The interdependencies of payment and settlement systems, June 2008

iii Foreword The network of domestic and cross-border systems that comprise the global payment and settlement infrastructure has evolved significantly over recent years. These systems, like the financial markets and economies they support, are increasingly connected through a wide array of complex interrelationships. As a result, the smooth functioning of an individual system often depends on the smooth functioning of other related systems. The safety of the global payment and settlement infrastructure requires that system operators, financial institutions, and service providers have a robust understanding of payment and settlement risks, and that they manage those risks effectively. Tighter interdependencies among systems, however, change the nature of risks present in the global infrastructure, and they also create new challenges for achieving effective risk management. Given its long-standing focus on strengthening systems to prevent systemic risk, the CPSS developed this report to identify the various interdependencies that exist among the systems of CPSS countries, analyse the risk implications of these interdependencies, and assess any associated risk management challenges. The report concludes that interdependencies have important implications for the safety and efficiency of the global payment and settlement infrastructure. Tighter interdependencies have contributed to strengthen the global infrastructure by reducing several sources of settlement costs and risks. At the same time, interdependencies have increased the potential for disruptions to spread quickly and widely across multiple systems. To address the potential for a disruption to spread quickly to many systems, the report suggests that system operators, financial institutions, and service providers take several actions in order to adapt their existing risk management practices to the more complex, integrated environment resulting from tighter interdependencies. To that end the report underlines the importance of broad risk management perspectives, risk management controls that are commensurate with the role played in the global payment and settlement infrastructure, and wide coordination among interdependent stakeholders. The report also suggests that central banks and other authorities review, and where necessary, adjust their policies in light of the challenges posed by interdependencies. In this context, the CPSS will pursue a number of objectives to increase the resilience of the global payment and settlement infrastructure.