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KembaraXtra – Islamic Banking – Principles for Conventional Payment Systems
To ensure that payment systems operate safely, efficiently, and reliably, the Bank for International Settlements (BIS) has established a set of core principles for conventional payment systems. These principles are designed to reduce risk, enhance transparency, and promote financial stability across jurisdictions.
First, a payment system must be supported by a sound and well-founded legal framework that is enforceable in all relevant jurisdictions. This legal clarity ensures that rights and obligations of all participants are clearly defined and protected.
Second, the rules and procedures of the system must be clearly documented and understood by all participants. Participants should be able to assess how their involvement in the system affects the financial risks they face, including credit and liquidity risks.
Third, the system must have clearly defined procedures for managing credit risk and liquidity risk. These procedures should specify the responsibilities of both the system operator and the participants and should include incentives that encourage effective risk management and risk containment.
Fourth, the payment system should ensure prompt and final settlement on the value date. Settlement should preferably occur during the business day, and at the very least by the end of the day, using prevailing market values.
Fifth, where the system uses multilateral netting, it must be robust enough to complete daily settlements even if the participant with the largest settlement obligation fails to meet its payment. This requirement is essential for preventing systemic disruptions.
Sixth, settlement assets used by the system should ideally be claims on the central bank. If other assets are used, they should carry minimal credit risk and liquidity risk to ensure confidence in the settlement process.
Seventh, the system must maintain a high level of security and operational reliability. It should also have effective contingency and backup arrangements to ensure that daily processing can be completed even in the event of technical or operational failures.
Eighth, the payment system should offer a payment mechanism that is practical for users and efficient for the economy. This includes ease of use, reasonable costs, and the ability to handle transaction volumes effectively.
Ninth, there must be objective and publicly disclosed participation criteria. These criteria should promote fair and open access while ensuring that participants meet appropriate financial and operational standards.
Finally, the system’s governance arrangements must be effective, transparent, and accountable. Clear governance structures help maintain confidence in the system and ensure that decisions are made in the best interests of financial stability.
Exam-Ready Summary
The BIS core principles for payment systems aim to ensure legal certainty, effective risk management, timely settlement, operational reliability, fair access, and transparent governance in order to promote safe and efficient payment systems.
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