Between 2004 and 2007, there was a comprehensive reform of the payment and settlement systems, including the TASE Clearing Houses, check clearing and Masav. In July 2007, a new payments system, the Zahav system was launched, which meets international standards and which brought Israeli financial infrastructure to an advanced international level. Development of the new system and legislation of the Payments Systems Law, 5768-2008, also helped the shekel join the trade in the CLS bank.
These and other measures, which were completed in May 2008, helped improve the stability of the local financial infrastructure, allowing foreign and local entities to continue to perform transactions in the shekel and between the shekel and other currencies immediately, finally and safely, even when the global financial crisis became more severe in September 2008.
The financial infrastructure in Israel includes interbank payment and settlement systems which are used to transfer and settle payments, communication systems and means for making payments, as presented in the following diagram.
The most important payment systems in Israel are the Zahav system, which is designated for immediate and final settlement of large or urgent payments; the Paper-Based Clearing House for paper transmissions (checks and various credits and debits); the Masav (banks' automated clearing house, which settles electronic debit and credit instructions; the TASE clearing houses (the securities and the Maof clearing houses) and the credit card companies.
The CLS system which operates outside of Israel is an integral part of Israel's payment and settlement system: it settles the Israeli currency against foreign currencies which are settled in CLS. Since Shekel joined the CLS in May 2008.
The payment systems encompass transactions using different methods - including automated (electronic) debit/credit instructions, checks, debit cards, cash and payments by means of Internet and cellular phone.
Participants in the various payment systems are mostly commercial banks and large financial institutions. The general public uses the means of payment directly, and needs to use the inter-bank payment systems for the transfer of money from bank to bank. Transfer of money from an account to another account at the same bank does not require use of an interbank payment system.
- The settlement system in Israel
The Zahav system - the Bank of Israel acts as a final clearer for interbank settlements. The banks' settlement accounts are managed in the Zahav system operated by the Bank of Israel. The system is linked directly to the payment systems in the economy (BCH, Masav, and the TASE) and the Bank of Israel's internal systems.
Apart from the Zahav system, the existing settlement system - whose members are the commercial banks in Israel, CLS, Bank of Israel and the Postal Bank – incorporates several payment systems, described below, that operate alongside each other:
The banks' paper-based clearing house (BCH) clears drafts (checks, and paper based debits and credits). Drafts are cleared on the evening of the business day on which they were deposited at the banks. Under certain conditions the banks are permitted to reject drafts, and in such cases these are generally returned on the day after their deposit. Returned drafts are registered at the time they are returned at their current value on the date they were deposited. The final settlement between the banks is recorded in the Zahav system on the next business day.
The Automated Clearing House (Masav) is an electronic system that clears debit and credit instructions that are not paper-based, such as authorizations to debit an account ("standing orders"), and credits such as salary payments and tax rebates, which are sent to the clearing house by the banks and by various banks' customers authorized to send instructions directly to the Masav. Debit and credit instructions are cleared in the evening of the day they were sent, at that day’s value. Interbank transfers are recorded on the business day following the transfer date. Participants in Masav are entitled to return debits and credits several days after their presentation. Returned payment instructions are assigned the value date of the business day the returns were presented.
The Tel Aviv Stock Exchange (TASE) clearing house clears transactions in securities carried out in the stock exchange and provides other securities-related services, such as interest payments on bonds and dividend payments. Transactions in derivative assets are settled in the Maof clearing house.
Settlement is performed on a net basis for each of the above systems. The results are sent to the Zahav system, which is the final clearer for all the payment systems in the economy.
- The reform in the payment and settlement systems in Israel
In July 2007 the Bank of Israel launched the Zahav system (a Hebrew acronym for Real Time Credits and Transfers), which is known worldwide as RTGS (Real Time Gross Settlement). The Zahav system is an advanced system for the final, effective and reliable settlement of shekel payments in the economy in real time. Payment instructions in the Zahav system are handled immediately and are final. The system guarantees its users rapid and secure payment: the settlement operation is conducted within just a few minutes, it is irrevocable, and the recipients of the payment can use it immediately, without exposure to risk.
Introduction of the Zahav system required the entire banking system to improve the way in which it manages liquidity and to move from retroactive liquidity management to liquidity management on an intraday basis. The Bank of Israel initiated the development of a system for full collateral management against intraday and overnight credit. This system is managed by the TASE.
Together with the creation of the Zahav system, as part of the reform in the payment and settlement systems, the Bank of Israel also introduced a series of other changes and improvements into the existing payment systems, in order to bring them into line with accepted international standards. The principal changes were:
- Cancellation of retroactive recording of transactions in the banks’ accounts so that balances in the banks' accounts are final.
- Extending the working hours in the business day, ending at 18:30 instead of 15:00, in order to permit execution of transactions in the Zahav system in the afternoon and evening hours as well.
- Creation of an interbank arrangement to handle failure of one of the participants in multilateral Masav clearing or check clearing house, in order to ensure that payments are settled by the clearing houses by the end of the day at the latest.
- Implementing of improvements in check clearance process, including: mandatory electronic settlement for all the banks, cancellation of the retroactive check clearing, check imaging and transfer of files between the banks, and initiation of a law for check truncation. In 2009 a memorandum of law "Electronic Check Clearing, 5768-2008" was published.
- Implementing of improvements in the Masav clearing process, including: a change in the order of operations so that sending of the files to the banks (clearing) takes place only after settlement in the Zahav system, cancellation of retroactive settlement of returns and creation of two settlement windows during the day (morning and evening).
- The TASE Clearing Houses prepared to introduce a Delivery Versus Payment (DVP) system so that settlement of the payment in the Zahav system will be executed together with transfer of security. This method significantly reduces the settlement risks in the TASE Clearing House. This move began with government bonds and makam, and in coming years the TASE will work to extend it to corporate bonds and afterwards to securities.
To minimize legal risks in the payment systems, the Bank of Israel initiated the process leading to the passing of the Payment Systems Law, 5768-2008. This law ensures the effective function of Israel's payment systems and minimizes the risks relating to them. The law also defines the Bank of Israel's powers in supervising those payments systems declared by the Governor as "controlled systems".
The Zahav system provided Israel with new options also in the international plane. The most important development in this respect was for the shekel to be included in settlement by the CLS system in May 2008. The CLS (Continuous Linked Settlement Bank), which was established in the early 2000s, functions as an international clearing house for exchange transactions. The activity in CLS is similar to the activity in RTGS system, although instead of settlement action in a single currency, in the CLS system the actions of settlement and currency conversions are carried out simultaneously.
- Zahav system operating days for 2015
Zahav system operating days for 2015
- The BIS Core Principles
The Bank for International Settlements (BIS) is an international organization of central banks that promotes financial cooperation, and has acted as a central banks' banker since 1930.
Awareness of the size and intensity of risks involving the payment systems prompted the BIS in 1999 to set up a Committee on Payment and Settlement Systems (CPSS). The committee formulated a set of core principles relating to these systems, intended, among other things, to reduce the risks facing payment systems and those who participate in them. Those principles have been adopted and implemented in most of the advanced economies and in many emerging markets. The Bank of Israel adopted the core principles on the establishment of Zahav system, and has been investing much effort to ensure the implementation of the principles.
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The Core Principles are:
1) The system should have a well founded legal basis under all relevant jurisdictions. The recommendation of the CPSS is to have a single law which will cover all the aspects of the payment & settlement system. If several different laws cover settlement arrangements and regulations one has to make sure that there is no contradiction between them and that they are clear and transparent.
2) 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. Participants, the system operator, and other involved parties should understand clearly the financial risks in the system and where they are carried. An important determinant of where the risks are carried is the rules and procedures of the system. These should define clearly the rights and obligations of all the parties involved and all such parties should be provided with up-to-date explanatory material. The relationship between the system rules and the other components of the legal environment should be clearly understood and explained. In addition, key rules relating to financial risks should be publicly disclosed.
3) 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. The rules and procedures of a systemically important payment system are not only the basis for establishing where credit and liquidity risks are carried in the system, but also for allocating responsibilities for risk management and risk containment. They are, therefore, an important mechanism for addressing the financial risks that can arise in payment systems. A system's rules and procedures should therefore ensure that all parties have both the incentives and the capabilities to manage and contain each of the risks they bear and that limits are placed on the maximum level of credit exposure that can be produced by each participant.
4) 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. This relates to daily settlement in normal circumstances. Between the time when payments are accepted for settlement by the payment system and the time when final settlement actually occurs, participants may still face credit and liquidity risks. These risks are exacerbated if they extend overnight, in part because a likely time for the relevant authorities to close insolvent institutions is between business days. Prompt final settlement helps to reduce these risks. As a minimum standard, final settlement should occur at the end of the day of value.
5) 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. Most multilateral netting systems defer settlement of participants' obligations. They therefore can create the risk that, if a participant is unable to meet its settlement obligations, other participants will face unexpected credit and liquidity risks at the time of settlement. The amount at risk can be much greater than the net amounts due. The risk is worsened by the longer settlement is deferred. At a minimum, such netting systems must be able to withstand the failure of the largest single net debtor to the system.
6) 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. Most systems involve the transfer of an asset among system participants to settle payment obligations. The most common form of such an asset, which is also the preferable form, is an account balance at the central bank, representing a claim on the central bank. There are, however, examples of other forms of settlement asset, representing a claim on a supervised institution. The settlement asset must be accepted by all participants in the system.
7) The system should ensure a high degree of security and operational reliability and should have contingency arrangements for timely completion of daily processing. Market participants rely on payment systems for settling their financial market transactions. To ensure the accuracy and integrity of these transactions, the system should incorporate commercially reasonable standards of security appropriate to the transaction values involved. To ensure completion of daily processing, the system should maintain a high degree of operational resiliency. Operators, participants, such as banks and their customers and overseers of systems all have an interest in the efficiency of a system. There will typically be a trade-off between minimizing resource costs and other objectives, such as maximizing safety. Within the need to meet these other objectives, the design of the system, including the technological choices made, should seek to economize on relevant resource costs by being practical in the specific circumstances of the system, and by taking account of its effects on the economy as a whole. It is also necessary to have effective business procedures and well-trained and competent personnel who can operate the system safely and efficiently and ensure that the correct procedures are followed.
8) The system should provide a means of making payments which is practical for its users and efficient for the economy. Operators, participants, such as banks and their customers and overseers of systems all have an interest in the efficiency of a system. There will typically be a trade-off between minimizing resource costs and other objectives, such as maximizing safety. Within the need to meet these other objectives, the design of the system, including the technological choices made, should seek to economize on relevant resource costs by being practical in the specific circumstances of the system, and by taking account of its effects on the economy as a whole.
9) The system should have objective and publicly disclosed criteria for participation, which permit fair and open access. Access criteria that encourage competition amongst participants promote efficient and low-cost payment services. Any restrictions on access should be objective and based on appropriate risk criteria. All access criteria should be stated explicitly and disclosed to interested parties. The rules of the system should provide for clearly specified procedures for orderly withdrawal of a participant from the system, either at the participant's request, or following a decision by the system operator that the participant should withdraw.
10) The system's governance arrangements should be effective, accountable and transparent. Payment system governance arrangements include the set of relationships between the payment system's management and its governing body (such as a board of directors), its owners and its other stakeholders. These arrangements provide the structure through which the system's overall objectives are set, how they are attained and how performance is monitored. Because systemically important payment systems have the potential to affect the wider financial and economic community, there is a particular need for effective, accountable and transparent governance, whether the system is owned and operated by the central bank or by the private sector.
11) Responsibilities of the central bank in applying the Core Principles:
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. Designers and operators of private sector payment systems, and participants and other users of all systems, as well as other interested parties, need to have a clear understanding of the central bank's role, responsibilities and objectives in relation to payment systems. They also need to understand how the central bank intends to achieve those objectives, whether by formal powers or other means. This will enable those parties to operate in a predictable environment and to act in a manner that is consistent with those objectives and policies.
b) The central bank should ensure that the systems it operates comply with the Core Principles. The central bank is often the operator of one or more systemically important payment systems. It therefore must ensure that they comply with the Core Principles.
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. Where systemically important payment systems are not operated by the central bank, the latter should oversee their compliance with the Core Principles. The central bank's oversight of systems should be sound based on the country's legal and institutional framework. Oversight on new and existing systems should include;
- All critical payment systems,
- Carrying out a systematic regular appraisal of existing systems,
- Strict supervision of new payment systems including their design.
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. Cooperation with other central banks is particularly important for systems with cross-border or multicurrency characteristics.
- Risks in the payment systems and ways of reducing them
Inefficient payment and settlement systems expose their participants to several risks, the most important of which are:
- Credit risk—one of the parties to the transaction will fail to settle and obligation for full value, either when due or at a time thereafter.
- Liquidity risk—one of the parties to the transaction will fail to settle an obligation for full value when due.
- Legal risk— the risk of loss to one of the parties to the transaction because the payment and settlement systems are not supported by clear laws and regulations.
- Operational risk—the risk of loss resulting from inadequate or falied systems or their environments, such as human error, a technical failure of hardware or software, and communication failures.
These risks could develop into overall systemic risk, in which a failure by one of the parties leads to the failure of the other settlement participants. In more serious cases, the risks could pass from system to system, and even lead to a financial crisis in the entire economy.
The Zahav system helps to greatly reduce the level of the risks inherent in the payments systems. This system effectively rules out credit and liquidity risks because once the transaction is complete, the payment becomes final and the recipient bank can credit its customer without fear of the payment being canceled. The system also reduces each participant’s dependence on the other settlement participants, which considerably reduces the systemic risks of the banks participating in it. The establishment of backup systems for Zahav system components and the establishment of an overall backup site for the Zahav system reduces operational risk. The existence of the Payment Systems Law, 5768-2008, reduces the legal risk inherent in the activity of the payment and settlement network in Israel.
- National Committee for Payments and Settlement
In line with the rules of the Zahav system, during the course of 2009 a National Committee for Payments and Settlement was established, whose members represent different entities operating in Israel, including representatives of the Bank of Israel, the banking corporations and the payment systems, as well as representatives of interested parties (such as the Securities Authority, provident funds, insurance companies, pension funds and credit card companies). The council is headed by the Assistant Governor of the Bank of Israel.
The Committee is an advisory body only, whose function is to assist in assuring the efficiency and stability of the Israel's payment systems. The Committee meets at least once in each calendar year.
- Means of payment in Israel
The means of payment via which the general public can execute payments are cash, checks, electronic debits, debit cards, account debiting authorizations, payments via the Internet and by telephone and more.
Set out below is a brief explanation of the main means of payment in Israel:
- Cash - notes and coins, which are the most liquid means of payment.
- Check - a document in which a person ("the drawer") instructs the bank at which he manages his account, to pay money from his account to a third party ("the payee") at a predetermined time. The check, as a document, can be endorsed (unless the drawer restricts his endorsement on the check, and the legal conditions permitting this have been fulfilled), and in such case the endorsee (the person to whom the check has been endorsed to) can demand redemption from the drawer or from the endorser.
- EFT (Electronic Funds Transfer) - electronic funds transfer from a payee to a recipient by means of communication between information systems, without physical transfer of paperwork, banknotes or checks. A Zahav transfer (see below) and a transfer via MASAV are examples of this means of payment in Israel.
- Zahav transfer - an electronic transfer executed via the Zahav system during the business day, usually within a few minutes. A transfer of this type is final and irrevocable.
- Debit card - a means of payment that is used as a substitute for cash and checks. When paying by means of a debit card, the payer presents the card or gives his details. The supplier or recipient of the payment contracts the clearing house, which sends him the payment and debits the customer.
- Credit card - a type of debit card, which is used as an alternative means of payment to cash; the customer is usually charged for the transaction at a date later than the transaction date.
- Pre-paid card - a type of debit card, which has to be charged in advance with the maximum amount for debiting. Each payment is deducted from the customer's balance until the balance is zeroed.
- Payments by Internet - payments by means of online banking, which enable the payer to send funds from his bank account to a creditor.
- Foreign-currency transfer abroad - a means of payment that is common among foreign workers, who transfer funds from the country in which they work at to their country of origin.
- Foreign-currency/Shekel conversion - a foreign-currency exchange transaction in the local currency. Currency conversions worldwide are the parameters that determine currency rates.