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THE BANK OF POLICY ON PAYMENT SYSTEM

1. THE BANK OF MONGOLIA ROLE IN PAYMENT SYSTEM

1.1. The Bank of Mongolia is entitled to develop National payment system, maintain safety, efficiency and smooth operation of national payment system.

1.2. The Bank of Mongolia’s core operation is to constitute sound legal environment in order to develop and maintain payment system efficiency and safety.

1.3. The Bank of Mongolia shall formulate payment system rules and regulations according to the core principles and guidelines published by Bank for International Settlements, and thereafter, conduct in its policy.

1.4. The Bank of Mongolia shall issue the National payment system development strategy, define its priority and perspective objective, approve strategic plans and implement it gradually.

1.5. Pursuant to the “Law of ”, the Bank of Mongolia has the following operations related to the payment system:

 To organize cash settlement by issuing national banknotes in circulation,  To conduct and perform interbank settlement process.

2. OPERATION OF INTERBANK PAYMENT SYSTEMS

2.1. The Bank of Mongolia ensures the operation of interbank payment systems offering interbank settlement services to banks. The Switch Clearing Center /SCC/ of the Bank of Mongolia is the core mechanism of the entire payment system that transfers interbank high-value and low- value interbank payments. The SCC is an automated clearing house system, in which the

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processing of payments is fully automated and only electronic payment instructions are accepted and processed.

2.2. According to the fundamental principles – payment finality in a day, therefore follows settlement finality:  The SCC transfers interbank high and low-value payments on time,  The Payment and Accounting Department of the Bank of Mongolia performs interbank settlement finality. The SCC has the back-up server in order to provide interbank payment system smooth operation.

2.3. All banks are subject to have a settlement account at the Bank of Mongolia and each bank is responsible for its own interbank indebtedness and can settle over its own account at the Bank of Mongolia. Participation in the interbank settlement system and claims on the central bank are the safest form of settlement asset, since the Bank of Mongolia guarantees the availability of the funds for settlement thus eliminating liquidity and credit risk associated with the settlement assets of the systems’ participants.

2.4. The Bank of Mongolia shall pay a close attention to the payment system modernization process, perform interbank settlement process promptly, and support technical development by introducing real time gross settlement system. Real time gross settlement system enables participants intraday liquidity, mitigate credit risk, perform interbank settlement process on the real time basis, monitor liquidity, balance account and settlement stream on the actual time basis. The Bank of Mongolia shall, at its discretion, extend intraday liquidity facility to the system participants to assist them meet their liquidity requirements on the collateral basis.

3. SYSTEMICALLY IMPORTANT PAYMENT SYSTEM /HIGH-VALUE PAYMENT SYSTEM/

3.1. The Bank of Mongolia is responsible for the oversight function of payment system operation as well as performing interbank settlement process. To eliminate systemic risk, the Bank of Mongolia shall conduct oversight function by reporting and informing possible risks to the system participants and service providers.

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3.2. The Bank of Mongolia complies with “Core Principles for Systemically Important Payment Systems” published by Bank for International Settlements

3.3. The Bank of Mongolia, in cooperation with the National Payment and Settlement Council, shall formulate and approve the legislative acts such as National payment system development strategy, policy, prime and perspective objectives, related regulations and core principles that clearly highlight the management of the system participants’ correlation and the mitigation of imminent risks.

3.4. The Bank of Mongolia, with prior negotiation and agreement with its participants and other related parties, may amend the standing payment system rules and regulations.

3.5. The Bank of Mongolia shall, at its sole discretion, prefer to cooperate with the National Payment and Settlement Council and system participants to successfully implement and resolve the national payment system issues.

3.6. The Bank of Mongolia will pay continuous significance towards risk management and oversight of the Systemically Important Payment Systems.

4. LOW-VALUE PAYMENT SYSTEM

4.1. Even the low-value payments are not considered to be the most important source of systemic risk for the overall national payment system, the operational and other errors in such systems may affect a large number of users and reduce credibility of the national payment system. The “Core Principles for Systemically Important Payment System” should also apply this system to escape possible risks and to improve efficiency of low-value payments.

4.2. The Bank of Mongolia shall provide consultations to operators of clearing and retail payment systems on risks associated with payment systems. The Bank of Mongolia may also estate its opinion on the compliance of a particular payment system with “Core Principles for Systemically Important Payment Systems” and on the particular issues related to the

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functioning or development of the system. The Bank of Mongolia will participate in the development project referring to the operation of clearing and retail payment systems.

4.3. The Bank of Mongolia prepares, on a regular basis, the statistics of payment system and, if required, may request operators of the payment system to provide information such as system rules and regulations, risk management and mitigation procedures in the payment system, and other related documentations.

5. PAYMENT INSTRUMENTS

5.1. The cash use reduction and introduction of new non-cash payment instruments into market, and developing its usage among payment system participants will increase payment system efficiency.

5.2. Introduction and development of a newly recognized modern technologies and electronic means of payment such as payment cards, online banking service will intensify payment stream, further providing safety and efficiency in the payment system.

5.3. The Bank of Mongolia collects information and conducts surveys on payment instruments being used in Mongolia. The Bank of Mongolia may issue recommendations, instructions or regulations, and if necessary, participate in drafting amendments to relevant legislations when the usage of payment instruments increases considerably and this expansion may increase the national payment system’s exposure to risks.

5.4. The Bank of Mongolia shall cooperate with other participants on introduction, development and implementation of a new payment instruments. It may also provide if requested, its opinion on the development of the respective payment instrument and risks associated with it.

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6. OVERSIGHT OF PAYMENT SYSTEM

6.1. The Bank of Mongolia shall independently oversee the payment system smooth operation. The objectives of oversight of the payment system are to ensure the financial stability and the efficient and secure operation of the payment system, and to support the state implementation. 6.2. The oversight of payment system is the main form of providing the compliance with the related rules and regulations. The Central bank shall establish criteria on payment system participants, and if required, may carry out inspections to check compliance of banks and other financial institutions participating in the payment system.

6.3.To mitigate risks associated with payment system, the oversight function will involve the whole system itself or system participants separately.

6.4. Risks in payment and settlement system are classified as follows:  Credit risk,  Liquidity risk,  Legal risk,  Operational risk,  Systemic risk.

Risks in payment and settlement systems

 Credit Risk: The risk that a counterparty is unable to settle an obligation when it is due or at any time afterwards;

 Liquidity risk: The risk that a counterparty (or participant in a settlement system) will not settle an obligation for full value when due, but at some unspecified time thereafter.

 Legal risk: The risk that a poor legal framework or legal uncertainties will cause or exacerbate credit or liquidity risks.

 Operational risk: The risk of human error or a breakdown of some component of the hardware, software or communications systems, which is crucial to settlement.

 Systemic risk: The risk that the failure of one participant in a transfer system to meet its

required obligations will cause other participants to be unable to meet their obligations (including settlement obligations in a transfer system) when due.

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6.5. The Bank of Mongolia shall follow the “General Principles of Central bank oversight in payment system" published by Bank for International Settlements:

General oversight principle A: Transparency

The oversight policies, including the policy requirements or standards for systems and the criteria for determining which systems these apply to, should be transparent to the public.

General oversight principle B: International standards

Central banks should adopt internationally recognized standards for payment and settlement systems.

General oversight principle C: Effective powers and capacity

Central banks should have the powers and capacity to carry out their oversight responsibilities effectively.

General oversight principle D: Consistency

Oversight standards should be applied consistently to comparable payment and settlement systems, including systems operated by the central banks and other organizations.

General oversight principle E: Cooperation with other authorities

Central banks, in promoting the safety and efficiency of payment and settlement systems, should cooperate with other relevant central banks and authorities.

7. COOPERATION WITH SUPERVISORY AND INTERNATIONAL AUTHORITIES

7.1. To mitigate systemic risk associated with payment system, the Bank of Mongolia handles payment system oversight function. When the financial stability of each participant of the payment system /predominantly banks/ may affect systemic risk in the payment system, the Bank of Mongolia, when necessary, shall cooperate with other financial supervising authorities /Ministry of Finance of Mongolia, Financial Regulatory Committee/ on oversight function.

7.2. The Bank of Mongolia will sign an agreement on cooperation with other authorities to exchange necessary information.freely. Upon mutual agreement, the Bank of Mongolia

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7.3. together with related authorities may carry out joint inspections to check compliance of system participants with certain requirements or regulations. Where necessary, they may examine the ability of the banks and other financial institutions to meet its obligations to the customers and participants of the system.

7.4. The Bank of Mongolia shall cooperate with central banks of other countries and other international institutions on the payment system oversight functioning and other issues related the payment system.

8. PUBLIC AWARENESS

8.1. The Bank of Mongolia shall publish, on a regular basis, reports on the development of payment system in Mongolia, that include payment instrument development, payment system operation, oversight function and an analysis of payment system.

8.2. The Bank of Mongolia reports on payment system legislative acts, related rules and regulations on its official web site - www.mongolbank.mn. The Bank of Mongolia may report the national payment system information and statisticаl data to international organizations for the public press.

BANK OF MONGOLIA

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