In its 2006 Annual Report, the Bank of Lithuania (BoL) refers to a self assessment conducted in 2005 on the then systemically important payment system (SIPS), LITAS. This assessment indicated that LITAS fully complied with nine of the ten Core Principles for Systemically Important Payment Systems (CPSIPS) promulgated by the Committee on Payment and Settlement Systems (CPSS) and broadly complied with the remaining Core Principle VII. In 2007, LITAS was replaced by two new SIPS: the large-value real-time gross settlement system LITAS-RLS and the retail payment system LITAS-MMS. Both are owned, operated and overseen by the BoL. A third system, KUBAS processes payments between credit unions and their customers, and is owned and operated by the Central Credit Union of Lithuania. The oversight of the KUBAS is also carried out by the BoL. A 2007 Report by the European Central Bank (ECB) commends Lithuania on taking significant steps in improving its payment system infrastructure. According to the ECB report, the BoL is actively preparing to participate in TARGET2 (the European Union (EU) payment system) and as such Lithuania has introduced substantial legislative reforms affecting payment systems in the country to align itself with the EU Directives. Per the 2007 ECB report, the three interbank payment systems operating in Lithuania are all designated systems overseen by the BoL in accordance with the Settlement Finality Directive of the EU. However, there is no information publicly available as to the compliance of these new systems with the CPSIPS.

General Overview

In its 2006 Annual Report, the Bank of Lithuania (Lietuvos Bankas, or BoL) refers to a self assessment conducted in 2005 on the current systemically important payment system (SIPS), LITAS. This assessment indicated that LITAS fully complied with nine of the ten Core Principles for Systemically Important Payment Systems (CPSIPS) promulgated by the Bank for International Settlements (BIS) and broadly complied with the remaining Core Principle (CP) VII. In 2007, LITAS was replaced by two new SIPS: the real-time gross settlement system LITAS-RLS and the retail payment system LITAS-MMS. Since then, there has been no information publicly available as to the compliance of these new systems with the CPSIPS.

The European Central Bank (ECB) commends Lithuania on taking significant steps in improving its payment system infrastructure. According to a 2007 Report on "Payment and Securities Settlement Systems in the European Union," Lithuania replaced its previous payment system, TARPBANK, with LITAS in 2004. In 2007, LITAS was replaced by the LITAS-RLS and the LITAS-MMS. Further, the BoL is also actively preparing to participate in TARGET2. Lithuania has also introduced substantial legislative reforms affecting payment systems in the country to align itself with the European Union (EU) Directives, notably Directive 97/5/EC on cross-border credit transfers and Commission Recommendation 97/489/EC concerning transactions by electronic payment instruments; and Settlement Finality Directive 98/26/EC.

The 2007 ECB Report enumerates the three interbank payment systems operating in Lithuania: LITAS-RLS, LITAS-MMS and KUBAS. The report notes that all three are designated systems overseen by the BoL in accordance with the Settlement Finality Directive. The LITAS-RLS is the large-value RTGS system, and the LITAS-MMS is the retail payment system; both are owned, operated, and overseen by the BoL. The third system, KUBAS processes payments between credit unions and their customers, and is owned and operated by the Central Credit Union of Lithuania (Lietuvos Centrinė Kredito Unija, or LCKU). The oversight of the KUBAS is also carried out by the BoL. The BoL website adds that, as of 2007, participants of the LITAS-RLS and the LITAS-MMS were the BoL, nine commercial banks, two foreign bank branches, nine financial brokerage companies, ten private limited companies, the Central Securities Depository of Lithuania (Lietuvos Centrinis Vertybinių Popierių Depozitoriumas, or LCVPD) and the LCKU. Further, participation in the KUBAS is open to the LCKU and its members, and as of 2007, the KUBAS had 59 credit unions as participants.

The 2007 ECB Report also notes that cash is the most popular form of payment in Lithuania. However, its popularity is declining due to technological developments and greater access to electronic payment options. Among non-cash payment instruments, credit transfers are the most common, accounting for 52 percent of all non-cash payment instruments in terms of volume and 99 percent in terms of value. Payment cards are also increasingly being used, debit cards being considerably more popular than credit cards. In 2006, payment cards accounted for 44 percent of total non-cash payments in terms of volume. In addition, there are retailer cards and one card with an e-money function, operating since 1996. As a response to the growing use of payment cards, automated teller machines (ATMs) and point of sale (POS) networks have also been expanding continually. In addition, the country also uses direct debit and checks, though they are insignificant in terms of volume and value.

The Principles

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

II

The 2006 BoL Annual Report, published in 2007, states that according to a 2005 BoL assessment of the LITAS, it was fully compliant with CP I. However in 2007 the LITAS was replaced by two new SIPS: the real-time gross settlement system LITAS-RLS and the retail payment system LITAS-MMS, and since, there has been no information publicly available as to the compliance of these new systems with this Principle.

The 2007 ECB Report spells out the legal framework that governs payment systems in Lithuania. The Civil Code of the Republic of Lithuania of 2000 forms the legal basis for payment and contractual relations between banks and customers. The 1999 Law on Payments as amended in 2004 lays down rules on payment instruments and procedures both within Lithuania and internationally. The 2003 Law on Settlement Finality in Payment and Securities Settlement Systems forms the legal foundation for the safe and reliable operation of payment and securities settlement systems in Lithuania. The 2004 Law on Banks regulates the activities of banks. The 1993 Law on Currency decrees the litas as Lithuania's monetary unit. The 1993 Law on Foreign Currency, as amended in 2002, decrees that euro can be used for payments in cash, while foreign currency can be used for non-cash payments and settlements by agreement between the parties. The 1997 Law on the Prevention of Money Laundering, as amended in 2004, requires customer identification and reporting by banks and other credit institutions in the case of unusually high amounts of non-cash payment transactions. Other relevant laws, according to the 2007 ECB Report, include the 1999 Law on Bills of Exchange and Promissory notes, and the 1999 Law on Checks; both, as stated, adopt the respective Geneva Conventions.

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

The 2006 BoL Annual Report states that according to a 2005 BoL assessment of the LITAS, it was fully compliant with CP II. However in 2007 the LITAS was replaced by two new SIPS: the real-time gross settlement system LITAS-RLS and the retail payment system LITAS-MMS, and since, there has been no information publicly available as to the compliance of these new systems with this Principle.

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

The 2006 BoL Annual Report states that according to a 2005 BoL assessment of the LITAS, it was fully compliant with CP III. However in 2007 the LITAS was replaced by two new SIPS: the real-time gross settlement system LITAS-RLS and the retail payment system LITAS-MMS, and since, there has been no information publicly available as to the compliance of these new systems with this Principle.

The BoL website states that all three payment systems in Lithuania, the LITAS-RLS, the LITAS-MMS, and the KUBAS have appropriate liquidity and operational risk management measures in place. Further, the LITAS-RLS settles payments in real time through settlement accounts opened at the Bank of Lithuania, thereby eliminating credit risk. The LITAS-MMS eliminates credit risk by queuing payments on the basis of available funds in the system. Credit risk is eliminated in the KUBAS by processing payments on a gross basis and queuing payments according to priority set by the participants. As for liquidity risk management, LITAS-RLS requires all credit institutions to hold reserves at the Bank of Lithuania to be used for intraday and overnight settlements. It also employs the tool of system monitoring, by which participants in the system can monitor their account balance and the order of payments, so as to prioritize, revoke or suspend orders according to fund availability. The LITAS-MMS and the KUBAS employ similar liquidity risk management measures. The KUBAS participants may also enter into account overdraft agreements with the LCKU for emergency liquidity arrangement. The BoL website adds that all three systems also have a wide array of hardware, software and organizational tools to manage operational risks.

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

The 2006 BoL Annual Report states that according to a 2005 BoL assessment of the LITAS, it was fully compliant with CP IV. However in 2007 the LITAS was replaced by two new SIPS: the real-time gross settlement system LITAS-RLS and the retail payment system LITAS-MMS, and since, there has been no information publicly available as to the compliance of these new systems with this Principle.

The BoL website further states that the LITAS-RLS settles payments in real-time, and the LITAS-MMS and KUBAS settle transactions at the end of the day, with a queuing mechanism and the use of their reserves with the BoL or the LCKU respectively, that prevents credit or liquidity risk.

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

The 2006 BoL Annual Report states that according to a 2005 BoL assessment of the LITAS, it was fully compliant with CP V. However in 2007 the LITAS was replaced by two new SIPS: the real-time gross settlement system LITAS-RLS and the retail payment system LITAS-MMS, and since, there has been no information publicly available as to the compliance of these new systems with this Principle.

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

The 2006 BoL Annual Report states that according to a 2005 BoL assessment of the LITAS, it was fully compliant with CP VI. However, in 2007 the LITAS was replaced by two new SIPS: the real-time gross settlement system LITAS-RLS and the retail payment system LITAS-MMS, and since, there has been no information publicly available as to the compliance of these new systems with this Principle.

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

The 2006 BoL Annual Report mentions that in 2005 the BoL had carried out an assessment of the then RTGS payment system in Lithuania, LITAS. The assessment ascertained that the LITAS broadly complied with the CP VII. The 2006 BoL assessment of the LITAS' compliance with CP VII found that it showed improvement, especially in its business continuity management. However, the BoL decided to retain the compliance level with that CP at "broadly compliant". In 2007 the LITAS was replaced by two new SIPS: the real-time gross settlement system LITAS-RLS and the retail payment system LITAS-MMS. Since then there has been no information publicly available as to the compliance of these new systems with this Principle.

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

II

The 2006 BoL Annual Report states that according to a 2005 BoL assessment of the LITAS, it was fully compliant with CP VIII. However, in 2007 the LITAS was replaced by two new SIPS: the real-time gross settlement system LITAS-RLS and the retail payment system LITAS-MMS, and since, there has been no information publicly available as to the compliance of these new systems with this Principle.

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

II

The 2006 BoL Annual Report states that according to a 2005 BoL assessment of the LITAS, it was fully compliant with CP IX. However, in 2007 the LITAS was replaced by two new SIPS: the real-time gross settlement system LITAS-RLS and the retail payment system LITAS-MMS, and since, there has been no information publicly available as to the compliance of these new systems with this Principle.

The 2007 ECB Report observes that the LITAS-RLS and LITAS-MMS charge service fees to participants "based on the principles of full cost coverage, transparency and equality of treatment of system participants" (p. 181, 183). The systems do not charge entry or periodical fees, only fees for orders. The BoL website informs that the Procedure for the Calculation of Service Fees of the Payment System LITAS-RLS and of the Retail Payment System LITAS-MMS, approved by the Resolution of the BoL Board in January 2007 laid down the service fees of the two systems.

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

II

The 2006 BoL Annual Report states that according to a 2005 BoL assessment of the LITAS, it was fully compliant with CP X. However, in 2007 the LITAS was replaced by two new SIPS: the real-time gross settlement system LITAS-RLS and the retail payment system LITAS-MMS, and since, there has been no information publicly available as to the compliance of these new systems with this Principle.

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

The 2007 ECB Report observes that the amendment of the Law on the Bank of Lithuania decrees the BoL as the exclusive oversight authority over payment and securities settlement systems in Lithuania. Further, the Law on the Bank of Lithuania as amended in 2004 lays down the primary objective of the BoL as maintaining price stability. Amendments to the law also expanded the function of BoL to include encouraging the "stable and efficient operation of payment and securities settlement systems" in Lithuania (p. 175). To fulfill its objectives, the BoL, as observed by the ECB, develops and maintains the infrastructure required to carry out its responsibilities. However, there is insufficient information publicly available addressing Lithuania's compliance with this Principle.

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

II

The 2006 BoL Annual Report states that in performing the function of the oversight of payment and securities settlement systems, the BoL monitors the LITAS-RLS, the LITAS-MMS, the securities settlement system of the LCVPD and the payment system KUBAS of the LCKU, to ensure their secure and efficient operation.

The 2007 ECB Report observes that the payment systems oversight role of the BoL gives priority to the systematically important payment systems, and applies the Core Principles for Systemically Important Payment Systems (CPSIPS) promulgated by the Bank for International Settlements (BIS) as standards for their efficient functioning. The oversight responsibility of the BoL includes registration, assessment, and monitoring of systems operated by the BoL. The BoL registers systems in accordance with the 2003 Resolution "On Approving the Procedure for the Registration of Payment and Securities Settlement Systems, Data Management and Publication" approved by the BoL Board. The BoL also monitors them periodically, and assesses their compliance with the CPSIPS. However, there is insufficient information publicly available addressing Lithuania's compliance with 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.

II

The 2006 BoL Annual Report states that in performing the function of the oversight of payment and securities settlement systems, the BoL monitors the LITAS-RLS, the LITAS-MMS, the securities settlement system of the LCVPD and the payment system KUBAS of the LCKU, to ensure their secure and efficient operation. The 2007 ECB Report also notes that the payment system, KUBAS, which is owned and operated by the LCKU, was designated in accordance with the Settlement Finality Directive in 1994, and has since been subject to BoL oversight. However, there is insufficient information publicly available addressing Lithuania'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

The 2007 ECB Report states that the BoL is a member of the European System of Central Banks (ESCB) since Lithuania's accession to the EU in May 2004. As a member, the BoL participates in the General Council of the ECB and the committees of the ESCB in developing and adopting the decisions of the ESCB, inter alia in the field of payment systems. The 2006 BoL Annual Report enumerates the ESCB committees and working groups that it is associated with: the Payment and Settlement Systems Committee, the Payment Systems Policy Working Group, the Securities Settlement Working Group, the Working Group on TARGET2, and the TARGET Management Working Group. The 2007 ECB Report further mentions that the BoL also closely cooperates with the central banks and banking supervisory institutions of other EU states. Domestically, the BoL cooperates with the Lithuanian Securities Commission, the LCVPD and the Association of Lithuanian Banks. However, there is insufficient information publicly available addressing Lithuania's compliance with this Principle.