RESOLUTION OF BOARD OF NATIONAL BANK OF THE KYRGYZ REPUBLIC

of May 19, 2005 No. 16/4

About approval of "Policy on risk management in payment system of the Kyrgyz Republic"

Having considered the project of "Policy on risk management in payment system of the Kyrgyz Republic", the Board of National Bank of the Kyrgyz Republic decides:

1. Approve "Policy on risk management in payment systems of the Kyrgyz Republic" it (is applied).

2. To management of payment systems together with Legal department in accordance with the established procedure to carry out state registration of this resolution in the Ministry of Justice of the Kyrgyz Republic.

3. This resolution becomes effective from the moment of official publication after state registration in the Ministry of Justice of the Kyrgyz Republic.

4. To management of payment systems to bring this resolution to the attention of commercial banks of the Kyrgyz Republic, JSC Settlement and Savings Company, regional managements and Representative office of National Bank of the Kyrgyz Republic in Batken Province.

5. After publication of the registered regulatory legal act to inform the Ministry of Justice on publication source (the name of the edition, its number and date).

6. To impose control of execution of this resolution on the vice-chairman of National Bank of the Kyrgyz Republic Moldokanov Sh. I.

Approved by the Resolution of Board of National Bank of the Kyrgyz Republic of May 19, 2005 No. 16/4

Policy on risk management in payment system of the Kyrgyz Republic

1. Introduction

1.1 This Policy is developed according to the Civil code of the Kyrgyz Republic, the laws of the Kyrgyz Republic "About National Bank of the Kyrgyz Republic", "About banks and banking activity in the Kyrgyz Republic", "About electronic payments", other regulatory legal acts of the Kyrgyz Republic (further the legislation) and on the basis of methodological instructions of International settlements bank (*) and "Concepts of National Bank of the Kyrgyz Republic on risk management".

(*) The key principles for system and significant payment systems (Core Principals for Systemically Important Payment Systems) International settlements bank, Basel, Switzerland.

The policy determines the principles and risk management methods in payment system of the Kyrgyz Republic.

1.2 Main objective of risk management in payment system is development and implementation of measures for restriction of systemic risk and to operational acceptance of management decisions on regulation of payment system.

1.3 For the purpose of realization of this Policy instructions and procedures for accomplishment of measures for risk management for everyone functional component of payment system are developed.

2. The used terms and determinations

2.1 The terms and determinations used in this Policy correspond to terms and the definitions given in "Basic provisions on the organization of payment system in the Kyrgyz Republic" approved by the resolution of Board of National Bank of the Kyrgyz Republic of March 25, 1999 No. 20/7 (in edition of the Resolution of Board of National Bank of the Kyrgyz Republic No. 3/6 of 16:02. 2001).

2.2 In addition in this Policy the following terms and determinations are used:

- Functional components of payment system - interbank money transfer systems (clearing systems, systems of large payments, settlement systems with use of payment cards).

- System of large payments of National Bank of the Kyrgyz Republic (further - National Bank) - system in which calculations between financial institutions happen individually according to each payment document according to rules and procedures of system and are reflected directly in the correspondent accounts of financial institutions opened in National Bank.

- Final settlement - calculation which is irrevocable and unconditional.

- Supervision of payment system - the task of the Central bank which is essentially aimed at providing transparent functioning of payment systems and protection of financial system against systemic risk which can occur when one or several participants of system test credit risk or liquidity risk. Supervision of payment system is exercised concerning system, but not her certain participants.

- FIFO (first in first out) - the principle of payment processing in case of which payments are processed consistently according to the procedure of their receipt.

3. Types of risks in payment system

3.1 Influence efficiency of activities of payment system as external risks (risks of the circle), and internal risks (risks of process).

The external risk is risk that adverse external circumstances can interfere with accomplishment of the purposes, tasks and functions of payment system. Treat external risks of payment system: the risks arising owing to impact of factors of force majeure (natural disasters, military operations, etc.) and country risk.

The internal risk (risk of process) is the risk arising owing to the internal factors connected with functioning of system. Treat internal risks of payment system: financial risks, legal risks and operational risks, including the risks of information technologies and risks arising owing to factors of force majeure for separate parts of payment system.

This policy considers financial, operational and legal risks in payment system.

3.2 Subject of the main attention in payment system are financial risks and some external risks, such as factor of force majeure. Treat financial risks: liquidity risk, credit risk and systemic risk.

3.2.1 The liquidity risk is risk that the partner in connection with shortcoming or lack of money will not make complete calculation for the obligation in case of approach of term. The liquidity risk does not mean that the partner is insolvent as he is able to make calculation for the obligation, but in definitely not established time in the future.

3.2.2 The credit risk is risk that the partner will not make complete calculation for the obligation in case of maturity or in any subsequent time.

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