Page 72 - ITU-T Focus Group Digital Financial Services – Interoperability

ITU-T Focus Group Digital Financial Services
Interoperability

participants, in particular, including issues such as access to, and direct participation of, foreign institutions
in domestic PSIs; choice of relevant laws; enforceability of collateral agreements and transfer of collateral
ownership in the event of default; enforceability of netting for the purpose of final settlement; irrevocability
and finality of settlement, and applicable resolution and bankruptcy laws and wind-up procedures for financial
institutions. Incompatibilities between the legal frameworks underlying schemes and systems of different
national jurisdictions might erect significant barriers to the achievement of international interoperability.

28. Some regional PSI interlinking arrangements address the above problems by adopting common
agreements or directives. These agreements (e.g., TARGET2 guidelines) or directives (e.g., EU settlement
finality directive) are ratified and incorporated into the legal and regulatory frameworks of the sovereign
countries participating in the regional arrangement. In other cases, where common agreements or directives
are not feasible, expert legal opinions might be necessary to ensure that the interoperability agreements
have legal support and standing under the existing legal framework of each of the sovereign participating
countries, and do not violate the legal and regulatory provisions governing the operations of the regional
arrangement. This latter approach presumes that the existing legal and regulatory regimes of each of the
sovereign participating countries are sufficiently compatible to permit a reasonably common legal standard
for participation in the regionally integrated payment systems. This approach also presumes that there are
no legal or regulatory barriers in the sovereign jurisdictions of the participating countries that will unfairly
distort competition in favor of national systems and participating entities vis-à-vis foreign ones. This legal risk
can ultimately generate network and business risks.
29. Two specific types of risk may be associated with the interlinking of national PSIs and international
interoperability: sovereign risk and participation risk. Sovereign risk originates from the circumstance that
the operations of internationally integrated PSIs are subject to the political, legal, and regulatory regimes
of the participating countries. While there may be interoperability agreements among PSIs, and even
cooperative agreements among national regulatory agencies of the national jurisdictions involved, national
laws and regulations may change over time in ways that might violate the intent and even the letter of existing
interoperability agreements. Generally, there is no effective recourse in these cases other than renegotiation
for enforcing the agreements, short of expulsion of noncompliant PSIs. Regarding the second type of risk
mentioned above, participation, it should be noted that the legal and regulatory requirements that govern
participation of financial entities in national PSIs vary across the jurisdictions of the internationally linked or
shared PSIs. There is the possibility that some of the jurisdictions involved may impose substantially less rigorous
licensing, reporting, and prudential requirements on participating entities than the others. Similarly, oversight
monitoring and regulatory enforcement practices may differ across jurisdictions, with some jurisdictions
applying weaker standards or practices than others. As a result of these asymmetries, participants in an
international interoperability agreement might be exposed to risks originating in any participating PSI which
are being transmitted internationally across the interlinking mechanisms.

Harmonization and standardization

30. Challenges and risks may be associated with the harmonization and standardization of national PSIs.
Harmonization of operating rules, procedures and standards, as well as standardization of critical technical
processes and system modules for information exchange and transmission, communication, data processing,
and payment clearing and settlement are typically required to interlink PSIs and achieve international
interoperability (Box 2). They help ensure that differences, inconsistencies, and incompatibilities between PSIs
do not prejudge their interlinking and they are necessary to deliver efficiencies. Very often, in fact, the degree
of homogeneity and compatibility of existing PSIs limits the choice of interlinking architecture. Challenges
may originate from the intrinsic difficulties of achieving harmonization and standardization in an international
environment with a multiplicity of industry interests, where resistance to changing current rules and procedures
may be strong, and where agreeing on common standards may be problematic: many times, scheme or system
owners will want to keep their specific processes, as they fear that harmonization and standardization might
compromise their own way of doing business.

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