELER has made adequate progress in completing the tasks to be performed before the accession. Before the go-live date, further developments are needed to support a number of tasks,51 including those related to the management of corporate actions.52 Before­joining­T2S,­KELER­needs­to­provide­evidence­that­its­internal­processes­conform­to­those­applied­by­the­platform.­Harmonisation­tasks­affect­ legal­ and­ information­ technology­ topics,­ as­well­as­issues­regarding­business­operations,­such­as­the­ regulation­of­ settlement­finality,­ the­applicable­message­ standards­ and­ the­ definition­ of­ the­ exact­timetable­of­ a­ business­ day.­A­ special­ item­among­those­ to­ be­ harmonised­ is­ the­ management­ of­corporate­actions,­which­requires­significant­changes­across­Europe­both­in­terms­of­the­legal­environment­and­in­terms­of­market­standards.­The­reason­for­this­is­the­fact­that­there­is­no­uniform­European­practice­

regarding­the­processing­of­corporate­actions­related­to­ securities­ involved­ in­ pending­ transactions.­ An­example­for­this­is­the­management­of­dividend­rights­associated­with­securities­included­in­orders­that­have­been­received­by­the­depository­but­their­settlement­is­still­pending.­Given­the­ large­number­of­country-specific­features,­standardising­the­management­of­corporate­actions­across­Europe­is­one­of­the­greatest­challenges­of­the­T2S­project.­KELER­and­the­MNB­are­committed­to­putting­in­place­the­necessary­changes­in­Hungary.­The­technical­conditions­for­T2S­accession­will­ be­ provided­ by­ the­ Strategic­ Modernisation­Programme­ launched­by­KELER­ in­2012,­within­ the­framework­of­which­several­T2S-specific­modifications­will­go­ live­before­KELER’s­accession­on­6­February­2017.­ Thus,­ the­months­ remaining­ until­ entry­ will­be­dedicated­to­these­preparations,­and­the­MNB­is­providing­full­support­to­KELER­in­the­execution­of­the­developments­ahead.

Through­a­ single­depository,­ the­Portuguese­ investor­ in­ the­example­ above­ can­now­gain­ access­ to­ the­ securities­selection­of­all­other­T2S­depositories,­saving­all­the­costs­that­were­paid­in­the­past­to­local­intermediaries­in­specific­national­markets.

A­prerequisite­for­systemic­cooperation­between­European­depositories­is­the­harmonisation­of­their­basic­processes.­Harmonisation­ provides­ the­ means­ for­ the­ efficient­ operations­ of­ a­ shared­ settlement­ system.­ Importantly,­ all­depositories­are­expected­to­have­a­harmonised­calendar­of­opening­days­and­a­harmonised­timetable­for­the­busi-ness­day­(“settlement­day”),­and­ indirectly,­ this­may­have­an­ impact­on­the­processes­of­the­MNB.­A­business­day­closes­at­6­pm­in­T2S,­followed­by­45­minutes­of­end-of-day­processing.­The­next­business­day­opens­between­6:45­pm­and­8­pm,­and­will­be­available­from­8­pm.­Since­KELER­is­also­expected­to­adopt­the­timetable­of­the­business­day,­it­needs­to­revise­its­submission­cut-off­times­that­are­currently­set­after­6­pm.­Such­a­cut-off­time­is­applicable­to­the­pledging­of­securities­ in­ favour­of­ the­MNB­as­well,­as­ for­ the­time­being,­ the­banking­sector­has­until­6:30­pm­to­complete­this­process.­The­deadline­for­pledging,­therefore,­needs­to­be­brought­forward­to­at­least­6:00­pm­after­KELER’s­accession­to­T2S,­which­will­reduce­the­time­limit­available­for­banks­by­at­least­30­minutes.­The­next­potential­change­arises­from­the­calendar­applied­by­T2S­which,­contrary­to­Hungarian­practice,­does­not­apply­Saturday­busi-ness­ days­ and­ does­ not­ consider­ national­ holidays.­ After­ accession,­ KELER­ will­ comply­ with­ both­ the­ Hungarian­calendar­ and­ T2S’s­ calendar,­ but­ this­means­ that­ on­ some­business­ days­ it­will­ have­no­ access­ to­ T2S.­Under­ the­infrastructure­cooperation,­there­will­be­limited­access­to­the­pledging­function­in­these­cases,­which­means­that­on­Saturday­business­days­banks­presumably­will­not­be­able­ to­ increase­ their­ credit­ lines­with­ the­MNB­by­pledging­additional­securities.­The­reason­for­this­is­the­fact­that­collateralisation­events­must­also­appear­in­T2S­to­preserve­consistency­ between­ the­ records­ of­ KELER­ and­ T2S;­ however,­ since­ T2S­ will­ not­ be­ available­ on­ Saturdays,­ the­synchronisation­ of­ records­ will­ be­ impossible.­ Presumably,­ this­ will­ have­ to­ be­ managed­ by­ restricting­ the­collateralisation­function­on­these­days.­Consultations­are­in­progress­between­the­MNB­and­KELER­regarding­these­potential­changes,­and­the­affected­market­participants­will­be­informed­in­due­time.

51­­Europian­Cental­Bank­(2016):­Sixth­T2S­Harmonisation­Progress­Report­52­­Corporate­actions­are­the­cases­where­the­owner­of­a­negotiable­instrument­is­entitled­to­exercise­the­rights­attached­to­the­instrument­vis-à-vis­the­issuer­(e.g.­dividend­payment,­general­meeting,­interest­payment,­etc.).

Payment SyStemS RePoRt • June 201656

5 Security issues in payment transactions

The­ safe­ operation­ of­ financial­ infrastructures­ and­electronic­payment­instruments­is­indispensable­for­promoting­ the­ widespread­ use­ of­ these­ payment­instruments.­ Therefore,­ risks­ and­ fraud­ associated­with­electronic­payments­should­be­monitored­on­a­continuous­basis,­and­clear­rules­should­be­defined­

regarding­the­operation­of­the­payment­instruments.­In­light­of­the­rapid­technical­progress­and­the­use­of­payment­methods­in­new­areas,­it­should­be­borne­in­mind­that­innovation­should­not­jeopardise­the­safe­execution­of­transactions­and­confidence­in­payment­systems.

SECURITy­ISSUES­IN­PAyMENT­TRANSACTIONS

Payment SyStemS RePoRt • June 2016 57

5.1 Fraud related to electronic payment transactions

The ratio of payment card fraud to total turnover and the value of fraud increased somewhat in 2015, but it can still be considered extremely low­ (Charts­32­and­33). The­upward­shift­in­fraud­observed­in­2014­continued­in­the­first­three­quarters­of­2015,­but­the­Hungarian­payment­card­system­remains­extremely­safe­ in­ international­ comparison­ as­ well.­ 16,504­fraud­events­were­ recorded­ in­ relation­ to­payment­cards­issued­­in­Hungary­in­the­first­three­quarters­of­the­year,­and­the­related­losses­amounted­to­almost­HUF­575­million.­Although­ from­the­second­half­of­2013­both­the­number­of­fraud­events­and­the­losses­sustained­ edged­ up­ compared­ to­ total­ turnover,­the­respective­ratios­are­still­below­0.005­and­0.01­per­ cent­ of­ the­ total­ transaction­ turnover.­ On­ the­acquirer­ side,­2,204­ fraud­events­were­ recorded­ in­the­ Hungarian­ acceptance­ network,­ causing­ more­than­HUF­116­million­ in­damages­ in­ the­first­ three­quarters­of­ the­ year.­As­ regards­ card­ technologies,­in­terms­of­fraud,­there­appears­to­be­no­difference­

between­traditional­and­contactless­cards;­the­faster­and­more­convenient­use­of­contactless­technology­does­not­pose­any­additional­risk­to­customers.

fraud mainly affected cross-border transactions and card-not-present (typically online) purchases.­In­the­first­half­of­2015,­around­three­quarters­of­all­fraud­events­were­recorded­in­relation­to­card-not-present­transactions.­It­should­be­noted,­however,­that­even­in­comparison­to­the­substantial­rise­in­payment­card­turnover,­the­surge­in­the­turnover­of­online­purchases­is­remarkable,­which,­therefore,­could­have­been­one­of­the­reasons­behind­the­increased­fraud­ratio­in­this­category.­Trends­are­fairly­similar­regarding­the­losses­generated­by­fraud­events,­although­the­ratio­of­fraud­losses­from­counterfeit­cards­is­somewhat­higher­(over­23­per­cent­in­2015­Q1)­in­terms­of­value­than­it­is­in­terms­of­number­(Chart­34).

Chart 32Ratio of fraud and related losses to total payment card turnover on the issuer side (2010–2015)

0.000 0.001 0.002 0.003 0.004 0.005 0.006 0.007 0.008 0.009

0.000 0.001 0.002 0.003 0.004 0.005 0.006 0.007 0.008 0.009

Per centPer cent

Ratio of the value of payment card frauds to total turnover value of payment card transactionsRatio of the number of payment card fraud events to total number of payment card transactions

2011

H1

2010

H2

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Chart 33year-on-year changes in the turnover of cards issued in Hungary vs. in the number and value of the fraud events related to their use(2011–2015)

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0 20 40 60 80

100 120 140 160

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Value of fraudTotal value of transactionsNumber of fraud eventsTotal number of transactions

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MAGYAR NEMZETI BANK

PAYMENT SYSTEMS REPoRT • JuNE 201658

Payment with cards issued in Hungary is extremely safe by European standards as well.­Based­on­ the­analysis­ of­ 2013­ data­ presented­ in­ the­ European­Central­Bank’s­comprehensive­report53­on­card­fraud,­Hungary­recorded­the­lowest­fraud­losses­in­Europe­in­relation­to­transactions­by­payment­cards­issued­in­Hungary­(Chart­35).­Card­fraud­is­typically­related­to­international­perpetrator­groups­that­tend­to­attack­countries­with­ less­ safe­ infrastructures.­ Preserving­the­ current­ safety­ level­ of­ the­Hungarian­ payment­card­ system­ is­ an­ important­ goal,­ which­ requires­continuous­development­efforts­both­on­the­part­of­payment­ service­providers­and­on­ the­part­of­ card­companies.

Chart 34Distribution of the number and value of fraud events related to payment cards issued in Hungary by fraud category (2010–2015 Q1)

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Number of fraud eventsPer centPer cent

Other fraudCards not receivedCNPCounterfeit cardsFraudulent applicationLost or stolen cards

2011

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Other fraudCards not receivedCNPCounterfeit cardsFraudulent applicationLost or stolen cards

2011

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53­European­Central­Bank:­Fourth­report­on­card­fraud,­2015.

Chart 35Value of fraud losses as a percentage of total payment card turnover in individual European countries (2013)

Per cent Per cent

0.00

FR GB

LU DK

IE MT

SEPA

AT

EA-1

7BE D

EN

LIT SE ES CY FI LV EE SI BG CZ PT H

RG

RSK PL RO LT H

U

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Issuer sideAcquirer side

Source: ECB: Fourth report on card fraud

SECURITy­ISSUES­IN­PAyMENT­TRANSACTIONS

Payment SyStemS RePoRt • June 2016 59

Primarily as a result of regulations in favour of consumers, the vast majority of the losses written off in relation to payment card fraud are borne by the issuer and acquirer payment service providers instead of the cardholders (Chart­36).­Losses­written­off­on­the­issuer­side­in­the­first­three­quarters­of­2015­approached­HUF­537­million,­but­only­11­per­cent­of­these­losses­were­borne­by­customers.­On­the­acquirer­side,­slightly­less­than­two­thirds­of­the­losses­written­off­were­borne­by­issuers­and­one­third­was­paid­by­merchants­(see­Box­5,­“Who foots the bill?”).

The­Act­on­Payment­Services­prescribes­numerous­rules­to­protect­payer­(cardholder)­customers­in­relation­to­the­use­of­payment­services,­including­cases­of­payment­card­fraud.­The­Act­on­Payment­Services­establishes­detailed­rules­regarding­liability­and­loss­allocation­relating­to­payment­services­and­the­relevant­tasks.­The­customer­is­required­to­notify­the­payment­service­provider­without­undue­delay­upon­becoming­aware­of­loss­or­theft­of­the­payment­card­or­of­ its­unauthorised­use.­However,­assisted­by­various­monitoring­systems,­even­payment­service­providers­may­become­aware­of­such­payment­transactions,­irrespective­of­customer­reports.­After­being­notified­by­the­customer,­the­payment­service­provider­must­refuse­the­execution­of­any­payment­transaction­based­on­a­payment­order­given­by­a­payment­card,­and,­if­agreed­in­the­framework­contract,­the­payment­service­provider­may­block­the­payment­card­on­suspicion­of­unauthorised­or­fraudulent­use­or­for­the­protection­of­the­payment­card.­The­payment­service­provider­ may­ not­ charge­ a­ fee­ for­ blocking­ the­ payment­ card­ or­ for­ the­ refusal­ of­ the­ execution­ of­ a­ payment­transaction­based­on­a­payment­order­given­by­payment­card.

The­Act­on­Payment­Services­has­no­provisions­regulating­that­the­customer­is­required­to­file­a­police­report­in­the­event­ of­ payment­ card­ fraud,­ theft,­ etc.­ Therefore,­ the­ investigation­ procedure­ of­ the­ payment­ service­ provider­cannot­be­conditional­upon­the­customer’s­ filing­a­police­report;­ it­ is­conducted­ irrespective­of­such­a­report.­ It­ is­extremely­important­to­note­that­each­individual­case­requires­individual­consideration.­By­default,­when­a­payment­transaction­unauthorised­by­ the­customer­ is­executed­ (by­way­of­ fraud­by­a­ third­party),­among­other­ things,­ the­payment­ service­ provider­ is­ required­ to­ refund­ the­ amount­ of­ the­ unauthorised­ payment­ transaction­ and­ to­compensate­the­customer­for­the­losses­sustained.­Although­there­may­be­some­cases­where­the­customer­is­forced­to­bear­the­losses,­it­is­important­to­know­that­the­extent­of­this­loss­allocation­is­basically­limited.­Therefore,­provided­that­the­customer­did­not­act­fraudulently­or­with­malicious­intent­–­for­instance,­the­fraud­was­perpetrated­by­a­lost­or­stolen­payment­card­and­PIN­code­–­it­will­bear­the­losses­sustained­prior­to­notifying­the­payment­service­provider­of­ the­ fraud­only­up­ to­ a­maximum­of­HUF­45,000.­ In­ fact,­ following­ the­ implementation­of­ PSD2­ into­Hungarian­legislation,­as­of­the­beginning­of­2018,­this­amount­is­expected­to­be­reduced­further­to­around­HUF­15,000.­After­

Box 5Who foots the bill?

Chart 36Losses written off in relation to payment card fraud on the issuer and on the acquirer side (2015 Q1–Q3)

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Issuer side Acquirer side

Losses of cardholdersLosses of acquirers in and outside the countryLosses of issuersLosses of issuers in and outside the countryLosses of merchantsLosses of acquirers

MAGYAR NEMZETI BANK

PAYMENT SYSTEMS REPoRT • JuNE 201660

There is significant volatility in the number and value of fraud events affecting other, non-card electronic payment turnover, but their ratio as a percentage of total turnover is negligible (Chart­37).­The­number­of­ successful­ fraud­ events­ remained­ below­ 80­ in­each­ quarter­ of­ the­ past­ period,­ but­ compared­ to­the­ 80–90­million­ electronic­ payment­ transactions­processed­quarterly­(e.g.­credit­transfers,­etc.),­ this­

level­is­insignificant.­The­value­of­fraud­is­similarly­low­in­this­category.

In terms of fraud, cash use is far more dangerous for customers than electronic payment methods.­It­is­not­possible­ to­ compile­ comprehensive­ statistics­comparable­to­those­on­electronic­payment­data­on­the­ number­ of­ fraud­ events­ and­ criminal­ offences­regarding­ cash­and­cash­ transactions.­According­ to­criminal­statistics,­more­than­2,000­wallet­thefts­and­robberies­were­reported­in­2015,­while­7,000­cases­of­ theft­ and­ robbery­ were­ reported­ in­ relation­ to­domestic­banknotes.­In­terms­of­volume,­this­is­less­than­the­number­of­fraud­events­reported­in­relation­to­payment­cards­issued­in­Hungary;­however,­there­may­have­been­numerous­cases­where­the­theft­or­loss­was­not­reported­by­the­victims.­In­addition,­thanks­to­consumer-friendly­regulations,­only­a­small­fraction­of­payment­card­fraud­losses­are­borne­by­cardholders,­whereas­subsequent­compensation­is­generally­not­an­option­in­the­case­of­cash,­and­the­related­losses­are­usually­borne­exclusively­by­the­victims.­The­share­of­fraud­affecting­credit­transfer­and­other­transactions­is­extremely­low;­in­addition,­payment­service­providers­apply­numerous­safety­measures­to­ensure­that­the­risk­of­ fraud,­ from­the­perspective­of­customers,­ is­negligible.

Chart 37Number and value of fraud events in electronic payment transactions54 (2010–2015)

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Value of successful fraud attempts (right-hand scale)Number of successful fraud attempts

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receipt­of­the­customer’s­notification,­the­payment­service­provider­bears­all­the­losses­resulting­from­the­loss­or­theft­of­the­payment­card.

By­default,­the­payment­service­provider­must­accept­the­customer’s­claim­of­fraud.­If­the­payment­service­provider­questions­ the­ customer’s­ claim­ that­ the­ payment­ transactions­ concerned­were­ not­ authorised­ or­ initiated­ by­ the­customer,­it­is­the­obligation­of­the­payment­service­provider­to­prove­that­the­payment­transactions­in­question­were­indeed­authorised­or­initiated­by­the­customer.­The­payment­service­provider­will­only­be­exempted­from­its­liability­for­ damages­ if­ it­ can­ provide­ evidence­ that­ the­ damages­were­ caused,­ for­ example­ by­ the­ customer’s­ fraudulent­actions.­In­such­cases,­the­total­loss­will­be­borne­by­the­customer.­It­should­also­be­noted­that­the­customer­will­bear­full­liability­for­the­losses­if­it­failed­with­intent­to­notify­the­payment­service­provider­of­the­theft­of­the­card­even­though­it­was­aware­of­the­theft,­or­if­it­acted­with­gross­negligence,­such­as­keeping­its­PIN­code­together­with­the­payment­card.

54­The­chart­excludes­data­on­payment­card­fraud.

SECURITy­ISSUES­IN­PAyMENT­TRANSACTIONS

Payment SyStemS RePoRt • June 2016 61

5.2 Cyber risk

In the past 10 years, the increasing number of cyber attacks worldwide has also increased the cyber risk of financial market infrastructures.­Addressing­ the­issue­of­cyber­risk­is­considered­to­be­one­of­the­most­significant­challenges­of­our­time,­as­cyber­attacks­on­financial­market­infrastructures­–­due­to­their­central­role­in­the­financial­sector­–­also­carry­systemic­risks.­Cyber­ attacks­ have­ become­ increasingly­ frequent­and­ sophisticated­ worldwide,­ and­ since­ both­ the­attackers­and­their­motivations­change­continuously,­it­ is­ difficult­ to­ prepare­ for­ averting­ cyber­ attacks.­Cyber­attackers­take­advantage­of­the­increasing­role­of­information­technology­in­the­operation­of­financial­market­infrastructures­and­in­the­provision­of­financial­services,­ and­ they­also­benefit­ from­ the­ increasing­interdependencies­between­the­system­operators­and­participants­of­financial­markets.

Recognising the importance of cyber risk, several international recommendations have been issued, which are being integrated into the Hungarian oversight methodology. In­2012,­the­Committee­on­Payment­and­Settlement­Systems­(CPSS)­of­the­Bank­

for­International­Settlements­(BIS)­and­the­American-based­ International­ Organisation­ of­ Securities­Commissions­ (IOSCO)­ published­ their­ 24­Principles for Financial Market Infrastructures (PFMI),­which­set­the­requirements­for­financial­market­infrastructures­on­ uniform­ foundations.­ These­ overseer­ principles­treated­cyber­risk­as­part­of­operational­risk.­In­view­of­the­increasing­threat­of­cyber­attacks,­they­examined­cyber­ risk­ from­ several­ aspects,­ and­ subsequently,­along­ the­ lines­ of­ the­ principles­ of­ the­ PFMI,­ BIS­issued­more­detailed­recommendations55­ regarding­the­ cyber­ governance,­ general­ risk­ management,­settlement­finality,­communication­and­links­between­financial­market­infrastructures.­BIS­and­IOSCO­drafted­a­guidance56­on­the­application­of­the­new­cyber­risk­recommendations.­In­the­context­of­an­international­consultation,­ the­ provision­ of­ opinions­ on­ the­Guidance­ is­ in­progress.­The­MNB­has­also­offered­a­number­of­proposals­–­after­having­requested­the­opinion­of­the­overseen­systems­–­with­respect­to­the­Guidance.­The­adaptation­and­implementation­of­the­international­ recommendation­ into­ the­ Hungarian­oversight­methodology­is­in­progress.

55­Cyber­resilience­in­financial­market­infrastructures­(November­2014).56­Guidance­on­cyber­resilience­for­financial­market­infrastructures­–­Consultative­report­(November­2015)

MAGYAR NEMZETI BANK

PAYMENT SYSTEMS REPoRT • JuNE 201662

5.3 Publication of SecurePay recommendations

with the publication of the MNB’s Recommendation for the security of internet payments and the ongoing inspections verifying compliance, fraud and misuse will become preventable in this area.57­ In­ order­ to­ensure­compliance­with­the­guidelines­of­the­European­Banking­ Authority­ (EBA),­ the­ MNB­ developed­ and­published­ on­ 13­ November­ 2015­ on­ its­ website,­its­ “Recommendation­ for­ the­ security­ of­ internet­payments”.58­The­Recommendation­is­intended­to­offer­guidance­to­all­financial­ institutions­providing­online­services.­ The­ Recommendation­ covers­ online­ credit­transfers­ (e.g.­ utility­ bill­ payment,­ online­ purchases­via­credit­transfer),­card­payment­transactions­on­the­internet­(online­payments­with­bankcards),­the­issuance­of­online­direct­debit­electronic­authorisations,­as­well­as­ transfers­ of­ electronic­money­ between­ e-money­accounts­ via­ the­ internet.­ The­main­purpose­of­ the­Recommendation­ is­ to­ prevent­ fraud­ and­ misuse­related­ to­ internet­payments­–­ including­ the­use­of­bankcards­on­the­ internet­–­and­hence,­ to­maintain­confidence­in­online­payment­methods,­which­serves­the­ interests­ of­ banks­ and­ customers­ alike.­ To­ that­end,­ in­ addition­ to­ the­minimum­ requirements­ for­the­general­control­and­security­environment­and­the­specific­ control­ and­ security­ measures­ on­ internet­payment­transactions,­the­Recommendation­sets­out­requirements­regarding­the­provision­of­information­to­customers,­the­education­of­customers­and­the­method­of­communication­with­customers.­This­is­particularly­important­in­light­of­the­recent,­spectacular­boom­in­online­sales­across­Europe.­The­highest­growth­rates­were­ achieved­ in­ the­ countries­ of­ the­ Central­ and­Eastern­European­region;­in­2014,­Hungary’s­turnover­rose­ by­ 25­ per­ cent.­ Since­ EBA’s­ guidelines­ on­ the­security­ of­ internet­ payments­ were­ incorporated­into­ the­ renewed­ Payment­ Services­ Directive­ (see­Chapter­3.3),­upon­the­transposition­of­the­Payment­Services­ Directive­ into­ Hungarian­ law,­ the­ MNB­Recommendation­will­be­repealed­and­the­amended­Hungarian­regulations­will­be­applicable.

One of the most important changes affecting customers and banks alike is the tightening of the

customer authentication procedure.­ Single­ factor­authentication­ –­ which­ requires­ a­ single,­ static­password­ linked­ to­ the­user­ ID­–­does­not­provide­adequate­ security­ for­ financial­ services­ provided­over­the­internet.­In­order­to­improve­the­safety­of­online­ payments,­ the­ Recommendation­ prescribes­strong­ customer­ authentication­ for­ the­ use­ of­ the­service­or­ for­ the­modification­of­data.­ In­practice,­strong­customer­authentication­means­a­procedure­designed­ to­ identify­ customers­ unambiguously,­based­on­ two­or­more­elements­classified­ into­ the­category­of­authentication.­The­elements­are­mutually­independent­of­one­another;­therefore,­the­breach­of­ one­ element­ does­ not­ influence­ the­ reliability­of­the­rest­of­the­elements.­Specific­authentication­categories­ include­knowledge-based­authentication­(information­known­only­to­the­user­of­the­service,­such­ as­ password­ or­ PIN­ code);­ possession-based­authentication­ (the­ possession­ of­ the­ object­ is­intrinsically­ linked­ to­ the­ identity­of­ the­user,­ such­as­ a­ payment­ card);­ and­ biometric­ caracteristic-based­ authentication­ (personal­ traits­ of­ the­ user,­such­ as­ the­ user’s­ fingerprint­ or­ voice).­ In­ some­cases,­ lower­security­ level­customer­authentication­procedures­ are­ also­ permitted,­ such­ as­ outgoing­transactions­to­reliable­beneficiaries­pre-defined­on­the­customer’s­white­lists,­transactions­between­two­accounts­ of­ the­ same­ customer­ held­ by­ the­ same­institution,­ credit­ transfers­ between­ accounts­ held­by­ the­ same­ institution­ and­ deemed­ agreeable­ by­transaction-based­ risk­management,­ and­ low-value­payment­transactions.­ In­all­other­cases,­customers­must­go­ through­tighter­authentication­procedures­whenever­they­enter­their­internet­bank­for­payment­purposes­ or­ pay­ online­ by­ entering­ their­ bankcard­data.­ In­practice,­strong­customer­authentication­ is­typically­based­on­a­user­name­and­a­static­password­specified­ by­ the­ customer,­ complemented­ by­ a­one-time­ password­ that­ may­ be­ delivered­ to­ the­customer­on­a­variety­of­channels­such­as­being­sent­in­a­text­message­to­their­mobile­phone­or­generated­by­ themselves­ using­ a­ token­ provided­ by­ their­ bank.

57 http://www.origo.hu/gazdasag/20151116-fokozodik-az-elektronikus-fizetesek-biztonsaga.html58 ­http://www.mnb.hu/letoltes/a-magyar-nemzeti-bank-15-2015-szamu-ajanlasa-az-interneten-keresztul-nyujtott-penzugyi-szolgaltatasok-biztonsagarol.pdf

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5.4 Payment malfunctions in 2015

The ad-hoc reports of the banking sector on payment malfunctions rose 1.5-fold in 2015 compared to the previous year, but the number of reports is still regarded low relative to the number of payment service providers and to the complexity of the financial infrastructures.­For­a­more­accurate­assessment­ of­ the­ operational­ risk­ of­ payment­services,­the­MNB­has­instructed­banks,­specialised­credit­ institutions­ and­ branch­ offices­ to­ report­payment­malfunctions.59­In­2015,­27­credit­institutions­reported­a­total­of­247­payment­malfunctions,­while­169­ cases­ were­ reported­ by­ 26­ credit­ institutions­in­ 2014.­ According­ to­ the­ reports,­ calculated­ from­the­ start,­ the­ duration­ of­ the­ malfunctions­ was­ 3­hours­and­40­minutes­on­average,­which­implies­an­improvement­by­nearly­20­minutes­compared­to­2014.­The­time­between­the­occurrence­of­the­incidents­and­their­detection­was­still­below­half­an­hour.

Either because of the type or the duration of the incident, 14 per cent of the reported malfunctions violated the provisions of MNB Decree No 18/2009 (vIII. 6) on Payment Services Activities.­ In­ most­of­ these­ cases,­ credit­ institutions­ failed­ to­ fully­comply­with­ the­provisions­pertaining­ to­ failure­ to­credit­ immediately­ and­ to­ the­ execution­ time60­ of­the­payment­ transaction­between­payment­service­providers.­These­delays­can­be­generally­measured­in­hours,­but­in­some­cases,­more­than­a­whole­banking­day­elapsed­between­the­detection­and­correction­of­the­error­which,­in­the­case­of­credit­transfers,­may­have­been­particularly­ inconvenient­ for­ customers,­irrespective­ of­ the­ value­ of­ the­ transaction­ (e.g.­payment­of­tax­obligations).­According­to­the­reports­received­ by­ the­MNB,­ 15­malfunctions­ at­ 7­ credit­institutions­ lasted­ for­ 24­hours­ or­ longer.­Of­ these­malfunctions,­the­time­elapsed­between­the­start­of­the­malfunction­and­its­detection­was­16­days­in­one­case­and­31­days­ in­another­case.­ In­ the­first­case,­the­processing­of­a­package­containing­direct­debit­requests­sent­to­the­overnight­clearing­module­was­inadequate­–­due­ to­negligence­by­a­ staff­member­–­while­in­the­second­case­messages­related­to­700­

direct­debit­authorisations­provided­by­customers­over­the­telephone­were­not­sent­to­the­beneficiaries­due­to­a­system­failure.­The­malfunctions­were­eliminated­shortly­ in­ both­ cases;­ however,­ customers­ may­have­been­ inconvenienced­by­ the­ failed­execution,­especially­ considering­ the­ fact,­ that­ it­ is­ far­ more­difficult­for­customers­to­monitor­direct­debit­orders­than,­for­example,­failed­card­payments.

Most payment-related malfunctions affected internet bank applications and the dispatch and receipt of credit transfers from banking applications­ (Chart­38). The­ most­ frequent­ problem­ affecting­ these­transactions­ was­ failure­ to­ credit­ the­ transaction­(forint­ credit­ transfers­ sent­ to­ intraday­clearing,­FX­transfers,­credit­transfers­via­VIBER­and­postal­cash­payments)­immediately.­Problems­affecting­internet­banking­platforms­often­involved­customers’­failure­to­initiate­credit­transfers­or­their­inability­to­monitor­their­account­activity.­Some­of­the­errors­were­related­to­customer­identification­and­to­the­internet­bank­as­a­stand-alone­application.­As­regards­identification,­it­should­be­noted­that­in­some­cases­the­problem­arose­at­telecommunications­service­providers­independent­of­ the­ credit­ institution­ (SMS­ identification),­ but­

59­­For­the­purposes­of­the­reporting­obligation,­malfunctions­include­any­disruptions­or­outages­affecting­payment­services­provided­by­the­data­supplier.

60­MNB­Decree,­Section­21­(1)­and­Section­17­(2).

Chart 38Payment malfunctions by failure type (2014–2015)

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hardware­and­software­malfunctions­linked­directly­to­the­application­were­also­frequent­(out­of­memory­errors,­ inadequate­configuration­of­ interfaces).­ It­ is­important­to­take­note­of­the­steadily­high­number­and­growing­share­of­bankcard­and­ATM-related­problems­(from­2014­to­2015­the­share­of­these­errors­rose­to­11­per­cent­from­7­per­cent).­This­can­be­attributed­to­the­multi-player­nature­of­the­process­(card­companies,­merchants,­ credit­ institutions,­ telecommunications­companies,­ etc.),­ which­ inevitably­ increases­ the­risks­ and­ potential­ errors­ involved.­ Malfunctions­between­ the­ internet­banking­ service,­ the­account­management­system­and­its­supporting­systems­were­a­recurring­problem­with­several­banks.­Eliminating­these­problems­would­require­major­IT­developments,­

but­based­on­the­recurrence­of­ these­errors­ in­ the­reports­of­the­affected­banks,­for­the­time­being,­the­banks­concerned­have­tried­to­prevent­the­recurrence­of­the­problem­by­various­minor­modifications.

In order to avoid the recurrence of the payment malfunctions experienced, credit institutions continued to respond with a variety of measures to find a temporary or a final resolution to the problems.­These­included­rescheduling­the­updates­of­various­system­programs­to­periods­outside­opening­hours,­the­reengineering­of­end-of-day­procedures,­adjustments­ to­ the­ band­ widths­ required­ for­ the­operation­of­ the­systems,­and­ the­ incorporation­of­new­control­points­into­various­process.

Payment SyStemS RePoRt • June 2016 65

6 Glossary

4-hour rule­ ­­Pursuant­to­MNB­Decree­15/2010.­(X.­12.),­starting­from­1­July­2012­the­payment­service­provider­of­the­payer­must­assure­that­Hungarian­forint­credit­ transfers­ generated­ by­ customers­ electronically­within­ the­time­period­specified­for­same-day­execution­(i.e.­before­the­final­submission­time)­are­received­by­the­payment­service­provider­of­the­payee­within­ 4­hours­of­acceptance.

Acquirer (payment card)­ ­The­ payment­ service­ provider­ that­ the­ merchant­ accepting­ payment­for­ purchases­ by­ payment­ card­ enters­ into­ an­ agreement­ to­ execute­transactions.­In­the­course­of­the­clearing­and­settlement­of­transactions­the­ acquirer­ collects­ and­ forwards­ to­ the­merchant­ the­ value­ of­ card­transactions.

Additional financial collateral­ ­Surplus­collateral­required­by­KELER­CCP­from­clearing­members­and­power­market­non-clearing­members­for­guaranteed­capital­market,­gas­market­and­power­market­transactions.

ATM­ ­Automated­Teller­Machine,­through­which­cash­withdrawals­as­well­as­other­transactions­(e.g.­credit­transfers)­can­be­executed­using­payment­cards.

Batch processing­ ­Simultaneous­collective­processing­of­items­received­at­different­points­in­time­which­are­put­in­the­same­group­if­specific­features­are­identical.

BÉTa­ ­Multilateral­trading­facility­(MTF)­operated­by­the­BSE,­as­a­platform­for­trading­foreign­stocks­in­Hungarian­forints.­The­stocks­purchased­in­the­BÉTa­market­are­identical­with­the­stocks­listed­on­foreign­stock­exchanges.

Blue chips­ ­The­most­liquid­and­most­traded­stocks­in­a­market.

BSE­ ­Budapest­Stock­Exchange­Ltd.

Capital position limit­ ­Quantity­of­the­open­derivative­positions­which­a­clearing­member­or­client­may­have­as­a­percentage­of­equity.­At­KELER­CCP­the­position­limits­are­calculated­by­dividing­the­initial­margin­requirement­calculated­by­KELER­CCP­by­the­equity.

CEEGEx­ ­Central­Eastern­European­Gas­Exchange.

Central counterparty­ ­The­central­actor­that­interposes­itself­between­the­counterparties­and­guarantees­the­settlement­of­the­transaction­even­if­either­party­fails­to­fulfil­its­obligations.

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Central securities depository­ ­Its­main­responsibility­is­the­safekeeping­of­printed­(physical)­securities,­the­registration­of­immobilised­or­dematerialised­securities­(existing­in­the­form­of­electronic­signals)­and­the­registration­of­the­owners­of­securities­by­main­account.­Central­securities­depositories­operate­securities­settlement­systems,­in­which­securities­transactions­are­settled­by­book­entries­(that­is,­without­physical­movement­of­the­securities).

CGF­ ­Collective­Guarantee­Fund.

Chip migration­ ­The­equipping­of­payment­cards­bearing­only­a­magnetic­stripe­with­chips,­and­simultaneously­ the­enabling­of­devices­handling­payment­cards­ to­accept­chip­cards.

CIfE Act­ ­Act­CCXXXVII­of­2013­on­Credit­Institutions­and­Financial­Enterprises.

Clearing­ ­The­acceptance,­formal­and­substantive­verification­of­orders­followed­by­the­calculation­of­the­bilateral­or­multilateral­liabilities­of­clearing­members.­Liabilities­may­be­calculated­on­a­gross­or­net­basis.

Clearing and settlement risk­ ­A­delay­or­failure­of­clearing­or­settlement­in­the­payment­or­securities­clearing­system,­despite­the­fact­that­the­clearing­or­settlement­service­is­uninterrupted.­The­term­‘clearing­and­settlement­risk’­is­justified­by­the­separation­of­the­two­phases­(clearing­and­settlement)­in­some­systems.­Depending­on­the­structure­of­the­system,­the­realisation­of­clearing­risk­does­not­necessarily­ result­ in­ the­ failure­of­ settlement­and­settlement­risk­may­occur­even­ if­ the­ clearing­phase­goes­ smoothly.­Clearing­and­settlement­risk­may­crystallise­from­the­insufficient­liquidity­or­insolvency­or­operational­problems­of­participants.

Clearing house­ ­The­entity­performing­the­processing,­clearing­and,­in­the­absence­of­a­settlement­agent,­settlement­of­transactions.

CLS­ ­Continuous­Linked­Settlement.­A­clearing­and­settlement­model­facilitating­the­ elimination­ of­ FX­ settlement­ risk­ relying­ on­ a­multi-currency­ PvP­mechanism.­The­CLS­is­operated­by­the­CLS­Bank.

Collective guarantee fund­ ­Collateral­required­by­net­clearing­systems,­which­is­part­of­the­guarantee­system­and­can­be­used­ if­ any­of­ the­members­of­ the­ risk­ community­fail­to­fulfil­their­obligations.­Its­purpose­is­to­reduce­losses­arising­from­transaction­settlement­fails­and­delays­through­a­jointly­owned­guarantee­fund.

Cooperative credit institutions­ ­Cooperative­credit­institutions­signing­the­‘agreement­on­the­integration­­of­cooperative­credit­ institutions’.­They­participate­ in­the­payment­and­settlement­systems­indirectly,­through­Magyar­Takarékszövetkezeti­Bank­Zrt.­as­their­correspondent­bank­and­they­execute­their­payment­transactions­through­the­correspondent­bank.

CSDR­ ­Regulation­on­improving­securities­settlement­in­the­European­Union­and­on­central­securities­depositories.

Customer payments­ ­Payment­orders­generated­by­customers­of­system­participants.

operating with an integrated model

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Payment SyStemS RePoRt • June 2016 67

Designated system­ ­The­payment­and­settlement­system­which­the­Magyar­Nemzeti­Bank­as­the­designating­authority­designates­as­being­covered­by­the­SFA­as­well­as­a­system­operated­by­the­Magyar­Nemzeti­Bank­pursuant­to­the­provisions­of­the­SFA.

designating authority­ ­The­Magyar­Nemzeti­Bank­pursuant­to­the­SFA.

direct submitter­ ­A­customer­who­has­an­agreement­with­the­clearing­house­exclusively­for­the­direct­submission­to­the­clearing­house­of­payment­orders­relating­to­its­own­economic­management,­pursuant­to­the­authorisation­of­a­direct­participant­and­under­a­clearing­arrangement­with­such­participant,­who­is­not­considered­a­participant­in­the­payment­system.

DvD (Delivery versus Delivery)­ ­Delivery­versus­delivery.­The­exchange­of­securities­to­securities,­which­means­that­the­instrument­to­be­exchanged­is­credited­and­debited­to­the­parties’­accounts­simultaneously.­

DvP­ ­Delivery­versus­Payment.­The­settlement­method­which­links­the­cash­and­securities­ legs­of­orders­for­the­settlement­of­securities­transactions;­ it­assures­that­the­securities­leg­settlement­occurs­only­after­the­cash­leg­settlement­has­been­completed,­or­conversely,­ the­cash­ leg­settlement­occurs­only­if­the­securities­are­available­and­settlement­is­assured.

EBPP­ ­Electronic­Bill­Presentment­and­Payment.

ECC­ ­European­Commodity­Clearing­AG,­a­Leipzig-based­clearing­house­acting­as­a­central­counterparty­mainly­for­clearing­in­the­energy­market.

Eligible collateral­ ­The­scope­of­collateral­ that­ the­MNB­accepts­as­cover­ for­ the­secured­credit­transactions­it­enters­into­(including­intraday­credit­lines).­The­types­of­eligible­collateral­are­listed­in­the­‘Terms­and­Conditions­of­the­Bank’s­Operations­in­Hungarian­Forint­and­Foreign­Exchange­Markets’.

EMIR­ ­Regulation­on­OTC­derivative­transactions,­central­counterparties­and­trade­repositories.

ESMA­ ­European­Securities­and­Markets­Authority.

EuroMTS­ ­A­multilateral­ trading­platform­mainly­ for­ secondary­market­ trading­ in­government­bonds,­where­government­bond­series­ in­excess­of­EUR­5­billion­issued­by­most­European­countries­are­traded.

Execution­ ­See­under­Settlement.

FGS­ ­Funding­for­Growth­Scheme.

FoP­ ­Free­of­Payment,­a­transaction­that­does­not­involve­any­payment­at­the­time­of­the­settlement­of­a­securities­transaction.

GIRO­ ­Giro­Elszámolásforgalmi­Ltd.

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Gridlock­ ­Gridlock­may­emerge­if­orders­submitted­by­one­or­a­few­participants­in­the­payment­or­securities­clearing­system­are­not­settled­due­to­the­lack­of­funds­or­securities.­As­a­result,­the­orders­of­a­number­of­other­participants­remain­unsettled.

Gross clearing­ ­A­clearing­mechanism­whereby­only­entirely­funded­transactions­are­cleared.

Guarantee callable­ ­For­transactions­guaranteed­by­KELER­CCP,­in­addition­to­the­protection­offered­by­the­individual­and­collective­guarantee­elements,­KELER­also­provides­a­guarantee­to­KELER­CCP­up­to­a­certain­percentage­of­its­capital.­If­in­the­course­of­the­management­of­settlement­fails­KELER­CCP­needs,­over­and­above­the­use­of­individual­and­collective­guarantee­elements,­to­resort­to­the­guarantee­callable­on­first­demand,­KELER­is­obliged­to­make­available­to­KELER­CCP­funds­up­to­the­amount­of­the­guarantee­callable­on­first­demand.

HHI­ ­Herfindahl−Hirschman­Index,­an­Indicator­measuring­market­concentration,­calculated­by­summing­the­squares­of­the­percentage­market­shares­held­by­the­various­market­participants.­Its­value­may­be­between­0­and­1.­A­value­close­to­0­means­the­absence­of­concentration,­while­1­indicates­a­monopolistic­market­structure.

ICS­ ­Interbank­Clearing­System,­a­deferred­time­gross­clearing­system­operated­by­GIRO,­offering­two­types­of­clearing:­overnight­clearing­and,­since­2­July­2012,­intraday­clearing.

Individual guarantee elements­ ­Collateral­required­by­net­clearing­systems,­which­are­part­of­the­guarantee­system­and­can­be­used­only­if­the­clearing­member­providing­the­security­fails­to­settle­(in­case­of­the­KELER­CCP:­basic­financial­collateral,­variation­margin,­initial­margin,­additional­financial­collateral,­liquidity­FX­security­deposit).

Information asymmetry­ ­A­(decision)­situation­where­one­of­the­parties­to­a­transaction­has­more,­or­more­accurate,­information­than­the­other­party.­This­upsets­the­balance­of­power­between­the­parties­and­in­the­worst­case­scenario­may­lead­to­market­failure.

Interchange fee­ ­A­ fee­calculated­as­a­proportion­of­the­purchase­price­and­paid­by­the­acquiring­payment­service­provider­to­the­issuer­in­respect­of­purchases­made­with­payment­cards.

Interoperability­ ­Interoperability­means­technical­(e.g.­standards)­and­business­solutions­that­support­the­execution­of­payment­transactions­between­the­participants­of­the­payment­solution­even­in­those­cases­where­participants­are­members­of­ two­different­ payment­ systems­or­ participants­ of­ services­ provided­within­the­same­system.­In­other­words,­the­execution­of­payments­cannot­be­hindered­by­business­or­ technical­obstacles­ that­would­necessitate­membership­in­more­than­one­system­for­the­execution­of­the­payment­transactions.

on first demand

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Intraday credit line­ ­Given­sufficient­collateral,­the­settlement­agent­(mostly­the­central­bank)­provides­intraday­credit­lines­to­system­participants­to­facilitate­the­prompt­execution­ of­ the­ payment­ orders­ cleared­ in­ the­ system.­ The­ scope­ of­eligible­collateral­is­determined­by­the­settlement­agent.­The­credit­line­and­the­current­account­balance­of­participants­together­result­the­liquidity­available­as­collateral­for­payment­orders.

Issuer (payment card)­ ­The­payment­service­provider­that­makes­the­payment­card­available­to­the­card­holder­and­in­the­course­of­the­settlement­of­transactions,­forwards­the­value­of­the­transactions­to­merchants­through­acquirers.

KELER­ ­Központi­ Elszámolóház­ és­ Értéktár­ Zrt.­ (Central­ Clearing­ House­ and­Depository­Ltd.).

KELER CCP­ ­KELER­KSZF­Központi­Szerződő­Fél­Zrt.­(KELER­KSZF­Central­Counterparty­Ltd.).

KID system­ ­A­system­that­ensures­electronic­communication­between­KELER­and­its­clients.

LEI­ ­Legal­ Entity­ Identifier,­ which­ enables­ the­ unambiguous­ and­ unique­identification­of­actors­in­financial­markets,­making­it­possible­to­identify­not­only­parties­to­financial­transactions­but­also­their­affiliated­companies­and­company­groups,­thereby­facilitating­without­limitation­the­assessment­of­ the­ risk­ of­ financial­ contagion­ as­ well­ as­ the­ combating­ of­money­laundering­and­terrorism.

Liquidity­ ­The­totality­of­financial­instruments­that­can­be­used­to­settle­orders­in­payment­and­settlement­systems.

Liquidity bound­ ­The­upper­bound­of­liquidity­indicates­the­amount­of­liquidity­required­in­the­payment­system­for­the­settlement­of­items­without­queuing­or­delays,­whereas­the­lower­bound­of­liquidity­indicates­the­lowest­value­of­systemic­liquidity­where­items,­although­with­delays,­will­be­settled­by­the­end­of­the­day­concerned.

Maximum usage of intraday­ ­An­indicator­calculated­for­the­usage­of­the­central­bank’s­intraday­credit­line­which­shows­the­maximum­percentage­used­on­a­given­business­day­for­the­settlement­of­orders.

MiFID, MiFIR ­ ­Markets­in­Financial­Instruments­Directive­and­Regulation.

MNB­ ­Magyar­Nemzeti­Bank.

MTF­ ­Multilateral­(aternative)­Trading­Facility.

MTS­ ­The­multilateral­trading­facility­operated­by­EuroMTS.

Net clearing­ ­In­the­process­of­netting,­the­conversion­of­the­payables­and­receivables­of­clearing­members­vis-à-vis­one­another­into­a­single­payable­or­receivable­by­deducting­the­receivables­from­the­payables.­Netting­may­be­bilateral­or­multilateral.­Then­the­net­debit­positions­thus­calculated­are­settled.­If­ funds­are­ insufficient,­ the­guarantee­ system­of­net­ clearing­must­be­activated.

credit lines

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NFKP­ ­Daily­Natural­Gas­and­Capacity­Trading­Market.

Optional reserve requirement­ ­Since­the­reserving­period­of­November­2010,­credit­institutions­subject­to­a­reserve­requirement­have­been­able­to­choose­their­reserve­requirement­ratio.­They­can­change­their­ratio­twice­a­year­(in­April­and­October),­and­choose­between­rates­of­2,­3,­4­and­5­per­cent.

OTC­ ­Over­the­Counter­market­(including­MTF­and­OTF­platforms).

OTF­ ­Organised­Trading­Facility.

Participant­ ­An­entity­entitled­to­send­orders­ to­ the­payment­or­securities­clearing­system­in­its­own­name­or­on­behalf­of­its­customer.­Participants­can­be­direct­or­indirect,­depending­on­whether­they­are­connected­on­their­own­or­through­another­participant.

Payment account­ ­An­account­held­in­the­name­of­one­or­more­customers­of­a­payment­service­provider­which­is­used­for­the­execution­of­payment­transactions,­including­bank­accounts.

Payment service provider­ ­A­credit­institution,­institution­issuing­electronic­money,­institution­operating­the­Postal­Clearing­Centre,­payment­institution,­the­MNB­and­the­Treasury­offering­payment­services.

Payment system­ ­In­the­case­of­the­overseen­systems,­the­form­of­cooperation­based­on­the­agreement­between­cooperating­parties­to­run­the­system­specified­in­point­18­of­Chapter­I­of­Annex­2­to­the­CIFE­Act.­Part­of­the­financial­infrastructure.­It­includes­the­different­means­of­payment,­bank­procedures­as­well­as­interbank­payment­systems,­which­in­combination­facilitate­the­execution­of­payments.

PFMI­ ­Principles­ for­ Financial­Market­ Infrastructures,­ a­ publication­ issued­ in­2012­by­BIS­ and­ IOSCO­ setting­out­ 24­principles­ that­ provide­uniform­foundations­ for­ and­ thereby­harmonise­ the­ requirements­ for­ financial­market­infrastructures­in­order­to­ensure­that­they­are­robust­and­resilient­to­shocks.

POS terminal­ ­Devices­facilitating­the­execution­of­payments­by­payment­card­(occasionally­also­the­withdrawal­of­cash)­in­merchant­locations.­Information­relating­to­the­transactions­is­collected­in­electronic­or­paper­formats;­the­former­is­the­electronic­POS­(EFTPOS:­Electronic­Funds­Transfer­POS),­the­latter­the­imprinter.

Post-trading infrastructure­ ­The­group­of­institutions­performing­clearing­and­settlement­functions­after­the­conclusion­of­a­transaction.

Potential liquidity­ ­From­the­perspective­of­payments,­potential­ liquidity­is­the­sum­of­the­account­balance­of­the­VIBER­member’s­payment­account­with­MNB,­the­intraday­credit­line­provided­against­the­securities­pledged­to­the­central­bank,­and­other­securities­on­the­credit­institution’s­balance­sheet­that­may­optionally­be­pledged.

PSA­ ­Act­LXXXV­of­2009­on­the­Pursuit­of­the­Business­of­Payment­Services.

ratio

GLOSSARy

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PSD­ ­Payment­Services­Directive,­Directive­2007/64/EC­on­payment­services­in­the­internal­market.

PvP­ ­Payment­ versus­ Payment.­ Simultaneous­ execution­ of­ interbank­ and­customers­payment­orders­of­two­participants­in­a­payment­system,­which­assures­that­ they­are­settled­when­and­only­when­the­other­party­has­sufficient­funds­for­the­settlement­and­both­orders­can­be­settled.

queue management­ ­A­ central­ procedure­ whereby­ the­ system­ does­ not­ reject­ temporarily­uncovered­orders­in­the­payment­or­securities­clearing­system,­instead,­they­are­put­in­a­queue,­then­processed­automatically­when­sufficient­funds­are­available.

Risk of service continuity­ ­The­disruption­or­downtime­of­the­clearing­or­settlement­service­in­the­payment­or­securities­settlement­system.­This­is­generally­attributable­to­some­operational­irregularity­at­the­service­provider­or­it­may­arise­from­its­financing­or­commercial­problems.

SCT­ ­SEPA­credit­transfer

SDD­ ­SEPA­direct­debit

SecuRe Pay Forum­ ­European­Forum­on­the­Security­of­Retail­Payments.­A­Forum­established­in­2011­at­the­initiative­of­the­European­Central­Bank­on­the­security­of­retail­payments.

SEPA­ ­Single­Euro­Payments­Area

SEPA End date Regulation ­ ­Regulation­ (EU)­ No­ 260/2012­ establishing­ technical­ and­ business­requirements­for­credit­transfers­and­direct­debits­in­euro­and­amending­Regulation­(EC)­No­924/2009.

Settlement­ ­Execution­of­payment­and­securities­delivery­obligations­between­system­participants.­Settlement­occurs­through­accounting­records­on­the­accounts­kept­at­the­entity­functioning­as­settlement­agent.

Settlement agent­ ­An­organisation­ that­maintains­ the­settlement­accounts­of­ the­entities­participating­ in­ the­payment­and­securities­ settlement­ system­and­ the­account­of­the­central­counterparty,­providing­the­execution­of­orders­and,­if­necessary,­grants­credit­to­an­entity­or­the­central­counterparty­for­the­purpose­of­facilitating­settlement.

SFA Act­ ­Act­XXIII­of­2003­on­Settlement­Finality­in­Payment­and­Securities­Settlement­Systems.

Social cost­ ­It­includes­the­entire­resource­requirement­of­the­payment­chain,­that­is,­the­expenditures­of­all­the­participants­in­the­payment­chain­excluding­the­fees­paid­by­the­parties­to­each­other­within­the­chain.

System operational ­ ­It­may­arise­if­the­various­interdependent­steps­in­the­clearing­and­settlement­process­are­performed­by­different­service­providers.­The­mostly­liquidity­related­interdependencies­of­systems­may­give­rise­to­contagion.

interdependency risk

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T2S­ ­TARGET2-Securities.­ Pan-European­ settlement­ infrastructure­ for­ the­settlement­of­transactions­in­European­securities­markets.­

TEA­ ­Exchange­Settlement­Fund.

Third party, external­ ­A­party­not­directly­ involved­in­the­process­of­clearing­and­settlement.­Mostly­performs­communication­services,­supply­of­software­and­hardware,­other­support­or­outsourced­services.

Trading­ ­The­mutual­contractual­agreement­between­trading­members­with­the­purpose­of­the­sale­and­purchase­of­financial­instruments.­Settlement­may­be­through­physical­delivery­or­cash­settlement.

Trading Platform­ ­A­special­online­platform­supporting­the­daily­balancing­of­participating­natural­gas­systems­and­the­settlement­of­the­end-of-day­imbalances­of­the­gas­day,­where­systems­operators­and­Trading­Platform­members­may­conclude,­through­a­central­counterparty,­natural­gas­and­capacity­trades­as­required­for­the­efficient­management­of­their­trading­portfolio­or­for­the­execution­of­their­daily­balancing­tasks­based­on­the­principle­of­anonymity­between­seller­and­buyer,­in­the­form­of­standardised­transactions.

vIBER­ ­Real­time­gross­settlement­system,­a­payment­system­primarily­ for­the­purpose­ of­ settling­ large-value­ and­ time­ critical­ transactions.­ Clearing­and­settlement­occurs­in­real­time,­upon­the­verification­of­cover­(gross­settlement),­in­a­single­step.­If­in­the­course­of­the­processing­immediately­following­ the­ submission­ of­ the­ transaction­ there­ are­ sufficient­ funds­available,­the­order­is­executed­finally­and­irrevocably.

service provider

King Louis I (‘the Great’)(5­March­1326,­Visegrád­–­10­September­1382,­Nagyszombat)

King­of­Hungary­(1342–1382)­and­Poland­(1370–1382)­from­the­House­of­Anjou.

His­reign­is­considered­to­be­one­of­the­golden­eras­in­the­history­of­the­Medieval­Hungarian­Kingdom:­peace­at­home­and­dynastic­relationships­abroad­facilitated­social,­economic­and­cultural­development­and­narrowed­the­gap­between­Hungary­and­Western­Europe.­Louis’­active­diplomacy­and­military­campaigns­also­elevated­Hungary­to­become­one­of­the­great­European­powers.­The­personal­qualities­and­victorious­battles­of­the­‘knight­king’­inspired­even­the­poets­of­19th­century­Hungarian­romanticism.

Louis­was­the­son­of­Charles­I­of­Hungary­and­Princess­Elizabeth­Łokietek­of­Poland.­His­versatile­education­matched­his­status­as­crown­prince.­In­addition­to­law,­history­and­politics,­his­tutors­from­the­ranks­of­the­clergy­also­introduced­him­to­theology­and­the­seven­liberal­arts­(grammar,­dialectic,­rhetoric,­arithmetic,­geometry,­astronomy­and­music)­as­well­as­knightly­skills.­Following­his­father’s­death,­he­was­crowned­at­Székesfehérvár­on­21­July­1342,­with­uniform­approval­of­the­aristocracy.

Louis­inherited­a­healthy­state­treasury,­a­stable­and­seamlessly­operating­state­administration­and­also­enjoyed­the­backing­of­talented­and­loyal­aristocrats,­who­were­ready­to­help­the­young­monarch­realise­the­foreign­policy­objectives­he­set­out­in­his­pledge­made­at­Nagyvárad.­He­was­deeply­religious­and­a­fine­example­of­a­knight,­and­he­used­an­iron­hand­to­govern­his­empire.­He­was­a­devout­Christian­and­a­champion­of­the­Church­even­though­the­clergy­did­not­always­serve­the­king’s­interests.

Basically,­Louis­ruled­the­land­in­harmony­with­the­aristocracy;­yet,­he­also­tried­to­win­the­support­of­the­lesser­nobility.­His­laws­codified­in­1351­remained­in­force­until­1848­and­served­as­the­backbone­of­the­nobility-based­constitutional­system.­­One­of­such­laws­was­the­confirmation­of­the­Golden­Bull­of­1222,­which,­one­and­a­half­centuries­after­it­was­issued,­had­become­a­fundamental­law­of­noble­privileges.­Among­others,­this­piece­of­legislation­declared­that­all­nobles­enjoyed­‘one­and­the­same­liberty’­(in­Latin:­‘unus­eademque­libertas’),­thereby­granting­equal­rights­to­all­members­of­the­noble­class.­Another­key­piece­of­legislation­was­the­Law­of­Entail,­which,­among­other­provisions,­ruled­that­if­the­family­line­died­out­completely,­the­estate­reverted­to­the­Crown.­(Even­though­the­Golden­Bull­permitted­free­inheritance,­it­never­became­general­practice;­thus,­the­king­only­documented­the­status­quo.)­In­the­latter­years­of­his­reign,­King­Louis­implemented­ a­number­of­reforms­in­the­state­administrative­and­the­judicial­systems.­

At­the­request­of­the­pope,­Louis­often­led­his­army­‘to­protect­the­one­true­faith’­against­pagan­Lithuanians,­heretics­(the­Bogumil)­or­orthodox­Christian­South­Slavs.­His­reign­was­also­marked­by­a­number­of­campaigns­to­Italy,­Dalmatia,­Lithuania­and­ the­Balkans.­ These­wars­ took­a­heavy­ toll­ on­ the­ country’s­political,­ financial­ and­military­ capacities­but­ the­ state­government­stabilised­by­Louis’­father­successfully­passed­all­these­tests.­The­Kingdom­of­Hungary­had­become­a­true­European­great­power­(‘Magyar­Archiregnum’)­during­Louis’­reign.­In­addition­to­his­immediate­interests,­Louis­the­Great’s­diplomatic­efforts­also­targeted­a­number­of­European­states;­no­Hungarian­ruler­before­or­after­him­had­ever­practised­such­an­active­foreign­policy.­Spared­from­domestic­struggles­and­foreign­attacks,­Louis’­reign­enabled­the­country’s­development­both­in­terms­of­politics­and­economics.

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