The 2002 International Monetary Fund (IMF) Financial System Stability Assessment concluded that the Croatian Large Value System (HSVP) and the National Clearing System (NKS) - the systemically important payment systems in the country - broadly complied with the Committee on Payment and Settlement Systems' Core Principles. At the same time, the IMF revealed some shortcomings; however, those were not related to systemic risk matters. In a 2004 follow-up assessment, the IMF identified the HSVP as a modern, functional system that follows international best practices, procedures, and technology. The report found that the NKS also complies with international best practices, and noted that the payment systems framework had gone through a major reform process involving the institutional framework, payment structure, and transmission. The Croatian National Bank's oversight role has been strengthened, and a new National Payment System Law as well as a set of new by-laws have been enacted.

General Overview

Information provided on the website of the Croatian National Bank (Hrvatska Narodna Banka, or CNB) indicates that interbank payment systems operating in Croatia are the Croatian Large Value Payments System (HSVP) and the National Clearing System (NKS), both regulated by the CNB. The HSVP is a real time gross settlement (RTGS) system, whereas the NKS settles low-value payments on a multilateral basis. The CNB website adds that the National Payment System Act and supporting CNB legislation govern payment systems in Croatia.

According to the 2002 International Monetary Fund (IMF) Financial System Stability Assessment (FSSA), the CNB identifies the Croatian Large Value System (HSVP), a real-time gross settlement system for large and time sensitive transactions, and the National Clearing System (NKS), a multilateral netting system for small value payments, as the country's two systemically important payment systems. The IMF found both systems to be in broad compliance with the core principles promulgated by the Committee on Payment and Settlement Systems (CPSS), but also reported some "minor, nonmaterial deficiencies" (p. 35) that were unrelated to systemic risk matters and were already being addressed by the CNB and the Financial Agency (FINA).

The CNB, the FINA, banks, savings banks, savings cooperatives, and the Croatian Post provide payment services in Croatia. The CNB oversees, controls, and supervises all aspects of the national payment system. In its 2002 FSSA, the IMF noted that the payment systems framework had gone through a major reform process, including the institutional framework, payments structure, and transmission. The CNB's oversight had been improved in order to ensure that all payment systems satisfy the evolving needs of all sectors of a modern market economy. At the same time, the IMF reported that the CNB had agreed to put greater emphasis needed on risk mitigation, efficiency, and cost; also, the CNB recognized that the reform strategy should focus on the avoidance of the creation of liquidity, credit, and systemic risk.

In 2004, the IMF published an update to the 2002 FSSA that included an assessment of recent changes in the HSVP and the NKS. The 2004 update also dealt with Croatia's other payment systems, such as those covering checks, debit and credit cards, and ATM and POS networks, deeming none of these to be a source of systemic risk. According to the report, "the HSVP was found to be a modern and well-performing system that uses international best practices, procedures, and technology" (p. 7). However, the IMF recommended modifying the HSVP in order to support a fully-collateralized, intra-day facility and real-time-delivery-versus payment (DVP) for secondary market trading in government and central bank securities. Regarding the NKS, the IMF update also noted that "the low value NKS system was also found in compliance with international best practices, provided that secondary back-up sites are developed" (p. 7).

The 2004 IMF update further reported that the Domestic Payment System Law had been replaced by a new National Payment System Law, which was supplemented by additional new by-laws. Pursuant to the new law, the payment system is within the exclusive authority of depository institutions. The CNB manages bank and government accounts, and banks manage household and enterprise accounts. Interbank systems carry out interbank payments. Payment operations by non-bank institutions may only be performed in the name and for the account of banks. With the adoption of the Law on the FINA in 2001, the FINA lost its monopoly and assumed responsibilities that are more closely related to "information technology support (particularly for the operation of the state treasury system, public revenue collection, and operating a register of payment orders and other registers), collecting and processing data on business entities and financial flows (for tax authorities, statistical office, securities supervisors, etc.), and providing on a commercial basis services to banks (e.g., receiving payment orders at FINA's branches, providing electronic information on balances during the day, archiving, data entry, network services) and the CNB (distribution and processing of cash)" (p. 8). As of 2004, the IMF stated that the future role of the FINA and the possible privatization of parts of the agency were under further consideration. The 2004 IMF report also noted that, in 2003, the CNB established the National Payment System Committee, with the goal of standardizing payment system activities. Members of the committee are representatives of the CNB, the Ministry of Finance (MoF), commercial banks, the Croatian Banking Association (CBA), and the Croatian Chamber of Economy (CCE). The committee published standardized domestic payment orders and relevant instructions in mid 2003.

The Principles

I. The system should have a well-founded legal basis under all relevant jurisdictions.

CP

According to the 2002 FSSA, Croatia broadly observes this principle for the HSVP and the NKS. The legal framework at the time of the assessment provided a solid basis for payment systems and was backed by strong legal structures, including a bankruptcy law. However, the IMF revealed some shortcomings. For example, "the legal position of exercising collateral and related issues was not totally clear ... [and] legal certainty and any ambiguities such as "zero hour" issues have not yet been tested in court" (p. 35). Also, the interrelation between payments law and contractual law with respect to enforceability was not sufficiently examined.

The 2002 FSSA noted that the CNB is responsible for payment systems in general and systemically important systems in particular. According to the IMF, the "legal framework has enabled the CNB to demonstrate strong leadership with regard to policy, organizational, operational and technical aspects of the two major systems" (p. 34). In its 2004 update to the FSSA, the IMF reported that the Domestic Payment System Law had been replaced by a new National Payment System Law and a set of new by-laws. Pursuant to the new law, the payment system is within the exclusive authority of depository institutions. The CNB manages bank and government accounts and banks manage household and enterprise accounts. Interbank systems carry out interbank payments. Payment operations by non-bank institutions may only be performed in the name and for the account of banks.

The HSVP, which is owned and operated by the CNB, was launched on April 6, 1999, and participation in the HSVP is limited to banks and savings banks. According to the IMF, the HSVP is a modem system applying international best practices, procedures, and technology. The low value NKS, which was developed by the FINA, began to operate on February 5, 2001 and is limited to credit transfers. As of April 2002, commercial banks assumed responsibility for maintaining and operating customer accounts held in the past with the FINA. According to the IMF, this was "a major step in completing operational aspects of the high volume and low value system in the payments system reform process toward a market economy" (p. 34).

The 2005 CNB Annual Report (published in 2006) noted that the HSVP settled 127,688 transactions in 2005, with the average value of a payment transactions totaling HRK 14.3 million. The NKS settled 109.3 million transactions in 2005, with the average value of a payment transactions amounting to HRK 6,547.

II. The system's rules and procedures should enable participants to have a clear understanding of the system’s impact on each of the financial risks they incur through participation in it.

FC

In its 2002 FSSA, the IMF concluded that the HSVP and the NKS observe the requirements of this principle. With respect to the HSVP, the system's rules and procedures enable participants to have a clear understanding of financial risks. The CNB, which is the owner, operator, and supervisor of the HSVP, provides information and details about the system on its website. The NKS's rules and procedures also enable participants to have a clear understanding of financial risks. The FINA, which is the operator of the system, provides information about the system. Members must participate in FINA training sessions and seminars, which cover all aspects of the clearing system. As of the IMF's 2002 FSSA, only credit transfers were processed on a gross basis, even though the NKS had been designed as a multilateral netting system. The NKS is prefunded with reserve deposits up to a limit for each participant agreed with the CNB.

III. The system should have clearly defined procedures for the management of credit risks and liquidity risks, which specify the respective responsibilities of the system operator and the participants and which provide appropriate incentives to manage and contain those risks.

FC

In its 2002 FSSA, the IMF concluded that the HSVP and NKS observe the requirements of this principle. According to the IMF, the "main issues relate to the possible future introduction of an intraday credit facility, free of interest charges through fully collateralized overdrafts using repos and the possible impact that indirect membership of a wider range of institutions might have. Cross-border issues are not considered systematically relevant in the current stage of payments system development" (p. 35). The FSSA added that FINA, which is the operator of the system, provides information about the system. Members must participate in FINA training sessions and seminars, which cover all aspects of the clearing system. As of 2002, only credit transfers were processed on a gross basis, even though the NKS had been designed as a multilateral netting system. The NKS is prefunded with reserve deposits up to a limit for each participant agreed with the CNB. According to the IMF, there are no credit and liquidity risks.

According to the 2004 IMF update to the FSSA, an HSVP by-law has enhanced the framework for liquidity management, but a fully collateralized intra-day facility had not been established. Further, the CNB and the Securities Depository Agency (SDA) had not yet agreed on a suitable form of Delivery versus Payment (DVP) for securities markets transactions.

IV. The system should provide prompt final settlement on the day of value, preferably during the day and at a minimum at the end of the day. (Systems should seek to exceed the minima included in this Core Principle.)

FC

According to the 2002 IMF FSSA, the HSVP and NKS observe the requirements of this principle. The 2007 HSBC report stated that the HSVP settles transactions in real time and with immediate finality. After end-of-day netting in NKS, net balances are settled via the HSVP on settlement accounts held at the CNB from 16:30 until 16:45 Central European Time. According to the 2007 HSBC report, the NKS clears all transactions on a same day settlement cycle, and payment orders are processed electronically. The report further stated that clearing among NKS participant banks is performed via their clearing accounts and transactions posted against the clearing accounts are input on a continuous basis throughout the entire day. These transactions are then netted, resulting in an end-of-day net balance in the banks' NKS clearing accounts and final settlement takes place by settling each bank's NKS and HSVP net balances (HSBC 2007).

V. A system in which multilateral netting takes place should, at a minimum, be capable of ensuring the timely completion of daily settlements in the event of an inability to settle by the participant with the largest single settlement obligation. (Systems should seek to exceed the minima included in this Core Principle.)

II

In its 2002 FSSA, the IMF stated that this principle is not applicable for the HSVP, since payment transfers are processed continuously in real time and settlements are irrevocable. According to the IMF, this principle is not applicable for the NKS either.

VI. Assets used for settlement should preferably be a claim on the central bank; where other assets are used, they should carry little or no credit risk and little or no liquidity risk.

FC

In its 2002 FSSA, the IMF stated that this principle is observed by both the HSVP and the NKS.

VII. The system should ensure a high degree of security and operational reliability and should have contingency arrangements for timely completion of daily processing.

EN

According to the 2002 FSSA, this principle is partly observed with respect to the HSVP. The IMF considered the HSVP technically and operationally robust. It "makes maximum use of existing S.W.I.F.T. facilities" (p. 36). With regard to the NKS, the FSSA found that Croatia partially observes this principle. The IMF states that "the system is robust from a technical architectural perspective. Modern fault tolerant, authentication, and encryption capabilities are used. Contingency plans and back-up facilities are in place and have been tested" (p. 36). The FSSA recommended improving back-up facilities for both the HSVP and the NKS as well as implementing secondary site arrangements. In its 2004 update to the FSSA, the IMF reported that the back-up facilities have been strengthened. Also, secondary site arrangements were established for the NKS, but not for the HSVP.

VIII. The system should provide a means of making payments which is practical for its users and efficient for the economy.

CP

According to the 2002 FSSA, this principle is broadly observed by both the HSVP and the NKS. Improvements were made with regard to risk mitigation, transaction cost reduction and processing efficiency (intraday finality); however, as of the 2002 IMF report, Croatia still needed to revise its risk reduction policies. The report also stated that the utility of the system and its usefulness and acceptance could be enhanced through a better use of available liquidity and implementation of a suitable DVP capability for securities transactions. With respect to the NKS, the IMF concluded that, compared to previous years, payment arrangements had become more efficient and transaction pricing had been improved. However, the role of liquidity management in a more market-oriented environment and the processing of debit transfers needed to be further discussed, particularly in light of risk-mitigation and efficiency requirements of users.

IX. The system should have objective and publicly disclosed criteria for participation, which permit fair and open access.

FC

According to the 2002 FSSA, the HSVP and the NKS observe this principle.

X. The system's governance arrangements should be effective, accountable and transparent.

EN

According to the 2002 FSSA, the HSVP broadly observes with this principle. The HSVP "has an effective government structure, transparent with adequate disclosure of regulations and procedures" (p. 37). However, the IMF recommended disclosing operations and decision-making processes to participants and the public more regularly. The NKS partly observes this principle. In its 2002 report, the IMF recommended establishing a clear board of management structure for the NKS with representatives of the relevant stakeholders separate from the FINA. The 2004 IMF update to the FSSA reported that the new legislation, particularly the Law on the FINA, partially implemented these recommendations. The NKS is a separate organizational unit within the FINA, though not a separate legal entity. In 2004, the IMF stated that the future role of the FINA and the possible privatization of parts of the agency were being considered.

A. The central bank should define clearly its payment system objectives and should disclose publicly its role and major policies with respect to systemically important payment systems.

FC

According to the 2002 FSSA, the CNB observes this principle.

B. The central bank should ensure that the systems it operates comply with the Core Principles.

FC

According to the 2002 FSSA, the CNB observes this principle.

C. The central bank should oversee compliance with the Core Principles by systems it does not operate and it should have the ability to carry out this oversight.

CP

According to the 2002 FSSA, the CNB broadly observes this principle. The IMF pointed out, however, that the fact that the CNB owns, operates, and oversees the RTGS system creates potential conflicts of interest. Therefore, the 2002 FSSA recommended separating the CNB's oversight responsibilities from its operational responsibilities. The 2004 IMF update reported that the oversight responsibilities had been transferred to the CNB's internal audit entity. In its 2002 FSSA, the IMF also recommended extending the CNB's oversight responsibilities to include oversight of the competitive environment and other public interest issues. However, the IMF did not follow up on this issue in its 2004 update.

D. The central bank, in promoting payment system safety and efficiency through the Core Principles, should cooperate with other central banks and with any other relevant domestic or foreign authorities.

EN

According to the 2002 FSSA, the CNB only partly observes this principle. The IMF recommended establishing formal and informal information exchange mechanisms with other agencies and supervisory bodies. In order to promote safety and efficiency issues, the CNB should also consider creating a more formal network for information sharing and coordination, for example through signing Memoranda of Understanding. Finally, the CNB should make sure that decisions by various agencies, particularly in the case of cross-border payments, do not interfere with the objectives of others in clearance and settlement matters.