Designation of Payment Systems-New Part VC of the Reserve Bank of New Zealand Act 1989

By DeSourdy, Loretta | The Reserve Bank of New Zealand Bulletin, March 2004 | Go to article overview

Designation of Payment Systems-New Part VC of the Reserve Bank of New Zealand Act 1989


DeSourdy, Loretta, The Reserve Bank of New Zealand Bulletin


This article looks at the new Part VC of the Reserve Bank of New Zealand Act, which deals with the designation of payment systems. It briefly describes payment systems and looks at why legislation designating them was required. The article then looks at the details of the legislative framework.

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1 Introduction

The Reserve Bank of New Zealand Amendment Act 2003, which came into force in August last year, added two new parts to the Reserve Bank of New Zealand Act (the Act), both of which deal with payment systems. The first of these, Part VB, deals with oversight of payment systems by the Reserve Bank, and provides the Bank with the power to collect and publish information in relation to payment systems (1). The other new part of the Act, Part VC, provides for the designation of payment systems by Order in Council for the purpose of providing greater legal certainty to payments executed through designated payment systems. This article focuses on Part VC of the Act.

2 Background--Payment system risks, legal uncertainty and the adoption of payment system designation

Payment systems are a key part of the financial infrastructure of the economy. They are used to transfer funds among participants, which are usually financial institutions, acting on their own behalf or on behalf of their customers, by using a system or arrangement for the clearing and/or settlement of payment obligations or for the processing of payment instructions. Sound and efficient payment systems play a vital role in maintaining financial stability and the smooth functioning of a modern economy. However, they can also transmit financial shocks and, in the case of payment systems dealing with large-value payments, can lead or contribute to systemic crises if they are poorly designed and managed. It is important therefore to contain risks in a payment system. These risks are of various types, including legal, credit, liquidity and operational risk.

As discussed in various articles in the Bulletin over recent years, a number of major changes have been implemented in New Zealand's payment systems to reduce risks, for the purpose of promoting a more robust and efficient financial system. These changes have included the implementation of real time gross settlement (RTGS) for large-value payment systems, in which payments between participants (typically banks and other financial institutions) and their customers are only executed upon the underlying settlement being made between the participants intra-day. Another important development was the introduction of robust laws to facilitate the enforcement of netting arrangements for payments settled on a deferred basis (which mainly affects smaller-value payments). Both of these developments have substantially reduced the credit risks associated with payments transactions between participants, and have thereby reduced the potential for the failure of one participant to contribute to the financial distress or failure of another. These reforms, together with the introduction of laws to facilitate electronic processing of cheque clearance in the mid-1990s, have also helped to promote greater reliability and efficiency in the payments system. The enactment of Part VC of the Act is a further step in strengthening the New Zealand payment system.

The enactment of Part VC will help to reduce the legal risks in payment systems to provide more legal certainty for payments made through a designated payment system, where a designation is made by Order in Council at the recommendation of the Reserve Bank. One of the Core Principles for Systemically Important Payment Systems--the international principles relating to payment systems--is that a payment system should have a well-founded legal basis. The Core Principles, which are published by the Committee on Payment and Settlements Systems of the G10 central banks (2), and operate under the auspices of the Bank for International Settlements, provide an internationally recognised framework for the sound design and operation of payment systems. …

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