In 2000, the International Monetary Fund (IMF) released a Report on the Observance of Standards and codes (ROSC) addressing the compliance of Estonia's payment systems with the Committee on Payment and Settlement Systems' Core Principles for Systemically Important Payment Systems (CPSIPS). At the time of the IMF report, Estonia's payment system was being overhauled and the Interbank Payment System (IBPS) was being established. According to the IMF 2000 ROSC, the IBPS was expected to fully observe international standards. A 2002 IMF report noted that the IBPS comprised the Real-Time-Gross-Settlement (RTGS) system and the Designated Time Net Settlement System, ESTA - both of which were designated as systemically important. According to a 2007 HSBC publication on payment and cash management in Estonia, both systems are owned and operated by the Bank of Estonia (BoE) and have about 13 direct participants. The RTGS settles high-value (above 1 million EUR) and urgent interbank transactions in real time. The ESTA settles large amount retail and non-urgent transaction (below 1 million EUR). According to a 2007 European Central Bank (ECB) publication, the 1993 Law on the Bank of Estonia, the 2001 Law of Obligations Act, the 1999 Credit Institutions Act, and related Governor's decrees govern payment and settlement systems in Estonia. The ECB states that the legal framework complies with EU Directive 98/26/EC on Settlement Finality in Payment and Securities Settlement Systems and EU Directive 97/5/EC on Cross-Border Credit Transfer. On November 20, 2006, the BoE was connected to the Trans-European Automated Real-Time Gross Settlement Express Transfers (TARGET) system.

General Overview

In 2000, the International Monetary Fund (IMF) released a Report on the Observance of Standards and Codes (ROSC) addressing the compliance of Estonia's payment systems with the Committee on Payment and Settlement Systems' Core Principles for Systemically Important Payment Systems (CPSIPS). At the time of the IMF report, Estonia's payment system was being overhauled and the Interbank Payment System (IBPS) was being established. According to the ROSC the IBPS was expected to fully observe international standards. In January 2002, according to a 2002 IMF ROSC Update, the IBPS was established. In its 2007 publication on Payment and Settlement systems in the European Union (EU), the European Central Bank (ECB) stated that the interbank payment and settlement system in Estonia is based on the Real-Time-Gross-Settlement (RTGS) system and the Designated Time Net Settlement System (DNS), which is known by the acronym ESTA. Both systems are owned and operated by the Bank of Estonia (BoE). The BoE issued separate rules and regulations for each system. The rules govern legal and business details of the systems that are not covered by laws or agreements between the participants of the system, including matters related to system infrastructure, prerequisites for participation, accession procedures, communication channels, types of payment, settlement conditions, and payment priorities and queues. On November 20, 2006, the BoE was connected to the Trans-European Automated Real-Time Gross Settlement Express Transfers (TARGET) system.

According to the 2007 HSBC publication on payment and cash management in Estonia, both systems have about 13 direct participants. The RTGS settles high-value (more than 1 million EUR) and urgent interbank transactions in real time via SWIFT. ESTA, on the other hand, settles large amount retail and non-urgent transactions under 1 million EUR. The RTGS settles transaction on a same day basis with immediate finality. Payments are processed in real time across the participants' bank accounts held at the BoE. In the case of ESTA, each participant's net balance is fixed at 17:00 before being forwarded to the RTGS for final settlement.

The 2007 ECB publication explains that the 1993 Law on the Bank of Estonia (last amended in 2003), the 2001 Law of Obligations Act (last amended in 2005), the 1999 Credit Institutions Act (last amended in 2005), and related Governor's decrees are the laws that cover payment and settlement systems in Estonia. The ECB states that the legal framework complies with the EU Directive 98/26/EC on Settlement Finality in Payment and Securities Settlement Systems and EU Directive 97/5/EC on Cross-Border Credit Transfer. However, according to the ECB, some minor shortcomings remain, which will be remedied with further legislative amendments.

The International Monetary Fund (IMF), in its 2002 update on the Report on the Observance of Standards and Codes (ROSC), states that the BoE has operational and oversight functions with respect to payment systems. The operational role is carried out by the Clearing and Settlement Department of the BoE. The Financial Stability Department, on the other hand, develops the legal framework of the payment and settlement systems, implements payment and settlement system policy, and oversees the payment system. According to the 2007 ECB publication, the BoE cooperates with the Financial Supervisory Authority (FSA), which is the common supervisor of the insurance and securities market, in order to guarantee financial stability. The BoE, the Ministry of Finance, and the FSA entered into a memorandum of understanding (MoU) in order to establish a basis for the exchange of information, the development of legislation, and the implementation of a safety net. Internationally, the most important partner of the BoE is the ECB. The BoE signed a MoU on cooperation between payment systems overseers and banking supervisors in the EU.

According to the 2007 ECB publication on Payment and Settlement Systems in the EU, "in 2005 more than 76% of all interbank payments were made by two major banks, which means that the banking sector in Estonia is fairly consolidated. Around 11% of payments by volume (and 25% of payments by value) are made through [the BoE]'s interbank payment system" (p. 106)

The Principles

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

II

In its 2000 ROSC, the IMF indicated that when the IBPS was established it would fully observe international standards. In January 2002, according to a 2002 IMF Update, the IBPS was established comprising the Real-Time-Gross-Settlement (RTGS) system and the Designated Time Net Settlement System, ESTA - both designated as systemically important. However, no further information on the actual compliance of these systems with this principle is publicly available. According to the 2007 ECB publication on Payment and Settlement Systems in the EU, the 1993 Law on the Bank of Estonia (last amended in 2003), the 2001 Law of Obligations Act (last amended in 2005), the 1999 Credit Institutions Act (last amended in 2005), and related Governor's decrees are the laws covering payment and settlement systems in Estonia. The ECB states that the legal framework complies with the EU Directive 98/26/EC on Settlement Finality in Payment and Securities Settlement Systems and Directive 97/5/EC on Cross-Border Credit Transfer. However, according to the ECB, some minor shortcomings remain, which will be remedied with further legislative amendments.

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.

II

In its 2000 ROSC, the IMF indicated that when the IBPS was established it would fully observe international standards. In January 2002, according to a 2002 IMF Update, the IBPS was established comprising the Real-Time-Gross-Settlement (RTGS) system and the Designated Time Net Settlement System, ESTA - both designated as systemically important. However, no further information on the actual compliance of these systems with this principle is publicly available. According to the 2007 ECB publication on Payment and Settlement Systems in the EU, the operating rules of the RTGS and the ESTA are set by the BoE according to the Law on the Bank of Estonia and the Credit Institutions Act. In order to participate in the RTGS, participants must have an account with the BoE, meet the accession criteria as set by the BoE, and sign an accession contract with the BoE. The accession contract defines the rights and obligations of the parties and requires them to abide by the general terms and conditions as well as technical specifications of the RTGS. Similarly, in order to access the ESTA, a participant has to meet the system's access requirements and sign an accession contract with the BoE.

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.

II

In its 2000 ROSC, the IMF indicated that when the IBPS was established it would fully observe international standards. In January 2002, according to a 2002 IMF Update, the IBPS was established comprising the Real-Time-Gross-Settlement (RTGS) system and the Designated Time Net Settlement System, ESTA - both designated as systemically important. However, no further information on the actual compliance of these systems with this Principle is publicly available. According to the 2007 ECB publication on Payment and Settlement Systems in the EU, "the RTGS system does not involve any credit risk for the participants, because the funds transfers in the payment system are only executed if there is sufficient cover for each payment on the payer's settlement account.... Credit institutions are required to hold at least 50% of the minimum reserve requirement on the account with Eesti Pank. The second half of the reserve requirement can be met with high-quality foreign securities (debt securities with at least a double A credit rating). Against this background, funds deposited by the RTGS participants with Eesti Pank are "around 3.5 times larger than the turnover of RTGS, and the likelihood of liquidity risk being incurred in the settlement of daily transactions is very low" (p. 110). With respect to the ESTA, credit risk is not considered an issue, since ESTA settles payments on a gross basis and only if there is sufficient collateral to settle the payment. According to the 2007 ECB report, "the system is a fully protected settlement system" (p. 113). Liquidity risk might only be an issue when a participant has insufficient settlement funds. However, the ECB states that the liquidity risk can be mitigated by the possibility of paying an additional cash collateral in real time during the ESTA operating day.

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.)

II

In its 2000 ROSC, the IMF indicated that when the IBPS was established it would fully observe international standards. In January 2002, according to a 2002 IMF Update, the IBPS was established comprising the Real-Time-Gross-Settlement (RTGS) system and the Designated Time Net Settlement System, ESTA - both designated as systemically important. However, no further information on the actual compliance of these systems with this Principle is publicly available. According to the 2007 HSBC publication on payment and cash management in Estonia, the Estonian Interbank Settlement System is composed of a Real Time Gross Settlement System (RTGS), which is fully compliant with TARGET, and the ESTA, which is a multilateral designated-time net settlement (DNS) system. Both systems have about 13 direct participants. The RTGS settles high-value (more than 1 million EUR) and urgent interbank transactions in real time via SWIFT. ESTA, on the other hand, settles large amount retail and non-urgent transaction below 1 million EUR. The RTGS settles transaction on a same-day basis with immediate finality. Payments are processed in real time across the participants' bank accounts held at the BoE. In the case of ESTA, each participant's net balance is fixed at 17:00 before being forwarded to the RTGS for final settlement.

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 2000 ROSC, the IMF indicated that when the IBPS was established it would fully observe international standards. In January 2002, according to a 2002 IMF Update, the IBPS was established comprising the Real-Time-Gross-Settlement (RTGS) system and the Designated Time Net Settlement System, ESTA - both designated as systemically important. However, no further information on the actual compliance of these systems with this Principle is publicly available. According to the 2007 HSBC publication on payment and cash management in Estonia, the Estonian Interbank Settlement System is composed of a Real Time Gross Settlement System (RTGS), which is fully compliant with TARGET, and the ESTA, which is a multilateral designated-time net settlement (DNS) system. Both systems have about 13 direct participants. The RTGS settles high-value (more than 1 million EUR) and urgent interbank transactions in real time via SWIFT. ESTA, on the other hand, settles large amount of retail and non-urgent transaction below 1 million EUR. The RTGS settles transaction on a same-day basis with immediate finality. Payments are processed in real time across the participants' bank accounts held at the BoE. In the case of ESTA, each participant's net balance is fixed at 17:00 before being forwarded to the RTGS for final settlement.

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.

II

In its 2000 ROSC, the IMF indicated that when the IBPS was established it would fully observe international standards. In January 2002, according to a 2002 IMF Update, the IBPS was established comprising the Real-Time-Gross-Settlement (RTGS) system and the Designated Time Net Settlement System, ESTA - both designated as systemically important. However, no further information on the actual compliance of these systems with this principle is publicly available. According to the 2002 IMF report, "assets used for settlement in [the] RTGS system are claims on [the] central bank" (p.2).

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

II

In its 2000 ROSC, the IMF indicated that when the IBPS was established it would fully observe international standards. In January 2002, according to a 2002 IMF Update, the IBPS was established comprising the Real-Time-Gross-Settlement (RTGS) system and the Designated Time Net Settlement System, ESTA - both designated as systemically important. However, no further information on the actual compliance of these systems with this principle is publicly available.

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

II

In its 2000 ROSC, the IMF indicated that when the IBPS was established it would fully observe international standards. In January 2002, according to a 2002 IMF Update, the IBPS was established comprising the Real-Time-Gross-Settlement (RTGS) system and the Designated Time Net Settlement System, ESTA - both designated as systemically important. However, no further information on the actual compliance of these systems with this principle is publicly available.

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

II

In its 2000 ROSC, the IMF indicated that when the IBPS was established it would fully observe international standards. In January 2002, according to a 2002 IMF Update, the IBPS was established comprising the Real-Time-Gross-Settlement (RTGS) system and the Designated Time Net Settlement System, ESTA - both designated as systemically important. However, no further information on the actual compliance of these systems with this principle is publicly available. According to the 2002 IMF report, "the persons having the right to become participants of the [ESTA] and RTGS systems are specified in the contract, general terms and conditions, and the technical conditions of the systems. All credit institutions and the Estonian Central Securities Depository are participants of the [ESTA] system. There are three types of participants in the RTGS system: fully qualified participants, participants with restricted rights, and net settlement systems managers" (p. 2)

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

II

In its 2000 ROSC, the IMF indicated that when the IBPS was established it would fully observe international standards. In January 2002, according to a 2002 IMF Update, the IBPS was established comprising the Real-Time-Gross-Settlement (RTGS) system and the Designated Time Net Settlement System, ESTA - both designated as systemically important. However, no further information on the actual compliance of these systems with this principle is publicly available.

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.

II

According to the 2002 IMF report, the BoE has an operational function and an oversight function with respect to payment systems. The operational role is carried out by the Clearing and Settlement Department of the BoE. The Financial Stability Department, on the other hand, develops the legal framework of the payment and settlement systems implements payment and settlement system policy, and oversees the payment system. However, no further information on the actual compliance of these systems with this principle is publicly available.

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

II

According to the 2002 IMF report, the Governor's Decree No. 1 of 2002 provides for General Terms and Conditions and Price-lists of the RTGS and the ESTA. Pursuant to the decree, the administrator of the two systems may set forth technical conditions, including contingency plans. However, no further information on the actual compliance of these systems with this principle is publicly available.

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.

II

There is insufficient information publicly available as to Estonia's compliance with this principle.

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.

II

According to the 2007 ECB publication, the BoE cooperates with the FSA in order to guarantee financial stability. The BoE, the Ministry of Finance, and the FSA entered into a MoU in order to establish a basis for the exchange of information, the development of legislation, and the implementation of a safety net. Internationally, the most important partner of the BoE is the ECB. The BoE signed a MoU on cooperation between payment systems overseers and banking supervisors in the EU. However, no further information on the actual compliance of these systems with this principle is publicly available.