Systemically Important Payment System

A systemically important payment system (SIPS) is a payment system whose failure or disruption could trigger or spread serious problems across the financial system and the wider economy. Such systems typically handle large values, settle the cash side of financial market transactions or are the only practical way to make a particular kind of payment. Because of this, central banks and other authorities hold them to higher standards of risk management and oversee them more closely than other payment systems.

The term is an official category in international standards and in some national laws. It was first used formally in the Core Principles for Systemically Important Payment Systems, published in 2001 by the committee of central banks now known as the Committee on Payments and Market Infrastructures (CPMI). Since 2012 those principles have been replaced by the Principles for Financial Market Infrastructures (PFMI), which apply to all systemically important payment systems and to other financial market infrastructures.

Most towns have many roads, and closing one of them for a day causes some delays but nothing worse. A few roads, though, carry the fuel tankers, the ambulances and the food lorries. If one of those closes, hospitals run short and shelves go empty. Planners watch those roads more closely, build them to higher standards and keep diversions ready.

A systemically important payment system is one of those critical roads for money. If it stopped, banks could not pay each other, trades in shares and currencies could not complete, and businesses and governments might miss important payments. Because the damage would spread so widely, central banks set stricter rules for these systems and check regularly that they are followed.

Authorities use a mix of quantitative and qualitative criteria. Common factors include:

• Value and volume. The total value of payments processed, especially relative to the size of the economy or the currency area.
• Type of payments. Whether the system settles interbank, money market, securities or foreign exchange transactions, or other payments that other systems depend on.
• Substitutability. Whether participants could switch quickly to another system if it failed.
• Interconnectedness. How closely the system is linked to other infrastructures, such as securities settlement systems and central counterparties.
• Market share. Whether the system dominates a segment, such as retail payments in a given currency.

Most central bank real-time gross settlement (RTGS) systems and many other large-value transfer systems are considered systemically important. Some retail payment systems also qualify where they are dominant and hard to replace.

In the euro area, the European Central Bank's SIPS Regulation, first adopted in 2014, identifies systemically important payment systems and sets binding requirements based on the PFMI. Systems identified under it have included T2 and its predecessor TARGET2, and the private large-value system EURO1. In the United Kingdom, the Bank of England supervises recognised payment systems under the Banking Act 2009, including CHAPS. In the United States, the Financial Stability Oversight Council has designated certain financial market utilities as systemically important under the Dodd-Frank Act, including CHIPS and CLS, while Fedwire is operated by the Federal Reserve itself and held to comparable standards.

• Legal basis. A well-founded and enforceable legal basis, including rules on settlement finality, often supported by formal designation under finality laws.
• Credit and liquidity risk. Measures to manage credit risk and liquidity risk, including the ability to complete settlement if the participant with the largest obligation fails.
• Money settlement. Settlement in central bank money where practical and available.
• Operational risk. High availability, backup sites and recovery plans, including the expectation that critical systems can resume operations within two hours of a disruption. Cybersecurity risk is covered by further CPMI-IOSCO guidance issued in 2016.
• Governance and access. Clear governance, fair and open access criteria, and public disclosure of rules and risks.

Central bank oversight of systemically important payment systems includes regular assessments against the PFMI, reviews and follow-up of identified gaps, and many operators publish disclosure frameworks explaining how they meet each principle. Where the central bank also owns and operates the system, as with most RTGS systems, it must keep its roles as operator and overseer separate.

Critics argue that the label can entrench incumbent systems, since the cost of meeting the standards makes it hard for new entrants to compete, and that it may create an expectation of public support. Supporters respond that the concentration of systemic risk in these systems justifies the extra scrutiny, and that the standards have made major payment systems markedly more resilient.

• CPMI-IOSCO Principles for Financial Market Infrastructures
• European Central Bank