V.V.ZHUKOV — Chief of the Payment System and information Department, the National Bank of the Republic of Belarus

Belarus is a medium-sized (pop. 10m) European country, bordering Poland and the extreme western part of Russia, which became independent after .the collapse of the former Soviet Union. Located on strategic routes between Russia and Western Europe, Belarus is economically influenced by both. The intention of the Belarus authorities today is to create a self-supporting economic and financial infrastructure, based on the principles of a socially secured market mechanism. This could perhaps, in the broadest sense, be viewed as Belarus interpretation of a 'transition economy".

Within the former Soviet Union, Belarus was recognised as a testing ground for the trial and implementation of what were then advanced IT solutions in banking applications, expertise which stands in good stead today. Automated data communications and complex processing systems for handling Interbank Electronic Fund Transfers (IB EFT) implemented here 20 years ago remain active to this day, albeit having undergone substantial hardware and software upgrades.

Two years ago, however, the National (Central) Bank of Belarus (NBB) and the rest of the banking community came under pressure to adopt major changes to the organisation of the payment system and the code of practice — both vital in order for Belarus to adapt to the new banking environment. In the 1970s and 1980s, under the 'planned socialist economy' with its total deficit of goods and services, there was no shortage of non-cash bank money resources. The State Bank provided liquidity, and funds for settlements, essentially free of charge and with no regard either to the true market value of non-cash facilities or to the risks related to transactions on lending markets or interbank settlements. As a result, the payments system and IB EFT were operating on simple and easy arrangements without any built-in schemes for controlling and minimising the underlying risks.

Those days have now gone for good. New market regulations have helped to return monetary values to realistic levels and have drastically altered requirements for all banking and financial tools and systems which handle money streams. Today, all types of payment system exposures are evaluated in terms of both quality and quantity. The NBB now requires modern facilities to monitor and minimise the risks, and commercial banks need more sophisticated tools to manage cash resources. Radical transformations of the domestic payment system, particularly of the IB EFT related to high value payments, have become unavoidable in the interests of the national economy.

The Current Position Of The JP. EFT

In order to provide a clearer explanation of the situation, there follows a brief description of the existing facilities for domestic interbank funds transfers and settlements in Belarus. It pinpoints the starting point for transition towards the concept of Real Time Trading System (RTGS), although certain transitional-elements are already in place.

The intention of the Belarus authorities today is to create a self-supporting economic and financial infrastructure, based on the principles of a socially secured market mechanism. This could perhaps be viewed as Belarus' interpretation of a 'transition economy'.

In Belarus, banking institutions are structured on two levels, with the NBB on the one hand, and the 38 commercial banks with their network of 700 branches on the other. The efficiency of a fully centralised payment system infrastructure in Belarus can, for the most part, be explained by the compact size of the country.

All data for interbank transfers is collected and fed electronically, via a banking proprietary communications network, to the Belarus Interbank Settlement Centre (BISC), a state-owned enterprise structured along the lines of the NBB. It is the operator of the payments system and is authorised by the NBB to conduct electronic noncash interbank settlements during the business day.

NBB regulations state that the mechanism for conducting interbank-settlements is (operative via a single Correspondent Account (CA) which each commercial bank maintains on the books of the NBB. It is worthwhile mentioning here that direct (bilateral) correspondent relationships between domestic banks are not used.

In the BISC, four payment message input-output processing sessions (two hours each) are run during the business day. At the end of each day, a fifth processing session is run, exclusively dedicated to interbank money market transaction messages. Each payment message (either in files or as individual urgent payments) is considered as irrevocable once the BISC has performed positive entry checks and has acknowledged acceptance of a file for processing with the sender bank. The finality of interbank settlements for each session is recognised as soon as the debiting of the sender bank's CA and crediting of the receiver bank's CA has been effected, at the end of the current processing session. Today, this procedural mechanism allows banks multiple use of the incoming funds they receive during the business day (although this is subject to the requirement for paper documents, as discussed below). Moreover it helps them to gradually become accustomed to RTGS procedures, where settlement for each individual payment will be final in real time mode and funds received might be immediately used by banks to make further payments. Thus the system is gradually moving to meet one of the key goals of the Project — to increase the velocity of fund flows.

At the end of the day NBB approves settlements under the following parameters:

1. Bank payments have been effected within the balances available on CA.

2. Overdraft limits set by the NBB for each bank have been observed.

Bank payments made via a CA on the hooks of the NBB are performed on condition that sufficient available funds exist in the CA. Selected approved banks are given the option to conduct transactions using overdraft limits set up on a strictly individual basis Once approved, the intraday overdraft facility is free, with the limit determined as 20% of the mandatory reserves fund of the bank in question, which is legally considered as collateral security for intraday debit balance of the CA. At the end of each business day, banks are required to recover the account overdraft position and normally they do so. Should they fail to do so, the banks are charged penalty interest (at three times the basic refinancing rate) on the balance of the overdraft. Should a bank's debit balance position extend for more than 2 days, all transactions via that bank's CA are suspended on the morning of the third day.

Additional intraday liquidity might be obtained from the domestic money market. Interbank short-term lending is especially active for a period of several days every month, when the bapks are remitting tax payments. At this time, banks experience a shortage of funds and therefore have to resort to withholding interbank transfers in order to raise liquidity on the market.

New market regulations have helped to return monetary values to realistic levels and have drastically altered requirements for all banking and financial tools and systems which handle money streams.

Recently, as an additional service for banks, the BISC has introduced 'urgent ' (real time) processing of payments information. For the time being, this electronic handling of data has no legal bearing on the status of the payment order, since in Belarus there is no law documenting electronic payments. It means that the original paper payment still has to be mailed to make any electronically processed payment message (including urgent ones) legally binding for the purposes of finally crediting the receiver's accoLint. However, in practice, banks can still resolve the problem of express delivery of urgent payments through special bilateral agreements with clients. The urgency of the payment is determined by the client and not necessarily linked to the amount. However, because the fee for urgent data processing is high, the number of such payments remains relatively low (about 1% of all 130, 000 transactions processed each day).

The aforementioned urgent payments data is now processed according to RTGS methodology. Each individual payment is checked at the system's entry gate against the balance of the CA. Provided sufficient cover is available, the payment is processed (debit-credit) and the new account balance is immediately (in real time) reported to both the sender bank and the receiver bank.

Input of all other payment messages is done by files, and these are processed during four two hour sessions. The total file amount is checked for sufficient cover against the CA balance, although each payment is processed individually. After completion of each session reports are generated and delivered (via E-mail or by bank mail) to all participating banks. Reports include a full list of debit-credit turnovers plus updated CA balance. In case of a shortfall in the balanced files, the entire batch is entered into a payments queue in the ΒΒΡ.

The BISC utilises an automated settlements optimisation tool which consists of a continuous payments queue call generated every time an incoming payment is received by the system. If the incoming amount is sufficient, the pending files of payment messages are released automatically.

From the legal point of view the arrangements for conducting interbank settlements are stipulated by a number of NBB regulations and agreements defining the roles, locations, responsibilities and liability of each bank participating in settlements. The Regulations also contain definitions of key terminology and concepts used in Payments Systems, including payment', 'settlement', 'finality of interbank settlement', 'irrevocability of funds transfers', etc. This helps greatly when it comes to resolving disputes between participants quickly and efficiently.

As can be seen from the above, the existing Belarus payment system has a number of vital drawbacks which will be eliminated by modernisation. In addition, commercial banks do not at present receive real-time information on their CA balance position and accordingly have problems with interactive cash management during the business day.

Moreover, the current payment system does not meet modern requirements in terms of reliability (no back-up and recovery procedures) and security, and of course there is no legal framework covering electronic payment documents interchange. The mechanism for express interbank fund transfers is not cost-effective and is moreover exposed to a number of risks. Credit risk has become especially high, particularly as the introduction of Lombard-type intraday credits or other fully collateralised provision of NBB liquidity to commercial banks has not, so far, been considered - in spite of the fact that this type of secure liquidity provision has become standard world-wide. The NBB does not possess adequate facilities to manage risks in real time in order to fully control the banking system operations.

This diagnostic assessment of the existing payment system in Belarus is shared by a number of Western experts. All of the above arguments underline the need for enhancement and modernisation of the existing payment system on the basis of advanced concepts in IT solutions and international standards.

But the above relates only to the settlement system governing IB EFT and payments transactions and new market forces are stimulating the introduction of new instruments, new services and new markets. For example, initial design and development has been undertaken in respect of securities trading settlements, and major secondary securities market institutions are now being established and commencing operations. Initial steps have been taken to introduce netting schemes which will arrange clearing for the banks plastic cards payment system, which is expanding quite rapidly in its own right. Correspondent relationships between Belarus banks and their western counterparts are developing smoothly, with cross-border transactions performed using the S.W.I.F.T network (of which 17 of our banks are members). Without the burden of historical precedent, Belarus has the opportunity to build up and integrate all these components into a single, interlinked, highly reliable and cost effective national mechanism which relies on advanced and proven expertise and international industry standards. All this is to be realised by the national BIS (Belarus Interbank Settlements) Scheme.

Main Directions For The Development Of An Integrated Domestic Payment System.

In May 1995, the NBB Board approved the 'User Requirements of the Project for Development and Modernisation of the Payment System' which stipulates that:

• interbank funds transfers and settlements related to high-value payments should be performed on a gross basis in real time (RTGS);

• paper documents interchange timing should be minimised in the framework of domestic settlements;

• electronic information security, including payments data transmitted via communication network and 'data at all stages of processing, should be enhanced;

• banks should be provided with a range of facilities for more effective management of CA balances, including transparency of account balance information in real time;

• irrevocability of payment messages and finality of interbank settlement should be assured.

It is assumed that the core of the National Payment System will be the automated high-value Belarus Interbank Settlements (BIS), which will be built according to RTGS principles. The technical design of the BIS system has been assigned to the BISC and the system is to be developed and implemented in stages, starting in 1997.

The 'core concept' is shown above in the diagram figure 1. The design of the system is such that the BIS will be used not only for interbank high-value fund transfers and relevant settlements but also for interbank settlements of net balances fed to the BIS from other clearing sub-systems. The BIS will provide banks with exclusive access to consolidated CA balances with the NBB as well as to intraday central credit facilities. The intention is not to split and distribute available funds among individual subsystems but rather to manage these funds most effectively from one bank workstation. For instance, the newly designed plastic cards system will use an interbank multilateral netting scheme to compute final netting positions for all participating banks at the end of the day. Each bank with a debit or credit position will then be able to settle its obligations using only one net payment message addressed via the BIS. The obvious advantage is that there is no need to allocate or block surplus funds for this particular sub-system. It is also intended that six Larnfalussy standards, together with the findings of the 'Report on Interbank Netting Schemes' issued by the Bank for International Settlements, 1990, should be incorporated into domestic netting systems.

Among the strategic targets of the new system are:

• to minimise payment system risks by managing payments flows in real time, through uninterrupted monitoring of settlements positions and the liquidity of system participants;

• to increase the efficiency of the domestic payments system by stepping up velocity of non-cash funds turnover;

• to increase the trust and confidence, in the settlements system, of user-banks and their clients, and as a result to attract more money to the banking system;

• to set up technical facilities for introducing modern payment services,

• to build up the core of target multi-modules architecture into a Payment System that allows for simple integration of new payment instruments;

There follows a brief definition of the key design solutions for the BIS system, developed by the BISC Project Team and approved by the NBB Board in July 1996:

1. Interbank funds transfers and settlements shall be performed via the CA of commercial banks with the NBB, provided that the paying bank has sufficient balances;

2. Automated high-value payments and settlements shall be performed on gross basis in real time (RTGS);

3. Processing of payments which are not of a high-value type shall be performed by clearing arrangements in specialised subsystems;

4. Final settlements of net balances resulting in clearing sub-systems shall be performed on a net position basis for each individual participant in these sub-systems;

S. The BIS system will provide for a message queuing facility where pending messages can be stored awaiting incoming sufficient cover. Banks will be provided with tools to manage payments (priority) in their queues;

6. The potential settlements positions will be predicted with regard to payment messages held in BIS queues and messages coming in to clearing sub-systems;

7. The NBB shall regulate interbank settlements by imposing guidelines on limits, permits, suspensions, restrictions, etc.;

8. Emergency interruption or fraudulent intervention in operations of interbank settlements will be prevented and systems secured;

9. Automated interbank settlements shall have a special legal and regulatory basis, and will include regulations governing the procedures of electronic payment documents turnover;

10. Payment messages formats similar to international standards will be used. This will provide the basis for compatibility with international payments and settlements systems;

11. A single national hardware and software complex site (plus back up site) shall be set up. This will act as the platform for the BIS system as well as for other subsystems and will facilitate integration of these sub-systems.

Strategy For Implementation OiThe New System

Bearing in mind the high level of complexity and responsibility involved, the significant labour inputs required for developing and implementing the Project, as well as the need to keep interruption or malfunctioning of interbank settlements to a minimum, the transition period from the existing system to the targeted one will be carried out in stages between 1997 and 2000.

The NBB and the BISC have already started to implement the steps in Stage One of the Project Implementation Plan, whereby methodological and regulatory documents are being developed, and the legal basis formulated for conducting interbank settlements according to the new procedures.

The next step will be to split the entire payments stream into "high amount", "urgent", and "other" payments types. Methodology and codes of practice will be defined for processing "other" types of payments on a net basis, and electronic digital signatures will be introduced to the 'high amount' and 'urgent' payments files of all participants. Rules will then be defined for settling net results from clearing 'other' payments sub-systems via the BIS. All this constitutes the first step in the gradual transition to RTGS.

Practical steps are also already being taken to establish a back-up technical (processing) site and software reliability and recovery facilities which will provide for full redundancy and allow for uninterrupted operation of the settlements system.

Software applications packages are to be developed and implemented which will enable the Head Offices of banks to monitor the current and forecast balances of correspondent

accounts with the NBB in real time. As a result they will be able to efficiently manage the cash flows and payments messages held in their queues. The next stage is to set up a system for long term data archiving and to complete implementation of a complex structure of security controls, system emergency recovery and full back up for all technical and functional systems.

In conclusion, we can safely say that the BIS Project takes into account those common features of EU member countries domestic RTGS which are harmonised under the TARGET Project. Belarus is well aware chat adequate regard to the specific factors involved in running interbank settlements in the EU, with a single 'Euro' currency, is essential - particularly if we are to avoid the losses that might potentially arise due to non-compatibility of technical or legal aspects of Interlinking. Furthermore, the framework of the EC TACIS program aims to develop and harmonise 'Minimum common requirements for RTGS design in the CIS'. Even at this early stage, the BIS Project is sure to satisfy most of these specifications, and some of its features might even come to be regarded as model solutions.

(c) 1996, 1997 A3A WebTv, WWW Belarus, Minsk, Belarus

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