Page 39 - ITU-T Focus Group Digital Financial Services – Interoperability

ITU-T Focus Group Digital Financial Services
Interoperability

Box 2. Risk implications of interdependencies
The development of interdependencies has several implications for the safety of payment
infrastructures. Interdependencies raise the potential for disruptions to spread widely and quickly
across the financial system in at least three ways:

First, they can propagate disruptions sequentially from one system to another. This potential effect
arises when the smooth functioning of one or more systems is conditional on that of another
system. For example, in the case that a LVPS participant experiences an operational disruption or
liquidity shortfall, it may be unable to transfer funds to its counterparties. As a result, other LVPS
participants may have lower balances than expected. This shortage of funds could prevent these
institutions from receiving incoming securities transfers in a linked central securities depository (CSD),
causing securities to fail. In this way, a disruption in the LVPS could pass to the CSD. This type of
interdependency creates what might be called a “cross-system” risk between the CSD and the LVPS.

Second, interdependencies can also act to spread disruptions simultaneously to several systems. This
potential effect stems from systems depending on other critical systems, large financial institutions,
or key PSPs. From an international perspective, many systems are dependent on the Society for
Worldwide Interbank Financial Telecommunication SWIFT network. An outage of this network could
have direct and immediate implications for many systems. From a domestic perspective, many
systems are critically dependent on the primary LVPS, and a disruption affecting a LVPS could impair
the functioning of those other systems.

Third, in some circumstances, interdependencies may transmit disruptions beyond systems and
their participants to financial markets. The functioning of markets with relatively short settlement
cycles, such as the markets for uncollateralized overnight loans and repurchase agreements, might
be particularly affected.
The actual impact of a given disruption will depend on many factors, and is difficult to predict.
First, systems’ and institutions’ risk management procedures can help prevent the transmission
of disruptions across systems. Second, interdependencies can sometimes be useful in mitigating
the impact of a disruption. For example, “liquidity bridges” can allow institutions to move available
liquidity resources between systems, possibly helping to manage potential liquidity disruptions, and
preventing their further transmission. Third, the reaction of systems and institutions to a particular
disruption may significantly influence whether and how a disruption spreads. These reactions may
be very difficult for other parties to anticipate. Moreover, market conditions can influence both the
initial intensity of a disruption, as well as systems’ and institutions’ reactions to it.

Source: “The Interdependencies of payment and settlement systems.” Committee on Payment and Settlement Systems,” Report of
the Committee on Payment and Settlement Systems No. 84. Bank for International Settlements, Basel.

12. As institutions responsible for preserving the trust of the public in the national currencies, central banks
exercise a special form of supervision of payment systems called “oversight”. The oversight of payment
systems is a central bank function whereby the objectives of safety and efficiency are promoted by monitoring
existing and planned systems, assessing them against these objectives and, where, necessary, inducing change.
4
Oversight is a public policy activity focused on the efficiency and safety of systems, as opposed to the efficiency
and safety of individual participants in such systems. Overseeing payment systems involves putting in place
5
policies to ensure the smooth and efficient provision of payment services to all participants and users in the
economy, to control for the risk of systemic transmitting of shocks through the economy, and to promote

4 See “Central bank oversight of payment and settlement systems”, Report of the Committee on Payment and Settlement Systems
No. 71, Bank for International Settlements, Basel, May 2005.
5 See “Policy issues for central banks in retail payments”, Report by the Committee on Payment and Settlement Systems, Bank for
International Settlements, Basel, 2003.

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