Page 108 - DMGT303_BANKING_AND_INSURANCE

Unit 5: Payment and Settlement System

3.4 These measures are expected to facilitate an orderly growth and functioning of the payment Notes
systems thereby instilling confidence among the various stakeholders.

IV. Risk Mitigation

4.1 With increase in reach, size and significance of payment systems the Bank is committed to
assuring their safe and efficient functioning by identifying various risks, addressing risk-
reduction by putting in place risk-mitigation measures and mandating appropriate risk-
management practices.
4.2 The risks in payment systems viz. concentration risk, counter-party risk, credit risk, legal
risk, liquidity risk, operational risk, regulatory risk, settlement risk and systemic risk
will continue to be addressed by the Bank.
4.3 Towards this end, emphasis will be on advocating –

Mitigating concentration risk in both large value as also retail payment systems by
way of limiting operations of multiple payment systems by a single entity as also
one bank acting as settlement bank for multiple payment systems or alternatively
putting in place measures for risk mitigation wherever necessary. Important large
value payment systems are now being operated by Clearing Corporation of India
Limited (CCIL), which also acts as a central counterparty for systemically important
payment systems. This calls for very close monitoring of the activities and
functioning of CCIL and continuously reviewing the need for an additional/alternate
central counterparty operating some of the payment systems with each capable of
taking over the operations of the other in case of eventuality. The risk of concentration
of settlement in the form of a single central counterparty needs to be carefully
looked into. The retail payment systems are operated by various entities, and the
focus would be to ensure that there is no concentration of a single bank acting as
settlement bank for multiple payment systems. The other issue that needs to be
addressed as part of concentration risk is in the outsourcing arrangements entered
into by system participants with service providers. Reliance on a single or few
service providers gives rise to concentration risk and could emerge as a significant
single-point-of-failure. Proper risk mitigation measures in this regard would be
pursued in consultation and co-ordination with all the regulatory departments.

Risk mitigation measures to address operational risk would be by way of (a) using
latest and relevant technology, (b) having straight-through-processing interfaces,
(c) placing controls in the form of maker-checker practices and building proper
audit trails, (d) encouraging vendor-neutral platforms and products, (e) addressing
scalability issues by monitoring adequacy of infrastructure and performance, etc.
Approaches to mitigating counterparty liquidity and settlement risks by regulating
access (access criteria, credit ratings, exposure limits, net debit cap, etc.), guaranteed
settlement by committed lines of credit, settlement guarantee fund using central
counterparty, preventing volatility (margins, haircuts, calling for additional
securities, etc.) and secure netting systems.
4.4 With the move towards consolidation of infrastructure and integration of various payment
systems, isolating and mitigating operational risk assumes importance. Risk- containment
is the plan and as part of this exercise, exacerbation and transmission to other systems will
be analysed and prevented both in Bank-operated and others- operated systems. The
participants in such systems will also be expected to institutionalise similar practices.

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