Reforming PAYMENTS AND SECURITIES SETTLEMENT SYSTEMS IN LATIN AMERICA CARIBBEAN AND THE MASSIMO CIRASINO MARIO GUADAMILLAS JOSÉ ANTONIO GARCÍA FERNANDO MONTES-NEGRET ©2007 The International Bank for Reconstruction and Development / The World Bank 1818 H Street NW Washington DC 20433 Telephone: 202-473-1000 Internet: www.worldbank.org E-mail: feedback@worldbank.org All rights reserved 1 2 3 4 5 10 09 08 07 This volume is a product of the staff of the International Bank for Reconstruction and Development / The World Bank. The findings, interpretations, and conclusions expressed in this volume do not necessarily reflect the views of the Executive Directors of The World Bank or the governments they represent. The World Bank does not guarantee the accuracy of the data included in this work. 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All other queries on rights and licenses, including subsidiary rights, should be addressed to the Office of the Publisher, The World Bank, 1818 H Street NW, Washington, DC 20433, USA; fax: 202-522-2422; e-mail: pubrights@worldbank.org. ISBN-10: 0-8213-6635-1 ISBN-13: 978-0-8213-6635-6 eISBN: 0-8213-6637-8 DOI: 10.1596/978-0-8213-6635-6 Cover design: Rock Creek Creative, Inc. Library of Congress Cataloging-in-Publication Data has been applied for. Contents Preface vii Contributors ix Acknowledgments xi Abbreviations xii C H A P T E R 1 Introduction 1 2 Major Trends in Payments and Securities Settlement Systems 5 3 Assessment Tools 21 4 Payments Systems Assessment Findings in Latin America and the Caribbean 27 5 Securities Settlement Systems Assessment Findings in Latin America and the Caribbean 105 6 Transparency, Oversight, and Cooperation in Payments Systems 185 7 Implementing Payments and Securities Settlement Systems Reforms 205 8 Concluding Remarks 215 v vi Contents A P P E N D I X 1 Main Statistics of Payments and Securities Settlement Systems in Selected Latin America and the Caribbean Countries 221 2 Scope, Elements, Participants, and Processes of Securities Settlement Systems 239 3 CPSS Core Principles for Systemically Important Payment Systems 247 4 CPSS-IOSCO Recommendations for Securities Settlement Systems 249 5 CPSS­IOSCO Recommendations for Central Counterparties 251 6 CPSS General Guidance for National Payments System Development 253 7 Recommendations of the Financial Action Task Force on Money Laundering 255 8 Systemically Important Payment Systems in Latin America and the Caribbean: Results of the Self-Assessment Exercises 261 References 265 Index 271 Preface T could generate contagion and severe systemic disrup- he exponential growth in values transferred tions in financial markets. Moreover, rapid technologi- through the payment systems within national and cal changes, accompanied by evolving user needs, have across international borders, as well as the inherent transformed the role of payment systems in the delivery risks in the clearing and settlement processes, have and efficient provision of financial services. The on- increased central and commercial banks'--as well as going revolution in payment systems has increased the securities commissions'--attention to payment and opportunities to market participants and end users. securities settlement systems and their influence on the International organizations, national authorities, and, stability and efficiency of financial intermediation. As in general, payment system stakeholders have recently a result, payment systems issues have moved up the list looked more carefully into payments and securities set- of public policy priorities and have moved from the tlement issues. The first set of important standards backroom to the boardroom of financial institutions. came with the release in 1989 of the Group of Thirty In the 1970s and 1980s, central banks focused mainly recommendations regarding securities clearance and on the influence of payment systems in the transmis- settlement and the 1990 Lamfalussy Report recom- sion of monetary policy, but in recent years their atten- mending minimum standards. Since then, many differ- tion has broadened to deal more systematically with the ent organizations have issued international standards, goals of efficiency, integrity, security, reliability, and principles, recommendations, and codified best prac- accessibility. An efficient, secure, and reliable payment tices. At the end of the 1990s and the beginning of the system reduces the cost of exchanging goods, securi- 2000s, a consensus emerged within the Committee on ties, and services, and is an essential tool for the effec- Payments and Settlement Systems (CPSS) of the Bank tive implementation of monetary policy and the smooth for International Settlements (BIS) to introduce new functioning of money and capital markets. Although standards known as the core principles for systemically payment systems have traditionally focused on fund important payments systems, followed by the joint transfers, value is also exchanged by means of securi- CPSS­International Organization of Securities Com- ties trading. Consequently, recent trends in payment missions (IOSCO) recommendations for securities system development have resulted in new initiatives settlement systems. Furthermore, the work of interna- leading to increasing convergence and interoperability tional institutions is going beyond payments and secu- of banking, payment, and securities infrastructures. rities settlement systems assessment to advice on how Payments systems are considered critical for the safe and to effectively implement a reform. The World Bank effective functioning of the financial system. Safe sys- Regional Initiatives on Payments and Securities Settle- tems are, therefore, a key element for maintaining and ment Systems and the CPSS's "General Guidance for promoting financial stability. Poorly designed systems or National Payments System Development," published technical and operational failures, combined with the in its final version in January 2006, are clear examples increasing interdependence of financial intermediaries, of these efforts. vii viii Preface In the Latin America and Caribbean (LAC) region, the secure and efficient payments and securities clearance World Bank started efforts as early as 1995 to raise the and settlement systems in the respective member coun- awareness of the importance of modernizing national try, systems that are capable of satisfying the needs of payments systems and of setting up a regional forum the local, regional, and international markets--has for the exchange of information. Such efforts further been fostered by the work undertaken over the past evolved with the request of regional finance ministers seven years. Moreover, the WHI has led to the establish- for the World Bank to launch a regional initiative to fos- ment of a high-level regional policy forum for the dis- ter such a process of transformation. The latter initiative cussion of payments and securities settlement issues, was formalized in 1999 into the Western Hemisphere which can be invaluable to foster increased coopera- Payments and Securities Clearance and Settlement Ini- tion as the LAC region becomes more integrated. The tiative (WHI) and converted in 2003 into a regional WHI-WHF has also significantly contributed to the Western Hemisphere Payments and Securities Clearance joint World Bank­International Monetary Fund (IMF) and Settlement Forum (WHF), dedicated to the assess- Financial Sector Assessment Program. ment of and exchange of information on payments and This book intends to extract the main lessons and expe- securities settlement systems in the LAC countries. riences of WHI-WHF from the assessments to the The WHI has been a coordinated effort supported by implementation of the reforms. It benefited from the central banks and securities commissions inside and out- numerous country assessments, as well as from follow- side the region, as well as international financial and up work undertaken by the World Bank in the reform of standard-setting institutions. In addition to the World payments and securities settlement systems in the LAC Bank and the Centro de Estudios Monetarios Latino- region. The book describes major trends in payments americanos, other institutions have supported the WHI, and securities settlement systems worldwide and pre- such as the Council of Securities Regulators of theAmer- sents the assessment tools used in preparing the country icas and an International Advisory Council, the latter reports under WHI-WHF. In addition, the book provides comprising highly experienced institutions dealing with a detailed summary of the main findings of the WHI- clearance and settlement of payments and securities. WHF assessments in the payments and securities settle- ment areas for each country in the following fields: Under the WHI, 23 country assessments were under- (1) legal and regulatory framework, (2) main character- taken between May 1999 and December 2005. Coun- istics of the interbank exchange and settlement circuits, try assessments are prepared jointly by an international (3) retail settlement systems, (4) the role of the govern- team and their local counterparts. The so-calledYellow ment as a major participant in the payments system, Book typically consists of a comprehensive description (5) foreign exchange and cross-border settlement, providing a brief background of the economic and (6) the operation of the interbank money market, financial conditions in the country, key institutional (7) aspects related to securities settlement such as the aspects related to the operation of the payments and legal framework, clearance and settlement processes, securities settlement infrastructure--including the settlement risks, operational reliability, custody, depos- legal and regulatory frameworks and the oversight role itories' organizational arrangements, cross-border links, of the central bank in coordination with other govern- and (8) the oversight role of the central bank, coordina- mental organizations--and details on the major char- tion with the regulatory and supervisory role over secur- acteristics of both payments and securities settlement ities settlement, and cooperation with the private sector. systems. In addition, a confidential report is delivered exclusively to the country authorities. This report Finally, the purpose of this book is not only to indicate includes an assessment of the risks and improvement the situation derived from the assessments, but also to opportunities as a contribution to the development of propose practical observations regarding the imple- an action plan for the reforms deemed necessary in mentation of payments and securities settlement sys- experts' views. In several cases, follow-up activities tems reforms in the LAC region. In some cases, these have been undertaken to discuss the way in which the observations are also based on the experience gained recommendations might be implemented. The overall through the World Bank's lending operations and tech- objective of the WHI--that is, the development of more nical assistance projects in this area. Contributors Massimo Cirasino System Department and, later on, in the Representative Senior Financial Sector Specialist Office in New York. Prior to joining Banca d'Italia, he Financial Sector Operations and Policy Department worked in Brazil as a journalist and a researcher in monetary economics. Massimo Cirasino joined the World Bank in July 1998. He plays a leading role in the Financial Sector Opera- tions and Policy Department and has participated in JoséAntonio García many of the group's country and regional interventions. Financial Sector Specialist He coordinates regional initiatives (including the West- Financial Sector Operations and Policy Department ern Hemisphere Payments and Securities Clearance and Settlement Initiative and the Western Hemisphere José Antonio García joined the World Bank in March Credit and Loan Reporting Initiative) for the improve- 2004. In his current position, he provides technical and ment of financial infrastructure and has led several conceptual advice to World Bank financial sector oper- country studies. In 2004, Mr. Cirasino launched similar ations and research, and coordinates regional initiatives regional initiatives for the Commonwealth of Indepen- for the improvement of financial infrastructure in Latin dent States and the Middle East. Mr. Cirasino repre- America and the Caribbean, the Commonwealth of sents the World Bank on the BIS-CPSS task force, Independent States, and the Middle East and North which developed the core principles for systemically Africa. He has also led several country studies. Mr. important payments systems; the CPSS-IOSCO task García is a member of the secretariat of the joint World force, which created the assessment methodology for Bank-CPSS task force, which drafted the General Prin- systemically important payments systems; and the ciples for International Remittance Systems. Prior to CPSS-IOSCO task forces, which developed recom- joining the World Bank, he was a senior economist at mendations for central counterparties and guidelines the Centro de Estudios Monetarios Latinoamericanos, for national payment system development. Mr. Cirasino where he acted as the World Bank's counterparty for is also the co-chair of the World Bank-CPSS task force, management of the WHI, and served as technical secre- which drafted the General Principles for International tary of the Working Group on Payment System Issues of Remittance Systems. Additionally, he is the primary Latin America and the Caribbean. From 1997­2000, he World Bank contact for the assessment of payments worked in the corporate credit department of Banco and securities settlement systems in the context of the Inbursa in Mexico City, and from 1992­97 as technical IMF-World Bank Financial Sector Assessment Pro- consultant in banking supervision at Centro de Estudios gram, and is responsible for World Bank training activ- Monetarios Latinoamericanos. Mr. García received a ities in payment and securities systems. Mr. Cirasino B.A. in Economics and an M.A. in Business Economics worked at Banca d'Italia from 1993­96 in the Payment from Universidad Anahuac in Mexico City. ix x Contributors Mario Guadamillas Fernando Montes-Negret Senior Financial Economist Sector Director Finance, Private Sector, and Infrastructure Finance and Private Sector Development Latin America and the Caribbean Region Europe and Central Asia Region Mario Guadamillas has worked for the World Bank Fernando Montes-Negret is in charge of defining and since 1998. In his current position, he provides tech- implementing the Bank's strategy for the development nical and conceptual advice to World Bank financial of the financial and private sectors of client countries sector operations and research on the region. He coor- in Europe and Central Asia. He joined the World Bank dinates regional initiatives for the improvement of in October 1984 as an economist in the LAC region, financial infrastructure, including the WHI for pay- where he worked on industrial development and ment systems and the Western Hemisphere Credit and finance projects in Argentina, Chile, and Costa Rica. Loan Reporting Initiative for credit reporting systems, From 1986­89, he served as deputy governor of the and has led several country studies. He is also involved Banco de la República (Colombia's central bank). in the IMF-World Bank Financial Sector Assessment After returning to the Bank in June 1989, he held posi- Program and represented the World Bank on the tions as senior economist in the East Asia and Pacific BIS-CPSS task force, which developed guidelines for region (as country economist for China), the Europe national payment system development; the CPSS- and Central Asia region, and the Financial Sector IOSCO task force, which developed the assessment Development Department. In April 1994, he was pro- methodology for the Securities Settlement System moted to principal financial economist. In August Recommendations; and the World Bank-CPSS task 1997, he transferred to the LAC region and became sec- force, which drafted General Principles for Interna- tor leader in Mexico City. He became sector manager in tional Remittance Systems. Prior to joining the World the finance cluster of the Finance, Private Sector, and Bank, Mr. Guadamillas was an economist in the Min- Infrastructure Sector Management Unit in October istry of Finance of Spain. He also worked for the cen- 1999, and was appointed sector director in April 2004. tral bank of Spain as an economic and financial Mr. Montes-Negret is a graduate of the Universidad analyst. From 1992­98, he lectured at Universidad de los Andes, Wisconsin University, and Rice Univer- Autónoma, Universidad San Pablo CEU, Universidad sity. Prior to joining the Bank, he held various posts in Alfonso X, Universidad Europea de Estudios Superi- Colombia, including undersecretary of finance, advi- ores, and Universidad Nacional de Educación a Dis- sor to the Monetary Board, and advisor to the Minister tancia, all in Madrid. Mr. Guadamillas earned an M.A. of Development of Colombia. in business at Universidad Complutense, and a Ph.D. in economics at Universidad Nacional de Educación a Distancia in Madrid. Acknowledgments T (former deputy director general) for their enthusiasm he ideas presented in this book are those of the and support of the project. We also want to thank authors and do not represent the World Bank's other colleagues and friends for their very useful com- position, the WHI's position, or the position of any insti- ments: Carlos Andrade (Banco Central del Ecuador), tution participating in the WHI. However, the authors Augusto de la Torre (World Bank), Gustavo da Matta are grateful for the contribution of WHI International Machado (Brazilian Mercantile & Futures Exchange), Advisory Council members, country authorities (central Caramae Farmer (Central Bank of Trinidad and banks and securities regulators) from the LAC region, Tobago), Catiana García (Consejo Monetario Centro- staff of private institutions who the authors visited to americano consultant), José Manuel Garrido (Banco study the WHI, and especially the members of the Central de Chile), Patricia Guajardo (Banco Central Working Group on Payments System Issues of LAC. de Chile), Francisco Guiñez (Depósito Central de Val- We are especially grateful to the reviewers--Robert ores, Chile), Jim Hanson (World Bank), Gerson Lar- ios (Banco Central de Reserva del Salvador), Jose Keppler (World Bank), Jeff Stehm (Federal Reserve Antonio Marciano (Banco Central do Brasil), Carlos Board), and Joaquín Bernal (Banco de la República, Melegatti (Banco Central de Costa Rica), Gloria Colombia)--for their very useful comments. We also Moya (Comisión Nacional de Bancos y Seguros de want to thank our colleagues in the World Bank-- Honduras), María Inés Ordoñez (Superintendencia Mahktar Diop, Marilou Uy, and Susan G. Goldmark-- Financiera, Colombia), Byron Sagastume (Banco de for their support in the review process and the publication Guatemala), Francis Stenning (Caja de Valores de phase of this book. Lima, Peru), and Fernando Yañez (Depósito Central The successful experience of the WHI could have not de Valores, Chile). Finally, we want to thank Ana been possible without the excellent contribution of Laura Sibaja (CEMLA) for statistics compilation and our regional partner, the Centro de Estudios Monetar- Santiago Pombo Bejarano (World Bank) and Dana ios Latinoamericanos. We are especially grateful to Vorisek (World Bank) for their support in the publica- Kenneth Coates (director general) and Luis Giorgio tion process. xi Abbreviations ACH automated clearinghouse BVDN Bolsa de Valores de Nicaragua ADRs American depositary receipts BvdNA Bank van de Nederlandse Antillen AFP Administradoras de Fondos de BVG Bolsa de Valores Global (Guatemala) Pensiones BVL Bolsa de Valores de Lima ALADI Asociación Latinoamericana de Integración BVM Bolsa de Valores de Montevideo AMF Arab Monetary Fund BVN Bolsa de Valores Nacional (Guatemala) ASIGNA Asigna Compensación y Liquidación BVP Bolsa de Valores de Panamá ASOBAN Asociación Bancaria BVPASA Bolsa de Valores y Productos de Asunción ATM automated teller machine CARICOM Caribbean Common Market BACEN Banco Central do Brasil CAVALI Caja de Valores de Lima BANGUAT Banco de Guatemala CBLC Companhia Brasileira de Liquidação BBV Bolsa Boliviana de Valores e Custodia BCB Banco Central de Bolivia CBOB Central Bank of The Bahamas BCBA Bolsa de Comercio de Buenos Aires CBTT Central Bank of Trinidad and Tobago BCCH Banco Central de Chile CCAV Cámara de Compensación de Pagos de BCCR Banco Central de Costa Rica Alto Valor (Chile) BCE Banco Central del Ecuador CCE Cámara de Compensación Electrónica BCH Banco Central de Honduras (Peru) BCN Banco Central de Nicaragua CCP central counterparty BCP Banco Central del Paraguay CD/DD Créditos Directos/Debitos Directos BCR Banco Central de Reserva de El Salvador (Costa Rica) BCRA Banco Central de la República Argentina CDs certificates of deposit BCRD Banco Central de la República Dominicana CECOBAN Centro de Compensación Bancaria BCRP Banco Central de Reserva del Perú (Mexico) BCU Banco Central del Uruguay CEDEC Cámara Electrónica de Compensación BCV Banco Central de Venezuela (Colombia) BCV Bolsa Centroamericana de Valores CEDEVAL Central de Depósito de Valores del Salvador (Honduras) CEMLA Centro de Estudios Monetarios BEVSA Bolsa Electrónica de Valores (Uruguay) Latinoamericanos BGP border gateway protocol CENIT Sistema de Compensación Electrónica BHV Bolsa Hondureña de Valores Nacional Internbancaria (Colombia) BIS Bank for International Settlements CENIVAL Central Nicaragüense de Valores BISS Bahamas Interbank Settlement System CENTRAL Centralclearing de Compensação BISX Bahamas International Stock Exchange e Liquidação (Brazil) BITF Sistema Interbancario de Transferencia CEPROBAN Centro de Procesamiento Bancario de Fondos (Honduras) BM&F Bolsa de Mercadorias e Futuros CETIP Central de Custódia e de Liquidação BMV Bolsa Mexicana de Valores Financeira de Títulos (Brazil) BNP Banco Nacional de Panamá CEVAL Central de Valores de la Bolsa Nacional BNV Bolsa Nacional de Valores (Costa Rica) de Valores S.A. (Costa Rica) BOJ Bank of Jamaica CEVALDOM Central de Valores Dominicana BOVESPA Bolsa de Valores de São Paulo CHIPS Clearing House Interbank Payments System BR Banco de la República (Colombia) CIFTS Customer Inquiry and Funds Transfer BROU Banco de la República Oriental del Uruguay System (Jamaica) BVC Bolsa de Valores de Caracas CII Cámara de Intercambio de Imágenes BVC Bolsa de Valores de Colombia (Mexico) xii Abbreviations xiii CIP Cámara Interbancaria de Pagamentos ECOFIN European Union's Economic and Finance (Brazil) Ministers CLC Compensación y Liquidación de Cheques y ECSE Eastern Caribbean Securities Exchange Otros Valores (Costa Rica) ECSM Eastern Caribbean Securities Market CLS continuous linked settlement ECSRC Eastern Caribbean Securities Regulatory CLS Bank Continuous Linked Settlement Bank Commission CM clearing members EDV Empresa Depositaria de Valores (Bolivia) CMCA Consejo Monetario Centroamericano EFTPOS electronic funds transfer at the point of sale CMN Conselho Monetário Nacional (Brazil) EMC Emerging Markets Committee CNBS Comisión Nacional de Bancos y Seguros EMI European Monetary Institute (Honduras) ESCB European System of Central Banks CNBV Comisión Nacional Bancaria y de Valores EU European Union (Mexico) FATF Financial Action Task Force on CNMV Comisión Nacional del Mercado de Valores Money Laundering (Spain) FDI foreign direct investments CNV Comisión Nacional de Valores (Argentina) FDvP final delivery versus payment CNV Consejo Nacional de Valores (Ecuador) Fedwire Fedwire Funds Service CNV Comisión Nacional de Valores (Panama) FIAB Federación Iberoamericana de Bolsas CNV Comisión Nacional de Valores (Paraguay) de Valores CNV Comisión Nacional de Valores (Venezuela) FIBV Federation Internationale des Bourses COELSA Compensadora Electrónica S.A. (Argentina) de Valeurs COMPE Centralizadora da Compensação de FIFO first in, first out Cheques é Outros Papéis (Brazil) FIU Financial Intelligence Units CONASEV Comisión Nacional Supervisora FRBNY Federal Reserve Bank of New York de Empresas y Valores (Peru) FSAP Financial Sector Assessment Program CONASSIF Consejo Nacional de Supervision (World Bank-IMF) del Sistema Financiero (Costa Rica) FSC Financial Services Commission (Jamaica) COSRA Council of Securities Regulators of the FSF Financial Stability Forum Americas FX foreign exchange CPSIPS core principles for systemically important G-7 Group of Seven payment systems G-8 Group of Eight CPSS Committee on Payment and Settlement G-10 Group of Ten Systems G-30 Group of Thirty CRYL Central de Registración y Liquidación de GEM Global Equity Market Instrumentos de Endeudamiento Público IAC International Advisory Council (Argentina) IADB Inter-American Development Bank CSD central securities depository ICSD International Central Securities Depository CUD Sistema Electrónico de Cuentas de Depósito IFIs international financial institutions (Colombia) ILI Información y Liquidación de Impuestos CVM Comissão de Valores Mobiliários (Brazil) IMF International Monetary Fund CVV Caja Venezolana de Valores INDEVAL Instituto para el Depósito de Valores DCV Depósito Central de Valores (Chile) (Mexico) DCV Depósito Central de Valores (Colombia) INVERLACE Sistema de Registro, Información y DECEVAL Depósito Centralizado de Valores de Transacciones (Colombia) Colombia IOSCO International Organization of Securities DECEVALE Depósito Centralizado de Valores Commissions de Ecuador ISD Investment Services Directive DIAN Dirección de Impuestos y Aduanas ISIN International Securities Identification Nacionales Number DNS deferred net settlement ISL Infolink Services Limited (Trinidad DPN Deuda Pública Nacional and Tobago) DTC Depository Trust Company ISSA International Services Securities DvP delivery versus payment Association ECCB Eastern Caribbean Central Bank JCSD Jamaica Central Securities Depository ECCSD Eastern Caribbean Central Securities JETS Jamaica Electronic Transfers System Depository JSE Jamaica Stock Exchange ECCU Eastern Caribbean Currency Union LAC Latin America and the Caribbean ECH electronic clearinghouse LATINCLEARCentral Latinoamericana de Valores ECNs electronic communication networks (Panama) xiv Abbreviations LBTR Sistema de Liquidación Bruta en Tiempo Real SENDI Sistema Electrónico de Negociación de LGB Ley General de Bancos (Chile) Divisas (Honduras) LGTOC Ley General de Títulos y Operaciones SEP Sistema de Ejecución Presupuestal de Crédito (Mexico) SEPA single European payment area LGTOC Ley General de Títulos y Operaciones SEPSA Sistema Electrónico de Pagos (Argentina) de Crédito (Mexico) SERPRO Soluções para um Brasil de Todos LINX Infolink Services Limited (Trinidad SET Sistema Electrónico de Transferencia de and Tobago) Fondos para Préstamos Interbancarios LMF Ley Monetaria y Financiera (Dominican (Venezuela, R. B. de) Republic) SFC Superintendencia Financiera de Colombia LSE Liquidación de Servicios Externos SHCP Secretaría de Hacienda y Crédito Público (Costa Rica) (Mexico) LVPS large-value payments systems SIAC Sistema de Atención a Cuentahabientes MAE Mercado Abierto Electrónico (Argentina) (Mexico) MEC Mercado Electrónico de Colombia SIBE Sistema Integrado Bursátil Electrónico MEP Medio Electrónico de Pago (Argentina) SICAM Sistema de Cámaras (Mexico) MERVAL Mercado de Valores de Buenos Aires SICET Sistema de Custodia Electrónica de Títulos MEXDER Mercado Mexicano de Derivados (Venezuela, R. B. de) MICR magnetic ink character recognition SICOF Sistema de Información Contable y MIT Mecanismo Interbancario de Transferencias Financiera (Guatemala) SIDV Sistema Interactivo para el Depósito MPLS multiprotocol label switching de Valores NACHA National Clearinghouse Association SIGALC Sistema Integrado de Garantías y Líneas (United States) de Crédito (Venezuela, R. B. de) NACS Netherlands Antilles Clearing System SILOC Sistema de Liquidação Diferida de Ordens NPS national payment system de Crédito Interbancárias (Brazil) NPSSC National Payments and Securities SIMA Sistema Integrado de Mercado Abierto Settlement Council (Venezuela, R. B. de) OAL Obligación Adicional de Liquidación SINAC Sistema Integrado de Negociación Asistida (Mexico) por Computador (Argentina) OECD Organisation for Economic Co-operation SINACOFI Sistema Nacional de Comunicaciones and Development Financieras (Chile) OECS Organization of Eastern Caribbean States SINE Sistema Integrado de Negociaciones OTC over-the-counter Electrónicas PAC Pago Automático de Cuentas (Chile) SINEDI Sistema de Negociación de Divisas PKI public key infrastructure SINPE Sistema de Negociación y Pagos POS point of sale Electrónicos (Costa Rica) PROSA Promoción y Operación S.A. (Mexico) SIPAV Sistema de Pagos de Alto Valor (Bolivia) PSSS payments and securities settlement system SIPS systemically important payment system PvP payment versus payment SISTRE Sistema de Tasas Referenciales RG general resolution (Venezuela, R. B. de) RGSM Regional Government Securities Market SITE Sistema de Transferencias Electrónicas (Eastern Caribbean) (Bolivia) RTGS real-time gross settlement system SITRAF Sistema de Transferéncia de Fundos (Brazil) SADC Southern African Development Community SLE Sistema de Liquidación y Ejecución SBL Sistema Bancario en Línea (Ecuador) SBOIF Superintendencia de Bancos y Otras SML Securities Market Law Instituciones Financieras (Nicaragua) SN-BVDN Sistema de Negociación de la BVDN SCC Sistema de Cámaras de Compensación SPEI Sistema de Pagos Electrónicos (Ecuador) Interbancarios (Mexico) SCT Sistema de Custodia de Títulos SPEUA Sistema de Pagos Electrónicos de Uso SEBRA Sistema Electrónico del Banco de la Ampliado (Mexico) República (Colombia) SPI Sistema de Pagos Interbancarios (Ecuador) SEC Securities and Exchange Commission SPI Sistema de Pagos Interbancarios SEDEC Sistema Electrónico de Comunicaciones (Venezuela, R. B. de) (Uruguay) SPID Sistema de Pagos Interbancarios SELIC Servico Especial de Liquidação e Custodia para Divisas (Brazil) SPVS Superintendencia de Pensiones, Valores SEN Sistema Electrónico de Negociación y Seguros (Bolivia) (Colombia) SRO self-regulatory organization Abbreviations xv SSF Superintendencia del Sistema Financiero TI Sistema de Transferencias Interbancarias (El Salvador) (Costa Rica) SSS securities settlement system TT Transferencia de Terceros (Costa Rica) STP straight-through processing TTCD Trinidad and Tobago Central Depository STR Sistema de Transferência de Reservas TTS Transferencia Telefónica Segura (Nicaragua) (Brazil) TTSE Trinidad and Tobago Stock Exchange SUGEVAL Superintendencia General de Valores USD U.S. dollar (Costa Rica) VALPRE Préstamo de Valores (Mexico) SV Superintendencia de Valores (Bolivia) VAR value at risk SV Superintendencia de Valores (Colombia) WGPS Working Group on Payment System Issues SVS Superintendencia de Valores y Seguros WGPS-LAC Working Group on Payment System Issues (Chile) of LAC SWIFT Society for Worldwide Interbank Financial WHCRI Western Hemisphere Credit and Loan Telecommunication Reporting Initiative TEBEL online trading system in Costa Rica WHF Western Hemisphere Payments and Securities TECBAN Tecnología Bancária (Brazil) Clearance and Settlement Forum TEF Transferencia Electrónica de Fondos WHI Western Hemisphere Payments and Securities (Mexico) Clearance and Settlement Initiative 1 Introduction T and settlement system can be considered as part of the o the extent that expanding production and overall payment mechanisms of a country, in that it sat- exchange in a market economy requires an increas- isfies the main features of this overall definition. In this ing interconnection of various, and usually anonymous, case, the exchange of financial value consists of both decisional units, economic development rests crucially the exchange of securities (equity, fixed income, or on infrastructure that makes those interconnections derivatives) and the exchange of liquid funds (usually efficient, stable, and reliable. This infrastructure includes sight deposits). The soundness and efficiency of a pay- the whole complex of technical systems, actors, rules, ments system determines the efficiency with which and procedures that define the field of action where transaction money is used in the economy, and the risks agents negotiate and perform commercial and financial associated with its use. An efficient system reduces the transactions. cost of exchanging goods and services, and it is indis- pensable to the functioning of the interbank, money, and In contexts where many decisions are taken by multitudes capital markets. A weak payments and securities settle- of heterogeneous agents, an efficient, stable, and reliable ment system may severely drag on the stability and infrastructure is necessary to ensure that transactions developmental capacity of an economy; its failures can are carried out on the terms and conditions agreed on result in inefficient use of financial resources, inequitable by their originating counterparts. Interconnecting the risk sharing among agents, actual losses for participants, elements of infrastructure becomes even more essential and--at the extreme--loss of confidence in the financial as modern communication and information technologies system and in the very use of money.2 make markets independent of specific physical locations. Especially where exchange involves agent commitments Many countries are embarking on projects to reform to future obligations--as is typically the case with finan- and modernize their payments and securities settlement cial contracts--elements of infrastructure such as the systems, and domestic policy makers are faced with the legal system and contract enforcement mechanisms must formidable task of designing payment system infrastruc- be in place to provide trading counterparts with sufficient tures in fast-changing technological and institutional reassurance that commitments are fulfilled in accordance environments. These tasks become increasingly complex with their agreed-on terms and conditions.1 because competition and innovation require an always- changingcombinationofefficiency,reliability,safety,and The payments and securities settlement system is the system stability in the provision of payment services to infrastructure (comprising institutions, instruments, rules, larger numbers of individual users and institutions. procedures, standards, and technical means) established to effect the transfer of monetary value between parties discharging mutual obligations. A securities clearance 2Listfield and Montes-Negret (1994) discuss how an efficient pay- ment system contributes to the development of modern, market- 1Bossone and Cirasino (2001) expand on these concepts. based financial institutions and markets. 1 2 Payments and Securities Settlement Historically, payment systems have been at the heart of differs from country to country, and can include the pro- banking. As more and more countries in the nineteenth vision of special purpose large-value, time-critical, funds and early twentieth centuries started to centralize money- transfer systems; bulk low-value electronic systems, issuing activities in single banking institutions, or central including automated clearing house services; and gov- banks, the liabilities of these institutions became for most ernment securities clearance and settlement services and commercial banks the instrument to settle their interbank settlement agent for other payment systems. In addition, paymentobligations.Itbecamenaturalforcentralbanksto central banks increasingly perform the functions of reg- provide clearing and settlement services for the payments ulation and oversight of payment systems and services delivered by commercial banks. As a consequence, the (Padoa-Schioppa 1999). promotionoftheefficiencyandsafetyofpaymentarrange- The private sector, in contrast, has traditionally pro- ments became one of the raisons d'être of central banks vided most of the payment services to end users. In (Padoa-Schioppa1999).Yetinthemiddleofthetwentieth addition, the private sector is normally involved in retail century, as payment technology had settled down, pay- clearing services and clearance and settlement of non- ment system issues were considered less important than governmental securities. In this latter regard, in some other aspects of the financial system, and were seen countries--especially countries in the early stages of mostly as technical matters to be dealt with by subunits capital markets development--comprehensive and rig- of IT departments in the central and commercial banks. orous attention to regulatory issues is sometimes lacking It was not until the mid-1980s that the debate on pay- as initial major emphasis is placed, quite naturally, on ment system reform policies took on greater weight matters relating to operational efficiency and cost. in the countries with more advanced financial systems. Today, securities clearance and settlement systems are Financial market liberalization led private sector agents and national regulators to identify technical and institu- recognized as having the same inherent risks as those tional solutions to serve the increasing demand for new associated with systemically important payment mech- payment services, while protecting the economy from anisms. Both the efficiency and the safety and soundness the risks originating from rapidly growing volumes of aspects of these systems are now receiving closer atten- financial transactions. Also, the internationalization of tion from domestic securities regulators as well as inter- financial markets and episodes of severe financial crisis national organizations.4 In essence, the initial prominent around the world fostered closer cooperation among role played by the private sector in the implementation industrial countries--and among industrial countries and and operation of securities systems is now being replaced emerging economies--on how to set up and enforce stan- by a combination of roles shared by the private and pub- dards to improve payment system performance in terms lic sectors, with specific and well-defined roles being of risk control and shock resilience. assigned to the securities regulator. Due to their historical involvement in payment systems In sum, a national payments system encompasses "the and the implications for an effective monetary policy of entire matrix of institutional and infrastructure arrange- a sound payment system, the central banks of the leading ments and processes in a country for initiating and trans- industrial countries have been the main actors in moving ferring monetary claims in the form of commercial bank the policy debate forward and in taking concrete steps and central bank liabilities."5 As such, payment systems to improve domestic and cross-border payment system performance. It takes only a cursory look at the list of 4 These concepts include speed of settlement, certainty of settlement studies and reports under the aegis of the Committee on (correct amount, correct party, correct date, clear understanding when Payment and Settlement Systems (CPSS) of the Group finality occurs), reliability (availability, in accordance with rules and regulations), safety and soundness (to ensure against fraud, of Ten central banks to see the intensifying cooperative credit and systemic risk, privacy), convenience (easy access, con- effort under way and its results to date.3 In practice, the sistent with technological capabilities), cost (realistic, consistent specific role filled by central banks in the payment system with the service provided), and universality (equitable basis by all financial institutions, interface with other systems). 5In this book, a broad interpretation of a national payments system 3See the Bank for International Settlements' Web site at . (CPSS 2006). Introduction 3 are at the core of a country's monetary and financial Under the WHI, 23 country assessments were under- system. This system evolves continuously, reflecting taken between May 1999 and December 2005. Country the changing needs of its stakeholders and the increas- assessments are prepared jointly by an international ing number of options offered by rapid technological team and their local counterparts. development. Such evolution can at times take the form The purpose of this book is to (1) extract the main of incremental change aimed at gradually improving the lessons and experiences of the WHI-WHF regarding the system's safety and efficiency. In other cases, countries implementation of various reforms; (2) describe status embark in major revolutionary reforms that lead to quan- of and major trends in payments and securities settle- tum leaps in the design and components of the national ment systems worldwide and their implications for the payments system. LAC region; (3) summarize the detailed assessment find- As a result of the growing international interest in issues ings for each LAC country;6 and (4) propose practical related to payments and securities settlement systems, observations regarding the implementation of payments the World Bank and the International Monetary Fund and securities settlement system reforms in the LAC have increased their involvement in this area by assisting region. member countries in setting up standards and in enforcing their implementation. In this respect, both institutions ORGANIZATION OF THE BOOK operate through a variety of instruments, including tech- nical assistance, project assistance, and, recently, the The rest of the chapters of this book are organized as assessment of payment system vulnerabilities in indi- follows: Chapter 2 indicates some of the major trends vidual member countries as part of the joint International worldwide in the area of payments and securities set- Monetary Fund­World Bank financial sector assess- tlement systems. The chapter analyzes the importance ment program (FSAP). of adopting an integrated approach in reforming pay- ment systems and describes the latest debate and evo- In the Latin America and the Caribbean (LAC) region, lution in issues such as large-value payment systems, efforts to raise the awareness of the importance of the use of the central bank's money, the direction of modernizing national payments systems and setting up advances in retail payments systems, the growing flow a regional forum for the exchange of information were of remittances and new players in the foreign exchange started by the World Bank as early as 1995. Such efforts and cross-border transactions such as the Continuous further evolved with the request of regional finance Linked Settlement (CLS) Bank. In the area of securi- ministers to the World Bank to launch a regional initia- ties settlement systems, the chapter indicates the closer tive to foster such a process of transformation. The lat- attention paid to those issues and a broader approach ter initiative was formalized in 1999 into the Western through the evolution of international standards. It also Hemisphere Payments and Securities Clearance and includes the current debate about market infrastructure, Settlement Initiative (WHI), later converted in 2003 into globalization, and the new challenges for securities set- a regional Western Hemisphere Payments and Securities tlement systems. Finally, it covers the need for strength- Settlement Forum (WHF), dedicated to the assessment of ening the oversight function of the central bank over and exchange of information on payments and securities payments systems. settlement systems in the LAC countries. The WHI has been a coordinated effort supported by Chapter 3 describes the tools used for the WHI assess- central banks and securities commissions inside and ments. They include working papers (especially Working outside the region, as well as international financial and Papers 2 and 3) produced by the WHI-WHF, the CPSS standard-setting institutions. Besides the World Bank core principles for systemically important payment and the Center for Latin American Monetary Studies, systems, the International Monetary Fund­World Bank other institutions have supported the WHI, such as the Council of Securities Regulators of the Americas and an 6 The information included is based on the WHI-WHF findings and International Advisory Council, the latter comprising subsequent updates. However, payments and securities settlement highly experienced institutions dealing with clearance systems are continuously evolving. Thus, information should be and settlement of payments and securities. checked with country authorities to ensure accuracy. 4 Payments and Securities Settlement guidance note for assessing observance of core principles chapter covers the legal foundations of the oversight for systemically important payment systems, the CPSS­ function; transparency and dissemination of information; International Organization of Securities Commissions objectives, scope, instruments, pricing, and access; and (IOSCO) recommendations for securities settlement organizational arrangements and cooperation. systems, the CPSS-IOSCO methodology for the securities For chapters 4, 5 and 6, the book follows a system- settlement systems, and the CPSS-IOSCO recommenda- atized approach for each issue covered. First, it includes tions for central counterparties. a brief context in which the main areas, normally iden- Chapter 4 covers the main findings of the WHI­WHF tified through international standards and best practices, country assessments in the area of payment systems. are described. Second, a status subsection is included Twenty-three countries have been assessed under the describing the facts identified for each of the 23 coun- WHI-WHF. The issues covered include the legal basis, tries covered. Finally, the observations subsections sum- interbank exchange settlement circuits, retail payment marize the findings often encountered in the systems systems, government payments, foreign exchange and analyzed or that, even if not identified in many sys- cross-border settlement systems, and the functioning tems, are important due to their relevance (for exam- and settlement of the interbank money market. ple, issues related to dollarized systems). Chapter 5 analyzes the main findings of the WHI­WHF Chapter 7 goes beyond the assessment exercise to indi- country assessments in the area of securities settle- cate some practical steps in the way forward for a pay- ment systems. The issues covered are the legal basis, ments system reform. The chapter starts on how to use clearing and settlement processes, settlement risk, settle- the assessment as a starting point for the reform effort, ment asset, operational issues, custody risk, depositories' and then covers issues such as the role of a national pay- organizational arrangements, regulatory and oversight ments and securities settlement system, the different framework, and cross-border settlement. institutional roles in a reform, how to engage the private sector in the effort, and finally the preparation and imple- Chapter 6 indicates the main issues related to the over- mentation of the reform. sight role of the central bank, the coordination with other regulators, and cooperation with the private sector. The Finally, chapter 8 presents the concluding remarks. 2 Major Trends in Payments and Securities Settlement Systems M nized as having the same inherent risks as those associ- any trends can be identified in payment and ated with systemically important payment mechanisms. securities settlement systems over the past few International organizations consider both payments and years. Many of the trends are captured in recent publi- securities settlement as a joint area of analysis; the private cations from the Committee on Payment and Settlement sector also looks at this issue as a unique area. Some new Systems (CPSS), leading central banks, international terminology incorporating concepts for payments and financial institutions such as the World Bank and the securities settlement has emerged. International Monetary Fund, and payment system Payments and securities settlement systems also have specialists. This chapter highlights the most visible of important interrelations with other areas of the financial these trends.1 sector. Examples are bank-troubled resolution schemes (unwinding mainly in cheque systems that still settle BROADENING THE SCOPE large-value payments) and credit information systems. OF THE PAYMENTS SYSTEMS The concept of payment systems has changed, or at least ADOPTING AN INTEGRATED APPROACH the payment systems area of influence has widened. TO PAYMENT SYSTEM REFORM A payment system can be defined as the collection of Recognizing the importance of an integrated approach institutions, instruments, rules, procedures, standards, to payment system reform, the CPSS published a report and technical means used to exchange financial value containing general guidance for national payment system between two parties discharging an obligation (Listfield development. The report acknowledges that there is no and Montes-Negret 1994). Traditionally, payment sys- single recipe for effective payment system development, tems have focused on funds transfer systems. However, but the questions that countries undergoing a reform value can be transferred also by means of securities. process ask themselves are largely similar. For example, Government securities traditionally have received close who should be involved and who should initiate the attention from central banks due to the role that they play process? What are the priorities in which to invest and as the government's bank as well as the government's are they based on a solid understanding of the payment agent with regard to public debt management. However, system? What are the different infrastructures needed and private securities have normally been outside the influ- what are their supporting institutional arrangements? ence of central bank regulation and oversight. Today, securities clearance and settlement systems are recog- The CPSS report provides expertise in payment systems and the consensus view of central banks and inter- national financial institutions. However, the priorities of 1For an analysis of change drivers in the payment systems area see CPSS member countries need not be the same as those Montes-Negret (2006). of other countries. Indeed, reform priorities differ from 5 6 Payments and Securities Settlement country to country based on each country's needs and information and communication technology and to the capabilities. Drawing on a comparison with the trans- measures taken by central banks to reduce systemic portation system, buying the most expensive technol- risks in these systems. The CPSS of the central banks of ogy to build an airport would be pointless if the rest the Group of Ten (G-10) countries reflected these changes of the system were not sufficiently developed to make by publishing the report Real-Time Gross Settlement effective use of that airport. Alternatively, the airport Systems in 1997 (CPSS 1997b). may provide only a modest contribution to the overall The purpose of a new report by the CPSS, published in transport system if most people still use ground trans- May 2005, is to present the state of the art in LVPS, tak- portation. Indeed, the objective of the payment system, ing stock of the developments that have taken place since just like that of the transportation system, should be the 1997 report. It is written to be free standing and does to develop an appropriate mix of infrastructures and an not require reference to previous reports. The central mes- institutional framework to connect people in an effi- sage of the report is that interbank payments today settle cient and safe way. faster, with a lower amount of liquidity (mainly, central The CPSS report aims to give assistance in and advice on bank money), and at a lower cost. Indeed, whereas the the planning and implementation of reforms in the pay- key achievements in the 1990s were speed and safety of ment system as a whole. It underlines that the central payments, the focus since the turn of the century has bank is always a driving force in the development of the been to reduce liquidity costs and to provide users with national payment system. However, reforms in this field more flexible intraday liquidity management. depend on a parallel development of the banking system, In parallel, new systems have emerged to meet an expand- and should therefore be a cooperative effort, involving ing demand for cross-border payments. The primary stakeholders from, for example, the banking sector and example is Continuous Linked Settlement Bank, which regulatory agencies. An adequate understanding of the was established to reduce credit risk in the settlement of different infrastructures and their institutional frame- foreign exchange (FX) transactions (see below). Another work is needed and is indispensable for getting the pri- example is the emergence of new infrastructures in coun- orities right. tries where a foreign currency plays an important role. The report includes 14 guidelines (see appendix 6) Standardized arrangements have been established that and accompanying explanatory text on payment system enable financial institutions to settle foreign currency development. The report also includes implementation transactions through a correspondent bank while using sections, which illustrate the guidelines with practical the same system design as the local RTGS system. examples, issues, and possible approaches to implemen- tation. In preparing the report, the CPSS drew on the While certain trade-offs exist between achieving lower contribution of a working group, which consisted of a risks and achieving lower costs, recent developments in broad range of central bank experts from industrial and LVPS design allow more flexibility in addressing various developing countries around the world, as well as from risk and cost trade-offs than were available in traditional the International Monetary Fund and the World Bank. architectures. Central banks, on their side, have continued to seek a balance between more stringent risk controls and the need for systems to be cost efficient.2 DEVELOPMENTS IN LARGE-VALUE PAYMENT SYSTEMS The analysis in the new CPSS report shows that the com- plexity of trade-offs between risks and costs implies a Large-value payment systems (LVPS) play a key role wide range of possibilities for the design of an LVPS. in the financial infrastructure by discharging payment There is therefore no single solution fitting all markets obligations between banks. The 1990s experienced a major transformation in the design of these systems: from deferred net settlement systems, which settled only at 2 the end of the day, to real-time gross settlement (RTGS) For an interesting analysis on the practical implications in terms of liquidity in an RTGS system and some measures to reduce the systems, which settle on a continuous basis. This revo- liquidity pressure and increase liquidity distribution, see Bernal and lution was largely due to the possibilities offered by Merlano (2006). Major Trends in Payments and Securities Settlement Systems 7 and all participants' preferences. Hence, the report sitions. At the same time, however, there are often differ- does not prescribe the adoption of any specific feature ences when it comes to the implementation of policy. or design element introduced in a given LVPS in the CPSS countries. It is the responsibility of the owner of UNCLEAR DIRECTIONS REGARDING THE USE each LVPS to come up with the design that best fits the OF RETAIL PAYMENT INSTRUMENTS user's needs, and achieve an optimal balance of risks Around the world, retail payment instruments are diverse, and costs, while meeting the relevant policy objectives. both within and between countries. The diverse nature of the transaction types, counterparties, and payment THE USE OF CENTRAL BANK MONEY volumes and values has given rise to several different As a result of the launch of RTGS systems in many payment instruments. For example, in G-10 countries, countries around the world, there is a growing use of although all the countries use all the noncash retail pay- central bank's money to settle transactions, in particular ment instruments to some extent, they fall into one of of large value. However, the role of central bank money two groups that rely heavily on a particular class of non- in payment systems raises a number of questions. Indus- cash instrument: Many European countries and Japan rely trial economies have complex and interdependent pay- mostly on credit transfers, whereas Australia, Canada, ment arrangements in which there is a combination of the United States, and a few European countries depend competition and cooperation between the many institu- heavily on cheque payments. tions involved. The use of central bank money is thus The most significant trends in retail payments common part of the underlying issue of the balance between the to the selected countries are the continued primacy of services provided by central banks and those provided cash (in volume terms) for face-to-face payments, despite by commercial banks in the payment system. Given the a long-standing movement toward noncash payments; widespread and fundamental changes that have occurred growth in payment cards, primarily for face-to-face over the past decade or so and that continue today, it is payments; increased use of direct funds transfers, espe- useful to consider whether an appropriate balance is being cially direct debit transfers, for remote payments; and maintained and how the composite use of both monies substantial changes in the market arrangements for pro- can best be achieved. viding and pricing the retail payment instruments and services delivered to end users. A 2004 CPSS report looks at a range of practical policy questions. For example, which institutions should have Retail payments in the selected countries are experi- accounts at the central bank? What services should cen- encing an increased pace of experimentation and inno- tral banks provide to meet the needs of account holders? vation. Although the most recently emerging payment When should central banks insist that payment or secu- technology and its specific applications have not yet rities settlement systems settle in central bank money been adopted as core payment methods, research and or--when this is not practicable--what sufficiently safe development, and market experimentation continue. alternatives exist to mitigate credit and liquidity risks? At the same time, more traditional forms of payment What are the possible benefits and risks of the concen- instruments, technology, and banking arrangements tration of payments through a few large banks, and how are evolving. Over the long term, some of these market might central banks approach this issue? Finally, to what developments may well alter traditional payment prac- extent can the supply of central bank money, normally tices and contribute to increased efficiency and conve- confined to the area of jurisdiction of the central bank, nience in retail payment systems. meet the demands of global players who are active in multiple currencies? GROWING FLOWS OF REMITTANCES The report shows that there is much common ground International remittances initiated by migrant workers among CPSS central banks in their objectives as well as in are an important source of family income in many dev- the main tenets of their policy concerning the role of cen- eloping economies as well as a significant share of the tral bank money in payment systems. These collective recipient's GDP. Originators of such remittances through- views and practices are presented in the form of 10 propo- out the world generally comprise low-income migrants 8 Payments and Securities Settlement who regularly send money to family members in labor- that affect the cost of these transfers, as well as the use exporting countries. Often, beneficiaries depend on remit- of new technologies, while maintaining effective finan- tance income to cover day-to-day living expenses, and cial oversight." remittances provide a cushion to mitigate the shocks Furthermore, at their meetings in Boca Raton, Florida, associated with emergencies, and in some cases to cre- in February 2004, the general statement from the Group ate investment in sustainable employment opportunities. of Seven finance ministers and central bank governors Remittance payments are cross-border retail payments included the commitment, "We aim to reduce the imped- with particular access requirements on both the paying iments that raise the cost of sending remittances." and the receiving sides. Remitters and recipients fre- During the Group of Eight Summit in the United States, in quently do not have access to banks as payment agents, June 2004, Group of Eight countries stated the following:3 and instead rely on systems set up by non-bank remit- tance service providers, with service agents as inter- "G8 [Group of Eight] countries will work with the mediaries. Therefore, remittance systems may differ World Bank, IMF, and other bodies to improve data on from other payment systems in that, normally, there remittance flows and to develop standards for data col- will be a multitude of international remittance systems lection in both sending and receiving countries. G8 operating in a country. Whereas a LVPS frequently will countries will also lead an international effort to help include all operators that process large-value transac- reduce the cost of sending remittances. The develop- tions, remittance systems tend to be proprietary with a mental impact of these flows may be fostered by increas- limited set of operators, which again provide a limited ing financial options for the recipients of these flows. number of products. Remittance systems typically do The G8 programs will: not entail systemic risk, but they have a great impact (i) Make it easier for people in sending and receiving on the welfare of consumers and, potentially, on the countries to engage in financial transactions through development of countries. formal financial systems, including by providing access Because remittance services are a subset of the broader to financial literacy programs, where appropriate, and retail payment systems, to ensure that remittance transfers by working with the private sector to extend the range provide the best value and certainty to the end users there and reach of these services. is a need for regulations for remittance service providers (ii) Reduce the cost of remittance services through the and appropriate minimum standards for the provision promotion of competition, the use of innovative pay- of these services. To ensure compliance with the stan- ment instruments, and by enhancing access to formal dards, there is a need for a framework to guide oversight financial systems in sending and receiving countries. practices in areas such as supervision, monitoring, inspec- In some cases, remittance costs between sending and tion, enforcement, cooperation, information sharing, dis- receiving countries have been reduced by up to 50 per- closure, and system and service requirements. cent or more. G8 countries believe that similar reduc- In January 2004, the presidents of the Americas in the tions of high costs could be realized in the case of other Declaration of Nuevo León, Mexico, stated, "We recog- countries. nize that remittances are an important source of capital (iii) Promote better coherence and coordination of inter- in many countries of the Hemisphere. We commit to take national organizations that are working to enhance remit- concrete actions to promote the establishment, as soon tance services and heighten the developmental impact of as possible, of necessary conditions, in order to achieve remittance receipts in developing countries. the goal of reducing by at least half the regional average cost of these transfers no later than 2008 and report on (iv) Encourage cooperation between remittance service progress achieved at the next Summit of the Americas in providers and local financial institutions, including micro- Argentina in 2005. We will adopt, as needed or appro- priate, measures such as: the promotion of competition between the providers of these services, the elimination 3G8 Action Plan: Applying the Power of Entrepreneurship to the of regulatory obstacles and other restrictive measures Eradication of Poverty, Sea Island, June 9, 2004. Major Trends in Payments and Securities Settlement Systems 9 finance entities and credit unions, in ways that strengthen Defined the appropriate regulatory framework for the local financial markets and improve access by recipients remittance market. to financial services. Discussed the role of authorities and remittance service providers' bank in the application of the principles. (v) Encourage the creation, where appropriate, of market-oriented local development funds and credit The task force, in addition to CPSS and World Bank unions that give remittance-receiving families more representatives, comprised representatives from central options and incentives for productively investing remit- banks of both sending and receiving countries, as well tance flows. as from multilateral institutions such as the Inter- national Monetary Fund, development banks, and the (vi) Support dialogue with governments, civil society, Arab Monetary Fund. The task force benefited from the and the private sector to address specific infrastruc- work carried out by several institutions worldwide, and ture and regulatory impediments. For example, gov- constantly pursues coordination with other international ernments should ensure non-discriminatory access to fora involved on this matter. payment systems for the private sector, consistent with strong supervisory standards, and work together to mod- AN INCREASING ATTENTION TO ernize overall financial infrastructure." OPERATIONAL RELIABILITY, RESILIENCE, AND INTEGRITY OF SETTLEMENT SYSTEMS Against this background, the World Bank and the CPSS Responses to disaster risk involve the adoption of mea- convened a task force in November 2004 to address the sures that would allow continuous operation in a suffi- needs of international policy coordination for remittance ciently controlled environment at a level that will permit systems. the ongoing management of existing positions and pay- Following its mandate, in March 2006 the task force ments. To make this possible, robust contingency plans published for public comments some general principles need to be prepared and tested, including establishing on remittances describing key features and functions backup computer centers, frequent updating of backup that should be satisfied by remittance systems, provid- data, backup power sources, and so on. After the Sep- ers, and financial intermediaries. These principles are tember 11, 2001, disaster important vulnerabilities were intended to be clear and universally applicable interna- identified in liquidity management caused by operational tional standards; the principles' main focus being to and telecom problems among major financial institutions identify the main characteristics of sending and receiv- and their customers, resulting in important bottlenecks ing remittances and the related infrastructures, with a for several days. This happened despite the resilience view to improving them. shown by the U.S. payment system thanks to the Federal Reserve's market participants' extraordinary cooperation. The task force pursued the following streams of work: Lost and disrupted transactions caused uncertainty. As a Mapped and compared the remittance market in dif- result, U.S. regulatory agencies and industry participants learned important lessons, pointing to the fundamental ferent countries, as well as the respective cross-border flaw that continuity plans were developed at the level of arrangements in these countries in the form of coun- individual institutions, in general, with a focus on single- try reports. This analysis allowed the task force to site outage scenarios. define stylized structures of remittance systems and to determine principles that could be applied. As a result of the disruption of all services to lower Identified principles to ensure an appropriate level of Manhattan from the 9/11 terrorist attacks, major players consumer protection and transparency. must now recast their plans to deal with the potential for Discussed the appropriate level of access to pay- wide area disruptions, making evident the importance of ment systems infrastructure preserving the safety geographical diversification and focusing more on desired and integrity of the infrastructure. Appropriate mech- outcomes than on specific scenarios. There also is a new anisms for educating the remittance agents and oper- emphasis on availability of critical staff and distribution ators will also be considered. of business and technical expertise. The 9/11 crisis made 10 Payments and Securities Settlement clear the importance of testing within and across insti- Setting higher standards for security and recovery of tutions, with emphasis on ongoing communications dur- core settlement systems is having major cost impli- ing a crisis (governance during emergencies), the risks cations for banks and other financial participants. Major of geographical concentration of service providers and investments in what is known as "high availability key staff, as well as the need to better understand the web architecture" (which might include "synchronous mir- of interdependencies between market participants and roring," that is, the simultaneous copying of transac- clients, banks, utility companies, and so on. tions at primary and recovery centers to avoid any loss of data; data mirroring, clustering, data replication, load One of the main conclusions of the ongoing review is the balancing between processing centers, and so on) are need to coordinate plans across the industry, domestically under way.6 and even internationally, more closely than previously anticipated. The regulatory response has been fast in In summary, the response to geographic diversification providing a number of initiatives to identify sound prac- is being built around a capability model with three com- tices for business continuity. These initiatives are con- ponents: (1) split operations in an active-active mode tained in two reports: the "Interagency White Paper on (White Paper recommendations); (2) splitting of opera- Sound Practices to Strengthen Resilience of the U.S. tions in such a manner that they take place in two distinct Financial System," and the "Interagency White Paper geographic areas; and (3) traditional backup recovery on Structural Change in the Settlement of Government capabilities.7 Securities: Issues and Options." Other work include the new guidelines from the Payments Risk Committee, Operational risks must be dealt with not only at the level enhanced contingency testing of Fedwire Funds Service of payment system operators, but also at the level of and the Clearing House Interbank Payments System, and system participants. In this regard, within Basle II a new further enhancement of Fedwire funds and securities emphasis on operational risk is focusing the attention of services. Extensive work in these areas has been carried boards, bank managers, and bank regulators. The Basle out also by U.K. authorities. Committee on Banking Supervision defines this risk as "the risk of direct or indirect loss resulting from inade- Obviously, emphasis needs to be put on the market infra- quate or failed internal processes, people, or systems or structure and the larger institutions that can create sys- from external events." Operational risk is also defined temic risk.4 Proper focus has been given to the resilience as the "risk that deficiencies in information systems or and continuity of critical markets and firms that play internal controls will result in unexpected loss: fraud, significant roles in those markets beyond the national non-deliberate incorrect information, disaster risk and borders of major financial centers.5 personnel risk" (CPSS 2003c). Finally, in October 2004, the Financial Action Task Force on Money Laundering revised the 40 recommen- 4It is interesting to note the huge increase in liquidity support dations and introduced nine special recommendations following the 9/11 events. Commercial bank borrowings from the Federal Reserve discount window rose from $200 million to about (see appendix 3), all aimed at fighting money laundering $45 billion on September 14, 2001, with daylight overdrafts peak- and terrorist financing. The Financial Action Task Force ing at $150 billion on September 14, the highest level ever and more on Money Laundering comprises a broad spectrum of than 60 percent the usual level. international authorities, including financial intelligence 5In the United States, critical markets have been defined to encompass the operation of the federal funds market, the FX and commercial units, central banks, and law enforcement entities. For paper markets, as well as the government, corporate, and mortgage- more information, see http://www.fatf-gafi.org. backed securities markets. Although "core clearing and settlement organizations" consist of market utilities that provide critical clear- ing and settlement services for financial markets and large payment 6 system operators, "firms that play significant roles in critical finan- Monks (2003). This technology is still limited to distances of no cial markets" are those that participate in sufficient volume or value more than 100 kilometers (60 miles) between the recovery center such that their failure to perform critical activities by the end of the and the primary center. business day could present systemic risk. See U.S. Securities and 7For an interesting discussion of some private sector perspectives, Exchange Commission (2002). see ECB-CPSS (2003). Major Trends in Payments and Securities Settlement Systems 11 A NEW APPROACH TO FX AND CROSS-BORDER Literature on cross-border payment systems is relatively TRANSACTIONS: THE LAUNCH OF THE CLS recent and in most cases the attention has been centered in the risk features of these transactions. Not surprisingly, A broad definition would regard a cross-border payment much of the systematic work carried out in recent years as a transaction that involves individuals, corporations, by policy makers and international institutions has focused settlement institutions, central banks, or a combination on cross-border payments associated with transactions thereof in at least two different countries. Following in financial markets, because this particular type of cross- this definition, at least three major categories of cross- border transactions is regarded as having the potential border payment transactions can be identified: of producing systemic risk effects due to their large- Payments that originate in some country and for which value nature. the destination (that is, the final beneficiary) is some Particularly relevant in this area is the work of the other country. Major examples in this category would CPSS of the G-10 countries. Two of the specific top- be the payments (typically made by corporations) ics studied by the CPSS have been cross-border secu- associated with the international trade of goods and rities settlements and settlement risk in FX transactions services, as well as the unilateral transfers from an (CPSS 1995, 1996a). In particular, as a result of the individual residing in country X to an individual res- work in the latter area, commonly known as the ident of country Y (that is, personal remittances). This Allsopp Report, in 1996 the G-10 central bank gover- type of payments is what most people would regard nors launched a comprehensive strategy to reduce the as a "payments of a cross-border nature." systemic risks in settling FX transactions.9 In Latin Payment transactions in which the origin and desti- America and the Caribbean, settlement risks in the nation are both in the same country, but which use FX domestic markets, which are the most relevant in the payments infrastructure of at least some other the region in terms of their cross-border implications, country for settlement. For example, two banks oper- are currently being studied by Latin America and the ating in the same country and that make trades in the Caribbean central banks in the context of the Working local FX market usually settle the foreign currency Group on Payment System Issues of Latin America and leg through foreign bank correspondents. Another the Caribbean. example in this category could be the payments a res- ident of country X makes with a credit or debit card In particular, when in 1996 governors of the central banks (issued in country X) while traveling in country Y. of the G-10 countries endorsed a comprehensive strategy As far as the payer and the payee are concerned, the to reduce risks, particularly systemic risks, in settling transaction would be domestic in nature, although FX transactions, they agreed on a three-track strategy the payments infrastructure of at least these two providing for countries would be used to process and settle the Action by individual banks to control FX settlement payment. exposures; Cash payments. Major examples here are the pay- Action by industry groups to provide risk-reducing ments made by a resident of country X in country Y multicurrency services; and with the legal tender of the latter, or payments made Action by central banks to induce rapid private sec- through some remittances companies in which the tor progress. originator gives cash in country X to be paid to a ben- eficiary (typically in cash) in country Y.8 The most important action, which can be considered a revolution in the world of FX and cross-border market was the launch, in September 2002, of the Continuous 8Resident of country X could be carrying cash all the way or could Link Settlement Bank (CLS Bank). CLS Bank started its withdraw cash with a card issued in country X from an ATM in country Y to make payments in this latter country. According to the definition given above, one could even think of including the cash payments made between residents of the same country with the 9 A progress report on this issue was produced in July 1998. See legal tender issued by some other country. CPSS (1998a). 12 Payments and Securities Settlement CLS, settling FX transactions in seven currencies (the important global initiatives that have the potential to Australian dollar, the Canadian dollar, the U.S. dollar, the increase efficiency or reduce payment risks, or both. Such euro, the Swiss franc, the Japanese yen, and the British new networks and vehicles are having an important pound) on a payment versus payment basis on the books impact on the operation of banking and non-banking of the seven respective central banks. At the time of its institutions. Some examples are cited below: launch, CLS had 66 of the world's largest financial insti- In Europe, authorities and market players are strug- tutions participating as shareholders. In 2005, FX deals gling to achieve the Single European Payment Area with a total of 15 currencies (the former plus the Danish and interesting efforts to integrate financial systems krone, the Norwegian krone, the Swedish krona, the and capital markets, including settlement and depos- Hong Kong dollar, the Korean won, the Singapore itory institutions are taking place. The launch of the dollar, the South African rand, and the New Zealand Trans-European Automated Real-Time Gross Settle- dollar) were being settled through the CLS Bank. By ment Express Transfer System 2 (TARGET 2) is also the end of 2005, the CLS Bank had a total of 56 mem- moving in the same direction of rationalization of the ber banks (shareholders, with settlement accounts) payment infrastructure. and 674 member customers (third parties sponsored In Central America, a project is under way to inte- by a member bank), and nearly 80 percent of total mem- grate the LVPSs of Costa Rica, Dominican Republic, ber volume was being settled through it. The CLS Bank Honduras, Guatemala, and Nicaragua. is subject to the cooperative oversight of central banks In the securities area, there are also a number of involved and it is under the direct oversight of the global initiatives. The projected Global Equity Mar- U.S. Federal Reserve. ket initiative of the New York Stock Exchange to Some of the most relevant features of the CLS service establish a common stock market among 10 major follow: countries, including Brazil and Mexico, would allow 24-hour trading around the world. Counterparty risk is eliminated through a form of payment versus payment, although liquidity risk is "The automation of trading systems, led by the European not eliminated. Exchanges and US `electronic communication networks' Settlement members hold accounts at the CLS Bank. (or ECNs), combined with the growth of online trading, has led to significant declines in trading costs, massive Single multicurrency account on CLS Bank's books. increases in turnover, internationalization of trading and settlement systems' operations, and a major reform in Individual currency balances calculated, monitored. FX trades settle gross on CLS Bank's books. the structure and governance of securities exchanges. Reductions in trading costs lowered the cost of raising Final, simultaneous debits and credits to Settle- ment Member's accounts: Achieves payment ver- equity capital and shifted issuance of trading activity to sus payment. lower cost centers" (IMF 2003, 131). Pay-ins and pay-outs are via CLS Bank accounts and The same concern about the fragmentation of the banks' RTGS systems. liquidity applies to the use of their collateral: "Large CLS Bank holds accounts at central bank of issue. banks want to be able to approach several markets from Participants' funding and defunding of these a single access point enabling them to make the most accounts is on the basis of the net amounts in each efficient use of collateral and to minimize costs" (Sabatini currency of the trades they are settling that day. 2003). Within the Trans-European Automated Real-Time Gross Settlement Express Transfer System 2 this concern INCREASING IMPLEMENTATION OF will be reduced, because there will be less need for col- INTEGRATED INITIATIVES IN PAYMENT lateral movements. AND SECURITIES SETTLEMENT SYSTEMS Cross-border issues in payments and securities trading In addition to the CLS Bank, industry groups and gov- are being studied by a Cross-Border Collateral Task ernment agencies have launched or are studying several Force established by the New York Payments Risk Major Trends in Payments and Securities Settlement Systems 13 Committee.10 One of the task force's recommendations ence for the assessment of SSSs. Major SSSs around the contains a request to the G-10 central banks to "expand world were assessed against these recommendations and therangeofacceptablecollateraltoinclude(more)foreign some upgraded in order to observe with the recommen- denominated collateral."11 Within the EU, central banks dations included in this document. The Group of Thirty began accepting securities collateral from any of the (G-30) report focused on the areas of trade comparison, other EU markets in two eligible currencies (the euro trade confirmation/affirmation, central securities deposi- and the U.K. pound) provided that agreeable custodian or tories, netting schemes, delivery versus payment,14 same- collateral arrangements are put in place. As international day-funds, rolling settlement cycle, securities lending, and central securities depositories develop, we will see further common message standard. In addition, the Lamfalussy changes in this area. Minimum Standards (CPSS 1990) issued for the pur- pose of cross-border and multicurrency netting and On the retail side of the payments system, some inte- settlement schemes were not only relevant for pay- gration initiatives are taking place, in particular in Europe (for example, STEP2),12 or links between dif- ments settlement systems (PSSs), as mentioned before, ferent domestic automated clearinghouses (for exam- but also for SSSs. These six standards refer to the legal ple, the link between the Mexico and U.S. automated basis, financial risks, management of credit and liq- clearinghouses). uidity risks, admission criteria, and operational relia- bility of netting schemes. CLOSER AND BROADER ATTENTION TO In 1990, the technical committee of the International SECURITIES SETTLEMENT SYSTEMS Organization of Securities Commissions (IOSCO) issued THROUGH THE EVOLUTION OF a report on clearing and settlement. Its objective is to INTERNATIONAL STANDARDS "contribute to the process of creating an efficient central securities depository from a national regulatory point of In the area of securities settlement systems (SSSs), there view and, at the international level, offering views on has been an important process of consolidation and gen- how to create links in accordance to the recommendations eralization of international accepted standards worldwide. issued on the subject." The report is intended to be applic- The first set of internationally recognized standards was able for both spot and derivatives markets. The report included in the document, "Group of Thirty Recommen- deals with a broad range of issues related to securities dations Regarding Securities Clearance and Settlement," settlement, mainly regulatory (including the role of self- published in 1989 and targeted to "reducing risk, improv- regulatory organizations), liquidity risk, and industry ing efficiency and promoting greater standardization in organizational arrangements and operational reliability. international settlement."13 Soon after and throughout the In addition, it endorses the G-30 recommendations as decade of the 1990s this document became a key refer- practical, feasible, short-term goals and supports its prompt implementation. In 1995, the International Securities Services Association 10The Payments Risk Committee is a private sector group of senior amended the G-30 recommendations. The main amend- managers from U.S.-resident banks (domestic and foreign) that is sponsored by the Federal Reserve Bank of New York. The com- ments included trade comparison in T + 0 instead of mittee identifies and analyzes issues of mutual interest related to risk T + 1; positive affirmation of trade details by indirect in payments and settlement systems. It also seeks to foster broader market participants by T + 1; explicit reference to immo- industry awareness and discussion, and to develop input on public bilization and dematerialization and rules when several and private sector initiatives. central securities depositories operate in a country, in order 11 See http://www.newyorkfed.org/prc/PRCGlobalPaymentLiquidity. pdf to allow for use of funds and cross-collateral; and choice 12The first pan-European automated clearing house (PE-ACH) is the STEP 2 system, which the Euro Banking Association launched in April 2003. 13G-30 (1989). A year before, in 1988, the International Securities Services Association issued a publication with four recommendations 14This concept was introduced in CPSS (BIS), September 1992, Deliv- that helped to pave the way for many of the G-30 recommendations. ery versus Payment in Securities Settlement Systems. 14 Payments and Securities Settlement between an RTGS or Lamfalussy Recommendations­ trade confirmation, securities lending, management prac- compliant netting system for funds settlement. tices, and management systems and unit costing. The report ended with some recommendations about business Progress in technology had driven most systems to cen- plans, the custodians and fail rates, the global standard tralized and computerized book-entry custody, as well as settlement cycle, management information, netting, the clearance and settlement. However, in some emerging Code of Good Practice, and future surveys. markets, the legal framework was still based on deliv- ery of physical securities. Thus, the Emerging Markets In 2000, International Securities Services Association Committee of IOSCO was given the mandate to con- issued new recommendations in order to tackle key risks duct a study on the legal and regulatory framework for in current clearance and settlement arrangements through- clearing and settlement in emerging markets. The aim out the world. Special attention was given to governance was to conduct a comparative study of the legal regula- of infrastructure, the appropriate use of technology, and tory framework of participating countries,15 identify and the management of technology risks and user require- discuss similarities in developing their respective cen- ments in cross-border transactions. tral depository systems and provide guidelines for the Despite all these efforts from public and private sector development of policies in relation to the legal and reg- institutions that have fundamentally helped to drive ulatory framework. Thus, in November 1997, the doc- the upgrade and modernization of SSSs around the ument "Towards a Legal Framework for Clearing and world, a comprehensive set of public sector endorsed Settlement in Emerging Markets" was released. recommendations was lacking. This task was undertaken In 1998, IOSCO set up 30 principles of securities regu- by central banks and securities regulators through lation in the document "Objectives and Principles of a CPSS-IOSCO task force with the publication in Securities Regulation." The principles were based on November 2001 of the document "Recommendations three main objectives of securities regulation: protecting for Securities Settlement Systems." This document investors, ensuring that markets are fair, efficient, and has been included by the Financial Stability Forum, in transparent; and reducing systemic risk. The principles its seventh meeting, held in Hong Kong, China, as one are grouped into eight categories; one of them, Princi- of the key standards that international organizations use ple 30, in the secondary market category, indicates that for the assessment of financial systems.17 The objective SSSs should be subject to regulatory oversight; should of this report is "to promote implementation by SSSs be designed to ensure that they are fair, effective, and of measures that can enhance international financial efficient; and should reduce systemic risk. stability, reduce risks, increase efficiency and provide safeguards for investors by developing recommen- In 1999, the International Federation of Stock Exchanges dations for the design, operation and oversight of such released the document, "Clearing and Settlement Best systems." The 19 recommendations are designed to Practices Report."16 The objective of the report was "to identify minimum standards that systems should meet. enable FIVB members and their respective clearing and They constitute the most comprehensive set of SSSs settlement organizations individually to score their per- recommendations, including a broad range of topics formance against benchmarks and best practices, and to (see appendix 4). identify areas in their processes where improvements should be considered." The report examines main find- ings in the areas of settlement cycles, settlement success rates, processing cycles, asset lockup periods, market 17The Financial Stability Forum was established in Washington on systems integration, delivery versus payment, indirect April 14, 1999. Its objective is to assess financial system vulnerabil- ities, identify corrective actions to attack these vulnerabilities, and improve cooperation and information exchange among financial system authorities. It comprises 40 members, including national authorities responsible for financial stability in significant inter- 15The participating countries were Brazil, the Republic of Korea, national financial centers, international financial institutions, sector- Malaysia, Mauritius, South Africa, Sri Lanka, and Thailand. specific international groupings of regulators and supervisors, and 16This report was the continuation of an effort initiated with the committees of central bank experts. For a more detailed explanation, International Federation of Stock Exchanges (FIBV 1996). see http://www.fsforum.org/. Major Trends in Payments and Securities Settlement Systems 15 Figure 2.1. Evolution of International Standards for Securities Settlement Systems Legal & custody C&S processes Settlement risk CCP Operational Regulatory & oversight Organizational arrangements Cross-border Cost-efficiency G-30 IOSCO G-30/ IOSCO IOSCO FIBV ISSA CPSS NEW ISSA IOSCO G-30 1989 1990 1995 1997 1998 1999 2000 2001 2002 Note: Gray boxes represent issues covered; white boxes represent issues not covered. In any case, at the private level, the effort to contribute to tion has evolved from the core process issues to increas- the upgrading and modernization of SSSs has continued, ingly consider other elements such as legal, operational, and the G-30 has issued a set of new recommendations regulation, and oversight. focused on the cross-border and international context. In November 2004, the CPSS-IOSCO Task Force issued These recommendations go beyond minimum standards the document "Recommendations for Central Counter- and try to identify best practices. Thus, public policy parties (CCPs)" that includes detailed international stan- makers may first wish to assess and ensure observance dards for CCPs' risk management.18 The CCPs' large and of CPSS-IOSCO minimum standards while encouraging to strive for G-30 best practices where the market is more mature, or for specific issues that are relevant for the SSSs assessed. The report focuses on three main areas 18A central counterparty interposes itself between counterparties to of reform: building a strengthened, interoperable global financial contracts traded in one or more markets, becoming the buyer to every seller and the seller to every buyer. Central counterparties network; strengthening network safety and stability; have long been used by derivatives exchanges and a few securities and improving governance. exchanges and trading systems. In recent years, they have been intro- duced by many more securities exchanges and have begun to provide Figure 2.1 summarizes the evolution of international their services to over-the-counter markets, including markets for standards in more than a decade, and shows how atten- securities repurchase agreements and derivatives. 16 Payments and Securities Settlement growing role in SSSs and the potential for risk manage- European clearing and settlement system, and the private ment failures could disrupt markets and payment and and public sector roles in building it. It indicated that the SSSs. For that reason and to increase use of CCPs for public role would come through the Investment Services securities settlement, the CPSS and IOSCO established Directive review and the work of the Giovannini Group. the task force to come up with international standards The Giovannini Group conducted a comprehensive analy- for CCPs' risk management. sis on cross-border clearing and settlement arrangements In January 2006, the CPSS published the report on cross- for equities, fixed income securities, and derivatives with border collateral arrangements. There are important three main goals:20 liquidity issues arising from commercial banks' use of To analyze the current situation of cross-border clear- payment systems. Because collateral plays an important ing and settlement in the market concerned; role in securing the credit extended by a central bank, To consider the requirements against which the effi- these liquidity issues are deeply interrelated with policies ciency of possible alternatives for clearing, settlement, stipulating the terms and conditions under which a central and depository services can be assessed; and bank accepts collateral. During the past few years, with To identify some possible alternative arrangements the globalization of financial markets and the increasing for clearing, settlement, and depository services. use of collateral to mitigate counterparty risks in financial market transactions, the banking community has dis- The group identified 15 barriers to efficient cross-border cussed the potential use of collateral in one country or clearing and settlement regarding technical requirements currency to obtain liquidity in another. The report ana- and market practice, national differences in tax proce- lyzes these factors. dures, and issues relating to legal certainty. Those impose higher costs to the clearing and settlement process At the European regional level, in November 1997, the through increased direct costs in the form of higher fees European Monetary Institute endorsed a report entitled, for the services provided, indirect costs due to extra "Standards for the use of EU Securities Settlement back-office facilities needed to complete the settlement Systems in ECSB Credit Operations," which laid down process, and opportunity costs because of the inefficient the nine standards for assessing the soundness of SSSs use of collateral and a higher incidence of failed trades. seeking to qualify for involvement in monetary policy and intraday credit operations. These standards refer to In Latin America and the Caribbean, the Council of legal soundness, settlement in central bank money, no Securities Regulators of the Americas published in undue custody risks, regulation or control by competent 1996 the document, "COSRA Principles of Securities authorities, transparency of risks, and conditions for Clearance and Settlement" and in 2001 the document, participation in a system, risk management procedures, "Delivery versus Payment and Settlement Assurance." intraday finality of settlement, operating hours and days and operational reliability of technical systems, and avail- MARKET INFRASTRUCTURE, GLOBALIZATION, ability of adequate back-up facilities. AND CHALLENGES IN SSSs The European Union's Economic and Finance Ministers From a securities services perspective, the "customer" (July 17, 2000) defined the terms of reference for a report includes asset managers, insurance companies, and indi- on the regulation of European securities markets to be viduals. The banks, broker-dealers, and nonbank finan- produced by the Committee of Wise Men.19 Its target was cial institutions provide them with products and market to refine regulatory proposals and produce operational recommendations. The final report included a section 20The Giovannini Group consists of financial market participants, regarding clearing and settlement. The committee focused and the chair is Alberto Giovannini (deputy general manager of Banca in the process of consolidation for an efficient pan- di Roma). It advises the European Commission on financial market issues. The group was formed in 1996 and has focused its work on identifying inefficiencies in the European Union financial markets 19 The chair of this committee was Alexandre Lamfalussy, and included and proposing practical solutions to improve market integration. Cornelius Herströter, Luis Angel Rojo, Bengt Ryden, Luigi Spaventa, The commission's Directorate-General for Economic and Financial Norbert Walter, and Nigel Wicks. Affairs provides the secretariat for the Giovannini Group. Major Trends in Payments and Securities Settlement Systems 17 access. The securities value chain from the investment Higher specialization: the need to respond to a more decision to the settlement and added-value services is differentiated demand. Customer demands from the represented in figure 2.2. securities services industry will change. There is a move toward a world of differentiation, not a world Clearing and settlement is a key element to determine the where "one size fits all." infrastructure quality of capital markets. The core clear- ing and settlement services (shadowed area in figure 2.2) The most pressing needs extend beyond clearing and have been normally delimited by the confirmation, clear- settlement. They arise also at the beginning and end of ing, and settlement and banking services associated with the securities value chain. the settlement of the securities transactions. Other ser- The industrial market population will undergo a major vices were established outside the borderline of clearing change in the next few decades. Figure 2.3 shows the and settlement systems. Today, it is difficult to distin- percent of the population by age group for Europe and guish core clearing and settlement services from the rest, the United States over a 60-year period. "Prime savers" or to define the borderline clearly. Other services such (ages 40 to 59) are at or near a 100-year peak. Older dis- as investment decisions, execution, asset servicing, and savers will outnumber prime savers in Europe and the other value-added services are provided by the same United States; the problem is acute in countries such as institutions that provide clearing and settlement services. Italy and Japan, with a ratio of prime savers to dissavers of 2:1. In contrast, in the cases of China and India the In the near future, important changes are expected in the trend is an increase of prime savers as a percentage of demand and supply of capital that, at the same time, will the population. drive to changes in investors' behavior. Thus, the demand and supply of capital will be influenced by the following: Changes in the investment strategy will imply: Demographics: evolution in the population ratio More attention to best execution and low fees; and between prime savers (40­59) and dissavers (60 +) Outperformance in emerging markets. could imply a surplus or deficit in capital supply. Differentiated needs from investors will imply: Aging savers will accumulate surplus capital. The Increased speed and expandable capacity; capital they supply will probably exceed what is "Functional flexibility" in the securitized and struc- required to fund global GDP growth. tured products area; Economics: GDP per capita growth in emerging A large investor segment interested in "one size fits markets will increase capital demand. all" solution, despite the specialized need; and In addition, it will produce the following: Market segments interested in enhanced market transparency and investor protection. Asset reallocation: the investors and their inter- mediaries will reallocate assets in the search of In addition, securities markets are increasingly globalized increased predictability of returns. on trading, but the consolidation of national clearing Figure 2.2. Securities Services Value Chain Investment Execution Confimation Clearing and Banking and Asset Value-added decision settlement finance servicing services Transparency Indication of Allocation Clearance Credit and cash Income Pricing interest management collection Research Execution Affirmation Delivery Securities Corporate Accounting lending actions Buy-sell Notification Instructions Payment Margin Tax reclaim Performace decision finance reporting 18 Payments and Securities Settlement Harmonized regulations Figure 2.3. Evolution of "Prime Savers" vs. Fair market access "Dissavers" in the European Union Adequate oversight of the systems and the United States Uniform, consistent supervision of market participants Chapter 5 of this book analyzes in detail how the coun- European Union tries in Latin America and the Caribbean have faced the 70 challenges described above through the recent reforms 60 50 of their SSSs. 40 population 30 STRENGTHENING THE OVERSIGHT FUNCTION of 20 % OF CENTRAL BANKS 10 0 There is an emerging consensus within the international 1985 2005 2025 2045 central banking community on the need to ensure the smooth functioning of domestic and cross-border pay- United States ment systems through appropriate oversight.21 70 60 The oversight function should be developed and strength- 50 ened with a view to ensuring the financial and technical 40 integrity of the payment system; its robustness against population 30 of shocks; and its overall efficiency through rules, standards, 20 % 10 monitoring, and enforcement. In this regard, the CPSS 0 has produced important guidelines on payment system 1985 2005 2025 2045 design and, lately, it has laid out the core principles for primesavers (age 40­59) dissavers (age 60+) others (age 0­39) systemically important payment systems, or systems han- dling large transaction volumes in relation to the size of their participants.22 In addition to the core principles for systemically important payment systems, the CPSS task and settlement infrastructures is still an obstacle for force identified four central bank responsibilities in apply- market integration. This is especially the case for such ing the core principles, in effect laying out the main fea- regions (for example, Europe) that are in a process of tures of central banks' oversight of the payments system. financial markets integration. This consolidation requires In May 2005, the CPSS published a report on oversight, a common regulatory approach and a set of governance which starts from the observation that central banks have rules that prevent any natural monopoly position by ser- always had a close interest in the safety and efficiency vice providers. But market developments have still not of payment and settlement systems. One of the principal resulted in a clear picture on how and when to achieve functions of central banks is to be the guardian of pub- that final stage, nor what it ultimately will look like. The lic confidence in money, and this confidence depends objectives are better risk management, reduction of oper- crucially on the ability of economic agents to transmit ating costs, achievement of efficiency gains, and mainte- money and financial instruments smoothly and securely nance of competitive service offerings and provider through payment and settlement systems. The systems choice. must therefore be strong and reliable, available even In this environment, what are some of the key issues to when the markets around them are in crisis, and never give attention in order to provide more efficient and themselves be the source of such crisis. secure clearing and settlement services?: 21 Lower cost Central banks in many countries are currently engaged in an effort to clarify their role as payment system overseer. For a recent example, Reduced operational risk see Bank of England (2000). Straight-through processing 22For a discussion of the problems relating to compliance with the Fully interoperable markets core principles, see Johnson (2000). Major Trends in Payments and Securities Settlement Systems 19 Central banks have traditionally influenced payment and be useful to set out publicly what has been learned about settlement systems primarily by being banks that provide effective oversight. Most of this report is both descriptive a variety of payment and settlement services to other and analytical, explaining why and how central banks banks. As such, central banks provide a safe settlement oversee payment and settlement systems. It looks at the asset, and, in most cases, they operate systems that allow need for oversight, the source of central banks' respon- for the transfer of that settlement asset. It is only relatively sibilities for oversight, the scope of oversight, and the recently that oversight has become a function that is more activities that oversight involves. In addition, it looks formal and systematic--namely a function whereby the at cooperative oversight, where more than one central objectives of safety and efficiency are promoted by bank or other authority has responsibilities for a system. monitoring existing and planned systems, assessing them However, in addition to this description and analysis, the against these objectives, and, where necessary, inducing report includes 10 principles for effective oversight, each change. However, although recent, this development in with explanatory text. Five of the principles are generally the nature of oversight has been rapid and the function has applicable to oversight arrangements, while the other five now come to be generally recognized as a core respon- are specifically for cooperative oversight arrangements. sibility of central banks. As discussed in chapter 6, many central banks beyond Given the importance of the subject, and the experience the G-10 are involved in the process of establishing the that has been gained over the years, the CPSS felt it would payment system oversight function. 3 Assessment Tools S Similarly, Working Paper 2 describes the methodology everal assessment tools were used in the evaluation used for the assessment of the securities clearance and of the payments and securities settlement systems settlement systems in the same context.2 (SSSs) in each country. In addition to those listed below, mention should be made of the discussions that took Another important reference for the assessment is the place in the working group that prepared the Committee table of contents and methodology for the Latin America on Payment and Settlement Systems (CPSS) report on and the Caribbean descriptive reports ("Yellow Books") guidance on national payment system development (see and statistical tables.3 The tables of contents and statisti- chapter 2). Some of the authors participated actively cal tables have built on the models of the Group of Ten in this project and brought to the attention of the inter- countries' reports ("Red Books"), and the models of national community the experience gained in the differ- European Union countries ("Blue Books").4 ent country assessments, which is captured in this book. It needs to be noted that at the moment of the pre- In addition, they gained from other working group mem- paration of the first draft of these documents, which bers new perspectives that became an important tool in coincided with the beginning of the activities of the the assessment exercise, in particular in moving from the assessment to reforms. Western Hemisphere Payments and Securities Clearance and Settlement Initiative, most of the other assessment WORKING PAPERS 2 AND 3 OF THE WHI tools presented in this chapter were not available and, (AND WHF) therefore, these documents have been particularly useful in carrying out this exercise. Working Paper 3 of the Western Hemisphere Payments and Securities Clearance and Settlement Initiative (and Western Hemisphere Payments and Securities Clearance and Settlement Forum) presents a model for the confiden- tial report, "Assessment and Observations on the Pay- Fernando Montes-Negret (World Bank), and all colleagues par- ticipating in the Western Hemisphere Payments and Securities ments Clearance and Settlement System of Country X," Settlement Forum missions. This tool is constantly being revised which was delivered to each participating central bank as a result of international developments, comments received, and at the end of the international team's work, and which new experience gained from country assessments under the West- was deployed on the field in the context of the Western ern Hemisphere Payments and Securities Clearance and Settle- ment Initiative. Hemisphere Payments and Securities Settlement Forum.1 2This document was prepared by Mario Guadamillas (World Bank) and has benefited from comments by Massimo Cirasino (World Bank), José Antonio García (World Bank), Robert Keppler (World Bank), and Fernando Montes-Negret (World Bank). 1 This document was prepared by Massimo Cirasino (World Bank) and 3 has benefited from comments by José Antonio García (World Bank), See www.ipho-whpi.org. Mario Guadamillas (World Bank), Robert Keppler (World Bank), 4See www.bis.org. 21 22 Payments and Securities Settlement THE CPSS CORE PRINCIPLES FOR oversight and reform. That was the purpose of the exer- SYSTEMICALLY IMPORTANT cise; the authors hope that the report will continue to PAYMENT SYSTEMS prove helpful for many years to come. The CPSS established a task force on payment system THE INTERNATIONAL MONETARY principles and practices in May 1998, to consider what FUND­WORLD BANK GUIDANCE NOTE principles should govern the design and operation of FOR ASSESSING OBSERVANCE OF CORE payment systems in all countries. The task force has PRINCIPLES FOR SIPS developed an international consensus on such principles. It comprised representatives not only from the Group of This document provides guidelines for assessing CPSS Ten central banks and the European Central Bank, but core principles for SIPS (CPSIPS) under the financial also from 11 other national central banks of countries in sector assessment program.5 The CPSIPS apply to indi- different stages of economic development from all over vidual payment systems that are considered of systemic the world, and from representatives from the Interna- importance. The assessment also covers the central bank tional Monetary Fund and the World Bank. In develop- responsibilities in applying the core principles both as ing universal principles, it consulted groups of central operator of a SIPS and as overseer of SIPS run privately. banks in Africa, the Americas, Asia, the Pacific Rim, The most direct application of the CPSIPS is for systems and Europe. that involve only fund transfers, but CPSIPS also apply to In December 1999, the Bank for International Settlements payment systems in which transfers of funds related to published a draft of the CPSS core principles for comment other financial assets, such as securities, are settled. In from the wider financial community. From the responses, fact, a relevant factor to determine whether a system is it was clear that there is strong and widespread inter- systemically important is the nature and origin of the national support for the core principles. It was also clear payments it handles, including the cash leg of securities from the written and oral comments that many readers markets transactions. It is widely recognized that there would value more detail on how to interpret and imple- is a strong interrelationship between payments and SSSs. ment the core principles. Accordingly, the task force dev- The assessment of both payments and securities clear- eloped a second part of this report, which provides such ance systems and SSSs should be highly coordinated. guidance. Public comments were sought once again on The following factors are considered relevant to the a draft of the second part, and the responses demonstrated assessment process: continuing extensive support for the exercise and its results. The final report was published in January 2001. 1. Objective of Assessment. The primary objective of an assessment should be the identification of The core principles are expressed deliberately in a gen- the nature and extent of any weaknesses in indi- eral way to help ensure that they will be useful in all vidual SIPS and their observance of the CPSIPS. countries, and that they will be durable. They do not The assessment should not solely focus on defi- represent a blueprint for the design or operation of any ciencies, but also highlight relevant strengths. This individual system, but rather suggest the key character- istics that all systemically important payment systems (SIPS) should satisfy. The second part of the report there- 5The first version of the guidance note was published August 2001, fore discusses in more depth the interpretation of the core in Washington, DC. The guidance note was prepared by a team principles, by giving more-detailed examples of issues comprising Kai Barvell and Udaibir Das (International Monetary to be addressed in complying with the core principles, Fund), and Massimo Cirasino and Mario Guadamillas (World Bank). Charlie Garrigues and Robert Keppler (World Bank) also contributed and of ways in which these issues have been tackled in to the drafting process. The paper benefited from the comments of some particular contexts. It does not and cannot provide the CPSS of the Bank for International Settlements, and in particular a single model for every practical application of the core from Gregor Heinrich and Robert Lindley (CPSS Secretariat), Rita principles. It is already apparent that the core principles Brizi (Banca d'Italia), Daniel Heller (Swiss National Bank), Jeffrey Marquardt (Board of Governors of the Federal Reserve System), and the explanatory second part of the report are being and Elke Wunstorf (European Central Bank). The Guidance Note used widely to analyze payment systems and to guide can also be used for self-assessment or for peer review purposes. Assessment Tools 23 approach will provide a more accurate measure of exercised as to whether assessment criteria are ful- overall observance with the CPSIPS. The assess- filled in practice, and not just in form. In this regard ments should identify systemically relevant weak- full cognizance should be given to payment system nesses of a payment system and recommend actions reforms that are under way. The assessor must be and priorities for the improvements needed to aware of cross-linkages with the banking and secu- achieve observance with the CPSIPS. In addition, rities sectors, and must integrate assessment find- the assessment should focus on the central bank ings with the assessments of the banking, securities, responsibilities in applying the CPSIPS and, in case and core principles and practices of transparency. of shortcomings, identify the appropriate measures 6. Assessment of Enforcement. Strong emphasis is to to be taken. be laid on the actual practice and enforcement of 2. Cooperation. A detailed assessment of CPSIPS the core principles to ensure the safety and soundness cannot be performed without the full cooperation of the payment system. Assessors should evaluate of the payment system operator and relevant author- not only the legal and regulatory framework and ities, which includes primarily the central bank in the rules of the payment system, but also the way relation to its role and responsibilities as overseer in which such rules and legislation are applied in of the private payments system or as operator of practice and are enforced. If, for example, differ- its own SIPS. ent kinds of risks in the settlement process are not 3. Access to Information. When conducting an assess- controlled or properly mitigated due to a lack of ment, the assessors must have access to all relevant enforcement, then this point should be noted via a information and persons. The required information clarifying comment. may include not only published documents such as 7. Assessment Criteria. In order to achieve full obser- the relevant laws, regulations, rules, and adminis- vance with a standard, the assessment criteria must trative policies, but also more sensitive information, generally be met without any significant short- such as self-assessments and operational guidelines comings. These criteria have been taken from the used by or compiled by the operator or overseer.6 implementation summary for each core princi- During the mission, the assessor will need to meet ples mentioned in the CPSS report. There may be with various individuals and organizations. Typi- instances where one can demonstrate that the core cally, these could include the payment system over- principles have been observed through different seer and other supervisory authorities, relevant means other than these criteria. Conversely, due to government ministries, payment system participants, the specific conditions in individual countries, the other financial sector institutions, and auditors. Spe- assessment criteria identified in this document may cial note should be made when any required infor- not always be sufficient to achieve the objective of mation is not provided; note should also be made of the specific standard, and therefore additional ele- the impact this might have on the accuracy of the ments may have to be taken into account. Examples assessment. of these elements have also been included in the 4. Assessment by Experts. The assessment of a pay- assessment criteria under each core principle. ment system should be conducted only by persons 8. Assessment Preparation. Prior to the mission, the with sound experience of payment system mecha- assessor will review the self-assessments undertaken nisms. The assessment process requires judgmental by the authorities. A questionnaire has been prepared weighing of numerous elements that only qualified to be used in instances when a self-assessment is assessors--who have practical, relevant experi- not available or contains significant information ence--can normally make. gaps. The questionnaire should be sent to the central 5. Comprehensiveness. The assessment must be con- bank of the country in its capacity as payment sys- ducted in sufficient depth to allow judgment to be tem overseer. Response should be obtained well in advance of the field mission. The assessor should also review relevant laws, regulations, instructions, 6Self-assessments are strongly encouraged in the financial sector and other documentation (responses to the financial assessment program process. sector assessment program questionnaire, reports, 24 Payments and Securities Settlement studies, public statements, Web sites, and non- The recommendations were developed by the task force published guidelines, directives, and assessments). on SSSs that the CPSS and the technical committee of Prior to the mission, the assessor will also need to dis- IOSCO created in December 1999. The task force com- cuss with the mission chief and agree with relevant prises 28 central bankers and securities regulators from authorities on a comprehensive agenda of meetings 18 countries and regions, and from the European Union. and interviews with stakeholders in the payments The task force's work has benefited greatly from input system. These stakeholders include the central bank, from other central bankers and securities regulators, and other domestic authorities, and any relevant govern- from operators of, and participants in, SSSs. In January mental and private sector entities (including bankers 2000, the task force received input from central bankers associations, card companies, clearinghouses, secu- andsecuritiesregulators--whotogetherrepresentedabout rities market operators, and so on). 30 countries--as well as from representatives of the 9. Assessment Counterparts. In most countries, at International Monetary Fund and the World Bank. In least one SIPS is operated by the central bank, and January 2001, the CPSS and the technical committee of the assessment work is subsequently conducted by IOSCO released a version of this report for public com- discussing issues with central bank officials, to a ment. Nearly 90 comments were received, coming from large extent. a wide variety of interested parties. Most parties were In countries where a SIPS is privately operated, in Europe, but some were also from Asia, Africa, and the central bank, as the overseer of payment sys- the Americas. As a result of these comments, several tems, should have made an assessment of the recommendations have been changed significantly and system's observance of the core principles. In such cases, the assessor should primarily discuss a new recommendation on cross-border links between the assessment with the central bank, but should settlement systems has been added. also meet with the system operator. The 19 recommendations and accompanying explanatory In case the central bank has not made any assess- texts identify minimum standards that SSSs should meet. ment of the privately operated system, the assessor The recommendations are designed to cover systems should primarily meet with the system operator, for all types of securities, for securities issued in both but also discuss the result of the assessment with industrial and developing countries, and for domestic as the central bank. It may be the case that in such well as cross-border trades. a situation the central bank would like to attend the assessor's meeting with the system opera- National authorities responsible for the regulation and tor, and this would be acceptable. However, in oversight of SSSs are expected to assess whether markets all of the assessor's other interviews, he or she in their jurisdiction have implemented the recommen- should avoid having someone from the authori- dations and to develop action plans for implementation ties attending the meeting, as this could hamper where necessary. As an important first step towards the dialogue. establishing a comprehensive methodology for assess- 10. Assessment Obstacles. The assessor will identify any ing implementation, the report includes key questions factors that facilitated or impaired the assessment, pertaining to each of the recommendations, answers to with particular reference to the degree of cooperation which would form the basis for assessments. encounteredincarryingouttheanalysis,and will indi- cate the extent to which these factors may have affected the objectivity of the assessment. THE ASSESSMENT METHODOLOGY FOR THE SSSs THE CPSS­INTERNATIONAL ORGANIZATION As mentioned above, in November 2001 the CPSS- OF SECURITIES COMMISSIONS IOSCO recommendations for SSSs were published. RECOMMENDATIONS FOR SSSs These recommendations have been included in the key TheCPSSandthetechnicalcommitteeoftheInternational standards for sound financial systems highlighted by the Organization of Securities Commissions (IOSCO) issued Financial Stability Forum. The CPSS and the technical recommendations for SSSs in November 2001. committee of IOSCO encourage national authorities Assessment Tools 25 responsible for the regulation and oversight of SSSs to stability. CCPs have long been used by derivatives assess whether markets in their jurisdiction have imple- exchanges and a few securities exchanges. In recent years, mented the recommendations and to develop action plans they have been introduced into many more securities for implementation where necessary. markets, including cash markets and over-the-counter markets. Although a CCP has the potential to reduce risks The assessment methodology, released by the CPSS- to market participants significantly, it also concentrates IOSCO task force in November 2002, aims to set out a risks and responsibilities for risk management. Therefore, clear and comprehensive framework for use in these the effectiveness of a CCP's risk control and the adequacy assessments. The methodology is primarily intended for of its financial resources are critical aspects of the infra- use in self-assessments by national authorities or in peer structure of the markets it serves. In light of the growing reviews of such self-assessments. It is also intended interest in developing CCPs and expanding the scope of to serve as guidance for the international financial their services, the CPSS and the technical committee of institutions (that is, the International Monetary Fund IOSCO concluded that international standards for CCP and the World Bank) undertaking their financial sec- risk management are a critical element in promoting the tor assessments, and for other forms of technical assis- safety of financial markets. tance, possibly including financing of reforms by the World Bank. In this regard, international financial insti- The report has 15 headline recommendations and accom- tutions took part in developing this assessment method- panying explanatory text. The recommendations cover ology. Furthermore, the methodology may also prove the major types of risks CCPs face. The report sets out useful to private market participants who may be con- the intended scope of application of these recommen- ducting their own assessments of the safety and effi- dations and their relationship with the task force report ciency of SSSs on the basis of the SSSs' observance of on recommendations for SSSs. The report also includes the recommendations. a methodology for assessing implementation of the recommendations, which identifies key issues and key CPSS-IOSCO RECOMMENDATIONS questions and provides guidance on the assignment of FOR CENTRAL COUNTERPARTIES an assessment category. The CPSS-IOSCO recommendations for central counter- The CPSS and the technical committee of IOSCO encour- parties (CCPs), released in March 2004, aim to set out age CCPs to conduct a self-assessment of their observance comprehensive standards for risk management of a CCP. of the recommendations and to utilize the answers to CCPs occupy an important place in SSSs. A CCP inter- the key questions as a basis for their public disclosure. poses itself between counterparties to financial transac- National authorities responsible for the regulation and tions, becoming the buyer to the seller and the seller to oversight of the CCPs are also expected to assess whether the buyer. A well-designed CCP with appropriate risk the CCPs in their jurisdiction have implemented the rec- management arrangements reduces the risks faced by ommendations and to develop plans for implementation SSS participants and contributes to the goal of financial where necessary. 4 Payments Systems Assessment Findings in Latin America and the Caribbean T Table 4.1 Dates of Country Assessments his chapter covers the main findings of the Western Country Date Hemisphere Payments and Securities Clearance and Settlement Initiative on-the-field assessments in Argentina July 1999 the area of payment systems. The countries assessed Bahamas, The May 2001 are Argentina, The Bahamas, Bolivia, Brazil, Chile, Bolivia October 2004 Colombia,CostaRica,theDominicanRepublic,Ecuador, El Salvador, Guatemala, Honduras, Jamaica, Mexico, the Brazil November 2000 Netherlands Antilles, Nicaragua, the Organization of Chile December 1999 Eastern Caribbean States (OECS), Panama, Paraguay, Colombia February 2001 Peru, Trinidad and Tobago, Uruguay, and the República Costa Rica June 2001 Bolivariana de Venezuela.1 Table 4.1 indicates the date of the original assessment. Updates to these assessments Dominican Republic January 2002 have been included in the information presented in this Ecuador August 2002 chapter for most countries. El Salvador February 2000 The assessments took place following the methodology Guatemala February 2004 described in chapter 3. Areas covered in this chapter Honduras October 2002 are legal basis; interbank exchange settlement circuits; retail payment systems; government payments; foreign Jamaica June 2002 exchange (FX) and cross-border settlement systems; and Mexico March 2001 the functioning and settlement of the interbank money Netherlands Antilles December 2002 market. Nicaragua December 2003 The chapter is organized as follows: Section 2 deals with OECS April 2000 issues related to the legal framework, section 3 includes Panama January 2005 an analysis of large-value payment systems (LVPS), section 4 describes the retail payments systems, section 5 Paraguay April 2004 covers the government payments, and section 6 discusses Peru June 1999 FX and cross-border settlement mechanisms. Section 7 Trinidad and Tobago February 2000 Uruguay May 2005 1OECS comprises Anguilla, Antigua and Barbuda, the Common- Venezuela, R.B. de November 2002 wealth of Dominica, Grenada, Montserrat, St. Lucia, St. Kitts and Nevis, and St. Vincent and the Grenadines. Source: Authors' elaboration. 27 28 Payments and Securities Settlement describes the functioning and settlement of interbank tronic signature, validation of netting, and settlement money markets, in which the link between funds trans- finality); and (3) the rules, standards, and procedures fers and securities settlement is explicit. agreed by the participants of a payment system. The legal infrastructure should also cover other activities Each section follows a systematic approach for each carried out by both public and private sector entities. issue covered. First, it includes a brief context in which For example, the legislative framework may establish the main areas, normally identified through international clear responsibilities for the central bank or other regula- standards and best practices, are described. Second, a tory bodies such as oversight of the payments system or status in the region subsection box describes the main the provision of liquidity to participants in these systems. facts identified for each of the countries in the specific Finally, relevant pieces of legislation that have impact issue covered. Finally, the observations subsections on the soundness of the legal framework on the payments summarize the findings that are often encountered in the system include law on transparency and security of pay- systems analyzed. ment instruments, terms, and conditions; antitrust legis- lation for the supply of payment services; and legislation LEGAL FRAMEWORK on privacy (see table 4.2). While laws are normally the appropriate means to enforce a general objective This section includes context, status in the region, and in the payments field, in some cases regulation by the observations regarding the legal framework. overseers might be an efficient way to react to a rapidly changing environment. In other cases, specific agreements Context among participants might be adequate; in this case, an A sound and appropriate legal framework is generally appropriate professional assessment of the enforceability considered the basis for a sound and efficient payments of these arrangements is usually required. Finally, because system. The legal environment should include (1) laws the payments system typically includes participants and regulations of broad applicability that address issues incorporated in foreign jurisdictions, or the payments such as insolvency and contractual relations between system might operate with multiple currencies or across parties; (2) laws and regulations that have specific applic- borders, in some cases it may be necessary to address ability to payment systems (such as legislation on elec- issues associated with foreign jurisdictions. Status in the Region Table 4.2 Main Legal Issues in Individual Latin America and the Caribbean Countriesa Country Legal Issues Argentina Regulatory and Oversight Powers of the Central Bankb The legal framework for payments consists primarily of the Financial Institutions Law of 1997, the Charter of the Banco Central de la República Argentina (BCRA), the Cheques Law of 1995 (amended by Law 24, 760 on December 11, 1996), and the bylaws issued by the BCRA. The BCRA's authority over clearinghouses and similar entities that perform payment settlement functions stems indirectly from the Financial Institutions Law, and is formalized in the BCRA's charter. Payment Instruments Two kinds of cheques are recognized by the Cheques Law: ordinary and postdated. The BCRA is authorized by law to regulate the terms and requirements for the opening and closing of accounts with ordinary and postdated cheques, regulate cheque forms, and decide on matters concerning effective rendering of clearing services, including the rejection of cheques, accounts denominated in foreign currency, and the operation of electronic clearing systems. Settlement Finality and Zero-Hour Rule There are no provisions at the level of the law to clarify when settlement is to be considered final, or if zero-hour rules could be applicable. Payments Systems Assessment Findings in Latin America and the Caribbean 29 Table 4.2 Main Legal Issues in Individual Latin America and the Caribbean Countriesa (Continued) Country Legal Issues Argentina According to the Circular 2534 of the BCRA, in order to participate in the BCRA's real-time gross settlement (Continued) (RTGS), the Medio Electrónico de Pagos (MEP), financial entities must sign an agreement with the former. This agreement covers all transactions that are settled in the MEP. Article 3 of the agreement establishes that all messages issued by financial institutions to move their funds deposited at the BCRA have the nature of irrevocable payment instructions. In addition, Article 4 of the agreement states that the accounts are debited when there are sufficient funds and as long as there is no judicial order that mandates otherwise (for example, in case of bankruptcy). This implies that when the BCRA has received notice of the court order, it applies that court order immediately without any retroactive effect. In this case, therefore, the zero-hour rule does not apply. Netting Arrangements Although netting is used on a broad scale for the settlement of large-value and retail payments, there is no explicit legal recognition of the netting arrangements. Electronic Payments, Messages, and Signatures Regarding electronic payments, the BCRA only has legal authority, under the Cheques Law, to regulate the operations of electronic cheque-clearing systems. The operation of electronic payment systems is governed by a number of circulars issued by the BCRA. Private clearinghouses have their own rules and procedures, which are based on the provisions contained in BCRA circulars. Bahamas,The Regulatory and Oversight Powers of the Central Bank In the Central Bank of the Bahamas (CBOB) Act of 2000, the only explicit mention to payment systems is in Section VI, Article 25, which states that the CBOB may promote the establishment of a bank-clearing system and provide facilities therefore. Settlement Finality and Zero-Hour Rule There is no clear definition at the level of the law of intraday finality for accounting entries in the CBOB's books or in the books of the banks that initiate transfers for their own account or for the accounts of their customers. Netting Arrangements There is no legal definition regarding the validity of multilateral netting schemes. Electronic Payments, Messages, and Signatures Three relevant legal pieces are the Data Protection Act, the Electronic Communications and Transactions Act, and the Computer Misuse Act. Key references to these acts have been incorporated into documented agreements among the clearing banks, and between the latter and the CBOB. Other Relevant Laws and Provisions The operations of the cheque clearinghouse are governed by the Bahamas Clearing Arrangement, which is signed by the seven clearing banks. This agreement covers the clearing process; operational issues; times of the clearing; and treatment of out-station cheques, dishonored cheques, and returns and settlement. Bolivia Regulatory and Oversight Powers of the Central Bank Article 3 of the Legal Statute of the Banco Central de Bolivia (BCB) provides a general basis for the oversight function over the payment systems. Settlement Finality and Zero-Hour Rule Although included in the clearinghouses regulation (Article 25.4) and Sistema de Pagos de Alto Valor regulation (Articles 35 and 36), the concepts of acceptance, irrevocability, or settlement finality of an order to be processed by the system and the possible implications these concepts may have in different circumstances are not recognized at the level of the law. (Continued) 30 Payments and Securities Settlement Table 4.2 Main Legal Issues in Individual Latin America and the Caribbean Countriesa (Continued) Country Legal Issues Bolivia There is no explicit zero-hour rule. (Continued) Netting Arrangements Although netting is used on a broad scale for the settlement of large-value and retail payments, there is no explicit legal recognition of the netting arrangements used in financial transactions. Collateral and Repos Article 8 of the BCB Statute and Articles 85 and 131 of the banking law seem to provide enough legal protec- tion to collateral pledged to BCB under repos and reserve requirements (the so-called Fondo RAL). However, Article 128, which establishes the liabilities priority in case of a bank resolution process, only assigns a second-degree priority to liabilities with the BCB. This is a key issue for the envisaged mechanisms for the intraday credit mechanism in the Sistema de Pagos de Alto Valor. Although the repo is regulated in a BCB resolution and the internal rules of the stock exchange, a clear legal definition (ownership transfer) is neither included in the mentioned regulations nor in any law. In the case of the pledge, the general legal basis is included in the civil code, but there is no specific legal framework for the securities used as collateral in financial market transactions. Brazil Regulatory and Oversight Powers of the Central Bank The general responsibilities of the central bank (Banco Central do Brasil [BACEN]) are stated in its legal statute, Law 4,595, of December 1964. The Payment System Law of 2001 defines the scope of the Brazilian payments system. This law sets out the specific responsibilities of the BACEN toward payment systems. In particular, it reinforces the BACEN'S broad mandate, stated in Law 4,595, to regulate payment and securities clearance and settlement systems. Resolution 2,882 of 2001 of the National Monetary Council (Conselho Monetário Nacional) states the payments system objectives of the BACEN. It also defines the scope of application of BACEN's rules and interventions, namely all clearinghouses and system operators that handle interbank transfers and settle among at least three direct participants. Nine general rules with which system operators must comply are the core of this resolution. In general, these rules resemble the Committee on Payment and Settlement Systems (CPSS) core principles for systemically important payment systems. Furthermore, according to this resolution, the BACEN will conduct oversight on a continuous basis over payment systems; to this purpose, it is entitled to regulate the activities of system operators, authorize the functioning of the systems, and apply sanctions. The resolution also specifies that the BACEN may apply specific provisions to those systems that are considered systemically important, and the resolution clarifies the role of the securities regulator and the cooperative framework between it and the BACEN. Finally, it states that the BACEN will only operate payment systems that settle on a gross basis, in real time. Following up on this resolution, in August 31, 2001, the BACEN issued Circular 3,057. This circular contains the detailed regulation of the functioning of clearinghouses and other payment system operators, and defines several features with which these entities must comply, including capital requirements, transparency standards, risk control measures, operational requirements, and so on. All these elements had to be submitted to the BACEN for their revision and approval. The annex to the circular also defines a formula to determine whether a system is systemically important, based on the average value of the largest transaction or the aggregate value, or both, over a six-month period. Settlement Finality and Zero-Hour Rule; Collateral and Repos; Netting Arrangements The legal framework established by the payment system law also grants private clearinghouses important legal rights and protections. These are (1) legal rights to seize the collateral pledged by bankrupt partici- pants, (2) protection of the payments system against the implications of a zero-hour rule, and (3) legal recog- nition of multilateral netting schemes. This legal framework also clarifies specific responsibilities for the clearinghouses: Those that are designated as systemically important by the BACEN must act as central coun- terparties and guarantee final settlement of the transactions they accept for clearance and settlement. Payments Systems Assessment Findings in Latin America and the Caribbean 31 Table 4.2 Main Legal Issues in Individual Latin America and the Caribbean Countriesa (Continued) Country Legal Issues Brazil These clearinghouses are subject to sanctions similar to those that are applicable to financial institutions. A (Continued) specific restriction is that the net assets of a clearinghouse cannot be used as pledged collateral for any loans sought by the clearinghouse. Electronic Payments, Messages, and Signatures The electronic signature is protected legally. However, some issues regarding the certification authority for cryptography are still open. Chile Regulatory and Oversight Powers of the Central Bank Article 3 of the Legal Statute of the central bank (Banco Central de Chile [BCCH]) of 1989 establishes its main responsibilities and powers, among which the BCCH is responsible for safeguarding currency stability and the smooth functioning of domestic and foreign payments. According to this law, it is the BCCH's duty to authorize the creation and regulate the operation of cheque and other clearinghouses in which banks and financial companies participate. In addition, Article 35 establishes the duties of the BCCH towards companies whose line of business is to issue or operate credit cards or any other similar system. The BCCH is empowered to issue the rules to which such companies must abide. Besides, these companies are subject to monitoring by the banking supervisory agency. Payment Instruments The law on credit transactions and other monetary liabilities generally regulates monetary and credit transactions, either in local or foreign currency. The Bank Current Accounts and Cheques Law of 1982 regulates the operation and use of cheques. Other Relevant Laws and Provisions The General Banking Law (Ley General de Bancos) of 1997 groups some relevant provisions for the payments system in Chile. Among others, the Ley General de Bancos includes the rules that regulate the BCCH's system to guarantee demand deposits in the case of the failure of a bank. The Ley General de Bancos also regulates the creation of auxiliary banking institutions by banks, the creation of essential instruments for specific payment system functions such as clearinghouses, the establishment of automated teller machine (ATM) networks, and the operation of credit cards. Finally, the compendium of central bank financial regulations includes, among other provisions, those related to the large value and retail payments system, such as the operational rules for the RTGS; the operational rules for the cheque clearinghouse; liquidity credit lines regulations for banks and finance companies; the required legal reserve; technical reserve regulations; payment cards services; BCCH transactions with financial instruments; and so on. Colombia Regulatory and Oversight Powers of the Central Bank The central bank does not have a clear empowerment over payment system oversight. The legal foundation for central bank intervention in the system is included in Article 16 of the Central Bank Law 31 de 1992 (Ley Orgánica del Banco de la República [BR]). In describing the central bank functions, the article states that the central bank should study and adopt monetary, credit, and FX measures to regulate monetary circulation and, in general, the liquidity of the financial system, and the smooth functioning of the domestic and international payment system. When the central bank directly provides payment services, it meets its regulatory objectives by means of subscription by participants of bilateral contracts in which all obligations and responsibilities of participants are established, as well as the rules for their operations, service pricing, and the sanctions for noncompliance. The Law 795/2003 (Estatuto Orgánico del Sistema Financiero) states that the Superintendencia Financiera de Colombia will regulate the payments systems and related activities that are not under the responsibility of the central bank. This activity will be executed with prior consultation to the BR board of directors (Article 6j). In addition, Article 71, paragraph 1, indicates that the Superintendencia Financiera de Colombia will supervise, monitor, and inspect, following general guidelines issued by the national government, the entities administering credit and debit cards or payment and settlement systems. (Continued) 32 Payments and Securities Settlement Table 4.2 Main Legal Issues in Individual Latin America and the Caribbean Countriesa (Continued) Country Legal Issues Colombia Payment Instruments (Continued) The cheque in Colombia is considered as a credit vehicle, and as such is regulated by general norms in the Commercial Code (Articles 619 to 821). It is also subject to special provisions of the Commercial Code (Articles 712 to 751) and the Single Accounting Circular of the Superintendencia Financiera de Colombia (Title III, Chapter I). Banking current accounts are governed in general by the Commercial Code (Articles 1382 to 1392) and by Superintendencia Financiera de Colombia regulations, although the corresponding contracts are deemed bilateral and consensual. Settlement Finality and Zero-Hour Rule The laws for liquidation of companies do not explicitly contain any provisions on this area. Nonetheless, Article 2490 of the Civil Code contains a rule applicable to creditors' payments when an individual is in bankruptcy. Following this rule, creditors have the right to demand, following a judicial procedure, the cancellation of any businesses carried out by the debtor against their interests, provided there is fraud of the debtor and its counterpart. Netting Arrangements Regarding the recognition of netting arrangements, under Colombian law bilateral netting is explicitly seen as a way to extinguish obligations when two persons present reciprocal debit positions. Multi- lateral netting is permitted in cases where multiple and reciprocal entities hold debit and credit positions and participate in a payment system, and where there is an agreement among them, also provided that the agreement respects the provisions of the law. Thus, in Colombia, netting is legally recognized and operates automatically without explicit solicitation of the counterparties between themselves or a third party. The Colombian Civil Code (Articles 1687 to 1710) rules the legal figure of novation. Electronic Payments, Messages, and Signatures Law 527 of 1999 allows data messages to be used as a means to both offer and accept contracts. In this context, data messages are referred to as the information originated, received, organized, or communicated by electronic, optical, or similar means, such as the electronic data interchange, Internet, and electronic mail. Data messages bases can be admitted as evidence before court proceedings.c In this regard, the signature in a data message is an important element to determine its integrity. When the message contains an electronic signature, the law presumes that the subscriber has the intention of validating the message and of being linked to its content. The use of the digital signature has the same force as the physical signature, as long as it complies with the set of attributes established in the law. Costa Rica Regulatory and Oversight Powers of the Central Bank Law 7558 of 1995 (Organic Law of the Banco Central de Costa Rica [BCCR]) prescribes as one of the basic objectives of the central bank "to promote the efficiency of the internal and external payment system and to maintain its smooth functioning" (Article 2) and as one of its main functions to establish, operate and oversee clearing systems. Law 7558 also empowers the board of directors of the BCCR to organize and regulate the functioning of the payment system. However, Article 69 of this law seems to limit the BCCR's responsibilities to services provided by the central bank itself; for that reason, it is unclear who is in charge of regulating and overseeing payment systems operated by other entities. Settlement Finality and Zero-Hour Rule There is no explicit mention in any law on when settlement becomes final. The Costa Rican laws do not contain explicit references to the zero-hour rule. Netting Arrangements Neither the civil code nor the commercial code has explicit provisions for netting arrangements. Article 130 of the Securities Markets Law implicitly admits this arrangement for securities clearance and settlement, even though in case of insolvency the court may rule the arrangement as invalid. The principles of netting are not well known outside the payment and securities area. Payments Systems Assessment Findings in Latin America and the Caribbean 33 Table 4.2 Main Legal Issues in Individual Latin America and the Caribbean Countriesa (Continued) Country Legal Issues Costa Rica Collateral and Repos (Continued) Articles 49 and 50 of the Securities Markets Law indicate that ownership of the securities is transferred by means of a repo. Electronic Payments, Messages, and Signatures The Securities Markets Law (Article 180) recognizes electronic or magnetic transmission and data-storage media as official proof in a court of law. A law on digital signatures and digital certificates was issued in 2001. Digital signatures have the same legal validity and effectiveness as written signatures. Dominican Republic Regulatory and Oversight Powers of the Central Bank In November 2002, the Monetary and Financial Law (Ley Monetaria y Financiera [LMF]) was approved. This law establishes all aspects related to the financial sector as well as the monetary and exchange regimes of the nation. The LMF is a framework law, and the principles contained in it are applied through regulations issued by the monetary board; those regulations have a ranking similar to laws. Article 27 of the LMF states that the payments system, cheques clearance, and other payment means are a public service whose exclusive regulator is the Banco Central de la República Dominicana (BCRD). As such, the BCRD has to act as the supervisor and final settlement agent of these services. The monetary board is responsible for regulating the organization and functioning of the payment systems to ensure the smooth functioning of payment flows and of the interbank market. The LMF explicitly prohibits the organization of alternative multilateral settlement systems, although the service could be provided by a private institution if explicitly authorized by the monetary board. Payment Instruments Cheques are ruled by the Cheque Law of 1951, modified by Law 62-2000 of August 2000. This law contains rules regarding the form and creation of the cheque, and the endorsement and the conditions that, if not complied with, make the cheque void. Credit cards are regulated by various resolutions of the monetary board; the last such resolution was issued in February 1988. Settlement Finality and Zero-Hour Rule For the various payment systems there are no explicit legal dispositions dealing with payment finality. Moreover, there is no explicit zero-hour rule. Netting Arrangements Payment system concepts such as bilateral netting and novation are considered only in a general sense in civil legislation. There is no explicit legal base for multilateral netting. However, the LMF states that the monetary board, in order to regulate the functioning of the payments system, may establish different subsystems using the international standards as a reference. Electronic Payments, Messages, and Signatures An electronic trade, documents, and digital signatures law (Ley de Comercio Electrónico, Documentos y Firmas Digitales, No. 126-2002) was approved in 2002, and a draft version of its regulation was being discussed in January 2003. The main purpose of this law is to regulate the identification of the individuals or entities participating in an electronic trade transaction. Ecuador Regulatory and Oversight Powers of the Central Bank The Central Bank of Ecuador (Banco Central del Ecuador [BCE]) is empowered under the Monetary Regime and State Bank Law (Ley de Régimen Monetario y Banco del Estado), which is considered as the BCE's legal statute, to establish the monetary policy and to apply financial and exchange rate policies. This law states that the BCE is the official depository of public sector funds and of the banking reserve requirements. Thus, the BCE is the financial and fiduciary agent for the government and is responsible for managing the current accounts held by financial and nonfinancial entities. In this role, it must provide all the necessary facilities (Continued) 34 Payments and Securities Settlement Table 4.2 Main Legal Issues in Individual Latin America and the Caribbean Countriesa (Continued) Country Legal Issues Ecuador for the proper, timely, and safe execution of the transactions over these accounts; at the same time, it must (Continued) control the overall risks in the system. The regulations code of the BCE sets and regulates its operational responsibilities toward the national clearing system, the reserve requirement, interbank transactions, public sector current accounts and conventional payment instruments. There are no legal or regulatory dispositions dealing with the oversight powers of the central bank over the payments system. Payment Instruments A Cheque Law and its regulation were approved in 1975. The BCE codified regulations rules the BCE operational responsibilities regarding the national clearance and settlement system, the legal reserves ratio, the interbank money market operations, the public sector accounts, and conventional payment media. Settlement Finality and Zero-Hour Rule The Cheque Law explicitly states the timing of settlement finality. There is no such definition for other payment systems. There are no explicit references to the zero-hour rule. Netting Arrangements Netting arrangements are not recognized explicitly in the Ecuadoran laws. Collateral and Repos Repurchase agreements are not defined in Ecuadoran laws. There is however, a National Securities Commission regulation for exchange-traded repos, which entitles the stock exchange to seize the guarantees posted by the selling party. Electronic Payments, Messages, and Signatures A law on electronic trade, electronic signatures, and messages (Ley de Comercio Electrónico, Firmas y Mensajes de Datos) was approved in 2002. It rules data messages, electronic signatures, and certification services, among other issues. Under this law, for all legal purposes data messages have the same validity as paper documents, and electronic signatures have the same validity as written signatures. Annexed messages through a direct electronic link are also legally valid. El Salvador Regulatory and Oversight Powers of the Central Bank The legal and regulatory framework that governs the nation's payment system is provided, in a limited way, through the banking law, the commercial code, and Banco Central de Reservas (BCR) regulations. The BCR has responsibility for maintaining the legal reserve requirements established by its board of directors on the daily balances of deposits of commercial banks. The BCR also has the authority to regulate the payment system and provide clearing and settlement services for payment transactions, with settlement taking place through the commercial banks' dedicated reserve accounts. The Superintendence of the Financial Sector supervises banks and other financial institutions. Finally, the BCR is authorized to issue regulations regarding the payment system. In general, it would appear that the BCR leaves the proposal of new regulations largely to the commercial banks. Payment Instruments There is a relatively old Cheque Law that contains the usual provisions. Settlement Finality and Zero-Hour Rule The timing of settlement finality is not mentioned explicitly in any law. There are no explicit references to the zero-hour rule. Netting Arrangements Netting arrangements are not recognized explicitly in the laws. Payments Systems Assessment Findings in Latin America and the Caribbean 35 Table 4.2 Main Legal Issues in Individual Latin America and the Caribbean Countriesa (Continued) Country Legal Issues El Salvador Other Relevant Laws and Provisions (Continued) In December 2000, a new law (Ley de Integración Monetaria) was passed by congress that introduced, de facto, the dollarization in the country, effective since January 2001. All accounts are denominated in U.S. dollars and the local currency (colón) is currently present only for physical transactions in banknotes and coins. The dollarization has introduced several implications for the payments system in El Salvador. For example, the law states that after a transition period of two years banks will be allowed to maintain their reserve requirements abroad. Guatemala Regulatory and Oversight Powers of the Central Bank The Legal Statute of the Banco de Guatemala (Ley Orgánica del Banco de Guatemala [BANGUAT]) dated May 10, 2002, and published in the official gazette on May 13, 2002, includes as a basic function of the BANGUAT "to provide for a smooth functioning of the payment system" (Article 4c). Thus, the law is not specific about the role of the central bank in payments systems, but it establishes the basis for its regulatory and oversight powers and, if necessary, for the operation of some systems. In addition, the law empowers the monetary council to regulate the clearinghouse or any other instrument with similar goals (Article 26d). This law also regulates the reserve requirements (Article 43 and 44) as the basis for payments settlement in central bank money (Article 70), and in open market operations (Article 46). Payment Instruments Cheques are regulated by the Regulation of the Cheque Clearinghouse, 2003, which also includes the rules for cheque standardization. Settlement Finality and Zero-Hour Rule In the law, there is no provision regarding the concepts of acceptance, irrevocability, or settlement finality of an order to be processed by the system and the possible implications these concepts may have in different circumstances. Netting Arrangements Although netting is used on a broad scale for the settlement of large-value and retail payments, there is no explicit legal recognition of the multilateral netting arrangements, and therefore it is unclear what would be the court's interpretation in case of an insolvency procedure. Collateral and Repos The Civil Law (Article 744) and the Operations Manual of the Stock Exchange Trading Floor (Article 20) include the definition of repo transactions. In both, a repo transaction is defined as the ownership transfer of securities by an agreed price with the commitment, after an agreed period, to transfer back the ownership of fungible securities. The repurchase operation takes place under a contractual arrangement between the counterparties. Electronic Payments, Messages, and Signatures There is no law or regulation thereof with reference to electronic documents and signatures. There is only an explicit authorization of the monetary council to the BANGUAT to operate the systems using electronic records. Honduras Regulatory and Oversight Powers of the Central Bank The general empowerment of the central bank regarding payment systems emanates from Article 2 of the Central Bank (Banco Central de Honduras [BCH]) Law. The BCH is responsible for the stability of the internal and external value of the domestic currency and the normal functioning of the payments system. Article 16 includes as one of the functions of the BCH board the responsibility over the adequate functioning of the financial and payments systems in the country. In terms of liquidity provision by the BCH, Articles 38 and 39 regulate central bank liquidity provision under normal and exceptional circumstances, respectively. Government payments are regulated in Article 56. Chapter IV, Section II, establishes the reserve ratio regulation, and Article 54 specifically states that the reserve ratio funds serve as a basis for the cheque clearinghouse, which only operates in domestic currency. (Continued) 36 Payments and Securities Settlement Table 4.2 Main Legal Issues in Individual Latin America and the Caribbean Countriesa (Continued) Country Legal Issues Honduras Payment Instruments (Continued) There is a law and regulation of credit cards. The Commercial Law (Articles 595 to 631) regulates cheque clearing. The operation of the electronic cheque clearinghouse (ECH) is based on an agreement (Convenio Especial para la Administración del Proceso Elec- trónico de la Cámara de Compensación Nacional) between the bankers' association and the BCH. The agree- ment indicates that the rules of the system are to be issued by the central bank, and that the operations settled through the system are under the supervision of the Banking Superintendence. Actually, the BCH has issued two regulations for the cheque clearinghouse: one for cheque standardization and the other, the operational rules of the clearinghouse. Settlement Finality and Zero-Hour Rule There is no explicit zero-hour rule. There is no clarity about the timing of final settlement and, in any case, there is legal uncertainty about the settlement finality of multilateral net debit positions of the cheque clearinghouse. Netting Arrangements There is no legal recognition of netting arrangements. Collateral and Repos The Commercial Law (Articles 1289 to 1307) provides the legal basis for the pledge. Article 1298 regulates securities pledge and the different ways it can be constituted. However, the methods to constitute a pledge of securities are applicable only to securities issued on physical form and, thus, because almost all securities are dematerialized and no central securities depository exists there is no efficient and secure way to constitute a pledge on securities. Jamaica Regulatory and Oversight Powers of the Central Bank Regarding the central bank's (Bank of Jamaica [BOJ]) powers over the payments system, the BOJ Act only contains a reference (Provision 27) to the promotion, by the BOJ, of clearance and settlement facilities for banks. It does not contain any provisions on the powers or the role of the BOJ as payment systems overseer. As for the payment systems operated by the BOJ, not all of them have detailed rules. Rules are available to the participants, but not to the public. Settlement Finality and Zero-Hour Rule There is no definition of settlement finality at the law level, nor is there a definition of specific triggers for the intervention of a financial institution.d Netting Arrangements Netting--in particular, multilateral netting--is not explicitly recognized by law. The only relevant reference is in the bankruptcy law, which allows for the offsetting of the obligations with the bankrupt party. Electronic Payments, Messages, and Signatures In terms of electronic documents and signatures, there is no specific law; there is only an article in the evidence law. So far, that article has been tested positively only in contexts other than the payments system. Mexico Regulatory and Oversight Powers of the Central Bank Article 2 of the Central Bank Law (Ley del Banco de México) of 1993, establishes fostering a well-functioning payments system as one of the primary tasks of the Banco de México. Article 3 defines the central bank's functions, some of which include to regulate the issuance and circulation of currency and of the payments system, and to operate with credit institutions as the reserve bank and as lender of last resort. Article 15 details the requirements and exceptions for financing that the Banco de México may grant to credit institutions in order to avoid problems in the payments system, and details the operations the Banco de México can make as the lender of last resort. Article 24 establishes the central bank's ability to issue regulations for the payments system and to impose sanctions. Article 31 establishes the central bank's ability to regulate the transfer of funds through banks. Payments Systems Assessment Findings in Latin America and the Caribbean 37 Table 4.2 Main Legal Issues in Individual Latin America and the Caribbean Countriesa (Continued) Country Legal Issues Mexico Before November 2002, the interpretation of these powers was that the Banco de México was responsible (Continued) for regulating, organizing, and controlling its own payment systems, as well as for overseeing self-regulated private systems in order to guarantee the continuous, appropriate, efficient, and safe provision of financial services in a competitive environment of free access. In November 2002, the Mexican Congress enacted the Payment System Law, granting the Banco de México clear and full powers to oversee all payment systems and to impose sanctions. Payment Instruments The General Law of Credit Certificates and Transactions (Ley General de Títulos y Operaciones de Crédito) regulates paper-based payment instruments such as cheques, money orders, and bills. A June 2001 reform to the Banking Law authorized banks to provide clients with direct debit or preauthorized charge services. Settlement Finality and Zero-Hour Rule The Payment System Law also clarified the timing of settlement finality in systemically important payment systems, and gave explicit protection to collateral pledged in such systems from any insolvency procedures. Additionally, in the Mexican legislation there are no specific references to the zero-hour rule. Netting Arrangements The Federal Civil Code (Fifth Title, Book 4, Articles 2185 to 2205) contains the legal underpinning for netting arrangements. However, there is no explicit recognition of multilateral netting arrangements. This same code also contains general legal dispositions for novation (Fifth Title, Book 4, Articles 2213 to 2223). Collateral and Repos As for collateralization, in Mexico there are two basic legal frameworks: the pledge, and securities safekeeping (caución bursátil). A relevant feature of securities safekeeping is that the extrajudicial sale of pledged securities may be agreed, as long as the specific execution procedure described in the law is followed. Ownership of securities is transferred through repurchase agreements, which are regulated in the Ley General de Títulos y Operaciones de Crédito. Electronic Payments, Messages, and Signatures Regarding electronic documents and signatures, the commercial code contains a section on electronic commerce. Article 89 establishes that, for purposes of the code, electronic and optic media and any other technology may be used in commercial activities. Information created, sent, received, filed, or communicated through these media is called a data message. It is presumed (Article 90) that a data message comes from the issuer if a means of identification such as a user name and password has been used, or if the message is received through an automated information system programmed either by the issuer or on his behalf. Article 1298-A establishes that data messages are accepted as proof in a court of law. On July 5, 2002, the Banco de México issued Circular 19/2002, known as the Circular on Extended Infrastruc- ture. This circular allows the Banco de México to authorize commercial banks to issue digital certificates to their clients for operational purposes and to register and process such certificates through the extended infrastructure. Netherlands Antilles Regulatory and Oversight Powers of the Central Bank In the statutes of the central bank (Bank van de Nederlandse Antillen [BvdNA]) of 1985, there are no provisions regarding the powers of the BvdNA to promote the efficiency of payments and to regulate the security of payment instruments and products, neither are there provisions regarding the oversight powers of the central bank over payment and securities settlement systems. Finally, there are no formal provisions regulating the activities of the BvdNA in offering facilities to the banking sector for the settlement of payments or of securities trades. Payment Instruments In the Code of Commerce (Wetboek of Koophandel), only specific arrangements are given with respect to cheques and bills of exchange. (Continued) 38 Payments and Securities Settlement Table 4.2 Main Legal Issues in Individual Latin America and the Caribbean Countriesa (Continued) Country Legal Issues Netherlands Antilles Settlement Finality and Zero-Hour Rule; Netting Arrangements (Continued) The legal framework is incomplete or nonexistent regarding basic concepts such as settlement finality, the legal recognition of bilateral or multilateral netting arrangements of payments, and the prevention of possible conflicts of laws in case a foreign bank with branches in the Netherlands Antilles goes bankrupt. In particular, it is not certain whether the finality of payments made at the BvdNA's RTGS occurs immediately once a payment is settled, and that it cannot be revoked or made void, for instance due to the existence of the so-called zero-hour rule. Collateral and Repos There is no legal basis for repos or standardized repo contract. Electronic Payments, Messages, and Signatures Regarding electronic means of payment, in 2000 the parliament enacted a law dealing with the conduct of contracts via electronic channels and the electronic signature. An e-signature has now the same legal force as a written one, and there are no judicial hinders to citing electronic documentation or data in a court of law. Nicaragua Regulatory and Oversight Powers of the Central Bank The basic legal framework is included in the Banco Central de Nicaragua (BCN) Organic Law. Article 3 of this law articulates BCN's general responsibilities regarding payment systems. Article 38 empowers the BCN to provide cheque-clearing services, mentioning that the reserve requirement can be used as basis for cheque clearing. Government payments are regulated in Article 48. Settlement Finality and Zero-Hour Rule There is no explicit zero-hour rule. There is no clarity about the timing of final settlement and, in any case, there is legal uncertainty about the settlement finality of multilateral net debit positions of the cheque clearinghouse. Netting Arrangements There is no legal recognition of netting arrangements. Electronic Payments, Messages, and Signatures Despite Article 119 of the banking law, which contains several operational rules for the use of information technology in banking operations, the legal framework for the recognition of electronic documents and signatures is not complete. The article could serve as a basis for regulation of these issues, but currently no specific regulation has been issued with respect to payments system. OECS Regulatory and Oversight Powers of the Central Bank The legal framework in the OECS is heavily affected by the multiterritorial structure of the organization where eight independent jurisdictions coexist. On the one hand, the regulatory powers conferred on the Eastern Caribbean Central Bank (ECCB) by the agreement that established it in 1983 have not been used to date.e On the other hand, there is a banking legislation common to all of the member states, collectively referred to as the Uniform Banking Act. The Uniform Banking Act recognizes the ECCB as the region's central bank with responsibility for the supervision of the financial system. Regulatory orders drawn under this law also have the force of law and provide a significant degree of flexibility to the monetary authorities. The Clearing House Rules establish the ECCB clearinghouse in accordance with the ECCB agreement. The rules and procedures deal with the management of the system, clearing arrangements, settlement, returned items, missing instruments, and general provisions such as endorsement of cheques. The Procedural Guidelines for Operations between the Commercial Banks and the ECCB explain, among other things, the procedures and time schedules that should be followed to request and utilize the banking services the ECCB avails to the commercial banks, whereas the Procedural Guidelines for Operations Payments Systems Assessment Findings in Latin America and the Caribbean 39 Table 4.2 Main Legal Issues in Individual Latin America and the Caribbean Countriesa (Continued) Country Legal Issues OECS between Participating Governments and the ECCB explain the procedures and time schedules the ECCB (Continued) uses in effecting its role as banker to the member governments. Payment Instruments The Bills of Exchange Act (1987) regulates cheques and deals with the legal rules applicable to bills of exchange such as negotiability; the effect of forgery; delivery; acceptance; endorsements; dishonor; alteration and cancellation; presentment; conflict of laws; liability of acceptor, drawer, or endorser; definition and present- ment of cheques; promissory notes; signatures; and other related matters. The legal framework for the clearance and settlement of (intra-island) cheques is to be found in the clearing- house rules. These rules were issued in 1990 by the ECCB, but the rules were not published in the official gazettes of the territories and they only have a contractual nature. Settlement Finality and Zero-Hour Rule There is no clear definition of intraday finality for accounting entries in the ECCB's books or in the books of the banks that initiate transfers for their own account or for the accounts of their customers. Netting Arrangements There is no legal definition regarding the validity of multilateral netting schemes. Electronic Payments, Messages, and Signatures There is no specific legal framework regarding the acceptability of electronic signatures or of bank computer records as evidence in a court of law. Other Relevant Laws and Provisions Draft Payments Code and General Banking and Payments Rules were completed in September 2003. Panama Regulatory and Oversight Powers of the Central Bank The U.S. dollar is legal tender in Panama and there is no central bank. The legal and regulatory framework that governs the Panamanian payment system is provided by the Banking Law (Decree-Law 9, 1998), the fiscal code, the commercial code (Law 57, 1917), the law of the Banco Nacional de Panamá (BNP; Law 20, 1975) and others. The BNP, a state-owned commercial bank, is authorized to open accounts to any other bank operating in Panama. Government agencies, mixed or government enterprises, and municipalities are obliged to maintain their deposit accounts in the BNP. The clearinghouse of the banking system also functions under the direc- tion and responsibility of the BNP, whose board of directors issues regulations concerning the functioning of the clearing process for cheques, the Automated Clearing House (ACH), debit and credit cards, and oversees compliance with those cards by the banks. The BNP is also authorized to open settlement-only accounts to nonbank payments providers such as Telered (in charge of clearing ACH, debit, and credit cards) and Latinclear (the central securities depository). Given the special characteristics of the Panamanian monetary and payments system, the payment systems oversight function is not regulated. Some specific regulations in this area are contained in the Banking Law and in the law of the BNP. Settlement Finality and Zero-Hour Rule No specific legal provisions are identified protecting finality and irrevocability of payments and netting. Article 126 of the banking law, however, ranks obligations resulting from the clearing process at the BNP among the top priorities to be honored in case of an insolvency process. There is no explicit zero-hour rule, nor is there complete certainty as to whether a judge in liquidation proceedings might have the power to revoke obligations against a defaulting financial institution pending settlement. (Continued) 40 Payments and Securities Settlement Table 4.2 Main Legal Issues in Individual Latin America and the Caribbean Countriesa (Continued) Country Legal Issues Panama Netting Arrangements (Continued) No explicit regulations are in place for bilateral or multilateral netting of transactions exclusively related to the payments system. Collateral and Repos The Securities Market Law is clear in protecting securities pledged against any third party claim even in case of insolvency. Pledged securities therefore, can be executed in a bankruptcy case without the need of a court order. Electronic Payments, Messages, and Signatures A legal framework (Law 43, 2001) supports electronic processing of payments (signature, recording, legal proof, and so on). Paraguay Regulatory and Oversight Powers of the Central Bank The Legal Statute of the Central Bank (Ley 489/95--Carta Orgánica del Banco Central de Paraguay [BCP]) describes the authority of the BCP to supervise payment systems. Article 45 indicates that the BCP is responsible for the efficiency and smooth functioning of the payments system. To this purpose, the BCP may adopt measures to develop and upgrade payment systems and may create payment clearinghouses. Article 5 articulates the BCP regulatory authority for the development of its functions. Article 45 also describes the type of instruments that may be settled in the clearinghouse, and Article 64 provides the legal basis for the opening of current accounts of financial institutions at the central bank as well as for the operation of clearinghouses by the BCP. This law also regulates the reserve requirements and the management of public funds by the BCP. Article 45 provides a general basis for the payment systems oversight function and for the operation of clearinghouses. However, there is no regulation developing in more detail the procedures on which over- sight activities are to be based. Other relevant laws include the Banking Law (Ley 861/96 de Bancos, Financieras y Otras Entidades de Crédito); the Deposit Insurance Law (Ley 2334/2003 de Garantía de Depósitos), and the Bankruptcy Law (Ley 154/70 de Quiebras). Particularly relevant are Articles 13 and 26 of the Deposit Insurance Law, which describe, respectively, the bank resolution causes, and the creditors' priority in case of a bankruptcy, making no mention of any payment system's final settlement balances. Payment Instruments The Cheques Law (Ley 805/96 de Cheques) regulates all aspects related to cheques and their use both as payment instruments and as credit instruments. Settlement Finality and Zero-Hour Rule There are no provisions regarding the concepts of acceptance, irrevocability, or settlement finality of an order to be processed by the system and their possible implications in different circumstances. In fact, the Bankruptcy Law includes cases in which transactions can be revoked after one year (see Article 61). Netting Arrangements There is no explicit legal recognition of multilateral netting arrangements. Collateral and Repos The legal basis for the repo, included in the civil code, is uncertain. Although the legal basis for the pledge is included in the civil code, there is no specific legal framework for the securities used as collateral in financial market transactions. Electronic Payments, Messages, and Signatures There is no legal support to make electronic documents and signatures legally valid. Payments Systems Assessment Findings in Latin America and the Caribbean 41 Table 4.2 Main Legal Issues in Individual Latin America and the Caribbean Countriesa (Continued) Country Legal Issues Peru Regulatory and Oversight Powers of the Central Bank In Peru, the legal framework that empowers the central bank (Banco Central de Reserva del Perú [BCRP]) to regulate and oversee payment systems stems from its objective to preserve monetary stability. The Organic Law of the BCRP specifies the powers and duties related to its functions as a monetary authority. The BCRP's legal authority is specific and clear in the case of low-value transactions. In this regard, Article 68 of the Organic Law specifies that the regulation of clearinghouses is a competence of the BCRP. In addition, the recently modified Securities Law (Ley de Títulos-Valores, October 2000) empowers the BCRP to issue regulations regarding electronic clearing and settlement of cheques and securities. The banking supervisory agency, however, is the one that grants authorization to parties interested in operating a clearinghouse. This legal empowerment for the BCRP is not present in the case of large-value systems. Thus, although the BCRP has issued regulations for the operation of the central bank­operated RTGS system, legal shortcomings and uncertainties have been solved through the incorporation of adherence agreements (Convenios de Adhesión). Based on them, the participants in the system agree to the conditions established in those agreements. Settlement Finality and Zero-Hour Rule There is no provision regarding the concepts of acceptance, irrevocability, or settlement finality at the law level. These concepts have only been included in the operational regulation of the RTGS (Article 7) and in the electronic clearinghouse (ECH) general regulation (Article 12). In case of insolvency, the so-called zero-hour rule is not applicable in Peru. In case of a bank intervention, the banking supervisory agency decides, on the day of the intervention, if the relevant bank has enough funds to cover its net debit position in the cheque clearinghouse. If the banking supervisory agency decides that the intervened bank will cover its position, the Banking Law (Article 118) states that this debit position should be considered senior debt. Netting Arrangements Multilateral netting is not recognized at the law level, although it is recognized in some regulations (Article 13 of the ECH general regulations). Novation is recognized in the Civil Code (Articles 1277 to 1288), but is only effective when the parties explicitly state their intention to novate. Collateral and Repos It is not clear whether security interests provided under collateral arrangements may be enforced efficiently and in all relevant circumstances. Electronic Payments, Messages, and Signatures In June and July 2000, regulations for the legal recognition of electronic signatures and documents were issued, supporting the electronic processing of payments. Law No. 27291 modified the civil code to adapt its provisions to the use of electronic documents. Law No. 27269 regulates electronic signatures. In addition, Law No. 27309 incorporates the information technology offences in the criminal code. Trinidad and Tobago Regulatory and Oversight Powers of the Central Bank The Central Bank Law empowers the Central Bank of Trinidad and Tobago (CBTT) the right to issue notes and coins to be regarded as legal tender. The CBTT is also empowered to establish and maintain a clear- inghouse for commercial banks operating in the country. The law also specifies other functions of the CBTT in the payment system area, which include (1) issuing demand drafts and other kinds of remittances; and (2) opening accounts for and accepting deposits from the government, local govern- ment authorities and statutory bodies, other public authorities, commercial banks, and nonbank financial institutions. (Continued) 42 Payments and Securities Settlement Table 4.2 Main Legal Issues in Individual Latin America and the Caribbean Countriesa (Continued) Country Legal Issues Trinidad and Tobago The Central Bank Act and the Financial Institutions Act have been amended to give explicit powers (Continued) for oversight of the payments system to the central bank. The Financial Institutions Act will cover the treatment of orders for transfer of funds on the commencement of external administration, as well as the validity and enforceability of financial collateral and close-out netting arrangements. Payment Instruments The Bills of Exchange Act states that the law recognizes three types of cheques: ordinary, postdated, and antedated cheques. The Dishonored Cheques Act of 1998 refers to cheques that cannot be covered due to insufficient funds, and makes it illegal for a person to acquire goods or services by use of a dishonored cheque. Settlement Finality and Zero-Hour Rule Currently, there is no specific legislation that addresses issues related to payments and securities clearance and settlement such as acceptance, finality, or revocability. Netting Arrangements There is no explicit legal recognition of multilateral netting arrangements. Electronic Payments, Messages, and Signatures As part of the reform package to modernize legislation with respect to electronic commerce draft policies on electronic funds transfer and data protection were published by the Ministry of Public Administration and Information for Public Comment. Uruguay Regulatory and Oversight Powers of the Central Bank The Legal Statute of the Central Bank (Banco Central del Uruguay [BCU]) of 1995 includes as a basic function of the BCU "to ensure a smooth functioning of the domestic and foreign payments" (Article 3b). Thus, the law is specific about the role of the central bank in payments systems, but it establishes the basis for its regulatory and oversight powers (although not explicitly) and, if necessary, for the operation of some systems. Articles 6 and 26 regulate the issue of currency. The law also empowers the BCU to establish arrangements with private and public institutions regarding payments and settlement (Article 29). This law also regulates the reserve requirements (Article 27), open market operations, and financial assistance (Articles 27, 36 and 37). Article 55 refers to the securities issued by the central bank. Article 3 and 7 of the legal statute of BCU provides a general, although not explicit, basis for the oversight function over the payment systems. There is, however, no regulation developing the oversight function and the implications of this activity for the participants in the payments system. Settlement Finality and Zero-Hour Rule There is no provision at the law level regarding the concepts of acceptance, irrevocability, or settlement finality of a payment order to be processed by the system. Netting Arrangements There is no explicit legal recognition of netting arrangements. Collateral and Repos Although the repo is included in a BCU regulation (Title I, Chapter 7, Book 3, Article 182.1) and Communications (2004/110, 111, and 344), a clear legal definition (ownership transfer) is not included either in the regulations or in any law. This BCU Regulation only includes an operational definition and related procedures. Electronic Payments, Messages, and Signatures The legal basis for electronic signatures and documents is included in only a limited way. Article 694 of the Budget Law (Ley de Presupuestos) of 1998 and Decree 65/1998 of March 1998, include these concepts but only for activities related to public administration (for example, public documents). Payments Systems Assessment Findings in Latin America and the Caribbean 43 Table 4.2 Main Legal Issues in Individual Latin America and the Caribbean Countriesa (Continued) Country Legal Issues Venezuela, R.B. de Regulatory and Oversight Powers of the Central Bank The law of the Banco Central de Venezuela (BCV) dated October 3, 2001, includes as a basic function of the BCV "to care for the smooth functioning of the payment system of Venezuela and to establish its operating rules" (Article 7, Item 7). The law also empowers the BCV to oversee and regulate the functioning of the dif- ferent payment systems in the country, whether or not they are operated by the BCV, in order to guarantee that those systems work in an efficient way and within the highest levels of security for the systems partici- pants and for the public (Article 21, paragraph 17). Payment Instruments The legal framework to be applied for cheques is the Commerce Code of Venezuela (El Código de Comercio de Venezuela). The cheques could be drawn al portador (bearer form); two types of cheques exist: a la vista (cash) and a término (term). Currently, the legal framework for cheques clearing and settlement is the regulation of the system of clearinghouses, issued by the BCV. Settlement Finality and Zero-Hour Rule There are no provisions regarding the concepts of acceptance, irrevocability, or settlement finality of an order to be processed by the system and the possible implications these concepts may have under different circumstances. There is no explicit zero-hour rule. Netting Arrangements There is no explicit legal recognition of netting arrangements. Collateral and Repos The Banking Law (Article 46) and the Securities Market Law (Article 79) include the definition of repo trans- actions. In both, a repo transaction is defined as the ownership transfer of securities by an agreed price with the commitment, after an agreed period, to transfer back the ownership of fungible securities. In case the underlying securities of repo transactions are constituted by shares, the ownership transfer must occur at the issuer's registry. The legal basis for the pledge is included in the civil code but the pledge, as a tool for collateralized financial transactions, is not regulated. Electronic Payments, Messages, and Signatures An electronic documents and signature decree law was approved in February 2001. It regulates signatures and electronic data messages so they are accepted as proof in a court of law. It specifically assigns to the electronic signature the same validity as the autograph signature (see Article 16). In any case, this legal basis is still to be customized for the different settlement systems in the country through their specific regulations and rules. Source: Authors' elaboration. a. The description of legal issues contained in this table is derived from the experience of country missions. The analysis of legal framework of individual countries is particularly complex. Therefore, it is possible that some important elements are omitted and that the description is incomplete. For this reason, the organization of information in the table differs slightly from country to country. b. See also Table 6.1. c. Nonetheless, for the validation of data messages as evidence, elements taken into account are the form in which the data message was generated, archived, and communicated; the form in which the integrity of the information in the message was preserved; and the form in which its initiator was identified. d. At present the BOJ applies a policy of unlimited current account overdrafts, for which reason the legal finality issue is less relevant in practice. If the BOJ decides to limit its credit exposure, this issue will become crucial. e. Regulations were issued only informally and were never published in the Official Gazettes of the territories, thus not acquiring the legal strength envisaged by the Agreement. 44 Payments and Securities Settlement Observations unclear what would be the interpretation of a court in case of an insolvency proceeding. Because netting Some of the specific problems identified in the legal and is used on a very broad scale for cheque clearing, regulatory framework follow: other retail payments, and even for the settlement of In general, there is no regulation developing the over- securities transactions, this constitutes a serious legal sight function and its implications for the participants risk. It may also hamper further development of finan- of the systems. Nevertheless, central bank laws usually cial instruments such as derivatives. It is important to recognize somehow, implicitly in most cases, that the protect netting schemes from potentially disruptive oversight of payment systems is among central banks' insolvency laws so that even if a system participant fails functions. during the day, a liquidator cannot unwind settlement In general, there is a lack of provisions regarding the occurring on a net basis later in the day.3 concepts of acceptance, irrevocability, or settlement Few countries have enacted a payment system law that finality of an order to be processed by the system and covers, among other topics, settlement finality, the their possible implications in different circumstances. protection of systems against bankruptcy proceedings, These concepts are especially important in the case and the specific oversight powers of the central bank. when an insolvency proceeding is opened; the defin- A similar approach could prove beneficial for other ition of these concepts could limit potential problems. countries, because current legal provisions are gener- Especially in netting systems, the legal definition of ally spread in several laws, and in many cases lack these concepts would reduce uncertainties and curtail clarity or the required level of specificity. the possibility of any unwinding procedures resulting On some occasions, the provisions stated in the central in serious liquidity risk that could derive in systemic bank law have not been developed in specific regula- risk. Similarly, and although in general there are no tions dealing with the various processes associated with explicit zero-hour rules, there is uncertainty on whether the operation of the different settlement systems. Not the judicial courts may revoke pending or already all the systems have detailed rules. Thus, participants executed operations made by the defaulting institution. cannot be aware of the different risks they incur when Related to the lack of rules on settlement finality, many participating in the systems and the implications of legal frameworks in the region fail to define specific applicable procedures and compromises in all circum- triggers for the intervention of financial institutions, stances. This situation, however, is changing rapidly creating uncertainty about the effective daily closing in countries that are introducing new systems, espe- of the systems or central bank credit risk exposure.2 cially those introducing RTGS systems. In other cases, In countries where the legal framework is more there is also a lack of clarity regarding the sanctions advanced, there is still the possibility that settlement policies and the procedures and conditions for remov- finality is negatively affected because of bankruptcy ing participants from the system. proceedings through which fraudulent transactions Although there is a general legal definition for the may be reversed several days before the participant is pledge, in most cases the implications when used to declared bankrupt. However, the impact in case of guarantee operations to be processed in a payments RTGS systems is likely to be negligible due to the system are unclear. The legal basis for the pledge is gross nature of the system. Also, some problems of normally included in the civil code, but the pledge as interpretation may arise because, generally, settlement a tool for collateralized operations is not regulated. finality is regulated in detail only in system regulations, Furthermore, there are no rules regarding the proce- which have a lower hierarchy than the bankruptcy dures for the execution of those guarantees in case of laws. Initiatives to engage the judicial system in this a default. This creates an important impediment for debate are worth pursuing. central banks granting or wishing to grant collateralized Normally, there is no explicit legal recognition of the intraday credit for the purpose of payment settlement. multilateral netting arrangements and therefore it is 2In case the central bank grants uncollateralized loans or allows 3 See, for instance, the EU Directive on Settlement Finality in Payment current account overdrafts. and Securities Settlement Systems (CPSS 2001, p. 19). Payments Systems Assessment Findings in Latin America and the Caribbean 45 Many countries have recently approved laws for elec- changes required could justify a payments system tronic documents and signatures. These need to be law. In any case, these topics should be dealt with at completed with the corresponding changes in regula- the level of a law. tions and rules of settlement systems in order to make effective the legal basis already created in this area and LARGE-VALUE PAYMENT SYSTEMS (LVPs) to make clear that the laws also apply to the electronic This section includes context, status in the region, and exchange of messages within the payment systems observations regarding LVPSs. operated by the central bank or other organizations, or both. Context In general, there is no public or private body respon- sible for the resolution of potential conflicts arising LVPSs are the most significant components of national from the operation of the systems. There is no provision payments systems. This is because they are able to gener- regarding the responsibility of the operator in case of ate and transmit disturbances of a systemic nature to the malfunctioning of the system, and therefore there is financial sector. In order to cope with these systemic risks, no rule dealing with a possible compensation for those several measures are adopted, depending on the nature of events. the LVPS. If the system is characterized by a deferred net Plans to educate the judicial system on the specific legal settlement of payment transactions, risk control measures needs of the financial sector and on the systemic impli- include the introduction of bilateral and multilateral caps, cations of the application of certain laws should be put the implementation of loss-sharing agreements, and the in place as soon as an exhaustive assessment of the legal pledging of collateral to cope with the inability of one or framework for the payment system has been completed. more participants to pay. In contrast, the development of In sum, country authorities, and, in particular, the com- RTGS systems is one response to the growing awareness mittees managing payments systems reform projects, of the need for sound risk management in large-value need to review the legal framework with particular funds transfer systems. RTGS systems can offer a power- attention to the irrevocability of final settlement, ade- ful mechanism for limiting settlement and systemic risks quate protection of the systems against the effects of in the interbank settlement process because they can effect bankruptcy proceedings, the legal definition of a repo final settlement of individual funds transfers on a contin- operation, the legal recognition of multilateral netting uous basis during the processing day. In addition, RTGS arrangements,andthelegaldefinitionandtheregulation systems can contribute to the reduction of settlement risk of oversight powers of the central bank. Other legal in securities and FX transactions by facilitating the deliv- issues to be considered from a developmental point of ery versus payment (DvP) and payment versus payment view include the legal basis for the collateral pledge (PvP) mechanisms. Variants of the basic RTGS system-- and securities lending. Due to the variety and extreme the so-called hybrid systems that take into account importance of these legal aspects, some countries liquidity-saving features that exist in net settlement should consider if the importance and number of legal systems--are being introduced in some countries. Status in the Region Table 4.3 Main Features of LVPSs in Individual Latin America and the Caribbean Countries Country Large Value Systems Argentina RTGS System The RTGS--the Medios Electrónicos de Pago (MEP)--is owned and operated by the BCRA. It was launched in 1997. RTGS System Participants Banks, electronic clearinghouses, and the BCRA itself are the direct participants of the MEP. Nonbank financial intermediaries hold limited-purpose accounts at the MEP. (Continued) 46 Payments and Securities Settlement Table 4.3 Main Features of LVPSs in Individual Latin America and the Caribbean Countries Country Large Value Systems Argentina RTGS System Operation (Continued) The MEP enables participants to execute real-time gross transfers through the current accounts held with the BCRA over a long operational cycle that extends from 9:00 a.m. to 8:00 p.m. Cross-border transfers may be executed through the MEP. Clearinghouses also settle their net balances at the MEP at the end of the operational day. System participants have access to real-time information on funds available on their accounts. They can use their reserve requirement to make payments throughout the operating day. The system does not provide queuing mechanisms or intraday liquidity facilities. Commercial banks have access to BCRA overnight repos and overnight rediscount credit facilities. Other Systems that Handle Large-Value Interbank Payments In Argentina there are two large-value clearinghouses.a Interbanking, owned and operated by a group of private banks, started operations in mid-1998. Provincanje is the other large-value clearinghouse; it serves the provincial banks. Both provide same-day settlement services, are interconnected, and operate in parallel under BCRA coordination. In practice, Interbanking operates as a complementary service to the MEP: Interbanking holds an account at the MEP and subaccounts for the participants, through which the former offers multilateral netting services. Banks may use this service to net electronic payments ordered through their central bank accounts. It also offers electronic payment services for entities that do not hold an account at the MEP (private sector firms, for example). Payments made through Interbanking are settled (on a net basis) on day T at the end of the day through funds transfers via the MEP. It has several risk management procedures in place, including bilateral credit limits, a guarantee fund, and a loss-sharing mechanism. Bahamas, The RTGS System The Bahamas Interbank Settlement System is an RTGS system owned by the Central Bank of Bahamas (CBOB). It was launched in May 2004. RTGS System Participants Membership is limited to the current seven clearing banks operating in The Bahamas. RTGS System Operation The system handles transactions in both local currency and U.S. dollars. Although it typically handles large-value and time-critical payments, payments of any magnitude--including those of bank customers-- may be submitted via the Bahamas Interbank Settlement System. The Bahamas Interbank Settlement System operates from 8:30 a.m. to 5:00 p.m. Bahamas Interbank Settlement System participants communicate in a closed users' group environment via the SWIFT network, and access the system via a Web browser. Payment instructions are irrevocable and final when accepted for settlement: Transfers are processed only if the originating account has enough balance or sufficient intraday credit. The reserves requirement currently stands at 5 percent of prescribed liabilities of the clearing banks, and may be used during the day for payment system purposes. The clearing banks also have access to intraday credit from the CBOB. This credit is fully collateralized and must be repaid by the close of the business day. Other Systems that Handle Large-Value Interbank Payments Some large-value cheques (US$100,000 and more) are still processed at the daily clearing through a special procedure. Messengers deliver cheques to the CBOB up to 4:00 p.m. for value the same day. Telephone advices for cheques over US$100,000 are accepted by the CBOB as long as the item is presented by 3:30 p.m. A paper order or confirmation must follow the telephone advice in all cases. Payments Systems Assessment Findings in Latin America and the Caribbean 47 Table 4.3 Main Features of LVPSs in Individual Latin America and the Caribbean Countries (Continued) Country Large Value Systems Bolivia RTGS System In late 2003, as part of a broad project for large-value payments, the Banco Central de Bolivia (BCB) launched the electronic transfers system (Sistema de Transferencias Electrónicas, SITE), which enables banks to settle transactions in domestic currency or U.S. dollars on an RTGS mode. The SITE operates through electronic messages originated in remote sites, through terminals connected online with the BCB where payment orders are settled. RTGS System Participants At present, only commercial banks that hold an account and the legal reserve requirement at the BCB may participate in the SITE. RTGS System Operation The types of transactions that can be carried out through the Sistema de Pagos de Alto Valor are classified in two groups, according to the nature and origin of the information. The first group includes transactions based on information sent by the participant itself that it transfers to direct SITE partici- pants and transfers to accounts of other entities in the BCB, which are not direct SITE participants. The second group includes debits and credits for transactions made directly by the BCB for transactions related to it. The current reserves requirement stands at 12 percent of a group of bank liabilities. Banks can mobilize a 2 percent trench during the day. Intraday, overnight, and liquidity credits are available in the SITE. All these facilities must be properly collateralized. The maximum amount of total credit that may be granted is 40 percent of the remaining 10 percent of each participant's reserves requirement.b Other Systems that Handle Large-Value Interbank Payments Manual funds transfer mechanisms such as the paper-based central bank window facility (carta interbancaria) and BCB cheques are still operational at the central bank for the transfer of interbank payments. The BCB intends to gradually migrate all payments made through these mechanisms to the SITE. For example, in the first half of 2004, the carta interbancaria mechanism had already reduced its relevance to only 900 transactions representing US$250 million, compared with US$2.14 billion of the SITE. Some large-value interbank payments are still made with cheques: The average value of a cheque exceeds US$4,000. There is no specific session for large-value items. The clearinghouse is explained in detail in the Retail Settlement Systems section of this chapter. Brazil RTGS System In April 2002, the Banco Central do Brasil (BACEN) launched its RTGS, the Reserves Transfer System (Sistema de Transferência de Reservas, STR). The STR is the backbone of the Brazilian payments system. Besides bank-to-bank payments processed directly on an RTGS basis, the STR also settles the final balances of several payments, securities, FX, and derivatives clearinghouses.c Moreover, it is the only channel through which any participant can reach either its own account or third parties' accounts within the BACEN. RTGS System Participants In addition to the BACEN and the national treasury (Secretaria do Tesouro Nacional, 141 deposit-taking institutions and five private payments clearinghouses (two settlement accounts for the Câmara Interbancária de Pagamentos [CIP] and three for the Bolsa de Mercadorias e Futuros) are direct participants of the STR. Deposit-taking institutions are commercial banks, universal banks with commercial banks' capabilities, and federal savings and loans. They all hold reserve accounts, which are also settlement accounts, within the BACEN.d (Continued) 48 Payments and Securities Settlement Table 4.3 Main Features of LVPSs in Individual Latin America and the Caribbean Countries (Continued) Country Large Value Systems Brazil RTGS System Operation (Continued) The STR's operating hours are from 6:30 a.m. to 6:30 p.m. Nobody but the account owner is allowed to make debits to its settlement account. Making such debits is even forbidden to the BACEN itself. Funds transfers are considered final in the exact moment when the accounts are posted at the BACEN. Reserves requirements at the BACEN can be freely used during the day. Centralized queuing arrangements are in place in the STR. The main queuing algorithm used is first in, first out (FIFO), allowing for priority, which ranges from A (highest) to D (lowest). An optimization routine is envisaged to prevent gridlock and will be started up at the BCB's discretion. The BACEN provides the banks with a free, unlimited intraday liquidity facility by means of repo transactions backed with federal government securities. A haircut is applied to the collateral posted. Should an intraday repo not be paid by the end of the day, it will be automatically converted into an overnight repo; a penalty rate applies in this case. Other Systems that Handle Large-Value Interbank Payments In December 2002, the CIP, a Clearing House Interbank Payments System­type system, was launched. At present, the CIP operates two settlement systems--SITRAF and Sistema de Liquidação Diferida de Ordens de Crédito Interbancárias, respectively--for large- and low-value funds transfers. The SITRAF is a hybrid settlement system. When participants send payment messages, they generate payment obligations that are cleared and settled in a multilateral and deferred manner directly in CIP's settlement account in the STR. However, the CIP also has mechanisms that enable payments to be processed in real time. If sufficient balances are available on the account, the payment can be processed immediately by the clearinghouse. The processed payment immediately affects the accounts within the CIP.e Some large-value cheques are still processed in the Centralizadora da Compensação de Cheques e Outros Papéis (COMPE). The number of large-value cheques has decreased substantially with the introduction of the STR. The decrease is also due to the introduction of a prefunding requirement for cheques with an individual value of reals (R$) 5,000 or more. There is no specific session for large-value items. The COMPE system is explained in detail in the Retail Settlement Systems section of this chapter. Chile RTGS System Chile launched its RTGS system in 2004. The Sistema de Liquidación Bruta en Tiempo Real (LBTR) is owned and operated by the Banco Central de Chile (BCCH), is fully automated, and handles transactions in local currency only. RTGS System Participants Commercial banks as well as the financial entities licensed by the banking superintendence that hold a current account with the BCCH are RTGS participants. Application for participation must be approved by the BCCH. In addition, all approved participants must sign a contract with the BCCH (the so-called Contrato de Adhesión al Sistema LBTR). RTGS System Operation The LBTR system settles direct funds transfers between system participants and on behalf of their clients, and settles the final positions of the clearinghouses and transactions between the BCCH and system participants. Operating hours are 9:00 a.m. to 6:15 p.m. Transactions are considered irrevocable and final once accepted for settlement. No current account overdrafts are allowed. All participants have online information on account balances and other relevant statistics. The system has a queuing and a gridlock resolution mechanism. Payments orders waiting in a queue are processed on the basis of the priority assigned by the participant and, within each priority level, according to the FIFO principle. Payment orders waiting in the queue may be cancelled. The system automatically cancels all payment orders waiting in the queue by the end of the operating day. Payments Systems Assessment Findings in Latin America and the Caribbean 49 Table 4.3 Main Features of LVPSs in Individual Latin America and the Caribbean Countries (Continued) Country Large Value Systems Chile The BCCH offers a credit facility to LBTR participants. This consists of an intraday repo free of charge (Facili- (Continued) dad de Liquidez Intradía). In case the participant does not repay by the end of the operating day, the facility is converted into an overnight repo and a penalty interest rate is applied. Currently, BCCH securities are used as collateral. Other Systems that Handle Large-Value Interbank Payments In addition to the LBTR, the Cámara de Compensación de Pagos de Alto Valor (CCAV) was launched in December 2005. This system is operated by joint stock company owned by the banks. It is a net system for large-value payments. The rules of the CCAV approved by the central bank board determine that the CCAV must establish risk management tools that ensure timely completion of settlement in the event of inability to settle by the participant with the largest single settlement obligation (i.e., Lamfalussy compliant, Core Princi- ple V of the CPSS). For this purpose, the CCAV should be able to accommodate several settlement cycles, require multilateral and bilateral net debit caps, and establish mechanisms to ensure the availability of funds in case of failure (e.g., multilateral and bilateral limits and loss sharing arrangements). In addition to the launch of the RTGS and the CCAV systems there is a central bank program for the migration of large-value pay- ment systems to the new systems that already concluded. Prior to the launch of the RTGS system, payments, settlement took place through one of the four clearinghouses: interbank operations, cheques and other doc- uments in domestic currency, ATM, and foreign currency instruments. The migration program targets for the migration of all large-value payments (over Ch$50 million) to the new payments system and the use of the clear- inghouses only for low-value payments. In the medium term, the program targets the closure of the interbank operations clearinghouse after a period of parallel functioning with the RTGS system; the modification of operational rules for the cheque to ensure that only low-value payments are settled through this system; and the gradual elimination of noncollateralized intraday and overnight (one-day) credit. Colombia RTGS Systems In 1998, the Banco de Reserva de Colombia (BR) launched its RTGS system, which operates through the Sistema Electrónico of the BR, the national interbank communications network. Through this RTGS system, called the Sistema Electrónico de Cuentas de Depósito, a variety of operations are settled. These operations include monetary policy operations, treasury payments, interbank money market transactions, the cash leg of securities transactions, and the balances of deferred net payment systems operated by the BR. RTGS System Participants All of financial intermediaries are allowed to hold a current account with the BR and to have direct access to the Sistema Electrónico de Cuentas de Depósito. These financial intermediaries include commercial banks and other deposit-taking institutions, brokers, pension funds administrators, insurance companies, and so on. Payments and securities clearing and settlement service providers are also granted access in order to allow them to settle in central bank money. The government treasury also makes payments in the RTGS through its single account at the BR. RTGS System Operation The system offers all users online information on account balances during the entire operating day (from 8:00 a.m. to 9:00 p.m.). Banks are allowed to mobilize their reserve requirements. All transactions lacking enough funds are put on pending activation (pendiente por activar) status, so that they can be reinserted in the system again as many times as necessary. The BR provides several liquidity facilities, including intraday and overnight repos. This provision affects the intraday repos, which are charged a 0.1 percent interest rate. The settlement of repo operations with the BR occurs at 2:30 p.m., soon after the funds stemming from cheque clearing are released (approximately 1:00 p.m.) and several hours after knowing the results of the repo auction (approximately 11:30 a.m.). In 2001, the BR authorized the conversion of the intraday repo into an overnight repo, without the seizure of the underlying securities, for the authorized entities. The cost of this conversion is equivalent to the interest rate applied to the Lombard facility of monetary expansion plus 1 percentage point. The requisite for this conversion is that it does not exceed the total limit authorized by the BR for repos for a particular entity. (Continued) 50 Payments and Securities Settlement Table 4.3 Main Features of LVPSs in Individual Latin America and the Caribbean Countries (Continued) Country Large Value Systems Colombia Other Systems that Handle Large-Value Interbank Payments (Continued) In Colombia, there is no other designated large-value funds transfer system. Some interbank large-value cheques are still used, although the number has decreased substantially since the introduction of the Sistema Electrónico de Cuentas de Depósito. There is no specific session for large-value items. The cheque clearing- house is explained in detail in the Retail Settlement Systems section of this chapter. Costa Rica RTGS System Costa Rica's RTGS system, the Transferencias Interbancarias (TI), system was launched in 1999, and is the backbone of the national payments system operated by the Banco Central de Costa Rica (BCCR), the Sistema de Negociación y Pagos Electrónicos. The TI was opened for the settlement of retail payment systems oper- ated by the private sector. Moreover, it has made it possible for the securities and FX markets to settle their transactions safely and efficiently. RTGS System Participants Commercial banks, as well as nonbank financial institutions that hold a current account and reserve requirements with the BCCR, are direct participants of the TI. RTGS System Operation TI operating hours are 8:00 a.m. to 5:00 a.m. Payment orders are settled in real time once they are accepted by the system. In order for this to happen, the beneficiary must indicate to the BCCR that it accepts the credit to its account. Financial institutions are allowed to use their reserve requirements during the day for payment purposes. Average reserve calculation from second to second during the day has been changed to counting only funds at the end of the day to calculate the two-week (fortnight) average. This has lowered liquidity pressures on banks. The TI does not have a queuing mechanism. Therefore, a payment order that would lead to an account over- draft is automatically rejected and must be sent in again. The BCCR does not grant intraday loans to banks that have a temporary liquidity shortage. Current account overdrafts are not allowed. Therefore, participants with a temporary liquidity shortage, even though incoming payments later on the day would fully compensate the debit position, are obliged to cover their liquidity needs by means of an overnight repo transaction with the BCCR, or else to cover the debit position in the money market. Other Systems that Handle Large-Value Interbank Payments Some interbank large-value cheques are still used, although the number has decreased substantially since the TI system was introduced. In 2000, its first full year of operation, the TI represented one-third of total settlement throughput. This figure had increased to 70 percent by 2004. Meanwhile, the value of payments settled through cheques has remained stagnant in nominal terms. There is no specific session for large-value items. The cheque clearinghouse is explained in detail in the Retail Settlement Systems section of this chapter. Dominican Republic RTGS System A RTGS system does not yet exist in the Dominican Republic. The Banco Central de República Dominicana (BCRD) is currently engaged in a project to reform payment systems in the country. The implementation of an RTGS system is included in this project. Other Systems that Handle Large-Value Interbank Payments The LVPS comprises funds transfers among financial intermediaries that hold an account at the BCRD. Such transfers originate mainly from interbank loans made with cheques. These cheques are not processed in the clearinghouse. Multiple banks making a loan draw a cheque that is delivered physically to the BCRD through a messenger. The BCRD executes settlement on a gross basis. Other types of financial institutions also draw cheques that are charged directly to the reserve accounts of multiple banks at the BCRD. Both retail and large-value payments are processed in the BCRD-operated cheque clearinghouse; these payments include corporate payments, interbank cash withdrawal transactions, funds transfers, and the interbank obligations resulting from other retail payment systems such as credit cards and ATMs. There is no specific session for large-value items. The cheque clearinghouse is explained in detail in the Retail Settlement Systems section of this chapter. Payments Systems Assessment Findings in Latin America and the Caribbean 51 Table 4.3 Main Features of LVPSs in Individual Latin America and the Caribbean Countries (Continued) Country Large Value Systems Ecuador RTGS System The BCE has been working on a payments reform that includes the launch of an RTGS system (Sistema de Pagos en Línea y Tiempo Real [SPL]). This system was launched in 2005. The BCE does not provide intraday credit. Banks and other financial institutions with accounts at the BCE are direct participants, in addition to some public sector entities. Other Systems that Handle Large-Value Interbank Payments In addition to the RTGS system, the BCE reform plan includes the following systems: an interbank payments system (Sistema de Pago Interbancario [SPI]), launched in 2002 (see the Retail Payments section in this chapter); a deferred net settlement system (Sistema de Pagos por Valores Netos [SPN]); settlement facilities for external ACHS (Sistema Nacional de Cámaras de Compensación); a bilateral credit line system (Lineas Bilaterales de Crédito); and a new custody system for government securities. Prior to the reform, the Banco Central del Ecuador (BCE) operated three funds transfer mechanisms for large- value payments (defined as those above US$500). The first one is the settlement and execution system (Sis- tema de Liquidación y Ejecución), through which the BCE settled its own transactions with financial intermediaries. Transactions are irrevocable from the moment they are accepted for settlement by the sys- tem, which depends solely on the availability of the necessary funds in the Sistema de Liquidación y Ejecu- ción by the participating banks.f Financial institutions that participate in the SWIFT closed users' group send credit-type payment messages to the BCE. Payment instructions are sent online and in real time within the operating hours (9:00 a.m. to 2:30 p.m.). Although the BCE has developed an interface between this subsystem and its current accounts system, transactions are not settled in real time but rather at specific cutoff times throughout the day. The window facility entails the use of paper forms containing standard payment information. Processing is fully manual and transactions are settled on a gross basis as they arrive at the BCE. Payment instructions are received from 9:00 a.m. to 3:00 p.m. The BCE also operates the cheque clearinghouse. Large-value payments and retail payments are channeled through this system. There is no specific session for large-value items. The cheque clearinghouse is explained in detail in the Retail Settlement Systems section of this chapter. El Salvador RTGS System A RTGS system does not yet exist in El Salvador. Other Systems that Handle Large-Value Interbank Payments In El Salvador, there is no other designated large-value funds transfer system. The main means for the exchange of value among banks is the cheque. Commercial banks can also instruct the BCR to debit their reserve accounts during the operating day outside the cheque clearing process, in particular to clear securities transactions. There is only one formal cheque clearinghouse in the country, located in San Salvador. There is no specific session for large-value items. This system is explained in detail in the Retail Settlement Systems section of this chapter. Overdrafts of the reserve account are not permitted. As a practical matter, the level of required reserves is high relative to daily clearings, thus, overdrafts are unlikely to occur. The BCR does not provide any form of credit because, due to dollarization, it is constrained by its own law to grant credit to financial institutions, even if collateralized. Guatemala RTGS Systems In 2004, the Banco Central de Guatemala (BANGUAT) launched the project to implement the RTGS system, which went live in January 2006. The system allows participants to settle in real time large-value and time- critical payments. It also allows participants to settle clearing balances of other payment systems (e.g., the cheque clearinghouse operated by the bankers' association). (Continued) 52 Payments and Securities Settlement Table 4.3 Main Features of LVPSs in Individual Latin America and the Caribbean Countries (Continued) Country Large Value Systems Guatemala RTGS System Participants (Continued) All institutions that hold accounts at the BANGUAT (credit institutions and public entities) can participate in the RTGS system. Other institutions can require participation, provided they meet the requirements established by the BANGUAT. System rules explicitly provide for exit and exclusion criteria. RTGS System Operation The RTGS system of the BANGUAT has two main provisions to manage liquidity risk: queuing mechanisms based on optimization techniques, and the provision of intraday credit through collateralized repos. The current reserves requirement stands at 14.6 percent of specified bank liabilities, and banks can mobilize most of it (14.0 percent) during the day. System rules and requirements are included in a document approved by the Monetary Council (Junta Monetaria) on November 30, 2005. Other Systems that Handle Large-Value Interbank Payments Prior to the launch of the RTGS system a funds transfer system between current accounts at the central bank operated through two main mechanisms: (1) the interbank transfers mechanism (mecanismo interbancario de transferencias) in which payment instructions are sent through codified fax; and (2) paper instructions (oficios), a paper-based central bank window facility that is used mainly by the central government. The Sistema de Información Contable y Financiera is the general ledger of BANGUAT. It is fully interconnected with RTGS. The two funds transfer mechanisms mentioned above are not going to be used anymore, as they are being replaced by the RTGS system. The most relevant system, in addition to the RTGS, is the cheque clearinghouse, which processes both large-value and retail items. There is no specific session for large-value items. Recently, in August 2005, the BANGUAT passed the operation of the system to the bankers association, maintaining a role of oversight and monitoring. The cheque clearinghouse settles its net balances on the RTGS system. BANGUAT is actively involved in reducing the systemic importance of such system by creating price incentives and using moral suasion so as to discourage participants from issuing large-value cheques. Honduras RTGS System An RTGS system does not yet exist in Honduras. The Banco Central de Honduras (BCH) is currently engaged in a project to reform payment systems in the country. The implementation of an RTGS system is included in this project. Other Systems that Handle Large-Value Interbank Payments Although there is no distinction between large- and low-value payments in Honduras, the so-called funds transfer system is used normally only for large-value transactions, whereas the cheque clearinghouse settles both large- and low-value payments. The funds transfer system is a service offered by the BCH in association with the current accounts held with it by financial institutions and the government entities with an account at the BCH include banks, savings and loans, finance companies, FX intermediaries, stock exchanges, and the central government and its agencies and statutory bodies. The funds transfer system operates through a window at the BCH main office or via SWIFT (only for four banks that are connected to the BCH). Participants can make transactions between 9:00 a.m. and 5:00 p.m., or, in excep- tional circumstances, until 7:00 p.m. Funds transfers can be made either in domestic or foreign currency. Both large- and low-value payments are settled through the cheque clearinghouse. There is no specific session for large-value items. The Centro de Procesamiento Bancario system is explained in detail in the Retail Payment Systems section of this chapter. The reserve ratio is 12 percent for domestic currency and 50 percent for foreign currency. The domestic currency reserves can be used during the day for payment purposes. In the case of foreign currency reserves, a part must be maintained at the BCH while another can be in liquid assets with some foreign bank. However, in this case, the part that is maintained with the BCH cannot be used during the day for payment purposes. Payments Systems Assessment Findings in Latin America and the Caribbean 53 Table 4.3 Main Features of LVPSs in Individual Latin America and the Caribbean Countries (Continued) Country Large Value Systems Jamaica RTGS System An RTGS system does not yet exist in Jamaica. The Bank of Jamaica (BOJ) is currently working on a project for the modernization of the national payments system, which will include the launching of a full-fledged RTGS system. The RTGS will replace the current Customer Inquiry and Funds Transfer System (see below). Other Systems that Handle Large-Value Interbank Payments The Customer Inquiry and Funds Transfer System is the communications network and current account management system operated by the BOJ. This system facilitates the exchange of payment information among financial institutions, and between them and the BOJ. The system also facilitates movements to the current accounts financial institutions hold with the BOJ as well as real-time access to account balances. The main payment instrument that triggers movements in these accounts is the cheque. In Jamaica, cheques are used for large-value and retail payments, and can be denominated in Jamaican dollars (J$) or in some major foreign currencies, of which the U.S. dollars represents more than 99 percent of the total. The clearing and settlement process foresees a special clearing sessions for large-value payments (J$500,000 and more) and is held at 3:00 p.m. An additional daily large-value clearing is conducted at 2:30 p.m. in Montego Bay. Large-value cheques presented at the BOJ during the special clearing have a T + 0 settlement cycle. In the case of local currency items, at 3:30 p.m. interbank clearing takes place and banks are presented with their final current account balances which include postings resulting from the clearing of all items such as cheques. The time window from 3:30 p.m. to 4:20 p.m. is reserved for deposits in order to cover all outgoing payments and to avoid an account overdraft.g After 4:20 p.m., settlement of payment instructions entered into the Customer Inquiry and Funds Transfer System takes place on a net basis. Availability of funds to Customer Inquiry and Funds Transfer System members occurs normally by the opening of the next business day. Settlement of the net balances resulting from the exchange of U.S. dollar­denominated items takes place directly between two members, according to bilateral agreements. Amounts exchanged exceeding US$5,000 must be settled by way of wire transfer into the claiming bank's account in the United States. Mexico RTGS Systems Banco de México owns and operates three systems. The first one is the account holders service system (Sistema de Atención a Cuentahabientes, SIAC), which handles the current accounts that financial institu- tions hold at the central bank. Although the majority of large-value transactions are executed through other systems (see below), the SIAC is particularly important, because all major systems in the country settle their balances in it. Payment transactions made by third parties or on their behalf may not be processed through SIAC. Banco de México also owns and operates the Sistema de Pagos Electrónicos de Uso Ampliado (SPEUA), which was launched in 1995. Only banks have access to the SPEUA, and through it they may execute their own payments or payments on behalf of customers. At the same time, the processing capacity of the SPEUA is limited and only transactions of Mex$50,000 (US$4,600) or more are accepted for settlement through it. Finally, the Sistema de Pagos Electrónicos Interbancarios (SPEI) went live on August 2004. RTGS System Participants SIAC: commercial banks, brokerage houses, mutual and pension fund management firms, some insurance companies, and the national treasury SPEUA: commercial banks SPEI: commercial banks (Continued) 54 Payments and Securities Settlement Table 4.3 Main Features of LVPSs in Individual Latin America and the Caribbean Countries (Continued) Country Large Value Systems Mexico RTGS System Operation (Continued) SIAC: Orders to transfer funds among institutions holding a current account must be sent through SIAC between 8:30 a.m. to 7:30 p.m., and the day of value may be the same day or the following working day. In any given working day (T), the SIAC settles the following: (1) SIAC's own transactions, (2) the balances of the SPEUA (5:45 p.m.), (3) net balances of the retail payments clearinghouse with a T value date (at 8:30 a.m.), and (4) bal- ances of the securities settlement systems, the Sistema Interactivo para el Depósito de Valores, which include transactions made in T - 2, T - 1, and T (at 4:05 p.m.). Only commercial banks may overdraw their accounts at the SIAC. Banco de México sets a limit on overdrafts on the basis of net capital; to use the overdraft facility, banks may post collateral in favor of Banco de México. The SIAC does not settle those payments that would cause the overdraft to exceed this limit or the amount of the collateral posted. SPEUA: Payment orders are processed and the funds become available to the receiving bank once the system has validated that the issuing bank has enough money or credit available to cover them. The receiving bank must accept these payment orders as long as the beneficiary is the receiving bank itself or one of its account holders, and it must credit the corresponding amount to the respective account within 30 minutes following receipt. The SPEUA operates from 8:30 a.m. to 5:45 p.m. The SPEUA cancels those payment orders that, by closing time, have not passed its controls. The SPEUA does not operate directly with the banks' current accounts in the SIAC. Rather, it uses a system of virtual cash balances based on bilateral credit lines that are granted among the system's participants. At the end of the day, participants with a debit position, after an end-of-day multilateral netting process, must pay the relevant amount through the SIAC. Final and irrevocable charges are applied in the current accounts of participants with a debit position, and final and irrevocable credits are applied in the accounts of participants with a credit position. When the multilateral net position of any given bank in the SPEUA exceeds the sum of its current account balance and overdraft limit in SIAC, that bank registers a so-called pending obligation. When this happens, all other banks that granted credit to it face an additional settlement obligation (obligación adicional de liquidación). Banco de México is authorized to charge these latter banks their corresponding obligacións adicionals de liquidación.h SPEI: The SPEI operates from 8:30 a.m. to 5:00 p.m. The SPEI draws its initial balances from the accounts in the SIAC and settles end-of-day balances in the latter system, as well. The receiving bank must accept payment orders as long as the beneficiary is the receiving bank itself or one of its account holders, and it must credit the corresponding amount to the respective account within 10 minutes following receipt. There are no overdraft or credit facilities in the SPEI. The SPEI has an advanced queuing system. All payment orders go into the queue and the system continuously executes an algorithm to determine which payments can be settled with the balances that participants have at that particular moment. Payments that cannot be settled immediately remain in the queue and are cancelled by the end of the operating day. Participants can also set priorities and reserve balances to execute priority payments. The messaging network of the SPEI is based on open protocol, which better allows system participants to automatize their internal processes. Other Systems that Handle Large-Value Interbank Payments Only few large-value cheques, most of them issued by nonfinancial corporations, are processed at the cheque clearinghouse. Netherlands Antilles RTGS System The BvdNA operates the Netherlands Antilles Clearing System (NACS), a multicurrency automated network system for the electronic clearing and settlement of large-value interbank payment transactions and small value ACH type payments. The heart of the NACS is the RTGS system, which mainly settles payments denominated in Netherlands Antilles guilders (NA f.) and in U.S. dollars, although settlement in other currencies is also possible. Payments Systems Assessment Findings in Latin America and the Caribbean 55 Table 4.3 Main Features of LVPSs in Individual Latin America and the Caribbean Countries (Continued) Country Large Value Systems Netherlands Antilles RTGS System Participants (Continued) Only commercial banks can be participants of the RTGS. RTGS System Operation The latter operates with queuing facilities and a V-shape communication structure using the public telephone infrastructure (dial in) and standard SWIFT messages. According to the rules of the system, all payments channeled through the RTGS are irrevocable and unconditional. The system uses a strict FIFO settlement order; it is not possible to change the order of unsettled payment orders. According to the system rulebook, the participants committed themselves to implement and maintain an adequate cash management and information program to prevent liquidity, credit, and settlement risks. In practice, however, this is difficult because the elementary dial-in communication system does not allow the participants to use the information output of NACS on an online and real-time mode to feed their internal cash management program. If gridlock occurs in their settlement accounts, banks are obliged to contact the BvdNA. If, at the end of the day, payments are not settled, the NACS operator is authorized to cancel the entries. The BvdNA holds current accounts for banks both in local currency (NA f.) and in U.S. dollars. There is a reserve requirement of 9 percent for some bank liabilities denominated in NA f., and banks may use their overnight cash reserves during the day to settle payment obligations in the NACS. The BvdNA also provides an intraday credit facility. In the case of items denominated in U.S. dollars, because there is no reserve requirement, settlement can only occur if funds are readily available in the current account or if the BvdNA grants participants a loan. Normally, all credit must be collateralized in full and is limited to the value of the pledged securities minus a haircut.i The system automatically adds any overdrafts in all the participant's accounts and compares the total with the available credit before a debit to any of these accounts is executed. Other Systems that Handle Large-Value Interbank Payments Cheques are intensively used in the Netherlands Antilles, and large-value cheques are still channeled through the cheque clearinghouse. Additionally, because only the banks located in Curaçao are connected to the NACS, bank customers in the other islands of the country have no option other than cheques for interbank payments. There is no specific session for large-value items. The cheque clearinghouse is explained in detail in the Retail Payment Systems section of this chapter. Nicaragua RTGS System An RTGS system does not yet exist in Nicaragua. Other Systems that Handle Large-Value Interbank Payments The BCN operates the secure telephone transfer system (Transferencia Telefónica Segura), a credit transfer mechanism for both local currency (córdoba, C$) and U.S. dollars that settles on a gross basis and that is available for those institutions that hold an account at the BCN, namely banks, nonbank financial institutions (financieras), and the central government's treasury. The Transferencia Telefónica Segura has become increasingly important: In 2004 it handled nearly 30 percent of total settlement throughput at the BCN. In 2003, the average payment through the Transferencia Telefónica Segura amounted to nearly US$300,000. The Transferencia Telefónica Segura does not handle payment messages on behalf of third parties and, although there is no designated minimum amount, at present it is used almost exclusively for large-value transactions. Other large-value payments such as those of commercial and industrial corporations, card schemes, and ATM network­derived interbank obligations are channeled through the cheque clearinghouse, which is also operated by the BCN. This latter system is explained in detail in the Retail Payment Systems section of this chapter. Banks can mobilize their reserves during the day for payment purposes having only to comply with reserve requirements on a weekly average basis. The BCN provides overnight credit in case a participant is unable to settle its debit position at the cheque clearinghouse. (Continued) 56 Payments and Securities Settlement Table 4.3 Main Features of LVPSs in Individual Latin America and the Caribbean Countries (Continued) Country Large Value Systems OECS RTGS System An RTGS system does not yet exist in the OECS. Other Systems that Handle Large-Value Interbank Payments The ECCB operates a gross settlement system for funds transfers between institutions that hold current accounts with it; this includes commercial banks; governments and statutory agencies; and other nonfinancial banking institutions including the Eastern Caribbean Central Securities Depository, the Eastern Caribbean Home Mortgage Bank, and the Eastern Caribbean Institute of Banking. The technological platform is provided by GLOBUS, which supports ECCB's accounting operations and processes and records commercial bank transactions in an online, real-time mode. Transactions, when manually authorized by ECCB staff, are posted directly to the bank's current account. Authorized users, using dial-up access at their expense, are able to view their balances and recent transactions (for up to two days) on demand. The GLOBUS system also provides support for the multilateral net settlement of the cheque- clearing operation that occurs in each of the eight Eastern Caribbean Currency Union countries and for the securities exchange. There are, on average, a total of 125 payment transactions per day. Current accounts at the ECCB are combined with reserve accounts from which banks can temporarily withdraw funds for the clearance of cheques and the settlement of balances among financial institutions. At the commercial bank's discretion, large-value transactions, defined normally as cheques with a value above EC$50,000 are settled within a special clearings system. In this mechanism, the paying bank, upon presentation of the cheque, will send a SWIFT message to the ECCB asking to debit its account in favor of the payee's bank. Bilateral interbank obligations can also be discharged by sending a SWIFT message to the central bank. All the large-value payments submitted to the ECCB under the current system are settled promptly on a gross basis during the day of value. Panama RTGS System An RTGS system does not yet exist in Panama. Other Systems that Handle Large-Value Interbank Payments There are two main mechanisms for settling transactions among financial institutions: (1) funds transfers through correspondent banks in the United States, which is the method preferred by financial institutions for interbank payments, and (2) the clearinghouse operated by the BNP. Concerning the first, the 20 largest banks in the country, at least, use SWIFT, and some of them provide correspondent services to the rest. Interbank transactions are settled on a gross basis through correspondent banks in the United States, either through Fedwire or the Clearing House Interbank Payments System. All commercial banks operating in Panama are obliged to have a special clearing account with the BNP.j Banks and the ministry of economy and finance can instruct the BNP to debit their accounts during the oper- ating day; this can be done by paper order. This mechanism is seldom used; cheques are the most widely used instrument for domestic interbank transfers. There are 27 direct and 24 indirect participants in the payments clearinghouse operated by the BNP; all of these participants are commercial banks. Direct participants are fully responsible before the clearinghouse for all operational and financial obligations, both their own and those of the indirect participants they represent. Direct participants settle with indirect participants their mutual obligations on a bilateral basis outside the clearinghouse. There cannot be overdrafts of the special clearing account, and the BNP does not provide any credit facilities. Banks with debit positions in the clearing process have until 10:00 a.m. to transfer funds to the BNP in case such debit exceeds the balance of the special clearing account. Banks in that position must recur to the interbank market. In case a bank fails to cover a deficit before 10:00 a.m., it is subject to a penalty of US$20,000, it will be excluded from the clearing process for one day, and an unwinding process is triggered. Payments Systems Assessment Findings in Latin America and the Caribbean 57 Table 4.3 Main Features of LVPSs in Individual Latin America and the Caribbean Countries (Continued) Country Large Value Systems Paraguay RTGS System An RTGS system does not yet exist in Paraguay. Other Systems that Handle Large-Value Interbank Payments For interbank payments, banks can affect the accounts they hold at the central bank through the Sistema Interbancario de Transferencia de Fondos, operated by the BCP. Payments are settled on a gross basis and are held in queue if the bank does not hold sufficient funds, and are eventually rejected at the end of the day. Settlement procedures are fully manual in the Sistema Interbancario de Transferencia de Fondos. Payments orders must be presented physically at the BCP's main office. Payment orders can be of two types: órdenes for interbank payments and notas for the settlement of transactions related to monetary policy or foreign currency operations. The Sistema Interbancario de Transferencia de Fondos does not count on any facilities to manage intraday liquidity. The current reserve requirement stands at 15 percent for liabilities denominated in local currency and 25 percent for the U.S. dollar-denominated ones. Banks are not allowed at all to mobilize their reserves. Indeed, these are held in a account separate from the current account banks use for payment purposes. The interbank money market is rarely used as a means to obtain liquidity. Despite the existence of the Sistema Interbancario de Transferencia de Fondos, the cheque clearinghouse is the major funds transfer system and cheques are the main instrument used for the exchange of large-value interbank payments. Large corporate payments, card schemes, and ATM network-derived obligations are also settled by cheques. There is no specific session for large-value items. The cheque system is explained in detail in the Retail Payments System section of this chapter. Peru RTGS System In December 2000, the Banco Central de Reserva del Perú (BCRP) launched the Sistema LBTR, an RTGS for large-value payments. A variety of operations--including monetary policy operations, treasury payments, interbank money market, FX market transactions, and the balances of the Electronic Clearinghouse (ECH)-- are settled. RTGS System Participants Type I Participants: private commercial banks Type II: Banco de la Nación (a government-owned commercial bank) and COFIDE (a financial company). RTGS System Operation The system handles transactions in nuevos soles (S/.) and in U.S. dollars. Participants can make transactions on their own behalf or on behalf of their customers. The minimum amount for transfers is S/.15,000, or US$5,000. The communication structure is Type V, and there is one connection point between each participant and the RTGS. In case of a contingency, the BCRP has terminals available for use by entities experiencing problems; facsimiles will be used only as a last resort. Operating hours are from 8:00 a.m. to 6:30 p.m. Payment instructions are irrevocable and final when accepted for settlement: Transfers are processed only if the originating account has enough funds or sufficient intraday credit. Banks can mobilize their reserve requirements during the operating day. Before beginning operations, funds to cover debit positions stemming from the ECH are blocked in the accounts of the participants. The system includes a queuing mechanism that uses a bypass FIFO algorithm, although priority is given to instructions that relate to payments to the BCRP. Payments in the queue may be cancelled by the originating entity. At 5:00 p.m., payments still pending are cancelled automatically. Intraday credit is provided to Type I participants only through intraday repos. If, by the time of closing, participants are not able to cover their debit positions, the collateral they have posted will be executed. Debit positions in U.S. dollars are covered first. (Continued) 58 Payments and Securities Settlement Table 4.3 Main Features of LVPSs in Individual Latin America and the Caribbean Countries (Continued) Country Large Value Systems Peru Other Systems that Handle Large-Value Interbank Payments (Continued) With the introduction of the LBTR, the cheque clearinghouse has significantly reduced its systemic importance. The remaining large-value cheques are generally issued by nonfinancial corporations. There is no specific session for large-value items. The cheque system is explained in the Retail Payment Systems section of this chapter. Trinidad and Tobago RTGS System The RTGS system of Trinidad and Tobago called Safe-tt was launched on October 2004. Safe-tt is a system for settling large-value and time-critical payments between the banks. Large-value payments are defined as payments of Trinidad and Tobago dollars (TT$) 500,000 and more. RTGS System Participants The participants in the Safe-tt are the institutions that hold a current account at the CBTT, namely the commercial banks and the government. As of December 2005, there were a total of 21 participants, of which seven have the status of direct participants. RTGS System Operation As of May 2005, approximately 80 transactions per day were processed in the Safe-tt. The system supports payments made by banks on behalf of third parties. The system is based on SWIFT messaging. The reserve requirement currently stands at 9 percent of prescribed liabilities of commercial banks. The CBTT provides intraday credit. The system operates from 8:00 a.m. to 2:45 p.m. for all payments, and until 3:15 p.m. for interbank payments only. A Safe-tt users' group has been formed to address issues related to system improvements. Other Systems that Handle Large-Value Interbank Payments Approximately 200 large-value cheques (TT$500,000 or more) are cleared each day through a special clearings procedure. Any commercial bank receiving a large-value cheque drawn by a CBTT account holder seeks clearance by telephone from the CBTT. Once clearance is given, the CBTT credits the commercial bank's reserve account. When the CBTT receives large-value cheques drawn on commercial banks, however, it calls the commercial banks to obtain clearance before affecting the banks' reserve accounts. The cutoff time for obtaining clearance is 1:30 p.m. on Mondays through Thursdays, and at 12:30 p.m. on Fridays. Each commercial bank involved in the special clearings process of that day will exchange a special clearing facsimile message with each other or with the CBTT within 30 minutes of the deadlines. The physical items are presented and exchanged in the low-value cheque clearinghouse on the following morning. Uruguay RTGS System The RTGS system is operated by the BCU. This system operates as a module within the BCU's main operating system, the Sistema Electrónico de Comunicaciones, and is available for some of the institutions holding a current account at the BCU to make funds transfers among them. RTGS System Participants At present, the general policy (not written) is that all participants in the Sistema Electrónico de Comunica- ciones must have a current account with the BCU. However, having an account at the BCU does not give automatic access to the Sistema Electrónico de Comunicaciones. RTGS System Operation The RTGS is the major funds transfer system in the country. Participants have access to real-time information regarding their balances at the BCU, as well as their overall liquidity positions. The funds banks hold at the BCU as reserves requirements can be used to make payments during the day. Payments Systems Assessment Findings in Latin America and the Caribbean 59 Table 4.3 Main Features of LVPSs in Individual Latin America and the Caribbean Countries (Continued) Country Large Value Systems Uruguay The system provides settlement on a real-time basis if the participants have sufficient liquidity on their settlement (Continued) accounts to cover the payment orders or if they can obtain sufficient credit from the BCU. There is no queuing system in place. At present, all credit extensions of the BCU are collateralized. There are no particular incentives (for example, pricing policy) to foster the participants delivering their payments early in the operating day. The funds transfer system within the Sistema Electrónico de Comunicaciones is migrating to a new technological platform known as AGATA. Other Systems that Handle Large-Value Interbank Payments Cheques are still used as an instrument for the exchange of large-value payments. There is no specific session for large-value items. The cheque clearinghouse is described in detail in the Retail Payment Systems section of this chapter. Manual paper-based interbank transactions via the BCU are still possible, although at present the volume and value of transactions is small when compared with the RTGS and the cheque clearinghouse. Venezuela, R.B. de RTGS System An RTGS system does not yet exist in the República Bolivariana de Venezuela. Other Systems that Handle Large-Value Interbank Payments Approximately 500 transactions are processed every day in the current account credit transfer facilities that the BCV provides. Within these facilities, the main system is the so-called SWIFT DC298, a closed users' group, which represents 83 percent of total volume and nearly 80 percent of settlement throughput. Transactions are settled gross on the same day through an interface between SWIFT DC298 and the BCV's current account system. Manual facilities include paper orders (carta orden) and telex transmissions. Processing of these payment instructions by the central bank is manual, and transactions are settled on a gross basis as they arrive. The BCV allows approximately 60 minutes to process telex transmissions. This period is extended to 90 minutes for paper orders, because signature verification is required. Both large-value and retail payments can be channeled through the cheque-clearing system, which is operated by the BCV. There is no specific session for large-value items. The cheque clearinghouse is explained in detail in the Retail Payment Systems section of this chapter. Participants can use their reserve requirement throughout the day to make payments. The BCV does not provide credit facilities for payment system purposes. Source: Authors' elaboration. a. The BCRA designates clearinghouses as large value if they settle transactions within 24 hours, regardless of their value. b. The reserve requirement is invested in securities through a special-purpose fund (Fondo de Reserva de Activos Líquidos). c. The basic general model for settlement in central bank money is for the clearinghouses to receive funds from participants with net debt position at some time during their operational cycle, and then pay participants with a net credit position. To this end, each clearinghouse was given a settlement window dur- ing STR operating hours. d. Investment banks also have the option to hold a reserve account, provided they meet all technological requirements. e. In order to process the greatest number of messages possible, processing of queued messages complies with criteria such as selection of processing method (gross, bilateral net, or multilateral net), references chosen by remitting banks and the chronological order of messages' entry. The regulation of the Sistema de Transferência de Fundos (SITRAF) also states that remitting banks should program the sending of payment messages in such a way as to ensure that at least 70 percent of the volume expected for the whole main cycle will effectively be remitted during the first two-thirds of the period. f. The BCE does not provide any form of credit, and does not foresee doing so. The major reason is that Ecuador is a dollarized economy and, thus, the BCE cannot act as lender of last resort. g. However, all payment instructions entered into the system could be considered final because the BOJ guarantees the settlement of all outgoing funds transfer instructions. h. Hence, this guarantee would cover the participant's inability to settle with the largest settlement obligation, although it may not be sufficient if two or more big participants are unable to settle. i. Banks can bring in fresh collateral to enlarge their credit facility at the NACS. However, this procedure cannot be executed on the same day. For this rea- son, if a gridlock were to occur in the accounts of the sender, the board of the BvdNA, after contacting the participant concerned, can decide to grant it an uncollateralized loan. The latter is usually covered by the next day. j. Panama is fully dollarized, and there is no central bank in the country. 60 Payments and Securities Settlement Table 4.4 Operational Risk Management in LVPSs in Selected Latin America and the Caribbean Countries* Country Backup Facilities Business Continuity Plans Argentina The BCRA has an alternative processing site. This site is A procedure is in place to enable business continuity. to be used in case of an extended malfunctioning of the If a malfunctioning of the telecommunications system primary site. In other words, the transfer of the processing occurs, all payment instructions are to be channeled from the primary site is not automatic, but occurs only through an alternative communications network and after the BCRA authorities take this decision. After receiving are to be processed in batches every hour. In case an e-mail from the BCRA, the participants must ask their both networks fail, the participants may go to the telecommunications providers to enable the switching BCRA premises and enter transactions through PCs mechanism to start channeling transactions to the that will be made available for that purpose. secondary site. Brazil There are two independent and internally redundant The BCB has implemented a formal business continuity transmission control protocol­Internet protocol backbones plan that consists of two stages. The first stage considers (provided by Embratel and AT&T) using multiprotocol a failure that prevents participants' access to the main label switching technology and border gateway proto- computer center of the STR. In this situation, the backup col routing policies, which provide 99.8 percent uptime site is immediately started up and the operation guarantee for the whole system, redundant last-mile con- resumption is completed in no more than one hour. nections for all institutions connected. Additionally, all The second stage considers the possibility of a com- service providers must have fault and disaster-tolerant plete STR outage. To cover this, the system counts on sites such as backup sites and data replication. six monitoring centers, which are distributed among Appropriate backup facilities have been implemented as five geographic areas. During that outage event, the a result of the payment system reform. A backup site data monitoring centers are expected to make telephone processing center, which replicates all characteristics of connection with the participants to ensure business the main center, has been built seven kilometers away continuity. The contingency plan targets business from the main processing center. Both sites have inde- continuity in a secure way to avoid losses among pendent operational systems. participants. The contingency plan is to be tested and fully documented at least once a year. Colombia System architecture contains built-in redundancy and The BR as system operator carries out a formal business backup capabilities typical of the SUN System architecture. continuity planning exercise. Business continuity Data communication networks contain fallback circuits arrangements are documented and regularly tested. at the access line level and for accessing the central They include procedures for crisis management and primary and backup sites. information dissemination. The BR routinely undertakes training of participant personnel in addition to the explicit Rigorous quality assurance processes and procedures training provided during the certification process. are in place and are practiced routinely. There is a small possibility that documentation may not be current, thus Business continuity arrangements of the BR normally the potential for a problem might exist. However, the include diversion of payments to another payment probability of occurrence is low. system, a second processing site, or a minimum service level requirement. Costa Rica The BCCR has a contingency site with equipment and Contingency plans have been established for each of technological characteristics identical to those of the the technological elements embodied in the system's main site. processes, such as electric power, telecommunications, hardware, software, and others. In case a participant faces a situation in which it is not able to transmit its files to the BCCR, the participant has In case of a contingency, the operator informs the the option to use the alternative operations hall, located rest of the participants of the situation as well as the inside the BCCR. measures to be adopted to solve it by means of an Extranet bulletin. These measures may include an extension of the closing hour of one phase of the cycle (collection or return), or may include a provision that returned items be transferred to the next cycle for a specific entity. Guatemala New systems being developed under the payments reform For the new systems, the BANGUAT is currently working take into account operational reliability considerations. on a contingency plan and backup facilities. In a first phase a duplicate of the databases will be made, and An alternative computer hall is currently being developed in a second phase an alternative processing site will by the BANGUAT at a secondary site, the Casa de la be built. Moneda. Payments Systems Assessment Findings in Latin America and the Caribbean 61 Table 4.4 Operational Risk Management in LVPSs in Selected Latin America and the Caribbean Countries* (Continued) Country Backup Facilities Business Continuity Plans Jamaica System architecture contains redundancy and backup Emergency procedures have been designed, but no capabilities. The Customer Inquiry and Funds Transfer comprehensive, tested business continuity plan exists. System, which is the data communication network, has a fallback circuit that is tested every other year. As part of its reform program, the BOJ is planning a backup site at an appropriate location on the island. Mexico Banco de México has an alternative processing site If there are failures in the communications between located outside Mexico City. Banco de México's equipment and those of one or more of the participating institutions, if SPEUA is closed To operate in SPEUA, every participant must keep at before the established hours, or if any other event has least two sets of equipment with the same functions and an extraordinary impact on SPEUA, Banco de México capabilities, including security procedures to authenticate may take some of the following actions: extend the payment orders. operating hours of SPEUA, extend the cutoff time to determine the pending obligations in SPEUA and the corresponding additional settlement obligations, mandate participants to stop sending payment orders through SPEUA, or order the participants to keep sending instructions through backup equipment. Netherlands The payments process and the IT system are continuously A contingency communication system based on satellite Antilles monitored. The BvdNA has a backup system available. telephony is available. If participants are not able to Part of the latter system functions in a hot standby mode. send in their payment orders and payment files elec- Work is under way to mirror all the functionalities and tronically due to a failure of the communication facilities, activities on the backup system in real time. The backup they can take their payment files on a diskette together facilities and the primary processing site are located in with a properly authorized hard copy of the entry files the premises of the BvdNA. to the BvdNA. The BvdNA guarantees the availability of the NACS during For emergency situations, a redundant power supply operating hours and working days. Work is on its way to is available that can provide electricity to the central implement an automated internal and external helpdesk bank in case of a power failure. system to monitor and record all problems and measures been taken. At the moment, there is no structural monitoring of problems. Nicaragua Currently there is no backup system for the computing An operational plan for contingency of payment system center, which is located in the capital city of Managua. applications was prepared in August 1999. This plan had a particular focus on the Y2K issue and does not take into account modern business continuity planning for systemically important payment systems. OECS The major threat to operations is hurricanes, which can The ECCB established a business continuity committee interrupt services for a lengthy period. The current payment headed by the managing director. The objectives of system has redundant processors and power backup equip- this committee are to ensure that the ECCB is fully ment that allows the ECCB to maintain operations in case of prepared to cope with disasters; oversee the ECCB's temporary disruption of services and short-term (less than return to business in the event of a disaster or other one day) emergencies. In addition, the ECCB has provided disruption; and develop, review, and continually for the off-site storage on a weekly basis of computer tapes update the ECCB's business continuity plan. containing databases and accounting information. Since hurricanes are the major threat, it is doubtful ECCB staff is looking at a variety of alternatives should its that the ECCB would be able to relocate people on a headquarters become unavailable for a long time. One timely basis to ensure continuing operations. The alternative is a separate site on St. Kitts that would be able remote location would need some minimal level of to process the workload. Another alternative is expanding skills to support hardware as well as normal operating one of the representative offices in another Eastern procedures of the banking and monetary operations Caribbean Currency Union country to function as an department and other areas. alternative site for processing. (Continued) 62 Payments and Securities Settlement Table 4.4 Operational Risk Management in LVPSs in Selected Latin America and the Caribbean Countries* (Continued) Country Backup Facilities Business Continuity Plans Peru The BCRP provides, in its headquarters, redundant The system counts with contingency procedures for equipment readily available for participants that are communications and the BCRP has terminals available experiencing problems with their own equipment. for use by entities experiencing problems in accessing the system; facsimiles are used as a last resort. The BCRP is planning to create a backup site in an Settlement is done in the time required for the manual alternative location. input of operations. Trinidad and The CBTT ensures the availability of the Safe-tt during The CBTT started a business continuity plan for Tobago operating hours on working days. The main site consists Safe-tt that describes the processes and procedures of two independent servers. to prevent interruption of mission-critical services, and to reestablish full functioning as swiftly and The Safe-tt system resides on Sun Solaris. The two smoothly as possible. It addresses technical recovery independent servers use a shared storage device for issues. It does not attempt to cover business failure, data. If one server at the main site should fail, CBTT other than when alternate site recovery may be incorporates a switchover to the second server that is involved. Key features of the plan include managing transparent to all users. contingency events, e.g., hurricanes and communi- On a daily basis, the database backs up via the operating cation failure, primary and alternate site facilities, system and database exports, done backend, are per- recovery processes and procedures, and communi- formed. The databases for the past month are archived cation systems. to tape monthly to be stored onsite and offsite. Currently, the CBTT is working on implementing a Safe-tt is viewed as a critical system, and all such systems CBTT-wide business continuity plan that would are replicated live to a hotsite at a remote location. If include plans for the RTGS. both servers at the main site should fail CBTT can switch operations to the hotsite. There is a helpdesk system to monitor and record all problems and measures to be taken. Uruguay At present, the main tools to manage operational risk in In case participants are not able to connect to the the systems operated by the BCU are backup servers in system due to a malfunctioning of the communications hot standby mode and daily information backups. These network, they can still order payment transactions servers and the main operating server are all located on over the phone. However, there is no manual, structured the same premises, the BCU headquarters. The BCU emergency procedure, or even written statement on backs up in tapes the information of the operating day for what to do in case of such a failure. all systems it operates, and stores them in a satellite location. The operation of the cheque clearinghouse has been del- egated to a private sector institution. There are no BCU rules regarding the operational standards or features that the system should fulfill. Venezuela, Currently, there are no backup premises for disasters, There are several contingency arrangements. In case R.B. de although the BCV is considering starting to develop an of system malfunctioning, orders may keep coming in alternative site for transaction processing. to the central bank via SWIFT, telex, or paper means and the central bank will continue to process these provisionally in Excel. External participants experiencing problems with their terminals may go to the central bank building and con- tinue entering transactions into the system. Records are replicated in real time and kept in central bank premises. Source: Authors' elaboration. Note: In Chile, security, contingencies, and business continuity measures are contained in Sections XI and XII, respectively, of the operational regulation of the Sistema LBTR. This information is, however, considered confidential by the BCCH. Payments Systems Assessment Findings in Latin America and the Caribbean 63 Table 4.5 Pricing Policies in LVPSs in Selected Latin America and the Caribbean Countries Country Pricing Policy Argentina The BCRA currently does not apply any charges to commercial banks for the settlement of their transactions in the MEP. This policy was adopted at the time the system was launched in order to promote its use among the banking sector. Brazil The STR pricing policy aims at full cost recovery: Fees should cover all operating costs, both fixed and variable. Imputed costs also considered. The STR price schedule is R$0.62 (approximately US$0.28) per each immediate transfer that is sent and received. Early transfers (before 8:00 a.m.) are charged a lower fee (R$0.31 for each transfer sent and received). For the SITRAF, the fees are similar to the fees charged in the STR environment. Chile The pricing policy of the BCCH regarding the RTGS system aims at covering all the costs related to implementation, daily operation, and maintenance. Each participant is subject to a fixed monthly charge and a fixed amount per transaction settled in the system. The actual charges and amounts are set in the operational regulations of the system. Colombia The current pricing scheme started to be applied in April 2004, with the following objectives: (1) to correct, to the extent possible, cross-subsidies between the various services the BR provides, (2) to transfer a bigger portion of total costs to the participants, (3) to induce a higher efficiency in the use of the services, (4) to create incentives for a more uniform distribution of payment throughout the operating day, and (5) in general, to better comply with Core Principle VIII. The current practices are a fixed amount of Col$2,000 (approximately US$0.85) per transaction settled up to 6:00 p.m. and an ad valorem tariff of Col$2.5 per million for payment orders after that cutoff time. El Salvador The BCR does not charge any fees for the clearing or settlement services it provides to financial institutions. Mexico In the SIAC, each participant pays an annual fee that is intended to cover all costs incurred by the Banco de México; these covered costs include the telecommunications network, software, and hardware maintenance. The fee varies according to the number of terminals that each participant has. In the SPEUA, each participant pays an annual fee and a monthly fee, the latter on the basis of the number of payments made and the time of the day in which such payments were made. The rates are calculated by Banco de México so that it is able to cover all the costs it incurs to design, implement, and run the system. In the SPEI each participant pays an annual fee and a monthly fee. The monthly fee is calculated on the following basis: (1) the number of payment orders sent, (2) the number of rejected orders, (3) the number of e-signatures verified by the module, and (4) the amount of information retransmitted by the SPEI on request of the participating institution. Netherlands Antilles The NACS was developed jointly by the BvdNA and commercial banks and the investment costs for the development and implementation of the NACS were shared between them. Each participant contributes the same amount and maintenance costs are divided equally among the participants on an annual basis. Personnel costs to operate the system are at the expense of the BvdNA. Under this arrangement, no fee is charged to the participants for individual transactions processed through the NACS. Nicaragua The charges applied by the BCN as part of its pricing policy for the provision of payment services do not cover operating costs, and are irrespective of considerations such as the volume of operations that participants insert into the system. OECS At present, the ECCB does not charge any fees for its clearing or settlement services. However, in 2003 the ECCB initiated a study to investigate the feasibility of a pricing scheme; the aim is to reduce the subsidization of payment services and obtain a level of cost recovery. The objective of full cost recovery will be a longer-term development; it may be several years before it is fully achieved. Peru The pricing scheme created by the BCRP sets a fixed monthly charge and a fixed amount per transaction, which becomes higher if the operation takes place after 3:00 p.m. Thus, through its pricing policy, the BCRP explicitly targets the smooth flow of payments. The prices are adjusted quarterly on the basis of inflation and are applied to transactions denominated in either local currency or U.S. dollars. (Continued) 64 Payments and Securities Settlement Table 4.5 Pricing Policies in LVPSs in Selected Latin America and the Caribbean Countries (Continued) Country Pricing Policy Trinidad and Tobago The CBTT adopted a two-part pricing policy for Safe-tt. An annual membership fee is charged to all participants, which offsets the marginal costs of implementing the system. This fee consists of the total marginal cost of implementing Safe-tt, divided evenly among the six local commercial banks and the CBTT. The second fee charged is a transaction fee for each transaction processed over Safe-tt. The latter fee assists in offsetting the daily operational cost of the system. At present, due to the still low volumes on Safe-tt and proportionally higher transaction costs, the CBTT has had to subsidize transaction fees. Uruguay The BCU currently does not apply any charges to the settlement services it provides. Charges were applied in the past, though, and the BCU intends to reinstate charges once the migration of the RTGS system to the new AGATA platform is concluded. Venezuela, R.B. de Large-value payment services offered by the BCV are not priced. Banks pay fees to SWIFT to use the system for the domestic and international traffic Source: Authors' elaboration. Observations countries in the region count with a designated LVPS that complies with the CPSS core principles for sys- LVPSs and systemically important payment systems in temically important payment systems. To this end, all Latin America and the Caribbean do not fully observe aspects of the new systems must be carefully evaluated several of the Committee on Payment and Settlement and discussed with market participants. In particular, Systems (CPSS) core principles for systemically impor- central banks should prepare rules and procedures tant payment systems. In many cases, the national relating to the use of the system covering legal, finan- central banks, recognizing these weaknesses, initiated cial, and operational risks. The design should include reforms in the payments system to improve the safety elements that could affect efficiency and practicality and efficiency of LVPSs, launch an RTGS system, and such as full integration of available systems, convenient reduce the use of cheques for large-value settlements. operating hours, and reduction and elimination of man- With few exceptions, the high value of cheques settled ual procedures. Some form of cost recovery should be in cheque clearinghouses throughout the region and the fact that this instrument is still used for interbank evaluated compared with all other externalities that payments confirm that cheque systems should still be stem from a robust and efficient payment system (that viewed as a systemically important payment systems is, risk reduction). in most countries. To strengthen the stability of the An appropriately designed RTGS system has been payments system, the discharge of obligations among recommended as a powerful tool to expedite settlement financial intermediaries must be made through an and minimize systemic risk. Countries with smaller appropriate system, such as an RTGS system. Conse- or less active financial markets should consider imple- quently, central banks should evaluate any measures menting a system of this kind as the markets develop that help persuade intermediaries to use the RTGS sys- and the number of time-critical interbank payments tem for interbank transfers and to reduce the use of increases. large-value cheques. It is suggested that pricing policy The smooth functioning of the RTGS system requires be used as the main incentive for this transition of the availability of appropriate liquidity management the large-value payments from the cheque system to tools and an efficient distribution of liquidity among the RTGS system, to reduce, and eventually eliminate, intermediaries during the operational hours of the day. the systemic importance of the cheque clearinghouse. Central banks must remove obstacles that prevent an Several countries launched an RTGS system several efficient use of liquidity, including allowing a flexible years ago and others are moving in the same direc- use of reserves requirements and providing intraday tion. In this regard, it has been recommended that all creditbymeansofproperlycollateralizedintradayloans Payments Systems Assessment Findings in Latin America and the Caribbean 65 or repos. Intermediaries should also have complete (legal, risk control mechanisms, liquidity provision, and timely information on incoming and outgoing pay- access policies, governance, organizational arrange- ments. To this end, central banks should improve the ments, operational aspects, reliability and business collection of reliable statistical information for analy- continuity, and so on). sis purposes. Some central banks have also found it useful to review the time schedule of settlement of RETAIL SETTLEMENT SYSTEMS payments in the RTGS system during the day and the This section includes context, status in the region, and critical times at which relevant sources of liquidity observations regarding the retail settlement systems are injected into the system. In this regard, the proper synchronization of the payments of the national trea- Context sury is critical in order to avoid unforeseen injections or withdrawals of reserves, which create volatility in A wide range of payment instruments is essential for the availability of intraday liquidity and may end up supporting customers' needs in a market economy. A affecting the conduct of the monetary policy. In deter- less-than-optimal supply of payment instruments may mining the most appropriate solutions to improve the ultimately have an impact on economic development efficiency of the system, it is important that open dis- and growth. Moreover, the safe and efficient use of cussion takes place among the parties involved in the money as a medium of exchange in retail transactions is RTGS system. The introduction of so-called users' particularly important for the stability of the currency groups has been recommended for this purpose. and a foundation of the trust people have in it. As CPSS Several improvements are also necessary to reduce publications have shown, the use of retail payment instru- operational risks and improve the resiliency of LVPSs. ments differs in industrial countries both within and To this end, it has been recommended that the follow- among the countries considered (CPSS 1999, 2000c). ing elements be redesigned or added to systems cur- This is due to a variety of factors, including cultural, rently in place or included in the design of a new LVPS: historical, economic, and legal. However, some common (1) implementation of a robust and efficient commu- trends may be observed, namely the continued primacy nication network between the central bank and sys- of cash (in volume terms) for face-to-face payments; tem participants, which should reduce and eventually growth in payment cards use; increased use of direct funds eliminate the use of manual- or paper-based proce- transfers, especially direct debit transfers, for remote dures; (2) implementation and enforcement of strict payments; and changes in the market arrangements for security measures both for physical and electronic providing and pricing the retail payment instruments access to the system; (3) implementation of disaster and services delivered to end users. This evolution is recovery mechanisms, including the setting-up of a likely to continue in the future and is expected to influ- secondary site; and (4) development of comprehen- ence traditional (especially paper-based) instruments. sive business continuity plans to be tested on a peri- As the CPSS reports state, over the long term some of the observed market developments may well alter traditional odical basis. payment practices and contribute to increased efficiency Because LVPSs represent the backbone of the national and convenience in retail payment systems. In an increas- payments system, reforming the existing RTGS system ing number of countries, more and more attention is or implementing one will result in a major improvement devoted by authorities and market participants to the to the safety and efficiency for each country's financial efficiency and efficacy of production and distribution of infrastructure. From another perspective, completing payment instruments (including cash). these processes will not only serve the needs of the individual domestic payment systems, but also create In March 2003, the CPSS published a new report that appropriate conditions for an eventual future integra- identifies and explores policy issues for central banks tion at a subregional level. It is important to stress that and considers the possible contribution of central banks any potential integration in this area should be based towards furthering certain policy goals in this area on the previous harmonization of the systems--that (CPSS 2003a). Central banks are currently involved in is, the existence of common features in all relevant areas retail payments in three main ways: (1) in an operational 66 Payments and Securities Settlement capacity, (2) as payment system overseers, or (3) as cat- ance of the various aspects of safety and efficiency. The alysts or facilitators of market and regulatory evolution. public policy goals, the central bank minimum action Even though the involvement of the central bank in retail and the range of possible additional actions identified in payments varies from country to country, the report the CPSS report are summarized in box 4.1. suggests that each central bank should examine devel- opments in its markets periodically in the light of some The CPSS report has been prepared in the light of the identified policy issues (see below), in order to form a trends in retail payment markets in the Group of Ten view on whether such issues arise in practice. Where countries and Australia. It is likely that, in developing such issues are judged to arise, relevant public authori- countries, central banks and other private and public ties (including central banks) may decide to take action entities need to take a proactive role and explore care- aimed at establishing or reestablishing an acceptable bal- fully the possibility of adopting additional measures. Box 4.1 Public Policy Goals, Central Bank Minimum Actions, and Range of Possible Additional Actions for Retail Payment Systems LEGAL AND REGULATORY FRAMEWORK Public Policy Goal A: Policies relating to the efficiency and safety of retail payments should be designed, where appropriate, to address legal and regulatory impediments to market development and innovation. The central bank should, at a minimum: Review the legal and regulatory framework to identify any barriers to improvements in efficiency and/or safety; Cooperate with relevant public and private entities so that the legal and regulatory framework keeps pace with the changing circumstances and barriers to improvements in efficiency and/or safety are removed, where appropriate. The range of possible additional actions could include, depending on the individual central bank's responsibilities, powers and priorities: Altering regulations that currently present barriers to improving efficiency and safety, where this is within the central bank's remit and where other public interest arguments do not militate against such action; Introducing or proposing new regulations, as the central bank's remit allows, where the legal or regulatory framework is insufficient to support increased efficiency and/or safety; Offering expert advice to other responsible authorities, for example, in the preparation of relevant legislation. MARKET STRUCTURE AND PERFORMANCE Public Policy Goal B: Policies relating to the efficiency and safety of the retail payments should be designed, where appropriate, to foster market conditions and behaviors. The central bank should, at a minimum: Monitor developments in market conditions and behaviors relating to retail payment instruments and services and assess their significance; Cooperate with other public or private entities, as appropriate, to foster competitive market conditions and to address any significant public policy issues arising from market structures and performance. The range of possible additional actions could include, depending on the individual central bank's responsibilities, powers and priorities: Promoting appropriate standards or guidelines for transparency, in cooperation with relevant public and private sector entities; Reviewing conditions in the market for cross-border retail payments, with a view to promoting improvements, is such action is warranted; Considering and, if appropriate, performing regulatory and/or operational interventions in cases where market forces are judged not to have achieved or not to be likely to achieve an efficient and safe solution. STANDARDS AND INFRASTRUCTURE Public Policy Goal C: Polices relating to the efficiency and safety of retail payments should be designed, where appropriate, to support the development of effective standards and infrastructure arrangements. Payments Systems Assessment Findings in Latin America and the Caribbean 67 Box 4.1 Public Policy Goals, Central Bank Minimum Actions, and Range of Possible Additional Actions for Retail Payment Systems (Continued) The central bank should, at a minimum: Monitor developments in security standards, operating standards and infrastructure arrangements for retail payments which the central bank judges to be important for the public interest, and assess their significance; Cooperate with relevant public and private entities to encourage market improvements in such standards and infrastructure arrangements, where appropriate. The range of possible additional actions could include, depending on the individual central bank's responsibilities, powers and priorities: Participating actively in reviewing and developing appropriate standards and arrangements, in cooperation with relevant public and private entities, where the central bank judges its more intensive involvement to be necessary to furthering the goal; Considering and, if appropriate, performing regulatory and/or operational intervention in cases where market forces are judged not to have achieved or not to be likely to achieve and efficient and safe solution. CENTRAL BANK SERVICES Public Policy Goal D: Policies relating to the efficiency and safety of retail payments should be designed, where appropriate, to provide central bank services in the manner most effective for the particular market. The central bank should, at a minimum: Review and, if appropriate, adapt its provisions of settlement services to contribute to efficient and safe outcomes; Be transparent in its provision of services. The range of possible additional actions could include, depending on the individual central bank's responsibilities, powers and priorities: Reviewing the relevant nonsettlement services it provides and considering their adaptation to changing market conditions; Reviewing policies on access to central bank services and on pricing. Note: The text comes directly from the quoted document. Status in the Region Table 4.6 Retail Settlement Systems and Instruments in Individual Latin America and the Caribbean Countriesa Country Retail Settlement Systems and Instruments Argentina Cheque Clearinghouse and Credit Transfers and Direct Debits Since 1997, two private clearinghouses have been authorized by the BCRA to electronically process low-value payments: ACH, S.A., and Compensadora Electrónica S.A. mainly serves banks in the Buenos Aires area, whereas ACH serves the provincial banks. All members are direct participants. The two clearinghouses handle the following payment instruments: cheques, letters of credit, term certificates of deposit, banking payment orders, postal and bank giros and transfers, and sight bills of exchange drawn against quotas of mutual funds. The two clearinghouses are interconnected to exchange transactions that are presented from the member of one in favor of a member of the other. This procedure applies to all cleared instruments. The structure of the archives and of the messages was developed following NACHA (the electronic payments association) standards. Settlement is accomplished at the BCRA through the MEP. Payment Card Systems The use of payments cards, especially credit cards, is widespread. There are seven credit card networks active at the national level: Five are owned by banks and operate in an open scheme; the other two are American Express and Diners Club. Debit cards are issued mainly under Visa (Electron) and MasterCard (Maestro). Almost all ATM cards in the country can be used as debit cards for payments. (Continued) 68 Payments and Securities Settlement Table 4.6 Retail Settlement Systems and Instruments in Individual Latin America and the Caribbean countriesa (Continued) Country Retail Settlement Systems and Instruments Argentina The networks are partially interoperable. Payment cards operations for national cards are cleared at the network (Continued) level and settled through commercial banks in the accounts held at the BCRA. Other Systems The postal administration (Correo, S.A.) manages two types of payment instruments: postal money orders and recurrent payments operations. The Correo is used extensively for recurrent payments. The network for these payments, named Sistema Electrónico de Pagos, operates with bar-coded instruments. Payments are received at the post office in cash and are transferred the following day to Sistema Electrónico de Pagos, which distributes them to the final beneficiary (utility companies, tax-collecting agencies, and so on). Bahamas, The Cheque Clearinghouse Cheques are used intensively for all types of payments in The Bahamas. On the one hand, the number of cheques cleared each year in the clearinghouse has remained almost constant in the past few years. On the other hand, the total value of cheques has been rising at an average of 5 percent a year. The cheque system operates with a clearinghouse managed by the CBOB. The clearing banks have signed an agreement governing the exchange of cheques and their settlement. The exchange of documents continues to be paper based. Although some banks take advantage of the MICR codes in their processing, this technology is not widespread in the banking sector. Clearing results are presented through each bank's central clearing branch by 9:15 a.m. each day. Following the exchange, net settlement obligations are calculated and vouchers prepared to meet the obligations. These vouchers request that the CBOB make the necessary debits and credits for the settlement. Credit Transfers and Direct Debits Only recently, some banks have started making available credit transfers and direct debits to their customers. At present, these are available only at an intrabank level. The CBOB and the clearing banks association are leading a project for the launching of an ACH that, among other things, will process credit transfers and direct debits. This is expected to become operational as of year-end 2006. Payment Card Systems Payment cards are used intensively in The Bahamas. Recently, the use of cards as payment instruments (that is, in electronic funds transfer at the point of sale [EFTPOS]) has increased significantly. Five of the seven clearing banks have their own network of ATMs, and a number of these banks are actively promoting the use of bank cards to replace cheques. There are no shared networks for ATMs in The Bahamas. Bolivia Cheque Clearinghouse There is a single national cheque clearinghouse in local currency and in U.S. dollars operated by the Asociación Bancaria, the bankers' association. Cheque standardization, MICR technology, imaging, and other procedures have been implemented recently to increase the degree of automation and to expedite settlement. There are two daily clearance and settlement sessions for each currency denomination, with parallel processes; and the outgoing balances are settled at the BCB. Funds are normally available on customer accounts by T or T + 1, depending on the time of presentment and on the clearing bank, because there are no rules stating the time by which funds must be available at customer accounts. The average value of a cheque cleared at the clearinghouse is slightly more than US$4,000. The BCB has already issued a general regulation for payments clearinghouses that mandates the introduction of risk controls and facilitates BCB payment services for the settlement of clearinghouse positions, among other desirable features. Credit Transfers and Direct Debits At present, credit transfers and direct debits are used only at the intrabank level, and the volume is still low. The Asociación Bancaria is planning to launch an ACH that would provide credit transfer and direct debit services. Payments Systems Assessment Findings in Latin America and the Caribbean 69 Table 4.6 Retail Settlement Systems and Instruments in Individual Latin America and the Caribbean Countriesa (Continued) Country Retail Settlement Systems and Instruments Bolivia Payment Card Systems (Continued) There are more than 500,000, 200,000, and 50,000 debit, credit, and stored-value cards, respectively. Payment cards, particularly stored-value cards, are becoming increasingly important. There are two major ATM networks that are interoperable. The combined network comprises almost 500 machines. The ATM networks and EFTPOS systems settle interbank balances with cheques or in correspondent bank accounts. Brazil Cheque Clearinghouse The COMPE provides cheque-clearing services all over the country. Settlement is made against banks' reserve accounts at the BACEN on T + 1. Banco do Brasil, a government-owned commercial bank, is the operator of the COMPE. The COMPE, however, is regulated by the BACEN. All commercial banks, multiple banks with commercial operations, and savings banks are participants in the COMPE. Participants' reserve accounts at the BACEN are linked to another account (the linked account) created for the financial settlement of interbank obligations arising from the COMPE. This account receives deposits through funds transfers ordered by the account holders through the STR. Basic features and processing are standardized across the country. All cheques contain MICR encoding. Cheque truncation has not yet been implemented in Brazil at the system level. The COMPE holds two daily ses- sions for the exchange and return of documents: The first session includes cheques up to a limit established by the BACEN (currently R$299.99) that were accepted by the banking network during the previous business day. These cheques are settled by T + 1 at the level of the participants. The second session covers cheques for indi- vidual amounts above the R$299.99 limit and bloquetos de cobrança received in the banking network during the same business day (T). Because there are no safeguards to guarantee settlement, if a participant does not have sufficient funds for set- tling its obligations an unwinding of the multilateral positions is made and the relevant institution is excluded from the settlement process. Credit Transfers and Direct Debits Although the infrastructure created with the restructuring of the Brazilian payment system already makes it technologically feasible to develop a wide range of retail payment products, direct debit and credit services are still only available at the intrabank level. Direct debits are used extensively to pay utility bills. The Sistema de Liquidação Diferida de Ordens de Crédito Interbancárias is a multilateral net settlement system that settles interbank obligations related to interbank credit orders. It is operated by the Câmara Interbancária de Pagamentos and went live in February 2004. All deposit-taking institutions have access to the Sistema de Liquidação Diferida de Ordens de Crédito Interbancárias. The Sistema de Liquidação Diferida de Ordens de Crédito Interbancárias holds two daily settlement sessions: the interbank credit orders issued in the day before (T - 1) are usually settled in the morning session, through a settlement window that ends at 8:20 a.m., whereas returned items are usually settled in the afternoon session, which ends at 4:10 p.m. The multilateral balances are informed by the Câmara Interbancária de Pagamentos. Funds transfers from participants with a net debit position to Câmara Interbancária de Pagamentos, and funds transfers from Câmara Interbancária de Pagamentos to the participants with net credit positions are made through the STR. Final settlement occurs once the BACEN posts the multilateral balances in the reserve accounts. Credit transfers through interbank credit orders are limited to R$5,000 per order. An unwinding of the positions would occur if a participant were unable to cover its settlement position. Payment Card Systems The most representative institutions are TecBan, which settles transactions from Banco24Horas, an ATM network with 52 associated financial institutions, and Visanet and Redecard, which settle credit and debit card transactions. (Continued) 70 Payments and Securities Settlement Table 4.6 Retail Settlement Systems and Instruments in Individual Latin America and the Caribbean Countriesa (Continued) Country Retail Settlement Systems and Instruments Brazil Credit cards represent almost 40 percent of the total credit card business in Latin American markets and (Continued) 2.6 percent of the credit card business in the global market. The number of credit cards issued increased from 23.4 million in December 1999 to 44 million in December 2003. The number of transactions increased from 553.2 million in 1999 to 1.08 billion in 2003. In 2004, the number of credit and debit card transactions per capita exceeded the number of cheques issued for the first time. The main brands are American Express, Diners Club, HiperCard, MasterCard, and Visa. The issuer segment of the industry has increasingly become a bank business. The main players in this area are American Express, Banco do Brasil, Bradesco, CrediCard, and HiperCard. Since April 2002, the interbank settlement of credit card transactions was removed from the COMPE. For this purpose, RedeCard and VisaNet, the exclusive acquirers for MasterCard and Visa brands in Brazil, turned themselves into clearinghouses to provide settlement services on a bilateral netting basis. Regarding debit cards, as of year-end 2003, almost 162 million debit cards were in circulation and accepted by more than 1.4 million of affiliated merchants throughout the country. They operated under the same umbrella of major credit card brands. Banco24Horas has its own brands. ATM networks are not fully interoperable in Brazil. Each of the major private banks in Brazil operates its own ATM network. Smaller banks usually share an ATM network. As of year-end 2003, there were around 137,000 ATMs, connected to 29 ATM proprietary networks. Only a few banks issue smart cards to their customers. Two systems are currently being adopted: the SIBS and Visa Cash. Other Systems Post offices traditionally have had a limited role in providing payment instruments in Brazil. Two services are available--the vale postal (a payment order) and the collection of bills on behalf of third parties. These are not widely used in Brazil. Chile Cheque Clearinghouse Cheques are the main payment instrument in Chile: more than 270 million cheques are processed each year. The Sistema Nacional de Comunicaciones Financieras operates the low-value clearinghouse. There are several clearing sessions to process cheques and vales vista in local currency, cheques in foreign currency, and ATM inter-network balances. The first clearinghouse session is held at 5:30 p.m. The exchange, clearing, and honoring of cheques and other documents in local currency takes place at this time. Documents pertaining to other banking sites (clearing locations) are processed one day before (T - 1) and the results are added to those of the first (local) clearing- house session held on day T. At 9:30 a.m., a second clearinghouse session is held for errors. A third session is held at 11:30 a.m. for returned items. At 3:00 p.m., a fourth clearinghouse session is held for transactions among financial institutions.b At the end of day T + 1, the BCCH debits or credits the participating institutions' current accounts. A central bank liquidity warranty is understood to cover the vale vista under exceptional circumstances (see cheque clearing- house rules and article 36 of the BCCH legal statute), and the central bank provides automatic credit, if there are overdrafts. Overdrafts are infrequent because a system of severe penalties is in place. Credit Transfers and Direct Debits Direct debits or the automatic payment of bills out of a current account is a commonly used mechanism introduced many years ago. However, it is available only at the intrabank level. Some years ago, several banks launched the Pago Automático de Cuenta, an interbank direct debit system that enables ad hoc payments, mainly for collections. There are almost 500 organizations participating in this system. Payments Systems Assessment Findings in Latin America and the Caribbean 71 Table 4.6 Retail Settlement Systems and Instruments in Individual Latin America and the Caribbean Countriesa (Continued) Country Retail Settlement Systems and Instruments Chile Payment Card Systems (Continued) Regarding payment cards, as of year-end 2005, there were about 3.8 million bank-issued credit cards in circulation, and approximately 60,000 EFTPOS in the country. There were also approximately 5.6 million debit cards in use. This instrument is not used extensively due to disadvantages such as the US$60 annual administration fee and a tax levied for each transaction performed. Transbank, a company that provides support services for the banking business and that is owned by several banks, provides a national clearing system for credit and debit card transactions. There are also credit and fidelity cards issued by different businesses. It is estimated that there are 8 million cards issued to people who do not have access to bank products. There are more than 3,000 ATMs in the country operating through two noninteroperable networks. Redbanc operates the ATM networks of 20 banks comprising more than 2,500 ATMs, while Globalnet operates a network of roughly 500 ATMs. The results of the Redbanc ATM clearing (from 2:01 p.m. of T - 1 to 2:00 p.m. of day T) are settled at the BCCH. In 2005, the two ATM networks announced they plan to engage in an interconnection agreement. Colombia Cheque Clearinghouse Cheques are used not only for low-value payments, but also by the corporate sector and by financial intermediaries for large-value transactions. Recent figures show that the use of cheques has decreased substantially. Clearing and settlement of cheques at Cámara Electrónica de Compensación occurs in two sessions: The first session, which takes place the same day of the presentation of the cheques, executes a provisional settlement on the participants' accounts at BR. Final settlement is carried out the next day at the second session, in which the balances are calculated, excluding the returned items. Credit Transfers and Direct Debits The implementation of ACH services in Colombia brought with it the opportunity to implement electronic payment operations in both credit and debit form. The volume of transactions in both ACHs is still small. The first ACH, called Sistema de Compensación Electrónica Nacional Interbancaria, is managed and owned by the BR and is used primarily for public sector retail payments. Settlement occurs three times a day by crediting and debiting the accounts at the BR. The second one, called ACH Colombia, was implemented by the financial intermediaries and is used essentially for recurrent payments of individuals and for corporate payments--mainly payrolls, pensions, and payments to suppliers. ACH Colombia settles its multilateral balances at the BR. Payment Card Systems The main operators in this market are Visa, MasterCard, and Diners Club. Of the 10 million debit cards currently operating in the market, MasterCard has a share of almost 60 percent and Visa the remaining 40 percent. The number of ATMs is estimated at more than 5,600. The number of transactions a year is close to 400 million. There are six major ATM­EFTPOS networks that are completely interoperable. At the end of the day, each net- work calculates the net positions of its cardholders and its credit and debit position versus the other networks, and settlement occurs according to an agreed procedure through the Sistema Electrónico de Cuentas de Depósito. Costa Rica Cheque Clearinghouse The cheque is the most important retail payment instrument. The cheque-clearing system has well-defined rules and regulations. Standardized procedures and other measures have reduced the processing time from almost two weeks to T + 1. Rules and regulations prescribe that the receiving bank has to credit the account of the ben- eficiary for the relevant amount within two hours after the multilateral cheque clearing has taken place in the books of the central bank. At present, the system does not support truncation. (Continued) 72 Payments and Securities Settlement Table 4.6 Retail Settlement Systems and Instruments in Individual Latin America and the Caribbean Countriesa (Continued) Country Retail Settlement Systems and Instruments Costa Rica For the cheque settlement, a guarantee scheme was put in place to ensure timely settlement in case of default (Continued) by one of the participants. This is also the case for other retail payment systems that clear and settle on a multi- lateral basis within the Sistema de Negociación y Pagos Electrónicos. These schemes are based on a defaulter's pay principle. Each participant has to pledge to the BCCR an amount of securities issued by the government, or by the BCCR itself. In the case where a participant has no balances or insufficient balances in its account and does not succeed in funding its debit position (banks have one hour to do so), the central bank will automatically conduct a repo based on the available securities and provide the necessary liquidity in order to settle the debit position. This repo has to be reversed within seven days. Credit Transfers and Direct Debits There are credit transfer and debit services as part of the Sistema de Negociación y Pagos Electrónicos. Both operate under straight-through processing (STP): The information required for the clearance and settlement of payment orders is introduced only once into the system. Both services work with a T + 1 cycle starting from the moment in which the originating client requests the payment service to its financial entity and the transaction is put into the system. Both services use the same schedule for the electronic transmission of information, returns, and settlement on the reserve accounts at the BCCR. For the direct debit service, however, the current account holder is required to issue a debit order by which it authorizes the relevant company to withdraw funds from its account. Payment Card Systems There are two debit and credit card networks operated by Credomatic and ATH. As to ATMs, five networks are in operation and are not interoperable, in general. Liquidación de Servicios Externos is an application developed recently within the Sistema de Negociación y Pagos Electrónicos to settle services provided by third parties, that is, ATM withdrawals, and debit and credit card payments. The Liquidación de Servicios Externos follows a similar cycle to that of the credit transfers and direct debits service. Dominican Republic Cheque Clearinghouse Cheques are the most relevant payment instrument in the Dominican Republic. Only the multiple banks are direct participants in the cheque clearinghouse operated by the BCRD, which is partially automated. The processing cycle begins at 9:00 a.m. of T + 1. Through the communications network, each bank sends an electronic file to the BCRD with the list of all the interbank cheques that were received for collection. The ECH module of the system automatically calculates the net multilateral positions and makes the corresponding credits and debits to the current accounts. These credits and debits are not final, because banks still have to exchange the physical cheques and produce the returned items. At 3:00 p.m. of T + 1, the banks send through the Sistema Bancario en Línea a new electronic file to the BCRD with the returned items. The ECH module processes this file and generates the final credits and debits to the current accounts, which are made at 4:00 p.m. The accounts of the final beneficiaries are generally credited by T + 4. Credit Transfers and Direct Debits Direct credit and debit services are only available at the intrabank level. In recent years, the use of this alternative to pay utility bills and other similar recurrent payments has been growing at a fast pace. Recently, ATH Dominicana, the operator of one of the ATM networks in the country, has been working on an ACH project to enable banks and the banks' customers to make credit- and debit-type retail interbank payment trans- actions. Payment Card Systems In the Dominican Republic, there are two interoperable ATM networks with approximately 1,300 machines. Each network calculates daily the multilateral net balances of its members, as well as the amount to be charged to the other network. The ATH and the BTH networks inform their members of their multilateral net positions and coordinate settlement through a multiple bank designated as settlement agent. For the most part, payments are made through cheques that are cleared at the BCRD clearinghouse. Payments Systems Assessment Findings in Latin America and the Caribbean 73 Table 4.6 Retail Settlement Systems and Instruments in Individual Latin America and the Caribbean Countriesa (Continued) Country Retail Settlement Systems and Instruments Dominican Republic In recent years, payments with credit and debit cards have greatly increased their significance as payment (Continued) instruments. There are approximately 3 million cards, of which 60 percent are credit cards, for a population of almost 8 million. In the period from 1999 to 2003, the total value of card transactions more than doubled. In early 2003, credit card­issuing firms operated 9,135 EFTPOS terminals. The two major acquirers are VisaNet and CardNet, which are owned by BTH and ATH, respectively. Their platforms are partially interoperable. Pay- ments made with all the major card brands can be processed in the CardNet platform, whereas VisaNet only accepts those made with MasterCard and Visa. The interbank obligations derived from card systems are settled in a similar way to those of the ATMs system. Ecuador Cheque Clearinghouse Cheques are the most relevant payment instrument in Ecuador for large-value and retail transactions. Cheque clearing and the physical exchange of documents are distributed in 17 zones, selected on the basis of geographical distribution of banking infrastructure. Settlement is centralized in the headquarters of the BCE in Quito and its Guayaquil branch. The 17 zones send to one of these offices the result of the clearing session for settlement at the current accounts held in the BCE. Final settlement of the cheque clearinghouse occurs at 1:30 p.m. of T + 1. Credit Transfers and Direct Debits The Sistema de Pago Interbancario (SPI), launched in August 2002, is an interbank payment system for retail electronic credit transfers. Individual payment transactions for more than US$10,000 may not be channeled through the SPI. The SPI is accessible through a private communications network using public key infrastructure in an Internet technology framework. Clearing and settlement processes are similar to those of the cheque clearinghouse, although in the case of the SPI all processes are fully automated. From 8:00 a.m. until noon, the participants send files to each other through the BCE communications network; these files have detailed instructions of the funds to be credited to each institution's customers. Between noon and 1:00 p.m., the SPI makes a cutoff, and automatically calculates the multilateral net positions, and executes a preliminary settlement on the current accounts at the BCE. Participants with a multilateral net debit position have until midnight to fund such positions. Participants receiving payment instructions have until 11:00 a.m. of T + 1 to reject transactions on the basis of the nonexistence of the beneficiary's account, the account being closed, and so on. Once the returned items session is over, the BCE executes final settlement by making the necessary adjustments to the preliminary multilateral net positions. Payment Card Systems Regarding ATMS and EFTPOS, the major operator in the country is Banred, which processes the transactions made in almost 90 percent of the roughly 1,000 ATMs in the country. At 7:00 p.m., the system makes a cutoff of the daily transactions and calculates the interbank bilateral positions. Banred then produces credit and debit vouchers for all possible bilateral combinations and sends them to the BCE for settlement. These items are processed as part of the returned items session of the cheque clearinghouse. Banred does not have a risk management mechanism in place to deal with potential defaults by any of its member banks. Unicredit MasterCard processes and clears the transactions made in the Cirrus ATM network. Through Datafast, its subsidiary, Unicredit MasterCard processes payment transactions made with MasterCard credit and debit cards. The system makes a cutoff at 8:00 p.m. and calculates multilateral net positions. Unicredit MasterCard holds a current account at the BCE that serves as a pass-through account for the settlement of these positions. Settlement occurs no later than 11:00 a.m. of T + 1. However, credit and debit positions are not settled simultaneously, and, due to the lack of risk management tools, Unicredit MasterCard often has to fund net debit positions. The BCE launched the clearinghouses' system (Sistema de Cámaras de Compensación), which allows payment obligations stemming from private clearinghouse arrangements to be settled in central bank money. (Continued) 74 Payments and Securities Settlement Table 4.6 Retail Settlement Systems and Instruments in Individual Latin America and the Caribbean Countriesa (Continued) Country Retail Settlement Systems and Instruments El Salvador Cheque Clearinghouse The payments system in El Salvador is largely cheque based. Between 180,000 and 220,000 cheques are written in the country every day, with an average value in excess of US$1,000. Following official dollarization, all cheques are written in U.S. dollars. On the one hand, the majority of cheques are "on us" cheques. On the other hand, there is only one formal cheque clearinghouse in the country, located in San Salvador. MICR technology has been recently employed to permit the automated processing of cheques, although full standardization of cheques has not yet been reached. The banks utilize a range of methods for the capture and sorting of cheques, from multipocket proof machines that can encode, capture, and sort cheques in one operation, to single-pocket encoders combined with high-speed-reader sorters, which encode in one opera- tion and capture and sort in a second operation. Settlement for the clearinghouse takes place on a same-day, multilateral net basis. Almost all cheques are cleared and settled on a next-day basis. Only about 10 ­15 percent of the interbank cheques are exchanged out- side the San Salvador clearinghouse. The final clearing occurs at 5:00 p.m. for the return of cheques presented in the earlier clearings during the day. The settlement process is manual, and each bank submits its settlement information in paper form showing the volume and value of cheques presented against the other clearinghouse participants. The BCR clearinghouse manager calculates the net position of each bank on a manual basis. These deposit sheets are manually entered into PCs by BCR employees to affect the reserve accounts of banks. On ver- ification of a zero net position and adequate funds in each bank's reserve account, the settlement takes place. Overdrafts of the reserve account are not permitted. The level of required reserves is high relative to daily clear- ings, so overdrafts are unlikely to occur. Credit Transers and Direct Debits Direct credits and direct debits are used frequently in El Salvador, although only at the intrabank level. Direct deposit has replaced cash as the primary means of paying employees for most businesses of medium and large size. This trend has led to a broader participation in the banking system on the part of the employees of such businesses, because a bank account is required to obtain the direct deposit. For some time, commercial banks have been trying to implement an ACH to process interbank electronic credit transfers. The main impediment for this project to materialize is the lack of agreements between banks. Payment Card Systems There are more than 250 ATMs in use in El Salvador. The card used for ATM transactions can also be used as a debit card. It is estimated that about 40 percent of bank retail customers have an ATM­debit card. Many ATMs are deployed off premises, in shopping malls, grocery stores, gas stations, and so on. There are four networks that are fully interoperable. Two of them are operated by the two largest banks, one by a consortium of smaller banks, and one by a credit card company. The shared networks apply an interchange transaction fee. There are several networks for the interbank clearing and settlement of card-based transactions, and they are not interoperable. As a result, many merchants that accept debit or credit cards, or both, must have multiple point-of-sale terminals to accommodate the multiple networks. Guatemala Cheque Clearinghouse Retail payments are settled mainly by cheque. Cheque standardization, MICR technology, imaging, and other procedures have been implemented recently to increase the degree of automation. There is a single national cheque clearinghouse in local currency and in U.S. dollars that is operated by a private sector entity, which settles outgoing balances at the BANGUAT. There are 28 participants, mostly banks, but also other nonbank financial institutions. There are two daily clearance and settlement sessions and funds are normally available on customer accounts by T + 2. Payments Systems Assessment Findings in Latin America and the Caribbean 75 Table 4.6 Retail Settlement Systems and Instruments in Individual Latin America and the Caribbean Countriesa (Continued) Country Retail Settlement Systems and Instruments Guatemala Credit Transfers and Direct Debits (Continued) Direct credits and direct debits are used in Guatemala, although at present almost exclusively at the intra- bank level. Bancared, the major ATM and payment card operator, provides credit transfer services for some utilities firms (electricity and telephone) as well as tax collections. Through this service, the clients of any Bancared member bank can use different channels such as Bancared ATMs, phone banking, Internet bank- ing, and banking agencies to make their payments, whereas the payees need to hold only one bank account at a member bank to receive the corresponding credits. Bancared is planning to build a full ACH to process credit transfers and direct debits electronically. Payment Card Systems As of year-end 2003, there were 1.93 million debit cards and 1.65 million credit cards. Payment cards are becom- ing increasingly important as evidenced by the growth in total settlement throughput from US$43 million in 1997 to US$132 million in 2003. There are five major ATM networks that are interoperable; as of year-end 2003, the combined network comprised 774 machines. Regarding clearance and settlement of the interbank balances generated through ATM transactions, there are multiple arrangements. In general, the outstanding balances among the networks (or among banks that belong to the same network) are settled by cheque or through domestic correspondent bank accounts. The different card brands cannot be processed at all EFTPOS terminals. The settlement circuits for payment card transactions are also similar to those for ATMs. Furthermore, due to the lack of widely accepted interbank retail electronic payment instruments, card processors pay merchants with cheques, or mer- chants need to have accounts at various banks to receive credits from every card processor with which they work. Honduras Cheque Clearinghouse The cheque is the main payment instrument in Honduras. A new ECH was launched in 2001, and is owned by 20 pri- vate banks. The BCH--a public bank--and a savings and loans association also participate, but are not owners. Truncation has not been implemented, and physical documents are exchanged in four cities. In any case, the settlement process does not wait for the physical exchange: Participants use the electronic image provided by the system in order to validate the documents and check that enough funds exist in the relevant account. The clearinghouse operates from 9:00 a.m. to 5:00 p.m. for the first clearing. Participants include in the electronic system the information and images of items to be cleared. Participants know their provisional net debit position as soon as the cheques drawn against them are included in the electronic system. At 5:00 p.m., the BCH debits or credits the accounts of clearinghouse participants according to multilateral net positions. These postings are not final. Between 5:00 p.m. and 7:00 p.m., participants enter information on items rejected. At 7:00 p.m., the BCH executes the final settlement with the adjustments resulting from the rejected items session. Five banks normally represent about 70 percent of the value settled; 30 percent of all items are entered from 4:00 p.m. to 5:00 p.m. Credit Transfers and Direct Debits Only recently, credit transfers and direct debits have started to become an alternative for making payments in Honduras. They are available only at the intrabank level. Payment Card Systems There is not information of the number of credit cards and debit cards in the system. Nonetheless, payment cards are perceived to become increasingly important. There are five major ATM networks that are interoperable, the combined network comprising 365 machines. (Continued) 76 Payments and Securities Settlement Table 4.6 Retail Settlement Systems and Instruments in Individual Latin America and the Caribbean Countriesa (Continued) Country Retail Settlement Systems and Instruments Honduras Regarding clearance and settlement of the inter-bank balances generated (Continued) Through ATM transactions, there are multiple arrangements. In general, the outstanding balances among the networks (or among banks that belong to the same network) are settled by cheque or through domestic corre- spondent bank accounts. Settlement circuits for payment card transactions are also similar to those for ATMs. Furthermore, due to the lack of widely accepted interbank retail electronic payment instruments, card processors pay merchants with cheques, or merchants need to have accounts at various banks to receive credits from every card processor with which they work. Jamaica Cheque Clearinghouse The cheque is the most important retail payment instrument in Jamaica. Jamaica's private ACH was established in October 2002, replacing the manual clearing system previously operated by the BOJ. The ACH is governed by the Jamaica Clearing Bankers Association, which comprises all commercial banks and the BOJ. The cheque-clearing and settlement process foresees two sessions. The first session is held at 7:30 a.m. and is for small-value payments and U.S. dollar­denominated cheques and drafts. At 3:30 p.m., interbank clearing takes place and banks are presented with their current account balances (which include postings resulting from the clearing of all items such as cheques). This information may be accessed online. The time window from 3:30 p.m. to 4:20 p.m. is reserved for deposits in order to cover all outgoing payments, and therefore to avoid an account overdraft. After 4:20 p.m., settlement takes place on a deferred multilateral net basis on accounts held at the BOJ. Availability of funds to system participants occurs normally by the opening of the BOJ on the next business day. Settlement of the net balances resulting from the exchange of U.S. dollar­denominated items takes place directly between two members according to bilateral agreements. Credit Transfers and Direct Debits Only recently, credit transfers and direct debits have started to become an alternative for making payments in Jamaica. At present, they are available only at an intrabank level, although the Jamaica ACH intends to start pro- cessing these payment instruments also at the interbank level in the second stage of the ACH project. Payment Card Systems The Jamaica Electronic Transfers System, a joint venture of several Jamaican financial institutions, is a service platform for electronic retail banking services. It uses a shared network that allows withdrawals at ATMs and card payments at EFTPOS. Interbank obligations arising from these services are settled through Jamaica Elec- tronic Transfers System's own clearinghouse on member banks settlement accounts. Each member is required to secure its net daily settlement obligations by pledging marketable securities to the Jamaica Electronic Trans- fers System. Settlement takes place on a net basis on the business day following the date the transaction was effected. Mexico Cheque Clearinghouse Cheques are still used frequently for retail payments in Mexico, although their importance is decreasing rapidly. The Centro de Compensación Bancaria (CECOBAN) offers countrywide clearance of cheques in Mexican pesos and U.S. dollars, and other retail payment instruments. CECOBAN belongs to the commercial banks. Cheques and bank accounts are standardized. In the cheque clearinghouse, all institutions have to present to the clearinghouse the documents on the same day they are received from their clients. Circular 2019/95 of Banco de México establishes that banks have to make the corresponding credits or charges to the customer accounts no later than noon of T + 1. On September 6, 2002, the banks, together with CECOBAN, began operating a cheque-truncation service. In 2003, the third stage of this process started and all cheques were truncated, and the images exchange clearinghouse (Cámara de Intercambio de Imágenes) became fully operational. Banco de México's clearinghouse system (Sistema de Cámaras) clears the payments that CECOBAN has processed up to the morning (between 6:30 a.m. and 7:30 a.m.) following the day in which the documents or files are presented for collection. The resulting balances are settled at the SIAC before 9:00 a.m. If a bank is unable to Payments Systems Assessment Findings in Latin America and the Caribbean 77 Table 4.6 Retail Settlement Systems and Instruments in Individual Latin America and the Caribbean Countriesa (Continued) Country Retail Settlement Systems and Instruments Mexico fulfill its obligations by the time these are due, it is excluded from the process before all other banks credit the (Continued) payments to the corresponding beneficiaries. Credit Transfers and Direct Debits Regarding retail electronic funds transfers, these have been offered by CECOBAN since 1996. This service was upgraded in 2002, and the former interbank payment system changed its name to Transferencia Electrónica de Fondos. In addition, a direct debit service was implemented. For the clearance and settlement of these elec- tronic instruments, the issuing banks send to CECOBAN the electronic files corresponding to the Transferencia Electrónica de Fondos and direct debit services between 5:30 p.m. and 8:30 p.m. CECOBAN validates the format and dates and informs each participating bank of the outcome. Then electronic files are processed and the cor- responding outgoing files generated. Credit transfer orders executed through the Transferencia Electrónica de Fondos are credited to the beneficiary account in T + 1 or T + 2, according to the originator's instructions, and funds are available after 9:00 a.m. The direct debit service operates with a T + 1 cycle. Payment Card Systems Credit and debit cards are widely used. There are approximately 10 million and 40 million bank-issued credit and debit cards, respectively, outstanding. Major retailers also offer payment cards. Prepaid cards for gas and telephone services are used extensively. There are three fully interoperable ATM networks with national coverage. Two are the property of the two largest banks of the country, Banamex-Citibank and BBVA Bancomer. The third one, named RED, integrates the networks of all other banks, and is controlled by Promoción y Operación, S.A. de C.V., a company owned by the participating banks. Interbank settlement of obligations derived from ATM, credit card, and debit card transactions is similar. The three large networks process the operations. Promoción y Operación, S.A. de C.V. then clears the payments and calculates the interbank obligations. These are settled by a commercial bank through electronic funds transfers at the SPEUA. Other Systems Postal money orders purchased through the state-owned Telecom Telégrafos are widely used. Netherlands Antilles Cheque Clearinghouse Cheques are used extensively in the Netherlands Antilles. The clearinghouse is operated by the BvdNA and is partially automated. On day of presentment (T), banks send cheque files from 10:00 a.m. to 1:00 p.m. Paying banks begin to process transactions at 1:30 p.m. and the payer's account is debited on the same day. The accounts of the paying banks are first debited; these banks have two working days to check whether there are any other rea- sons to reclaim the money. Thus, settlement of cheques in not final and irrevocable on settlement day. Funds are available on the accounts of the beneficiary customers by T + 3. The BvdNA initiated a cheque-truncation program by which encoded cheques are transmitted as truncated cheque files with the U.S. National Clearinghouse Association format. Cheques without this feature are transmit- ted separately and are physically exchanged at the BvdNA's premises. Branches located on islands other than Curaçao settle cheques independently, via facsimile instructions, through a different account at the BvdNA. Credit Transfers and Direct Debits Since October 2001, the NACS has also been used to settle electronic retail payment instruments on a gross basis in batch mode. Credit transfers are processed as ACH-type transactions. If payment instructions comply with all settlement requirements, the batch is settled in real time. The system also has the possibility to handle payment with a future settlement or future value date. The transactions are stored in the so-called future queue and settled on the day indicated in the payment order. (Continued) 78 Payments and Securities Settlement Table 4.6 Retail Settlement Systems and Instruments in Individual Latin America and the Caribbean Countriesa (Continued) Country Retail Settlement Systems and Instruments Netherlands Antilles Payment Card Systems (Continued) Approximately 120 ATM machines have been deployed in the country. The three major banks have integrated their ATMs into a network called Cashnet. The clearing of the Cashnet network is made by a commercial bank and balances are settled weekly, on a bilateral net basis, at the NACS. ATMs outside the network may interoper- ate with Cashnet, although transactions have to be processed abroad. The major card brands are Visa and MasterCard, and the major card payment processor is Credomatic. EFTPOS systems are not completely interoperable locally. All banks act as independent acquirers, and payments with cards issued by different banks are accepted in terminals other than those of the issuing bank. In some cases, however, they need to be processed through international circuits. Thus, it is not uncommon for merchants to have more than one terminal in a single point of sale. Nicaragua Cheque Clearinghouse Cheques are used for both large-value and retail payments. There is one national cheque clearinghouse, which is operated by the BCN. The clearinghouse operates for both local currency and U.S. dollar­denominated cheques. In recent years, cheque standardization and other procedures have been implemented to increase the degree of automation. Recently, the BCN completed the full automation, and fully electronic cheque clearing is now available. There are two daily clearing and settlement sessions for cheques. Each of the two postings in the current accounts of banks are final, regardless of whether there are sufficient funds in the accounts to which the cheques are related. Funds are normally available on customer accounts by T + 2 in Managua and from three to five days after presentment for other regions. Credit Transfers and Direct Debits Only recently, credit transfers and direct debits have started to become an alternative for making payments in Honduras. They are available only at an intrabank level. Payment Card Systems Payment cards are only recently starting to become a common payment instrument. Although the card base is low at present with some 250,000 cards (that is, five cards per 100 inhabitants), it has been growing at high double-digit rates for the past two to three years (there has been close to 50 percent increase in the number of credit and charge cards, and 90 percent increase a year in the volume of transactions from 2001 to 2003). As of year-end 2002, there were 103 ATM machines operating through four noninteroperable networks. EFTPOS terminals are available for both credit- and debit-card payment processing. With few exceptions, the three card- processing platforms--Credomatic, Technicap, and Avalcab--are not interoperable. OECS Cheque Clearinghouse The ECCB operates a cheque clearinghouse on a deferred net settlement basis. There is an ECCB agency in all territories operating a local clearinghouse under the guidance of the ECCB clearinghouse rules. Representatives of banks must attend the clearing, which starts at 9:30 a.m. (except in St Vincent and the Grenadines, where it starts at 8:30 a.m.). Instruments are then exchanged and a due-to form is compiled by each bank. The difference between the due-from forms and the due-to forms represents the net balance, which is debited or credited on the accounts held by banks at the ECCB. These accounts should not be overdrawn and should always guarantee the settlement of the clearing balances. Net positions are settled on the books of the ECCB on T + 1. Availability of funds to the banks' customers occurs between three days to two weeks, depending on where (intraisland or interisland) the cheque is presented. With respect to extraregional cheques (U.S. dollar­denominated cheques drawn on U.S. banks), availability of funds can take up to six weeks. A distinction is made between instruments that are returned to a collecting town bank, and instruments returned to a collecting out-of-town bank. In the former case, instruments must be returned by 11:00 a.m. of the working day following presentation at the clearings; in the latter case, instruments must be returned no later than 11:00 a.m. four working days after presentation. Payments Systems Assessment Findings in Latin America and the Caribbean 79 Table 4.6 Retail Settlement Systems and Instruments in Individual Latin America and the Caribbean Countriesa (Continued) Country Retail Settlement Systems and Instruments OECS Credit Transfers and Direct Debits (Continued) Direct debits for bill payments, and credit transfers are in the start-up phase and do not represent a significant share of payment activity. Payment Card Systems A credit card company, 4Cs, owned by 13 indigenous banks, is processing credit cards transactions (Visa and MasterCard) for its members. Approximately 16,000 cards have been issued for 10,000 clients. Around 180,000 cardholders' transactions were processed in 2003, 80 percent of which were foreign transactions. Around 43 ATMs and 850 merchants accept international cards for 210,000 transactions a year, a large share of which corresponds to foreign cardholders' transactions. Card transactions in Eastern Caribbean dollars are based mainly on paper-slip processing, and not on electronic procedures, due to technical specifications and financial arrangements between 4Cs and the commercial banks. The use of local ATM cards is restricted to the network of the issuing bank. A scheme for the installation by 4Cs of an interisland common network for debit cards is envisaged. Some large local banks have projects to launch their own proprietary debit card scheme. Panama Cheque Clearinghouse Cheques are the predominant instrument for retail payments. Cheques have been standardized as a result of interbank agreements to facilitate the use of MICR technology that permits some automation in cheque processing. Some banks are even able to use imaging, but only for internal purposes, because there are no interbank agreements on electronic cheque presentation or truncation. Cheques are presented at the clearinghouse operated by the BNP from 3:00 p.m. until 7:00 a.m. of T + 1. The clearinghouse operations remain largely manual, because there are no electronic links between the BNP and the commercial banks. Each participating bank submits a sheet showing the volume and value of cheques pre- sented against the other participants. These deposit sheets are manually entered into PCs by BNP employees. Before 7:30 a.m., the BNP provides information to each bank on the results of the session for that day. Simultane- ously, the BNP renders an update of the moving average of the net debit positions in the past six months which, according to the regulation, correspond to the required balance in the special clearing account of each direct participant for that day. On verification of balances, the BNP enters the net settlement position of each bank for online posting. The system is not able to provide real-time information on balances or recent transactions. The clearinghouse requires banks to submit cheques within two days after receiving them, but the common practice is T + 1. Return items should be informed one day after being received. The common practice is to post the customer account in T + 2, but there are no official regulations on float. Credit Transfers and Direct Debits ACH services for credit transfers are also offered by Ciasa, a nonfinancial service provider owned by the banks. Transactions are settled through the clearinghouse operated by the BNP. The settlement cycle is similar to that of cheques. Payment Card Systems There are some 300,000 credit cards and 500,000 debit cards issued by commercial banks for a population of 3.1 million. Ciasa is also the clearinghouse for debit and credit cards, and holds accounts for final settlement at BNP. The value of interbank-netted positions at BNP resulting from the clearing process performed by Ciasa on credit and debit cards and ACH operations is about US$10 million per month. Paraguay Cheque Clearinghouse The cheque is by far the main payment instrument in Paraguay. There are three clearinghouses in the country for cheques denominated in local currency. The BCP is a partici- pant, as well as the operator of all three cheque clearinghouses. The clearinghouses located in Ciudad del Este and Encarnación send their multilateral balances to the clearinghouse in the capital city of Asunción, which con- solidates its own results with those of the other clearinghouses and settles the outgoing balances at the BCP. (Continued) 80 Payments and Securities Settlement Table 4.6 Retail Settlement Systems and Instruments in Individual Latin America and the Caribbean Countriesa (Continued) Country Retail Settlement Systems and Instruments Paraguay A procedure to achieve some degree of automation was implemented recently, but, in general, the processes (Continued) remain highly manual. There are two daily clearance and settlement sessions; one in the afternoon of the day of presentment and the second in the morning of the following day for rejected items. Funds are normally available on customer accounts by the end of T + 1. For cheques denominated in U.S. dollars, which represent 5 percent to 10 percent of the overall volume of cheques and 10 percent to 15 percent of the total value settled, the commer- cial banks have agreed a settlement procedure because there is no centralized clearinghouse. Balances are settled through foreign correspondents. The cheque clearinghouse does not have explicit risk management tools. Credit Transfers and Direct Debits Only recently, credit transfers and direct debits have started to become an alternative for making payments in Paraguay. They are available only at an intrabank level. Payment Card Systems As of year-end 2003, there were almost 250,000 credit cards and 450,000 debit cards. The relative importance of cards as a payment instrument has remained steady over the past few years, although debit cards are expected to increase significantly in the upcoming months as a result of the efforts to increase the use of credit transfers to bank current accounts to pay suppliers and payrolls, which has expanded access to banks. There are two major ATM networks in the country with very low degree of interoperability; the combined net- work comprised approximately 220 machines as of year-end 2003. The ATM networks as well as the payment- card system settle interbank balances with cheques or in correspondent bank accounts (that is accounts local banks hold with other local banks). Peru Cheque Clearinghouse Cheques are the most widely used cashless payment instrument. U.S. dollar­denominated cheques account for almost 35 percent of the total value settled. The ECH (Cámara de Compensación Electrónica), launched in 2001, is owned and operated by a private firm. For each currency, there are two sessions--for presented items and rejected items, respectively. Participants send cheque files from 3:00 p.m. to midnight of day T. Truncation is permitted by the system rules, although it is not yet implemented. Settlement is made on a multilateral net basis on T + 1. Before beginning operations in the RTGS system, funds to cover debit positions stemming from the Cámara de Compensación Electrónica are blocked in the accounts of the participants at the BCRP. Funds are credited to participants with a net credit position from 1:15 p.m. to 1:30 p.m. The rules allow for participants to voluntarily establish bilateral or multilateral credit and debit positions in their operations. However, there are no compulsory bilateral or multilateral limits or other risk management tools. System rules allow for the unwinding of positions in case a participant is unable to settle its position. Credit Transfers and Direct Debits Direct credits and direct debits are used frequently. The Cámara de Compensación Electrónica allows for the clearing and settlement of electronic credit transfers; in the near future, the Cámara de Compensación Elec- trónica intends to introduce interbank direct debits and bills of exchange, as well. The clearance and settlement cycle for credit transfers is similar to that of cheques. Net positions are settled through the LBTR system operated by the BCRP. Payment Card Systems The use of payment cards is growing in Peru. For every 1,000 inhabitants, there are approximately 55 credit cards and 175 debit cards. In the past decade, annual growth in both the number of cards issued and payments cleared averaged double-digit figures. Payments Systems Assessment Findings in Latin America and the Caribbean 81 Table 4.6 Retail Settlement Systems and Instruments in Individual Latin America and the Caribbean Countriesa (Continued) Country Retail Settlement Systems and Instruments Peru UNIBANCA is a private entity owned by 14 banks; it operates a network of ATMs and EFTPOS. One member-- (Continued) selected on a rotating basis--is responsible for determining the interbank balances. Settlement is made in central bank money. A number of other banks have their own networks of ATMs. There is no interoperability across the major networks in Peru. Visanet is the major processor of credit cards in the country. Most banks undertake all of the administration of their credit cards. Trinidad and Tobago Cheque Clearinghouse Cheques are still intensively used for all types of payments in Trinidad and Tobago. The CBTT conducts the low-value cheque clearinghouse using a manual system. Cheques to be presented for collection are physically sent with a listing of the total value to the head offices of the commercial banks between 5:30 p.m. same day and 8:30 a.m. of T + 1. Banks receive both the physical cheques and a report of the total value. Some banks also exchange diskettes with cheque information for direct upload to their internal systems. Settlement is based on the values presented with the cheques and is agreed at the clearinghouse, which starts at the CBTT at 9:30 a.m. each business day. The total values confirmed during the clearing process are final and settled. Cheques are validated during the course of the day. There is a time limit of six days, starting from the day of presentment, for the processing of returned and dishonored cheques. The representatives of all commercial banks and the CBTT meet to review the values of the cheques (in and out), and on completion each bank signs a settlement voucher authorizing the CBTT to credit or debit its reserve account for the net amount of all the cheques between the institutions. Credit Transfers and Direct Debits Only recently, some banks have started to make available credit transfers and direct debits to their customers. At present, these are available only at an intrabank level. However, the CBTT is leading a payment system reform project in which one of the key components is the launching of an ACH to process credit transfers and direct debits. This is expected to become operational during 2006. Payment Card Systems The volume and value of transactions have almost doubled each year starting from 1997, although in the latest years growth has slowed. Credit and debit cards are mainly issued under the Visa and MasterCard labels. Infolink Services Limited (ISL) is responsible for the switching and daily settlement of ATM transactions switched between members of the ATM network (four banks). Each bank must provide ISL with settlement vouchers drawn on a designated settlement account, either at the CBTT or elsewhere. For the purposes of settlement, the day ends at 7:00 p.m. The ISL switch hub initiates processing of all transactions at approximately 8:30 a.m. of the following day and prepares a settlement summary report. Each business morning, ISL prepares settlement vouchers based on its settlement report of the previous day. ISL prepares a credit position settlement voucher drawn on its settlement account in favor of the member who is in a credit position in the amount of the net credit. The member deposits the value to its internal settlement account. In the case of debit position settlement vouchers, ISL deposits to its account the values shown on these vouchers. Most merchants and vendors are equipped to carry out EFTPOS transactions and the use of this facility has increased significantly over the last five years. These transactions are also settled by ISL. Other Systems The post office issues money orders, but in general its role in the payment system is limited. (Continued) 82 Payments and Securities Settlement Table 4.6 Retail Settlement Systems and Instruments in Individual Latin America and the Caribbean Countriesa (Continued) Country Retail Settlement Systems and Instruments Uruguay Cheque Clearinghouse The main system for retail payments in Uruguay is the national cheque clearinghouse. It is operated by the Bolsa Electrónica de Valores (BEVSA) and regulated by the BCU. Cheques denominated in either local currency or U.S. dollars can be processed at the BEVSA clearinghouse. Exchange of physical items takes place between 11:00 p.m. and 11:45 p.m. of day T. Cheque information is sent to BEVSA by banks before 12:30 a.m. of T + 1. A first multilateral net settlement balance is calculated at 10:00 a.m. BEVSA executes a process through which the multilateral net debit positions are settled in the accounts at BCU. On T + 1 between 10:30 a.m. and 11:30 a.m., a rejected items session takes place and new debit positions are settled at BCU accounts. Cheques can be endorsed several times without any limit. There are no risk management tools. The coverage (settlement guarantee) the BCU provided to the cheque clearinghouse was withdrawn on June 2005. No additional risk management tools are foreseen for the cheque clearinghouse so far. Credit Transfers and Direct Debits Direct credits and direct debits are popular in Uruguay, although for the moment these are offered only at the intrabank level. BEVSA is working on a project to develop an ACH. The original project aims at making cheque clearing more effi- cient, although the introduction of new payment instruments such as electronic credit transfers and direct debits is also being considered. Payment Card Systems The use of debit cards and credit cards is still limited. In particular, debit cards are seldom used as payment instruments and are used almost exclusively for cash withdrawals. There are five major credit card issuing com- panies: OCA, Visa, MasterCard, Diners Club, and American Express. Commercial banks charge relatively high annual fees (US$30­US$60) to customers holding debit cards. This is seen as major impediment for debit cards to become widespread payment instrument in the country. There are three major ATM networks: Banco de la República Oriental del Uruguay (BROU), Redbanc-Bancomat, and Cabal with more than 575 ATMs. For the most part, these networks are interoperable. The interbank obligations stemming from ATM transactions are settled in commercial bank money. In the case of one of the networks, the bilateral balances are settled with cash. EFTPOS devices are interoperable. Settlement of cards transactions takes place through the local networks in the case of OCA and Visa and regional networks (Argentina) in the case of MasterCard and international networks for the rest. EFTPOS transactions are also settled through commercial banks. Other Systems One peculiarity in Uruguay is the development of nonbank payment networks through which a great variety of payments and collections can be made, mainly with cash. The most relevant are ABITAB and Red de Pagos. Venezuela, R.B. de Cheque Clearinghouse The cheque is by far the main payment instrument in the country. The cheque clearinghouse underwent a major renovation process and was launched as a fully electronic clear- inghouse in 2005. The clearing process is now fully automated. With the information stemming from the ACH, the BCV calculates multilateral net positions, informs the participants from 2:30 p.m. to 3:00 p.m. of T + 1 after the returned items session has occurred, and settles net balances on the accounts bank held at the central bank as a result of both sessions. If an entity has insufficient funds to cover the net debit balance, the BCV separates it from the clearing, unwinds the operations, and calculates new balances. The BCV must inform this situation to the ministry of finance, superintendence of banks, deposit insurance agency, and the national banking board. The BCV does not assume Payments Systems Assessment Findings in Latin America and the Caribbean 83 Table 4.6 Retail Settlement Systems and Instruments in Individual Latin America and the Caribbean Countriesa (Continued) Country Retail Settlement Systems and Instruments Venezuela, R.B. de any responsibility considering the payment of the cheques. The entities will make the claim among themselves (Continued) for the reversed cheques. Credit Transfers and Direct Debits Banks have incorporated transfer services between accounts within the same bank. Home-banking applications have been introduced at the intrabank level and are being further developed. The ACH launched recently by the BCV, the Cámara de Compensación Electrónica de Cheques y otros Medios de Pago, will also process electronic credit transfers and direct debits in a second phase. Payment Card Systems The card base is still low (about 1 million cardholders and 2.7 million cards). The main credit cards are Visa and MasterCard; debit cards are practically nonexistent. Five independent ATM networks exist in the República Bolivariana de Venezuela; there were 4,500 ATM machines as of year-end 2004. Two of the networks are administrated by SUICHE 7B and Conexus. These two networks belong to two private banks groups and are interoperable. The remaining three belong to three different institutions and operate through Cirrus and Maestro. Each of the networks clears the operations individually, calculating the net balances for each institution. They inform those positions that are settled through debits and credits in correspondent accounts, or through cheques at the BCV. As for the settlement of transactions made at EFTPOS with credit cards, in May 2002, a group of seven banks created the interbank payment system (Sistema de Pagos Interbancarios) to automate credit cards payment instructions to other banks. Final settlement occurs at one of the commercial bank participating in the Sistema de Pagos Interbancarios. Source: Authors' elaboration. a. Due to the peculiarities of individual Latin America and the Caribbean (LAC) countries, the presentation of information in this table does not strictly follow a standardized model for each country. b. At which the interbank large-value cheques vales de cámara are exchanged. See BCCH rules in chapter 3. Observations be effective it would have to agreed and applied by all participants (for example, through binding inter- The region is characterized by a heavy use of bank agreements). cheques, which keeps the retail sector far from being optimal from the point of view of efficiency In some countries, ACHs for payment instruments that and risk control. Central banks and all stakeholders are fully electronic have been launched or are in the in the retail arena must work together in a clear process of being launched. It has been recognized that strategy to promote the intensive use of retail elec- an automated clearinghouse (ACH) is a key component tronic payment instruments and reduce the impor- that complements the overall efforts to modernize the tance of cheques. Customers change their choice of national payments system. However, in many countries payment service as a response to the price and con- of the region the ACH project is either too slow to catch venience of the services provided. Thus, to the up with the needs of customers or too limited in scope. extent possible central banks might think of using In some cases, the ACH project aims only at improving their moral suasion to persuade all participants to the cheque-clearing system. This is not only inadequate, price the various payment instruments they offer but may even be counterproductive as the investments according to the actual processing cost for each of required for this purpose may crowd out the develop- these, which could mean a relatively higher cost for ment of modern payment instruments or give the false cheques than that for electronic payment services. impression that cheque processing can be less costly It has been noted that in order for such an action to than that of other instruments. 84 Payments and Securities Settlement It has been strongly recommended that central banks account at many banks to receive credits from every actively support the full deployment of an ACH that card processor they work with. is able to process modern payment instruments such Central banks and all stakeholders in the retail arena as credit transfers and direct debits. New instruments should work together to promote the intensive use of will directly benefit the urban population or major rural efficient electronic payment instruments in the country, areas, probably, but could also indirectly benefit remote and define a clear strategy and a feasible implemen- rural areas through the reduction of operational costs tation plan for this purpose. In particular, central banks in financial institutions. Central banks should take a and payment services providers should engage in major leadership role to achieve the necessary agreements marketing and educational campaigns to raise aware- among banks and other participants so that an ACH ness among consumers of new payment instruments begins operations as soon as possible. Also, central and circuits available, and to provide the necessary banks should coordinate all efforts under way in order information on their features. Similar efforts are also to achieve a single system that encompasses all rele- useful when new projects and services (for example, vant players and that processes as many services as e-government solutions or automation of recurring possible, to avoid duplications and ensure it operates on payments) are launched. Payment services providers a full scale. As part of the oversight function, special can also agree on developing a set of incentives for attention must be given to the governance arrangements consumers to begin using these services and testing of this infrastructure to avoid restrictions to competi- their benefits. Formal cooperative arrangements, such tion and innovation. as a National Payment System Council, should be in In some countries, payment card circuits are character- place to ensure effective cooperation among stake- ized by low or null interoperability resulting in a very holders, between stakeholders and authorities and inefficient use of the current infrastructure. In contrast, among authorities (see chapter 6). many of the positive effects of a payment cards system Some banks are starting to offer retail payment instru- for increased efficiency are not being captured due to ments and services in multiple countries in the region. the lack of electronic payment instruments for retail These efforts should be monitored by central banks transactions. Although ATMs are not payment instru- and banking supervisors. While there is no project to ments on their own, they are an effective means to develop a common regional or subregional infra- reduce the use of "on us" cheques and are a useful infra- structure in the retail sector, consideration should be structure through which electronic payments and other given to foster the standardization and harmonization services can be channeled.4 Due to insufficient interop- in this area within countries. Eventually, this would erability of ATMs, among other things the volume of facilitate the creation of some form of regional ACH transactions that is needed for a faster amortization of in case countries believe such an infrastructure would investment costs incurred is not being achieved. In the be relevant and viable. case of EFTPOS, the lack of interoperability translates in merchants having several terminals (one for each In sum, central banks and the commercial banks have card processor) on their premises, which increases over- a role to play to ensure the existing retail circuits sup- all costs and favors merchants giving incentives to cus- port customers' needs, and that such arrangements are tomers to pay with cash. The lack of retail electronic safe, convenient, and efficient for the economy as a payment instruments also makes the card system more whole. In particular, the central bank, as the entity lead- cumbersome and costly because card processors pay ing the efforts to improve the country's financial infra- merchants with cheques, or merchants need to have an structure, should promote agreements among banks that would facilitate increased interoperability of the 4In this context, "on us" cheques are cheques used by the account current infrastructure. Following the CPSS retail pay- holder to cash funds at the teller of his or her bank. In another ments policy report, national central banks should context, from the bank's perspective, "on us cheques" are cheques examine developments in the market periodically in in which both the drawer and the drawee are customers of the bank the light of public policy goals, and, if issues arise that and, therefore, the items do not need to be cleared at the cheque clearinghouse. they judge to be relevant, decide, together with other Payments Systems Assessment Findings in Latin America and the Caribbean 85 relevant authorities (for example, a consumer protec- cient and safe outcomes, allowing all such systems to tion agency) to take action aimed at establishing or settle in central bank money. reestablishing an acceptable balance of the various aspects of safety and efficiency. In particular, central GOVERNMENT PAYMENTS banks should (1) review the legal and regulatory framework to identify barriers to improvements in This section includes context, status in the region, and efficiency or safety, and cooperate with relevant pub- observations regarding government payments. lic and private entities to ensure that such a framework keeps pace with market developments. Particular Context issues in this regard would be for the central banks to In all countries, the public sector is a heavy user of the assess whether the current legal framework effectively payments system, and the government receives and supports the use of modern (that is, electronic) pay- ments and related arrangements; (2) monitor whether remits many payments (for tax collection, salaries, pur- competitive market conditions and behaviors are in chase of goods and services, pensions, and so on). In place and take appropriate actions to foster such con- several countries, the public sector has lagged behind ditions; and (3) support the development of effective the private sector in terms of efficient use of payment standards and infrastructure arrangements. Once it instruments and has failed to reach an efficient inte- becomes necessary (for example, when agreements gration with the banking sector. In recent years, more on interoperability are reached or when an ACH is and more attention has been devoted to this issue and, deployed that would produce interbank obligations in some countries, the government has been able to that need to be cleared and settled), central banks use efficiently the options offered by new technologies should adapt their provision of settlement services for (ACH, smart cards, and so on), significantly reducing systems operated by other entities to contribute to effi- its processing costs. Status in the Region Table 4.7 Main Features of Government Payments and Collections in Individual Latin America and the Caribbean Countries Mechanism to Mechanism to Process Main Payment Process Main Payment Government Instruments Used Government Instruments Used Country Payments for Payments Collections for Collections Argentina The Banco de la Nación, Direct credits with STP The Banco de la Nación Cash, cheques, and intra- a government-owned processed via the ACH. also administers collec- bank credit transfers are commercial bank, holds tions. In this case, the made through the banking the single treasury system is fragmented network, then funds are account. For payments, and is administered from transfered via the RTGS the process is central- the Ministry of Finance. to the single treasury ized at Banco de la account. Nación. Bahamas, The The bulk of payments of Some of the government's There is no designated Generally, cash or the Ministry of Finance payments are made with system to process gov- cheques are used at and other public institu- cheques, but the volume ernment collections in a clearing bank branches. tions are channeled is decreasing each year. centralized manner. In through one clearing Some public sector insti- general, collections are bank. tutions use direct credits handled through the to bank accounts for pay- banking network. roll. (Continued) 86 Payments and Securities Settlement Table 4.7 Main Features of Government Payments and Collections in Individual Latin America and the Caribbean Countries (Continued) Mechanism to Mechanism to Process Main Payment Process Main Payment Government Instruments Used Government Instruments Used Country Payments for Payments Collections for Collections Bolivia The BCB holds the single Direct credits to beneficiary No designated system. Mainly cash. Cheques account of the treasury. bank. Manual intervention Payment of taxes and and intrabank credit In 2000, it developed the for beneficiary account customs duties are made transfers are also used treasury payments sys- details. mainly at government through the banking net- tem (Sistema de Pagos offices, and in some work; funds are then del Tesoro). cases are made through transferred via the RTGS the banking network. to the single treasury account. Brazil The BACEN holds the Direct credits via the RTGS No designated system. Cash, cheques, and intra- single account of the from single treasury Taxpayers may use the bank credit transfers. treasury. The Banco account to government bank of their choice. Banks forward the funds do Brasil, a govern- administrative units' via the RTGS to the ment-owned commer- accounts at Banco do BACEN, and the taxpayer cial bank holds the Brasil. data to the treasury's data accounts of administra- processing subsidiary, tive units, which make Soluções para um Brasil the payments to final de Todos. beneficiaries. Chile The general treasury Cheques and intrabank Most tax collections are Cash and cheques in makes its payments direct credits. handled through govern- treasury collections through commercial ment collections offices. branches, and electronic banks. Recently, federal taxes, credit transfers via the and other taxes and sur- Internet through some charges can also be banks.a processed via Internet banking. Colombia The BR holds the single In some cases, direct cred- No designated system. Cash, cheques, and intra- account of the treasury. its with STP processes. In Generally, taxpayers use bank credit transfers are Government payments other cases, transfers to the banking network as made through the banking are channeled via the the final executors of the well as the physical network; funds are then ACH of the BR. national budget, which hold branches of the tax transferred to the single accounts with banks and agency Dirección de treasury account. other financial institutions. Impuestos y Aduanas Nacionales. That agency has an electronic pay- ment system in place for large taxpayers. Costa Rica The BCCR holds the Direct credits with STP Tax collection is done Cash, cheques, and intra- single account of the processes via the ACH. through the banking bank credit transfers are treasury. Payments are network. There is a made through the banking channeled exclusively designated system, network; funds and pay- through the ACH oper- the Información y Liq- ment details are then ated by the BCCR. uidación de Impuestos, transferred to the ministry for banks to transfer of finance with STP funds and payment processes. details to the treasury the day after payments are made. Payments Systems Assessment Findings in Latin America and the Caribbean 87 Table 4.7 Main Features of Government Payments and Collections in Individual Latin America and the Caribbean Countries (Continued) Mechanism to Mechanism to Process Main Payment Process Main Payment Government Instruments Used Government Instruments Used Country Payments for Payments Collections for Collections Dominican Payments of the Ministry Payments of the central The customs office, the Most taxpayers pay Republic of Finance and other pub- government are made with national treasury, and directly with cash or lic institutions are chan- cheques. Some public sec- the internal taxes office cashiers' cheques at the neled through the Banco tor institutions are already are the collection bod- premises of government de Reservas, a state- using direct credits to bank ies. There is no desig- collection agencies. owned commercial bank. accounts for payroll. nated system currently There is no designated in place to process gov- system to process these ernment collections. payments centrally. Ecuador The budget execution Government agencies first The Sistema de Ejecu- Cash, cheques, and intra- system (Sistema de receive the funds from the ción Presupuestal is bank credit transfers are Ejecución Presupuestal) national treasury at the also used as the channel made through the banking is the system for the BCE. From there, the BCE for the collections of network; funds are then payments of public sec- uses direct credits with public sector institu- transferred to the tor institutions. Public STP processes via the SPI. tions. At the end level, account of the relevant sector institutions hold the system of govern- public sector agency at an account at the BCE ment collections is oper- the BCE. to receive allotments ated by the commercial from the national trea- banks, which collect sury, and also hold tax-related payments accounts at commercial from taxpayers. banks to pay to the final beneficiaries. El Salvador The BCR serves as the Cheques for payments of The BCR also receives Mainly cash. Cheques government bank, issu- the central government. the payments on behalf and intrabank credit ing payments on behalf Some public sector institu- of the government. transfers are also used of the government. tions use direct credits to There is no designated through the banking There is no designated bank accounts for payroll. system to process these network. system to process these collections centrally. payments centrally. Guatemala The national treasury Same-day credit transfers Government collections Cheques and intrabank holds a single account to beneficiary banks are managed by the credit transfers are made at the BANGUAT. Until through the Oficios system Superintendencia de through the banking net- recently, the national of the BANGUAT. On T + 1, Administración Tribu- work. In T + 1, the banks treasury was using the banks access the Web site taria. Taxes and other transfer the collected ACH-like system offered of the national treasury to payments to the govern- amounts through an offi- by Bancared, but it download the payment ment are collected cial letter (oficio). Finally, decided to develop an details. Today, 25 percent through the commercial banks access the system alternative system for of all government payments banking network. of the Superintendencia cost and efficiency are still made with de Administración Tribu- reasons. The final ben- cheques. taria to send the details of eficiaries are credited payments received. on T + 3. (Continued) 88 Payments and Securities Settlement Table 4.7 Main Features of Government Payments and Collections in Individual Latin America and the Caribbean Countries (Continued) Mechanism to Mechanism to Process Main Payment Process Main Payment Government Instruments Used Government Instruments Used Country Payments for Payments Collections for Collections Honduras The general treasury Mainly cheques. Collections related Cash or cheques. holds its account with to income taxes and the BCH. From there, it customs are operated transfers funds to other mainly through the government entities. For ministry's own premises. final beneficiaries, it uses cheques drawn on its BCH account. Jamaica The BOJ serves as the Cheques are used for the There is no designated Taxpayers pay with cash government bank for vast majority of government system to process or cheque at the locations payments. There is no payment transactions. collections centrally, of collecting government designated system to although, through its agencies. process these payments electronic government centrally. initiatives, the govern- ment is starting to use some electronic systems. The banking network is generally not used. Mexico The Banco de México Direct credits with STP Tax collections for the Electronic credit transfers holds the single account processes via the ACH federal government are via the Internet with STP of the federal treasury. operated by CECOBAN. handled through the processes are made The federal treasury is a banking sector. Starting through the banking direct participant in the in 2003, all federal taxes network and the ACH. ACH operated by must be processed as CECOBAN. Internet transactions. Netherlands The BvdNA serves as Some payments are made There is no designated Cash or cheques are used Antilles the government bank electronically through the system to process these for tax payments to the for payments, and has ACH, but the vast majority collections centrally. central government. In provided the central is still paper based. The central government the case of the island government and island receives collections at government of Curaçao, government of Curaçao its own premises. The collections are generally with access to the island government made through intrabank NACS. Neither has of Curaçao uses the electronic credit made any significant banking network. transfers. use of NACS; instead, each uses the banking network. Nicaragua The Ministry of Finance Mainly cheques. Recently, Collections related to Cash or cheques. The holds its account with the Ministry of Finance has income taxes are oper- Ministry of Finance holds the BCN. From there, it also been using direct ated mainly through the some 300 different transfers funds to other credits for payroll, but ministry's own premises. current accounts at government entities. For these represent only 2 per- Customs taxes and other commercial banks. final beneficiaries, it cent of the total volume. collections are operated uses cheques drawn on through the banking its BCN account. network. Payments Systems Assessment Findings in Latin America and the Caribbean 89 Table 4.7 Main Features of Government Payments and Collections in Individual Latin America and the Caribbean Countries (Continued) Mechanism to Mechanism to Process Main Payment Process Main Payment Government Instruments Used Government Instruments Used Country Payments for Payments Collections for Collections OECS There is no designated Mainly cash or cheques. There is no designated Cash or cheques are used system to process the Some territorial govern- system to process col- at banks or at the payments of territorial ments participate in direct lections of territorial premises of tax- and duty- governments centrally. deposit of payrolls. governments centrally. collecting agencies. In general, territory gov- In general, collections ernments hold accounts are managed through with commercial banks. the banking network. Panama The BNP serves as the For payroll, the national The BNP collects govern- Cash, cheques, or elec- government bank and treasury prepares cheques ment revenues through tronic credit transfers are acts as its paying agent. that are physically handed the banking network. used at banks. The government has to recipients by staff in the There is no designated several accounts, office of the comptroller. system to process collec- although it plans to For suppliers, the national tions. The upcoming rev- launch the single trea- treasury has direct access enues module of the sury account soon. to the ACH to make credit single treasury account transfers. will allow the automatic registry of all revenues. Paraguay The BCP serves as the Cheques. The central government Mainly cash and government bank, issu- and other tax and duties cheques. ing payments on behalf agencies receive collec- of the government. tions at their own There is no designated premises. system to process these payments centrally. Peru The Banco de la Nación, Mainly cheques. Direct The Banco de la Nación Mainly cash and cheques a government-owned credits through the Cámara is also responsible for are used at the premises commercial bank, serves de Compensación Elec- government collections. of Banco de la Nación. as the government bank, trónica are becoming Taxpayers may also issuing payments on increasingly important for make their payments behalf of the govern- payments to suppliers. through other commer- ment. Each public entity cial banks. has an account with the Banco de la Nación; payments are not processed through a central account. Trinidad and The CBTT is banker to For payroll, each ministry A fully manual teller ser- The government accepts Tobago the government and sends to each bank one vice is provided by the cash and cheques from manages several cheque with a list of per- CBTT for the receipt of the public for payment of accounts on its behalf. sons whose accounts are deposits (revenues) from taxes and services. Some There is no designated to be credited. Individual the various ministries agencies are equipped system to process these cheques are used in all and departments. with point-of-sale payments centrally. other cases. The govern- machines for collections. Corporation tax can be ment is preparing to use collected through one of Direct Credits over the the commercial banks. ACH. (Continued) 90 Payments and Securities Settlement Table 4.7 Main Features of Government Payments and Collections in Individual Latin America and the Caribbean Countries (Continued) Mechanism to Mechanism to Process Main Payment Process Main Payment Government Instruments Used Government Instruments Used Country Payments for Payments Collections for Collections Uruguay The financial agent of Cash, cheques, or electronic Government collections Cash and cheques in the the government is the transfers when beneficiaries are operated through case of nonfinancial pay- BROU, a government- have accounts with the the banking network, ment networks. Cash, owned commercial BROU. Some entities have and especially through cheques, and credit bank. Each government made agreements with other the nonfinancial net- transfers are used in the agency may channel its commercial banks to credit works for payments case of the banking payments through the final beneficiaries. The such as ABITAB. There network. treasury, or may directly banks of final beneficiaries is no designated system use its current account receive the funds by means to process collections with the BROU. of a large-value cheque centrally. drawn on the BROU. Venezuela, R.B. de The BCV is in charge of Cheques and direct credits Government revenues Cash, cheques, or elec- executing the national with some manual interven- are collected through tronic credit transfers are budget and holds tion. Direct credits with STP the banking network. used at banks. accounts for the ministry processes will be possible There is no designated of finance and other with the launching of the system to process public institutions. All ACH. collections. payments are channeled through a department (Agencia de Tesorería Nacional) of the BCV. The transactional plat- forms of the BCV and ministry of finance are interconnected. Source: Author's elaboration. Note: CENIT (Sistema de Compensación Electrónica Nacional Interbancaria). a. Those that have an agreement with the national treasury to process this type of payments. Observations lide with those of the private sector to launch an ACH for direct credits and direct debits; in many countries, Many countries throughout the region have imple- the government is the major or one of the major pay- mented or are in the process of implementing projects ers or collectors of the national payments system. to integrate the public sector in the national payments It is recommended that central banks and other relevant system. However, in most cases these are stand-alone government agencies foster coordination and commu- projects, and are not fully consistent with a long-term nication to ensure that collection and disbursements of strategic vision of the payments system. Although in the public sector institutions that are major players in some particular cases the integration has been particu- the payments system be processed electronically and in larly successful, in most other cases the procedures for a timely manner through an appropriate system, such the payment or collection of government and social as an ACH for retail electronic payment instruments. security payments are generally not integrated, in the It must be noted that, in many cases, the gains in effi- sense that payment details are generally independent ciency and cost reductions for government payments from the funds transfer; hence, STP is not achieved. have been the main result of the reform effort. Such a In some cases, central banks themselves have engaged strategy can also ensure that the benefits of new pay- in system developments to improve government pay- ment alternatives be accrued to all segments in the ments and collections. These initiatives seem to col- country by, for example, inducing a higher use of bank- Payments Systems Assessment Findings in Latin America and the Caribbean 91 ing services by the public in general. In contrast, gov- Also as a result of the recommendations included in the ernment payments provide a good opportunity to chan- CPSS (1996a) report, the Continuous Linked Settlement nel a high volume of transactions, thereby making the Bank International (CLS Bank) started its CLS service ACH project more attractive for potential investors. in September 2002, settling FX transactions in seven Government payments are also a major source of liq- currencies (the Australian dollar, the Canadian dollar, uidity for the banking system, and, if coordinated effec- the U.S. dollar, the euro, the Swiss franc, the Japanese tively, can facilitate the smooth functioning of the yen, and the British pound) on a PvP basis on the books RTGS system being implemented by the region's cen- of the seven respective central banks. In 2005, CLS Bank tral banks, thereby increasing its appeal to participants. was dealing with a total of 15 currencies (the former plus Danish krone, Norwegian krone, Swedish krona, FX AND CROSS-BORDER SETTLEMENT Hong Kong dollar, Korean won, Singapore dollar, South MECHANISMS African rand, and New Zealand dollar), all of which were being settled through CLS Bank. By the end of This section includes context, status in the region, and 2005, CLS Bank had a total of 56 member banks (share- observations regarding FX and cross-border settlement holders, with settlement accounts) and 674 member mechanisms. customers (third parties sponsored by a member bank), and nearly 80 percent of total member volume was Context being settled through it. The CLS Bank is subject to the FX markets present risks that are potentially relevant. The cooperative oversight of central banks involved, and is FX settlement risk clearly has a credit risk dimension. If under the direct oversight of the U.S. Federal Reserve. (as it is usually the case under current market practices) Retail cross-border payments, notably trade-related pay- a bank cannot make the payment of the currency it sold ments and personal remittances, are increasingly relevant conditional on its final receipt of the currency it bought, for economies and their societies as a result of current it faces the possibility of losing the full principal value global realities--particularly a growing economic inte- of the transaction. FX settlement risk also has an impor- gration and interdependence among countries at all levels tant liquidity risk dimension. Even temporary delays in and the increasing flow of immigrants throughout the settlement can expose a receiving bank to liquidity pres- world. From a policy-making perspective, retail cross- sures if unsettled funds are needed to meet obligations to border payments share many of the features of domestic other parties. FX settlement risk has other dimensions-- retail payments. Relevant issues to look at include the for example, legal risk. In the case of FX deals, legal risk efficiency of the payment instruments being used, security can be complicated by the fact that settlement normally and other risks, customer protection, costs, diversity of takes place in more than one jurisdiction. As reported in service providers, oversight capabilities of the central Settlement Risk in Foreign Exchange Transactions (CPSS bank, and so on. The cross-border dimension brings in 1996a), the Group of Ten central banks agreed on a some additional issues, including the involvement (in strategy providing for the following: many cases) of a FX transaction and of various national Action by individual banks to control the FX settle- laws, regulations, institutions, and even habits. ment exposures; Cross-border payment services customers expect to be Action by industry groups to provide risk-reducing provided with a set of convenient, cheap, reliable, and pre- multicurrency services; and dictable instruments to cover their most important pay- Action by central banks to induce rapid private sector ment needs: face-to-face payments, one-off and recurring progress. remote payments, and ATM cash withdrawals. Perfor- The report (p. 2) also states that, "G-10 [Group of Ten] mance in most of these areas is generally poor as a result central banks encourage existing and prospective indus- of, among others, lack of transparency, the diversity of try groups to develop and offer services that would con- cross-border payment services (among which several tribute to the risk-reducing efforts of individual banks."5 types of nonfinancial institutions that typically remain unregulated as to their provision of payment services), 5See also BIS 2000. and weak oversight as overseeing the full flow of a 92 Payments and Securities Settlement cross-border transaction would necessarily involve two payment system issues, in particular issues related to or more national authorities. efficiency, transparency, and risks. Furthermore, through enhanced international cooperation, central banks should As part of their role as payment system overseers, central analyze what the inhibitors and obstacles are for cross- banks should strive for the regulatory perspective in cross- border payments to become as efficient and safe as pos- border payments to be widened from the traditional areas sible within the general constraints set by national and of balance of payments and money laundering to include monetary boundaries. Box 4.2 The World Bank­CPSS Task Force for General Principles on International Remittance Systems An international remittance transfer is a payment from person to person. There is a large body of guidelines and regulations regarding payment systems, and the international standard setter in this field is the Bank for International Settlements' CPSS. CPSS reports can be accessed at the Web site www.BIS.org/CPSS/index.htm. International remittance transfers are cross-border retail payments. These payments are normally of a relatively low value, are largely made by private arrangements between banks or other international payment service providers, and are often not subject to oversight from central banks or other authorities. International remittance transfers also have special access requirements on both the sending and the receiving sides. On the sending side, remittance senders often do not have full access to the national payments system because they do not have bank accounts, payment cards, or other payment instruments, and they might not be comfortable interacting with banks in their host country. On the receiving side, the national payments system might not be well developed, and recipients might not have access to banks or formal institutions, often simply because there is no such institution where they live. Remittance firms provide a link between the banks that perform the actual cross-border payments and the end users. The attention of the development community often focuses on these special access requirements--such as financial literacy, poor people's access to financial services, and fair pricing. Payment system overseers are increasingly focusing on the cross-border aspect of remittances and on how to create an internationally coherent framework for regulation and oversight that best allows safe, efficient, and fairly priced remittance services to develop. In a joint effort between the development community and the international standard setter for payment systems, the World Bank and the CPSS together convened, at the end of 2004, a task force to lay the ground for the international payment system framework for remittances. The members of the task force represent central banks from remittance sending and receiving countries, as well as the multilateral development banks and the International Monetary Fund. This task force issued in March 2006 a consultative report with general principles for the provision of international remittances. The principles address such issues as the legal basis for remittance systems, competition, fair services, transparency, consumer protection, financial literacy, payment system infrastructure to support the provision of these services, inter- national policy coordination, as well as the role of public authorities and private firms in creating an efficient and safe remittance market. These principles provide the first internationally recognized payment system framework for remittance transfers, and they are expected to facilitate international policy coordination in the area of remittance transfers. The general principles presented below are aimed at the public policy objectives of achieving safe and efficient international remittance services. To this end, the markets for the services should be contestable, transparent, accessible and sound. TRANSPARENCY AND CONSUMER PROTECTION General Principle 1. The market for remittance services should be transparent and have adequate consumer protection. PAYMENT SYSTEM INFRASTRUCTURE General Principle 2. Improvements to payment system infrastructure that have the potential to increase the efficiency of remittance services should be encouraged. (Continued) Payments Systems Assessment Findings in Latin America and the Caribbean 93 Box 4.2 The World Bank­CPSS Task Force for General Principles on International Remittance Systems (Continued) LEGAL AND REGULATORY ENVIRONMENT General Principle 3. Remittance services should be supported by a sound, predictable, nondiscriminatory and proportionate legal and regulatory framework in relevant jurisdictions. MARKET STRUCTURE AND COMPETITION General Principle 4. Competitive market conditions, including appropriate access to domestic payments infrastructures, should be fostered in the remittance industry. GOVERNANCE AND RISK MANAGEMENT General Principle 5. Remittance services should be supported by appropriate governance and risk management practices. ROLES OF REMITTANCE SERVICE PROVIDERS AND PUBLIC AUTHORITIES A. The role of remittance service providers. Remittance service providers should participate actively in the implementation of the General Principles. B. The role of public authorities. Public authorities should evaluate what action to take to achieve the public policy objectives through implementation of the General Principles. Box 4.3 Cross-Border Payment Arrangements among Central Banks in the Latin America and Caribbean Region ASOCIACIÓN LATINOAMERICANA DE INTEGRACIÓN In 1965, as part of the agreements within the Asociación Latinoamericana de Integración (ALADI) the central banks of 12 Latin American countries--Argentina, Brazil, Bolivia, Chile, Colombia, the Dominican Republic, Ecuador, Mexico, Paraguay, Peru, Uruguay, and the República Bolivariana de Venezuela--subscribed to the Reciprocal Payments and Credits Agreement (Convenio de Pagos y Créditos Recíprocos) with the objective of reducing the cross-border transfer of foreign currencies among themselves. Under the ALADI system, the central bank of the country where the export was originated deposits funds, on behalf of the central bank of the importing country, in the commercial bank participating in the foreign trade transaction. Each country's central bank also authorizes its financial institutions to send commercial transactions directly through ALADI as "authorized institutions." These transactions result in net accrued positions in U.S. dollars among central banks. Every four months, the operations center, located in the central bank of Peru, makes a cutoff of multilateral balances among central banks through the automated system supporting the ALADI Reciprocal Payments and Credit Agreement (Sistema Computarizado de Apoyo al Convenio de Pagos y Créditos Recíprocos ALADI). Funds are settled in the Federal Reserve Bank of New York, which is the correspondent bank of all ALADI member central banks. During the 1970s, nearly three-quarters of all intraregional foreign trade payments were cleared and settled through ALADI. During the 1980s, this figure reached its maximum with approximately 90 percent. However, during the 1990s, the portion of international foreign trade payments channeled through ALADI decreased significantly, due in part to the availability of new and more convenient financing methods and to the increase in the stock of international reserves in many of the region's central banks. CARIBBEAN COMMON MARKET The central banks in the Caribbean Common Market region have bilateral arrangements to facilitate the settlement of payments between each other. Intraregional payments are made on the basis of instructions received via telex or SWIFT messages, and net settlement takes place on a monthly basis in U.S. dollars. Each net debtor makes payment to the relevant creditor's bank account within two working days after being billed. 94 Payments and Securities Settlement Table 4.8 Main Features of Cross-Border Payments and the Settlement of Domestic FX Transactions in Individual LAC Countries Settlement of Wholesale FX Transactions Cross-Border Payments Accounts in Foreign Relevance of Workers' Currency at the Remittances and Country Organized Market Central Bank SWIFT Use or Others Major Trends Argentina The FOREX-MAE is an Yes. Almost all banks are Low--Net recipient. organized FX market for connected to SWIFT. These accounts are used banks and other autho- for settlement of payment rized currency dealers. transactions. Transactions are settled on a multilateral net basis. ARGENCLEAR, the settlement agent, steps in the middle of the set- tlement of both currency legs to ensure PvP.a Bahamas, The There is no organized Yes. All clearing banks are Medium--Net recipient. market. These accounts are used connected to SWIFT. for settlement of payment transactions. Bolivia The bolsín is a mecha- Yes. Few banks are connected High--Net recipient. nism through which to SWIFT. These accounts are used commercial banks regu- for settlement of payment The BCB provides cross- larly purchase a limited transactions. border payment services amount of U.S. dollars to domestic financial from the BCB. At pre- institutions. sent, the bolsín is not much used. Brazil The Clearing de Cambio, No. Almost all banks are Medium--Net recipient. operated by the Bolsa de connected to SWIFT. Some arrangements, Mercadorias e Futuros involving mainly federal (BM&F), is a clearing- government-owned finan- house for FX transac- cial institutions, intend to tions. All deals are facilitate remittances settled on a PvP basis from Brazilians residing through correspondent abroad. banks; the clearinghouse acts as a central coun- terparty to ensure PvP. Special attention is given to correspondent banks' risk considerations. Chile There is an FX clearing- No. All banks are connected Low--Net recipient. house. The balances are to SWIFT. settled among banks with cheques drawn on banks located in New York. No PvP. Payments Systems Assessment Findings in Latin America and the Caribbean 95 Table 4.8 Main Features of Cross-Border Payments and the Settlement of Domestic FX Transactions in Individual LAC Countries (Continued) Settlement of Wholesale FX Transactions Cross-Border Payments Accounts in Foreign Relevance of Workers' Currency at the Remittances and Country Organized Market Central Bank SWIFT Use or Others Major Trends Colombia Small share of FX trades No. Almost all banks are High--Net recipient. is settled through dedi- connected to SWIFT. cated systems offered by correspondent banks for the foreign currency and the Sistema Electrónico de Cuentas de Depósito for the domestic leg. No PvP. Costa Rica The MONED, operated Yes. Around half of the banks Medium--Net sender. by the local stock are connected to SWIFT. These accounts are used exchange, is a trading for settlement of payment The BCCR provides system for domestic FX transactions. cross-border payment transactions. services to domestic All operations are set- financial institutions. tled gross on a real-time PvP basis. Dominican There is no organized No. All banks are connected High--Net recipient. Republic market. to SWIFT. Ecuador The country is dollar- No. (The U.S. dollar is the Most banks are con- High--Net recipient. ized. Transactions with official currency of Ecuador.) nected to SWIFT. other foreign currencies are negligible. El Salvador The country is dollar- No. (The U.S. dollar is the Most banks are con- High--Net recipient. ized. Transactions with official currency of nected to SWIFT. Some commercial banks other foreign currencies El Salvador.) The BCR provides cross- are developing propri- are negligible. border payment services etary mechanisms to to domestic commercial facilitate the processing banks. of remittances, mainly from the United States. Some banks have devel- oped their own messag- ing, clearing, and settlement systems to process intraregional payments. Guatemala There are two formal Yes. About half of the banks High--Net recipient. trading platforms: the are connected to SWIFT. These accounts are not Some commercial banks Sistema de Negociación used for settlement of Some banks have devel- are developing propri- de Divisas, managed by payment transactions. oped their own messag- etary mechanisms to the stock exchange, and ing, clearing, and facilitate the processing the Sistema de Pagos settlement systems to of remittances, mainly Interbancarios para process intraregional from the United States. Divisas. The combined payments. systems account for less than 6 percent of the total traded value in the marketplace. No PvP. (Continued) 96 Payments and Securities Settlement Table 4.8 Main Features of Cross-Border Payments and the Settlement of Domestic FX Transactions in Individual LAC Countries (Continued) Settlement of Wholesale FX Transactions Cross-Border Payments Accounts in Foreign Relevance of Workers' Currency at the Remittances and Country Organized Market Central Bank SWIFT Use or Others Major Trends Honduras Banks must convert Yes. Few banks are con- High--Net recipient. foreign currency incom- nected to SWIFT. These accounts are not Some commercial banks ing to the country to used for settlement of The BCH provides cross- are developing propri- domestic currency with payment transactions. border payment services etary mechanisms to the BCH. to commercial banks. facilitate the processing The purchase of foreign of remittances, mainly currency is done through from the United States. BCH auctions through the Sistema Electrónico de Negociación de Divisas. Jamaica There is no organized No. Most banks are con- High--Net recipient. market. nected to SWIFT. Legislation to regulate money transfer and remit- tance agents has been passed. License from the minister of finance and planning is required. The BOJ acts as regulator. Mexico There is no organized No. All banks are connected High--Net recipient. market. to SWIFT. Mexico and the United States linked their national payment systems through the FedACH service. Cur- rently, only credit trans- fers from the United States to Mexico are possible. Netherlands There is no organized Yes. All banks are connected Medium--Net recipient. Antilles market, although the to SWIFT. These accounts are used majority of FX deals are in for settlement of payment fact channeled through transactions. the BvdNA, in which case, PvP is achieved. Nicaragua The BCN operates Yes. Few banks and the BCN High--Net recipient. the major wholesale are connected to SWIFT. These accounts are used Some commercial banks FX market for banks, for settlement of payment Some banks have devel- are developing propri- financieras, and the gov- transactions. oped their own messag- etary mechanisms to ernment. The BCN is the ing, clearing, and facilitate the processing seller for every buyer, settlement systems to of remittances, mainly and the buyer for every process intraregional from the United States. seller. payments. PvP is achieved. OECS There is no organized Yes. Most banks are Medium--Net recipient. market. connected to SWIFT. These accounts are not used for settlement of The ECCB provides payment transactions. cross-border payment services to domestic financial institutions. Payments Systems Assessment Findings in Latin America and the Caribbean 97 Table 4.8 Main Features of Cross-Border Payments and the Settlement of Domestic FX Transactions in Individual LAC Countries (Continued) Settlement of Wholesale FX Transactions Cross-Border Payments Accounts in Foreign Relevance of Workers' Currency at the Remittances and Country Organized Market Central Bank SWIFT Use or Others Major Trends Panama The country is dollar- No. (The U.S. dollar is the All banks are connected Medium--Net recipient. ized. Transactions with official currency of Panama.) to SWIFT. In 2003, the BNP entered other foreign currencies into an agreement with are negligible. the U.S. Federal Reserve to receive ACH-type direct credits from the United States. Paraguay There is no organized Yes. Most banks are con- Medium--Net recipient. market. nected to SWIFT. These accounts are not Some commercial banks used for settlement of are currently implementing payment transactions. systems to process remit- tances at a lower cost. Peru The Bolsa de Valores de Yes. Most banks are con- High--Net receiver. Lima operates a trading nected to SWIFT. These accounts are used system for FX operations. for settlement of payment The BCRP is the opera- Transactions are settled transactions. tor of the ALADI system. PvP on the accounts held at the BCRP. Trinidad and There is no organized No. All banks are connected Low--Net recipient. Tobago market. to SWIFT. Uruguay The wholesale FX market Yes. All banks are connected Low--Net recipient. for banks is organized at to SWIFT. These accounts are used a central trading platform for settlement of payment BEVSA provides cross- operated by BEVSA. transactions. border payment services PvP is not achieved in to domestic banks and the majority of cases. other financial institu- tions through its SWIFT A relevant portion of the service bureau. market (for example, nonbanks) operates in the over-the-counter (OTC) market. Venezuela, The BCV is the main No. Most banks are con- Low--Net recipient. R.B. de provider of foreign cur- nected to SWIFT. rency to the market. It also operates a central- ized trading mechanism that is accessible to var- ious types of financial entities. PvP is generally not achieved for transac- tions directly between FX market participants. Source: Authors' elaboration. a. ARGENCLEAR operates through Interbanking, one of the large-value clearinghouses that has a settlement account at the MEP. 98 Payments and Securities Settlement Observations accreditation of funds to end beneficiaries. In this last regard, the regulatory perspective should be Throughout the region, FX transactions are not set- widened from the traditional areas of balance of pay- tled on a PvP basis in the majority of cases. In some ments and money laundering to include payment cases, there is a centralized FX trading platform, system issues, in particular issues related to efficiency, but such platforms have no direct links with a settle- transparency, and risks. Central banks, in coordination ment infrastructure. Deals and settlement are based with other authorities, should also decide whether purely on mutual trust, although some banks do estab- new actions or regulations are necessary to protect lish controls with regard to their FX counterparties, customers, and to foster a safe and efficient provi- and set limits on the amounts that may be traded with sion of services in this area. Remittance service such counterparties. In these cases, central banks providers should be involved in this process along should investigate the possibility of introducing some the lines set up by the General Principles for Inter- measures to mitigate the risks associated to these national Remittance Services. operations when PvP is not possible. Central banks In sum, it is recommended that the region's central might consider evaluating the risks in this market, banks carefully monitor trading and settlement plat- taking as a reference the reports and questionnaires forms and procedures for FX and cross-border published by the CPSS of the Bank for International transactions to ensure that the principles of safety Settlements. and efficiency in clearance and settlement activities For domestic FX transactions (that is, those that are applied at all times. In the case of international involve only domestic counterparties), those central remittances, a more activist approach is desirable. banks that allow holding reserve accounts both in Eventually, in coordination with other authorities, local currency and U.S. dollars should ensure that central banks should also decide whether new reg- wholesale FX trades are settled on central bank ulations are necessary to protect customers, and to money on a PvP basis. foster a safe and efficient provision of remittance Central banks and banking supervisors should be able services. to use their regulatory and supervisory powers to introduce appropriate measures to mitigate associated risks. Attention should also be given to correspondent INTERBANK MONEY MARKET arrangements abroad of domestic banks to ensure that This section includes context, status in the region, and risk profiles and operating procedures of correspon- observations regarding the interbank money market. dents are constantly reviewed and do not generate any relevant risks in the country. Context Proprietary mechanisms of commercial banks for cross-border payments can turn into a less costly The adequate functioning of an interbank money market and convenient alternative for customers. Another goes beyond clearance and settlement considerations. possible benefit is that remittances can now be chan- An efficient mechanism for trading and settlement of neled all the way through banks instead of, typically, these transactions will allow for the improvement of the through nonregulated specialized companies, apart liquidity management and, thus, for an increased safety from the fact that remittances need not be paid in and stability of the financial system. In addition, it will cash. Nevertheless, central banks, in cooperation with help securities settlement through lower interest rates banking supervisors, should carefully monitor these that will benefit broker-dealers in the credit lines they mechanisms and other related developments to make negotiate with banks. Another important concern for the sure they do not bring in new or incremental risks authorities is the smooth and effective functioning of for the domestic banks involved. monetary policy, because the interbank money market A large share of remittances are channeled through is normally the market that central banks use to give a nonregulated specialized institutions, which lack clear signal to banks, a signal that then is extended to the minimum acceptable standards in areas such as trans- rest of the financial sector. If the operational procedures parency of fees and other charges or the timing of or the organizational and regulatory arrangements do Payments Systems Assessment Findings in Latin America and the Caribbean 99 not provide for an efficient system, the central bank can (2) an electronic book-entry securities system to regis- have difficulties in clearly signaling the type of mone- ter and record changes in ownership of securities. The tary policy it is following. development of the depository function is an important discussion that a country has to undertake involving Two key elements for the development of interbank responsible authorities and all market participants. An money markets are (1) a special-purpose system for large- adequate strategy that takes into account the national value payments to provide secure electronic interbank interest and leaves apart any particular interest should transfers with immediate settlement, interconnected to be defined and agreed. Status in the Region Table 4.9 The Interbank Money Market in Selected Latin America and the Caribbean Countries Country Interbank Money Market Argentina Interbank money market transactions in Argentina are performed mainly through the Mercado Abierto Electrónico (MAE). The MAE is an OTC, quote-driven market where trades in government securities and private debt are executed by telephone and by price spread. Main instruments used are government securities and BCRA notes. Transactions are instrumented through repos or outright collateralized loans. The MAE does not settle or guarantee trades. Instead, Interbanking has partnered with the securities depository, Caja de Valores, and Argenclear (the securities clearinghouse) to facilitate DvP procedures for the MAE. For eligible securities, banks are able to move net securities positions settled at the Caja de Valores against net funds positions settled at MEP through Interbanking. Brazil The interbank money market in Brazil is deep and sophisticated. Securities issued by the federal government are mainly used to back interbank loans, which are handled mainly through repo transactions. The Sistema Especial de Liquidação e de Custódia is the central securities depository and settlement system for the securities issued by the federal government. At the same time, it is used as a source to report on the trading activity of government debt markets and as a tool to conduct monetary policy. The Sistema Especial de Liquidação e de Custódia settles all transactions in real time on a gross basis, and maintains a direct link with the RTGS system, the STR. Participants may distinguish between repo transactions in which the collateral is prohibited from resale, and those for which the collateral can be resold. Liquidity is hampered by a high degree of fragmentation, that is, a large variety of nonstandardized securities. To optimize the use of securities, some associations of operations are permitted. In these cases, although settlement is processed operation by operation, net balances are considered when checking for availability of securities and funds. Financial institutions that hold reserve or settlement accounts, or both, at the BACEN participate in the system as liquidating entities (for example, commercial banks and clearinghouses). All other nonsettling institutions are indirect participants (for example, mutual funds, insurance companies, private closed and open pension funds, health insurance management companies, nonfinancial institutions, and so on). Chile In Chile, the interbank money market is fragmented. The most relevant instruments are the securities issued by the BCCH, as well as some others securities issued by financial sector entities. Approximately one-third of the transactions with BCCH securities are carried out through the stock exchanges. Each of the three stock exchanges has a trading system for debt securities. In practice, however, none of these systems is much used. Repos (pactos) with BCCH securities are the main instrument of the interbank money market, accounting for almost two-thirds of all transactions in the interbank money market. Most repos are traded in the OTC market; commercial banks are by far the most relevant, if not the only, participants in this market. At the same time, the OTC market can be divided into direct trades among banks and intermediated trades, in which brokers interpose themselves between the seller and the buyer. (Continued) 100 Payments and Securities Settlement Table 4.9 The Interbank Money Market in Selected Latin America and the Caribbean Countries (Continued) Country Interbank Money Market Colombia Although an automated system has been established for the exchange of both collateralized and uncollateralized funds among banks (the Sistema Electrónico de Negociación), the development of the money market is insufficient so far. The most important impediments to its development are the constraints over credit lines that banks grant to each other. The lack of short-term securities and interest rate benchmarks creates disincentives to participation in the money market. Markets are shallow and fragmented, due to different regulatory treatment, accounting, tax rules, and market protocols. Costa Rica For historical reasons, money markets in Costa Rica are peculiar in that broker-dealers are the main players and trading systems are operated by the stock exchange. In fact, trading and settlement systems have been historically designed to provide broker-dealers a means to exchange liquidity in order to operate pseudomutual funds. The current trading and settlement systems, as a result of the measures taken to avoid defaults on the securities leg of a settlement transaction, have introduced fragmentation in the liquidity market due to operational difficulties to arbitrate between different trading systems. This is basically a consequence of the need to block securities before trading to ensure the security delivery in a nonstandardized securities market. However, as the banking system has evolved and banks have been more active in the money markets, new trading mechanisms have been required to attend to the need for an interbank money market. The Mercado Interbancario system was launched in 1997 by the stock exchange in order to facilitate interbank trading in this market. The Mercado Interbancario system settles transactions under DvP Model 1, and has a real-time link with the Sistema de Negociación y Pagos Electrónicos. Dominican Republic The interbank money market is not active. There are few interbank loans, ranging from overnight to seven days, in most cases. Funds are generally lent without collateral. In 2001, the BCRD created a mechanism to intermediate in this market and use banks' surpluses to grant short- term loans to other banks with temporary liquidity shortages. Ecuador The interbank money market is not very active and the liquidity is distributed through a system facilitated by the BCE. Every quarter, the Monetary Board of Ecuador approves the amount of Títulos del Banco Central that can be issued, which is also the amount of credit that the BCE can lend to banks in need of liquidity via open market operations (especially repo with government bond as collateral). Through this means, the BCE redistributes liquidity between banks. El Salvador The securities market is dominated by repo trading on the stock exchange. It is essentially a money market: The bulk of repo transactions have a maturity of fewer than seven days. Guatemala The interbank money market is not very active. Banks exchange liquidity among themselves through the Mecanismo Interbancario de Transferencias and the cheques system, but the central bank does not have the information to differentiate between interbank money market operations and other type of transactions carried out through this system. The interbank money market operations are normally outright loans, because collateralized interbank loans would require the exchange of physical certificates. The BANGUAT does not have statistics about the market. Interbank money market transactions take place by means of an interbank cheque or a transfer through the funds transfer system, but the central bank does not capture the reason for the operation. This market is mostly uncollateralized, because there is no effective way to collateralize securities and, thus, it would mean the exchange of physical certificates. The other active money market is the repos through the stock exchange, but it is not a banking market but a brokers-dealers market. Jamaica The money market in Jamaica consists mainly of repo transactions using government- and central bank­ issued securities and outright loans. There is also a significant overnight repo market. Repo operations with government securities are supported by the physical delivery of the certificates, due to the lack of demateri- alization or immobilization of these securities. However, no transfer of ownership takes place in the books of the Ministry of Finance. In effect, there is heavy reliance on counterparty trust. Because of the operational difficulties in transferring ownership, the level of risk inherent in these repo transactions is unacceptable to some market participants, and this limits and concentrates liquidity. Payments Systems Assessment Findings in Latin America and the Caribbean 101 Table 4.9 The Interbank Money Market in Selected Latin America and the Caribbean Countries (Continued) Country Interbank Money Market Mexico The interbank money market in Mexico is, for the most part, a bilateral OTC market. Some debt instruments issued by the government, the central bank, and commercial banks are also traded in the stock exchange through a system called SENTRA­Debt. The OTC market can be divided into direct trades among financial intermediaries, and intermediated trades. Intermediated trades comprise three segments: Automated screen trading. Interactive terminals are provided to the participants (banks and brokerage houses), which enter their final bid and ask prices as well as the amounts being offered for outright and repo transactions with government and banking securities. The screens show the best available prices, and participants may match a partial amount of the offer or its total amount. Voice brokerage. In this segment, a group of brokers intermediate outright and repo transactions with government and banking securities by telephone, with some screen support.a They provide participants (banks and brokers) with two resources: (1) noninteractive terminals in which the quantities and best bid and ask prices are shown, and (2) a speaker, through which brokers may call the attention of participants to any relevant change on the screens. Participants transmit their final orders by telephone to the brokers, who immediately enter the information on their screens without identifying the participant. Transactions are also closed by telephone, and the result is announced on the screens. Only at this moment do participants know who their counterparty is. Secondary market rounds. In this system, some of the brokers intermediate special auctions of government securities requested by any of the participants. The auction is held in the terminal of the broker. Netherlands Antilles The interbank money market is almost nonexistent. Participants with liquidity shortages may resort to some facilities: (1) They can sell U.S. dollars, (2) activate interbank outright overnight loans, and (3) sell central bank securities to other commercial banks through the BvdNA. The combination of relatively high reserve requirements (9 percent) and the abundance of liquidity under normal circumstances ensure that the system does not experience liquidity shortages as a whole. Nevertheless, the liquidity distribution is unequal. Nicaragua The interbank money market is almost nonexistent. Participants with liquidity shortages may resort to some facilities: (1) They can arrange an uncollateralized loan bilaterally, because there is no effective way to collateralize securities and, thus, it would mean the exchange of physical certificates. (2) They can get liquidity through a repo transaction at the stock exchange. (3) They can obtain liquidity from the BCN. The market is narrow at present for several reasons. Investors face a lack of investment alternatives, because there are not enough instruments in the market. The public debt market is not yet well organized and the government of Nicaragua does not issue securities on a regular basis. Additionally, banks, nonbank financial institutions, and brokerage houses are not allowed to invest freely in private sector securities, except if the Superintendencia de Bancos y Otras Instituciones Financieras gives them specific authorization, which occurs on a case-by-case basis. Panama No public or private sector institution receives and collects systemwide statistics. It is noteworthy that most interbank money market operations in Panama are executed through correspondent banks in the United States (either Fedwire or Clearing House Interbank Payments System), and are noncollateralized. It is not possible to perform same-day domestic operations in BNP funds. When trading securities, banks recur mostly to their own broker-dealers (for tax reasons) and rarely perform OTC transactions. Peru There is no active debt market in Peru, although some private sector bonds are issued and traded. The Bolsa de Valores de Lima operates a money market module. Trading is continuous from 9:00 a.m. to 2:00 p.m. Bids are not matched automatically. There is also an OTC market that is limited in scope. Trinidad and Tobago The interbank market is the overnight market for funds among commercial banks. Borrowing is usually for the purpose of meeting the reserves requirement. Most of the activity occurs between the banks, with minimal participation from the near-banks, particularly the subsidiaries or affiliated companies of the commercial banks. The market is self-regulated and is monitored by the CBTT for monetary policy purposes as well as for prudential reasons. Each institution has internal exposure limits with regard to counterparties. (Continued) 102 Payments and Securities Settlement Table 4.9 The Interbank Money Market in Selected Latin America and the Caribbean Countries (Continued) Country Interbank Money Market Trinidad and Tobago If commercial banks do not have adequate funds to settle all their payments on the Safe-tt at the end of a business (Continued) day, or are short on their reserves held at CBTT, their first option is to borrow on the interbank market. If they are unable to access funding in this market, they can enter into repos with the CBTT to obtain liquidity. Treasury bills and notes are used as collateral for these repos. Settlement of securities purchases and the registration of ownership are processed in the Government Securities and Settlement system, which has a direct link to Safe-tt for the funds settlement of securities transactions in real time, thereby facilitating delivery versus payment. Uruguay The value of money market transactions through BEVSA in Uruguay is similar to that of the FX market and the securities market combined. There is no information about the OTC interbank money market, because the central bank does not collect statistics. This market is mostly uncollateralized even if there is an effective way to collateralize securities. Venezuela, R.B. de The BCV has deployed several systems for different types of money market operations. The different interfaces mentioned below above allow for the settlement collateralized interbank money market operations on a DvP basis. These include the following: The Sistema Electrónico de Transferencias de Fondos para Préstamos Interbancarios, that allows for an overnight market, either collateralized or not, and counts with an interface with the Sistema Integrado de Garantías y Líneas de Crédito. The Sistema de Custodia Electrónica de Títulos, used by the BCV to register ownership transfer of securities issued by the government and the BCV and traded by financial institutions through the BCV. It counts with an interface with the current accounts system for funds settlement. The Sistema Integrado de Garantías y Líneas de Crédito for the collateralization of securities and credit lines that the institutions have in their portfolios, in order to guarantee overnight transactions. It has an interface with the Sistema de Custodia Electrónica de Títulos. The Sistema Integrado de Mercado Abierto channels primary market operations with CDs issued by the BCV and securities known as Deuda Pública Nacional and treasury bills issued by the government. The system also operates secondary market repos over these securities. Transactions are not executed online, but count with an interface with the current accounts system of the BCV and Sistema de Custodia Electrónica de Títulos that allows for settlement of securities and funds on a DvP basis. The Sistema de Tasas Referenciales aims to set a reference interest rate for the market and will have an inter- face with the Sistema Integrado de Garantías y Líneas de Crédito, the Sistema de Custodia Electrónica de Títu- los, and the current accounts system. Source: Authors' elaboration. a. Enlaces Prebon, Eurobrokers, Cantor Fitzgerald, and Red Financiera, among others, are special agents whose activities resemble those of brokerage houses. However, they are not considered as such for regulatory purpose. Observations operational procedures or the organizational and reg- ulatory arrangements do not provide for an efficient The adequate functioning of an interbank money system, the central bank can have difficulties in the market goes beyond clearance and settlement con- implementation of its monetary policy. siderations. An efficient mechanism for trading and A smooth functioning of the money market is also of settling these transactions improves the liquidity key interest for the functioning of LVPS. In particu- management in the system and, thus, may help in lar, the delivery of collateral to the central bank in achieving lower interest rates. Another important order to receive intraday or overnight credit is crucial concern for the authorities is the smooth and effec- in a dynamic financial market. For this reason, it is tive functioning of monetary policy: The interbank important that transactions be settled with intraday money market is normally the market that central finality. The development of this market is crucial in banks use to give clear signals to banks that are then a new environment in which large-value payments are extended to the rest of the financial sector. If the to be settled in a gross system and, thus, liquidity man- Payments Systems Assessment Findings in Latin America and the Caribbean 103 agement is a crucial issue. Recent reform processes is a difficult process because several private interests around the region envisage the link of the RTGS sys- will be affected, but it is the only solution to develop tem with a central securities depository. safe and efficient securities markets that can take a The future evolution of securities markets is an impor- lead in a potential regionalization process. tant discussion to be undertaken jointly by market par- In sum, the adequate functioning of an interbank money ticipants and relevant authorities. An adequate strategy market is an important element for the smooth function that takes into account the national interest and leaves of payments and securities settlement in a country. aside any private interest should be defined and An efficient mechanism for trading and settling these agreed. Once the strategy has been decided, a neutral transactions will allow an improvement in the liquidity securities clearance and settlement system can be management of the system and facilitate the effective implemented to allow fair competition in the financial functioning of monetary policy. Two key elements sector. Authorities and market participants should for the development of interbank money markets are openly discuss what will be the likely future of securi- a special-purpose system for large-value payments to ties markets and agree on organizational and regulatory provide secure electronic interbank transfers with arrangements that allow for an adequate development immediate settlement interconnected to an electronic of the interbank money market, on the one hand, and book entry securities system to register and record the securities market, on the other. A common strategy changes in ownership of securities. 5 Securities Settlement Systems Assessment Findings in Latin America and the Caribbean T Table 5.1 Dates of Country Assessments his chapter covers the main findings of the Western Hemisphere Payments and Securities Clearance Country Date and Settlement Initiative assessments in the area of secu- Argentina July 1999 rities settlement systems (SSSs). The countries assessed are Argentina, The Bahamas, Bolivia, Brazil, Chile, Bahamas, The May 2001 Colombia, Costa Rica, Dominican Republic, Ecuador, Bolivia October 2004 El Salvador, Guatemala, Honduras, Jamaica, Mexico, Brazil November 2000 Netherlands Antilles, Nicaragua, OECS, Panama, Chile December 1999 Paraguay, Peru, Trinidad and Tobago, Uruguay, and the República Bolivariana de Venezuela. Table 5.1 indicates Colombia February 2001 the dates of the original assessments. Updates from these Costa Rica June 2001 assessments have been included in the information pre- Dominican Republic January 2002 sented in this chapter. Ecuador August 2002 The assessments took place following the methodology described in chapter 3. The issues covered are legal El Salvador February 2000 basis, clearing and settlement processes, settlement risk, Guatemala February 2004 settlement asset, operational issues, custody risk, depos- Honduras October 2002 itories' organizational arrangements, regulatory and oversight framework, and cross-border settlement. Jamaica June 2002 The rest of the chapter is organized as follows. Section 2 Mexico March 2001 briefly describes securities markets and settlement in Netherlands Antilles December 2002 Latin America and the Caribbean (LAC). Section 3 deals Nicaragua December 2003 with issues related to the legal framework. The legal framework for the funds settlement is covered in detail OECS April 2000 in chapter 4, but some cross-references are included Panama January 2005 in chapters 4 and 5 because the issues are interrelated. Paraguay April 2004 Section 4 includes an analysis of clearing and settlement Peru June 1999 processes. Section 5 describes settlement risks. Section 6 covers operational issues and section 7 covers custody Trinidad and Tobago February 2000 risk. Section 8 describes the regulatory and oversight Uruguay May 2005 issues. Central securities depositories' (CSDs') organi- Venezuela, R.B. de November 2002 zational arrangements are covered in section 9. Finally, section 10 analyzes cross-border settlement. Source: Authors' elaboration. 105 106 Payments and Securities Settlement Sections 2 and 3 are descriptive of the situation of the related to dollarized systems). In any case, it is important securities markets and settlement procedures for each to note that the observations made are based on a general country. For the rest of the sections, the chapter follows situation of the systems assessed in LAC countries, but a systematized approach for each issue covered. First, the that in some cases individual systems in different coun- approach includes a brief context in which the main tries have already significantly advanced in the issue indi- areas, normally identified through international standards cated, or that the issues are not relevant for them. and best practices, are described. Second, a status sub- section is included by means of a table describing the SECURITIES MARKETS IN LATIN AMERICA facts identified for each of the countries in the specific AND THE CARIBBEAN issue covered. Finally, the observations subsections sum- marize the findings often encountered in the systems ana- Table 5.2 includes a brief description of the securities lyzed or that, even if not identified in many systems, are markets in each of the countries assessed as well as important due to their relevance (for example, issues statistics on market capitalization in U.S. dollars, and Table 5.2 Description of Securities Markets in Latin America and the Caribbean Market Capitalization: Central % Over GDP / Government US$ Billion Debt Over Country Brief Description of Securities Markets (2004) GDP (2004) Argentina The Bolsa de Comercio de Buenos Aires was founded in 1854 as a forum 27.7/42 42.8 for business and trading of products, stocks, and bonds. Trades may be executed either through a screen-based system (Sistema Integrado de Negociación Asistida por Computador) or the traditional open outcry (floor trading). Corporate and government bonds are not only traded through these two systems, but also through the Mercado de Valores de Buenos Aires S.A.'s (Merval's) continuous trading system. Trading in the over-the- counter (OTC) market in government securities and corporate bonds takes place at the Mercado Abierto Electrónico S.A. (MAE). More than 95 percent of the stock exchange trading takes place at the Merval. The Merval also maintains a securities clearing and settlement system. Stock markets in the provinces (Córdoba, La Plata, Mendoza, Rosario, and Santa Fé) represent less than 5 percent. The MAE is an OTC quote-driven market where trades in government securities and private debt are executed by telephone and by price spread. The MAE does not settle or guarantee trades. There is also a futures and option market (Mercado a Término de Buenos Aires) and a market for foreign exchange (Mercado a Término de Rosario). Bahamas, The Securities markets are still in a start-up phase. Government securities, n.a. n.a. which are either in bearer form (treasury bills) or registered (Bahamas Government Registered Securities), are cleared and settled at the central bank. A stock exchange, the Bahamas International Stock Exchange, was launched in May 2000. Currently, there are 17 domestic public companies listed on that exchange. In April 2001, the Bahamas International Stock Exchange launched a mutual fund listing facility. Bolivia Securities markets are dominated by debt securities. The government 21.6/1.9 78.5 issues letras del tesoro (maturities from 90 days to one year) and bonos del tesoro (maturities of two, four, six, eight, nine, and 15 years). There is one stock exchange in the country (Bolsa Boliviana de Valores, BBV). The main trading systems are the traditional open outcry (floor trading) for equity and fixed-income securities, and the trading desk (mesa de negociación) for promissory notes and bills of exchange. The main type of trades undertaken is the outright sale. Securities Settlement Systems Assessment Findings in Latin America and the Caribbean 107 Table 5.2 Description of Securities Markets in Latin America and the Caribbean (Continued) Market Capitalization: Central % Over GDP / Government US$ Billion Debt Over Country Brief Description of Securities Markets (2004) GDP (2004) Brazil Securities markets are relatively sophisticated in terms of infrastructure and 53.5/323.7 54 availability of instruments. However, private corporations do not use capital markets intensively as an alternative financing source. Securities issued by the federal government are the most liquid instruments in the market. These securities include fixed-rate treasury bills, floating rate treasury bills, and treasury bonds. In addition, the federal government issues a number of other types of securities--less liquid--such as public debt certificates, privatization certificates, treasury financial certificates, national treasury certificates, and base-rate-indexed national treasury securities. Stock exchanges in Brazil recently merged operations under the leadership of the São Paulo Stock Exchange (BOVESPA). Under the agreement, the stock exchanges of São Paulo; Rio de Janeiro; Minas-Espírito Santo-Brasília; Extremo Sul; Santos; Bahia-Sergipe-Alagoas; Pernambuco and Paraíba; Paraná; and the Bolsa Regional now comprise a single Brazilian stock market on a nationwide level, with a single trading, custody, and settle- ment system. The trading of stocks is now carried out from São Paulo, in a totally electronic environment. The other regional exchanges concentrate activities such as market development and providing services to the local markets. The Brazilian Mercantile & Futures Exchange (BM&F), also located in São Paulo, is the commodities and derivatives exchange. Also, more recently, the BM&F expanded its operations into the trading and clearing of foreign exchange and government securities. It constituted, within its organizational structure, three mutually independent clearing systems: the derivatives clearinghouse, the foreign exchange clearinghouse, and the securities clearinghouse. The securities clearinghouse is currently circum- scribed to the clearing of government securities, but should expand in the future into the clearing of obligations issued by financial institutions, such as bank certificates of deposit. Foreign exchange and government securi- ties are still traded OTC in parallel with the BM&F markets. Chile Three stock exchanges (Bolsa de Comercio de Santiago, Bolsa Electrónica 117.6/110.7 7.9 de Chile, and Bolsa de Corredores de Valparaíso) are currently operating in Chile for equity and fixed-income securities transactions. Since the early 1990s, the securities markets have shown a clear tendency to grow--with the exception of the stock market, whose trend has been erratic. The deriv- atives market is practically nonexistent. There have been few government issues; those few have been targeted toward specific economic policy objectives. The central bank has issued its own instruments in order to conduct monetary policy; in practice, it has become the manager of the domestic public debt, because it issues papers with different maturities. The stock market's liquidity is limited and concentrated in a few stocks. Institutional investors play a fundamental role and account for a high percentage of investments in the securities market. Pension funds are the most important institutional investors and are the most popular vehicle used for domestic savings. Colombia One stock exchange (Bolsa de Valores de Colombia, BVC), as a result of 26.7/26 51.6 the merger of the three previous ones (Bolsa de Bogotá, Bolsa de Occi- dente, and Bolsa de Medellín), is currently operating. The BVC operates an electronic system for fixed-income securities (Mercado Electrónico de Colombia), an electronic system for stocks, and owns a system in which intermediaries register OTC telephone market operations (Sistema de (Continued) 108 Payments and Securities Settlement Table 5.2 Description of Securities Markets in Latin America and the Caribbean (Continued) Market Capitalization: Central % Over GDP / Government US$ Billion Debt Over Country Brief Description of Securities Markets (2004) GDP (2004) Colombia Registro, Información y Transacciones, INVERLACE). Government securi- (Continued ) ties transactions can take place through the Sistema Electrónico de Nego- ciación (SEN), operated by the Banco de la República (BR), or by one of the trading systems operated or owned by the stock exchange. Transactions in fixed-income securities represent more than 98 percent of the total value for the securities market (mostly government securities). In the OTC mar- ket, transactions are carried out through an electronic trading system operated by the Banco de la República, the SEN, or bilaterally between the counterparties recording the transactions through the INVERLACE. In con- trast to SEN, INVERLACE is only a recording system. The stock market is very small compared with the fixed-income market, about 1 percent or 2 percent of the total securities market. Costa Rica One stock exchange (Bolsa Nacional de Valores, BNV) is currently operating 13.1/2.4 54 for both equity and fixed-income securities transactions. The secondary market activity represents about three-quarters of total market operation. The market is clearly dominated by public securities (mainly treasury and central bank securities). The repo market is very active, with underlying instruments mainly consisting of public securities. An important segment of the stock exchange activity is represented by the market for liquidity, whereas the equity market represents less than 1 percent of total operations. All securities publicly offered must be handled by the respective members of the stock exchange and negotiated in the normal trading mechanisms of the stock exchange (Article 23 of the Securities Market Law, SML). Thus, the OTC market in Costa Rica is minor. Stock exchange transactions are carried out through different trading systems (the online trading system, TEBEL, Mercado de Liquidez, and the Sistema de Transferencias Electrónicas) operated by the BNV in which only broker-dealers can participate. All trades are locked in with automatic clearing and settlement. Dominican The securities market consists almost entirely of commercial paper issued n.a. 31.9 Republic by major private sector firms. Commercial paper is traded mainly on the primary market. The secondary market is practically nonexistent. Most broker-dealers belong to a banking group; the only stock exchange in the country, the Bolsa de Valores de la República Dominicana, mainly performs a register function of transactions traded in the OTC market, through the Sistema Integrado de Negociaciones Electrónicas. Nearly 75 percent of trades are settled within the same broker-dealer. Government securities have played a minor role so far. Starting in 1999, the government resumed issuing domestic securities for the redemption of public debt accrued since 1984. These securities are given directly to final beneficiaries. The central bank also issues short-term securities (certificados) on an as-needed (that is, not continuous) basis to supplement monetary policy operations. Ecuador The securities markets are clearly dominated by government debt. The gov- 8.9/2.7 48 ernment of Ecuador issues mainly government bonds (bonos del estado) and treasury bills (certificados del tesoro). In terms of trading, government debt constitutes approximately 85 percent of the market; the rest is distributed among trading in private fixed-income securities (14 percent) and equities trading (1 percent). The central bank also issues short-term securities (títulos del banco central) by means of an auction and undertakes repo operations in order to facilitate liquidity distribution in the financial system. The amount of títulos del banco central is determined quarterly by the monetary board of the Securities Settlement Systems Assessment Findings in Latin America and the Caribbean 109 Table 5.2 Description of Securities Markets in Latin America and the Caribbean (Continued) Market Capitalization: Central % Over GDP / Government US$ Billion Debt Over Country Brief Description of Securities Markets (2004) GDP (2004) Ecuador BCE. Trading takes place through the two existing stock exchanges in the (Continued ) country, located in Quito and Guayaquil. The Guayaquil stock exchange oper- ates an electronic trading system (Sistema Electrónico Bursátil). An elec- tronic auction system for public and private securities (Subasta Serializada) in which participants are public entities (Article 37 of the SML) is located in Guayaquil and is interconnected with the Quito stock exchange. The Quito stock exchange operates an electronic system (Sistema de Negociación Electrónica). The bulk of the market is constituted by outright securities sales, although there are also forward and repo operations. El Salvador The securities markets are dominated by institutional investors, the 22.7/3.6 38 major ones being banks, insurance companies, private pension funds (Administradoras de Fondos de Pensiones, AFPs), and brokers trading on their own account. There is almost no retail market, except for a small number of investors with quasimutual funds that are managed by brokers. In terms of instruments, the securities market consists almost entirely of fixed-income securities, with equities forming a negligible portion. The primary market is dominated by the public sector, mainly bonds issued by the Banco Central de Reserva (BCR) as part of its open market operations. The treasury of El Salvador plays a relatively minor role in securities issues. The secondary market is dominated by repo trading on the stock exchange (Mercado de Valores del Salvador). The Mercado de Valores del Salvador started operating in 1992. It is basically a money market, because the bulk of transactions are repos with maturity of fewer than seven days. The underlying instruments for the repos are mostly central bank securities. There is almost no trading in equities. There is a trend for banks to place their excess liquidity abroad; their operations in the repo market are becoming less important. Guatemala The securities markets are dominated by central bank and government 0/0 18.9 debt, representing nearly 95 percent of total market activity (primary and secondary market). The central bank issues short-term securities (certifi- cados de depósito a plazo), which at present are used mainly to implement the central bank's monetary policy operations. The government issues mainly government bonds (bonos del tesoro or certibonos) and treasury bills (letras de tesorería). The equity market is almost nonexistent, although some years ago there was a narrow market. Stock exchange transactions are usually made at the Bolsa de Valores Nacional with a minor role of the Bolsa de Valores Global. Honduras There are two stock exchanges in Honduras (Bolsa Centroamericana de 0/0 60.1* Valores and Bolsa Hondureña de Valores). The secondary market is almost nonexistent. There is no electronic trading, because it is normally done through the OTC market over the telephone. Transactions are regis- tered in the corresponding stock exchange. The stock exchanges are currently functioning as brokers for the auction of public securities. These are issued on a dematerialized form and are under the custody of the Banco Central de Honduras or the stock exchange. In the rare occasion that those securities are traded in the secondary market, it is done through the physical exchange of custody certificates or through the custodian service of the stock exchange. (Continued) 110 Payments and Securities Settlement Table 5.2 Description of Securities Markets in Latin America and the Caribbean (Continued) Market Capitalization: Central % Over GDP / Government US$ Billion Debt Over Country Brief Description of Securities Markets (2004) GDP (2004) Jamaica The securities markets are clearly dominated by Jamaica government 176.8/14.2 140.2 debt. The government of Jamaica issues treasury bills, local registered stock, debentures of the government of Jamaica, U.S. dollar­indexed bonds, and U.S. dollar bonds. The Bank of Jamaica (BOJ) has estab- lished an electronic system for the auction of treasury bills in the pri- mary market. Primary dealers are the participants in the auction market. The issuance and settlement of all other government securities is split between the BOJ and the ministry of finance. In addition to the auction, there is direct placement of government securities. The trading of government securities takes place OTC. The sale of equity securities is conducted on the Jamaica Stock Exchange (JSE). The JSE is not involved in bonds trading. Mexico Equities and debt instruments issued by nonbanking private entities are 25.7/174.3 26.1 traded mainly in the stock exchange (Bolsa Mexicana de Valores, BMV), whereas government and banking instruments are traded mainly in OTCs. The stock market is small compared with the size of the economy. The market for corporate debt, as well as the market for debt issued by state- owned firms and local governments, is also relatively small. Therefore, the Mexican securities market is concentrated in securities issued by banks and those issued by the federal government. The BMV is the only stock exchange in the country. Since 1999, all trades are executed elec- tronically through the SENTRA-Capitales, SENTRA-Deuda, and REMATE- Lince systems. The clearance and settlement of operations with securities traded either at the BMV or in the OTC market is executed through the central securities depository (Instituto para el Depósito de Valores; INDEVAL). Since 1998, there has been an organized market for derivatives, called the Mexican Derivatives Market (Mercado Mexicano de Derivados, MEXDER). The main instruments traded in this market are foreign exchange, interest rates, and individual stocks futures. Since it began operations, the MEXDER has experienced a significant growth in traded volumes. Netherlands The securities market consists almost entirely of primary auctions of 0/0 n.a. Antilles government and central bank debt. The government issues mainly long- term government bonds and short-term treasury bills. The government issues treasury bills regularly, and bonds irregularly. Bond maturities vary at every auction. The central bank also issues short-term securities (certificates of deposit, CDs) every two weeks. There is a very small (fewer than five transactions a month) secondary market for securities. In this market, the central bank acts as broker between sellers and buy- ers and gives indicative prices. The central bank processes transactions via telephone and facsimile, and then enters securities and cash move- ments manually. Nicaragua The securities market is heavily dominated by government and central 0/0 n.a. bank securities, although the private sector is starting to participate, as well. In recent years, the central government has issued indemnification bonds (bonos de pago de indemnización). These are long-term (15-year) bonds that are allotted directly to the beneficiaries, who may sell them to other parties in a secondary market but who in general hold them until maturity. The bonos de pago de indemnización are not issued regularly. Securities Settlement Systems Assessment Findings in Latin America and the Caribbean 111 Table 5.2 Description of Securities Markets in Latin America and the Caribbean (Continued) Market Capitalization: Central % Over GDP / Government US$ Billion Debt Over Country Brief Description of Securities Markets (2004) GDP (2004) Nicaragua The central bank issues short-term bills (letras) denominated in U.S. dol- (Continued ) lars for monetary policy purposes. These are standardized securities that have been replacing the negotiable investment certificates (certificados negociables de inversión) that were issued until June 2003. Central bank securities are issued every week through the stock exchange and are the most liquid instrument in the market. Certificados negociables de inver- sión account for approximately 75 percent of total traded volume at the stock exchange. The Bolsa de Valores de Nicaragua (BVDN) is the only stock exchange in the country. The BVDN started operating in 1994; since then, it has experienced significant growth in total traded value. The OTC market is nearly nonexistent, in part because the interbank money market is not very developed. OECS Despite the existence of a currency union with a common currency and a 9.8/0.039 113.5a common central bank (Eastern Caribbean Central Bank, ECCB), the finan- cial system is fragmented, with eight separate securities markets. In this regard, the ECCB has established the goal for the development and inte- gration of these markets into a single financial space within the Eastern Caribbean Currency Union. The ECCB began by launching the creation of markets and institutions to achieve this goal, and identified five institu- tions to be established at the regional level. These include the Eastern Caribbean Home Mortgage Bank, the Eastern Caribbean Securities Mar- ket, the Regional Government Securities Market, the Eastern Caribbean Unit Trust, and the Eastern Caribbean Enterprise Fund. A major compo- nent of the ECCB's Money and Capital Market Development initiative started in October 2001, with the launch of the Eastern Caribbean Securi- ties Market. In November 2002, the Regional Government Securities Mar- ket was launched, providing primary and secondary market facilities for government securities from the Eastern Caribbean Currency Union mem- ber states. The initiative seeks to strengthen the existing primary market for treasury bills and bonds, and to promote the development of a sec- ondary market for these securities. Currently, St. Kitts and Nevis, St. Vin- cent and the Grenadines, and Grenada have issued securities on the Regional Government Securities Market. Panama Trading takes place on an electronic trading system provided by the 29.7/4.1 68.1 stock exchange (Bolsa de Valores de Panamá, BVP) named the Sistema de Negociación Autorizado. This is a screen-based electronic system that processes orders from brokers online in real time, and automatically matches the best bids and offers. The volume of transactions is low. All trades must be performed by the broker-dealer members of the stock exchange, who are obliged to actually have the securities in their accounts before trading (no short-selling is allowed). No trades are performed OTC. Paraguay Securities markets are dominated by central bank and government debt 0/0 20.8 and primary market activity. The central bank issues short-term securi- ties (cartas de compromiso and letras de regulación monetaria), which at present are used mainly to implement the central bank's monetary policy operations. The cartas de compromiso are nonnegotiable short- term securities issued on a registered form and kept under the custody of the Banco Central de Paraguay. The monetary regulation bills (letras (Continued) 112 Payments and Securities Settlement Table 5.2 Description of Securities Markets in Latin America and the Caribbean (Continued) Market Capitalization: Central % Over GDP / Government US$ Billion Debt Over Country Brief Description of Securities Markets (2004) GDP (2004) Paraguay de regulación monetaria) are registered short-term securities (up to (Continued ) 365 days of maturity) issued in physical form and transferable by endorsement. The bills can be kept under custody at the Banco Central de Paraguay, with any other custodian, or with the buyer itself. A minor percentage of central bank bills are held under custody at the central bank. The government issues mainly medium- and long-term treasury bonds (bonos del tesoro público) with maturities between one and five years. The primary market represents the bulk of the activity in public sector securities. The stock exchange (Bolsa de Valores y Productos de Asunción) began operations in October 1993. Securities traded at the stock exchange are fixed-income instruments, municipal bonds, private bonds (maturities more than one year), promissory notes (maturities less than one year), and shares. The bulk of the stock exchange activity is constituted by primary market transactions. Peru Securities markets in Peru are very narrow and dominated by private 26.6/18.2 43.3 securities, because the government debt market is still incipient. The Lima Stock Exchange (Bolsa de Valores de Lima, BVL) is the only stock exchange in Peru. The Caja de Valores de Lima (CAVALI) Institución de Compensación y Liquidación de Valores is the securities clearing and settlement institution in Peru. In addition to exchange cleared and trades settled, there is an OTC market. The bulk of the trading supported by the BVL historically has been in equities; trading of debt is increasing its sig- nificance, however, due mainly to public debt (in nuevos soles as well as in dollars). The BVL trades primarily stocks, bonds, and repos. Trading in the BVL is executed through an electronic system called ELEX. In the past four years, Peruvian capital markets have grown significantly. The government and the central bank worked hard to develop a yield curve for Peruvian sovereign bonds. This has helped private companies to issue in domestic currency (nuevos soles). Fixed-income securities are a larger market than equities in Peru. Most of the fixed-income trading is done through an OTC market, however. Almost 100 percent of trading in equities is done through the BVL. Trinidad and In Trinidad and Tobago most of the activities associated with securities 103.9/10.6 54.5 Tobago business are undertaken by a limited number of financial institutions. Many of the agencies that provide securities-related services are sub- sidiaries of the commercial banks. Although there are a few relatively developed market segments such as treasury bills and bond markets, the secondary market for corporate securities is still undeveloped. Treasury bills and notes are sold in the primary market through a com- petitive bidding process. The central bank has recently implemented a primary dealer approach for the distribution of treasuries. On the one hand, introduction of medium-term paper (government notes and bonds) is a recent event. On the other hand, the government is a signifi- cant issuer of long-term paper, and most investors hold this paper to maturity. The Trinidad and Tobago Stock Exchange was established in 1981. Although the actual volume of OTC trading is not known, it is believed that this is less than the volume of trades that cross the floor of the exchange. Uruguay Securities markets are dominated by central bank and government secu- 2.3/0.3 83.8 rities. The government issues treasury bills (letras del tesoro), which are Securities Settlement Systems Assessment Findings in Latin America and the Caribbean 113 Table 5.2 Description of Securities Markets in Latin America and the Caribbean (Continued) Market Capitalization: Central % Over GDP / Government US$ Billion Debt Over Country Brief Description of Securities Markets (2004) GDP (2004) Uruguay short-term securities, and treasury bonds (bonos del tesoro), which are (Continued ) long-term securities. The government also issues securities in foreign currency and foreign markets, global notes and bonds. The central bank issues short-term securities for monetary policy purposes (letras de regulación monetaria). Private sector securities consist of CDs, stocks, and negotiable bonds. However, operations of private securities are very limited, with trading in only one stock and five negotiable bonds. The secu- rities market activities are concentrated in two exchanges--the Bolsa de Valores de Montevideo (BVM) created in 1867 and the Bolsa Electrónica de Valores (BEVSA) created in 1993. Most of the activity is in public securities, except for the trading in CDs. Venezuela, The securities markets are dominated by government debt, representing 7.3/8 39.8 R.B. de more than 95 percent of total trading. The government issues mainly gov- ernment bonds (bonos de la deuda pública nacional) and treasury bills (letras del tesoro), although recently it has also been issuing securities directly to particular sectors of the population (a special debt security known as Vebono). The central bank also issues short-term securities (CDs), which at present are used mainly to supplement monetary policy operations due to the lack of sufficient government securities. Primary placement and secondary trading of government securities, except Vebonos, take place through the electronic trading systems developed by the central bank. Primary auctions of government securities are made through the Sistema Integrado de Mercado Abierto, operated by the cen- tral bank. Interbank money market transactions, mainly overnight outright and collateralized loans, are performed mainly through the Sistema Elec- trónico de Transferencia de Fondos para Préstamos Interbancarios, although there is also an OTC market for this type of transactions. Stock exchange transactions are made at the Bolsa de Valores de Caracas (BVC) established in 1976. The BVC has an electronic trading system, the Sistema Integrado Bursátil Electrónico (SIBE), for stocks, Vebonos, and private sector commercial paper issues. Some Venezuelan external debt issues (that is, Brady Bonds) and mutual fund­like securities trusts (known as Joyas) are also traded at the stock exchange, although their share in total trading is minor. Source: Authors' elaboration and World Bank Development Data Platform. a. Data corresponds to 2003. as a percentage of GDP and central government debt Context over GDP. The reliable and predictable operation of an SSS Table 5.3 includes a brief description of the SSSs in depends on (1) the laws, rules, and procedures that each of the countries assessed. support the holding, transfer, pledging, and lending of securities and related payments; and (2) how these laws, rules, and procedures work in practice--that is, LEGAL ISSUES whether system operators, participants, and their cus- This section includes context, status in the region and tomers can enforce their rights. If the legal framework observations regarding legal issues. is inadequate or its application uncertain, it can give 114 Payments and Securities Settlement Table 5.3 SSSs in Latin America and the Caribbean Country SSSs Operator / Owner General Description Argentina Merval / Caja de Private sector SSS for the stock exchange (Merval) transactions. Movement of securi- valores ties ownership is through the caja de valores. The caja holds collective cash deposits in the names of participating financial institutions. Partici- pants enter into a collective deposit agreement with the caja de valores. The deposit itself is made in the name of both the participant (for example, a bank) and its customer (that is, the beneficial owner of the securities). By the agreement, participants are required to return on request to the benefi- cial owner an identical amount of securities of the same issuer, class, and issue entrusted. Argenclear / Caja Private sector SSS for MAE-traded securities. It is operational since September 2000. de valores / CRYL MAE is an OTC market for government securities and corporate bonds. Interbanking has partnered with the caja de valores, the securities custodian for the Argentine market, and a new financial market intermedi- ary, Argenclear, to facilitate delivery versus payment (DvP) in securities settlement. For eligible securities, banks are able to move net securities positions settled at the caja de valores against net funds positions settled at Interbanking. Argenclear facilitates the movement of a participant's net securities against their net funds position on confirming that the participant has sufficient funds for the transaction. Only if the participant has sufficient funds does Argenclear instruct the caja de valores to transfer the securities to the account of the buyer at the caja de valores. CRYL Central bank SSS for treasury bills and medium-term treasury bonds (letes and bontes). (BCRA) Began operating in 1996. Traders in short- and medium-term government bills or bonds are not obliged to settle through Central de Registración y Liquidación de Instrumentos de Endeudamiento Público (CRYL). Those that do not settle in CRYL have their securities accounts in the caja de valores, the depository. To facilitate this process, the caja de valores (and Merval) have accounts in CRYL. Bahamas, The Securities firms Private sector Two securities firms provide registry, transfer, clearing, and settlement services for the publicly traded companies. The clearing and settlement is done on a trade-by-trade basis, using cheques for the payments. Some securities are in book-entry form, through the services of one of the securities firms. Settlement is not done on a DvP basis, and the risk management is left up to each firm and to its customers. A CSD has not yet been established. Bolivia Stock exchange / Private sector Although by 2004 the dematerialization process began at the Entidad de EDV Depósito de Valores (EDV), until the first half of 2005 most securities were still issued in physical form. By now, most private and public securities have been dematerialized by the EDV or are issued in a dematerialized form, or both. It is estimated that by the end of the second quarter of 2006 all securities will be completely dematerialized. Until then, all trans- actions with physical certificates will be settled in the traditional form (physical certificates on receipt of cheques) in the offices of the Bolsa Boliviana de Valores. Stock exchange activity is undertaken on the floor of the exchange for fixed-income securities and for stocks. No electronic trading system operates at the moment. Settlement takes place on T at 4:00 p.m. on a gross basis by means of exchange of physical securities and cheques. Securities still held in physical form must be previously registered in the stock exchange in order to be traded, although the Bolsa Boliviana de Valores does not keep record of ownership transfer. However, all transactions with dematerialized securities will settle through the EDV (Model 2) on T. Funds will go through the Banco Central de Bolivia (BCB) using a centralized account handled by the EDV. All Securities Settlement Systems Assessment Findings in Latin America and the Caribbean 115 Table 5.3 SSSs in Latin America and the Caribbean (Continued) Country SSSs Operator / Owner General Description Bolivia information regarding transactions settled through the EDV is transferred (Continued ) electronically by the Bolsa Boliviana de Valores. Finally, the Bolsa Boliviana de Valores is planning on implementing an electronic trading system by the end of 2006. Brazil CBLC Private sector The Companhia Brasileira de Liquidacao e Custodia (CBLC) is the custody and settlement system for equities. It settles equity securities transactions in Brazil. Following an agreement among Brazilian stock exchanges at the beginning of 2000, BOVESPA became the only active stock exchange in the country. The erstwhile Rio stock exchange (Bolsa de Valores do Rio de Janeiro, BVRJ), assumed the specialized responsibility for designing and operating a system for the automated trading of public securities (SISBEX) and foreign exchange, which was afterwards transferred to the BM&F upon its acquisition of BVRJ. The CBLC, which was the clearinghouse of the São Paulo Stock Exchange, incorporated the former clearinghouse of the Rio exchange (Camara de Liquidaçao e Custodia, CLC). SELIC Central bank The Sistema Especial de Liquidacao e Custodia (SELIC) is the central depository for the most negotiated federal public securities. The SELIC system, used for clearance and settlement of government securities eligible for discount at the central bank discount window, is fully integrated with the central bank's owned and operated real-time gross settlement system. Government securities trading occurs OTC or in electronic markets and exchanges, or both. BM&F Private sector The Brazilian Mercantile & Futures Exchange (BM&F) carries the vast majority of transactions with derivatives. Brazil has a relatively large and diverse financial derivatives market. Most of Brazil's financial derivatives are futures. Options based on individual corporate securities are traded on the São Paulo Stock Exchange. Derivative contracts are cleared within the BM&F by an in-house department (Derivatives Clearinghouse). The BM&F has also launched a clearinghouse (Securities Clearinghouse or Clearing de Ativos) for the clearing and settlement of public securities trading through the Sisbex-Negociação and Sisbex-Registro electronic trading systems. CETIP Central bank The Central de Custódia e de Liquidação Financeira de Títulos (CETIP), created in 1986, handles mainly the primary market for corporate bonds and other securities (including government and state securities). It is the central custodial and settlement system for some private securities, special purpose public securities, and swaps. The system also registers borrowing and lending of reserves between financial institutions through repurchase agreements with the borrower issuing CDs, as well as for state and municipal bonds. It constituted and sold to the banks a new clearinghouse, Centralclearing de Compensacao e Liquidacao S.A., which was intended to start operating as a central counterparty (CCP) a few months after the launch of the Sistema de Transferencia de Reservas (STR), and to settle transactions on a DvP basis in the STR system (on August 16, 2002). Instead, it ceased operating in February 2003, and was later shut down. In the new environment, corporate bond operations are settled mainly through CETIP, whether they are primary or secondary market operations. Chile Stock Private sector Securities can be traded in any of the exchanges in which they are regis- exchanges / tered, and in the OTC market. The exception is shares, which may only be OTC / DCV traded in the exchanges. Buy or sell orders must be channelled through a broker-dealer. Dematerialization-immobilization is applied. Shares can be (Continued) 116 Payments and Securities Settlement Table 5.3 SSSs in Latin America and the Caribbean (Continued) Country SSSs Operator / Owner General Description Chile represented by physical certificates or remain in the issuer's register until a (Continued ) request for the certificate is made by the shareholders. A large portion of fixed-income securities and financial intermediation instruments and, to a lesser extent, shares and investment fund quotas, are immobilized in the accounts at the securities depository (Depósito Central de Valores, DCV). Settlement of stock exchange transactions can be made either bilaterally, that is directly between the parties, or in a centralized way, through the DCV or the clearing system of the corresponding stock exchange. Centralized settlement is only valid for transactions settled on T + 2 (contado normal). There is a clearinghouse operated by the bolsa de comercio that settles fixed-income instruments on T + 1. In centralized settlement, the securities are delivered, separately, by means of bilateral netting between the parties. The settlement can be made by physical transfer (in an exchange) or electronic transfer (in accounts held at the DCV). Payments (cash settlement) are always made in the clearing system of the respective exchange by means of multilateral netting. How- ever, final settlement occurs through the interbank payment system. Cen- tralized settlement is the usual practice for shares and investment fund quotas traded in exchanges. Most are settled electronically in the DCV, and the rest are settled by physical transfers in the clearing systems of the exchanges. Bilateral settlement is compulsory for transactions with fixed- income securities traded in the OTC, regardless of the settlement condition (T, T + 1 or T + 2). For OTC transactions, settlement on T is the usual cycle. The bilateral settlement may be physical (in the clearing system of an exchange or at the buying broker's office), or electronic, through the accounts held at the DCV. Cash settlement takes place directly between the parties. Colombia Stock exchange Private sector Securities are immobilized or dematerialized in the two existing deposito- clearinghouse / except DCV ries: Depósito Centralizado de Valores de Colombia, S.A. (DECEVAL) and DECEVAL / DCV settlement DCV. DCV is a depository operated by the BR for public securities. All (central bank) securities in DCV are dematerialized. DECEVAL is a private company owned by the banks, stock exchange, fiduciary societies, financial corpo- rations, mortgage corporations, the banking association, and broker- dealers. Any security registered in the issuers and securities national register (Registro Nacional de Valores y Emisores) could be deposited for custody in DECEVAL, where securities are immobilized (global notes or individual securities). DECEVAL basically immobilizes private securities, although it also has in deposit some public securities (for example, bonos pensionales). In addition, DECEVAL has an omnibus account in DCV for securities registered in DCV. Thus, depositors of DECEVAL can maintain public securities at DECEVAL. For securities traded through the stock exchange systems, the stock exchange is responsible for the clearance and settlement process. Mercado Electrónico de Colombia transactions can be settled on DvP basis Model 1 through an interface to the DCV­ Sistema Electrónico de Cuentas de Depósito (CUD) system, "free of pay- ment" or "free of payment and securities delivery." Securities settlement is done through a book-entry movement in DECEVAL or in DCV, depending on where the respective securities are deposited in custody. For spot equity transactions, the standard settlement cycle is T + 3. Funds settlement is done on the day of settlement on a multilateral net basis by electronic transfer. SEN / DCV Central bank In the OTC market, fixed-income securities (mainly public securities) are traded. If securities are traded through SEN, the clearance and settlement process is carried out through DCV on a Model 1 DvP basis. Otherwise, OTC market transactions are settled bilaterally by the counterparties and regis- tered in the INVERLACE system. Securities Settlement Systems Assessment Findings in Latin America and the Caribbean 117 Table 5.3 SSSs in Latin America and the Caribbean (Continued) Country SSSs Operator / Owner General Description Costa Rica Stock exchange / Private sector Stock exchange transactions are carried out through different trading sys- CEVAL tems (TEBEL, Mercado de Liquidez, Sistema de Transferencias Electrónicas, primary market auctions) operated by the Bolsa Nacional de Valores in which only brokerage houses can participate by conducting trades for their own account and for their clients. For all four systems previously mentioned, only one multilateral net debit position is calculated every day for the cash settlement that takes place by means of bank transfers in the bank's reserve accounts in the central bank. The securities leg is settled, on a gross basis in the accounts of brokerage houses in the securities depository (CEVAL). Securities are blocked prior to be available for trading. The Costa Rican authorities have been working on a project to upgrade the SSS, named Sistema de Anotaciones en Cuenta. Dominican Stock exchange / Private sector Most broker-dealers belong to a banking group and the only stock exchange Republic CEVALDOM in the country, the Bolsa de Valores de la República Dominicana, mainly performs a register function of transactions traded in the OTC market, through the Sistema Integrado de Negociaciones Electrónicas system. Nearly 75 percent of trades are settled within the same broker-dealers (operaciones cruzadas). The securities depository (Central de Valores Dominicana, CEVALDOM) authorization was granted by the securities com- mission in January 2005. Securities are not dematerialized yet, but the legal basis has been set with the new law for electronic trade (Ley de Comercio Electrónico No. 126-02). Investors pay by cash or cheques for their transac- tions, and usually withdraw the physical security from broker-dealers. Ecuador Stock Private sector Securities settlement takes place by means of the delivery of physical cer- exchanges / tificates to the stock exchanges, on the securities side, and transfers on the DECEVALE current accounts of the stock exchanges at the central bank, on the pay- ments side. The current depository, Depósito Centralizado de Valores de Ecuador (DECEVALE) S.A., was established in 1994 mainly by the two stock exchanges, but since then has only performed the custody of dematerialized securities issued by the Corporación Financiera Nacional (that represent a very small share of the market, less than 1 percent) and never developed into a full-fledged depository. Thus, the central bank has become the major provider of central custodian services for public and private securities. El Salvador Stock exchange / Private sector Settlement for trades takes place on a same-day (T + 0) basis. Whereas CEDEVAL the securities are also transferred on a same-day basis, securities and payment settlements are not linked. The payment settlement is coordinated by the stock exchange on a multilateral net basis. The stock exchange main- tains an account with the BCR and each commercial bank to facilitate the settlement. Securities settlement occurs through Central de Depósito de Valores (CEDEVAL), which is the nation's security depository. Securities settlement occurs by transferring the ownership records at CEDEVAL. Because not all securities are immobilized, sellers must deliver physical securities to CEDEVAL 24 hours before the sale is made. Guatemala Stock exchange / Private sector / The primary market of central bank and government securities is done Central bank Central bank through direct placement (window), auction (licitación), electronic floor (correo electrónico), and the electronic interbank money desk (mesa elec- trónica bancaria de dinero). The window is managed by the central bank to deal with the demand of securities from individuals and public sector entities. Securities are issued in physical form or simply registered at the central bank if the investor decides to leave the securities under central bank custody. Funds settlement is normally done through cheque for indi- viduals and through deposit accounts at the central bank (cuentas de (Continued) 118 Payments and Securities Settlement Table 5.3 SSSs in Latin America and the Caribbean (Continued) Country SSSs Operator / Owner General Description Guatemala depósito) by public sector entities. In the case of cheque settlement, (Continued ) securities are not delivered until the cheque has been settled. The auction and the electronic floor systems are managed by the stock exchange, and funds settlement is done through a cheque delivered by the stock exchange on behalf of their members. Delivery of securities only takes place after 12:30 p.m. on T + 1 once the cheques have been settled. The electronic interbank money desk is managed by the banks through the Bancared network. Funds settlement is done through the bank's reserve accounts at the central bank, and the securities are delivered on T. The central bank only performs the custody function and not the ownership transfer, that is, the central bank only registers the ownership of the investor in the primary market. Subsequent ownership transfers are done by means of delivery (if bearer securities), or endorsement (if order securities), or book-entry note in the stock exchanges' securities depository, once previously deposited. Stock exchange trading may be settled in or outside the stock exchange. Approximately 50 percent of transactions are settled through the exchange. For stock exchange settlement, it is mandatory to have previously deposited the securities at the securities depository of either stock exchange. Settle- ment of secondary market operations (outright transactions and repos) takes place on T. Brokers deliver funds by means of cheque, and the stock exchange delivers securities on T once the cheque has been received by means of a book-entry note in the securities depository. Honduras Stock exchanges Private sector The secondary market is almost nonexistent, and current settlement arrangements consist basically of custody arrangements. For the rare secondary market operations, trading takes place OTC and then it is informed to the corresponding stock exchange, and settlement is done through the custody function of the stock exchanges. Stock exchanges currently perform the functions of brokers for the primary market, informa- tion registration of the rare OTC secondary market operations, and custody services; they do not perform the function of trading, however. The bulk of the market is the auction of public securities. Jamaica JCSD Private sector The sale of equity securities is conducted on the Jamaican Stock Exchange (JSE) and settled through the Jamaica Central Securities Depository (JCSD). The JCSD as well as broker-dealers have accounts at the BOJ and can transfer funds through the Customer Information Funds Transfer System, a funds settlement system operated by the BOJ. This allows for timely funds settlement on central bank assets. The JCSD, a wholly owned subsidiary of the JSE, was established in January 1999. The JSE has implemented an electronic trading system called SUNRISE. Because the trading system is linked to or coupled with the JCSD, trades effect book-entry movements or changes ownership of securities. Both brokers and customers have accounts at the JCSD. Securities are blocked in the account of the seller before they are traded. Mexico INDEVAL Private sector All securities in the Registro Nacional de Valores are represented physi- cally, generally by global notes, and are immobilized in INDEVAL, the CSD. INDEVAL is the only entity authorized to operate as a CSD. Among other services, it is the custodian and administrator of all the securities regis- tered in the Registro Nacional de Valores, and it clears and settles all transactions made with such securities. Until 1994, INDEVAL was respon- sible only for the transfer of securities, whereas payments were arranged bilaterally among counterparties. At the end of 1995, together with the Banco de México, INDEVAL implemented Sistema Interactivo para el Depósito de Valores (SIDV), which allows the settlement of all operations under a DvP framework. For settlement of the cash leg, SIDV has a real-time Securities Settlement Systems Assessment Findings in Latin America and the Caribbean 119 Table 5.3 SSSs in Latin America and the Caribbean (Continued) Country SSSs Operator / Owner General Description Mexico link with the payment systems of Banco de México, Sistema de Atención a (Continued ) Cuentahabientes, and Sistema de Pagos Electrónicos de Uso Ampliado. Stock exchange trades, mainly equities and debt securities issued by pri- vate sector entities, are settled in T + 2 under a multilateral netting scheme for the cash leg and securities (DvP Model 3 of the BIS). Securities traded in the OTC market are settled according to conditions established by the par- ties, generally in T or T + 1, on a gross basis for both the securities leg and the cash leg (DvP Model 1 of the BIS). INDEVAL does not act as CCP. The settlement of all transactions executed through BMV is covered by means of a settlement fund. To qualify for this guarantee, operations need to be declared unfulfilled because of the lack of either securities or cash, which would happen at the closing of T + 5. Prior to this day, if the operations are not settled normally by T + 2, they are declared in arrears, and the partici- pants may access the securities-lending facility created by INDEVAL in order to accomplish settlement. Regarding the derivatives market, a clearing house (Asigna Compensación y Liquidación, ASIGNA) operates as a CCP for all derivative contracts traded in MEXDER. ASIGNA shares the credit risks with four trusts, each of which was established by a commercial bank. Netherlands BvdNA Central bank The Bank van de Nederlandse Antillen (BvdNA) is the custodian and CSD of Antilles government securities. Most government securities are dematerialized. The secondary market is not very active, but is increasing in size. Investors in securities usually hold their positions until maturity, and there is no stock exchange. For the few secondary market transactions, the BvdNA processes transactions via telephone and facsimile, and then enters securities and cash movements manually. The CSD of the BvdNA operates with segrega- tion of accounts at the participant level. Banks are obliged by the BvdNA to segregate their own assets from the securities owned by their clients. No securities depository exists for private bonds or equities. Transactions in the book-entry system of the BvdNA are matched and settled on T + 1 on a gross basis and processed manually. Once the transactions are matched and once the availability of the securities has been checked, the securities are transferred to the account of the seller and the BvdNA inputs a direct debit order (MT 202) in the Netherlands Antilles Clearing System to transfer the money from the account of the buyer to the account of the seller. Banks can pledge their government securities to the central bank in order to obtain intraday credit facilities. Pledging takes place by blocking the securities in the account of the pledger. Nicaragua Stock exchange / Private sector The stock exchange has an electronic trading system connected to that of the CENIVAL CSD, the Central Nicaragüense de Valores (CENIVAL). For the most part, the CENIVAL settles securities trades on T, although this is a market practice and not an official rolling settlement cycle. The securities leg is settled through book entry, and the cash leg is settled independently outside the system. The BVDN has an electronic trading system, the Sistema de Negociación de la BVDN (SN-BVDN), to which the broker-dealers submit their orders that are traded, matched, and confirmed automatically. Broker-dealers may withdraw their bids as long as there has been no match. The SN-BVDN is used for both primary market and secondary market of private and public securities. Outcry floor transactions would only be available in case of malfunctioning of the SN-BVDN. The CENIVAL's system has a connection with the trading system of the stock exchange, but securities transfer instructions from the latter cannot be processed automatically. Instead, CENIVAL must receive a transfer order from the selling participants for the securities to be transferred to the buyer's account, which happens once the seller acknowledges the receipt of the payment. Securities are not delivered otherwise. (Continued) 120 Payments and Securities Settlement Table 5.3 SSSs in Latin America and the Caribbean (Continued) Country SSSs Operator / Owner General Description OECS ECCSD Private sector The Eastern Caribbean Securities Exchange (ECSE) trading system allows for automated processing of buy and sell orders from brokers that are located remotely in any of the eight countries that form part of the market. A daily call auction process has been set up that matches all submitted bids and offers. With increase in market activity and liquidity, the ECSE intends to migrate to a continuous order-driven system. The ECSE offers both primary and secondary trading platforms, creating a single focal point for all securities activities. The Eastern Caribbean Central Securities Depository (ECCSD) is owned by the ECSE. Its major function is to provide clearance and settlement of trades transacted on the ECSE. The main participants on the ECCSD are broker-dealers, limited service brokers, and custodians. The ECCSD provides services to participant intermediaries and processes transactions for trades reported by the exchange or other markets. Custody services are also being provided to those entities that wish to hold securities at the ECCSD on behalf of their customers--for example, custodian banks for foreign investors. Panama LATINCLEAR Private sector The CSD in Panama, Central Latinoamericana de Valores S.A. (LATINCLEAR), was created in 1997. All trades must be performed by the broker-dealers members of the stock exchange, who are obliged to have the securities in their accounts before trading (no short-selling is allowed); the securities are not blocked until T + 2 for final settlement. At the end of the day, the stock exchange confirms trades to participants. Affirmation with final customers takes place on T + 1. The final settlement is at T + 3 early in the morning at BNP, but for this purpose LATINCLEAR has actually to process operations and estimate multilateral clearing in T + 2 (at present, it has no account at BNP, so it has to settle through CIASA-Telered [see chapter 4]). The final settlement of the cash leg of the transactions takes place on BNP books based on the files submitted by CIASA against the accounts of the banks of the corresponding financial group, because broker-dealers do not hold accounts at BNP. LATINCLEAR settles the securities leg under a Model 2 DvP basis. Paraguay Central bank / Central bank / The central bank and the government maintain a registry for the primary government / Private sector market of their own securities. Subsequent ownership transfers are broker-dealers executed by means of physical delivery and endorsement (if registered securities). Changes in ownership are then communicated to the respec- tive registry in order to register the new owner. The process for owner- ship transfer is slow and cumbersome, especially in the treasury. The rare secondary market transactions of public securities are settled bilat- erally by the parties with the delivery of physical certificates and funds, normally through cheques. The bulk of stock exchange transactions are settled in-house at the broker-dealer books. Stock exchange activity takes place on the floor of the exchange, although actual trading does not take place every day. No electronic trading system operates at the moment. Ninety-nine percent of the transactions are settled in-house, because the buyer and seller are clients of the same broker-dealer. The stock exchange reviews the broker-dealer processes to ensure that funds and securities have been delivered to the clients before T + 2. Thus, the stock exchange does not participate in the clearance and settlement process directly and only reviews it ex post. Securities are normally kept at the brokers-dealers that act as custodians (this is allowed by the SML, Article 105f). A private settlement bank is used for funds settlement (the contract is renewed yearly). Securities Settlement Systems Assessment Findings in Latin America and the Caribbean 121 Table 5.3 SSSs in Latin America and the Caribbean (Continued) Country SSSs Operator / Owner General Description Peru Stock exchange / Private sector / Clearing and settlement of equity trades in the Lima Stock Exchange CAVALI / Central Central bank (LSE) must be executed through the securities depository (CAVALI). For bank the case of OTC and debt instrument trades, however, regulations include the possibility for settlement through bilateral arrangements. There are registered and not-registered securities dematerialized in CAVALI. Equi- ties are settled in T + 3 with multilateral settlement on a gross basis for the securities and a net basis for payments (DvP Model 2 of the BIS). Settlements takes place with debt instruments, mostly on T, although they could be arranged for T + 1. Beginning in November 2005, settlement of equity trades takes place by using CAVALI's account at the BCRP. For the settlement of other securities, there is one settlement bank (Banco Sudamericano--Scotiabank). Although the procedure still allows for unwinding before settlement--indeed, calculation of preliminary net positions--with the use of BCRP, Peru currently has a simultaneous process of securities and funds. If a participant has insufficient funds on settlement day, new rules allow for the use of the settlement fund, as well as the participant's credits lines, to avoid unwinding. Finality is declared on T + 3 after settlement process is concluded--no possible unwinding afterwards. Trading floor registered securities must be dematerialized to be traded in the BVL. Physical or book-entry registered securities can be traded in the OTC market. In these cases, the participation of a broker- dealer who certifies the transaction and its settlement is required. CAVALI keeps the securities registry in a comprehensive and exclusive manner and is responsible for dematerialized securities clearing and settlement. The registry is kept at the beneficial owner level. Repos with equity and fixed-income securities are also cleared and settled on a multilateral basis, and other kinds of fixed-income securities transactions are cleared on a gross basis in the accounts of CAVALI at the BCRP. Funds in repos and other fixed-income securities transactions can also be settled by the counterparties on a bilateral basis without intervention of CAVALI or the settlement bank, or can be settled through CAVALI. In the case of regis- tered dematerialized securities and for OTC transactions, CAVALI trans- fers the securities on the same day of the broker-dealer request, which should occur within the settlement period of such operations, (that is, until T + 2). In the case of operations with registered physical securities and for OTC transactions, the broker-dealer should notify the issuer within two business days after execution. In both cases, the cash settlement is done directly between the counterparties. In the case of securities not registered at the trading floor and traded outside the BVL, CAVALI takes part in the securities settlement only if the securities are dematerialized. BCRP CDs are cleared and settled through the BCRP. The CDs are dema- terialized and the registry is manually administered by the BCRP. In 2000, the system was modernized into an application in Power Builder, with an Informix data base. The BCRP transfers the CDs ownership at the seller's request, normally after the BCRP receives the funds from the counterpar- ties. Funds settlement is done through the RTGS. Trinidad and Central Bank of Central bank Under the Treasury Bills Act and the Treasury Note Act of 1995, the cen- Tobago Trinidad and tral bank of Trinidad and Tobago is authorized to issue short-term trea- Tobago sury securities on behalf of the government for the conduct of open depository market and debt management operations. The acts provide for the issuance of treasury bills with a maturity of up to one year, and for trea- sury notes with maturities of up to five years. The central bank provides clearance and settlement for treasury bills and notes. The central bank is (Continued) 122 Payments and Securities Settlement Table 5.3 SSSs in Latin America and the Caribbean (Continued) Country SSSs Operator / Owner General Description Trinidad and the fiscal and paying agent for treasury bills and notes. The central bank Tobago also provides depository services for government and other selected (Continued ) entities. Each bank has a securities account at the central bank to con- duct treasury bill activity. The government securities depository is linked to the RTGS system. Stock exchange / Private sector The Trinidad and Tobago Stock Exchange, mutual fund companies, and TTCD other financial institutions provide clearance and settlement functions in their respective market segments. Mutual funds companies, which are mainly subsidiaries of commercial banks, handle the clearance and set- tlement for mutual fund transactions. The stock exchange performs clearance and settlement functions for trades undertaken on the floor of the exchange. However, these functions are to be transferred to the Trinidad and Tobago Central Depository (TTCD). Some of the clearance and settlement systems are manually operated, and other systems are computerized. In January 2003, the Trinidad and Tobago Stock Exchange launched the TTCD. Only stocks are currently being received on deposit by the TTCD. Since TTCD stated operating, the on-floor trading of the stock exchange can only be done with securities previously immobilized. Listed companies have to accept the immobilization of their shares through the signing of an agreement with the TTCD. The TTCD receives the stocks in deposit, and at the end of the month, the register (that is maintained and managed by the issuer) issues a global certificate for the total value received in deposit during the corresponding month. The TTCD is linked to the RTGS system for funds settlement Uruguay Stock Central bank and Securities are issued in dematerialized (escriturales) or physical form. exchanges / private sector BVM activity is undertaken on the floor of the exchange from 2:00 p.m. to AGATA 2:30 p.m., and from 4:15 p.m. to 5:00 p.m. No electronic trading system currently operates. Confirmation process takes place in the 30 minutes following closing of the trading. Settlement takes place on T + 1 for domestic securities and T + 3 for securities issued in foreign markets at 5:00 p.m. (the time at which bank offices close) on a gross basis for secu- rities and multilateral net basis for funds. Physical securities and global securities are under custody in one private bank, and government and central bank dematerialized securities in the Banco Central del Uruguay (BCU) under the name of the BVM identifying the broker-dealer. Once the BVM receives the funds through ABN Amro, funds settlement account, or in its account at the central bank via the Sistema Electrónico de Comuni- caciones, the BVM transfers the ownership (delivers, if physical) the securities. If securities or funds are not delivered at settlement, the BVM rules include buy-in and sell-out procedures at the cost of the failing party through its generic stock exchange guarantee. The Bolsa Elec- trónica de Valores (BEVSA) operates an electronic trading system opened from 10:00 a.m. to 5:00 p.m. The BEVSA trading system is con- nected online with the BCU securities custody system (AGATA). For secu- rities under BCU custody, settlement takes place on a gross basis in real time for both securities and funds. Trading in other securities is settled bilaterally. Global securities settlement takes place bilaterally through international custodians on T + 3. Venezuela, SICET Central bank Except for Vebonos, the central bank is the central depository for govern- R.B. de ment securities. Accordingly the central bank, through its Sistema de Custodia Electrónica de Títulos (SICET), provides all custody and central depository functions for government securities, including ownership transfers and collecting associated rights. Central bank trading and depository systems are linked to its current accounts system. Transactions and collateralized Securities Settlement Systems Assessment Findings in Latin America and the Caribbean 123 Table 5.3 SSSs in Latin America and the Caribbean (Continued) Country SSSs Operator / Owner General Description Venezuela, operations with government securities executed through the Sistema Elec- R.B. de trónico de Transferencia de Fondos para Préstamos Interbancarios, Sis- (Continued ) tema Integrado de Mercado Abierto, and SICET systems of the central bank have different settlement cycles. For primary auctions, even for the same type of securities, there are different settlement cycles (that is, T + 0 or T + 1) depending on the day of the week in which such securities are auctioned. For secondary market transactions, the central bank uses a rolling settle- ment cycle of T + 0. In the case of the interbank money market (that is, the Sistema Electrónico de Transferencia de Fondos para Préstamos Interban- carios), once transactions are matched the system settles them immedi- ately. This is also the case for interbank OTC transactions that use the SICET system for settlement. Thus, once participants input the operation into the SICET system, transactions are settled. Stock exchange / Private sector The current private sector depository, Caja Venezolana de Valores S.A. CVV (CVV), was established in 1992 under the initiative of the BVC and started operating in 1996. The CVV holds stock issues and Vebonos in a system of direct depositors and client subaccounts. At the stock exchange, clearance and settlement takes place by means of book entries at the CVV on the securities leg and through a commercial bank for the cash leg. The BVC uses a rolling settlement cycle of T + 3. Settlement of securities and funds occurs independently, the first done on a gross basis by the CVV, and the second done on a multilateral net basis by the stock exchange. The CVV set- tles the securities on T + 3 and informs the stock exchange of the securities transfers it already made. Source: Authors' elaboration. rise to credit or liquidity risks for system participants beneficial owners. The rules and contracts related to the and their customers, or to systemic risks for financial operation of the SSS should be enforceable in the event markets as a whole. of the insolvency of a system participant, whether the participant is located in the jurisdiction whose laws gov- A variety of laws and legal concepts can affect the per- ern the SSS, or is located in another jurisdiction. formance of clearing and settlement systems. Contract laws, company laws, bankruptcy and insolvency laws, Another important emerging issue is the legal status of custody laws, property laws, and tax laws may impede a digital signatures. If digital signatures are to substitute better performance of clearing systems. The general need for handwritten signatures, they must have the same is to have an adequate legal basis that is able to accom- legal status as handwritten signatures--that is, they modate technological advances and that, thus, does not must be legally binding. A critical need is to ensure that constitute a constraint for the operation or future devel- laws are enforced and enforceable in all relevant juris- opment of the system. Key aspects of the settlement dictions. In addition, disputes should become the sub- process that the legal framework should support include ject of court proceedings only as a last resort. This can enforceability of transactions, protection of customer be achieved through the specification and acceptance assets (particularly against insolvency of custodians), of comprehensive and fair arbitration processes that are immobilization or dematerialization of securities, netting clear and nonambiguous. arrangements, securities lending (including repurchase agreements and other economically equivalent transac- Status in the Region tions), finality of settlement, arrangements for achieving DvP, default rules, liquidation of assets pledged or trans- Table 5.4 includes a brief description of the legal ferred as collateral, and protection of the interests of framework for SSSs in each of the countries assessed. 124 Payments and Securities Settlement Table 5.4 Legal Issues in SSSs Country Legal Issues Argentina The Public Offering of Securities Act (Law 17.811) of 1968 is the comprehensive body of law for securities market activities, the public offering of securities, the organization and operation of stock market institutions, and the acts of brokers and others engaged in securities trading. Other important laws are Law 19.550 (Business Companies Act), Law 20.643 (Registered Nature and Rules of the Caja de Valores), Law 21.382 (Foreign Investment), Law 24.083 (Mutual Funds), and Law 24.441 (Financial Trust). The securities regulator (Comisión Nacional de Valores, CNV) approved General Resolution (RG) 337/99 in 1999, modifying RGs 194/92 and 294/97 regarding futures and options. The Communication "A" 2426 of the central bank regulates the CRYL system. On July 15, 1999, the CNV approved RG 337/99 (Futures and Options), thereby repealing CNV RGs 194/92 and 294/97. RG 337/99 also reflects the principal issues included in the Futures Industry Association task force recommendations on financial integrity for futures and options for exchanges, clearinghouses, regulators, intermediaries, and customers, dated June 1995. Other relevant laws are Law 17.811 (Public Offering of Securities), Law 19.550 (Business Companies Act), Law 20.643 (Registered Nature and Rules of the Caja de Valores), Law 21.382 (Foreign Investment), Law 24.083 (Mutual Funds), and Law 24.441 (Financial Trust). Bahamas, The The Securities Act (as amended in 1999) regulates the securities commission, the securities exchanges and market participants, the authority of the securities commission, financial requirements of broker-dealers, the issue of securities to the public, reporting requirements, conduct of security business, and interest in securities of public and listed companies. Other relevant legislation for the securities industry includes the Investment Funds Act of 2003. Bolivia Regarding securities settlement, the SML (Ley 1834 del Mercado de Valores) was approved on March 31, 1998. This law includes the legal basis for the immobilization and dematerialization of securities in depositories (title 5, chapters 1 and 2). It is applicable to both private and public securities (see Article 2), although the BCB and treasury issues are excluded from the public offer requisite. This law regulates the functions and responsibilities of the securities superintendency (Articles 2, 15, and 16). The securities regulation and super- vision is currently under the securities department (Intendencia de Valores) of the Insurance, Pensions, and Securities Superintendency (Superintendencia de Pensiones, Valores y Seguros). Article 15.4 of the SML empowers the Superintendencia de Pensiones, Valores y Seguros to supervise of the entities under its juris- diction, including the depositories, stock exchanges, and market participants. However, the oversight function over securities clearance and settlement is not included in the law. The stock exchanges are considered as self-regulatory organizations (SROs) in all aspects of their activity (see Articles 31 and 33). Other relevant laws are the Pensions Law of November 29, 1996 (Ley 1732), and the Insurance Law of June 25, 1998 (Ley 1883). Relevant regulation for securities settlement includes the Depositories and Securities Clearance and Settlement Regulation approved by the Superintendencia de Pensiones, Valores y Seguros Administrative Resolution 530, December 13, 2002; the internal rules of the stock exchange; and the internal rules of the depository, draft to be approved by the Superintendencia de Pensiones, Valores y Seguros. Article 3 of Law 2297 provides the legal basis for the use of electronic documents and signatures. The BCB has issued regulation 086/2004 in order to apply this legal basis to payments system operations. In the absence of a general legal framework for the certification process, the BCB allows for the use private keys certified through a notarized process (certificado digital autofirmado) or public keys certified by a certification entity (certificado digital). Currently, the BCB is using the certificado digital autofirmado, and ASOBAN is using a foreign certification entity for the systems they respectively operate. Brazil A new legal framework was first established by Provisional Law 2008 in December 1999, which granted private clearinghouses certain legal rights and protections--for example, in terms of the use of collateral and recog- nition of multilateral netting. Specifically, it granted legal rights to seize the collateral of bankrupt participants held to secure financial transactions, protected settlement systems against the implications of a zero-hour rule, and gave legal recognition to multilateral netting schemes. The new legal framework also clarifies specific responsibilities for clearinghouses. According to the new law, clearinghouses must assume in total the counter- party risk with regard to their participants and the central bank. The provisional measure was revised (2115-14) in December 2000 in order to incorporate some additional safeguards, including the legal separation of the net assets of each discrete clearing and settlement environment, thus ensuring that any collateral posted in a specific environment will be solely used for settlement in that specific environment. In addition, clearing- houses are now subject to sanctions similar to those that apply to financial institutions. A specific restriction Securities Settlement Systems Assessment Findings in Latin America and the Caribbean 125 Table 5.4 Legal Issues in SSSs (Continued) Country Legal Issues Brazil is that the net assets of a clearinghouse cannot be used as pledged collateral for any loans sought by the (Continued ) clearinghouse. On March 27, 2001, the Brazilian congress approved and converted the Medida Provisoria 2115 into Law 10214. New bylaws for clearinghouses have been issued by the central bank. In particular, Conselho Monetário Nacional's (CMN's) Resolution 2882 of August 30, 2001, sets up the payments system objectives of the Banco Central do Brasil (Article 1). The resolution also specifies that specific provisions can be applied by the central bank to those systems that are considered systemically important, and clarifies the role of the securities regulator (Comissão de Valores Mobiliários, CVM) and its cooperation framework with BACEN. Financial institutions are regulated by the Banking Act of December 1964 (Law 4595/64) and by the Capital Market Act of July 1965 (Law 4728/65). Law 6385 establishes the authority of CVM to regulate and supervise the clearance and settlement process of securities in general, excepting government-issued securities, which continue to be regulated and supervised solely by the central bank. The legal framework of the clearance and settlement system is contained in the bylaws and operational regulations of the clearing agencies. CVM Rule no. 89/88 states that companies that provide services related to register of companies, custodians, and stock certificates issuers must be accredited by the CVM. Such services must be performed by financial institutions and stock exchanges that have proper and operational financial conditions. BACEN and the CVM provide legal basis for the rules applicable to (1) the CBLC depository service (for example, dematerialization and protection of investors assets against insolvency of custodians through a beneficial owner account structure); (2) CBLC and BM&F securities lending service; (3) CBLC and BM&F Securities Clearinghouse CCP and settlement ser- vices (for example, mandatory CCP for systemically important settlement systems, multilateral netting, DvP arrangements between a clearinghouse and its participants, consequences of a participant's default and priority over the execution of assets pledged as collateral to support participants obligations). Brazilian Law 10.214 sets a legal basis for execution of assets pledged as collateral by clearing and settlement systems. Chile The basic principles for the operation of the stock market in Chile are collected under the SML. In addition, the Organic Law of the Superintendencia de Valores y Seguros (SVS)--the laws which cover stock corporations, third-party fund management (investment funds, mutual funds, pension funds, housing funds, and the like), bank and financial institutions, insurance and reinsurance companies, and the depository and custody of securities--completes the basic regulatory framework related to the securities market. The SML establishes that the institution responsible for supervising and controlling compliance with the rules established in it is the SVS, in accordance with the duties conferred on it by its Organic Law and the SML itself. In view of its regulatory powers, the SVS issues a set of regulations to complement this legal framework. These comprise general rules in terms of authority determined by the law, circular letters that contain practical applications in the different areas, and official circular letters containing precise instructions issued to the supervised institutions. The SVS also has powers of approval (for example, of special companies) and of application of sanctions. The relationship between the SVS and the supervised entities, in answer to consultations and remarks, takes place by means of numbered, dated, and filed official letters. Finally, this legal framework is completed with the internal regulations issued by the entities under the supervision of the SVS, as the super- vised institutions have the authority and the obligation to so issue and enforce their internal regulations. The SVS approves these internal regulations. Colombia Law 964 of 2005 assigns regulatory powers to the national government in relation to securities markets and eliminates the general responsibility of the Superintendencia de Valores (SV). The SV has been merged with the banking superintendency to create the Superintendencia Financiera de Colombia (SFC) by Decree 4327 of November 2005. Resolution 400 of 1995 determines that the clearing of stock exchange operations must be done on a daily basis on settlement day. In this sense, stock exchange regulations must indicate the mecha- nisms and procedures through which operations are to be settled, and the measures to be adopted in cases of participant failure. To this end, the securities traded must be put at the disposition of the stock exchanges by the broker-dealers. Thus, broker-dealers can proceed to carry out the necessary procedures to transfer own- ership. Resolution 1200 of 1995 establishes the definition of certificate and its proof, the type of information it must include, its uses, its mandatory expedition, and the obligation of information of the issuer toward the CSD. Circular 13 of 1994 of the SV states that the issuers must record registered securities in the register book on the same day that they receive the information from the stock exchanges or the CSDs. The following regu- lations are applicable to CSDs: Law 964 of 2005, Articles 9 to 14; Law 27 of 1990, Articles 13 to 29 (Items 1 and 2 of Article 26 have been derogated by Law 964); Decree 437 of 1992; Decree 1936 of 1995; and Resolution 1200 of 1995 approved by the superintendent of securities, Articles 3.9.1.1. to 3.9.2.9. Regulations applicable to stock (Continued) 126 Payments and Securities Settlement Table 5.4 Legal Issues in SSSs (Continued) Country Legal Issues Colombia exchanges and brokers are Law 45 of 1990, Law 27 of 1990, Law 35 of 1993, and Law 510 of 1999; Decree 2969 (Continued ) of 1960, Decree 1172 of 1980, Decree 2739 of 1991, Decree 2016 of 1992 (mainly); and part of Resolutions 400 and 1200 of 1995. In November 1992, the Sociedad Administradora del DECEVAL was established, and its operation approved by Resolution 702 of 1993 of the SV. Based on Decree 436 of 1990, Law 27 of 1990, Articles 13 to 29; Law 31 of 1992, Article 21; Decree 437 of 1992; and Decree 2520 of 1991, Article 22, the BR established, in June 1992, an automated system named DCV, to provide custody services to the financial system and its intermediaries, and facilitate the ownership transfer of dematerialized public securities. The SV approved DCV rules by means of Resolution 235 of April 23, 1992. There is no specific legal framework for clearance and settlement of derivatives. The Colombian Civil Code, from Articles 1687 to 1710, rules the legal figure of novation; it is defined as the substitution of an old obligation by a new one, thus extinguishing the old one. Costa Rica The SML, Law 7732 of 1998, is the framework rule in force for the securities market. It regulates the persons or firms that participate either directly or indirectly in the securities markets; the actions, contracts, and securi- ties related to these markets; and the securities regulator (Superintendencia General de Valores, SUGEVAL). Article 4 the SML establishes that the central government, and all other public sector institutions, will have to consult SUGEVAL before issuing any act of general application related to the securities market. Regarding the secondary markets, the law establishes that these will be organized by the stock exchanges, which must be authorized by SUGEVAL, and that only the securities issuances registered in the securities and intermediaries national registry may be traded or publicly offered in these markets. The buying, selling, and repos of publicly offered securities must be executed through the members of the stock exchanges, which must be the prop- erty of the brokers-dealers participating in them. Title VII deals with the clearance, settlement, and custody of the securities. Article 115 states that the securities issuances registered in the securities and intermediaries national registry may be represented by means of electronic book entries or with paper certificates, the first of which is irreversible. Chapter 1 of the same title establishes a special regime for the dematerialized issues, regulating aspects such as the entities that may perform the functions of a CSD, investors' rights, securities transfers, and the creation of liens on this kind of securities. The legal background of the securities clearance and settlement system is found in Articles 126­133 of the SML. The system will be integrated by the stock exchanges and by clearance and settlement firms. All transactions executed in the organized markets must be settled through this system. The system will provide for the generalization of the electronic book-entry sys- tem, following the principles of universality, DvP, guarantee of delivery, and financial neutrality. The system will also have to establish mechanisms to ensure that payment will be made in those cases in which partici- pants lack the necessary funds, through the use of the collateral systems to be established by SUGEVAL. The law explicitly supports immobilization and dematerialization. For securities in dematerialized form, a spe- cial regime is in force (Articles 115­125 of the SML) that regulates the issuing of these securities, the entities that are allowed to act as central depository, the responsibilities of the members or associates in the central depository, the right of the investors, the transfer of security and finality thereof, and the constitution of any kind of lien on this kind of securities. For dematerialized securities, a pledge is realized by registration in the corresponding account; the registry of property pledge on the corresponding account is equivalent to the transference of possession of the title (Article 123) and therefore can be executed in a bankruptcy case with- out the need of a court order. Dominican Republic The SML (Ley del Mercado de Valores, No. 19-2000) is the legal framework in force for the securities market. This law regulates the public offering of securities either in domestic or foreign currency; issuers; stocks and commodities exchanges; participating financial institutions; and any other individuals or firms, national or foreign, that are participating in the market. The regulation implementing the SML was approved through an executive power decree in March 2002. It regulates the basic aspects involved in the development of securities markets activities. Novation is regulated by Article 1271 of the civil code. In August 2002, a law on electronic trade, documents, and digital signatures was approved. Ecuador The SML was approved in 1998. According to the SML, the Securities National Council (Consejo Nacional de Val- ores, CNV) establishes the general policy of the securities market and approves its regulation. The executor of this general policy is the superintendency of companies (superintendencia de compañías). Stock exchanges are defined as not-for-profit organizations (corporaciones civiles) and are SROs whose regulations must be approved by the superintendency of companies. Securities depository regulation has been issued by the CNV, as the deposi- tories are not considered SROs. Their operating rules have to be approved by the superintendency of companies. Securities Settlement Systems Assessment Findings in Latin America and the Caribbean 127 Table 5.4 Legal Issues in SSSs (Continued) Country Legal Issues Ecuador Recently, a law on electronic transfers and electronic signatures was approved by the parliament (Law no. 67, (Continued ) Ley de Comercio Electronico, Firmas y Mensajes de Datos, April 2002). It rules the data messages, electronic signatures, and certification services, among other issues. Under this law, data messages have the same validity as paper documents, and electronic signatures the same validity as written ones. Annexed messages through a direct electronic link also have legal validity. El Salvador The legal and regulatory framework that governs the nation's payment system is provided, in a limited way, through the Banking Law, the commercial code, and BCR regulations. The BCR has responsibility for main- taining the legal reserve requirements established by its board of directors on the daily balances of deposits of commercial banks. The BCR also has the authority to regulate the payment system and provide clearing and settlement services for payment transactions, with settlement taking place through the commercial banks' dedicated reserve accounts. The superintendent of the financial sector (superintendencia del sistema financiero) supervises banks and other financial institutions. Finally, the BCR is authorized to issue regulations regarding the payment system. In general, it would appear that the BCR leaves the proposal of new regulations largely to the commercial banks. Guatemala The SML (Ley del Mercado de Valores y Mercancías), was approved in June 1996. This law includes the legal basis for the immobilization and dematerialization of private securities. It also refers to public securities (see Article 52) but the commercial law indicates that these securities are ruled by their specific laws. Article 79 regulates the securities depositories. This law regulates a registry (Article 8 to 17) under the ministry of economy, but does not refer to a securities regulator. On the contrary, the stock exchanges are considered as SROs in all aspects of their activity (see Articles 18 and 24), including securities settlement. The stock exchanges are approved by the registry (see Article 23 of the SML). The regulations of the registry were approved in July 1997 by the government. The relevant regulation for securities settlement developed by the stock exchange includes internal rules of the stock exchange, 2003; operations manual of the floor, 2001; operations manual of the securities depository, 2001; and broker-dealer rules, 2002. The operations manual of the floor includes the details of securities clearance and settlement procedures (see Articles 47 to 63). The operations manual of the securities depository indicates that the caja de valores (securities depository) is created as a department of the stock exchange (see Article II.1). It obliges the broker-dealer to elaborate a trust contract (contrato de comisión) for custody services; the securities depository has to maintain the registry of the beneficial owner separate form the account of the broker-dealer (see Article V.2). Settlement of funds has to take place by means of cheques issued in the name of the stock exchange (see Article I.2.2). Rep- resentation in book-entry notes is reversible, both in the custody system of the central bank and in the securities depository (see Article V.3.3 of the operational manual of the securities depository). The Brokers-Dealers Regula- tion includes the protection of custodian arrangements (see Articles 16 to 20) at the subcustodian level. The Civil Law (see Article 744) and the operations manual of the floor (see Article 20) include the definition of repo trans- actions. In both, a repo transaction is defined as the ownership transfer of securities by an agreed-on price with the commitment, after an agreed period, to transfer back the ownership of fungible securities. The repurchase operation takes place under a contractual arrangement between the counterparties. Honduras Regarding securities, an SML was approved in 2001 and its associated regulation is still under development. The SML (Title IV) regulates the establishment of a securities depository as a joint stock company, and provides legal support for a book-entry note system of securities ownership transfer. However, currently there is no securities depository operating in Honduras. In fact, custody services are provided primarily by the central bank and the stock exchanges. However, there could be a legal uncertainty because the Commercial Law (Title I, Articles 449 to 643) deals with securities issues, referring to them always as represented in physical form. The decrees approved for the issue of public securities include the basis for dematerialization; these decrees are hierarchically inferior to the Commercial Law. In any case, a depository function has not been developed. How- ever, all public securities (Banco Central de Honduras certificates, certificados de absorción, treasury secu- rities, and bonos del estado), which constitute the bulk of the market, are issued in dematerialized form. The regulations for the trading of government securities (Reglamento de Negociación de Valores Gubernamentales, 1997) establish the conditions for the auction of government securities in the primary market. (Continued) 128 Payments and Securities Settlement Table 5.4 Legal Issues in SSSs (Continued) Country Legal Issues Jamaica The Securities Act of 1993 (Amended in 2001) regulates the securities business, mutual funds, stock exchanges, the compensation fund, the conduct of securities business, dealers accounts, and audits and CSDs. Under the Securities Act and Unit Trust Act, the Financial Services Commission (FSC) is responsible for the supervision of all brokers, securities companies, and their representatives. This supervision is directed from the securities division of the commission. The FSC Act of 2001 regulates the constitution and functions of the FSC. Other relevant legislation for the securities industry includes the Companies Act of 2004; the Financial Institutions Act of 1992 (amended in 1997 and 2002); the Banking Act of 1992 (amended in 1997 and 2002); the Unit Trust Act of 1970 (amended in 2001); the Building Societies Act of 1897 (amended in 1995 and 2002); the Industrial and Provident Societies Act of 1975 (amended in 1997); and the Insurance Act of 2001. Mexico The SML of 1975 (amended in 2001) regulates securities dealers, securities market intermediaries, stock exchanges, and CSDs. It also regulates public offerings of securities, the intermediation of these securities, the national securities registry, and the authorities and services related to this market. Intermediation in the securities market may be executed by brokerage houses, stock exchange specialists, other financial entities, and individuals. The ministry of finance and public credit (secretaría de hacienda y crédito público, SHCP) is empowered to interpret, for administrative purposes, the precepts of this law, and to provide through general rules everything necessary to apply it. The Comisión Nacional Bancaria y de Valores (CNBV) is empowered to supervise the securities market. Banco de México Circular 2019/95 is the reference to formal regulations for the trading of financial operations known as derivatives. This circular regulates the operations of credit institutions. As a result of the June 2001 reform of the SML, brokerage houses and stock exchange specialists also can trade derivatives, subject to regulations issued jointly by the Banco de México and CNBV. This circular contains rules regarding the authorization requirements for derivatives trading. The rules establish that authorized credit institutions may trade derivatives with any counterparty, subject to the existence of a written contract, as long as they inform Banco de México about the transaction. Trades may be executed either in OTC markets or on recognized exchanges. MEXDER, established in 1998, is one of the recognized markets for derivatives. The federal civil code contains the legal underpinning for netting arrangements. In order for netting to take place, debts must be equal in both liquidity and maturity. Operations different from these may be netted only if the parties explicitly agree. Netting, once legally executed, produces its full effects and extinguishes all related obligations. The legal dispositions regarding novation are also contained in the federal civil code. A contract is novated when the interested parties significantly modify it by substituting a new obligation for an old one. The commercial code contains a section on electronic commerce. Article 89 establishes that, for the pur- poses of the code, electronic and optic media and any other technology may be used in commercial activi- ties. Also, Article 1298-A establishes that data messages are accepted as proof in a court of law. On July 5, 2002, the Banco de México issued Circular 19/2002, known as the circular on extended infrastructure (infraestructura extendida). This circular allows the Banco de México to authorize commercial banks to issue digital certificates to their clients for operational purposes, and to register and process such certifi- cates through the extended infrastructure. Starting on September 9, 2002, the Banco de México, as the infraestructura extendida Central Registration Agency (Agencia Registradora Central), may issue digital certificates to commercial banks, which allow them to act as registration or certification agencies of infraestructura extendida. Netherlands Antilles There is no designated legal framework for the securities market or for the settlement of securities transactions. Supervision on investment institutions was recently introduced when the national ordinance on the supervision of investment institutions and administrators became operational in January 2003. Some of the main elements on supervision of investment firms are that it focuses on conduct of business rules rather than on prudential concerns; the separation between the manager of an investment institution and the custodian; a license or dispensation is required to operate an investment institution; the manager and the custodian must meet fit and proper criteria; the custodian must be organized as a legal entity with own funds separated from the assets of the investment institution; and investment institutions shall meet the requirements of BvdNA with regard to integrity, financial safeguards, conduct of business, and disclosure. Securities Settlement Systems Assessment Findings in Latin America and the Caribbean 129 Table 5.4 Legal Issues in SSSs (Continued) Country Legal Issues Netherlands Antilles Regarding electronic means of payment, in September 2000, the parliament enacted a law dealing with the (Continued ) conduct of contracts via electronic channels and the electronic signature. An electronic signature now has the same legal force as a written one, and there are no judicial hindrances to citing electronic documentation or data in a court of law. Nicaragua There is no designated legal framework for the securities market or for the settlement of securities transactions. The securities market has been working so far on the basis of the internal regulations of the BVDN, the CENIVAL, and on contract law. A project for an SML is currently being discussed in congress. The draft contains many of the necessary elements for securities transactions to be cleared and settled on a safe and efficient fashion, including legal recognition or definition of the following: the standardization and fungibility of securities (Article 11); the definition of repurchase (repo) transactions (Article 58); the dematerialization of securities (Article 137); CSDs (Article 139); the segregation of accounts (Article 146); the beneficial ownership being transferred through book entries (Article 150, 151); and the protection of investors in case of bankruptcy of the custodian (Article 168). OECS A regulatory framework for the trade and settlement of securities was implemented in 2001. This new law provides for the establishment of a securities commission, as the supervisor of activities of securities markets, and of the providers of services for the clearing and settlement of securities transactions. The Securities Act provides for the protection of investors by regulating the securities market, exchanges, and persons engaged in securities business, and by regulating the public issue of securities and to provide for related matters. Part III (Sections 22­45) deals with clearing agencies, that is companies whose business is the provision of services or the clearing and settlement of transactions in securities. To carry out securities business, a license delivered by the securities commission is needed; capital adequacy is evaluated before a license is given. The securities commission can also suspend or revoke licenses, but this would not affect any agreement, transaction, or arrangement related to dealing in securities, nor any right, obligation, or liability stemming from such agreements, transactions, and arrangements. Licensees shall comply with the rules of conduct listed in the act and with those contained in the regulations issued for this purpose by the minister of finance. Moreover, the Securities Act regulates the establishment and management of securities markets. Members of securities markets are subject to the disciplinary powers of both the ECSE and the commission. There is no specific legal framework regarding the acceptability of electronic signatures for transfer instructions from banks and other account holders. Panama The SML, Decree-Law 1, 1999, provides the framework for securities market regulation, including oversight of the agents who participate in the market and their activities. Under the SML, the securities regulator is the CNV de Panama. The main agents are the broker-dealers, investment societies, and SROs (BVP, the CSD, and LATINCLEAR). Article 82 of the Decree Law 1, 1999 (SML) establishes that only securities issuances registered at the CNV can be traded, except the case of public securities, which are exempt from the register requirement. Title IV of SML deals with SROs, which are the stock exchange (BVP) and the securities depository (LATINCLEAR). A more detailed regulation on this subject is developed in Acuerdo 7, 2003, of the CNV. SROs are authorized to issue internal regulations following the principles stated in Title IV of the SML and in Acuerdo 7, including: ensuring fair and open access, promoting cooperation among participants, exercising surveillance on partic- ipant behavior, reprimanding and imposing fines on participants, and even excluding them from the organization. Concerning securities custody, clearing, and settlement, the basic principles of regulation are contained in Title XI of the SML, which are developed in more detailed in Acuerdo 9, 2003, of the CNV. The main principles are: the internal regulations of SROs providing for certainty and finality of transactions; segregation of customers' securities; settlement on a DvP basis; securities lending; guarantee mechanisms; timely confirmation and settlement of transactions; dematerialization and fungibility of securities; and book-entry transfer of ownership and pledging. The law is clear in protecting securities pledged against any third-party claim, even in case of insolvency, and therefore can be executed in a bankruptcy case without the need of a court order. The law also states that assets under custody of broker-dealers and investment societies are not part of the insolvency pro- cedures (no-masa). Multilateral netting is authorized for transactions executed through the stock exchange. (Continued) 130 Payments and Securities Settlement Table 5.4 Legal Issues in SSSs (Continued) Country Legal Issues Paraguay The SML (Ley 1284/98 de Mercado de Valores) as well as the laws authorizing government securities issuances allow for the dematerialization of securities, but do not provide the legal basis for the ownership transfer. Thus, the ownership transfer is still based on the civil code articles. Article 1517 indicates that the ownership transfer of bearer securities is executed by means of the certificate delivery. The ownership transfer of order securities is executed by means of endorsement written in the certificate (see Article 1522), and registered securities ownership transfer is executed by means of endorsement written in the certificate and in the issuers' registry when it exists (see Article 1540). Article 8 of the SML allows for the issuance of securities in dematerialized form. The regulation of the SML was only approved in March 2004. A draft of a securities depository law was produced soon after the SML was approved, but has not been passed by congress. The SML is applicable to public securities, but is conditioned on the government bonds issue laws. Peru The Securities Law ruled by Act 16587 (Ley de Títulos-Valores, October 2000) empowers the BCRP to issue regu- lations regarding electronic clearing and settlement of cheques and securities. In June and July 2000, regula- tions for the legal recognition of electronic signatures and documents were issued. Law 27291 modifies the civil code to adapt its provisions to the use of electronic documents. Law 27269 regulates electronic signatures. In addition, Law 27309 incorporates information technology offenses in the criminal code (código penal). The SML approved by Legislative Decree 861 in 1996 allows for the dematerialization of securities and provides the legal basis for the ownership transfer (see Title VIII). The Comisión Nacional Supervisora de Empresas y Valores (CONASEV) grants authorization to operate clearing and settlement institutions for the capital markets, and is responsible for their supervision. Novation is recognized by the civil code, Article 1277­1288, although it is only effective when the parts explicitly state their intention to novate. The SML establishes the regulatory framework for the securities market and addresses issues such as market transparency; primary and sec- ondary markets; stock exchange functions and features; brokers; clearance and settlement; mutual fund managers; credit risk­rating agencies; asset securitization; protection of investors' assets; conflict resolution; and disciplinary actions. The SML also specifies that the institution in charge of supervising and controlling the fulfilment of its regulations be the CONASEV. Pursuant to the Organic Law of the National Commission for Companies and Securities Supervision, Decree Law 26126 (effective December 30, 1992), CONASEV is responsible for supervising the public unregistered securities operations, as well as all securities market participants. By virtue of its regulatory power, CONASEV established a number of regulations to complement the SML. Among the principal regulations are the following: regulation of stockbrokers; regulation of securities mutual funds and their managing firms; regulation of the public registrar of securities; regulation of mutual funds and of their administrators; regulation of primary public offering and sale of unregistered securities; regulation of important facts and confidential information to which securities issuers are subject; regulations on the asset securitization process; regulations on credit risk rating agencies; regulations on securities clearing and settlement institutions; internal regulation of the BVL; and regulation of the trading-floor of the BVL. The national legal system includes a number of other acts that affect the securities market. The Business Company Act 26887, for example, governs the procedures that can be adopted by firms, including joint stock, which also require the authorization of CONASEV to operate, as in the case of securities depositories. Trinidad and Tobago In Trinidad and Tobago, the legal framework for the securities market is based on the following key pieces of legislation: the Central Bank Act, Chapter 79:02; the Treasury Bills Act, Chapter 71:40; the Unit Trust Corporation of Trinidad and Tobago Act, 1981, Chapter 83:03; the Financial Institutions Act, 1993; the Companies Act, 1995; the Securities Industry Act, 1995; the Securities Industry Bylaws, 1997; and the Companies Regulations, 1997. Securities Settlement Systems Assessment Findings in Latin America and the Caribbean 131 Table 5.4 Legal Issues in SSSs (Continued) Country Legal Issues Trinidad and Tobago The Securities and Exchange Commission (SEC) also issues policy guidelines that set forth the basic policies (Continued ) of the SEC relating to securities regulation in Trinidad and Tobago, and the role of the SEC with respect thereto. Although the policy guidelines do not have the force of law and are not intended to have such effect, the SEC expects compliance with the guidelines unless compliance is waived. The Trinidad and Tobago securities legislation is based on the Canadian securities legislation. The Securities Industry Act, 1995, and the accompanying regulations, the Securities Industry Bylaws of 1997, are the pieces of legislation governing the securities market. The Securities Industry Act, Section 6, vests the SEC with wide- ranging powers. The act requires all persons or corporations that issue securities to the public to be registered with the SEC as reporting issuers. Thus, all market actors (including brokers, traders, dealers, securities companies, and investment advisers), SROs, and reporting issuers must be registered with the SEC. The act also requires the registration of all securities distributed to the public. Under the provisions of the Securities Industry Act, 1995, the Trinidad and Tobago Stock Exchange is registered with the SEC as an SRO. The Securities Industry Act also provides for regulations to be issued by the minister of finance on the recom- mendations of the commission. Section 131 of the Securities Industry Act, 1995, empowers the minister of finance with the advice of the commission to make bylaws on several matters. The Companies Act of 1995 contains provisions that regulate some aspects of securities business. The act addresses, among other things, shareholders' rights, the responsibilities of the registrar, the procedures for the corporate restructuring of public companies, and the disclosure obligations of public companies. The Treasury Bills Act empowers the minister of finance to borrow money by the issuance of treasury bills and to declare the conditions applicable to such borrowings. The act does not specifically mention clearance and settlement. The Treasury Notes Act authorized the minister of finance to borrow by the issuance of treasury notes, and made specific amendments to the Treasury Bills Act, notably to increase the ceiling for borrow- ing. The Unit Trust Corporation of Trinidad and Tobago Act regulates the activities of the Trinidad and Tobago Unit Trust Corporation, which was established by statute in 1981 although launched in November 1982. Apart from the mutual fund legislation, which governs the activities of the unit trust corporation, there is no legislation that specifically regulates collective investment schemes. The Financial Institutions Act reg- ulates banks and nonbank financial institutions licensed under the Central Bank Act. However, the act does not contain special clauses that address the specific concerns of the collective investments industry. Futures and options are regulated under the Securities Industry Act, 1995. Uruguay The SML was approved on May 2, 1996. This law includes the legal basis for the immobilization and dematerial- ization of private securities (Articles 7­12). Article 45 regulates the approval by the BCU of the securities depos- itories. The stock exchanges are considered as SROs in all aspects of their activity (see Article 15), including securities settlement. The BCU is the entity in charge of securities market regulation and supervision (Article 20). Other laws and regulation relevant for securities settlement developed include the following: Mutual Funds and Securitization Law No. 16.774 and No 17.202, 1996 and 1999; Trust Fund (Fideicomiso) Law No 17.703 and its Regulatory Decree No. 516/003, 2003; and SML Regulatory Decree No. 344/96 and 261/96, 1996. Venezuela, R.B. de The Public Sector Financial Administration Organic Law includes as a function of the treasury the custody of funds and securities of the government. The treasury can delegate this function to the central bank (Banco Central de Venezuela, BCV). Indeed, Article 48 of the BCV Law includes as a BCV function the custody of physical or dematerialized securities of any kind. The SML (Ley del Mercado de Capitales, Official Gazette No. 36565), was approved on October 22, 1998. Article 1 of the SML excludes public debt securities from its application. This law includes the legal basis for the immobilization and dematerialization of private securities, which can be issued in physical or dematerial- ized form. Representation in book-entry notes is irreversible, whereas securities issued in physical form can be reversed by their owners' acceptance. The CNV is empowered to require that securities be represented in book-entry form in order to be accepted for trading; this is the case for securities traded in the stock exchange. A CSD Law (Ley de la Caja de Valores, CVV), approved in August 1996, includes the legal basis for custodian arrangements when the securities are deposited in the CVV. Protection for custodian arrangements in respect to broker-dealers is included in the SML (Article 80). According to Article 21 of the CSD Law, in this system a depositor must open an account for its own holdings and a subaccount on behalf of each of its (Continued) 132 Payments and Securities Settlement Table 5.4 Legal Issues in SSSs (Continued) Country Legal Issues Venezuela, R.B. de clients, directly in the CVV. The CVV Law (Article 22) states that the ownership transfer takes place by means (Continued ) of the registry of securities in the name of the depositor or the beneficial owner in its account or subaccount respectively. The CVV rules (Normas Relativas a la Organización y Funcionamiento de las Cajas de Valores) were approved by the CNV in October 1996. As mentioned before, Article 24 of the SML provides the legal basis for representation of securities in book- entry form, but the article does not apply to public debt securities. For securities issued by the BCV, Article 57 of the BCV establishes that the central bank can issue and trade securities according to the regulation approved for each issuance. For public debt securities, specific regulations for each issuance include the dematerialization as a characteristic but a specific legal definition of immobilization and dematerialization does not exist. The Banking Law (Article 46) and the SML (Article 79) include the definition of repo transactions. In both, a repo transaction is defined as the ownership transfer of securities by an agreed-on price with the commitment, after an agreed-on period, to transfer back the ownership of fungible securities. The repurchase operation takes place under a contractual arrangement between the counterparties. In case the underlying securities of repo transactions are constituted by shares, the ownership transfer must occur at the issuer's registry. Source: Authors' elaboration. Observations Finality must be integrated in the legal framework. This is an important issue in all existing net settlement Some of the specific problems identified in the legal and systems, especially for systems that have longer set- regulatory framework follow: tlement cycles. Without this legal basis, it is uncertain Although Securities Markets Laws (SMLs) normally whether in case of a bankruptcy the transfer of secu- include the legal basis for immobilization and dema- rities to the counterparty or his custodian could take terialization, in a few cases SMLs only apply to private place, even if the counterparty has already paid for the securities. In addition, the legal framework for public securities. (In some systems there is a time lag between debt securities has not evolved in a similar way, and the the settlement of the cash leg and the settlement of the legal definition for dematerialization and immobiliza- securities leg.) Due to this uncertainty, an unwinding tion for these types of securities is not included in the of the net settlement might be the only solution if the legal framework. cash settlement process does not take place. If the cash A sound legal basis requires the legal definition of the settlement already took place, it might bring forward depository function (and not only the custody function) principal risk if the court did not grant the request to that the central bank is undertaking for public debt secu- transfer the securities. rities in many cases. However, the depository function Systems with more advanced legal frameworks still is normally defined in the SMLs for joint stock compa- present a potential impact on settlement finality nies, whereas the central bank legal basis only covers because of bankruptcy proceedings that may reverse the custody function. That is, central banks maintain fraudulent transactions up to certain days before the the registry of the primary market, but have not devel- participant is declared failed. However, the impact in oped the ownership transfer functionality for the sec- case of RTGS systems is likely to be negligible due to ondary market, even when another depository does not the gross nature of the system. Also, some problems exist. This is a clear impediment for the development of interpretation might arise because settlement final- of the secondary market, because settlement rests on ity is regulated in detail by regulations, which have a the exchange of physical certificates, or on very inse- lower hierarchy than the bankruptcy law. Initiatives cure practices in the case of a dematerialized registry. to engage the judicial system in this debate is worth There is a lack of laws that support finality of trans- pursuing to clarify the issue. actions linked to SSSs. Thus, there is a potential for Multilateral netting is not often recognized in the cur- counterparty risk in securities markets operations. rent legislations. Multilateral netting schemes are Securities Settlement Systems Assessment Findings in Latin America and the Caribbean 133 very common in securities settlement. It is important margin call. The present definition seems to leave no to protect netting schemes from potentially disruptive room for this market practice, and makes it difficult insolvency laws so that, even if a system participant to use international standard contracts. Margin calls fails during the day, a liquidator cannot unwind during the contract period might also give rise to legal settlement occurring on a net basis later in the day risk if the court recharacterizes a repo agreement with (see, for instance, the "Finality Directive of the Euro- interim margin calls as an improper pledge. It might pean Commission"). be worth studying if there should be an explicit dis- In general, protection of customer's assets under cus- tinction between a repo in the form of a collateralized todian arrangements is not clearly established. There- cash or securities loan, and an explicit sell-and-buy- fore, assets pledged as collateral by clearing members back transaction. are not covered adequately by the laws, thus compro- Laws are clear in terms of the segregation of accounts mising the capacity to execute collateral posted by the regarding the securities depository, but this is not members' customers. Sometimes the protection of the case in terms of the custody of securities or funds custody arrangements is only included for the depos- by the custodians (for example, banks and broker- itory and broker-dealers but not for other custodians, dealers), although normally segregation is done in or vice versa. In addition, this legal limitation could practice. In custodian arrangements are not ade- bar potential settlement arrangements.1 In the case of quately covered in the legal framework, it is unclear government securities, it could constitute a factor whether the customer assets will be protected against limiting the development of the retail market, because the insolvency of custodians. This issue is relevant beneficial owners are normally not identified in the in circumstances when the bulk of the market is rep- accounts of the depository. resented by government securities (a common situ- Custodian arrangements for government securities ation in LAC countries) that are issued in physical (that in many cases are issued in physical form) do not form and held by custodians. have a secure legal support, because primary dealers Legal basis for securities lending does not exist keep the ownership in the registry of the ministry of in many cases, nor have detailed regulations been finance or central bank. Thus, it is uncertain whether developed. In any case, for many markets, the low the certificate endorsements in subsequent repo oper- volume of market trading makes it difficult to develop ations can be considered as a proof of ownership in a that legal basis in any kind of practical way. How- court of law. In some cases, participants agree that the ever, the current situation could constitute a good transferred certificate will be kept but not used to opportunity to consider the development of the legal transfer ownership in the ministry of finance or central and regulatory framework to be prepared for an even- bank registry. tual recovery of market volumes. Definitions of repo normally only cover a sell-and- The fragmentation of regulations of wide legal rank buy-back transaction. However, the scope of a repo is and hierarchy relating to securities and capital mar- much wider, internationally. Repos are especially kets is common in the region. The current situation used to collateralize cash or securities loans. If during implies an uncertain and confused legal framework the collateralization period, due to market develop- that could increase the legal risk of the securities ments, the collateral offered does not fully cover the transactions, and that, at the end, could influence both obligation to pay back the loan or no longer covers the functioning of the markets and the activities of the the full value of the securities borrowed, additional markets' participants. A unified payments system law that systematizes all existing provisions in the field collateral can normally be requested by means of a might help to resolve the any conflicts of interpreta- tion on issues such as finality and oversight. 1For example, markets with a high volume of transactions sometimes Legal frameworks in many countries do not contain do not maintain subaccounts with the beneficial owner information, explicit conflicts of law rules. This could hamper the but only with accounts at the participant level with the aim of sim- development of interregional financial markets and plifying the operation of the settlement system. Of course, such international cooperation in the areas of trading, cus- settlement systems should be accompanied by strong legal protec- tion of custody arrangements and by a supervisory framework. tody, and clearing and settlement. 134 Payments and Securities Settlement Lack of the legal framework enforceability hampers recommends that trade settlement should occur by T + 3 the development of the SSS. Many countries have or less. However, T + 3 often is no longer regarded as introduced an adequate legal and regulatory frame- best practice. Clearly, the shortest possible elapsed time work for the processing of electronic operations, between trade date and settlement date is a desirable but the poor enforcement of legal and regulatory goal in system design. Nevertheless, the practical impact framework prevents further development of finan- of shortening this time must be assessed, especially if it cial markets. has an impact on the number of trades that fail to settle.2 In sum, updated laws and regulations on SSSs are Same-day settlement could be considered as the final necessary to focus on the development and improve- goal, although it is generally recognized that this may not ment of specific aspects, such as the irrevocability of be achievable in the short or medium term, particularly final settlement, adequate protection of the systems for cross-border transactions. The magnitude of the against the effects of bankruptcy proceedings, the changes required to achieve a particular standard must improvement of the legal basis for custody arrange- also be carefully considered. For example, whereas it ments, the legal definition of a repo operation, the legal might be relatively easy to move from T + 5 to T + 3 by recognition of multilateral netting arrangements, the simply imposing more discipline on all system partici- legal definition of immobilization and dematerial- pants, more fundamental changes (process reengineering) ization of securities, especially for public securities. in all aspects of the system are likely to be necessary to Other legal issues could be considered from a devel- move to T + 2 or T + 1. Regardless of the settlement cycle, opmental point of view, and imply a lower degree of the frequency and duration of settlement failures should urgency, although they can become increasingly impor- be monitored closely. tant with the development of the securities markets in The profile of market investors (retail compared to whole- the region. They include the legal basis for the collat- sale, and the amount of foreign investment) as well as eral pledge and securities lending. Due to the variety the profiles of their intermediaries should be taken into and extreme importance of these legal aspects, the great account, because this can influence the practicality of benefits of a unified payments and securities settle- the targeted clearing and settlement cycle. Appropriate ment law should be carefully assessed. trade-off between risk, cost, and convenience must be made, or else the system will not satisfy user requirements CLEARING AND SETTLEMENT PROCESSES at an affordable and acceptable cost, and thus might This section includes context, status in the region, and constrain market development. observations regarding clearing and settlement processes. Another widely recognized concept is that trade match- Context ing should occur as soon after the trade as possible, so those errors and discrepancies can be discovered early The clearance and settlement process includes captur- in the settlement process. The CPSS-IOSCO recom- ing trade information, trade matching, confirming and mended that trade comparison should be accomplished affirming institutional investor's trades, clearing, and by T + 0, and in any case no later than T + 1. In addition, settlement. Various international organizations have indirect market participants--institutional investors and attempted to set standards for the prompt, efficient, and custodians--should be members of a trade comparison effective trade processing, including its cost effective- system that achieves positive affirmation of trade details. ness (in terms of system operation and fees paid by par- Moreover, there should also be an integration system for ticipants) and ease and convenience of use. One of the trade matching, comparison, and book-entry settlement most widely recognized concepts is that the longer it takes to settle a securities trade, the greater is the risk that settlement will not take place. In this regard, the 2Currently, there is a debate about the adequacy of moving the Committee on Payment and Settlement Systems (CPSS)­ settlement cycle to T + 2. However, given the globalization process in financial markets, there is an increasing necessity to standardize International Organization of Securities Commissions this process at an international level, even if this would imply that (IOSCO) "Recommendations for Securities Settlement" some countries should increase their settlement cycle. Securities Settlement Systems Assessment Findings in Latin America and the Caribbean 135 of securities and funds. An automated link between the Observations exchange (OTC) and the CSD is generally considered to Some of the specific problems identified in the clearing be desirable, and is a prerequisite for broker-dealer STP and settlement processes follow: from execution to settlement. Likewise, when clearing and depository services are provided by different entities, In some cases, confirmation of trades between securi- it is recommended that these two functions are closely ties markets and SSSs or securities depositories takes tied;otherwise,finalityofsettlementisdifficulttoachieve. place later than T + 0. There is also an important degree Fortunately, the cost of implementing automated systems of manual handling in the confirmation process. is decreasing; care should be taken, however, to ensure Some systems have close links between trading and that sufficient transaction volume exists, and that users settlement, such as blocking of transactions before are willing to pay for the automated services based on they are matched. Although this procedure ensures tangible benefits in terms of efficiency or risk reduction. the availability of securities, it also influences the pos- sibilities to do back-to-back transactions and forms a Mature and liquid securities lending markets (including barrier for effective arbitrage between different trad- markets for repurchase agreements and other economi- ing and settlement platforms. To be able to arbitrate, cally equivalent transactions) generally improve the an investor might be willing to sell securities in one sys- functioning of securities markets by allowing sellers tem that were bought in another system during the same ready access to securities needed to settle transactions day. However, the investor cannot do that, because where those securities are not held in inventory, by securities have to be blocked in advance. This blockage offering an efficient means of financing securities port- also makes the rollover of repos very difficult. Risk folios, and by supporting participants' trading strategies. management tools that are more orthodox should be The existence of liquid markets for securities lending used to avoid the rigidity introduced by this mechanism. reduces the risks of failed settlements because market In addition, as long as there are no robust risk man- participants (with an obligation to deliver securities that agement procedures implemented, cash settlement on they have failed to receive and do not hold in inventory) a multilateral net basis should be done separately for can borrow these securities and complete delivery. Secu- each trading system, to minimize systemic risk even rities lending markets also enable market participants to if it implies higher costs because of higher liquidity cover transactions that have already failed, thereby curing needs of broker-dealers. the failure sooner. Intraday finality is crucial for these A standardized settlement cycle must be clearly fixed operations. In cross-border transactions, particularly and identified for all the trades executed in the securi- back-to-back transactions, it is often more efficient and ties markets. This is particularly relevant in the stock cost effective for a market participant to borrow a security exchanges, where a T + 3 settlement cycle could be for the delivery rather than to deal with the risk and costs implemented. Shorter settlement cycles for securities associated with a settlement failure. traded in the stock exchanges should be taken into con- Because of increased automation and globalization of sideration, especially those related to bilateral trades securities markets, it is beneficial from an interconnectiv- between market participants. ity perspective for domestic systems to use internationally Some stock exchanges play a crucial role in money recognized securities identification numbering standards. markets and have difficulties to accommodate differ- With this in mind, the Group of Thirty recommended that ent settlement needs. Should these stock exchanges all markets should adopt a numbering system that meets evolve in the future to a more traditional role of sec- the ISIN standards. The CPSS-IOSCO document insisted ondary market transactions, the introduction of stan- again on this point through its Recommendation 16. dardized settlement cycles would be needed. This is required because the settlement cycles needed for money markets are much shorter than the settlement Status in the Region cycles required for regular securities trading. If no Table 5.5 includes a brief description of the securities changes are included, it would be difficult for these settlement processes in each of the countries assessed. stock exchanges to play a role beyond money markets. 136 Payments and Securities Settlement Table 5.5 Clearance and Settlement Processes Trade Settlement Securities International Country SSS Confirmation Cycles Lending Numbering Argentina Merval T + 1 T + 3 (extension to Yes No T + 4) Argenclear T + 1 T + 3 No No CRYL T + 1 T + 3 (extension to No No T + 4) Bahamas, The Securities firms No standardized No standardized No No settlement cycle settlement cycle Bolivia Stock exchange / T T No No EDV Brazil CBLC Lock in T + 3 Yes (since 1997 for Yes equities) T + 0 (fixed-income securities) T + 1 (fixed-income securities) SELIC Lock in T + 0 No Yes T + 1 BM&F Lock in T + 1 (derivatives) -- Yes T + 1 (government securities). It can also be T + n, n varying from 0 to 23 CETIP Lock in T + 1 No Yes Chile Stock exchanges / T T (money markets) No No OTC / DCV T + 1 (fixed income) T + 2 (equities) Colombia Stock exchange / T T + 3 (extension to No No (only issues Clearinghouse / T + 6) allocated in DECEVAL / DCV foreign markets) SEN / DCV Real time Real time No (in No implementation) Costa Rica Stock exchange / Lock in (securities T (Mercado de No A standardiza- CEVAL blocked before Liquidez) tion process is matching) T + 1 (TEBEL) under way for T + 1 (SITE both private and public securities international and all issues in securities) CEVAL have T + 2 (primary been assigned auction) the ISIN. T + 3 (SITE equities) For all the systems, only one multilateral net debit position is calculated every day for the cash settlement. Securities Settlement Systems Assessment Findings in Latin America and the Caribbean 137 Table 5.5 Clearance and Settlement Processes (Continued) Trade Settlement Securities International Country SSS Confirmation Cycles Lending Numbering Dominican CEVALDOM Not yet operational Not yet operational Not yet operational Not yet Republic operational Ecuador Stock exchanges / Lock in T + 3 (both Quito and No Yes DECEVALE Guayaquil) El Salvador Stock exchange / T T No No (CEDEVAL is CEDEVAL in the process of becoming an ISIN encoder.) Guatemala Stock exchange T T No No Honduras Stock exchanges No confirmation No standardized No No settlement cycle Jamaica Stock exchange T T + 5 (although JSE No Yes JSE / JCSD rules will allow for T + 14) OTC (government T T No No securities) Mexico Stock exchange / Lock in T + 2 Yes (VALPRE) Yes INDEVAL OTC / INDEVAL T T, T + 1 Yes (VALPRE) Yes Netherland BvdNA T + 1 T + 1 No No Antilles Nicaragua Stock exchange / T T (market practice, No No CENIVAL no official settlement cycle) OECS ECCSD T T + 2 No Yes Panama Stock exchange / T T + 3 No No LATINCLEAR Paraguay Broker-dealers No standardized No standardized No No settlement cycle settlement cycle Peru Stock exchange / T T (fixed income with Yes Yes CAVALI extension to T + 1) T + 3 (equities) OTC / CAVALI T T + 2 No Yes (if registered) Trinidad and Stock exchange / T T + 5 No Yes Tobago TTCD T + 1 (for mutual funds, though it can be up to T + 10 for large amounts) CBTT depository Real time Real time No No (Continued) 138 Payments and Securities Settlement Table 5.5 Clearance and Settlement Processes (Continued) Trade Settlement Securities International Country SSS Confirmation Cycles Lending Numbering Uruguay Stock exchanges / T (30 minutes after T + 1 (domestic No No AGATA trading for BVM) securities) Lock in (BEVSA) T + 3 (global notes and bonds) Venezuela, Stock exchange / Lock in T + 3 (extended to No Yes R.B. de CVV T + 5) SET / SIMA / T T (primary and sec- No No SICET / current ondary market) accounts at BCV T + 1 (primary market) Source: Authors' elaboration. Note: CBTT (Central Bank of Trinidad and Tobago); CENIVAL (Central Nicaragüense de Valores); SELIC (Servico Especial de Liquidacao e Custodia); SET (Sistema Electrónico de Transferencia de Fondos para Préstamos Interbancarios); SIMA (Sistema Integrado de Mercado Abierto); SITE (Sistema de Transferencias Electrónicas); TEBEL (online trading system); VALPRE (Préstamo de Valores). Some SSSs allow for extensions of the standardized In the case of OTC transactions, it is difficult to know if settlement cycle should a failure occur in the settle- transactions are confirmed on T + 0, and T + 1 for ment process. It is essential to count on appropriate indirect participants. In most cases, these transactions risk management tools to guarantee settlement in the are settled-bilaterally between the parties. When cen- case of failure on settlement date. Settlement pro- tralized settlement takes place, transactions are nor- cedures on a DvP basis would be highly contributive mally registered in the system as locked in, but there to avoid settlement extensions. Given a failure in the is no possibility to make sure that those transactions delivery of securities on settlement date (and count- were confirmed in a specified period. ing on a guarantee regime and a settlement system on Automatic securities lending and borrowing facili- a DvP basis), SSSs could execute buy-in procedures ties are not the rule in markets throughout the region, in the securities markets to reduce the risk in the sys- mainly due to the low level of activity. Such mech- tem. That is, in case of a settlement failure, allow the anisms can provide the SSS with an effective risk purchase of securities in the market at the seller's management tool for the securities leg of market (who failed) cost. transactions. Prior to its establishment, securities lend- Sometimes the shortening of settlement cycles is not ing must be recognized and encouraged by law. The possible, due to the participation of foreign investors finalization of the standardization process is essen- in the local markets and the need to provide instruc- tial for this mechanism to be effective. Barriers of tions to custodians regarding the release of securities. any kind (for example, lack of standardization, legal The introduction of STP mechanisms could help to barriers, tax barriers) should be removed. Securities avoid longer settlement cycles in these cases. How- lending could be implemented in one of two differ- ever, another factor is the lack of facilities to move ent ways: the monies on T, even locally, if there is no direct In a bilateral way between market participants. access to central bank settlement. In this case, the CSD will act as a register of the As a result of complex procedures in some cases, stocks loans. settlement participants engage themselves in the In a multilateral or centralized way. This implies manual handling of securities, incurring inefficien- the creation of a pool of entities (mostly banking cies and risks that limit the development of the secu- and financial institutions) capable of lending rities markets. Indeed, the bulk of the market is securities from their portfolios (either their own sometimes settled in-house to minimize risks. or clients' accounts) against an interest rate. The Securities Settlement Systems Assessment Findings in Latin America and the Caribbean 139 administration of the pool of potential available Context securities for lending operations and the allocation The important issues of efficiency and flexibility have process normally has been delegated to the securi- been touched on previously. The safety of the system is ties depository or to another entity that is suitable, paramount from a participant and a regulatory perspec- acting on a policy of not taking risk. The efficiency tive, and should be given specific attention. The settle- of the several current ways to cope with securities ment process exposes market participants and clearance shortages should be evaluated with regard to stan- and settlement systems to different risks. The system dardized forms of securities lending. should be designed to minimize these risks. The immo- In addition, bilization or dematerialization of securities reduces or All securities lending operations must be collat- eralized and backed by private contracts, subject eliminates certain risks--for example, destruction or theft to international standards. of certificates. The transfer of securities by book entry Fiscal treatment of securities-lending contracts is a precondition for the shortening of the settlement must be neutral and objective. cycle for securities trades reducing replacement cost risks. If short-selling is permitted--for example, as a The major settlement risk is counterparty risk (credit and way to increase the liquidity of the markets--it principal risk). DvP is one of the primary means by which should be linked to securities lending operations a market can reduce the risk inherent in securities trans- to cover the oversold positions. In any case, secu- actions. The DvP concept seeks to eliminate principal risk ritiesregulatorsmustbealertagainstunhealthymar- from securities transactions by ensuring that sellers give ket practices relating to short-selling that could up their securities if, and only if, they receive full pay- lead to market manipulation. ment, and vice versa. There are three essential elements in Some communication networks do not follow interna- a DvP transaction: (1) good and irrevocable delivery of tional standards. Although many local communication securities, (2) final and irrevocable funds, and (3) simul- networks work correctly, in case of increasing volume taneous exchange. The CPSS of the BIS has identified of cross-border transactions the progressive implemen- three different models of DvP (CPSS 1992). Although tation of international communication procedures these models vary in their approach to achieving DvP, all should be taken into account. Securities depositories three models meet the concept of real DvP. and investment firms with a relevant foreign business share should adopt, in the short term, international stan- The use of a CCP trades is becoming more and more a dardized communications procedures (that is, SWIFT common practice. A CCP interposes itself between the or similar) to facilitate cross-border transactions both counterparties to securities trading. A CCP is an espe- free or against payment. Local firms should adapt their cially effective tool for reducing risks with regard to communication procedures to the international com- active market participants, but use of a CCP concentrates munications networks using the same standards. risk, and reallocates risk among its participants through In sum, improved clearing and settlement processes in its policies and risk management procedures. The abil- SSS are necessary to allow for confirmation of trades on ity of the system as a whole to withstand the default of the trade date, reduce market fragmentation, increase individual participants depends on the risk management standardization of settlement cycles, accommodate dif- procedures of the CCP and its access to resources to ferent settlement needs, operate with shorter settlement absorb financial losses. cycles, avoid extension of settlement cycles due to There is a variety of risk management procedures to inadequate risk management tools, improve markets' reduce market risk and strengthen a DvP mechanism. liquidity through automatic securities lending, and intro- Those procedures include admission standards, mem- duce international communication standards. bers' creditworthiness monitoring, novation, participa- tion funds, collateral, margins, buy-ins and sell-outs, net SETTLEMENT RISKS debit caps, bilateral credit limits, and loss-sharing arrange- This section includes context, status in the region and ments. Most settlement systems use more than one pro- observations regarding settlement risks. cedure to minimize market risk. In addition, there are a 140 Payments and Securities Settlement number of mechanisms designed to improve the settle- pressures. Use of the central bank of issue as the single ment process. Among them are central lending facilities, settlement bank may not, however, always be practicable. pledge recording facilities, and prompt reregistration In such cases, a private bank sometimes is used as the sin- procedures. Properly regulated securities lending and gle settlement bank, and steps must be taken to protect borrowing can bring significant benefits to a market and CSD members from potential losses and liquidity pres- its users, leading to more liquid markets. Short-selling sures that would arise from settlement banks failure. could be a useful mechanism to add liquidity. However, when short-selling is permitted, regulation must guard Status in the Region against manipulative practices, including those associ- ated with a significant short position. Table 5.6 includes a brief description of the status of immobilization and dematerialization of settlement sys- Systems that are considering whether to implement an tems in each of the countries assessed. RTGS or a netting scheme should carefully study market volume and participation to determine if these mecha- Table 5.7 includes a brief description of risk manage- nisms are appropriate. Netting was introduced originally ment mechanisms for settlement systems in each of the as an efficient measure to reduce the number of physi- countries assessed. cal documents passing between market members. Later, with the introduction of early computer systems, it was Observations used to reduce the number of electronic settlements. Today, with powerful high-speed computers and the Some of the specific problems regarding settlement risks introduction of RTGS systems, the efficiency advantages follow: are less important. Thus, the debate is focused on the Additional efforts are necessary to achieve full dema- trade-off between liquidity requirements and risk miti- terialization and immobilization of securities, as well gation, as discussed previously in this paper. as to achieve greater standardization. Central banks Settling in same-day funds is essential when operating and the ministries of finance have made great efforts in an RTGS environment and is useful in achieving real in the past years to achieve the complete dematerial- intraday DvP.3 To achieve timely and risk-free settle- ization of government securities. Similar efforts have ment in same-day funds, efficient banking arrangements been undertaken by the private sector. Lack of secu- will need to be developed that enable funds to be moved rities standardization is an important obstacle, mainly quickly and relatively inexpensively. in the case of public securities. In some markets the bulk of securities have been issued without ISIN The finality of payments and securities' ownership trans- numbering and in relative small amounts. Neither the fer is a crucial factor in the development of a securities redemption date nor the nominal value were stan- market. Otherwise, only local investors will operate in the dardized and they have a large variety of interest rate market; their operation will be based on well-established schemes, and so on. A large amount of these securi- client relationships and the confidence that this provides. ties are not in the vaults of the brokers or the deposi- In emerging markets, this factor is of critical importance tory but are still in circulation. Trading and clearing if there is a desire to attract foreign investment. Foreign and settlement of this kind of securities is extremely investors will be reluctant to participate in a market that difficult, cumbersome, and costly. At the moment, they do not consider safe. Payments finality is equally there are attempts to standardize and immobilize the important. outstanding securities but this is a time-consuming The failure of any bank that provides cash accounts to set- task. After standardization this kind of securities will tle payment obligations for CSD members could disrupt be also fungible and easier to register and to keep in settlement and result in significant losses and liquidity a central depository. A modern securities market needs to have a securities depository and fungible securi- ties. Therefore two actions are needed: (1) the amount 3Payment is made in same-day funds when payment of such funds is made on an irrevocable basis to the counterparty on the day of settle- of outstanding government debt in the form of non- ment such that the funds are available for use on the day of settlement. standardized and nonfungible securities should be Securities Settlement Systems Assessment Findings in Latin America and the Caribbean 141 Table 5.6 Immobilization and Dematerialization of Securities and Settlement Type Country SSS Immobilization and Dematerialization DvP modela Argentina Merval The vast majority of securities issued in Argentina are held Model 3 (immobilized or dematerialized) in the caja de valores or in Argenclear Model 3 CRYL. The caja de valores was founded in 1974. CRYL Model 3 Bahamas, The No depository exists, and securities are normally issued in No DvP physical form. Some securities are issued in book-entry form through the securities firms. Bolivia EDV All securities are issued in physical form. A dematerialization Model 2 and immobilization process started with the launch of the EDV. Dematerialization of outstanding securities began in 2004, but they were still issued in both forms. Starting in the fourth quarter of 2005, most securities have been issued in a dematerialized form. It is expected that all securities will be dematerialized by the second quarter of 2006. Brazil CBLC All securities in CBLC depository services are dematerialized Model 3 and registered, in book-entry form, in the name of beneficial owners. More than 50 percent of equity securities are held in custody by the CBLC. SELIC Government securities are immobilized and dematerialized. Model 1 BM&F All futures contracts are dematerialized. -- CETIP Some state-owned companies still issue certificated securities. Model 1 (the majority of transactions) Chile DCV All types of securities are currently issued in dematerialized Model 3 (centralized form. Some securities are represented by means of physical settlement) certificates that can be immobilized at DCV. Immobilization is Model 2 (bilateral settle- not a necessary condition for trading securities, but in the case ment through the stock of shares and in order to participate in the centralized settle- exchange) ment, securities must be deposited in the DCV by 6:00 p.m. of the trading date. Colombia Stock exchange Securities are represented in physical form, immobilized, or Mercado Electrónico de clearinghouse / dematerialized in the two existing depositories: DECEVAL and Colombia transactions DECEVAL / DCV DCV. Any security registered in the intermediaries and securities can be settled on DvP national registry could be deposited for custody in DECEVAL. In basis Model 1 through an DECEVAL, physical securities are immobilized in a safety cave interface to the DCV­ and entire issues are backed by a physical macrocertificate. Sistema Electrónico de DECEVAL basically immobilizes private securities, although it Cuentas de Depósito also has in deposit some public securities (for example, bonos (CUD) system, "free of provisionales). In addition, DECEVAL has an omnibus account in payment" or "free of DCV for securities registered in DCV. Thus, depositors of DECE- payment and securities VAL can maintain public securities at DECEVAL. Immobilization, delivery." dematerialization, and transfers of securities in book-entry form are not mandatory. More than 99 percent of public debt securi- ties are dematerialized and all the secondary market transac- tions take place in book-entry form either in DCV or DECEVAL. SEN / DCV Model 1 Costa Rica Stock exchange / At the moment, securities are represented by means of title (that Model 2 (although there CEVAL is, physical securities) or a global note that represent the whole are one and one-half issue. All issues represented by means of a global note and part hours difference between of the existing physical securities are immobilized in the existing the settlement of the cash depository, CEVAL. The government still issues debt in physical and securities leg) form. Dematerialization and immobilization are irrevocable. (Continued) 142 Payments and Securities Settlement Table 5.6 Immobilization and Dematerialization of Securities and Settlement Type (Continued) Country SSS Immobilization and Dematerialization DvP modela Dominican Stock exchange Transactions traded in the OTC are registered through the No DvP Republic Sistema Integrado de Negociaciones Electrónicas (SINE) by the only stock exchange in the country, the Bolsa de Valores de la Republica Dominicana. The SINE could also be used for electronic trading, but, because trade is still very limited, it is still done over the telephone. Nearly 75 percent of trades are transactions within the same broker- dealers (operaciones cruzadas). A CSD has been recently established, the CEVALDOM. Ecuador Stock exchanges / Although government securities are issued in an immobi- No DvP DECEVALE lized form by means of a global note, once the primary auction has been placed, individual physical certificates are produced and delivered, if required by the investor. The physical certificates can be kept in custody at the central bank or withdrawn for trading, or maintained with another custodian. Although the depository DECEVALE was created in 1994 under the SML, it has only performed the custody function of dematerialized securities issued by the Corporación Financiera Nacional (less than 1 percent of the securities market). In addition, private securities are issued in physical form due to the lack of depository function. Furthermore, they cannot even be kept immobi- lized in DECEVALE, because it has not developed the immo- bilization business and does not use vaults to provide physical custody. El Salvador Stock exchange / Currently, the BCR has physical custody of public securities No DvP CEDEVAL while they are immobilized in CEDEVAL. Because not all securities are immobilized, sellers must deliver physical securities to CEDEVAL 24 hours before the sale is made. Guatemala Stock Exchange In principle, all public securities are issued in physical No DvP form, although if the investor decides to keep them under the custody of the central bank, they are not issued in phys- ical form but as book-entry notes at the central bank reg- istry. Subsequent ownership transfers are done by means of delivery (if bearer securities) or endorsement (if order securities) or book-entry notes in the stock exchange's securities depository, once previously deposited. For stock exchange settlement, it is mandatory to have previously deposited the securities at the securities depository of either stock exchange. Honduras Stock exchanges Public securities are issued on a dematerialized form and can No DvP be under the custody of the Banco Central de Honduras or the stock exchange. Jamaica Government All government securities are represented in physical form. Model 2 securities Stock exchange / Equities are immobilized or dematerialized in the JCSD. No DvP JCSD Mexico INDEVAL All securities in the national securities registry (Registro Model 3 (stock exchange) Nacional de Valores) are physically represented, generally by Model 1 (OTC) global notes, and are immobilized in INDEVAL. Securities Settlement Systems Assessment Findings in Latin America and the Caribbean 143 Table 5.6 Immobilization and Dematerialization of Securities and Settlement Type (Continued) Country SSS Immobilization and Dematerialization DvP modela Netherlands BvdNA Almost all securities issued by the central and local government No DvP Antilles (except one issue) and all of the CDs issued by the central bank are dematerialized, and the ownership and other rights are registered in the book-entry system of the BvdNA. Nicaragua Stock exchange / CENIVAL receives in deposit mainly government securities No DvP CENIVAL (bonos de pago de indemnización) and bonds issued by the Banco Central de Nicaragua. It also receives in deposit securities issued by the private sector, but these are securities with a much lower quantitative importance. OECS ECCSD All securities are dematerialized. Therefore, transfer of Model 2 ownership is done via book entry at the ECCSD. Panama Stock exchange / Assets deposited in LATINCLEAR include treasury bonds, Model 2 LATINCLEAR treasury notes and bills, corporate stocks, preferred stocks, and corporate bonds. All trades must be performed by the broker-dealers members of the stock exchange, who are obliged to actually have the securities in their accounts before trading (no short-selling is allowed). Paraguay Broker-dealers No depository exists; securities are issued in physical form. No DvP Most trades are settled in-house with broker-dealers. Peru Stock exchange / Almost all--97 percent--of debt instruments (corporate debt; Model 2 CAVALI treasury bonds, bills, and notes) and 47 percent of all equities (remaining portion on equities belongs mainly to controlling interests of companies) are registered in a dematerialized form at CAVALI. Trinidad and TTCD Since TTCD started operating, the on-floor trading of the stock Model 3 (Stock Exchange) Tobago exchange can only be done with securities previously immobi- lized. Listed companies have to accept the immobilization of their shares through the signing of an agreement form with the TTCD. On signing the contract, securities are assigned an ISIN. TTCB depository Government securities, bills, and notes are issued in a Model 1 dematerialized form. Uruguay Stock exchanges / Securities are issued in dematerialized (escriturales) or Model 3 (BVM) AGATA physical form. Model 1 (BEVSA) Venezuela, Central bank (SICET) Most government securities are dematerialized or immobi- Model 1 R.B. de lized in the central bank. The custody and depository function of public securities, except for Vebonos and export bonds, is undertaken by SICET, a system developed and operated by the BCV. CVV Shares and Vebonos are immobilized in the CVV. No DvP Source: Authors' elaboration. a. This is not an attempt to determine if true DvP is achieved in the SSSs described, but rather a detail on how settlement takes place (gross-gross, gross-net, or net-net). 144 Payments and Securities Settlement Table 5.7 Risk Management Tools and Settlement Asset Cash Settlement Country SSS Risk Management Tools CCPs Asset Argentina Merval Guarantee fund The Merval guarantees trades Private settlement settlement that take place in the bank Special guarantee fund outcry system (floor) or in the Buy-ins automatic trading system (Sis- tema Integrado de Negociación Asistida por Computador), but only for those specifically des- ignated within the continuous session. Argenclear None (unwinding) No Medio Electrónico de Pagos (central bank RTGS system) or through Argenclear's U.S. dollar account at Deutsche Bank, New York CRYL None (unwinding) No Medio Electrónico de Pagos Bahamas, The -- No No Cheques Bolivia EDV Settlement fund and guarantee fund No Cheques for trans- actions with physi- cal certificates Centralized account at the central bank for all dematerialized securities Brazil CBLC Settlement fund (defaulters pay or CBLC acts as a CCP to its clear- STR (central bank survivors pay) ing members for all securities RTGS system) settled through its systems at Margins (for collateralization of the time of execution. Trades derivatives market and securities are channeled into the settle- lending program) ment systems in real time; once Buy-ins they have been tested against acceptance parameters, they are automatically reported to clearing members. SELIC Bilateral debit caps (for indirect No STR participants) Queuing 30 minutes (until 12:30 p.m.) Queuing until 6:00 p.m. (only in the case of insufficiency of the nego- tiated securities) Optimization algorithms Securities Settlement Systems Assessment Findings in Latin America and the Caribbean 145 Table 5.7 Risk Management Tools and Settlement Asset (Continued) Cash Settlement Country SSS Risk Management Tools CCPs Asset Brazil BM&F Pledge (associated with their The BM&F clearinghouses for STR (Continued ) membership of BM&F) derivatives transactions, for- eign exchange, and govern- Risk limits ment securities are CCPs, and Guarantee margins become liable for the defaulter's positions to the clearing mem- Limits on concentration of bers that have honored their positions and price fluctuations commitments. Calls for additional guarantee The securities clearinghouse margins performs risk analysis in real System of valuing and monitoring time, that is, trades submitted risk guarantees to acceptance by the clearing- house are instantaneously Value at risk system checked with regard to the avail- System of additional safeguards ability of collaterals to cover the additional overall portfolio risk Clearing fund (minimum net work- brought on by the trade. ing capital) CETIP Predeposit of securities No STR Funds fail (unwinding) Chile Stock exchanges / Guarantee fund No Private banks' DCV clearinghouse that settles balances in the RTGS (LBTR) system of the central bank Colombia Stock exchange Guarantee fund The stock exchanges' clearing- Funds are settled clearinghouse / houses do not assume counter- separately from DECEVAL / DCV party risk. securities (except DCV settlement; see below) on a net basis, by cheque or electronic transfer SEN / DCV Queuing (repique) No RTGS system of the central bank (CUD / SEBRA) Costa Rica Stock exchange / Block of securities prior to No Central bank CEVAL trading Credit line Guarantee fund (defaulters pay) Dominican Stock exchange None No Cash or cheques Republic Ecuador Stock exchanges / Guayaquil Stock Exchange No Current accounts DECEVALE of the exchanges Deferred bilateral settlement at the central Guarantee fund bank In case of a securities failure a buy-in mechanism exists; the guarantee fund covers the poten- tial market risk (Continued) 146 Payments and Securities Settlement Table 5.7 Risk Management Tools and Settlement Asset (Continued) Cash Settlement Country SSS Risk Management Tools CCPs Asset Ecuador Quito Stock Exchange (Continued ) Guarantee fund Unwinding (for securities failure) El Salvador Stock exchange / Credit lines of the stock exchange No Central bank CEDEVAL Guatemala Stock exchange None No Central bank or cheques Honduras Stock exchanges None No Cash or cheques Jamaica Stock exchange Securities blocked prior to No Central bank (JSE) / JCSD trading Credit lines of brokers with banks Mexico INDEVAL Irrevocable guarantee trust for INDEVAL plans to create a CCP Central bank through defaulted transactions (contribu- SIDV and SPEUA For derivatives, ASIGNA is a tions calculated through value at CCP risk methodology) Buy-in and sell-out procedures Netherlands BvdNA None No Central bank through Antilles the Netherlands Antilles Clearing System Nicaragua Stock exchange / None No Cheques CENIVAL OECS ECCSD No No Private settlement bank Panama Stock exchange / Securities blocking prior to No Private settlement LATINCLEAR selling agent (CIASA) Guarantee scheme on a defaulters pay basis Paraguay Broker-dealers No No Private settlement bank Peru Stock exchange / Settlement fund handled by No LBTR (CAVALI CAVALI CAVALI currently holds an account at the Guarantee fund handled by the central bank) stock exchange. Brokers' credit lines Trinidad and Stock exchange / Irrevocable standby letters of No Private settlement Tobago TTCD credit agents (banks) Buy-in and sell-out procedures TTCB depository Real-time settlement No Central bank RTGS system Buy-in and sell-out procedures Securities Settlement Systems Assessment Findings in Latin America and the Caribbean 147 Table 5.7 Risk Management Tools and Settlement Asset 1 (Continued) Cash Settlement Country SSS Risk Management Tools CCPs Asset Uruguay AGATA (BVM) No Central bank Real-time settlement (BEVSA) Venezuela, Central bank Real-time settlement No Central bank R.B. de (SICET) CVV Guarantee fund (general Although not defined as a Settlement bank purpose) CCP, the stock exchange rules state that the BVC guarantees Margins settlement. Credit line with settlement bank Buy-in (two days after settlement) Source: Authors' elaboration. Note: CENIVAL (Central Nicaragüense de Valores); LBTR (Sistema de Liquidación Bruta en Tiempo Real); SEBRA (Sistema Electrónico del Banco de la República); TTBC (Trinidad and Tobago Central Bank). drastically reduced or totally exchanged into fungible There is room for improvement in the current risk ones within a specific time span; (2) all the physical management tools used to cover settlement failures. securities kept in custody by participants of the secu- Some systems do not count with any risk management rities depositories should be immobilized in the secu- tools, and others count with tools that are clearly insuf- rities depository. Regular meetings with issuers and ficient. The authorities should determine if current risk institutional and noninstitutional investors are practi- management tools are enough to cover potential fail- cal measures to promote dematerialization and immo- ures, especially taking into account the fact that exist- bilization, and the massive movement of securities on ing guarantee funds can be used for failures other than a book-entry basis. those associated with settlement. A specific guarantee Some systems do not yet settle on a DvP basis, i.e., fund exclusively for settlement failures could be sep- payments are not necessarily linked to securities trans- arated from a more general guarantee fund. In some fers, and vice versa. Therefore, principal risk exists cases, operations are unwound previous to the use of and no measures have been taken to eliminate princi- the guarantee funds, and no risk management tool is pal risk and to reduce and mitigate replacement risk established for failures on the settlement side, except (that is, a guarantee regime). Coordination and links to compensate the broker-dealer for the fee. In order between securities and monetary flow transfers on a to avoid potential systemic risk, the guarantee funds DvP basis model are essential. Replacement risk must should be used previous to the unwinding and a buy- be reduced or mitigated with the implementation of a in or similar mechanism should be established to strict guarantee regime. cover securities failures. In some cases, the total value Many systems have imperfect DvP procedures. Due of the guarantees seems enough to cover failures for to the time differences between the clearing of the both--securities and funds--at the current levels of cash leg and the clearing of the securities leg, princi- market volume and value. The introduction of systems pal risk could occur if a broker goes bankrupt in the of dynamic guarantees should be explored. meantime. In that case, it might be difficult to trans- Related to the funds side, the use of cheques in the fer the securities from the special pledge account of settlement process implies important settlement risks. the depository in which they are blocked at the begin- Central bank money is used in transactions, on many ning of the trade day to the defaulter's counterparty, occasions. However, settlement in the central bank's even if the counterparty has already paid for these money is not normally mandatory and payments by securities. cheque are sometimes used. The use of central bank 148 Payments and Securities Settlement money to settle transactions relating to securities give confidence to the system and, thus, to create the markets should be encouraged (this is especially conditions that will allow the final investors to be the important for developing markets, although not providers of liquidity to broker-dealers for operations required by the international standards). Existing carried out on behalf of final investors. funds settlement systems in some countries through- Most of the securities markets in the region do not out the region already allow for the use of other type have a turnover high enough to justify a CCP. For the of funds transfer systems (for example, RTGS) that biggest markets in the region, following an integra- would eliminate this risk. Due to the nature of secu- tion process of SSSs, some settlement systems for rities transactions, funds settlement should take place government securities might become a CCP; the ben- by an instrument that allows for finality at the end of efits and costs of the change would need to settlement day. be carefully evaluated. On some occasions, arrange- In the case where settlement of funds is made at the ments of the CCP type are present, because partici- accounts of a private settlement bank (this is an exist- pants' failures are covered by credit lines granted by ing, although not common, situation in some SSSs in settlement banks or stock exchanges. However, this LAC) assets used to settle the cash leg of securities is normally done on a voluntary basis without any transactions between SSS members should carry lit- legal or regulatory support. In those cases, the rules tle or no credit or liquidity risk. If central bank money are not specific about where the final risk stands once is not used, steps must be taken to protect participants the guarantee systems have been used, and the sys- from potential losses and liquidity pressures arising tems are unable to cover the loss of a failure. from the failure of a settlement bank. However, in most Sometimes, plans for the development of new secu- cases when a private settlement bank is used, the lack rities depositories in the region are not realistic in of specific supervision of the settlement bank regard- terms of timing, and are driven by a specific techno- ing its settlement function does not allow for a clear logical solution and not by a strategy agreed upon by understanding of the risks involved. In addition, the all stakeholders. Some stock exchanges are develop- lack of coordination between regulators of this aspect ing technological solutions based on the experience increases the concern. The authorities should explore of other countries in the region. The launch of a secu- alternatives in terms of the assets used to settle the rities depository is a desirable and necessary element, cash leg of securities transactions; if the use of a pri- but it implies much more than the establishment of an vate settlement bank is used, adequate regulatory and operational system. The launch of a securities depos- supervisory mechanisms should be in place. itory should be considered in the context of a com- Normally, nonbank clearing members and broker- prehensive reform of the payments and SSSs. Some dealers do not have access to central bank money; this crucial elements should be agreed on by regulators and imposes a liquidity constraint for their operations. If other stakeholders before any implementation takes there is a lack of liquidity in the financial system or place. These elements include the role of the central an inefficient management of liquidity and market bank; what kind of securities the securities depository practices of the broker-dealers and their clients, the will immobilize or dematerialize; who the settle- shortage of liquidity could be exacerbated; if com- ment bank will be, and especially what implications bined with the problem of settlement without DvP, the legal framework has in this regard; what the most this increases the liquidity problem. In some cases, appropriate settlement cycles would be; whether the broker-dealers have difficulties accessing intraday depository should identify the beneficial owner, or liquidity facilities from commercial banks. Banking whether this should only be done at the custodian level innovation in payments mechanisms might bring (this decision highly depends on the strength of the some reduction of liquidity pressures at the broker supervisory function); what model of DvP will be and customers level. Also, provision of funds from implemented; what risk management tools will be in the final investor to the broker-dealer to execute the place to mitigate settlement risks in case of a multi- transactions would ease the liquidity problem. The lateral net system; operational security requirements reliability of the system as a whole, and clearing and and its supervision; the ownership structure that the settlement procedures on a DvP basis, are essential to depository should have; what the system will allow Securities Settlement Systems Assessment Findings in Latin America and the Caribbean 149 for fair and open access to all participants; what the reason have a monopoly on custody services for governance arrangements will be; and so on. It is immobilized securities. In some cases, all money mar- important that the reform focus on all elements of ket transactions have to be done via broker-dealers. SSSs, and not only on the operational system for a Broker-dealers also provide services to the public by securities depository. It is also important that the new attracting deposits, and by investing the relevant SSS implemented observe the "Recommendations amount in capital or money market instruments. This for Securities Settlement Systems" issued by CPSS- full range of services includes many liabilities of IOSCO in November 2001, which include aspects the broker-dealers to the banks, other financial insti- such as legal and custody issues, clearance and set- tutions, and the public. However, the capital require- tlement procedures, settlement risk, cash settlement ments for broker-dealers' houses are relatively low. asset, operational risk, regulation and oversight, Short-selling is allowed in some cases, although it is transparency, efficiency, access, and governance. not common. However, in cases of weak settlement Finally, formal coordination among regulators (led arrangements and an inadequate legal, regulatory, by the central bank) and cooperation with the private and supervisory environment, this practice could be sector are crucial in developing this piece of finan- risky. The authorities should determine if appropriate cial infrastructure. Commitment from the private sec- mechanisms are in place to allow for short-selling, tor should not only be from brokers, but also from and should regulate accordingly. Alternatively, as a issuers, banks, custodians, and even investors (mainly developmental issue the authorities should explore the institutional). implementation of securities lending as another mech- Sometimes public authorities are not taking a leader- anism to provide liquidity to the market. As indicated ship role in the development of settlement arrange- in the clearing and settlement processes section, it is ments for the securities markets, so private institutions difficult to develop securities lending in a context of are advancing through particular solutions that are not low market liquidity. In the future, the market could integrated in a comprehensive payments and securi- be more active and these developments could take ties settlement reform. Due to the public interest on time to be implemented. the development of an SSS infrastructure (implica- In summary, the main aspects to be improved are the tions to fiscal and monetary policy, liquidity manage- achievement of full dematerialization and immobi- ment, and development of the capital markets), public lization of securities, establishment and completion authorities (the central bank, securities regulator, pen- of DvP procedures, upgrade of current risk manage- sion funds regulator, and ministry of finance) should ment tools, mitigation of credit and liquidity risk in lead the way in defining how to develop such a system the cash leg settlement (including elimination of the and how to cooperate with the private sector to design use of cheques as a cash asset), better access to liquid- and implement the system. Several issues mentioned ity for SSSs participants, careful follow-up of short- in the paragraph above need to be agreed on by stake- selling when used, and a comprehensive approach for holders. Experiences in other countries show that if the reform of SSSs versus technology-driven and exclu- those issues are not appropriately debated and agreed sively operational reform projects. on, a bottleneck situation could be created, delaying the establishment of the depository function for a long OPERATIONAL ISSUES time. The public nature and neutral position of regu- This section includes context, status in the region and lators can help to overcome the logical problems of observations regarding operational issues. conflict of private interests. Some markets are exposed to concentration risk in Context settlement activity. Broker-dealers have a central function in some trading and SSSs. In some cases, they Operational risk is the risk that deficiencies in informa- have the monopoly on trading in the stock exchange. tion systems or internal controls, human errors, or man- They are also the only participants in the depository agement failures result in unexpected losses. As clearing with operational rights (pension funds and banks and settlement systems become increasingly depen- have nonoperational custody accounts), and for that dent on IT systems, their reliability is a key element in 150 Payments and Securities Settlement operational risk. Operational risk can arise from inade- The physical handling of securities is still common in quate control of systems and processes; from inade- many SSSs. The clearing and settlement of securities quate management more generally (lack of expertise, transactions with physical certificates is not only risky, poor supervision or training, inadequate resources); from but also cumbersome and costly, and it hampers the inadequate identification or understanding of risks and development of capital markets. It is absolutely not in the controls and procedures needed to limit them; and line with international code and standards. Thus, an from inadequate attention being paid to ensure that pro- important target should be to eliminate the physical cedures are understood and complied with. handling of securities. General laws on securities or capital markets must recognize the immobilization, To minimize operational risk, system operators should dematerialization, and transfer of securities on a book- identify sources of operational risk. All key systems entry basis. Depositories should encourage the dema- should be secure (that is, have access controls, adequate terialization and immobilization of all securities as a safeguards to prevent external intrusions, and provide matter of urgency. Regular meetings must be held by audit trails), reliable, scaleable, able to handle stress vol- depositories with issuers and institutional and non- ume, and have appropriate contingency plans to account institutional investors to promote immobilization and for system interruption. The system should maintain an the massive movement of securities on a book-entry adequate capacity to process current and anticipated basis. Securities regulators should promote this process. future transaction volume, including projected peak-day STP is not the rule in SSSs in the LAC region. Many and peak-hour volume demands. To achieve this, the procedures imply physical handling of the securities. operator must (1) establish formal current and future This makes some clearance and settlement proce- capacity estimates for their automated trade comparison dures cumbersome--for example, dividends payments systems; (2) conduct periodic capacity stress tests to and corporate actions in general require a substantial determine the behavior of systems under a variety of amount of manual intervention. A gradual implemen- simulated conditions; and (3) conduct independent annual tation of STP procedures would be desirable for all reviews to assess whether these systems can perform kind of securities to reduce operational risk. STP for adequately at their current and estimated future capac- securities transactions will mean a fully automated ity levels. transactional link for trade matching, comparison, Operational capacity must also be demonstrated to exist and book-entry settlement of securities and funds. at the mandatory disaster-recovery site. Operators must Such an integrated system would not only reduce the have in place a well-designed and adequately tested possibility of errors, but also make the clearing and mechanism for transferring system control to the backup settlement process more efficient by--for example, site in an acceptable time frame without loss of data or eliminating duplicate processes and giving the par- unacceptable reduction in service levels. ticipants immediate information to enable them to manage their liquidity effectively. In assessing the efficiency of settlement systems, the In many cases, backup facilities are not available, are needs of users and the costs imposed on them must be missing, or are in the process of being implemented. carefully balanced with the requirement that the system They should be in place at the earliest possible time to meet appropriate standards of safety and security. cover any contingency in the system. Alternative sites and disaster-recovery facilities must enable opera- Status in the Region tions to be recovered in a manner that does not dis- rupt settlement. Table 5.8 includes a brief description of operational fea- External auditing of the operational systems should tures for settlement systems in each of the countries be considered in order to assess the security and cost assessed. efficiency of all of the systems. The authorities and the private sector have made important efforts in the Observations development of the technological platforms for the Some of the specific problems regarding operational operation of the SSSs. In some cases, an "in-house" issues follow: solution has been developed, in other cases, standard Securities Settlement Systems Assessment Findings in Latin America and the Caribbean 151 Table 5.8 Operational Reliability in SSSs Country SSS Operational Reliability Argentina Caja de valores Major participants are linked electronically through a safe communications system that the caja de valores has put in place. Without any prejudice to the foregoing, securities markets have proprietary electronic securities trading systems, namely Mercado de Valores S.A. and Mercado Abierto Electrónico. At its electronic data processing center, the caja de valores runs every program connected with securities trading, dissemination, settlement, and custody. These systems are interconnected, and all participants have access thereto. Furthermore, the caja de valores maintains its proprietary securities custody system in a stand-alone environment. Bahamas, The Securities firms Mainly manual procedures, low level of automation. Bolivia EDV The EDV has an electronic linkage and handles online information with all its participants. Brazil CBLC CBLC's degree of automation includes the electronic integration of CBLC systems (clearance, settlement, and deposi- tory) in the same platform; the electronic linking of this platform with all the electronic trading systems to which CBLC renders services, allowing trades to be reported to CBLC in real-time fashion, locked in for settlement; the electronic linkage of the registrars (providers of bookkeeping services) to the depository; the electronic linkage of CBLC (as well as the other Brazilian clearinghouses) to the central bank payment system through a messaging system (MQ Series), allowing DvP in central bank money; the fully dematerialization of securities, which permits risk elimination derived from the handling of physical certificates; daily reconciliation of depository positions with issuers; and periodic auditing of CBLC using a three-tier system: (1) auditing conducted by the system itself; (2) internal auditing; (3) external auditing conducted by an independent firm of international reputation substituted every four years. This auditing follows a standard procedure, namely the comparison between the balances registered at CBLC in the name of each custodian and the controls of the issuing companies and the balances posted in the accounts of the participants themselves. CBLC has a formalized and comprehensive contingency plan that includes the presence of two sites. The plan was submitted (and approved) by the BACEN as a requirement for the approval of CBLC as a systemically important clearing and settlement system. The backup site of CBLC (also fully approved by the BACEN)--which guarantees systems' continuity in any circumstances--has the following functionalities: mainframes and servers duplication in both sites; ABC network, linking each CBLC's participant with both sites, through different providers of communication services; real-time communication between the main site and the backup site, through optical fiber (hot-site backup); different energy substations providers at each site; several levels of access and password control; secrecy of information through data encryption; and full protection against intruders with intruder detection systems and firewalls. The time for recovery is less than one hour; according to the central bank's requirements, this system has to be tested at least once a year. (Continued) 152 Payments and Securities Settlement Table 5.8 Operational Reliability in SSSs (Continued) Country SSS Operational Reliability Brazil SELIC SELIC shares several operational features with the STR (see chapter 4). (Continued) BM&F BM&F operations (including clearing operations) include operational reliability and contingency arrangements to guarantee business continuity (fully approved by BACEN): (1) Business application and data are protected against external or internal threats by two layers of firewalls. (2) Data are stored in an external enterprise storage. All the data are mirrored and backed up periodically by a corporate backup system. (3) All the data written to the enterprise storage are replicated (real time) to the contingency site. (4) BM&F works with an archi- tectural design that allows scale-up (CPU and memory scalability) and scale- out (multiple servers processing the same application). (5) System resources uses are monitored by a centralized management system. Stress tests are conducted regularly. (6) Clustering technology with automatic takeover is used to minimize downtime in case of computer failure. In case of site disaster, all the data will be available in the contingency site to restart the business. (7) For the services that run only in the main site, the servers in the contingency site will be periodically activated. (8) The contingency plan document describes all the procedures required to restart all the processes. (9) The contingency site is operationally active. Chile DCV DCV is linked to trading and matching platforms (exchanges), from which it receives the information regarding trades executed in that market. It is also linked to recurrent issuers (banks and the central bank), from which DCV receives the detail of the securities issued dematerialized and to which DCV sends the informa- tion regarding securities' maturities and the respective beneficiaries. Opera- tional features of the DCV system are described in chapters 10 and 11 of their internal rules (reglamento interno). The DCV has a business continuity plan with two mirror sites online. The DCV is audited, among others, by external auditors hired by the Comité de Vigilancia, comprised of DCV clients. From December 2005, the DCV has a Comité de Directores that analyzes issues related to operational risk and its audit. Colombia DECEVAL Below are operational features of DECEVAL: The electronic linking of DECEVAL platform with the electronic trading systems (Mercado Electrónico de Colombia and stocks) allows for trades to be reported to DECEVAL in real-time fashion, and to be locked in for settlement. The full immobilization of securities. System security conforms to commercially reasonable standards--for example, for confidentiality, integrity, authentication, nonrepudability, availability, and auditability. The contingency plan is tested three times a year. Participants are trained. The contingency system is not automatically triggered: It is triggered manually. It includes an alternative operational site (sede operativa alterna). DECEVAL has a backup system (centro de procesamiento alterno) located in Bogotá, 10 kilometers from the main site. The documentation of all processes was completed in 2003. The current recovery time is two hours. The future target is one hour. No failures to the system have occurred recently that have triggered the contingency plan. DECEVAL is audited periodically using a three-tier system as follows: (1) auditing conducted by the system itself; (2) internal auditing; (3) external auditing con- ducted by an independent firm using a technological matrix with 32 variables checked. System capacity is adequate. Securities Settlement Systems Assessment Findings in Latin America and the Caribbean 153 Table 5.8 Operational Reliability in SSSs (Continued) Country SSS Operational Reliability Colombia DECEVAL and the stock exchange are working toward the electronic integration (Continued) of both systems (trading, settlement, and depository) in order to allow for full straight-through processing (STP). DECEVAL has completed a process of technological upgrade: The hardware platform SunMicrosystems substituted the Hewlett Packard platform in October 2003. Regarding IT security, the Virtual Private Network (VPN) platform used will be substituted by the Checkpoint platform in 2004. Existing communications used will be upgraded in 2005. DCV Below are operational features of DCV: The connection to DCV by direct depositors is made through the Sistema Electrónico del Banco de la República system of the central bank. The techno- logic platform for the central bank systems (CUD, SEN, and DCV) is installed in SUN servers with a Solaris 8 operational system, Oracle databases, and Web Tomcat databases. The Internet application is Oracle IAS. The system ensures the main principles of security such as integrity, confiden- tiality, and access controls. Through a unique entrance point, the system allows access only to authorized users. The DCV software ensures that whoever accesses the information can register operations only in the amounts previously defined by the direct depositor. In addition, the system allows for the segregation of the inclusion, review, and transfer activation functions. The communication among direct depositors and the DCV is protected by encryption and control figures that ensure data integrity. SEN and DCV have appropriate identification of the operational risks arising in the securities settlement process. There are clear policies and procedures to address the risks Backup facilities (centro de cómputo alterno) and contingency plans are available and tested regularly. They guarantee a 99 percent of availability. Contingency plans are tested four times a year. The contingency plans follow the Disaster Recovery Institute methodology, and allows for a 10 to 20 minutes recovery, depending on the specific incident. The capacity is assessed every year, and estimates of processing growth are calculated. The BR has policies and methodologies to manage business and operational risks. The operational model follows the Australian methodology AS/NZS: 4360 of 1999. All processes are documented. Management controls are adequate, and there is enough staff to ensure that procedures are correctly implemented. The central bank has established a committee (Comité de Coordinación del Sistema de Control Interno) to assess the critical processes affecting the institution. This committee analyses all the payments systems operated by the central bank: DCV, Sistema de Compen- sación Electrónica de Cheques (CEDEC), Sistema de Compensación Elec- trónica Nacional Interbancaria (CENIT), CUD, and SEN. Costa Rica CEVAL Attention is paid to operational reliability for clearing and settlement and for central custody services. Every year, an analysis of potential threats is made and the existing emergency plan is adapted accordingly. A contingency committee is in place. Protection measures against unauthorized access are tested periodically by an external expert. There is an own-power supply. Communication with the bro- kers is based on a client-server infrastructure. Every participant is connected with the server via two dedicated optical fiber lines. Capacity of the systems can handle two times the demand during peak hours. Procedures are in place con- cerning procurement, development, and modification of the systems; modifica- tions are adequately tested before becoming operational. The systems have (Continued) 154 Payments and Securities Settlement Table 5.8 Operational Reliability in SSSs (Continued) Country SSS Operational Reliability Costa Rica separate environments for production, developing, and testing. A changeover (Continued) committee is installed with participants of the IT department who designed and implemented the modification, the internal audit department, and the person responsible for testing. The committee is chaired by the CEO. Disaster recovery facilities are not up to standard, however. There is no backup server in hot standby mode, and there is no second contingency site. Dominican Republic Stock exchanges Mainly manual procedures Ecuador Stock exchanges / Both stock exchanges use the data provided by their trading systems on securities DECEVALE to be delivered, and the calculation of net positions on the money side. These systems have the usual backup procedures. However the real operational risk is in the handling of physical securities and the cumbersome procedures involved in splitting the securities traded in the right denominations to be delivered to the different parties. El Salvador Stock exchange- Contingency plans are based on manual procedures. CEDEVAL Guatemala Stock exchange The Bolsa de Valores Nacional reports that all their systems, including the CSD, have safe operational features, backup sites, and contingency plans. However, there is no regulation or supervision of these issues by any regulatory authority, because the stock exchange operates as a full SRO. Honduras Stock exchanges Mainly manual procedures. Jamaica Stock exchange (JSE)- The JSE and the JCSD have established coordinated security measures, contin- JCSD gency planning procedures, and internal controls designed to limit operational risk. Nevertheless, the organizations separate functions where appropriate. For example, the JCSD's audit procedures are independent from the JSE's. Also, the JSE relies on a vendor to develop its core applications; however, testing, imple- mentation, and other applications are done by JSE staff to ensure integrity. The JSE and the JCSD can trace transactions from execution through settlement. The organizations maintain procedures to identify and resolve discrepancies. Their records are backed up nightly, and the JCSD performs a daily audit of critical activities--settlement, deposit approval, inter- and intramember movement, and trade data. The records are stored in a location that is separate from their pri- mary facilities. There is a disaster recovery plan, and the organizations plan to implement a hot backup site. The JCSD also conducts regular meetings with its participants to ensure smooth daily processing. Mexico INDEVAL Regarding communication systems, INDEVAL has routers, hubs, and network concentrating equipment for the internal links and all the necessary hardware to create remote links using a high-speed private telephone network. The chapter "Communications Infrastructure" in INDEVAL's operations manual describes the technical and safety requirements for connecting to INDEVAL's systems through a terminal and through the depositor's electronic, computer, or other telecommu- nication network. It also provides information about the reciprocal and identification access keys, and about verification of the elements and goods related to main- taining and operating the systems. Bursatec--a firm owned by BMV, INDEVAL, MEXDER, and ASIGNA--provides a contingency network, backup equipment, and a backup alternative site that ensure continuous processing and communica- tion during unanticipated contingencies. A fiber-optic network is used on a regu- lar basis, and contingency is guaranteed through KBTel microwaves. The alternative site is located in the city of Pachuca, in Hidalgo State. This site has alternative links for participants; it replicates the database every half hour, and is capable of substituting for the main processing site within an hour of failure. Securities Settlement Systems Assessment Findings in Latin America and the Caribbean 155 Table 5.8 Operational Reliability in SSSs (Continued) Country SSS Operational Reliability Netherlands Antilles BvdNa Mainly manual procedures. Nicaragua CENIVAL Neither the BVDN nor the CENIVAL has contingency facilities or backup sites. The only contingency plan at present is the possibility to hold outcry floor ses- sions for trading purposes in case of malfunctioning of the electronic trading system. OECS ECCSD The ECCSD includes the operational procedures. The operational requirements to become a participant in the ECCSD are included in the documents "ECCSD Requirements and Application Instructions" and "Participant Operational Procedures Manual" that contain requirements regarding the adequate physical facilities, books, records, and procedures. Panama LATINCLEAR Periodic analyses of potential threats are made. Communications with the bro- kers are made through dedicated lines. There is no backup server in hot standby mode, but there is an alternative contingency site located in Panama City, about 6 kilometers from the primary site. A tape containing a backup copy of operations is sent daily to the backup site. Paraguay -- No centralized settlement system is in place. Peru CAVALI According to the depositories' (Instituciones de Compensación y Liquidación de Valores) regulations, the depositories must have safe premises, capable of adequately preserving the information, avoiding any loss or alteration thereof, and granting it confidentiality. Safeguard systems must include access con- trols to the information contained in the accounting record and to any other information of a nonpublic nature, to avoid third-parties' access therein. They must have backup copies kept in places that are separate from the respective depositories; controls to avoid removal, loss, or modification of the information; and restricted access to users. The depositories' regulations require the depositories to provide measures to specifically cover system operational risks. These include alteration or destruction of records, commu- nications disruption, availability of securities or funds by nonauthorized peo- ple, and data manipulation. The depositories' regulations require that the depositories have contingency plans for the recovery of the depository's oper- ating capacity as soon as possible, to ensure that the normal development of the market is not affected. Contingency plans must include alternative power supplies; and auxiliary equipment for data processing and communication, among other plans. These plans must be reviewed, updated, and tested at least once a year, and any substantial modification thereto must be duly reported to CONASEV. CAVALI has advanced significantly in terms of operational reliability, safeguards, and contingency plans. All participants are linked electronically through a safe communications system (by using an enclosed private network) to CAVALI. Contingency communication systems through different providers of communication services are also in place. CAVALI is also linked electronically with the stock exchange for transfer of information online. Most processes at CAV- ALI have been automated, and currently most requests and transfers of information are processed through the system by participants and issuers. Over the past years, CAVALI has been actively pursuing the elimination of all paperwork and the use of magnetic systems (such as diskettes) for handling information. An alternative computer site is in place (duplication of mainframes), with real-time communication between the main site and the backup site. Physical backups are also kept on two other sites. (Continued) 156 Payments and Securities Settlement Table 5.8 Operational Reliability in SSSs (Continued) Country SSS Operational Reliability Peru Periodic risk assessments take place at CAVALI. At least once a year, all con- (Continued) tingency plans (including different scenarios, in order to ensure continuity under different circumstances) are tested, including a complete disaster scenario with the participation of all brokers, custodians, and major issuers. Regulators, as well as external auditors oversee the exercise. Full attention is given to information security (internal full-time dedicated officer) for protection against intruders, and to permanently analyze the safeguard of information. Trinidad and Tobago TTCD All agencies engaged in the securities are subjected to internal and external audits. In addition, these agencies are supervised either by the central bank or the SEC. The Securities Industry Act, Section 39 (3), requires that the rules of these agencies con- tain provisions designed to develop and operate a prompt and accurate clearance and settlement systems, and to safeguard money and securities in custody, under their control, or for which they are responsible. All agencies providing facilities for clearance and settlement of securities have adopted measures to protect and safe- guard their systems. These include routine daily backups of their transactions, off- site storage, and appropriate security access levels. In addition, many agencies have developed disaster recovery programs. Brokers' connections with TTCD are available online. Backup contingency plans are currently manual. Plans to establish a disaster recovery system are not yet complete; alternatives are to establish it out- side the country (in Jamaica or Barbados) or use the unit trust corporation facilities. TTCB depository See operational features of RTGS in chapter 4. Uruguay Stock exchanges- The BCU has been undertaking important efforts to improve the operational AGATA efficiency and safety of the system it operates, AGATA. The BVM has a backup system in a different location in Montevideo. An online contingency system and a contingency plan are currently being developed. BEVSA has indicated that for all their systems, they count with safe operational features, backup sites, and contingency plans. Venezuela, R.B. de Central bank (SICET) As for central bank systems for securities clearance and settlement, all applications have been developed in-house. Manuals are developed by the central bank; in order for participants to be able to trade in these systems, they must sign a letter stating that they have full knowledge of how the systems work and that they accept all conditions stated thereof. Modifications are developed by the central bank in coordination with market participants. The IT department of the central bank has a service unit to deal with system malfunctions reported by participants. Central bank systems run on an IBM OS/390 mainframe. The central bank has devel- oped various access controls, including providing passwords to authorized users; those users may change the passwords at any time. The network has two firewalls, one for internal users, and the other for external users. All central bank personnel may access the systems for which they have authorization from any terminal inside the institution. External participants experiencing problems with their terminals may go to the central bank building and continue entering transactions into the system. Records are replicated in real time, and kept in central bank premises. There are several other contingency arrangements. In case of system malfunction orders may keep coming in to the central bank via SWIFT, telex, or paper means, and the central bank will continue to process these provisionally in Excel. The central bank makes cutoffs of account holdings daily. Currently, there are no backup premises for disasters. The current capacity of the systems can handle the current demand during peak hours. Moreover, gains in systems efficiency have been achieved by several developments, such as securities standardization. Securities Settlement Systems Assessment Findings in Latin America and the Caribbean 157 Table 5.8 Operational Reliability in SSSs (Continued) Country SSS Operational Reliability Venezuela, R.B. de Stock exchange / CVV The stock exchange (BVC) uses an electronic trading system originally developed (Continued) in Spain, the SIBE. All system modifications are developed in Spain with usual quality control procedures, including appropriate testing. The BVC informs on changes to brokers dealers via e-mail, facsimile, and letters. However, there is no centralized functionality through which brokerage houses may track such changes. The SIBE runs on two mirror mainframes that are rotated every day. Records are backed up every night, and the BVC has a facility that enables the SIBE to con- tinue running for one hour in case of a general electricity cutoff. However, apart from the latter, there are no other backup facilities such as an alternative site away from the primary facilities. Backed-up information is also kept at the pri- mary site. Through the SIBE, the BVC defines two types of authorized users: transactional, and consultation only. Brokerage houses select the person(s) authorized for each type of operation and the BVC provides passwords to autho- rized users. Brokers may access the SIBE through the terminals inside the BVC, but mainly do so through remote-frame relay connections. The capacity of the system can easily handle the current demand during peak hours, because it was developed at a time when trading was much more active. Communications between the BVC and brokers are made via e-mail and diskette. Information between the BVC and CVV systems is not exchanged online, but rather via modem. The information is transmitted with the use of encryption techniques and general characteristics (for example, the size of the message, and so on) are confirmed via facsimile. Notwithstanding the fact that communications between BVC and brokers, and between the BVC and the CVV, allow for file transfers into their respective systems, thereby reducing the possibility of mistakes because of reentering the information, it seems that there is space for improvements, both in terms of risk and cost efficiency. The CVV backs up its information every night, generating three tapes, two of which are kept outside the CVV's facilities. The overall system has a backup site in hot standby mode. Source: Authors' elaboration. systems have been acquired from vendors. In cases erated or established when nonexistent. Finally, exter- when the system has been developed in-house, it is nal audit of the systems should be undertaken, espe- important to consider an external audit of the systems cially when the systems have been developed in-house. developed to make sure that all the required features The latter is especially important when the supervi- (that is, security, contingency, backups, capacity, sory framework for operational issues is weak. and so on) are in place for safe and efficient opera- tion of the new systems. This is even more important CUSTODY RISK when the supervisory framework of the operational This section includes context, status in the region and issues is not well developed in the country. observations regarding custody risk. In summary, there is room for important efficiency gains of the securities settlement infrastructure. In Context particular, physical handling of securities should be eliminated to increase the safety and efficiency of Custody risk is the risk of a loss of securities held in SSSs. In addition, there is room for improvement in custody; the loss is occasioned by the custodian's (or the clearing and settlement process, because STP is subcustodian's) insolvency, negligence, misuse of assets, not the common rule. The various plans for backup fraud, poor administration, or inadequate record keep- sites and disaster recovery facilities should be accel- ing. A custodian should employ procedures ensuring 158 Payments and Securities Settlement that all customer assets are appropriately accounted for Additional legal developments are still needed to and kept safe. Customer securities also must be protected guarantee the protection of a customer's assets in the against the claims of the custodian's creditors; typically, event of bankruptcy of the depositary holding its titles, client assets are given preferential treatment under or insolvency of the custodian. The country authori- insolvency law. ties should ensure that the segregation of accounts for securities and funds under custody has a clear legal Custodians must have a demonstrable capability to safe- basis under all circumstances. They must also ensure guard securities and funds in their custody or control or that all customer assets are appropriately accounted for which they are responsible, and for protecting against for as beneficial owners in the depository or in the reasonably anticipated internal or external threats to the custodian's omnibus accounts. Specifically, they must integrity of their operations. In many markets, settlement ensure that customer assets are protected against the is carried out and controlled through automatic data insolvency of custodians, whatever the nature of the processing systems. In these cases, the system should custodian. This issue should be explored under the con- have appropriate procedures to back up data, and a con- sideration of the overall legal framework for pay- tingency plan to minimize disruptions. ments and SSSs. Electronic technologies now in place or under develop- The immobilization or dematerialization of securities ment, such as the use of the Internet for initiating financial will eliminate the custody risk associated with deal- transactions, increase consumer choice, but also provide ing with physical certificates, but it also requires an additional means for abuse and illegal activity. Safeguards appropriate legal framework for electronic documents should anticipate, and be designed to provide protection and signatures. In LAC, there are important advances against, the possibility of theft; accidental or malicious in this direction (many laws have been recently destruction or loss of securities or funds; and the pos- approved). The authorities should make sure that the sibility of accidental or intentional, but unauthorized, corresponding regulations are approved to make it modification, disclosure, or destruction of data. applicable for settlement purposes. In connection with these objectives, the organization In general, there is no specific legal and regulatory should have an adequately staffed internal audit depart- framework for the pledge in the context of financial ment that has the authority to review, monitor, and eval- transactions. The consequence of this is that, in case uate the organization's system of internal controls and of a bankruptcy, realization of the pledged securities the integrity of the operational procedures. could not take place without a court order. In summary, particular attention is required to reduce REGULATORY AND OVERSIGHT ISSUES fraud. Some of the issues to be addressed are (1) the oper- ational security of systems including identification sys- This section includes context, status in the region and tems, message authentication, and protection measures in observations regarding regulatory and oversight issues. safeguarding access to the system; (2) protection against insider fraud; (3) a regular independent audit of the sys- Context tems to ensure continued system integrity; and (4) the determination of liability for loss or technical failure. Regarding regulation and oversight by the authorities, a specific allocation of responsibilities for securities clear- Status in the Region ance and settlement supervision is important. However, in most cases, this function is performed together with Table 5.9 includes a brief description of custody arrange- the general supervision function of the participant entities ments for settlement systems in each of the countries without any special attention being given to clearance assessed. and settlement issues. There is a trend toward regula- tory oversight policy being implemented at two levels; Observations this trend is substituting for traditional direct supervi- Some of the specific problems regarding custody risk sory activity. The regulator conducts the oversight of follow: the SROs' activities (CSDs, exchanges), whereas these Securities Settlement Systems Assessment Findings in Latin America and the Caribbean 159 Table 5.9 Custody Arrangements Country Depository Custody Arrangements Argentina Caja de valores The caja de valores adopts a tiered account structure, with the account in the name of the depositor or direct participant, who then provides subaccounts for identifying the securities holdings of the ultimate beneficiaries. In the event of bankruptcy of the primary account holder or depositor, the assets in the sub- accounts are automatically excluded from the bankruptcy estate, and the ultimate beneficiaries' assets are protected. The caja de valores acts as a registrar in case of issuers' demand (most of the cases) and as a payment agent for dividends, interests, and redemptions. Bahamas, The -- -- Bolivia EDV The protection of custody arrangements is only included for the securities depository, but not for other custodians. It is included in Article 49 b of the SML and Article 59a (being Article 59a in line with Article 39 of the depository regulation) regarding the final ownership of the securities, the custodian, or the depository, respectively. Brazil CBLC Although the CBLC depository service is a typical indirect holding system, it has a two-tiered account level structure, thus enabling the maintenance of sub- accounts in the name of the beneficial owners. This is a mandatory rule of the CVM, in order to permit the tracking of ownership in the case of any custodian's bankruptcy or fraud, thus providing security for the investors. CBLC provides dif- ferent mechanisms through which final investors can access information on their holdings. In addition, the investors can check their daily positions directly by Internet, provided they have the necessary password, which CBLC sends to the investor's address. SELIC Accounts are segregated within the SELIC system. It is worth noting that secu- rities clearinghouses (for example, BM&F Securities Clearinghouse) may use SELIC custody to which will be transferred securities available for trading in their environments without financial movement. Securities clearinghouses may also use a specific account for the safeguard of securities that have been regis- tered in SELIC and delivered as guarantee for transactions handled in its deferred net settlement systems. Securities registered in the custody accounts of clear- inghouses for this purpose may only be transferred by the clearinghouse to third parties' custody accounts in specific situations, which are clearly laid down in the clearinghouse regulations. Securities eventually registered in SELIC that belong to the clearinghouses will be registered in the clearinghouses' individual accounts. Chile DCV Code of Commerce, Article 192, includes protection of investors' or clients' assets against insolvency or bankruptcy procedures of custodians. Ownership transfer of registered securities is not completed until the securities are registered in the issuer's registry. Securities issued in order form are transferred by endorsement; in order to register them with a custodian, they must be endorsed in favor of such custodian. For securities deposited in the DCV, the DCV is responsible for the authenticity of the securities. In order to be depositors in the DCV, participants must sign a depositor contract. Participants must have their own securities in an account that is separate from those of their clients. Clients' securities records are kept in an aggregate way in the accounts. Depositors may also request the open- ing of special accounts, known as mandante accounts, to register clients' securi- ties in a segregated way. Other than keeping the securities at the DCV, investors may choose among keeping the certificates directly with them (which is common in the case of individuals), keeping them in custody with the issuing company (which is frequent in the case of institutions that own control share portfolios of the (Continued) 160 Payments and Securities Settlement Table 5.9 Custody Arrangements (Continued) Country Depository Custody Arrangements Chile companies and also for individuals), or keeping them in the custody of broker- (Continued) dealers and securities agents (which is the case of clients with frequent transaction activity in exchanges). It is also possible to keep an investor's securities in custody with a bank or a financial institution authorized to do so. The options are available to keep the securities in the name of the investor (by renting a vault or safe deposit box); or to make a transfer to the name of the custodian agency and register it with the issuing company, in the case of shares, or through endorsement, in the case of order securities. Colombia DCV DCV's depository accounts are segregated at the level of the beneficial owner, thus ensuring the full protection of customers against the claims of any custodian's (DCV's direct participant) creditors. The protection of customer assets, partic- ularly against insolvency of custodians, is included in the Code of Commerce (Article 192). DCV provides to the final investors access information on their hold- ings via Internet. The most updated information available at any moment is the situation two days before. Movements of up to two months can be obtained through Internet. DECEVAL DECEVAL's depository accounts are segregated at the level of the beneficial owner, thus ensuring the full protection of customers against the claims of any custodian's (DECEVAL's direct participant) creditors. The protection of customer assets, particularly against insolvency of custodians, is included in the Code of Commerce (Article 192). DECEVAL provides to the final investors access to infor- mation on their holdings. Costa Rica CEVAL Segregation of accounts in CEVAL exists at the level of the client. Ownership rights of an investor are clearly defined. An investor who has given his or her securities in custody is protected by law against the claims of the creditor of his or her custodians (Article 142). Independent of the form and the location, securities of clients form no part of custodian assets, stay outside the available assets after bankruptcy, and cannot be claimed by the custodian creditors. This is also the case if securities had been deposited for third parties. This article not only protects securities issued in Costa Rica that are owned by the investor, but also foreign securities that are kept in custody by a local custodian. The law not only protects inhabitants of Costa Rica, but also foreign investors and foreign custodians that use a Costa Rican local agent. Dominican Republic CEVALDOM The legal basis for custody arrangements is included for the CSD but not for other financial institutions. The social security law obliges the BCRD to have custody of the securities administered by pension funds. Ecuador SCT at the Most of the securities (around 75 percent) are deposited in Sistema de Custodia central bank de Títulos (SCT) operated by the Banco Central del Ecuador. In this system, banks have opened omnibus accounts. Banks are not obliged in SCT to segregate their own securities from their client securities. Most of the regulations on depository and custody refer to DECEVALE and the custodial services of banks and brokers for their clients. The law does also not explicitly protect the clients of a custodian who held the securities of this client in SCT, or in a foreign CSD, or by means of a local agent abroad, against the bankruptcy of the custodian. Whereas the trading of the securities on the stock exchanges demands the handing over of physical securities, most of the custody risk in Ecuador stems from the use of physical securities. Securities Settlement Systems Assessment Findings in Latin America and the Caribbean 161 Table 5.9 Custody Arrangements (Continued) Country Depository Custody Arrangements El Salvador CEDEVAL Securities settlement occurs through CEDEVAL. Securities settlement occurs by transferring the ownership records at CEDEVAL. Because not all securities are immobilized, sellers must deliver physical securities to CEDEVAL 24 hours before the sale is made. A law for dematerialization of securities was approved in 2002. The law makes it possible for the BCR to be the depository and to maintain the registry for public securities. Considering that 80 percent of all transactions in the securities market are of official securities (treasury and BCR paper), mainly in the form of short-term repos, the ongoing dematerialization is having an important impact in the securities settlement. Guatemala Stock exchange The securities depository of the Bolsa de Valores Nacional started operating in 1994. Physical custody of securities deposited in the caja de valores has been outsourced to a private bank. Custody of securities is formalized by means of a deposit contract, regulated in the SML (Article 79). Each participant in the deposi- tory must open his or her own account and an account on behalf of final beneficia- ries, of which the depository keeps a record. Broker-dealers must send periodic information to their customers about their accounts statements. The depository also offers the services of administering economic rights associated to the secu- rities deposited. Honduras Stock exchanges Public securities are issued on a dematerialized form and can be under the custody of the Banco Central de Honduras or the stock exchange. In the rare occasion that those securities are traded in the secondary market, it is done through the physical exchange of custody certificates or at the custodian ser- vice of the stock exchange. In any case, there is no legal basis for this custody arrangement, because the commercial law only recognizes securities issued in physical form. The SML provides the legal support for a CSD and ownership transfer of securities by book-entry notes through it, but the CSD has not yet been established. Jamaica Government Government securities settlement occurs through the physical delivery of the securities / JCSD certificate, with cash settlement occurring either by cheque or by a funds transfer over the BOJ's customer information funds transfer system. When government securities are sold, they are delivered with a transfer form so that they can be reregistered with the ministry of finance. Registration at the min- istry of finance may take up to two weeks. Jamaican securities markets face the typical custody risks associated with physical certificates: lost, stolen, and destroyed securities and the potential fraud associated with those certificates. In addition, although the law is clear in terms of the segregation of accounts regarding the JCSD, it is not clear in terms of the custody of securities or funds by the brokers, although segregation occurs in practice. Repo operations with government securities (that are all physical, bearer, or registered) do not have secure legal support, because the primary dealer always keeps the ownership in the registry of the ministry of finance, and it is uncertain whether the certifi- cate endorsements in subsequent repo operations can be considered as a proof of ownership in a court of law. Indeed, there is an agreement between participants (the Inter-Dealer Master Repurchase Agreement) that the transfer certificate will be kept, but not used to transfer ownership, in the ministry of finance registry. Mexico INDEVAL Article 18 of the Ley General de Títulos y Operaciones de Crédito establishes that the ownership of securities is transferred by transmitting the credit certificate through which ownership was originally established. However, all securities traded on the Mexican securities market are deposited and immobilized in INDEVAL. Hence, once the securities have been deposited, the transfer of ownership legally occurs by (Continued) 162 Payments and Securities Settlement Table 5.9 Custody Arrangements (Continued) Country Depository Custody Arrangements Mexico transferring ownership from one account to another at the CSD; this does not involve (Continued) either physically delivering the asset, or writing a legend on the securities them- selves, or, when applicable, on the issuer's registry. The certificates representing nominative shares must be endorsed to INDEVAL for administration. The endorse- ment enables INDEVAL to justify its securities holdings and to execute the functions granted by law to CSDs. When the securities are no longer deposited at INDEVAL, the endorsement no longer affects administration, and these securities become sub- ject to the regime established in the general commercial law and other applicable laws. INDEVAL must issue to depositors nonnegotiable letters of proof of ownership of the deposited securities. These letters are sufficient to demonstrate ownership of the related securities, to exercise them to attend shareholder meetings, and, in the case of equities, to permit the issuing company to be included in the registry of shareholders. These documents also serve to legitimate the execution of those actions mentioned in Articles 185 and 201 of the Commercial Enterprises General Law, as well as any other action in which it might be necessary to exhibit the securi- ties held in custody by INDEVAL. There are two basic legal frameworks for collateralization: the pledge and securities safekeeping (caución bursátil). In the Ley General de Títulos y Operaciones de Crédito, the pledge refers to credit transactions. When fungi- ble goods or securities are pledged, the pledge prevails if the securities or goods are substituted with others of the same kind. The Ley General de Títulos y Operaciones de Crédito also contains a concept called pledge without owner- ship transfer. This constitutes a real right over goods; its purpose is to guaran- tee the fulfilment of an obligation and its seniority for payment, while the debtor retains ownership. This type of pledge can guarantee any obligation. In case of bankruptcy of the debtor, the secured creditor may execute through judicial proceedings the goods with this kind of pledge. Securities safekeeping is described in Article 99 of the SML. The securities custody service is considered to be of public interest and can be provided by private sector firms only by concession of the federal government. Banco de México, brokerage houses, stock exchange specialists, stock exchanges, banks, and insurance companies can be the sole providers of this service. At the same time, these companies can provide custody services to brokerage houses, stock exchange specialists, stock exchanges, CCPs, banks, insurance firms, mutual funds and their management firms, and foreign finan- cial entities, as well as to other CSDs whose nationality is Mexican or foreign. Central depositories are subject to the inspection and control of CNBV. The SML does not mention explicitly the protection of securities held in custody in case of bankruptcy or insolvency of the custodian. In case of dissolution and liquidation of a CSD, the SML states that the occurrence will be handled according to rules established in the Commercial Firms General Law or, if applicable, to rules established in the Bankruptcy Law. Article 70 of the Bank- ruptcy Law states that the goods that can be identified as in possession of a firm but whose ownership has not been transferred to it in a legally final and irrevocable way may be separated from the bankruptcy process by the legal owners. Article 71 states that it is possible to separate from the total those goods that, among other circumstances, are in possession of a firm as a deposit or a trust or that were received in administration or consignation. The Bank- ruptcy Law contains a paragraph dealing with entities providing public goods under concession, as is the case for INDEVAL. The article states that bankruptcy procedures for these kinds of entities are subject to the laws, regulations, concession titles, and other dispositions regulating that specific concession and public service. Securities Settlement Systems Assessment Findings in Latin America and the Caribbean 163 Table 5.9 Custody Arrangements (Continued) Country Depository Custody Arrangements Netherlands Antilles BvdNa The National Ordinance on the Supervision of Investment Institutions and Admin- istrators became operational in January 2003. Some of the main elements on supervision of investment firms focus on custody arrangements: there must be separation between the manager of an investment institution and the custodian; the manager and the custodian must meet fit and proper criteria; and the custodian must be organized as a legal entity with funds separated from the assets of the investment institution. Nicaragua CENIVAL All public securities are issued in physical form. Subsequent ownership transfers are done by means of delivery (if bearer securities) or endorsement (if order securities) or book-entry note in the CENIVAL. In order to be traded at the stock exchange in a secondary market, securities must be deposited in the CENIVAL. Physical custody of securities is formalized by means of a deposit contract. Participants endorse their securities to CENIVAL in order for CENIVAL to make the necessary securities trans- fers through book entries. The depository also offers the services of administering economic rights associated to the securities deposited. Regarding the protection of customer assets in the event of bankruptcy or insolvency of the custodian, each par- ticipant in the depository must open an own account and an account on behalf of final beneficiaries, of which the depository keeps a record. In turn, the CENIVAL keeps the deposited securities in so-called memorandum accounts. However, there is no specific legal protection for assets under custody for the securities market. OECS ECCSD There is uncertainty about the enforceability of security interests provided under col- lateral arrangements and of any repurchase agreements. The validity of an interest held by a creditor (including a creditor that is not a regulated financial institution) in securities pledged or charged as collateral (including securities held in the ECCSD, and any other collateral pledged across national boundaries), is disputable under the current laws. So, too, are the rights and the ability of the creditor to quickly realize that collateral in the event of a default by the debtor. Pledging of securities as collat- eral is presently being looked at as part of the payment system improvement project. Panama LATINCLEAR The SML mandates segregation of accounts of clients. The ownership rights of an investor are clearly defined. An investor who has given his or her securities in custody is protected by law against the claims of creditors. Independent of the form and location, the securities of the clients are not part of the assets of the custodian, stay outside the available assets after bankruptcy, and cannot be claimed by the custodian creditors (SML, Articles 27, 37, 122, 177, and 179). About 99 percent of securities are dematerialized or immobilized. Paraguay Broker-dealers No legal basis for custody arrangements exists. A draft of a securities depository law was produced soon after the SML was approved, but it has not passed congress. Peru CAVALI In terms of clear definition of property rights, Article 237 of the SML states that, in case of dissolution or liquidation of the depositories, securities will not be included in the liquidation process. Changes to the law, approved in 2002, also include full protection for investors funds held by CAVALI or intermediaries. Securities are held at the beneficial owner level. The DvP process ensures immediate owner- ship to buyers after settlement process. By law, CAVALI's registry prevails as evidence of property. CAVALI provides different mechanisms through which par- ticipants or investors, or both, can access information about their holdings online. In addition, investors can check their positions directly via the Internet, provided they have a signed agreement with CAVALI and the necessary password. Trinidad and Tobago TTCD The Companies Act Section 195(1) states that the shares or debentures of a com- pany may be transferred by a written instrument of transfer signed by the transferor and by naming the transferee. The transfer of legal ownership of a security, how- ever, is not effected until the transferee's name is registered in the shareholder's registry by the issuer. Until the transferee is entered in the shareholder registry, the transferor is regarded as the legal owner of the security, although the buyer becomes the beneficial owner at the time a trade is executed. (Continued) 164 Payments and Securities Settlement Table 5.9 Custody Arrangements (Continued) Country Depository Custody Arrangements Trinidad and Tobago The Securities Industry Act of 1995 contains provision for the transfer of securi- (Continued) ties through a clearing facility. Section 105 of the act states that "the clearing agency, upon receipt of written instruction and a security certificate from a participant, is required to deliver the certificate to the issuer and request the transfer of the securities evidenced by the certificate to the clearing agency. The issuer on receiving notification from the clearing agency has a duty to reg- ister the transfer, immediately enter the transfer in its securities register, and deliver to the clearing agency a security certificate representing the securities and showing the clearing agency as registered owner." The Securities Industry Act of 1995, Section 108, determines that on receipt of written instructions from a participant, a clearing agency shall, in accordance with the instructions, effect a transfer by way of pledge of a security from the participant to the pledgee. The pledge shall be done by making an entry in the records to block the account in favor of the pledgee for the amount of the debt, other obligation, or the number of securities pledged. The clearing agency is not liable for any loss resulting from compliance with the instructions of a pledgee unless it knows before the transfer that the pledgee is not entitled to the securities. A participant has no right to pledge a security held for him by a clearing agency except through the facilities of the clearing agency. The rules of the proposed TTCD outline procedures for the pledging of securities. The Securities Industry Act of 1995 recognizes the right of a person or legal entity to hold property for another in custody or trust relationship. The law also recognizes the fungibility of securities. Apart from the clearing agency, no other entity or person has the right to hold securities for another in custody or trust relationship. Additionally, the Companies Act of 1995 recognizes that a trustee relationship can exist (see Section 148). However, Section 186(1) states that notice of a trust, whether expressed, implied, or constructive, shall not be entered in any register maintained by the company. Uruguay Stock exchanges- In principle, most public securities are issued in book-entry form. There is a legal AGATA basis for ownership transfer of book-entry (escriturales) for private securities, but it is uncertain if the SML is applicable to public securities, because Article 1 seems to exclude them from the application of the law. The protection of custody arrangements is included through the depository contract regulated by the commercial code. However, protection of custody arrangements is not included directly in any law or regulation. There is currently no supervision of custody arrangements by the BCU or stock exchanges. Venezuela, R.B. de Central bank CVV Regarding public debt, the BCV and the ministry of finance have made great efforts in the past three years to achieve the complete dematerialization of government securities. These are registered in book-entry form in the SICET, the central bank electronic custody system for government securities, and central bank issues. Banks (universal, commercial, mortgage, and investment), savings and loans institutions, broker-dealers, and other institutions allowed by the BCV can be participants (depositors) in this system. There is segregation between the depositor's own securities and its clients' assets. For fiscal reasons, each deposi- tor must hold six different omnibus client accounts according to the type of client, which gives extra statistical information to the system. Therefore, each depositor registers the beneficial owner; such owners are not known by the system. Although on an operational basis segregation is used, the customer's assets might not be clearly protected from a legal point of view against the claims of depositor's creditors. Securities Settlement Systems Assessment Findings in Latin America and the Caribbean 165 Table 5.9 Custody Arrangements (Continued) Country Depository Custody Arrangements Venezuela, R.B. de Concerning shares and commercial paper traded in the BVC, the physical security (Continued) must be deposited and immobilized in the CVV, which may outsource the physical custody of the securities to an authorized custodian. In this system, a depositor (depositante) must open an account for its own holdings and a subaccount on behalf of each of its clients (subcuentista), directly in the CVV, in order to ensure that securities are registered in the account of the beneficial owner. Segregation of accounts is therefore implemented, and protection of the customer's assets in case of bankruptcy of the depositor is legally stated in Article 17 of the Ley de Caja de Valores, which states that the owner of the securities deposited in the CVV will always be the holder of the accounts and subaccounts. Once the securities are immobilized and registered in the account or subaccount of the beneficial owner, transmission of ownership is done by means of an electronic transfer between the accounts or subaccounts opened in the CVV. Source: Authors' elaboration. Note: CEVALDOM (Central de Valores Dominicana). institutions perform the same function with regard to its Some countries do not have any regulatory agency or participants. function over securities settlement other than the SRO role of the stock exchange. This undermines the trust A securities regulator should have the authority to in the system, especially from a foreign investor per- license central clearinghouses and CSDs (system oper- spective, and it constitutes an important obstacle for ators) as SROs, and to review and approve their rules. further development of the securities market. This As an SRO, a system operator should have the authority becomes more crucial in some envisaged reforms for to make and enforce rules on its participants. The secu- the payments system, because liquidity management rities regulator should have the power to issue the guide- will become a crucial issue and an important element lines that system operators should follow. In addition, through the collateralized money market. the securities regulator should ensure that the rules and In general, the capacity of the securities regulators procedures issued by SROs permit a sound and effec- regarding securities settlement should be strength- tive operation of the system, and provide fair access to ened. Some securities regulators are recently-created all market participants. The securities regulator should institutions whose regulatory capacity for securities also have the authority to conduct periodic inspections, settlement should be strengthened. The securities reg- require the production of periodic reports, and enforce ulator must have the appropriate human and material the securities laws and regulations. resources to discharge its functions of supervision of Cooperation between the securities regulator and the the institutions and the oversight of the SSSs as a central bank, as well as their cooperation with other rel- whole. If the skills are not in-house, external assis- evant authorities, is important in achieving the securities tance should be obtained. regulator and central bank respective policy goals. The oversight empowerment for SSSs is missing in some cases. The securities supervisor oversight Status in the Region responsibilities on the SSSs must be strengthened by law. This law must regulate the powers of the securi- Table 5.10 includes a brief description of regulatory and ties regulator and authorize it to cooperate with the oversight issues for each of the countries assessed. central bank to issue regulations relating to securities clearing and settlement activities. Observations The oversight of a SSS and its participants is nor- Some of the specific problems regarding regulatory and mally divided between several regulators (central oversight issues follow: bank, securities regulator, pension funds regulator, 166 Payments and Securities Settlement Table 5.10 Regulatory and Oversight Issues in SSSs Country Regulatory and Oversight Issues Argentina The CNV, the national securities supervisor in Argentina, was created by the Public Offering of Securities Act in 1968. It is given broad supervisory authority over securities market activities, including supervising securities market institutions, regulating public offerings of securities, and regulating trading securities issued by private and partially government-owned companies. The CNV also has supervisory authority over SROs, including stock exchanges, stock markets, and CSDs. A secretariat of the ministry of economy is responsible for over- seeing the clearing and settlement of primary market transactions that take place on the CRYL system. Bahamas, The The Securities Act (as amended in 1999) regulates the securities commission and its authority. Bolivia The SV is the institution in charge of securities markets regulation and supervision (Article 15 of the SML). The securities depositories must be constituted as joint stock companies and their only activity must be the depository function. The SV authorizes the establishment and the legal statutes of the company as established by the SML. The depositories as SROs must develop operational rules that their participants should follow. The stock exchanges are also defined as SROs by the SML, and they develop their internal regulations. Brazil The BACEN is responsible for the supervision of financial institutions, oversight of payments and SSSs, and surveillance of some financial markets. Also, the BACEN acts as fiscal agent for the Brazilian government because the national treasury holds an account at the central bank. This account is used to transfer reserves related to treasury transactions. Surveillance of financial markets is also exercised by the CVM, which causes some overlapping with the BACEN oversight functions, especially in the area of securities settlement. Forms of cooperation and information exchange and cooperation exist between payment system overseers. CBLC is subject to the central bank and the securities commission regulations. SELIC is regulated and over- seen by the central bank. BM&F is currently submitted to central bank and securities commission regulations. Cooperation between the BACEN and the CVM was recently formalized in the area of SSSs. Chile The bodies that regulate the Chilean financial system are the central bank of Chile, the Superintendencia de Valores y Seguros (SVS), the Superintendencia de Administradores de Fondos de Pensiones (SAFP), and the Superintendencia de Bancos e Instituciones Financieras (SBIF), as described below: The Central Bank of Chile: This is the institution responsible for issuing rules on the monetary, credit, finan- cial, and international exchange fields; it is also responsible for their monitoring. The SVS is the entity charged with regulating and supervising the securities and insurance markets. The SAFP is the entity in charge of regulating and supervising the pension fund market and the fund's man- agement companies. The SBFI is the organization charged with regulating and supervising the banking system. The SVS is an autonomous institution, with legal capacity and its own capital, which is related to the government through the ministry of finance. Its duties are the following: supervising the issuers and intermediaries of publicly offered securities, the exchanges and their transactions, third-party funds and their managing companies (other than those entrusted by law to other supervisory agencies), insurance and reinsurance companies, open stock corporations, and any other entity or legal person entrusted to the SVS by the laws; ensuring that the individuals or institutions being supervised comply with the laws, regulations, bylaws, and other provisions that govern them; sanctioning of individuals or entities subject to monitoring by the SVS that infringe the laws, regulations, bylaws, and other rules that govern them, including censure, revenue penalty, cancellation of the registration, or revocation of the authorization for the company to exist; and finally, the SVS is the body responsible for requiring that the parties it supervises provide true, full, and timely information about their transactions. Colombia The SFC was created by Decree 4327 of November 2005, merging the existing Superintendencia Bancaria with the SV. The SFC supervision and monitoring function in relation to securities markets is to ensure that market agents' operations comply with the regulations and with market fair play. Before initiating operations, the stock exchanges and CSDs must have the authorization of the SFC that includes the approval of the general rules, operating rules, and trading systems. In the case of broker-dealers, the SFC must inspect and supervise them, and must ensure that they are complying with all applicable rules. Among those rules are equity requirements, financial statements disclosure, conflict of interest management, obligation to advise clients, Securities Settlement Systems Assessment Findings in Latin America and the Caribbean 167 Table 5.10 Regulatory and Oversight Issues in SSSs (Continued) Country Regulatory and Oversight Issues Colombia and development of their activities. The stock exchanges are empowered to issue operating and disciplinary (Continued) regulations and to establish the requirements to become a member of the exchange. The CSDs must oversee their depositories' compliance with the depositories' operating rules and the securities market regulation. The CSDs--DECEVAL and DCV--and the stock exchanges clearinghouses are subject to regulation and oversight by the SV that, under governmental delegation, is the body responsible for oversight. Oversight is extended to all market participants. The SFC also regulates subjects defined by law, and promotes and imposes fines to market participants. The clearing and settlement activities developed by the stock exchanges are also subject to the supervision and oversight of the SFC. The SFC is empowered to require information from the issuers and market participants, and to conduct on-site inspections. Costa Rica The Consejo Nacional de Supervisión del Sistema Financiero (CONASSIF) is responsible for issuing all regula- tions for the financial system, as well as for the overall policies that govern the three supervisory agencies of the financial system. In this regard, Article 169 of the SML states that the Superintendenci General de Entidades Financieras (SUGEF), the Superintendencia General de Valores (SUGEVAL), and the Superintendencia de Pensiones (SUPEN) will all function under the direction of the CONASSIF. The members of CONASSIF are the minister of finance, the president or the general manager of the Banco Central de Costa Rica, and five repre- sentatives not holding public sector positions. The SUGEVAL was created by Law 7732 of 1998, the SML; it replaced the former National Securities Commission, which in turn had been created by the previous SML, Law 7201 of 1990. Before the CNV, only the BNV exercised some sort of supervision, although with a self- regulatory character. The SUGEVAL is responsible for supervising broker-dealers, investment funds managing companies, financial groups, and financial and nonfinancial securities issuers. The SUGEVAL is an autonomous entity functioning under the umbrella of the Banco Central de Costa Rica. SUGEVAL is charged with the regu- lation, supervision, and control of the securities markets. However, its powers are limited by the SML, which confers to the CONASSIF the powers to dictate the rules for authorization, regulation, supervision, control, and surveillance that SUGEVAL and the other supervisory agencies must execute. In this regard, SUGEVAL may propose new regulations to the CONASSIF. The functions of the SUGEVAL are established in Article 3 of the SML. SUGEVAL must watch over the securities markets for transparency, adequate price formation, investor protection, and the necessary disclosure of information. SUGEVAL regulates, supervises, and controls the securities market, the activities of the individuals or firms participating either directly or indirectly in it, and the related actions and contracts determined by law. Regarding securities clearance and settlement, the SUGEVAL sets and supervises the rules regarding the functioning of CSDs, clearance systems, centralized transaction, and information systems for securities transactions. Article 6 of the SML specifically entitles SUGEVAL to regulate the organization and functioning of the Securities and Intermediaries National Registry, including the necessary information and updates, to which all individuals and firms participating either directly or indirectly in the securities market (except for investors) must subscribe. All actions and contracts associated with this market, as well as all public offerings of securities, must be registered in the Securities and Intermediaries National Registry. Depositories must be authorized by SUGEVAL. Article 134 of the SML gives them also the possibility, together with broker-dealers and entities subject to SUGEF control, to offer custody services, including the adminis- tration of economic rights associated with the securities under custody. Articles 119 and 134­143 regulate different aspects of the central depository and custody functions, such as the constitution of a deposit; proof issuance; restitution of securities, bonds, or documents; and depositor protection in case of bankruptcy or insolvency of a custodian. In August 1994, the only CSD in Costa Rica, the CEVAL, was created. Its equity is totally owned by the BNV. Currently, CEVAL administers and performs the clearance and settlement of the securities deposited in it. The regulations of the BNV establish the main characteristics of the CEVAL. Meanwhile, CEVAL's own regulations specify the features of the registry system. Oversight on SSSs and on the CSD is still to be developed and implemented. Dominican Republic The superintendency of securities was only established in 2002. Its regulatory and oversight capacity for securities settlement is in the process of being strengthened. Ecuador There is an unclear situation in Ecuador with respect to the oversight of SSSs. The securities regulator over- sees the DECEVALE, but not the SCT. On the other side, the Banco Central del Ecuador has no clear authority for the oversight of payments and SSSs. (Continued) 168 Payments and Securities Settlement Table 5.10 Regulatory and Oversight Issues in SSSs (Continued) Country Regulatory and Oversight Issues El Salvador The SV is the entity in charge of supervising and overseeing the stock market and its participants. This insti- tution began its operations on January 1, 1997, with the stock exchange, brokerage firms, deposit and securities custody firms, and risk-rating firms falling within its limits of supervision. The securities depositories must be approved by the SV; apart from this, however, there is no specific oversight function over securities settlement. Guatemala According to the SML, the stock exchanges are SROs with regulatory and supervisory power over their members. There is neither a securities regulator nor any other public agency that performs this role. This function is completely assumed by the stock exchanges in their SRO capacity. Article 18e of the SML indicates that it is a function of the stock exchange to oversee and ensure that the activity of the broker-dealers and issuers comply with the regulation. Title V of the internal rules of the stock exchange develops the supervisory role of the stock exchange over the registered entities and broker-dealers. Penalties are included in chapter 3 of title 2. Honduras The Comisión Nacional de Bancos y Seguros Law (Ley de la Comisión Nacional de Bancos y Seguros, 1995) defines the institutions under the supervision of the Comisión Nacional de Bancos y Seguros (see Article 6), including entities involved in securities markets. There is no formal oversight over the securities settlement. Jamaica The BOJ and the FSC share authority for the regulation and oversight of the securities market and settlement system in Jamaica. Both agencies were created by statute, and report to the ministry of finance and planning. The BOJ derives its authority from the BOJ Act, the Banking Act, and the Financial Institutions Act. It licenses and regulates the activities of commercial banks and merchant banks. The FSC was established by the FSC Act of 2001. Under the FSC Act, the FSC assumed the responsibilities of the previous office of the super- intendent of insurance, the securities commission, and the pension fund regulator. Accordingly, the super- vision of nonbanking and non-deposit-taking institutions (insurance companies; pension funds; and securities and collective investment funds) are the responsibility of one entity. In order to supervise each industry, the FSC administers the Securities Act, Insurance Act, and the Unit Trust Act. With regard to the Jamaican SSS, the Securities Act authorizes the FSC to license the JCSD and approve the rule changed by the JSE and JCSD. In addition, under the Securities (Conduct of Business) Regulations, 1999, broker-dealers are required to comply with standards for internal organization and operational conduct designed to protect the interests of clients, and to ensure the proper management of risk. These requirements include determining the credit worthiness of the client; ensuring that the client completes a request for proposal; ensuring that the request clearly states the level of authority being given to the portfolio manager by the client; and ensuring that the request clearly sets out the risk tolerances of the client. Through a memorandum of understanding, a forum has been established for the FSC, the BOJ, and other Jamaican financial services regulators to meet and share information. However, Sections 15 and 16 of the FSC Act, 2001, limit disclosures to foreign regulators. Mexico According to Article 8 of the SML, SHCP is responsible for the interpretation, in administrative terms, of the SML. SHCP must provide, through general dispositions, everything that is needed for the law's full application. SHCP executes its functions in this area once it hears CNBV's opinion. CNBV issues the prudential regulations and general dispositions that entities have to follow, and is in charge of their supervision. More specifically, CNBV supervises and regulates financial entities to ensure their overall stability and proper functioning as well as to maintain and foster a healthy and balanced development of the financial system as a whole, protecting the public interests. Financial group holding companies, banks, brokerage houses, market specialists, stock exchanges, CSDs, and risk-rating firms, among others, are all considered financial entities for these purposes. A concession is required to create an exchange. The concession is granted discretionally by SHCP once it hears the opinions of Banco de México and CNBV. The Incorporation Act and stock exchange bylaws and their modifications need to be approved by SHCP. Once this approval has been obtained, the stock exchange can be registered in the Public Registry of Trade. Article 37 of the SML states that stock exchanges must elaborate a set of internal regulations that include the self-regulatory rules applicable to the stock exchange itself, brokerage houses, and stock market specialists; the process for their adoption and supervision; the disciplinary and corrective measures that will be applied in case of failure to comply; and the procedures to apply these measures. These regulations and any modifications must be authorized by CNBV. In more general terms, CNBV is responsible for verifying compliance with the rules regulating stock exchange activity, and with self-regulatory rules, financial statements, assessment of trading system management, and confirmation of the dissemination of information to the market. Securities Settlement Systems Assessment Findings in Latin America and the Caribbean 169 Table 5.10 Regulatory and Oversight Issues in SSSs (Continued) Country Regulatory and Oversight Issues Mexico The SML states that the services of custody, administration, clearance, settlement, and transfer of securities (Continued) are of public interest. These services can only be provided by entities obtaining a concession from SHCP, once it hears the opinion of CNBV. Among other functions, CSDs are empowered to carry out depository functions; administer the deposited securities; and transfer, clear, and settle transactions made with the deposited securities. Article 58 of the SML states that CSDs are subject to inspection and surveillance by CNBV, to which they must provide all the necessary information and documents. More specifically, CNBV has powers regarding CSDs; to authorize the accounting records and issue the rules for grouping accounts and for registering operations; to issue general rules to which CSDs are subject according to the application of their equity; and to order inspection visits to CSDs. If applicable, CNBV is empowered to intervene in these institutions for the purpose of suspending, normalizing, or settling those operations that may endanger their solvency, stability, or liquidity, or those that violate the law or the general rules deriving from it. Article 60 of the SML states that CSDs must elaborate a set of internal regulations that include, among others, rules applicable to the delivery and withdrawal of deposited securities, physical custody and administration of deposited securities; procedures for the transfer, clearance, and settlement of deposited securities; pro- cedures for the execution of ownership rights; and procedures for the handling of settlement defaults and sanctions. The internal regulations and subsequent modifications must be approved jointly by CNBV and Banco de México. The provision of CCPs is of public interest and can only be performed by companies that obtain a concession from SHCP, once it hears the opinions of Banco de México and CNBV. CCPs are subject to the inspection and surveillance of CNBV. The powers of CNBV over CCPs are the same ones detailed in Article 58 of the SML (that is, those applicable to CSDs). Article 89 Bis 7 of the SML establishes the minimum requirements for the internal regulations that CCPs must elaborate. These minimum requirements include the requirements that the intermediaries must meet at all times so that the CCPs may act as reciprocal debtor and creditor; the procedures and systems through which the operations will be cleared and settled; and the systems of financial safeguards and operational, prudential, and self-regulatory rules applicable to the CCP and its reciprocal debtors and creditors. The internal regula- tions and any modifications to them are subject to authorization of Banco de México and CNBV, except for self-regulatory rules, over which these authorities may exercise veto power. Article 125 of the SML considers as SROs stock exchanges, CCPs, associations of securities market interme- diaries, and associations of providers of services linked to the securities market. Article 126 establishes that SROs are subject to the supervision and surveillance of CNBV for concerns with compliance with the self- regulatory rules they have issued. The functions of stock exchanges include establishing the necessary measures so that the transactions that brokerage houses or stock market specialists execute on their premises conform with the applicable rules. As mentioned, Article 37 of the SML states that stock exchanges must include in their internal regula- tions the self-regulatory rules applicable to the stock exchange itself, brokerage houses, and stock market specialists; the process for their adoption and supervision; the disciplinary and corrective measurements that will be applied in case of failure to comply; and the procedure for applying these measures effectively. The self-regulatory rules do not require the previous authorization of CNBV. Nevertheless, CNBV has veto power over them. The current internal regulations of BMV were authorized by CNBV on September 27, 1999, and became effective on October 25, 1999. Regarding supervision of its internal activities, the regulation includes detailed rules on aspects such as admission criteria; obligations of members, operators, and issuers; transaction fulfilment; surveillance; preventive measures; and sanctions. The INDEVAL regulation was authorized by CNBV on December 22, 1995, and since then it has changed. Moreover, INDEVAL has developed an operations manual for the services it offers, which details the requirements to participate and execute operations in its system. Failure to comply with the dispositions in the operations manual is considered a violation of the regulation; offenders are subject to the penalties described in the regulation. (Continued) 170 Payments and Securities Settlement Table 5.10 Regulatory and Oversight Issues in SSSs (Continued) Country Regulatory and Oversight Issues Netherlands Antilles There is no designated legal framework for the securities market or for the settlement of securities transac- tions. Supervision of investment institutions was recently introduced when the National Ordinance on the Supervision of Investment Institutions and Administrators became operational in January 2003. Nicaragua The stock exchange, the depository (or depositories), and broker-dealers are all regulated by the Superinten- dencia de Bancos y Otras Instituciones Financieras (SBOIF), but only on the basis of the banking law. The SML draft gives self-regulatory powers to the stock exchange (Articles 39 and 123). In this draft, deposi- tories are to be authorized by the SBOIF according to some of the requirements set forth in the banking law. Depositories are not considered SROs in the SML draft. OECS The Eastern Caribbean Securities Regulatory Commission (ECSRC) is the regulatory authority, charged under the Securities Act, with full and ultimate responsibility for the safe and sound operation of the market and for investor protection. It has the objectives to license persons engaged in securities business and to monitor and supervise the conduct of such busi- ness by a licensee; to ensure investor protection through promotion of the highest standards of professional and other activi- ties within the securities market; to maintain effective compliance and enforcement programs supported by adequate statutory powers; and to promote the growth and development of the capital market. All public companies within the region have to reregister with the ECSRC. Similarly, all new companies wishing to raise capital through a public offering will also need to register with the ECSRC. The corporate securities market is regulated by the ECSRC. The Regional Debt Coordinating Committee (RDCC) regulates the Regional Government Securities Market with support from the ECSRC. The ECCB provides technical and administrative support to the commission, which has been formalized under the terms of a memorandum of understanding. Under this arrangement, the ECCB provides a technical secretariat within its bank supervision department to handle the day-to-day operations of the ECSRC and to assist the commissioners in carrying out their mandate. The powers and responsibilities of the securities commission are stated in Articles 4 through 6 of the agreement, and are enumerated in detail in the Securities Act with regard to licensing; approval of rules; suspension and revocation; the ability to issue directions; the ability to call for information, inspection, and investigation; and dispute settlement. The commission is accountable to the monetary council of the ECCB under Articles 12 and 16 of the agreement. These articles set out the procedures for appointment, remuneration, and removal. Publication of appointment is to be carried out by publication in the gazette, and notice of removal is given to the participat- ing government or public body that nominated the commissioner. By virtue of the common law system, judicial review of the decisions of bodies such as the commission exists. Amendments have been drafted to allow for appeal of commission decisions to a disciplinary committee; those amendments explicitly provide for judicial review of that tribunal. These amendments have already been enacted in St Kitts and Nevis and in Grenada. Regulators should: conduct direct supervision of clearing and settlement systems and their operators; and require a framework that permits them to ensure the accountability of such systems, to monitor and, if possible, predict and prevent problems associated with clearing and settlement through (1) review of system mechanisms and establishment of operating standards; (2) the power to issue mandatory directions; and (3) inspection and periodic review. Also, the clearing agency has a duty to assist the commission. There is an element of periodic review under Sections 27­29 of the Securities Act, which provide for mandatory review of proposed amendments to rules by the commission; mandatory reporting of proposed alteration to or the occurrence of any event that affects or may affect in a material respect information supplied to the commission, or any matter in respect of which the clearing agency was required to supply information to the commission. Clearing and settlement organiza- tions should be required to make reports to the regulator, and may be required to submit to periodic and, if necessary, special audits and examinations. Securities Act Section 150 can be used for commissioning special audits or examinations. Securities Settlement Systems Assessment Findings in Latin America and the Caribbean 171 Table 5.10 Regulatory and Oversight Issues in SSSs (Continued) Country Regulatory and Oversight Issues OECS The ECSE is the sole SRO in the Eastern Caribbean Currency Union securities market. Membership criteria is (Continued) established and assessed by the ECSE, which also defines rules of conduct with which its members shall comply in the relationships with their customers, to ensure transparency and fairness in the performance of their activity. To this end, communication of securities exchange members with the public is based on the principles of fairness and good faith. Panama CNV is an autonomous entity, responsible for issuing all regulations for the securities market based on the principles of the Decree-Law 1, 1999. BVP and LATINCLEAR are SROs who have the capacity to issue and enforce regulations. CNV is responsible for supervising market participants (broker-dealers, investment societies, securities issuers, and SROs). Broker-dealers, investment societies, and SROs must be authorized by SUGEVAL. Articles 27, 56, and 122 of the SML regulate the conditions for the provision of custody services, including the administration of economic rights associated with the securities under custody. Title 11, chap- ters 1, 2, and 3, regulate different aspects of the central depository and custody functions, such as the con- stitution of a deposit; proof issuance; restitution of securities, bonds, or documents; and depositor protection in case of bankruptcy or insolvency of a custodian. Paraguay The CNV is the regulatory body for securities in the country. The CNV has broad empowerment over securities markets, including monitoring of public offers and trading of public and private securities. The CNV also is empowered to supervise the SROs (the stock exchanges and depositories). Peru The CONASEV has supervisory responsibility over stock exchanges (BVL), the depository (CAVALI), the broker-dealers, the issuers, and other institutions participating in the clearing and settlement process. Although the main supervisory responsibility for banks and insurance companies falls on the Superinten- dencia de Banca y Seguros (SBS), CONASEV is also responsible for supervising these institutions in those activities related to securities clearing and settlement. For this reason, CONASEV also supervises the cus- todians and settlement banks. The general supervisory powers granted by law to CONASEV must be under- stood in the context of a self-regulating concept of securities market supervision. The BVL bylaws, its internal regulations, and its modifications require CONASEV's prior approval. In this sense, without exclud- ing CONASEV from having its own supervision systems for the BVL supervision, the SML grants the BVL self-regulating powers with regard to its members. The authorization for the depositories' operation, and therefore for CAVALI's operation, must be granted by CONASEV, according to provisions of the SML and depositories' regulations. The depositories' regulations empower CAVALI to develop its own internal regu- lations and related rules. Furthermore, it grants the institution in charge of the clearing and settlement the supervision of its participants and the power to sanction them if they do not observe the appropriate rules. CAVALI internal rules, which consist of 13 chapters, were first approved in 2003. Any changes to CAVALI's rules must be approved by CONASEV; any changes must be exposed to the market for at least 10 working days to receive opinions from interested parties. Since its recent access to an account at the central bank, CAVALI is also subject to a central bank disposi- tion on all issues related to the settlement processes that use the RTGS system. Trinidad and Tobago The SEC is established by the government but operates independently. The Securities Industry Act of 1995 provides for the appointment of no fewer than three and no more than five commissioners to the board of the SEC. The Securities Industry Act, 1995, Section 9(2), states that the commissioners are to be selected from among persons with "wide experience and ability in legal, financial, business or administrative matters, one of whom shall be an attorney-at-law of at least 10 years' standing." The present board consists of five commissioners. In general, the SEC is charged with the responsibility of ensuring that market actors comply with the provisions of the Securities Industry Act, 1995, and the accompanying regulations, the Securities Industry Bylaws, 1997. In particular, Section 6 of the act vests the SEC with wide-ranging powers. Furthermore, all securities clearing agencies are required to register with the SEC. The SEC is responsible for determining the broad framework under which the clearing agency will operate. In addition, the SEC: reviews the rules of a clearing agency prior to granting approval for registration; may make an order requiring a change in the rules of the clearing agency; oversees and regulates the activities of the clearing agency; and has rule-making powers and can prescribe bylaws to effect the operations of the clearing agency. (Continued) 172 Payments and Securities Settlement Table 5.10 Regulatory and Oversight Issues in SSSs (Continued) Country Regulatory and Oversight Issues Trinidad and Tobago The SEC has the responsibility of maintaining surveillance over the securities market and ensures orderly, (Continued) fair, and equitable dealings in securities. In particular, the SEC has the authority to review and approve rules of clearance and settlement facilities. The clearing agency is also required to submit all proposed amend- ments to the SEC for approval. The SEC has the power to require changes in the rules of any SRO that are necessary to bring the rules into conformity with the requirements of the Securities Industry Act. The central bank is not required to register with the SEC. Its activities are governed by the provisions of the Central Bank Act Chapter 79:02 and its amendments. According to the Securities Industry Act, Section 36, no person shall carry on business as a securities exchange or clearing agency or carry on activities as an association of securities companies unless regis- tered as an SRO under the law. All SROs must register with the SEC before starting their activities. In the case of an applicant for registration as a clearing agency, the rules to be submitted for the SEC's con- sideration must contain provisions designed to develop and operate a prompt and accurate clearance and settlement system; to safeguard money and securities in its custody or under its control or for which it is responsible; and to provide that a securities company, a financial institution, another clearing agency, or a person or class of persons designated by the SEC may become a participant in the clearing agency. Amendments of SROs' rules must also be submitted for the SEC's consideration and approval. The SEC can make an order requiring changes in the rules of the SROs to ensure fair administration, or to make the rules conform to the requirements of the Securities Industry Act. SROs have supervisory and statutory responsibilities over their members and participants. In particular, an SRO may refuse membership or impose conditions on membership or prohibit or limit access to services fur- nished by it or its members in the specific cases established in Section 43 of the Securities Industry Act (lack of financial responsibility, not meeting the criteria required, not carrying the type of business specified, lack of training, or contravention of the law). Uruguay The BCU (Gerencia de Valores) supervises securities institutions under its jurisdiction, but has not developed a securities settlement oversight function, for which it lacks adequate resources. This activity is in part undertaken in a limited way through the stock exchange in its SRO capacity. Venezuela, R.B. de The securities regulator in the República Bolivariana de Venezuela, CNV, is charged in the Capital Market Law with the authority to oversee stock exchanges and CSDs outside the central bank. As stated by the CSD Law, Article 2, the CNV must authorize the creation, functioning, and control of CSDs, and must oversee its activities. The CNV is also the competent authority to carry out the supervision of the activities of broker- dealers, their accounts, and those broker-dealers maintain on behalf of their clients in the CVV, the SICET, and in any other national or foreign custody system in which the broker-dealer might hold an account. The CNV, as the securities markets regulator and according to its functions stated in Article 9 of the Ley del Mercado de Capitales, has to authorize the internal rules and regulations of stocks exchanges, as well as their modifications. The CNV has the same functions over CSDs' regulations (Article 16 of Normas relativas a la Organización y Funcionamiento de las Cajas de Valores). As a result, the CNV must certify that the internal regulations of the BCV and the CVV are updated. The Central Bank of the República Bolivariana de Venezuela is the owner of SICET (the electronic custody system for government securities). It is in charge of its smooth functioning and must monitor its performance. The Superintendencia de Bancos y Otras Instituciones Financieras (SUDEBAN), as the authority responsible for the supervision of banks and other financial institutions, supervises the banks that are involved in the SSS, either as participants in the CVV and SICET, as custodians, or as settlement banks. Most of the holdings of public debt are registered in the accounts that banks and other financial institutions have in SICET, which means that the verification of customers' holdings of public debt is mainly in the hands of SUDEBAN. As regards banks that participate in the CVV, SUDEBAN is the competent authority to guarantee that the client's holdings are properly accounted for. All the payments associated with transactions of shares and Vebonos, which take place in BCV, are settled in a private bank, Banco Provincial. The supervisor must take this fact into account in its task of oversight. Source: Authors' elaboration. Securities Settlement Systems Assessment Findings in Latin America and the Caribbean 173 and so on) that should cooperate in the oversight of CSDs and CCPs sit at the heart of the settlement process the SSSs. Potential conflicts between the roles of the as in many cases they are the sole providers of services central banks as operator and overseer of SSSs should to the markets they serve. Thus, their performance is a be addressed by appropriate internal organizational critical determinant of the safety and efficiency of those arrangements. Cooperation could be through a frame- markets. Therefore, their performance is a matter of pub- work (for example, a memorandum of understanding) lic as well as private interest. In addition, there may be or other formal agreement between the parties. other providers of services (for example, trade compar- In sum, securities settlement oversight should be insti- ison, or messaging services) whose performance is also tutionally strengthened by devoting adequate resources critical to the functioning of some markets. The gover- and establishing an effective cooperative framework nance arrangements of any critical service providers with other regulators, SROs, and the private sector. should also be consistent with this recommendation. CSDS' ORGANIZATIONAL ARRANGEMENTS No single set of governance arrangements is appropriate for all institutions within the various securities markets This section includes context, status in the region, and regulatory schemes. However, an effectively gov- and observations regarding CSD's organizational erned institution should meet certain basic requirements. arrangements. Governance arrangements should be clearly articulated, coherent, comprehensible, and fully transparent. Gover- Context nance arrangements should therefore seek to minimize It is widely accepted that a securities market should be the conflicts between the objectives of owners, users, and supported by the CSD with the broadest possible indus- other interested parties, and as far as possible should seek try participation. Admission should be open to all qual- to resolve remaining conflicts. ified market participants needing access to the CSD.4 Financial markets operate most efficiently when partic- Membership standards for system operators should be ipants have access to relevant information concerning established to minimize risk. Certain minimum standards the risks to which they are exposed; therefore, financial of financial responsibility, operational capacity (including markets participants can take actions to manage those system security and integrity), experience, and compe- risks. The need for transparency applies to the entities that tence should be prescribed for participation in the sys- form the clearing, settlement, and custodial infrastructure tems. Mandatory capital requirements for participants are of the securities markets. Informed market participants the first safety net to mitigate against a participant failure are better able to evaluate the costs and risks to which and, thus, an important risk management tool. However, they are exposed because of participation in the system. these requirements are frequently established for reasons Relevant information should be accessible to market other than clearance and settlement and a system operator participants. Information should be current and available should have the authority to impose higher financial stan- in formats that meet the needs of users. dards on its members or participants if the general require- ments do not adequately cover the perceived risks. Status in the Region The rules for clearing and depository organizations should Table 5.11 includes a brief description of CSDs' orga- avoid unfair discrimination with regard to the admission nizational arrangements for settlement systems in each of participants or among participants in the use of the of the countries assessed. system. The rules should provide fair procedures for review of decisions concerning denials of access. In addition, the system should provide participants with a Observations meaningful opportunity to participate in the adminis- Some of the specific problems regarding CSDs organi- tration of the organization's affairs. zational arrangements follow: In general, governance arrangements are adequate, 4The cost is an important element to consider in order to avoid an unfair situation for the minority investor. In any case, transactions but in some cases it is not clear whether they prevent cost per unit should be clearly identified. potential conflict of interests. These aspects should be 174 Payments and Securities Settlement Table 5.11 CSDs' Organizational Arrangements Country Depository CSD's Organizational Arrangements Argentina Caja de valores Securities market SROs, such as Merval, MAE, and the caja de valores, have as part of their statutory supervisory responsibilities over their members the right to refuse or impose conditions on membership, and to prohibit or limit access to ser- vices provided. Members of the caja de valores' board of directors are elected by stock exchanges and securities markets, which are the caja de valores' share- holders. Securities markets represent brokers nationwide. Stock exchanges, through their respective boards of governors, represent every section of the country's financial, industrial, and commercial activity. The voting position at the board is split between stock exchanges and securities markets, 50 percent each. Caja de valores issues circulars and newsletters reporting the rules that regulate the activity of participants, as well as the various corporate events that are con- ducted by issuers. Caja de valores has an up-to-date, comprehensive Web site, containing all its circulars and newsletters, as well as its financial statements. The depository publishes an annual report detailing its actions and plans, as well as its financial statements. Bahamas, The -- There is no securities depository. Bolivia EDV The EDV was established in 2002 and began the dematerialization process of all outstanding securities in 2004. The EDV fully initiated operations (including the clearing and settlement of transactions with dematerialized securities) in 2005. Brazil CBLC CBLC is a for-profit company, organized as a corporation, owned by 86 share- holders, most of which are banks and brokerage firms. CBLC's board of direc- tors comprises seven permanent representatives of its shareholders: two representatives from the full clearing agents category, two representatives from the self-clearing agents category, two representatives from BOVESPA, and the CEO. The executive responsibilities are divided into three areas: operations, risk management, and products and services. Clearing member- ship criteria are well and clearly established in CBLC's rules and procedures (available on CBLC's Web site at www.cblc.com.br). Specific capital require- ments apply, depending on the comprehensiveness of participants' activities-- for instance, if they are rendering services for their own customers or to other financial institutions. CBLC provides the market with information through different means: As a corporation, CBLC is obliged by law to publish its financial balances periodically. CBLC is audited both by market authorities and by independent auditors at least twice a year. CBLC bylaws as well as its rules and operational procedures are available on its Web site. CBLC has authorized the publication of its answers to international question- naires, such as the International Services Securities Association, the Associa- tion of Global Custodians (AGC), and the International Federation of Stock Exchanges. Through the RiskWatch system, clearing agents have access to all information related to their risk and their customers' risk. Through a special tool of RiskWatch, they can make simulations to assess the impact of a specific operation on their risk exposure. For the Theoretical Intermarket Margin System (TIMS)--the margin system for derivatives and securities lending contracts--the same is applicable. Regarding its clearing services, CBLC issues reports on clearing members and brokers' positions since trade execution. Securities Settlement Systems Assessment Findings in Latin America and the Caribbean 175 Table 5.11 CSDs' Organizational Arrangements (Continued) Country Depository CSD's Organizational Arrangements Brazil Brokers and clearing agents have access to their risk exposures and operational (Continued) limits in real time. Regarding its depository service, CBLC issues monthly statements directly to investors at their home addresses. Investors can also check on their holdings through the Internet, provided they have the password that CBLC assigns and mails directly to them; they can also check by facsimile. SELIC SELIC is managed by the central bank's open market operations department. SELIC access and exclusion criteria are publicly disclosed. SELIC participants include the BACEN itself, the national treasury (through the BACEN), and finan- cial and other institutions authorized to operate by the central bank. A distinction is made between settling participants and nonsettling participants, depending on whether or not they hold bank reserves accounts. Institutions holding bank reserves accounts may take part in SELIC and are responsible for making their own financial settlement to third parties and institutions that do not hold such an account. The latter may only operate on SELIC by obtaining a credit limit from a settling participant or through the brokerage account, acting as intermediaries. There is a credit limit up to which a participant accepts responsibility for entries made in its bank reserves account by a nonsettling participant. BM&F The BM&F clearinghouses integrate into BM&F's administrative structure. The exchange's most authoritative body is its general meeting; it is managed by an administrative council (Board of Governors)--through a general director--com- prising 17 council members and four substitutes. These are elected by the annual general meeting, except for the general director who is an ex officio member, and representatives of the honorary member indicated by it. Council members who have been elected or nominated have a term of office of three years, and substi- tutes have a term of office of one year; both are eligible for reelection or renomina- tion. The council will designate from among its members those who will hold the positions of president and vice president, with a term of office of one year, with reelection permitted. Ordinary meetings will take place at least once a month, and extraordinary meetings will be held whenever called by the president or seven council members. Among its other attributions, the administrative council will establish the BM&F's general policy and ensure its execution, being also respon- sible for nominating the director general and supervising his or her management. The latter's role is to execute the council's policy and decisions with the exchange's executive body under his or her direction; the executive body is made up of 14 directors. The main decisions relating to risk management are taken by the BM&F's administrative council, the director general, and the risk committee. Derivatives and securities clearing participants fall into two categories: (1) direct, when they take part in the chain of liabilities in the settlement of transactions processed in the clearing; and (2) indirect--that is, other entities or institutions that provide services that are instrumental for the activities carried out by the clearing. The main features of the direct and constituent participants are as follows: Clearing members (CMs): Exclusive participants that access the clearinghouses' services of clearing, settlement, and provision of guarantees. They settle trans- actions for their own account and the accounts of their clients (commodity brokers, special operators and securities trading participants), and are responsible for them to the clearing, which in its turn acts as guarantor of the net multilateral settlement made between its CMs. Commodity brokers: Participants with direct access to the BM&F's trading systems. They work for their own account or that of their clients, using the services of the clearing, with CM acting as intermediaries. (Continued) 176 Payments and Securities Settlement Table 5.11 CSDs' Organizational Arrangements (Continued) Country Depository CSD's Organizational Arrangements Brazil Participants with direct settlement: Clearing members with the right to direct (Continued) access to the trading session viva voce, through the commodities brokering desk. Special operators: Participants with direct access to the BM&F's trading systems. They operate only for their own account, using the services of the clearing with CMs acting as intermediaries. Constituents: Final clients that access the BM&F's markets through the com- modity broker, acting as intermediaries, and are responsible to the CM for all their clients' transactions. Securities trading participants: Financial institutions authorized by the central bank to conduct transactions and intermediation in the government securities market. Centralized settlement participants: Participants that trade through a securities trading participant but are allowed to settle directly with the Securities Clear- inghouse. This kind of participant was specifically designed to cater for domes- tic investment and pension funds. Settling banks: Banks holding bank reserves accounts with the central bank. They provide the financial settlement service for the CMs. BM&F provides accurate information on risks and costs associated with its use to market participants in several forms, including the publicly available Web site. CETIP CETIP is a nonprofit organization providing a public service to the financial com- munity. Eligibility for membership is regulated by the central bank's regulation manual. Chile DCV Law 18,876 (Securities Depository and Custody) governs the constitution of pri- vate organizations for securities deposits and custody. It establishes that these entities must have as their exclusive corporate purpose to receive in deposit publicly offered securities and to facilitate their transfer operations. The SVS authorized the creation of the DCV and approved its statutes, internal regula- tions, and the deposit contract to be used. At the DCV, accounts may be opened by securities intermediaries (broker-dealers and securities agents), by other institutions participating in the financial system (banks; AFPs; Administradoras de Fondods de Valores, AFV; Administradoras de Fondos Mutuos, AFM; exchanges; insurance companies; general insurance companies; reinsurance companies; investment funds; and foreign capital investment funds), nonfinan- cial companies, and all others authorized by the DCV. Ownership of the DCV is shared among the Sociedad Interbancaria de Depósito de Valores, owned by banks and financial societies (30 percent); Inversiones DCV S.A., owned by AFPs (30 percent); the Bolsa de Comercio de Santiago, DCV Vida S.A., owned by Life Insurance Companies (10 percent); Inversiones Bursátiles S.A., owned by Bolsa Electrónica de Chile (6 percent); and the Bolsa de Corredores de Valparaíso and other minority shareholders (1 percent). Colombia DCV DCV direct participants are banks, financial corporations, fiduciary societies, stock exchanges, broker-dealers, pension funds, public entities, and CSDs. Indi- rect participants are direct investors. The board of governors of the BR, that rules DCV, has disclosed criteria that allow fair and open access to their systems. There is no daily operative limit for transactions carried out by broker-dealers in relation to their capital. DCV is not a private society, but a service provided by the BR. DCV provides adequate information to its participants. DECEVAL DECEVAL is a private company owned by the banks, stock exchanges, fiduciary societies, financial corporations, saving and housing corporations, the banking association, and broker-dealers. DECEVAL participation is open to a wide range of entities: credit entities, stock exchanges, brokers, financial services companies, capitalization companies, insurance companies, pension fund companies, and some Securities Settlement Systems Assessment Findings in Latin America and the Caribbean 177 Table 5.11 CSDs' Organizational Arrangements (Continued) Country Depository CSD's Organizational Arrangements Colombia public companies. Participants pay a predetermined fee for its services. The board (Continued) of directors of DECEVAL has disclosed criteria that allow fair and open access to their systems. There is no daily operative limit for transactions carried out by broker- dealers in relation to their capital. DECEVAL provides adequate information to its shareholders. Costa Rica CEVAL Currently, only brokerage houses, with the exception indicated below, can open an account in CEVAL; for this reason, they have a monopoly on custodial ser- vices. Brokerage house accounts are segregated in own accounts and clients' accounts. Also, banks and pension funds have their own accounts at CEVAL; securities in these accounts, however, can only be traded if they are transferred to a broker's account or to the Mercado Interbancario de Dinero (MIB) account in the case of the interbank market. In the present governance structure, brokers, as owners of the stock exchange, dominate the policy with respect to trading, custody, clearing, and settlement. It is sometimes difficult to change the situation separating money markets and capital markets. All brokerage houses that fulfill the legal capital requirements of 50 million Costa Rican colones (Article 54 of the SML) have access to the settlement systems. This capital requirement allows for fair and open access to the settlement systems. In contrast, an issue of concern could be that, because brokers are involved in a wide range of financial services and transactions, this capital requirement might not be sufficient in the current situation. Indeed, brokerage houses maintain capi- tal well above the minimum requirement. There is no daily limit for transactions carried out by broker-dealers in relation to their capital. The CEVAL is a private institution fully owned by the exchange and governed by the members of the exchange board of directors (brokerage houses and the stock exchange). The CEVAL provides information to its shareholders. Online connec- tion exists among the CEVAL, the stock exchange, and its participants. The new private entity that will operate the Sistema de Anotaciones en Cuenta could have the following ownership structure: a maximum of 40 percent owned by the stock exchange, and the remaining 60 percent owned in equal parts among the rest of participants. Two Banco Central de Costa Rica representatives will sit on the board of the new entity. Dominican Republic CEVALDOM Not yet operational. Ecuador DECEVALE The CSD (DECEVALE) was constituted in 1994 under the regulation of the SML. Article 60 of the SML (also Article 3 of the depository general rules) allows for a broad participation in the depositary by institutions in the financial sector, and requires a minimum initial capital of 100,000 Unidades de Valor Constante (UVC) (indexed units)--that is, approximately US$260,000. Governance arrangements must be included in the internal rules that have to be approved by the securities regulator. However, due to financial problems, the depository has only worked as a custodian for dematerialized securities issued by the Corporación Financiera Nacional (which is a very small portion of the market, less than 1 percent of out- standing securities); the ownership transfer book-entry function has never been established. In this situation, the Banco Central del Ecuador has become the major custodian for public securities, although it is also custodian for private securities; it has not developed the depository function. El Salvador CEDEVAL Title V of the SML develops the theme of companies specializing in the deposit and custody of securities. These companies are constituted as corporations and offer services including transfers, clearance, and settlement of operations that are carried out in respect to the securities under supervision. Presently, there is an association specializing in the deposit and custody of securities under the name CEDEVAL-CSD--which began operations in 1998. (Continued) 178 Payments and Securities Settlement Table 5.11 CSDs' Organizational Arrangements (Continued) Country Depository CSD's Organizational Arrangements El Salvador Companies specialized in the deposit and custody of securities are constituted as (Continued) corporations and are subject to the commercial laws. The deposit and custody services can only be offered through stock exchanges, banks, financial institu- tions, or specialized institutions. Since January 11, 1994, CEDEVAL, a company constituted as a specialized com- pany in the deposit and custody of securities, whose operations began on November 18, 1998, has been of variable capital, having the stock exchange and brokerage firms as its principal shareholders. The institutions that have an account at CEDEVAL are the Administradoras de Fondos de Pensiones (AFPs), the stock exchange, and other foreign trustees. Presently, brokerage firms are not connected online with CEDEVAL. Neverthe- less, this institution works so that the AFPs and the brokerage firms can directly access the trustees' information from their terminals. Guatemala Stock exchange The creation of the cajas valores is regulated in the SML (Article 79). They have been created as a department of the respective stock exchanges. Thus, the gov- ernance arrangements of the securities depositories in Guatemala are the same as the stock exchanges. The stock exchanges are equally owned by each mem- ber, with each of them owning a share. As of December 2003, there were 33 reg- istered broker-dealers, of which 20 remain active, with 14 of those linked to a banking group. Some banking groups own more than one broker-dealer. In order to use the services of the cajas de valores, an entity must be an agent or broker- dealer of the respective stock exchange. The cajas de valores also allow for insti- tutional participants' own operations to use the services of the depository, but not for the operations of others. Honduras -- There is no securities depository. Jamaica JCSD The JCSD has a six-member board of directors with a representative from the JSE, the BOJ, and the ministry of finance. All of the brokers that are mem- bers of the JSE are members of the JCSD. The JCSD publishes an annual report and an informational brochure for market participants and the investing public. The operating rules and procedures of the JCSD are pending approval by the FSC. Mexico INDEVAL The first CSD in Mexico was created on April 28, 1978, under the name of INDE- VAL. This public sector entity was created to offer custody services, administra- tion, clearance, settlement, and transfer of securities through book entries. In 1987, this organization went private, and was legally constituted under the name of S.D. INDEVAL, starting operations on October 1 of the same year. INDEVAL is the only company in Mexico authorized to operate as a CSD according to the terms established in the Securities Market Law. INDEVAL is a private sector firm whose shareholders include 29 brokerage houses, 13 commercial banks, six insurance and guarantee firms, as well as the Banco de México, BMV, and Nacional Financiera, a state-owned development bank. Besides the services of deposit, custody, administration, clearance, settlement, and transfer of securities, INDEVAL provides the following services: Securities lending: In January 1997, INDEVAL created a securities lending pro- gram, Préstamo de Valores (VALPRE), making available to market participants an electronic system for securities lending. ISIN codes: BMV designated INDEVAL as the national numbering agency for ISIN codes. Specialized services: INDEVAL offers the following services directly to issuing companies: (1) registration of shareholders who are entitled to the rights of Securities Settlement Systems Assessment Findings in Latin America and the Caribbean 179 Table 5.11 CSDs' Organizational Arrangements (Continued) Country Depository CSD's Organizational Arrangements Mexico ownership but who have not registered their shares in a brokerage house, and (Continued) thus have not deposited them with INDEVAL; (2) the exercise of ownership rights, such as dividend payments, capitalizations, subscriptions, exchanges, and splits; and (3) rights updates. Netherlands Antilles -- There is no securities depository. Nicaragua CENIVAL The CENIVAL is a subsidiary of the stock exchange, which owns 90 percent of the equity of the former. The CENIVAL started operating in December of 1997; current arrangements and practices are based on bilateral agreements and contract law, because in Nicaragua there is no legal basis for the operation of a CSD. The governance arrangements of the securities depository are, in general, the same as those of the stock exchange. They even share the same board of direc- tors and some managing directors. Access to the CENIVAL is broad, because, according to Article 8 of its internal regulation, all types of financial institutions that are duly authorized by the Super- intendencia de Bancos y Otras Instituciones Financieras (SBOIF), foreign banks, and other nonfinancial institutional investors, may open a deposit account. OECS ECCSD The ECCSD is owned by the Eastern Caribbean Stock Exchange (ECSE). Its major function is to provide clearance and settlement of trades transacted on the ECSE. The main participants on the ECCSD are broker-dealers, limited service brokers, and custodians. The ECCSD provides services to participant intermediaries and processes transactions for trades reported by the exchange or other markets. Custody services are also provided to those entities that wish to hold securities at the ECCSD on behalf of their customers--for example, custodian banks for foreign investors. Established on October 19, 2001, the ECSE is a regional electronic securities exchange designed to facilitate the buying and selling of financial products. The ECSE is an SRO, and has developed a set of bylaws that, together with its opera- tional rules, govern and monitor exchange-related activities. The majority of its shares will always be owned by the private sector. The ECSE plays an important role in promoting investment banking capability within its member firms. It positioned its intermediaries to take on the role of underwriters for governments and corporate issuers. Working under the aus- pices of a syndicate relationship championed by the ECSE, the intermediaries collectively began offering a full array of services leading up to the successful placement of debt and equity offerings for issuers. The ECSE also began assisting its intermediaries to develop the capability to put together effective packages and investment or research reports for governments and corporate issuers. The ECSE is presently engaged with three additional institutions in Anguilla, St. Lucia, and St. Kitts and Nevis to facilitate their inclusion as intermediaries. Panama LATINCLEAR Broker-dealers accounts are segregated in own accounts and clients' accounts. In addition, banks and corporations have their own accounts at BVP, but securi- ties can only be traded if they are transferred to a broker's account. Acuerdo 7, 2003, of CNV explicitly encourages SROs' internal regulation to create conditions for fair and open access and to prevent any discriminatory practice. Paraguay -- There is no securities depository. Peru CAVALI Securities depositories, in their capacity as book-entry service providers, have been recognized in the SML of 1991, approved by Decree-Law 755, as well as in the current SML. As of May 1997, a single-entity CAVALI was formed to provide centralized clearing and settlement for the exchange. The SML (Continued) 180 Payments and Securities Settlement Table 5.11 CSDs' Organizational Arrangements (Continued) Country Depository CSD's Organizational Arrangements Peru states that depositories are companies whose exclusive objective is the (Continued) recording, custody, clearing, settlement, and transfer of securities. CAVALI is a for-profit company, organized as a corporation, owned by 25 shareholders, most of which are banks and brokerage firms. The SML allows for any individ- ual or entity to participate in the depository; no one, however, can directly or indirectly own more than 5 percent of the outstanding stock, except for the exchanges, which may have up to 40 percent control ownership. (Currently, the BVL holds about 29 percent ownership of CAVALI.) CAVALI's board of directors comprises seven permanent representatives of its shareholders. The depositories establish the requirements to become a participant that include the following: financial and economic capacity; operational capacity and infra- structure; moral suitability of their directors and managers; and existence of a supervisory body over the entity. Depositories are charged with the responsi- bility of admitting participants and evaluating on an ongoing basis that they comply with the requirements prescribed. They are also responsible for the suspension of participant status. Trinidad and Tobago TTCD TTCD is owned by the Trinidad and Tobago Stock exchange. The participants in the TTCD will be as follows: The clients and brokers. The clients will deposit their share certificates with their brokers, who will register the shareholdings with the TTCD. The share cer- tificates will be submitted to the registrars for cancellation. Brokers will have online connection to the system through dial-up lines; they will also have pass- word protection to enter their trades. Only brokers will be allowed to enter data into the CSD software. The registrars and the stock exchange. The brokers will send the securities to the registrars for verification and cancellation. The stock exchange will provide the TTCD with the details of the securities traded. The TTCD will verify and keep records of all transactions entered by the brokers. Uruguay Stock Exchanges- There is no single depository institution, but a multiplicity of custody or depository AGATA institutions. A private bank undertakes the depository function for physical and dematerialized securities traded on the BVM through the private bank omnibus account in the BCU. The private bank also performs the securities physical cus- tody function (also for global securities under its custody). The BVM performs the depository function through its omnibus account at the BCU. Other custodians undertake the custody or depository function for securities traded through BEVSA or OTC. Venezuela, R.B. de CVV The creation of the CVV was authorized by the CNV in November 1996, under the regulation of the Ley de Caja de Valores (CSD Law). According to this law, broker- dealers, banks, insurance companies, issuers, and other persons could be share- holders. The CVV was designed as a for-profit entity. It does not have a mutual structure, which means that not all the stakeholders of the CVV must be partici- pants, and not all participants in the system must be stakeholders. Currently, a high percentage of its capital is concentrated in the hands of six major share- holders. Article 5 of the CVV regulations states the steps that must be followed by an applicant who wishes to be a participant of the system. Nevertheless, there is no public disclosure of the specific criteria for the participation in the CVV, to permit fair and open access. Source: Authors' elaboration. Securities Settlement Systems Assessment Findings in Latin America and the Caribbean 181 carefully evaluated by the overseers, especially in Context light of possible expansion of the stock exchanges in Settlement of cross-border securities transactions is typ- the clearing and settlement industry. Also, the stock ically more complicated and potentially involves more exchanges might want to form a users' group to ensure risk than domestic transactions. Links between CSDs that the needs of all participants are represented, and permit participants in either CSD to settle trades in that all parties have the opportunity to participate in securities from multiple jurisdictions through a simple the decision-making process. gateway operated by the domestic CSD or by an inter- Some legal and governance arrangements introduce national CSD. However, CSDs need to design links monopolistic situations that impede the adequate devel- carefully to ensure that risks are reduced. They must opment of some markets (for example, money mar- address legal and operational complexities. If links are kets). This could lead to the development of settlement not properly designed, risks can be exacerbated. Ineffi- infrastructures that are not adequate for market needs ciencies may arise because of variations in the operating (this is not only the case with SSSs, but also with pay- hours. Links may create significant credit and liquidity ments systems). Some of problems are high entrance interdependencies between systems. A CSD should fees, existence of inadequate facilities, lack of facili- evaluate the financial integrity and operational reliabil- ties to process intraday repos used by the central bank ity of any CSD with which it intends to establish a link. to provide intraday liquidity, and so on. Any credit extensions between CSDs should be fully Unresolved conflicts of interest are the main reason secured by securities, letters of credit, or other high- for the underdevelopment of basic SSS infrastruc- quality collateral, and should be subject to limits. tures, such as depositories. In these cases, under the leadership of the securities regulator and the central Status in the Region bank in coordination with the ministry of finance, a legally sound solution should be agreed on with Table 5.12 includes a brief description of CSDs' links stakeholders to establish the depository function as for settlement systems in each of the countries assessed. soon as possible. Depending on the solution adopted for the immobilization or dematerialization of secu- Observations rities and establishment of the depository function, Some of the specific problems regarding cross-border careful attention should be given to the ownership links follow: structure of the depository to make sure that the system is efficient, fair in terms of access, and has appropriate Most securities depositories in the region do not have governance arrangements. The depository should pro- cross-border links. The authorities should analyze the vide participants with a meaningful opportunity to par- risks associated with these links, because settlement of ticipate in the organization's decision-making process cross-border transactions typically involves more risk for system design and settlement procedures. than settlement of domestic transactions. Particular A strong, capitalized, autonomous, and independent attention should be devoted to the multiple jurisdiction securities depository, with reliable and flexible sys- profile of these transactions, especially from the legal tems to expedite settlement of transactions and acces- and operational perspective. At the international level, sory rights is crucial for the development of the the main improvement in this area is related to the securities markets. When important conflicts of inter- international law governing the cross-border pledge of est emerge, the authorities should take the lead in securities as collateral. Some depositories have par- their resolution, avoiding any standstill situation that ticipated in the Hague Convention's efforts to build a consensual internationally accepted principle on this could prevent the development of basic pieces of SSS issue. Some securities regulators are already involved infrastructure. in this discussion. There is a clear tendency to con- tinue these efforts, and a proposal by the Federación CROSS-BORDER SETTLEMENT Iberoamerivcana de Bolsas de Valores to facilitate and This section includes context, status in the region and increase intraregional trading, which is based on and observations regarding cross-border settlement. is dependent on linkages among depositories. 182 Payments and Securities Settlement Table 5.12 Links between Securities Depositories Country Depository CSDs Links Argentina Caja de valores The depository (caja de valores) has a global account in his name at Cedel Inter- national SA (CEDEL, Luxembourg), Euroclear (Belgium), Depository Trust Company (DTC, United States), and Servicio de Compensación y Liaquidación de Valores (SCLV, Spain) allowing securities listed in Argentina but registered in these centers to be traded at the Buenos Aires Stock Exchange. Bahamas, The -- No cross-border links. Bolivia EDV No cross-border links. Brazil CBLC CBLC has a pledge account at the Depository Trust and Clearing Corporation (DTCC) and accounts in Clearstream and Euroclear that are used mainly by foreign investors that can choose this alternative to collateralize their positions in the derivatives market and in the securities lending program. CBLC is conservative in accepting foreign securities as collateral, and eligible securities are basically U.S. government bonds and bills. The linkage between CBLC and the Spanish SCLV is related to custody infrastructure to support the Mercado de Valores Latino Americano, which trades Brazilian equities in Spain. Foreign institutions are per- mitted to keep their securities at the CBLC through local custodians acting as par- ticipants. Local custodians, as direct participants of CBLC depository service, are fully responsible for all movements instructed in the custody. SELIC No cross-border links. BM&F The BM&F derivatives clearinghouse has custodial arrangements with interna- tional banks for the receipt of collaterals pledged abroad only for agricultural commodities derivatives, according to CMN Resolution 2687. Chile DCV No cross-border links. Colombia DCV No cross-border links. DECEVAL No cross-border links. Costa Rica CEVAL Regional links (see information for Guatemala and Nicaragua). Dominican Republic CEVALDOM No cross-border links. Ecuador DECEVALE No cross-border links. El Salvador CEDEVAL Regional links (see information for Guatemala and Nicaragua). Guatemala Stock exchange The securities depository (caja de valores) also offers the custody of securities, in physical or book-entry form, for securities issued outside Guatemala. To this purpose, the depository has links with Clearstream Banking, CEDEVAL, S.A. (El Salvador); Bolsa Hondureña de Valores, S.A., CENEVAL, Central para el Depósito de Valores en la Bolsa Nacional de Valores, S.A. (Costa Rica); and Central Latino- americana de Valores, S.A. (Panama). These operations are settled through an omnibus account open in the name of Bolsa de Valores Nacional, S.A. at each of these entities. The Bolsa de Valores Nacional keeps a detailed registry of the securities deposited in each of the omnibus accounts. Honduras -- No cross-border links. Jamaica JCSD No cross-border links. Mexico INDEVAL INDEVAL, through SIDV's international division, provides direct accounts to foreign entities holding securities issued in Mexico--for example, the American depository receipts of Mexican firms that are traded in New York. These are free-of-payment custody accounts, because payment occurs outside SIDV. SIDV international receives free-of-payment transfer instructions and sends them to its foreign depositors via facsimile or SWIFT. Securities Settlement Systems Assessment Findings in Latin America and the Caribbean 183 Table 5.12 Links between Securities Depositories (Continued) Country Depository CSDs Links Mexico When receiving instructions via facsimile, INDEVAL executes a prematching (Continued) process by telephone with the Mexican counterparty, and enters a free-of-payment securities delivery instruction in SIDV. Securities are then transferred, and confir- mations are sent via facsimile to the foreign depositor and the Mexican counter- party. If the instructions are received through SWIFT, INDEVAL electronically downloads them from the SWIFT terminal to SIDV. Once the prematching process has been executed, the instruction entered in SIDV is considered confirmed and the securities are transferred. Then INDEVAL sends confirmations via SWIFT to the counterparties. At the end of the day, INDEVAL also sends through SWIFT information on positions, activity, and pending transactions. Settlement of the cash leg occurs bilaterally between the counterparties. Some Mexican eurobonds denominated in U.S. dollars are held in securities accounts in Clearstream, a CSD. For this reason, INDEVAL opened an omnibus account with Clearstream. Some of these securities are listed in BMV and are traded mainly by mutual and pension funds. If a Mexican investor wants to acquire one of these securities, the original owner makes a transfer in Clearstream from its own account to INDEVAL's account, which then credits the account of the Mexican investor. Any further transaction with these same securities inside the Mexican market will be settled through INDEVAL just like any other operation, as long as it is denominated and settled in Mexican pesos. Netherlands Antilles BvdNA No cross-border links. Nicaragua CENIVAL Currently, the CENIVAL holds accounts for other CSDs in Central America: CEDEVAL, S.A. (El Salvador); Caja de Valores (Guatemala); Bolsa Hondureña de Valores; Central para el Depósito de Valores en la Bolsa Nacional de Valores, S.A. (Costa Rica); and Central Latinoamericana de Valores, S.A. (Panama). Foreign investors may buy securities deposited in CENIVAL through the omnibus account that these other CSDs hold with the former. The CENIVAL also offers the custody of securities, both in physical or book-entry form, for securities issued outside Nicaragua through the same group of Central American securities depositories. These operations are settled through an omnibus account open in the name of the CENIVAL in each of this entities. OECS ECSD No cross-border links. Panama LATINCLEAR -- Paraguay -- No cross-border links. Peru CAVALI CAVALI has an account in its name at the U.S. DTCC allowing for foreign securi- ties that are eligible to be registered at CAVALI and traded simultaneously in the U.S. market, in other markets, and in the BVL. Trinidad and Tobago TTCD Cross-border transactions are facilitated through broker-to-broker arrangements involving a broker from Trinidad and Tobago and from the broker in the other country involved in the transaction. For example, a person from another country who wishes to buy or sell a security in a company listed on the exchange in Trinidad and Tobago would first contact a broker in that person's country. The broker in that country would contact a broker operating in Trinidad and Tobago, who would execute the transactions on the floor of the exchange. Similarly, a person from another country would deliver funds to settle the transaction through his broker, who would subsequently forward the funds to the broker in Trinidad and Tobago. (Continued) 184 Payments and Securities Settlement Table 5.12 Links between Securities Depositories (Continued) Country Depository CSDs Links Trinidad and Tobago There is no difference in the process for the clearance and settlement of domestic (Continued) trades and cross-border transactions. However, the timetable to complete cross- border transactions can be longer. In Trinidad and Tobago, foreign investors wishing to hold 30 percent or more of a domestic company must apply for a license. The present system does not allow for electronic trading. However, automated trading will follow after CSDs are established in the region. There is a current initiative to link stock exchanges in five territories--The Bahamas, Barbados, the Dominican Republic, Jamaica, and Trinidad and Tobago. Uruguay Stock Exchanges- No cross-border links. AGATA Venezuela, R.B. de CVV No cross-border links. Source: Authors' elaboration. 6 Transparency, Oversight, and Cooperation in Payments Systems T The role of the central bank is particularly relevant when he smoothness and reliability of money transfer the country is engaged in a comprehensive reform of its mechanisms affect the efficiency of the real econ- payments system. In that case, the central bank will have omy and the financial markets; they also have an impact to play a leading role in developing a vision for the on central banks' lending of last resort function, the reformed system, in coordinating with all stakeholders conduct of monetary policy, and liquidity management. and in carrying out the reform plan. Direct involvement Market forces alone may not be able to achieve the of the central bank in managing clearing and settlement objectives of efficiency and reliability of the payments systems has been, in all countries, the first step to gov- system, because participants and operators may not erning the overall structure and operation of a country's have adequate incentives to minimize the risk of their payments system, and to ensuring that systemic risk, par- own failure, or of the failure or costs they impose on ticularly of large-value payment systems, is adequately other participants. In addition, the institutional struc- minimized. In many cases, this role stems from the need ture of the payments system may not provide incentives to ensure a widespread adoption of the more advanced or mechanisms for efficient design and operation. technology in the fund transfer mechanisms and to avoid possible discriminations in the access to payment ser- These are reasons why, in all countries, central banks' vices. In all cases, in order to pursue the public interest involvement in the payments system is an integral com- in the payments system, central banks should ensure that ponent of their overall mandate to ensure stability of the systems they operate comply with the principles and the financial system and to maintain confidence in the guidelines they establish; as overseers, they should domestic currency. In this context, central banks perform ensure the (financial and operational) reliability and effi- a number of different functions in their national clearance, ciency of the clearing and settlement systems they do not settlement, and payment arrangements. These functions operate. The oversight role of the central bank is more may include direct involvement in managing clearing likely to emerge in its relevance when the payments reform is complete and the central bank will be called to and settlement systems and in overseeing the payments ensure a proper monitoring of the reliability and effi- system by developing rules, principles, and best prac- ciency of the domestic system on an ongoing basis. tices under which private payment arrangements operate. The oversight role of the central bank is currently at the In recent years, in an increasing number of countries, heart of the international debate, and this function is payments system oversight has been explicitly entrusted emerging as key in central bank activity.1 to central banks by law. Specifying the objectives in relevant legislation may be the most direct way for providing a well-founded legal basis for the central 1Recent examples are the focus on central bank's responsibilities in bank to implement its policies, and to make it account- CPSS (2001), CPSS-IOSCO (2001), and Bank of England (2006). See also Bossone and Cirasino (2001). able in pursuing its goal and mandate in the payments 185 186 Payments and Securities Settlement system. For countries facing the implementation of overall payments system. The oversight of these systems reforms in the payments system, it is of utmost impor- might well be a cooperative effort of two or more regu- tance for the central bank to have a well-founded legal latory agencies. In some countries, also, retail (low-value) framework that clearly defines its payments system systems fall under control of the oversight agency because role and objectives. of their importance in the overall efficiency of the pay- ments system, their potential impact on the public trust As for the scope of the oversight function, at the interna- of money, and because of their relevance to sustain the tional level there is consensus on the fact that systems pos- ultimate objective of economic growth.2 ing systemic risks should fall under the direct control of the overseer. Typical examples of these systems are those The evolution toward a new role of the central bank in that handle transactions of a high value at both the indi- payment systems calls for a careful consideration of at least three key issues. First, the adequacy of legal enforce- vidual and aggregate level. For example, the Committee ment for central bank action in the payments system on Payments and Settlement Systems (CPSS) identified should be evaluated. The central bank role in payment four responsibilities of the central bank in applying the systems stems from its responsibility for financial market core principles for systemically important payment sys- stability and from its monetary policy. In many countries, tems (CPSIPS), presented in box 6.1. a clearly stated legal enforcement for the central bank's In May 2005, the CPSS published a report devoted to activity as overseer of the payments system has facilitated payment system oversight in Group of Ten countries. the fulfillment of the central bank's objectives. Increasing attention is being given to securities clearance Second, the internal organization of the central bank as far and settlement systems as relevant components of the as the payment system activities are concerned may also be worth evaluating. Experience in many central banks hasindicatedthatsignificantimprovementscanbederived Box 6.1 Oversight Role of the Central Bank by setting up a unit specifically devoted to payments policy issues. Typically, such a unit could develop an appropriate policy framework and the appropriate tools Responsibilities of the central bank in applying (for example, data collection, periodical inspections, and the core principles for systemically important so on) for use in assessing the appropriateness of individ- payment systems ual payments systems. This function could be undertaken The central bank should define clearly in close coordination with the banking supervisory func- its payment system objectives and should tion, for example, which has a high level of competence disclose publicly its role and major policies and experience in examining some of the related issues. with respect to systemically important In addition, it would be important for those staffing the payment systems. unit to have appropriate skills. Typical aspects to be ana- The central bank should ensure that the lyzed in administering the oversight functions include, systems it operates comply with the among other things, potential risks emerging from the var- CPSIPS. ious clearinghouses, the adequacy of risk control mea- The central bank should oversee compliance sures in place, the potential implications of the resort to with the CPSIPS by systems it does not oper- unwinding procedures, and efficiency issues. ate, and it should have the ability to carry out this oversight. Third, effective cooperation must be in place between the The central bank, in promoting payment sys- overseer and market players, among domestic regulators, tem safety and efficiency through the and among international oversight agencies. In particular, CPSIPS, should cooperate with other central it must be noted that central banks that do not have bank banks and with any other relevant domestic or foreign authorities. 2 Many examples can be given on how an inefficient retail system can affect economic activity--for example, by failing to accommodate the needs of customers and merchants in their desire to finalize a Source: CPSS 2001. transaction, which, as a result, cannot take place. Transparency, Oversight, and Cooperation in Payments Systems 187 supervisory powers may face considerable information and smooth functioning requires effective cooperation limitations, especially in crisis management. The overseer between all participants. On the one hand, the use of pay- would have to rely on information from the supervisory ment instruments generates significant externalities on the authorities, or should develop its own independent access demand side, because the usefulness of an instrument is to information on payment system participants. Whereas strictly linked to the degree of its acceptance and use for the first option transfers de facto the responsibility for trig- transaction purposes (network economies). Consequently, gering oversight action to the supervisory authority, the widespread use of new payment instruments and services second option raises risks of duplication of information relies heavily on public confidence in them. On the other collection, inconsistent public action, and additional costs hand, within the payments system the supply of services to participants. An effective way to overcome most of can be affected by coordination failures due to the exis- these problems is to stipulate rules for granting the over- tence of conflicts of interests (and information costs), as seer with adequate access to supervisory information. The well as the intermediaries' unwillingness to cooperate. institutionalization of information-sharing arrangements This can lead to suboptimal equilibriums in the organiza- may reduce the risk that the exchange of information will tional arrangements as to the system's reliability and be hampered by frictions in cooperation between differ- efficiency. The payments system overseer is therefore ent institutions. Various solutions can be adopted for this entrusted with making up for a specific type of failure in purpose, from signing a memorandum of understanding the market for payment services--that is, the coordination that specifies the framework for cooperation, to ensuring failures. Cooperation problems may be especially rele- contacts between institutions through joint board mem- vant within interbank clearing and settlement systems. In bership, the establishment of a comprehensive market fact, in these systems, the risk profiles--both at the sys- regulatory and supervisory body where all the institutions tem level and at the level of the individual intermediary-- with oversight responsibilities are represented and man- may not be fully assessed by participants. In addition, the dated to cooperate.3 Cooperation must also be pursued concern with having to support less reliable intermedi- between the overseer and the securities markets regula- aries may lead larger participants to discriminate against tors, because securities settlement is an integral part of the smaller ones, even when the latter are technically eligible payments system, and problems in securities markets to participate in the system. Finally, the payment system clearing and settlement may easily spill over to the pay- industry also depends on agreements between producers ments system, and vice versa. to ensure that different components of the system are Effectivecooperationamongmarketparticipants,between compatible. Most recently, the emergence of new types of regulators and market participants, and among regulators nonbank intermediaries and payment instruments has is essential for the development of a sound and efficient strengthened the need for a comprehensive level of coop- payments system. In particular, the cross-nature element eration in the payments system. that characterizes the transfer of money and the sys- With regard to the cooperation among regulators, the temic nature of the underlying operating procedures safety and efficiency objectives of payment and securi- make the payments system an institution whose existence ties settlement systems may be pursued by a variety of public sector authorities, in addition to the central bank 3See Banca d'Italia (1999) for a description of the institutional and the securities commission. Examples of these regula- arrangements adopted in some leading industrial countries. In the tors include legislative authorities, ministries of finance, United Kingdom, the Bank of England and the Financial Services Authority, responsible for regulating individual banks, recognize the and competition authorities. There are also complemen- need to share information about the main payment system members. tary relationships between oversight, bank supervision, The two institutions have signed a memorandum of understanding and market surveillance. Appropriate cooperation among requiring that "the FSA and the Bank [of England] will establish supervisors can be achieved in a variety of ways--for information sharing arrangements, to ensure that all information which is or may be relevant to the discharge of their respective respon- example, exchanges of views and information between sibilities will be shared fully and freely. Each will seek to provide the relevant authorities may be conducted by holding regular other with relevant information as requested" (see Bank of England or ad hoc meetings. Agreements on the sharing of infor- 2000). In the European Union, the European Central Bank has issued a protocol for payment system oversight to be adopted by the euro- mation may be useful for such exchanges. Table 6.1 pre- area national central banks and the European Central Bank. sents oversight and cooperative arrangements in LAC. 188 Payments and Securities Settlement STATUS IN THE REGION Table 6.1 Oversight and Cooperative Arrangements in Latin America and the Caribbean Country Oversight Issues Argentina Legal Foundations of the Function The Law of Financial Institutions is the legal framework that governs the financial and banking system as a whole. In particular, it gives the Banco Central de la República Argentina (BCRA) broad enforcement author- ity over entities participating in financial intermediation. BCRA authority over clearinghouses and similar entities that perform payment settlement functions stems indirectly from this law, and is formalized in the charter of the BCRA, the Carta Orgánica. The Carta Orgánica grants the BCRA's board of directors the power to regulate the creation and functioning of clearing organizations for cheques and other operations managed by financial entities (Article 14, Point J). Transparency of the Oversight and Dissemination of Information The oversight authority of the BCRA is not articulated in a formal policy document. There are no regular publications of the BCRA regarding the payments system. Objectives, Scope, Instruments, Pricing, and Access The BCRA supervises all clearinghouses. The main instruments are direct supervision, moral suasion, and cooperation through the Comisión Inter- bancaria de Medios de Pago de la República Argentina. Pricing policies are not disclosed. There is no formal policy regarding access to settlement systems. Organizational Arrangements and Cooperation The BCRA is involved through its banking supervision function in the oversight of the private sector clearing- houses. The control of technical and operational aspects of each clearinghouse, both before it is authorized to operate and subsequently, is managed by the banking supervisor (Superintendencia de Entidades Financieras y Cambiarias). The Superintendencia de Entidades Financieras y Cambiarias is also involved in the management of abnormal situations in the clearinghouse through the Comité de Camaras. The Carta Orgánica gives the Superintendencia de Entidades Financieras y Cambiarias the responsibility to enforce the legal provisions on the functioning of plastic cards and e-money issued by the Congress or by the BCRA. A cooperative body, the Comisión Interbancaria de Medios de Pago de la República Argentina, in which the central bank and the commercial banks are represented, was formed in 1996 to support payment system reform. No formal cooperation is in place between the central bank and other regulatory authorities in the payments system. The Banco Central de la República Argentina is a member of the Working Group on Payment System Issues of LAC (WGPS-LAC). Bahamas, The Legal Foundations of the Function It is not clear whether the law formally assigns to the central bank responsibility over the payments system. Transparency of the Oversight and Dissemination of Information Oversight function not formally performed. Objectives, Scope, Instruments, Pricing, and Access Oversight function not formally performed. Organizational Arrangements and Cooperation No unit is in charge of the oversight function. A national payment system council was recently established. The Central Bank of the Bahamas is not a member of the WGPS-LAC. Transparency, Oversight, and Cooperation in Payments Systems 189 Table 6.1 Oversight and Cooperative Arrangements in Latin America and the Caribbean (Continued) Country Oversight Issues Bolivia Legal Foundations of the Function Central Bank Law 1670 of October 31, 1995, states that the Banco Central de Bolivia is empowered to formulate policies of general application over the payments system to fulfill its overall objectives. The same law in its Article 54 (k) states that the board of directors of the Banco Central de Bolivia has the authority to authorize and regulate the functioning of clearinghouses. The Banco Central de Bolivia has issued several pieces of regulation over the payments system: for example, Resolution n. 070/2001 regulates the large-value payments system. Resolution n.138/2003 approves the Rules of Automated Clearinghouse and other clearing and settlement services; Resolution n. 086/2004 approves and regulates the electronic system. Transparency of the Oversight and Dissemination of Information Oversight function not formally performed. Objectives, Scope, Instruments, Pricing, and Access Oversight function not formally performed. Organizational Arrangements and Cooperation No unit is in charge of the oversight function. No national payment system council exists. The Banco Central de Bolivia is a member of the WGPS-LAC. Brazil Legal Foundations of the Function The Payment System Law (10214, March 2001) clearly defines the Banco Central do Brasil (BACEN) major payment system objectives. The BACEN's role, objectives, and policies with respect to the payment system have been publicly disclosed through policy statements. Generally, the BACEN's action during the implemen- tation process has encompassed widely announced objectives and permanent conversation and partnership with interested parties. The BACEN issued general regulation-setting minimum requirements for clearinghouses' risk-control devices. The Conselho Monetário Nacional's (CMN's) Resolution 2,882 strictly follows the CPSIPS except for Principle 6, which is placed in the Circular 3,057. The resolution includes the delivery versus payment principle for securi- ties settlement. Finally, the resolution expands on the objectives of payments system oversight. Also, Circular 3,060/2001 enforces the BACEN to offer funds transfer mechanisms operating under a real-time gross settlement (RTGS) mode by April 2002. Being the regulator, supervisor, and lender of the system, that norm rules the functioning of banks' reserve accounts, and a schedule of implementation of the restructuring project that covers communications network and participants' access; optional tests on the communication network, messages exchange system, security system, and prototypes system; mandatory tests; and rules to overdrafts allowance. Transparency of the Oversight and Dissemination of Information Publicly disclosed policy statements are available at the BACEN Web site, such as a technical note on monetary policy that deals with operational characteristics of banks' reserve account; the Sistema de Transferência de Reservas; intraday and interday repo and rediscount operations; the Servico Especial de Liquidação e Custodia, that operates under a gross settlement mode in the securities leg and under an RTGS mode in the payment leg; and considerations about reserves requirements on all eligible assets, which can be used for intraday needs. The above-mentioned note also contains the key policy decisions taken by the BACEN concerning the payment system. These include systems operated by the BACEN will settle on RTGS mode (reserves balances and government securities book-entry system); banks' reserves account will be monitored in real-time; no overdraft at the reserves account will be allowed; interest-free intraday credit will be granted by the BACEN through repo operations; financial institutions must authorize all debits on their reserves account; the communication network used by Sistema de Transferência de Reservas will be message driven. (Continued) 190 Payments and Securities Settlement Table 6.1 Oversight and Cooperative Arrangements in Latin America and the Caribbean (Continued) Country Oversight Issues Brazil Abundant information on payment system structure and data is available regularly from the BACEN and (Continued) other sources. Objectives, Scope, Instruments, Pricing, and Access By law and by regulation, the BACEN is committed to apply the CPSIPS to the systems it operates and to systems it does not operate. The existing legal and regulatory framework gives the BACEN authority to perform its oversight function, also, through moral suasion, which means that the BACEN has a broad range of oversight tools, including discretionary powers. Rules to sanction abnormal behavior of intermediaries in each system have been produced, and are considered a crucial element to enforce risk management measures to be taken by the system's participants because well- defined sanctions are viewed as important to ensure that adequate action is taken to remedy noncompliance with BACEN rules. There is no disclosed policy for pricing and access, although these policies are carried out in the context of the oversight framework described in this table. Organizational Arrangements and Cooperation The oversight function is performed by the department in charge of the RTGS and banking operations. A memorandum of understanding, signed on July 5, 2002, sets forth the exchange of information and previous consultation between the BACEN and the Comissão de Valores Mobiliários concerning issues related to entities dealing with settlement of financial assets. The memorandum of understanding is available on the BACEN Web site. Although the BACEN has a clear policy of cooperation with other stakeholders and system participants, no national payment system council exists. The Banco Central do Brasil is a member of the WGPS-LAC and cooperates with G-10 central banks in the context of the CPSS. Chile Legal Foundations of the Function Article 1 of the Legal Statute of the Central Bank (Banco Central de Chile, BCCH) of 1989 establishes its main responsibilities and powers, among which the BCCH is responsible "for safeguarding currency stability and the smooth functioning of domestic and foreign payments." This sets up an indirect basis for the establishment of the BCCH oversight policy. Transparency of the Oversight and Dissemination of Information Beyond the objectives explicitly mentioned in the BCCH legal statute, the central bank has defined policy objectives for payment systems in Chile. These have been published. They disclose publicly the BCCH's role and major policies with respect to BCCH payment systems. In particular, the BCCH has recently published a description of the modernization reforms coming with the introduction of a RTGS system and the replacement of outdated payment mechanisms. Objectives, Scope, Instruments, Pricing, and Access The RTGS was designed on the basis that it would meet the CPSIPS. The BCCH is overseeing the observance with the CPSIPS by the Sistema de Pagos de Alto Valor (the commercial banks' net large-value payment sys- tem) project proposed by the banks. For the moment, the BCCH does not oversee the observance with the CPSIPS for other payment systems such as the clearinghouse, which nets all retail and card payments, and the Redbanc automated teller machine network, which clears the automated teller machine payments of some banks. However, the BCCH regulates the retail payments systems. Organizational Arrangements and Cooperation The BCCH is working with the supervsion authorities' Superintendencia de Bancos e Instituciones Financieras and Superintendencia de Valores y Seguros to define a framework for collaboration on promoting the pay- ment systems' safety and efficiency. Transparency, Oversight, and Cooperation in Payments Systems 191 Table 6.1 Oversight and Cooperative Arrangements in Latin America and the Caribbean (Continued) Country Oversight Issues Chile No national payment system council exists. (Continued) The BCCH cooperates with other central banks, in particular through its active participation in the Western Hemisphere Payments and Securities Clearance and Settlement Forum and the Asociacion Latinoamericana de Integracion. The Banco Central de Chile is a member of the WGPS-LAC Colombia Legal Foundations of the Function The central bank (Banco de la República, BR) does not have a clear empowerment over the payment system oversight function. The legal foundation for central bank intervention in the system is included in Article 16 of Central Bank Law 31 of 1992 (Ley Orgánica del Banco de la República). In describing the central bank func- tions, the article states that the central bank should study and adopt monetary, credit, and foreign exchange measures to regulate monetary circulation and, in general, the liquidity of the financial system, and the smooth functioning of the payment system both domestically and internationally. When the central bank directly provides payment services, it meets its regulatory objectives by means of subscription by partici- pants of bilateral contracts in which all obligations and responsibilities of participants are established, as well as the rules for their operations, service pricing, and the sanctions for noncompliance. Law 795/2003 (Estatuto Orgánico del Sistema Financiero) states that the Superintendencia de Bancos "will regulate the payments systems and related activities that are not under the responsibility of the central bank." This activ- ity will be executed with prior consultation to the BR board of directors (Article 6j). In addition, Article 71, paragraph 1, indicates that the Superintendencia de Bancos "will supervise, monitor and inspect, following general guidelines issued by the national Government, the entities administering credit and debit cards or payment and settlement systems." Transparency of the Oversight and Dissemination of Information The central bank plays a significant role in the payments reform because it is the main service provider in the country. BR communications on payment systems (to the congress and public in general) indicate objectives for the payment systems operated by the BR Objectives, Scope, Instruments, Pricing, and Access No formal objectives are in place for the oversight function. The main instruments for carrying out the func- tion are the bilateral contracts and moral suasion. The BR collects and publishes (through the BR Web page) statistics of the systems it manages, and has mechanisms in place to consult with system participants in case of changes of system operations. The BR does not issue authorization to provide payment services. Consumer protection is under the control of the Superintendencia de Industria y Comercio. No explicit provi- sion exists to regulate the pricing of payment services. However, for payment services offered by the central bank, the BR has issued a directive that mandates the full recovery of the production costs, including the opportunity cost of the invested capital. The BR approved a new pricing policy in 2003 (which has been applied since April 2004) for the systems it operates. The BR board determines the access requirements to the systems managed by the central bank. Organizational Arrangements and Cooperation Payments system issues are dealt with by several departments under the Subgerencia de Operaciones Ban- carias. Focus is on operations, and no formal unit is in charge of monitoring the payment system as a whole. At the domestic level, mechanisms exist for ad hoc cooperation between different authorities involved in the financial sector--namely the central bank, the banking supervision authority, the securities regulator, and the deposit guarantee fund--to monitor the payments system. However, there is no formal framework for such cooperation. No national payment system council exists. The Banco de la República is a member of the WGPS-LAC and cooperates with G-10 central banks in the context of the CPSS. (Continued) 192 Payments and Securities Settlement Table 6.1 Oversight and Cooperative Arrangements in Latin America and the Caribbean (Continued) Country Oversight Issues Costa Rica Legal Foundations of the Function Law 7558 of 1995 (Organic Law of the Banco Central de Costa Rica, BCCR), Article 2. Transparency of the Oversight and Dissemination of Information The operation of systemically important payment systems are detailed in a set of documents known as the Blue Book. The BCCR does not have any regular publications covering payment system developments. Statistical information on the payments system is not available on a regular and structured basis. Objectives, Scope, Instruments, Pricing, and Access BCCR has played a significant role in the payments system reform. BCCR's objectives in the payment system have not been publicly disclosed. Currently, instruments of oversight can be summarized as the operational involvement, its specific regulations, and moral suasion. Explicit provision exists to regulate the pricing of payment services in both the central bank law and the Sistema de Negociación y Pagos Electrónicos regulation. The BCCR determines access requirements to the systems it manages. As of yet, there is no general provision to regulate access to payment systems managed by the private sector. Organizational Arrangements and Cooperation Several departments under the Dirección de Servicios Financieros deal with payments system issues. Some aspects related to foreign exchange and cross-border payments are dealt with by another department (especially management of international reserves). No formal unit is in charge of monitoring the payment system as a whole. At the top level, coordination exists through Consejo Nacional de Supervision del Sistema Financiero. How- ever, at the working level, no formal framework exists to enhance cooperation on a continuous basis. No national payments system council exists. The Banco Central de Costa Rica is a member of the WGPS-LAC. Dominican Republic Legal Foundations of the Function A monetary and financial law (Ley Monetaria y Financiera, No. 182-2002, Articles 15 and 27) indicates that the final settlement of payments and clearing systems, and interbank market operations is the responsibility of the Banco Central de la República Dominicana. Article 27 also mentions that payments and cheques settlement systems, as well as other payment media, are a public service under the exclusive competence of the Banco Central de la República Dominicana. The article explicitly prohibits the organization of alternative multilateral settlement systems for the settlement of these instruments, although the service can be provided by a private institution if determined by the monetary board (junta monetaria). Transparency of the Oversight and Dissemination of Information Oversight function not formally performed. The central bank does not have any regular publications on payment system developments. Statistical information on the payments system is not available on a regular and structured basis. Objectives, Scope, Instruments, Pricing, and Access Oversight function not formally performed. Payment system services are provided free of charge. Transparency, Oversight, and Cooperation in Payments Systems 193 Table 6.1 Oversight and Cooperative Arrangements in Latin America and the Caribbean (Continued) Country Oversight Issues Dominican Republic The central bank determines the access requirements to the systems it manages. As of yet, there is no gen- (Continued) eral provision to regulate access to payment systems managed by the private sector. Organizational Arrangements and Cooperation The technology and systems department manages the central bank-operated systems. No unit is formally in charge of the oversight function. No cooperation framework exists among authorities. No national payment system council exists. The Banco Central de la República Dominicana is not a member of the WGPS-LAC. Ecuador Legal Foundations of the Function The Banco Central del Ecuador (BCE) does not formally perform oversight over the payments system nor has the statutory authority to perform the function. Article 261 of the constitution defines the BCE function as the execution and monitoring of the monetary, financial, credit, and exchange policy. This article is replicated in the legal statute of the BCE (Article 70 of Ley de Régimen Monetario y Banco del Estado). The empowerment for payments systems stems from its role in the financial policy. There are also other specific references in the BCE legal statute, such as cheques clearing (Article 13) or the current accounts of financial institutions at the BCE. Transparency of the Oversight and Dissemination of Information Oversight function not formally performed. The central bank does not have any regular publications covering payment system developments. Only limited statistical information on the payments system is available on a regular and structured basis. Objectives, Scope, Instruments, Pricing, and Access Oversight function not formally performed. For payment services offered by the central bank, the policy of the central bank is that of full recovery of the production costs, including the opportunity cost of the invested capital. The central bank determines the access requirements to the systems it manages. As of yet, there is no general provision to regulate access to payment systems managed by the private sector. Organizational Arrangements and Cooperation Management of the central bank-operated systems is performed by the national banking services division. No unit is formally in charge of the oversight function. Payments systems issues are coordinated by two committees approved by the BCE regulations (Chapter I, Article 1): an internal committee of the BCE (Comité del Sistema de Pagos) and an interinstitutional commit- tee (Comité Interinstitucional del Sistema de Pagos). However, the securities regulator is not included in the interinstitutional committee. No national payment system council exists. The Banco Central de Ecuador is a member of the WGPS-LAC. El Salvador Legal Foundations of the Function No legal clarity on the authority empowered to regulate and oversee payment systems. Transparency of the Oversight and Dissemination of Information Oversight function not formally performed. Objectives, Scope, Instruments, Pricing, and Access Oversight function not formally performed. (Continued) 194 Payments and Securities Settlement Table 6.1 Oversight and Cooperative Arrangements in Latin America and the Caribbean (Continued) Country Oversight Issues El Salvador Organizational Arrangements and Cooperation (Continued) Oversight function not formally performed No national payments system council exists. The Banco Central de El Savador is a member of the WGPS-LAC. Guatemala Legal Foundations of the Function The Legal Statute of the Banco de Guatemala (BANGUAT) (Ley Orgánica del Banco de Guatemala) of May 2002, Article 4. Transparency of the Oversight and Dissemination of Information The BANGUAT does not have any regular publications covering payment system developments. Statistical information on the payments system is not available on a regular and structured basis Objectives, Scope, Instruments, Pricing, and Access The BANGUAT plays a leading role in the reform of payment arrangements in the country, in particular through the launch of the new RTGS system. The objectives and scope of the oversight function are not clearly defined. In absence of secondary legislation or any central bank document on payments system oversight, the available instruments are regulation and moral suasion in the context of the central bank's activities. The BANGUAT has not yet defined a coherent pricing policy for the payment systems it operates, or guide- lines for the payment systems it does not operate. There is no statement that clarifies BANGUAT objectives and policies related to access. Organizational Arrangements and Cooperation No unit is in charge of the oversight function. No formal cooperation exists between the BANGUAT and other regulators on payment system issues. Only recently, the BANGUAT has become more active in international and regional fora on payments and securities settlement issues. No national payments system council exists. The Banco Central de Guatemala is a member of the WGPS-LAC. Honduras Legal Foundations of the Function The general empowerment of the central bank regarding payment systems emanates from article 2 of the Banco Central de Honduras (BCH) Law. It indicates that the BCH is responsible for the stability of the internal and external value of the domestic currency and the normal functioning of the payment systems. Article 16 includes as one of the functions of the BCH Board the responsibility over the adequate functioning of the financial and payments systems in the country. Transparency of the Oversight and Dissemination of Information Oversight function not formally performed. Objectives, Scope, Instruments, Pricing, and Access The Banco Central de Honduras plays a leading role in the reform of payment arrangements in the country, in particular through the launch of the new RTGS system. Oversight function not formally performed. Organizational Arrangements and Cooperation No unit is in charge of the oversight function. A national payments system council was recently established. Only recently, the BCH has become more active in international and regional fora on payments and securi- ties settlement issues. However, BCH is not a member of the WGPS-LAC. Transparency, Oversight, and Cooperation in Payments Systems 195 Table 6.1 Oversight and Cooperative Arrangements in Latin America and the Caribbean (Continued) Country Oversight Issues Jamaica Legal Foundations of the Function The only reference is Article 27 of the Bank of Jamaica (BOJ) Act ("The Bank may promote the establishment of bank clearing systems and provide facilities for the clearance and settlement of transactions between commercial banks"). Transparency of the Oversight and Dissemination of Information The BOJ does not formally perform oversight of the payments system nor does it have the statutory authority to perform the function. The central bank does not have any regular publications on payment system developments. Statistical information on the payments system is not available on a regular and structured basis. Objectives, Scope, Instruments, Pricing, and Access The cheque clearinghouse is operated by the Jamaica Clearing Bankers Association but its oversight falls under the BOJ. The BOJ also participates in the governance arrangements of the Automated Clearing House For the payment services offered by the central bank, the policy of the central bank is that of full recovery of the production costs, including the opportunity cost of the invested capital. The central bank determines the access requirements to the systems it manages. As of yet, there is no general provision to regulate access to payment systems managed by the private sector. Organizational Arrangements and Cooperation The banking and market operations division manages the central bank­operated systems. No unit is formally in charge of the oversight function on both systems operated by the central bank and other operators. The BOJ is establishing its oversight function. The draft policy statement will include recommendations for the organizational structure of the oversight department. The payments system oversight function is to be carried out by an autonomous department. The department is currently staffed with a manager, one graduate member of staff, and an administrative assistant. The department is currently engaged in internal and external system implementation activities as they relate to payments system reform. The detailed staffing arrangements for oversight are to be determined on completion of the reforms. A national payment system council was established in 2005. Domestically, at the top level forms of coordination exist between authorities (in particular, the BOJ, the Min- istry of Finance, and the financial services commission). However, at the working level no formal framework seems to exist to enhance cooperation on a continuous basis. There is not yet a clear distinction between the banking supervision and the payments system oversight tasks within the BOJ. No formal agreement is in place with other central banks or international institutions. The Bank of Jamaica is a member of the WGPS-LAC. Mexico Legal Foundations of the Function The Banco de México law contains several articles dealing with the specific powers of the Banco de México for payment systems. Among these, the most relevant follow: Article 3 defines the central bank's functions as being to regulate the issuance and circulation of currency and of the payments system, and to operate with credit institutions as the reserve bank and as lender of last resort. Article 15 details the requirements and exceptions for financing that Banco de México may grant to credit institutions in order to avoid problems in the payments system and the operations Banco de México can make as the lender of last resort. (Continued) 196 Payments and Securities Settlement Table 6.1 Oversight and Cooperative Arrangements in Latin America and the Caribbean (Continued) Country Oversight Issues Mexico Article 24 establishes the central bank's ability to issue regulations for the payments system and to impose (Continued) sanctions on entities that do not follow these dispositions. Article 31 establishes the central bank's ability to regulate the transfer of funds through credit institutions. Moreover, in November 2002, the Mexican congress enacted the Payment System Law, granting Banco de México full powers to oversee all systemically important payment systems in the country, whether operated by itself or by any other entity or entities, and to impose sanctions. Transparency of the Oversight and Dissemination of Information The oversight authority of the Banco de México is not articulated in a formal policy document. Banco de México regularly publishes on its Web site statistics on fees charged by commercial banks for payment services, general information on the different products commercial banks offer to their clients, and statistics on the use of the major payment systems in the country. In January each year, Banco de México must disclose, by means of a publication in its official newspaper, the systems it deems as systemically important and, thus, that it is entitled to oversee. Objectives, Scope, Instruments, Pricing, and Access Banco de México formally oversees all systemically important payment systems in the country as well as the Sistema Interactivo para el Depósito de Valores, the securities settlement system operated by Instituto para el Depósito de Valores. In practice, it also oversees some retail systems, such as those operated by the Centro de Compensación Bancaria. The main instruments are direct supervision, moral suasion, and cooperation. The main criteria underlying the pricing policies are disclosed on Banco de México's Web site. There is no formal policy regarding access to settlement systems. Organizational Arrangements and Cooperation No national payment system council exists. No formal unit is in charge of payment system oversight within the Banco de México. There is no specific memorandum of understanding on settlement issues between the Banco de México and the Comisión Nacional Bancaria y de Valores. The Banco de México is a member of the WGPS-LAC and cooperates with G-10 central banks in the context of the CPSS. Netherlands Antilles Legal Foundations of the Function The Bank van de Nederlandse Antillen (BvdNA) does not have clear legislative authority for the oversight of clearance and settlement systems. The only available regulation for the payments system is the 2001 rule- book for the Netherlands Antilles Clearing System (NACS). Appropriate secondary legislation (bylaws, circulars, and so on) does not exist. Transparency of the Oversight and Dissemination of Information Oversight function not formally performed. The BvdNA does not have any regular publications covering payment system developments. Statistical information on the payments system is not available on a regular and structured basis. Objectives, Scope, Instruments, Pricing, and Access Oversight function not formally performed. The NACS was developed jointly by the BvdNA and commercial banks; the investments to develop the sys- tem and implementing it were shared. Each participant had contributed the same amount and no differentia- tion has been made to the future use of the system. Maintenance costs are yearly divided among the Transparency, Oversight, and Cooperation in Payments Systems 197 Table 6.1 Oversight and Cooperative Arrangements in Latin America and the Caribbean (Continued) Country Oversight Issues Netherlands Antilles participants according to the same formula. Staff costs to operate the system are at the expense of the (Continued) BvdNA. Under this arrangement, for individual transactions processed through the NACS no fee is charged to the participants. Moreover, NACS pricing policies are neutral with regard to less-efficient payment instruments (for example, cheques). Banks and the government have access to the NACS system operated by the central bank. There is no statement that clarifies BvdNA's objectives and policies related to access. Organizational Arrangements and Cooperation Only informal cooperation exists between the department in charge of operating the NACS system and the banking supervision department. No national payment system council exists. The BvdNA is not very active in international and regional fora on payments and securities settlement issues. The Bank van de Nederlandse Antillen is not a member of WGPS-LAC. Nicaragua Legal Foundations of the Function The Banco Central de Nicaragua has legislative authority for the oversight of clearance and settlement systems. The Organic Law (Article 3) states that one of the functions of the central bank is to regulate international and domestic payment. Other articles of the organic law mention more specifically its role for the payment sys- tem clearinghouse and could be interpreted as applicable to other payment systems, as well. Other available regulation for the payments system are the rulebooks for both the Transferencias Telefónicas Segura and the cheque clearinghouse. Transparency of the Oversight and Dissemination of Information Oversight function not formally performed. Objectives, Scope, Instruments, Pricing, and Access Oversight function not formally performed. Organizational Arrangements and Cooperation No unit is in charge of the oversight function. No national payment system council exists. The Banco Central de Nicaragua is not a member of the WGPS-LAC. OECS Legal Foundations of the Function Under the 1983 agreement, the central bank "may at a suitable time in conjunction with other banks organize clearinghouses in such places as may be desirable" (Article 36); no other provision contained in both the agreement and the Banking Act specifically addresses payment system issues, so the role played and the objectives pursued in the payment system are not disclosed. Transparency of the Oversight and Dissemination of Information Oversight function not formally performed. Objectives, Scope, Instruments, Pricing, and Access Oversight function not formally performed. Organizational Arrangements and Cooperation No unit is in charge of the oversight function. No national payment system council exists. The Eastern Caribbean Central Bank is a member of the WGPS-LAC. (Continued) 198 Payments and Securities Settlement Table 6.1 Oversight and Cooperative Arrangements in Latin America and the Caribbean (Continued) Country Oversight Issues Panama Legal Foundations of the Function No central bank. Transparency of the Oversight and Dissemination of Information Oversight function not formally performed. Objectives, Scope, Instruments, Pricing, and Access Oversight function not formally performed. Banco Nacional de Panamá performs some regulatory and administrative responsibilities related to cheques and other payment instruments and settlement. Organizational Arrangements and Cooperation No unit is in charge of the oversight function. No formal cooperative arrangements are in place, but banks have reached important agreements in relevant areas. No national payment system council exists. Panama authorities are not members of the WGPS-LAC. Paraguay Legal Foundations of the Function Article 45 of the Central Bank Organic Law 489 of June 29, 1995, states that it is a Banco Central de Paraguay's objective to guarantee the smooth functioning of payment systems, including clearinghouses. Article 5 of the Organic Law empowers the Banco Central de Paraguay to issue any regulations it deems appropriate to carry out its functions, including payment system oversight. Another piece of legislation for the payments system is the central bank resolution number 01/1999, which based on Law N. 1292/1943, regu- lates the cheque clearinghouse. Moreover, the Cheque Law 805/1996 gives the Banco Central de Paraguay the authority to regulate the modalities of issuance of the instrument. The Banco Central de Paraguay's Interbank Transfer System is regulated by Article 64 of the Organic Law (opening of current account) and several internal provisions of the Banco Central de Paraguay. Transparency of the Oversight and Dissemination of Information Oversight function not formally performed. Objectives, Scope, Instruments, Pricing, and Access Oversight function not formally performed. Organizational Arrangements and Cooperation No unit is in charge of the oversight function. No national payment council exists. The Banco Central de Paraguay is a member of the WGPS-LAC. Peru Legal Foundations of the Function The central bank does not have a clear empowerment over the payment system oversight function. At pre- sent, there is no explicit legal mandate for the central bank to be in charge of the oversight of the payment system, although it is indirectly hinted in the central bank bylaw, in its Article 68, whereby the central bank is empowered to regulate the operation of clearinghouses. The Banco Central de Reserva del Perú (BCRP) develops its oversight function through pieces of regulation called circulares. Transparency of the Oversight and Dissemination of Information The objectives of the payments system reform are not formally disclosed, nor is there a policy statement. Transparency, Oversight, and Cooperation in Payments Systems 199 Table 6.1 Oversight and Cooperative Arrangements in Latin America and the Caribbean (Continued) Country Oversight Issues Peru Objectives, Scope, Instruments, Pricing, and Access (Continued) The main objectives of the payment systems reform and their general guidelines are provided by the BCRP board. The central bank's credit and financial regulation division permanently supervises the performance of the financial sector. In that sense, the payment system department is in charge of payment system oversight, and the monetary and exchange operations department supervises the banks liquidity level and the financial support, if necessary. Finally, the financial system analysis department monitors and evaluates banking sector performance. All these functions are related, and there is feedback among the departments in charge of them. Organizational Arrangements and Cooperation The relationships between the Central Bank and the Superintendency of Banking and Insurance, in the framework of the payment system reform, are based on an Understanding Agreement. It guarantees cooper- ation and the coordination of common actions to issue regulations regarding the clearing of cheques and other payment instruments. The Superintendency of Banking and Insurance controls and supervises all financial institutions (main users of the Sistema de Liquidación Bruta en Tiempo Real and the clearinghouse). The Superintendency of Banking and Insurance, based on a memorandum of understanding (Acta de Entendimiento) with the BCRP, is empowered to grant the organization and functioning approvals to the elec- tronic clearinghouse. The BCRP also subscribed another memorandum of understanding with the securities commission, Comisión Nacional Supervisora de Empresas y Valores, in August 2002. In the latter, it was agreed on to set up a new securities settlement system based on a delivery versus payment system based on Model 2 of the CPSS (Bank for International Settlements) with final funds transfer through the RTGS. The BCRP established a cooperative framework through the Payment System Inter-bank Commission in 1998 to spearhead change in the payment systems. The Payment System Inter-bank Commission has provided a forum for developing a consensus on payments system reform, assisting the central bank in the development of an RTGS system, and providing leadership for the planned electronic clearinghouse. Currently, this committee meets occasionally to deal with specific topics. It functions as a forum whereby the central bank and the banking association interchange opinions on various matters of interest, the opinions being nonbinding. The Banco Central de Reserva del Perú is a member of the WGPS-LAC. Trinidad and Tobago Legal Foundations of the Function The Central Bank of Trinidad and Tobago undertook an upgrade of existing laws and the introduction of laws specific to payment systems. This legal reform will include a formal empowerment to the Central Bank of Trinidad and Tobago to exercise its payment system oversight function. Transparency of the Oversight and Dissemination of Information A draft policy statement, which includes the objectives, policy stance, and instruments of the oversight function, has been prepared by the payments system council. Payment system oversight is considered an autonomous regulatory function. The function has developed largely as a result of increasing international debate. It is deemed necessary to bring improvements to the payments clearance and settlement arrangements in the financial system. Objectives, Scope, Instruments, Pricing, and Access The following are according to the plan being implemented by the Central Bank of Trinidad and Tobago: The objectives of payments system oversight will be efficiency, reliability, safety, and protection of public interest. The participants are free to offer new products and services. The instruments for oversight will include moral suasion, rules, agreements, sanctions, and on-site inspec- tion. When the reforms, including legal reform, have been completed, the regulation will be an important instrument. The rules governing the operation of the RTGS, which is operated by the central bank, cover issues of sanctions and penalties for noncompliance. The plan is to carry out both on- and off-site assessment of systemically important payment systems. On-site assessment will be done in coordination with the supervision function. The oversight department will develop returns to be submitted by participants for analysis. (Continued) 200 Payments and Securities Settlement Table 6.1 Oversight and Cooperative Arrangements in Latin America and the Caribbean (Continued) Country Oversight Issues Trinidad and Tobago Organizational Arrangements and Cooperation (Continued) The payments system oversight function is to be carried out by an autonomous department. The department is currently staffed with a manager, one graduate member of staff, and an administrative assistant. The department is currently engaged in internal and external system implementation activities as they relate to payments system reform. The detailed staffing arrangements for oversight are to be determined on completion of the reforms. A national payment system council was established in 2003. The Central Bank of Trinidad and Tobago is a member of the WGPS-LAC. Uruguay Legal Foundations of the Function According to its legal statute (Central Bank Law 16.696) dated March 30, 1995, the Banco Central del Uruguay (BCU) has overall legislative authority for the oversight of clearance and settlement systems. The basis of this is expressed in Article 3, which includes as one of the purposes of the BCU, "to ensure the normal function- ing of domestic and international payments," and also from Article 7, which empowers the BCU to regulate and supervise the activities of financial sector institutions to accomplish its main purposes, as expressed in Article 3. Transparency of the Oversight and Dissemination of Information In practice, the payment system oversight function is not formally performed within the BCU. The BCU does not have any regular publications covering payment system developments. Statistical information on the payments system is not available on a regular and structured basis. Objectives, Scope, Instruments, Pricing, and Access In absence of secondary legislation or any BCU document on payments system oversight, the available instruments are regulation and moral suasion in the context of the central bank's activities. At present, the BCU does not charge for the payment and settlement services it provides to institutions that hold a current account with it. Fees were applied in the past, however, and once the migration to the new technological platform is accomplished, the BCU intends to resume the application of fees. However, the pricing policy targets solely a general cost recovery, and no other objectives are sought through this means. Financial institutions participate in the Sistema Electrónico de Comunicaciones under the legal basis provided by Article 29 of the Central Bank Law. Having a current account at the BCU is required for being able to operate in the Sistema Electrónico de Comunicaciones, but is not sufficient. Institutions without access to the Sistema Electrónico de Comunicaciones can transfer funds by means of paper-based instructions (cartas). There is no statement that further clarifies BCU objectives and policies related to access. Organizational Arrangements and Cooperation In practice, the payment system oversight function is not formally performed within the BCU. The BCU does not have any regular publications covering payment system developments. Statistical infor- mation on the payments system is not available on a regular and structured basis. Domestically, there is regular coordination with the Ministry of Finance for issues related to the issuance of government securities. The banking supervisory and securities regulatory functions are performed by the BCU through a banking superintendence and a specialized department (Gerencia del Mercado de Valores). There are no other formal or informal cooperation schemes with other authorities. No national payment system council exists. The Banco Central del Uruguay is a member of the WGPS-LAC. Transparency, Oversight, and Cooperation in Payments Systems 201 Table 6.1 Oversight and Cooperative Arrangements in Latin America and the Caribbean (Continued) Country Oversight Issues Venezuela, R.B. de Legal Foundations of the Function The Ley del Banco Central de Venezuela (BCV), October 3, 2001, states, "To achieve adequately its objec- tive(s), the BCV will carry out the following functions . . . to oversee the smooth functioning of the payments system and establish its operating rules" (Article 7, #7). Similarly, Article 21 (#17) states that among the pow- ers of the board of directors of the BCV is to exercise oversight and dictate rules for the different payment systems in the country, operated or not by the BCV, to ensure they operate efficiently and with the highest level of safety. The BCV is the only entity authorized to establish operating rules for bilateral and interna- tional payment systems. The BCV's resolution 99-07-01 expands on general considerations and objectives of the payments reform. The BCV has issued the rules and regulations for the cheque clearinghouse (Reglamento del Sistema del Sistema de Cámara de Compensación, Resolution #96 08-01). There is no other bylaw or secondary legislation available in the field of payment systems. Transparency of the Oversight and Dissemination of Information A public policy statement on oversight is being prepared by the BCV. The BCV does not have any regular publications covering payment system developments. Statistical information on the payments system is not available on a regular and structured basis. Objectives, Scope, Instruments, Pricing, and Access The central bank's charter mentions explicitly efficiency and safety as the main BCV objectives in the area of payment systems. The scope is wide because all payment systems in the country are covered by Article 21 of the BCV charter. In the absence of secondary legislation or any BCV document on payments system oversight, the available instruments are regulation and moral suasion in the context of the central bank's activities. Organizational Arrangements and Cooperation Coordination among the BCV, the securities regulator, the National Banking Committee (Consejo Bancario Nacional) and the banking supervision exists at the level of the steering committee. A national payment system council was established in 2004. The Banco Central de Venezuela is a member of the WGPS-LAC. Source: Authors' elaboration. OBSERVATIONS the area of securities settlement systems. Legisla- tion should clarify in detail the empowerment and In most Latin America and Caribbean (LAC) coun- enforcement of the central bank as payment system tries the law gives some authority to the central overseer. bank over the payments system. However, the legal In the context of establishing the oversight function, foundation of oversight of clearance and settlement each LAC central bank should disclose publicly its systems is not always solid. For example, the law is often not clear about the scope of application of objectives relating to all significant payment system the function and the relative roles of the central matters along with its implementation strategies. To bank and other authorities. To overcome these prob- this end, it is suggested that central banks develop a lems, it is of paramount importance that central comprehensive policy statement. This policy state- banks prepare and encourage approval of a primary ment should provide sufficient guidance to private or secondary legislation to complete the legal frame- sector organizations for all payment systems on mat- work and ensure the secure foundation of payment ters relating to governance, day-to-day management, mechanisms that effectively contribute to the integ- risk mitigation, and on the policies that must be satis- rity, efficiency, and safety of all financial markets fied by all transactions that are ultimately settled on and the operation of monetary policy, especially in its books. 202 Payments and Securities Settlement With regard to policy objectives, it is recommended needs. Information and public policy statements that LAC central banks broaden the focus beyond the relating to all substantial payment system matters two traditional main objectives of efficiency and reli- should be disclosed in a manner that ensures wide ability of payment systems to a wider set of issues dissemination among payment system stakeholders including the promotion of competition in the pay- and the general public (for example, in a payment ment services market and the protection of consumer system chapter of the annual report or other appro- interests. These objectives might be pursued by the priate publication). central banks, as overseer on the payment system, LAC central banks should move toward compliance especially in those cases not embraced by other reg- of all systemically important payment systems in the ulatory or supervisory authorities. With regard to the countries with international standards, as a matter of scope of its oversight role, it is recommended that the urgency. In particular, central banks will continue to be central bank apply its oversight authority over all pay- direct providers--owners and operators--of clearing ments and securities settlement systems in the coun- and settlement services. With regard to such services, try, both systemically important and retail systems, care should be taken to ensure that appropriate service because the latter are especially important in support- and performance levels are routinely achieved, and ing economic activity and the public trust in money. that these services and performance levels adequately LAC central banks, in exercising their oversight role, cover all critical safety and efficiency requirements. To should have the ability to carry out this function effec- this end, central banks should continuously review and tively, as follows: seek to improve the design and operation of the sys- Central banks should establish appropriate organi- tems they operate (for example, along the lines that the zational arrangements and staffing. This includes CPSS CPSIPS envisage for payment systems operated forming a small unit in charge of payments system by private entities). oversight to be separated to the extent possible from In performing the oversight function, LAC central the units in charge of operating the systems offered banks should ensure that transparency of policies and by the central bank. Skills of human resources conditions for payment services offered be available involved in the function should be as wide as possi- to the population of their countries at all times. In each ble and include legal, operational, and technical country, the central bank, commercial banks, and other expertise as well as policy and economics. financial institutions should be encouraged to provide Central banks should ensure that an adequate information to the public on the services they offer in degree of participant cooperation exists, and that the payments system and the fees they charge. More- it is sufficient to promote and realize the desired over, arrangements for the resolution of conflicts organizational and operational arrangements (see should be disclosed and understood by providers, below in this section). users, and regulators of payment systems and services. Central banks should verify that individual pay- The public should be able to resort to any consumers' ment systems satisfy user needs, as well as risk protection agencies (for example, a bank ombudsman) and efficiency requirements, through appropriate for resolution of conflicts related to payment services. interventions both at the development stage and The central bank should cooperate with the banking during the ongoing system implementation and supervisor and other relevant authorities to ensure operational phases. that payment instrument services and instruments are Central banks should define and implement appro- appropriately covered by the new arrangements. priate actions in case participants do not comply Cooperation among regulators is an essential compo- with published rules and regulations (for example, nent of the oversight function and is lacking in most the application of predetermined penalties and LAC countries. The payments system overseer (central sanctions for compliance failures). bank), the Ministry of Finance, the banking supervisor, Central banks should collect and distribute relevant the securities commission, and other relevant author- statistical information to demonstrate the use being ities should identify and implement procedure and made of each system and the extent to which the process changes to address any weaknesses or incon- systems are satisfying end user and other market sistencies in the regulatory arrangements and to ensure Transparency, Oversight, and Cooperation in Payments Systems 203 a high level of cooperation in the way that policies are payments and securities clearance and settlement sys- implemented. Consideration should be given to the tems improvements. This new body should be used as need for joint task forces to address problems of com- the main tool, also, to secure a constructive dialogue mon interest or the preparation of appropriate memo- between regulators and market participants. The cen- randa of understanding. At the international level, tral bank should provide strong leadership and the sec- central banks are invited to become more and more retariat of such a body. Payment system councils in the involved in the efforts of harmonization at the sub- different LAC countries could establish some forms of regional level--for example, within MERCOSUR, in interaction among them, in particular to move forward Central America and in the Caribbean, and in the activ- the harmonization and integration agenda. ities of the WGPS-LAC. Binding interbank agreements are equally important to In sum, regarding the oversight function and its trans- enhance cooperation within the banking sector. It is parency, many central banks in LAC are in the process understood that cooperation at the interbank level has of establishing the payment system oversight func- not always been satisfactory in LAC countries. Evi- tion. However, many central banks do not fully dence of this lack of interbank cooperation can be seen observe Responsibilities A, B, C, and D of the CPSIPS in the area of retail payment circuits, the development and, therefore, need to give more solid foundation to of the interbank market, and the slowness to reduce the the practice. dependency of some countries on cheques. In light of Cooperation among regulators and stakeholders is an possible market concerns about the potential loss of essential element to ensure safety and efficiency of competitive advantages--which are, however, lower the payments system. No formal cooperative arrange- than the social benefit of taking these actions--the cen- ments for the payments system as a whole exist in tral bank and the banks are urged to work together LAC countries. It is strongly recommended that, in toward the implementation of some agreements in the each country, the central bank establish as a matter of area of payment systems, which could enhance effi- urgency a formal national payment system council. ciency for the banking sector as a whole. The new body to be formed should include represen- In sum, cooperative arrangements in payment systems tatives from all major stakeholders with an interest in should be enhanced in LAC, as a matter of urgency. 7 Implementing Payments and Securities Settlement Systems Reforms T section presents an approach to engage the private sec- he implementation of a payments and securities tor in a reform program. Finally, the fifth section indi- settlement system (PSSS) reform is an important cates the main elements of an action plan. undertaking that will involve an effort from all stake- holders over a number of years. Thus, it will constitute THE ASSESSMENT AS A STARTING POINT a medium-term process normally led by public author- OF A PSSS REFORM ities, but with the important involvement of the private In assessing PSSSs, the assessors--that is, the national sector. This chapter is based mainly on the experience authorities in cooperation with the stakeholders or the of the PSSS reforms in which the Western Hemisphere external assessors--might identify the need for a major Payments and Securities Clearance and Settlement reform of the PSSSs, which goes beyond the application Initiative team has been involved, but also on other of specific measures to overcome existing deficiencies experiences of the World Bank payments unit in help- relative to individual settlement systems. Sound and ing to reform PSSSs around the world. Two of the efficient PSSSs are essential in guaranteeing a smooth authors of this book have also participated in the functioning of the country's financial markets and, ulti- CPSS working group that developed guidelines for mately, of the economy in general. In carrying out a national payment system (NPS)1 development, and reform of settlement systems, the domestic authorities some of the ideas included in this chapter have been and the stakeholders, with support from assessors, have integrated in the final working group document (CPSS to face several challenges, some of which are dealt with 2006a). This chapter is, thus, complementary with the in the current section of this report. In this exercise, document of the working group. authorities and assessors can also find some guidance in The starting point of a reform should be a comprehen- section 10 of the core principles report of the Committee sive assessment of PSSSs based on international stan- on Payment and Settlement Systems (CPSS 2001), which dards (see chapter 3 on assessment tools). This chapter expands on the importance of a strategic vision in is divided into five sections. The first section deals with reforming the payments systems, especially in emerg- the issue of how to use the international standards for a ing markets. In case of any doubt, authorities and asses- review or reform of PSSSs. The second section analyzes sors can seek assistance from external specialists, such the role of a national payment system (NPS), its scope, as those from the International Monetary Fund and the components, and conceptual framework. The third sec- World Bank, organizations that count with staff expe- tion explains the different institutional roles. The fourth rienced in reforming payments systems. An NPS architecture should be considered as an impor- 1References to NPS in this book cover both payments and securi- tant element in the safety and stability of the finan- ties settlement systems. cial system as a whole. A consensus on a strategic and 205 206 Payments and Securities Settlement collaborative approach is crucial, in that it would take a major participants in the settlement system--in order to holistic view of all aspects of the nation's payment sys- find out the needs of a revised or upgraded legal and tem needs and satisfy them in an orderly and cost-effi- regulatory framework for the PSSSs. Important issues cient manner. A collaborative approach, with the active include the enforceability of contract law and its possible participation of all stakeholders, is highly desirable incompatibilities between contractual arrangements and because of the complexity of the required changes, which various legislative provisions--for example, provisions will involve inputs relating to service providers; users; of insolvency and competition laws. Finality of a pay- technologies; legal and regulatory matters; and contri- ment or settlement and the possible implications of an butions from several professional disciplines. A well- existing zero-hour rule will need to be clearly defined. structured collaborative approach will create synergy, If need be, the assessor would also have to recommend stimulate learning, and provide a basis for optimizing actions to improve the legal safety in collateral transac- benefits through cooperation and consensus building. tions, which is typically subject to three main bodies of Finally, the strategic approach would be able to address law: the law of secured interests, insolvency law, and all the critical issues present in the current payments contract law. The law of secured interests governs the arrangements. establishment and realization of collateral, and is the The central bank or other regulators (in particular the law that determines the conditions under which a pledge securities regulators), or both, are well positioned to take (or possibly also a repurchase agreement) would be valid. the lead in formulating and implementing the strategy It also determines the procedures that have to be followed for payments system modernization. As neutral agents, if the transferor defaults and the collateral has to be they are less likely to trigger competitive concerns that realized by the transferee. The most likely reason for a could slow progress, and are more able to support the default by the transferor is insolvency, which would creation of a comprehensive vision for the future NPS. mean that the realization of collateral could be directly affected by the relevant insolvency law. Moreover, some The scope and difficulty of developing and carrying out a countries may have different types of insolvency schemes strategy for a successful modernization of the payments depending, for example, on the type of entity that is system should not be underestimated. This will be a insolvent. Contract law is also likely to be relevant to new process, and the projects that will be designed and the terms of the agreement between the transferee and carried out under the umbrella of the overall strategy transferor governing the collateral transaction. In addition will present new challenges to all parties involved. The to these laws, other bodies of law can sometimes be major risks are that (1) the systems developed could not relevant--for example, banking law, securities law, be used, (2) the resulting system changes will not satisfy consumer protection law, and criminal law. the needs of all users, and (3) the systems will not be cost efficient and affordable. However, a collaborative and There exist no clearly defined standards for what kind of cooperative approach is the only way in which these risks legislative or regulatory framework should be in place for can be minimized. In order to have an efficient coopera- a payment system. As a consequence, different models tive approach, appropriate human resources, in number exist--from specific payments system acts and laws on and expertise, should be made available by the different central bank oversight, to more general laws, some- stakeholders. times including provisions in the banking law and in the central bank law. In some countries, the laws are Important issues to be considered are described below. very detailed, whereas in others, the authorities--be it the central bank or other supervisors--have the power Legal Foundation to decide on the regulatory framework of the payment system. A sound legal foundation for the PSSSs is essential, and it is something that may take a long time to achieve It could be debated which one of the models would depending on a country's legislative framework. The be the best to choose. It is important to remember, while assessor should preferably discuss the outstanding legal taking into account the need for the NPS, that the NPS issues--not only with the authorities, but also with the is under constant development and that we do not know Implementing Payments and Securities Settlement Systems Reforms 207 today what kind of developments we will see tomorrow. Level of Sophistication in the Financial Sector This suggests that PSSSs would benefit from a regula- and the Infrastructure in the Country tory framework that includes less-detailed regulation in Recommendations on how to reform a PSSS should the form of a law, giving the overseer the power to reg- take into account the level of development in the finan- ulate the system in more detail. This is not to say that cial sector and the sector's actual needs. Furthermore, there cannot be situations where a more-detailed regula- any recommendations that an assessor makes should tion has to be included in the law, but that this should be take into account the level of development of the the exception rather than the rule. There are also certain infrastructure in the country, in particular the relia- areas that are better suited to be covered in a law--for bility of electrical power and telecommunication instal- example, netting and finality issues. lations. In making recommendations, the assessor would need to emphasize that--regardless of the simplicity Monetary Policy, Liquidity Management, of a system that sometimes may be best suitable for and Interbank Money Market a developing country--the system should observe the A safe and efficient PSSS is important for the develop- recommendations. Care should also be given to recom- ment of the financial markets. The fact that it is mainly mended actions that could form a base for easily upgrad- through transactions involving securities--in particular ing to higher standards, when deemed appropriate and government securities--that a central bank conducts its cost-effective. monetary policy operations gives the PSSS a central role in the financial market infrastructure. Well-functioning Development Priorities PSSSs are thus prerequisites for a modern way of con- ducting monetary policy. The assessor would have to Within the financial sector, a safe and efficient payment make sure that the interrelationship between the payment system for systemically important payment systems system used for settling the cash side of securities trans- (SIPS) would have the highest priority, because most sec- actions, and the securities settlement system (SSS) is tors of a country's economy and the country's population safe and efficient and that delivery versus payment is would engage in payment system transactions that are achieved. Should the assessor find that settlement of finally settled in a SIPS. An SSS that settles large values securities transactions could be improved, the assessor is likely to come next in the priority list, and its develop- should discuss such issues with central bank officials ment should be carefully integrated with the SIPS through responsible for monetary policy operations and with their which the cash side of securities transactions should set- counterparts in some of the major banks, before making tle in the form of delivery versus payment. As with SIPS, recommendations to that effect. an SSS that settles on a deferred net settlement basis has to be protected, so that it manages to settle even if the par- A safe and efficient PSSS is also important for achieving ticipant with the largest debtor position cannot deliver the an efficient market for short-term liquidity based on col- required securities. The protection could take several lateral. Thus, an adequate functioning of the interbank forms--for example, counterpart limits, insurance, auto- money market supports the liquidity management within matic securities lending, and liquidity funds built up by the financial sector. Efficient PSSS mechanisms will the participants and controlled by the operator of the SSS allow for the improvement of the liquidity management or the central bank. in the system, and thus will introduce better conditions for broker-dealers in the credit lines that they negotiate In defining the various activities that would need to be with banks. A smooth functioning of the money market undertaken, it is clear that the legal or regulatory frame- is also of key interest for the functioning of large-value work constitutes normally a first priority, and that work payment systems. This is especially true of the delivery of should start early in the reform process. The reason is that collateral to the central bank in order to obtain intraday it could take a considerable amount of time to put in place, or overnight credit, which is important in a developed or make necessary changes in the legal framework. There- financial market. For this reason, it should be possible fore, these are activities in a PSSS project that need to to settle transactions with intraday finality. start early in the process. 208 Payments and Securities Settlement In certain circumstances, it might also be important to transfers normally takes place across the accounts that take into account a regional or subregional perspective, approved institutions hold with the central bank, whose in particular if actions to consolidate systems at these pivotal role is vital to the functioning of the economy as levels are in place. a whole. The NPS is therefore a core component of the broader The Need to Increase the Knowledge Base of financial system and can be viewed as the infrastructure Payment and Securities Settlement Issues that provides the economy with the channels, or circuits, Competence within the area of PSSSs is scarce in many for processing the payments resulting from the many countries, because this area has only recently come into different types of economic transactions that take place focus. There are many ways in which the knowledge on a daily basis. base could be increased, which the assessor should stress. A well-functioning NPS requires a delicate balance An important way would be to study the various reports between market-driven competition, cooperation, and that have been published by the Committee on Payment public good considerations. In a mature environment, and Settlement Systems and International Organization banks and other payment-service providers should com- of Securities Commissions, as well as other institutions pete for payments business and customers, while achiev- and organizations--for example, the Group of Thirty ing the benefits and efficiencies that stem from the and the European Central Bank. Participation in inter- sharing of noncompetitive infrastructures. In the national national seminars and workshops should be encouraged. interest, it is imperative that economies of scale be The authorities (regulators and overseers) should be achieved and that the national payment service infra- encouraged to pay visits to foreign regulators and over- structure allow as many participants as possible to offer seers that have developed a substantial knowledge base their services to the public. in this area. It is recommended that the authorities take steps to make sure that major stakeholders engage in Scope and Components of an NPS studying all aspects of settlement systems, thus facili- tating the discussions about the possible needs to make It is clear from the previous points that a comprehensive existing settlement systems safer or more efficient, or to NPS comprises not just the funds transfer mechanisms-- embark on a reform program. payment processing organizations, communications networks, and computer systems--but also includes the following: THE ROLE OF AN NPS Institutions providing financial intermediation. It is widely accepted that an NPS consists of a set of A legal and statutory framework. instruments, banking procedures, and--typically--funds Rules, regulations, and agreements. transfer systems that ensure the circulation of money; Appropriate payment instruments. as well as the full set of institutional arrangements for Processing systems and procedures. the confirmation, clearance, and settlement of securi- A cost-effective technological infrastructure. ties trades and safekeeping of securities. Any country's Clearing and settlement mechanisms that adequately economy can be viewed as a series of layers in an inverted balance risk and efficiency requirements. pyramid, in which each layer is supported by the layers Providers of access to payment-related services. beneath it. The broadest layer of the pyramid represents Carefully selected range of payment-service providers the real economy and the financial markets--the buy- and products that satisfy market needs at acceptable ing and selling of goods and services throughout the costs. nation. It is supported by the country's banking system-- the next level of the pyramid--which provides payment Conceptual Framework for NPS Development services to all sectors of the economy. The third level consists of a limited number of interbank value transfer Typically, payment services have evolved--over time-- systems through which payment and other financial in an incremental manner, driven both by the need to transactions are processed. The final settlement of funds resolve problems and by the need to take advantage of Implementing Payments and Securities Settlement Systems Reforms 209 specifically identified improvement opportunities. To The NPS is internationally compatible. avoid a continuation of this ad hoc operational approach Payment settlement time lags resulting from trading to payments system development, several countries have transactions are in line with international practice. paused and initiated a business-and banking-needs- The NPS makes optimum use of the available liquidity. driven strategic approach to identify and implement a The international community has an appreciation of phased series of agreed-on changes--based on stake- the effectiveness of the NPS. holder consensus--to ensure the realization of a well- The success of the NPS should be measured against described medium-term vision of the NPS. A smooth and achievement of a comprehensive range of factors, such as: trouble-free implementation of the NPS can best be achieved through development of a vision that charac- Adequate risk control measures. terizes the sought-after arrangements in terms of goals, Irrevocability of settled transactions. objectives, primary features, critical success factors, Synchronization of delivery and payment. fundamental principles, and strategies. Facilitation of monetary policy execution. Sufficient liquidity. There is no disagreement that the primary goal of the NPS is to enable the circulation of money. This goal Confidentiality and security. emphasizes the fact that the NPS is an enabler of eco- Sound legal foundation. nomic activity. It provides the circuits for effecting pay- Adherence to national rules, regulations, and pro- ments, both domestic and international. Usually there is cedures. no disagreement as to the objectives of the NPS. There Effective fraud-prevention and detection measures are typically three broad objectives: in place. A suitable variety of payments. To provide effective mechanisms for the exchange of Service to all the people of the country. money between transacting parties. To ensure finality and irrevocability of both payment A vital issue in NPS development and implementation and settlement. relates to reaching consensus on a comprehensive range To enable the management, reduction, and containment of fundamental principles. The Committee on Pay- of systemic and other payment related risks. ment and Settlement Systems core principles for SIPS are an example of such principles. However, because the Primary features require detailed discussion and agree- NPS covers all payment systems, the range of agreed-on ment with all stakeholders, because they will include a fundamental principles should also cover all subsys- full range of policy, operational, and technical attributes tems. Such fundamental principles might include the that will characterize the future. A partial list of typical following: characteristics might be as follows: The provision of NPS services is not the exclusive Settlement of domestic interbank obligations is effected domain of banks. on a same-day basis. The evolution of the NPS infrastructure is a coopera- Participants compete on an equal footing in the pro- tive responsibility. vision of interbank clearing and settlement services. Participants are liable for the risks that they introduce There is healthy competition among customer into the NPS. payment­service providers. A balance is maintained between risk reduction The NPS is easily accessible. and cost. The NPS is cost efficient. The central bank response to a problem in the NPS Appropriate subsystems are provided for retail, whole- will be in the interest of the system, not in the inter- sale, foreign exchange, commodities markets, capital est of individual participants. market, and money market transactions. Surveillance (oversight) is necessary to ensure the The public is aware of NPS features. safety and soundness of the NPS. The NPS supports electronic delivery versus payment for securities transactions, and payment versus pay- Finally, a series of strategies should be developed that, ment for foreign exchange transactions. following implementation, will align the current payment 210 Payments and Securities Settlement arrangements with the envisaged NPS. These strate- Issuers are institutions that seek financing via the secu- gies, taken together, will represent an agreed-on set of rities markets. Broker-dealers undertake the primary initiatives that will be cooperatively implemented by intermediation role in securities market trading. For all stakeholders. Typically, this program of change is this reason, they also have a primary role in the clear- executed under the leadership of the central bank, and ance and settlement procedures. Custodians are enti- includes a number of clusters of activity aimed at, for ties that undertake the safekeeping of securities and example, risk reduction, strengthening the legal and other financial instruments on behalf of others. They regulatory framework, payment practices, interface may provide other services such as clearance and set- between trading systems and the NPS, and manage- tlement, securities lending, and so on. A global custo- ment of the NPS. Examples of such strategies might dian provides those services in respect of securities include the following: traded and settled, not only in the country where the custodian is located, but also in other countries through- Clarification of the roles and responsibilities of all out the world. Central securities depositories (CSDs) participants in the NPS. provide facilities for holding securities in either immo- Introduction of measures to limit credit exposures in bilized or book-entry form. In addition to providing this safekeeping role, a CSD may provide trade com- bulk clearing processes. parison services, and clearing and settlement services. Revision of the statutory powers of the central bank International CSDs are institutions that settle trades regarding payment systems. in international securities and in various domestic Introduction of a regulatory framework for clearing securities. They usually settle the trades in their own services providers. books or through direct or indirect links (through local Creation of participation agreements for utilizing agents) to domestic CSDs. Central counterparties are common investments in infrastructure. entities that become the buyer to every seller, and the Creation of an NPS forum to discuss and resolve seller to every buyer of a specified set of contracts-- relevant issues in the payments field. for example, those executed on particular exchanges. Establishment of NPS standards. Liaison with banks and financial authorities in the Exchanges and over-the-counter markets are the mech- region. anisms for trading activity carried out by broker-dealers. The key factor from a clearing and settlement perspec- Review of cross-border and foreign currency market tive is the way trading information is transmitted, rather practices from an NPS perspective. than on the way trading takes place. The clearing agent is the entity that carries out the procedures of trade cap- INSTITUTIONAL ROLES ture, matching, confirmation, and calculation of oblig- ations relating to securities transfer instructions prior to A broad range of institutions and entities are involved settlement. These functions are normally provided by in PSSSs. Regulatory authorities (mainly central banks, CSDs, which also provide the depository function or the bank regulators, and securities regulators) create the legal exchange where the trading takes place. A settlement and oversight environment within which the procedures agent manages the settlement process, determines the are carried out. Sometimes they also provide clearance settlement positions, and monitors the exchange of and settlement services. Participants are those institutions securities and payments. Again, this function is some- that send and receive orders directly to and from the times provided by CSDs or exchanges. The payment system, or which are directly bound by the rules gov- of funds is usually done through a settlement bank erning securities transfer systems. Direct participants (private bank or central bank), although in some situ- directly exchange transfer orders with other partici- ations it is done directly by the broker-dealer or its pay- pants in the system on behalf of themselves, their cus- ing agent through a means of payment such as a cheque tomers, or indirect participants. Indirect participants or a certified cheque. A correspondent bank provides are distinguished from direct participants by their payments and other services to another bank, and such inability to perform certain activities, such as input of services are primarily provided across international transfer orders. boundaries. Implementing Payments and Securities Settlement Systems Reforms 211 ENGAGING THE PRIVATE SECTOR ules of individual projects to be launched, financed, and IN A REFORM PROGRAM implemented. In doing that, the NPSSC's should pro- mote standardization of procedures and systems and The reform of the PSSSs is a project that would affect facilitate the sharing of information on economic and most people in a country. That reform would affect, in business requirements of all parties affected by the pay- particular, the major stakeholders--such as the central ment system. It should identify the impact of different bank, the treasury, other regulators, banks, financial insti- options on participants' business and daily operations tutions, corporations, and final customers. It involves and on end user interests, and seek to promote cooper- relatively large investment costs, which, together with ation among all institutions active in PSSSs. operational costs, would have to be covered by fees to be paid by those that use the service. It is important The work of the NPSSC would include the preparation that the major stakeholders agree as much as possible of ad hoc reports on PSSS issues. The reports, which on the vision for a country's payment system, avoiding should not have a prescriptive nature, would serve as the situation that might occur in which the normal par- reference for PSSS policies and reforms in the country. ticipants in such systems choose alternative and less An important part of the NPSSC's work would be to safe and efficient ways of making their transactions. promote the general knowledge of PSSS issues in the Other issues that are important in a PSSS reform project country. To this end, the NPSSC could use any means include ensuring that there is sufficient coordination it might find appropriate, like workshops, seminars, between various initiatives, and avoiding situations Web pages, newsletters, and so on. where certain systems cannot communicate with each The organizational structure and the participation in an other. There are also functional and operational comple- NPSSC could take different forms based on the level mentarities between the systems' oversight, financial of development in the respective country. Appointed institutions' supervision, and financial market surveil- representatives should preferably be at least at the level lance that need to be exploited. This can be achieved in a of director of their respective organization, and it might variety of ways, from exchanging views and information, be advisable to allow them to be assisted by a specialist to ad hoc or regular meetings and joint actions. in the payment system area at council meetings. In an A number of countries have created cooperative bodies-- advanced economy, the NPSSC could give representa- for example, a National Payments and Securities Settle- tion to all the major stakeholders of payment and clear- ment Council (NPSSC) to address PSSSs policy issues. ing systems and SSSs. These include the central bank The objectives of the NPSSC would be to support the and the securities regulators; the ministries of finance, achievement of safe and efficient PSSSs. It can also treasury, and banking; competition authorities; bankers' serve as a forum for cooperation to maintain orderly association; major banks; representatives of nonbank conditions in regional and international payment sys- financial institutions; clearinghouses and payment ser- tems. Authorities should consider the possibility of cre- vices providers; the stock exchange; CSDs; representa- ating an NPSSC, especially if the country is involved in tives of broker-dealers; and the end users (represented, a major reform. for example, by a producer association). If one does not see a need for a specific organization or institution to be The NPSSC would work to facilitate the necessary co- a regular member of the NPSSC, such entities and indi- operation between all market participants and regula- vidual experts could be invited on a case-by-case basis tors in the payments and securities settlement area, and to participate in its meetings. promote common initiatives toward the implementation of the PSSS infrastructure. These initiatives, in fact, should The council should have an internal governance structure foster a healthy competition among market participants. with a chairperson and a deputy, an executive body, An important part of the NSSPC's work would be to formal rules to determine the terms and conditions for prepare and agree upon a strategic document (vision) the appointment of the executive positions, and formal for the overall payment system architecture in the coun- rules to govern the activity of the executive body. The try. It should monitor the implementation of PSSS central bank would normally be chairing the NPSSC, in reforms, and improve or endorse the priorities and sched- close cooperation with the securities regulator, and would 212 Payments and Securities Settlement be responsible for its secretariat. An important part of areas of legislative and regulatory issues, supervisory or the NPSSC's responsibilities would be to report on its oversight issues, and possible competition issues. In activities to the top management of the constituting economies where the involvement of the private sector institutions. in the payments system is still limited, or where public confidence in the safety of privately run settlement sys- Working groups should preferably support the NPSSC, tems is not strong enough, the public sector might play including working groups for legal, technological, and a direct role in providing settlement services. business issues. The working groups could, depending on the composition of these groups or the NPSSC, or both, report directly to the NPSSC, or to a group consisting of PREPARING AN ACTION PLAN senior managers from the institutions or organizations Based on the above elements, authorities and the stake- participating in the council; this latter group would then holders (that is, the payments council), with support have the role of preparing material for the NPSSC. from eventual external assessors, should prepare a realis- The NPSSC should decide about the priorities in the tic action plan to address any shortfalls that emerge in the reform project, and who should be responsible for various assessment. The action plan should be prepared in modu- issues. These issues could fruitfully be divided between lar form and should reflect the priorities agreed on by the representatives from the private sector and the public council. Depending on the degree of development of the sector, depending on the issues at stake. The private sector PSSSs, the action plan will be comprehensive or targeted could take the lead in developments that would need to toward a specific development in the system. Guidelines be handled by the users and infrastructure providers, for for the potential elements and steps to be included in a example. The public sector would take the lead in the comprehensive action plan are described below. Table 7.1 Potential Pillars for Payments System Reform Pillar I Payment systems work in a sound and robust legal environment that supports settlement finality. Pillar II SIPS are safe and efficient and comply fully with the CPSS core principles for SIPS. Pillar III Interbank money markets are fully developed and closely integrated with settlement systems. Pillar IV Retail payment systems are efficient, sound, and interoperable. They support the offer of a wide range of payments instruments and services. Pillar V Government collections and disbursements are fully and efficiently integrated with the NPS, and support its smooth functioning. Pillar VI Securities clearance, settlement, and depository systems are safe and efficient, fully comply with international standards, and contribute to support the development of capital markets. Pillar VII The oversight and supervisory framework for PSSSs is clearly defined, and the central bank exercises effectively its oversight authority in cooperation with other regulators and supervisors. Pillar VIII Effective, structured, and fruitful cooperation is in place within the NPS. Source: Authors' elaboration. Implementing Payments and Securities Settlement Systems Reforms 213 Starting Point: Assessment Implementation Plan and Recommendations Other important elements that an action plan should The action plan should be based on the previous include are an implementation plan, estimation of the cost assessments and recommendations suggested in the of the reform, and immediate actions to be taken. The assessment of the PSSSs in the country in terms of implementation plan should include the detailed and international standards. It is important that the assess- dated sequence of the necessary steps included in the ments of both payments systems and securities settle- action plan, and it should be reviewed and updated reg- ment systems be taken into account when preparing ularly by the consultants or core team, or both, and pre- the action plan. sented to the NPSSC for its approval. The Scope of the Reform Estimates of the Cost of the Reform The elaboration of the strategic document (vision) This exercise is aiming to provide country authorities with the input of the assessments and recommenda- with a credible range for the total cost of the reform, based tions of external assessors should be the first task of on similar experiences in other parts of the world. Many the NPSSC; it is important that the members of the cost items are a direct function of ongoing decisions NPSSC subscribe to that document. The strategy should and will need to be revised and approved accordingly be based on basic pillars to be achieved. Table 7.1 pre- by the NPSSC. The estimates should include at least the sents an example of potential pillars for a payments following (explicit and implicit) costs: cost of long-, system reform. medium-, and short-term consultants; internal staff; training; implementation (equipment purchase, software, Organizational Arrangements and so on); and monitoring of the reform. Although the reform of PSSSs should be driven by the Immediate Actions NPSSC, many reform projects start with the establishment of temporary task forces to establish the NPSSC, a core It is normally very helpful for the reform process to project team, committees, ad hoc working groups, and, identify a set of four to six immediate actions necessary sometimes, the hiring of external consultants. to take, and to initiate these as a matter of urgency. 8 Concluding Remarks I The Western Hemisphere Payments and Securities Clear- n his closing address at a seminar sponsored by ance and Settlement Initiative helped create momentum the European Central Bank and the Committee on for reforms throughout the region. In most cases, the Payment and Settlement Systems in 2003, Tommaso reforms were comprehensive and included improvements Padoa-Schioppa, the "dean" of the central bank pay- not only to the systems, but also to the legal, regulatory, ment system experts, half-jokingly suggested that "the and oversight frameworks. In other cases, the approach fundamental function of a central bank is payments has been much narrower, focusing on the upgrade of a and monetary policy is just a perversion of it" (Padoa- particular system or merely a revision of operational Schioppa 2003). This indicates how prominent payment issues to achieve greater compliance with the inter- systems have become among the functions of central national standards. banks. Others, more graphically, say "that payment This last chapter highlights and synthesizes the main systems, domestically and internationally, are the life- findings of the work carried out through the Western blood of banking" (Pattinson 2003). Equally, as indi- Hemisphere Payments and Securities Clearance and cated at the beginning of this book, payment systems Settlement Initiative. The conclusions below are intended moved from the backroom to the boardroom of all to provide a picture of national payments and securities financial institutions due to the potentially very seri- settlement systems in the LAC region as a whole. The ous operational risks posed by a poorly structured or statements are therefore of a general nature, and not all functioning payment system, in addition to the increas- ing attention bank boards need to pay to the large IT of them are necessarily reflective of the situation in investments required by the progress automation of each individual country. banking operations and services. It can also be said Comprehensive reforms to the legal and regulatory that payment systems are moving from being a nar- framework are still lagging behind the improvements row channel for transferring funds to being a much already achieved in other areas, particularly those wider integrated network for transferring value (funds areas of a technological nature. and securities). In LAC as a whole, important progress has been made For these reasons, the World Bank has paid increasing on issues such as the legal validation of electronic sig- attention to payment systems development as a key natures and documents. However, many other key legal component of the financial infrastructure of a country. areas still need to be addressed, including, in particu- The World Bank's activities in the Latin America and lar, the irrevocability of final settlement, adequate pro- the Caribbean (LAC) region started in mid-1995, and tection of the systems against the effects of bankruptcy received a significant impulse with the launching of the proceedings, the legal definition of a repo operation, the Western Hemisphere Payments and Securities Clearance legal recognition of multilateral netting arrangements, and Settlement Initiative. and the legal definition and regulation of oversight 215 216 Payments and Securities Settlement powers of the central bank. Some other issues more In any case, to better understand the real needs of each closely related to securities settlement include improve- particular market the creation of a so-called target users' ments to the legal basis for custody arrangements, and group is recommended. the legal definition of immobilization and dematerial- In some countries, the cheque clearinghouse remains ization of securities, especially for public securities. systemically important because many large-value pay- Other legal issues that could be considered from a ments are still settled through it, or because it remains developmental point of view include the legal basis for the main payment system in the country, or both. the collateral pledge, and securities lending. Due to the variety and extreme importance of these legal In most cases, the cheque clearinghouse does not have aspects, countries should consider if the level of the appropriate or even basic settlement assurance mech- changes required would justify designing a specific law anisms. Because it is difficult and costly for cheque for payment and settlement systems. In any case, these systems to substantially reduce systemic risk and com- topics should be dealt with at the level of a law. ply with international standards, the launch of RTGS systems has been recommended as a better option than Throughout the region, there is a clear trend toward focusing efforts on creating guarantee funds or other the adoption of real-time gross settlement (RTGS) risk-management tools for systemically important cheque systems for large-value and time-critical payments. clearinghouses. More work is needed, however, to make these new systems more efficient so that all relevant market Because large-value systems represent the backbone of participants use them intensively. the national payments system, the implementation of an In some countries, the use of the RTGS system is expen- RTGS system in those countries that still do not have sive because no sources of liquidity are readily available one--along the guidelines discussed in this book --will at a low cost for system participants. RTGS system result in a major improvement to the safety and efficiency operators and regulators have been recommended to to those countries' financial infrastructures. introduce or improve the facilities to handle the distrib- In the retail arena, most LAC countries are still heav- ution of intraday liquidity. These measures are even more ily dependent on the use of cash and cheques. Migra- important considering that the central bank's reliance on high reserve requirements to enable the daily func- tion to electronic payment alternatives is still slow, in tioning of the RTGS system is clearly decreasing as the many cases. region's banking systems strive to become competitive Factors behind this aspect include the lack of an appro- in the global marketplace. priate infrastructure to process efficiently electronic These facilities should include modern queuing mecha- payment instruments such as direct credits and direct nisms and the provision of fully collateralized intraday debits; insufficient interoperability of payment card cir- credit by the central bank. Additional initiatives include cuits, which reduces their convenience and accessibility the system's operator providing timely and complete and raises the cost for end users; the lack of an appro- information to enable a thorough liquidity analysis, and priate strategy to induce change in customers' habits, the introduction of incentives (for example, pricing) so including price incentives; and proper customer educa- that a larger share of payments are passed early during the tion, among other factors. operational day. To better visualize the effects of policy actions that aim at addressing these concerns, central Central banks and the commercial banks have a role to banks can use a variety of methodologies, including the play to ensure that retail payment circuits support busi- processing and analysis of intraday account balances and nesses' and customers' needs, and that such arrangements flow of transactions in the RTGS system.1 are safe, convenient, and efficient for the economy as a whole. 1An example of applying this analysis to the case of Colombia is described in Bernal and Merlano (2006). The article also discusses Public sector institutions that are major players in the the interrelation between payment systems and monetary policy as payments system have not been sufficiently integrated regards liquidity and policy alternatives or actions to achieve the final goal of smoothing the functioning of the RTGS system. in the efforts to reform the national payments system. Concluding Remarks 217 While in some particular cases the integration has been The development of the interbank money market has successful, in most other cases the procedures for the become crucial in a new environment in which large payment or collection of government and social security value payments are to be settled in a gross system. payments are generally not integrated, hence straight- This, together with the general trend of decreasing through processing (STP) is not achieved. reserve requirements, makes liquidity management an increasingly relevant issue. It has been noted that in many cases the gains in efficiency and cost reductions for government payments have been It is in this market where the majority of domestic inter- the main result of the reform effort. Ensuring a proper bank funds transfers among financial institutions takes integration of public sector institutions in the national place, and where the central bank implements its mon- payments system can also ensure that the benefits of new etary policy, impacting the overall liquidity of financial payment alternatives be accrued by all segments in the markets. Its adequate functioning is important not only country by inducing a higher use of banking services by for the smooth operation of a country's payments and the public in general. Moreover, as public sector pay- securities settlement, but also for the effective transmis- ment and collection operations can greatly influence sion of monetary policy signals. the liquidity for the banking system, an effective coor- Two key elements for the development of interbank dination of operating hours and procedures can also money markets are the existence of a special purpose facilitate the smooth functioning of RTGS systems. system for large-value payments to provide secure elec- With few exceptions, central banks in the LAC region tronic interbank transfers with immediate settlement and do not carefully monitor the risks deriving from the its interconnection to an electronic book-entry securities settlement of foreign exchange transactions in the system to register and record changes in ownership of local market. securities. Authorities and market participants should also discuss in detail the organizational and regulatory A more activist agenda in this area has been recom- arrangements that allow for an adequate development mended. Central banks and banking supervisors should of this market. be able to use their regulatory and supervisory powers to introduce appropriate measures to mitigate associated Large-value payment systems and SSSs should risks. Attention should also be given to correspondent work in tandem to increase efficiency and reduce arrangements (of domestic banks) abroad. settlement risk. In particular, central banks should evaluate the risks in this To settle payment obligations, borrow funds, collater- market, taking as a reference the reports and question- alize securities, and achieve delivery versus payment, naires published by the Committee on Payment and Set- the large-value payment settlement systems and SSSs tlement Systems, and analyze together with the financial must be perfectly synchronized. For these reasons, in community the implications of recent major develop- planning reforms it is critical to take a holistic view of ments, such as the Continuous Linked Settlement Bank. all the various networks that are likely to interact, look- ing, in detail, at the infrastructure; the legal and regu- For the most part, attention to retail cross-border latory aspects; the operation of the trading systems, payments, including international remittances, is registration, and custody arrangements; and operation still limited to balance of payments and money laun- of the depositories, in conjunction with a review of the dering considerations. SSSs and the large-value payment system. In general, there are no standards for aspects such as Improved clearing and settlement processes in SSS transparency of fees and other charges, or the timing of are necessary in most securities markets in the region. accreditation of funds to end beneficiaries. It has therefore been recommended that the regulatory and payment Efforts in this area should aim at achieving trade confir- system oversight perspectives be widened to cover these mation on the same day of the trade, reducing market frag- arrangements from a payment system angle to include mentation, increasing the standardization of settlement issues related to efficiency, service level, transparency, cycles, accommodating different settlement needs, oper- and risks. ating with shorter settlement cycles, avoiding extensions 218 Payments and Securities Settlement of the settlement cycles due to inadequate risk manage- Strong, capitalized, autonomous, and independent ment tools, improving markets' liquidity through auto- securities depositories, with reliable and flexible matic securities lending, and introducing international systems to expedite settlement of transactions and communication standards. accessory rights, are crucial for the development of the securities markets. True delivery versus payment is still not achieved in many securities markets throughout the region. If important conflicts of interest emerge that could lead to a standstill situation or eventually to the creation of a The settlement of securities and funds should be linked weak central securities depository, the authorities should for securities transactions to eliminate principal risk take the lead in their resolution. This is even more impor- by establishing and duly enforcing delivery versus tant if arrangements for a central counterparty are to be payment procedures. The main aspects to be improved introduced. include the full dematerialization and immobilization of securities, upgrade of current risk management tools, The importance of cross-border links among central mitigation of credit and liquidity risk in the cash leg securities depositories is growing throughout the (including elimination of the use of cheques as a cash region. asset), better access to liquidity for SSS participants, Particular attention should be devoted to the multiple careful follow-up of short-selling (when used), and--in jurisdiction profile of these transactions, especially from general--a comprehensive approach for the reform of the legal and operational perspective. Authorities, service SSSs versus technology-driven and exclusively opera- providers, and market participants should further involve tional reform projects. themselves in the discussions to build a consensual inter- nationally accepted principle on the arrangements gov- There is room for important efficiency gains of the erning the cross-border pledge of securities as collateral. securities settlement infrastructure. Central banks throughout the region are beginning Straight-through processing is not the rule for the pro- to establish formally their payment system oversight cessing of securities transactions throughout the region. function. In order for this function to be implemented In particular, physical handling of securities should be effectively, adequate legal empowerment and proper eliminated to increase the safety and efficiency of SSSs. organization arrangements are needed. The various plans for backup sites and disaster recovery facilities should be accelerated or established when It is of paramount importance that central banks prepare nonexistent. External audit of the systems should be and encourage the approval of a primary or secondary undertaken, especially when the systems have been devel- legislation to clarify in detail the empowerment and oped in-house. The latter is especially important when the enforcement of the central bank as payment system supervisory framework for operational issues is weak. overseer. To perform their payment system oversight function Additional measures are necessary to guarantee effectively,centralbanksshouldhaveappropriatestaffing, the protection of customers' assets in the event of preferably in a small independent unit to be separated-- bankruptcy of the depository holding its titles or to the extent possible--from the units in charge of oper- insolvency of a custodian. ating the systems offered by the central bank. Staff should Country authorities should make sure that the segregation have broad skills and experience in a variety of relevant of accounts for securities and funds under custody have disciplines. a clear legal basis under all circumstances, and that cus- Enhanced transparency is needed throughout the tomer assets are legally protected against the insolvency region, both regarding the responsibilities of the of custodians, whatever the nature of the custodian may payment system overseer and regarding the general be. Moreover, authorities must also ensure that all cus- conditions of payment services offered. tomer assets are appropriately accounted for as beneficial owners in the depository or in the custodian's omnibus Central banks should develop a comprehensive policy accounts. statement regarding their oversight function to provide Concluding Remarks 219 the necessary guidance to private sector organizations of Ten central banks and securities commissions, and on matters relating to governance, day-to-day manage- other multilateral institutions. ment, risk mitigation, and on the policies that must be Cooperation between regulators and market partici- satisfied by all transactions that are ultimately settled on pants has proven equally important for the effective central bank books. achievement of the objectives of the oversight func- Central banks together with banks and other financial tion and should be improved in LAC countries. institutions should also ensure that transparency of poli- To secure a constructive dialogue, it has been strongly cies and conditions for payment services offered be recommended that central banks establish a formal available to the population of their countries at all times. mechanism for cooperation such as a national payments Central banks in LAC should broaden the focus of the and securities settlement system council (NPSSC) that oversight function beyond efficiency and reliability includes representatives from all major stakeholders of payment systems, and apply these powers over all with an interest in payments and securities clearance major settlement systems in their countries. and settlement systems improvements. It has been recommended that central banks include as part of their oversight objectives a wider set of issues MOVING FORWARD WITH THE such as the promotion of competition in the payment SUGGESTED REFORMS services market and the protection of consumer inter- The reform of the National Payments System (NPS) is ests. These objectives might be pursued especially in an important undertaking. The output will affect most those cases not embraced by other regulatory or super- citizens in a country, and in particular will affect major visory authorities. stakeholders, such as the central bank, the treasury, Central banks have been recommended to apply their other regulators, banks and other financial institutions, oversight authority not only to systemically important corporations, and final customers. It also involves rela- payment systems, but also to SSSs. This is especially tively large investment costs. The scope and difficulty important in those cases in which the entity in charge of of developing and carrying out a strategy for a success- securities regulation is weak or does not perform any ful modernization of the payments system should not be regulatory or oversight role over securities settlement. underestimated. This will be a new process, and the pro- jects will present new challenges to all parties involved. Cooperation among regulators should be an essen- The major risks of inadequate planning or implementa- tial component of the oversight function in LAC tion are that the systems developed could not be used, countries. that the resulting system changes will not satisfy the needs of all users, and that the systems will not be cost It has been recommended that cooperation take place efficient and affordable. throughaformalframework(forexample,amemorandum of understanding) to minimize the potential conflicts A collaborative and cooperative approach is the only way between the roles of the various authorities. This is in which these risks can be minimized. A well-structured especially important for SSSs, because in many cases the collaborative approach will create synergy, stimulate oversight function is divided among several regulators. learning, and provide a basis for optimizing benefits through cooperation and consensus building. The NPSSC At the international level, central banks and other relevant shall work to facilitate the necessary cooperation. regulators should increase their presence in international fora. In particular, an active participation in the Western The planned reform to the NPS should take into account Hemisphere Payments and Securities Settlement Forum the level of development in the financial sector and the and the Working Group on Payment System Issues of actual needs of the various stakeholders. The first task LAC has been recommended, because these have become of the NPSSC's work should therefore be to prepare and important mechanisms for the exchange of information, agree on a strategic document (vision) for the overall learning, and coordination within the region among all payment system architecture in the country, including stakeholders, as well as a forum to cooperate with Group SSSs. The document will represent an agreed-on set of 220 Payments and Securities Settlement initiatives that will be cooperatively implemented by Reforming appropriately each NPS in the region will all stakeholders, and it is therefore important that it be also create the conditions for increased harmonization, subscribed to by all members of the NPSSC. which will serve as a basis for an eventual integration Countries throughout the region should proceed rapidly among different payment systems. It is important to to reforming their payments systems following these stress that any integration of payment systems should guidelines. By adopting a broad approach based on be based on the existence of common features in all rel- international standards and best practices, and with sup- evant areas (legal, risk control mechanisms, liquidity port from international organizations, other central banks, provision, access policies, governance, organizational and payment system experts, each country will be able arrangements, operational aspects, reliability, and busi- to count on a set of payment arrangements, services, ness continuity). Any integration agenda should there- and circuits able to serve safely and efficiently the needs fore start from comprehensive reforms of the domestic of all users in the economy. payments systems of the countries involved. 1 A P P E N D I X Main Statistics of Payments and Securities Settlement Systems in Selected Latin America and the Caribbean Countries GENERAL NOTES FOR APPENDIX 1 CBLC Companhia Brasileira de Liquidacao e Custodia (Brazil) The tables included in appendix 1 were prepared on CCE Cámara de Compensación Electronica the basis of the country statistics provided by Work- (Peru) ing Group on Payment System Issues of Latin Amer- CD/DD Créditos Directos/Débitos Directos ica and the Caribbean (LAC) member central banks. (Costa Rica) The compilation work was coordinated by Ana Laura CEDEC Cámara Electrónica de Compensación Sibaja (Center for Latin American Monetary Studies). (Colombia) All country statistics are produced following a standard- CENIT Sistema de Compensación Electrónica ized methodology developed by the core team that man- Nacional Interbancaria (Colombia) ages the Western Hemisphere Payments and Securities CETIP Central de Custódia e de Liquidação Clearance and Settlement Initiative. Both this methodol- Financeira de Títulos (Brazil) ogy and the full Working Group on Payment System CLC Compensación y Liquidación de Cheques Issues of LAC statistics reports (full country + compara- y Otros Valores (Costa Rica) tive tables) are available at the Western Hemisphere Pay- COMPE Centralizadora da Compensação de ments and Securities Clearance and Settlement Forum's Cheques e Outros Papéis (Brazil) Web site: www.whpaymentsforum.org. These statis- CUD Sistema Electrónico de Cuentas de tics are updated regularly. Depósito (Colombia) CVV Caja Venezolana de Valores S.A. Throughout appendix 1, the following symbols are used: DCV Depósito Central de Valores (Colombia) General: DECEVAL Depósito Centralizado de Valores de n.a. data not available Colombia S.A. . . . data not applicable ECCSD Eastern Caribbean Central Securities Neg very small data relative to other relevant Depository data in the table concerned LBTR Sistema de Liquidación Bruta en Tiempo ECCU Eastern Caribbean Currency Union Real (Chile and Peru) M1 currency in circulation plus demand deposits LINX Infolink Services Limited (Trinidad and M1A broad money supply Tobago) MEP Medio Electrónico de Pagos (Argentina) Other: Merval Mercado de Valores de Buenos Aires BM&F Brazilian Mercantile & Futures Exchange S.A. BVL Bolsa de Valores de Lima MIT Mecasismo Interbancario de BVN Bolsa de Valores Nacional (Guatemala) Transferencias (Guatemala) 221 222 Payments and Securities Settlement SELIC Servico Especial de Liquidacao e SITRAF Sistema de Transferência de Fundos (Brazil) Custodia (Brazil) SPEI Sistema de Pagos Electrónicos Inter- SIAC Sistema de Atención a Cuentahabientes bancarios (Mexico) (Mexico) SPEUA Sistema de Pagos Electrónicos de Uso SICET Sistema de Custodia Electrónica de Ampliado (Mexico) Títulos (Venezuela) STR Sistema de Transferência de Reservas SIDV Sistema Interactivo para el Depósito de (Brazil) Valores (Mexico) TEBEL online trading system (Costa Rica) SILOC Sistema de Liquidação Diferida de Tecban Technología Bancária (Brazil) Ordens de Crédito Interbancárias TEF Transferencia Electrónica de Fondos de Bajo Valor (Mexico) (Brazil) TI Sistema de Transferencias Interbancarias SIPAV Sistema de Pagos de Alto Valor (Bolivia) (Costa Rica) Sistema Depósito Central de Valores (Chile) TT Transferencia de Terceros (Costa Rica) valores TTS Transferencia Telefónica Segura DCV (Nicaragua) SITE Sistema de Transferencias Electrónicas TTSE Trinidad and Tobago Stock Exchange (Costa Rica) Table A.1 Institutional Framework, year-end 2004 Number of Number of Number of Inhabitants Number of Inhabitants Accounts2 accounts Institutions1 per Institution Branches per Branch (millions) per Inhabitant Argentina 104 359,913 4,010 9,334 16.70 0.45 Bolivia 59 156,743 512 18,062 1.50 0.16 Brazil 138 1,315,942 17,269 10,516 89.90 0.50 Chile3 33 483,333 1,614 9,882 1.70 0.11 Colombia4 84 539,286 4,557 9,941 31.20 0.69 Costa Rica 57 74,535 527 8,062 n.a. n.a. ECCU 39 14,930 92 6,329 n.a. n.a. Guatemala 31 383,871 1,344 8,854 6.60 0.55 Jamaica n.a. n.a. n.a. n.a. n.a. n.a. Mexico5 52 2,019,231 8,524 12,318 33.70 0.32 Nicaragua 10 562,600 210 26,790 0.60 0.11 Paraguay4 21 271,508 156 36,549 n.a. n.a. Peru6 47 586,098 1,049 26,260 n.a. n.a. Trinidad and Tobago 24 53,775 n.a. n.a. n.a. n.a. Uruguay6 46 73,901 216 15,738 0.36 0.10 Venezuela, R.B. de7 40 652,500 2,680 9,739 12.50 0.48 Source: Working Group on Payment System Issues of Latin America and the Caribbean. 1. Includes all those institutions that make noncash payments on behalf of their clients. 2. Checking, savings, and term accounts. 3. The figure for number of accounts does not include the central bank. 4. The figure for number of accounts includes checking accounts only. 5. The figure for number of accounts is as of September 2005. 6. The figure for branches does not include the branches of state-owned banks. 7. The figure for branches and number of accounts does not include the numbers of state-owned banks and branches of foreign banks. Main Statistics of Payments and Securities Settlement Systems 223 Table A.2 Banknotes and Coins in Circulation, 2000­04 U.S. dollars and percentages 2000 2001 2002 2003 2004 2000 2001 2002 2003 2004 Argentina Jamaica per inhabitant 350.00 250.20 132.90 245.40 303.50 per inhabitant 149.30 151.90 152.90 145.40 163.60 as % of GDP 4.50 3.40 6.50 10.60 12.20 as % of GDP 4.90 4.90 4.80 4.70 4.90 as % of M1 63.30 57.30 58.10 62.00 60.50 as % of M1 36.80 34.70 34.30 36.80 35.70 Bolivia Mexico per inhabitant 41.10 42.50 40.60 45.20 52.00 per inhabitant 194.40 217.90 219.20 227.40 257.30 as % of GDP 4.10 4.30 4.50 5.00 5.50 as % of GDP 3.70 3.80 4.00 4.20 4.00 as % of M1 55.30 50.90 52.30 51.70 65.70 as % of M1 35.30 33.30 34.00 33.60 35.40 Brazil Nicaragua per inhabitant 85.50 80.90 67.90 83.30 107.90 per inhabitant 26.50 27.10 26.80 29.30 33.90 as % of GDP 2.40 2.80 2.60 2.90 3.20 as % of GDP 3.40 3.40 3.60 3.90 4.10 as % of M1 38.50 39.00 39.30 39.30 40.70 as % of M1 52.70 46.00 47.40 45.70 44.90 Chile Paraguay per inhabitant 122.00 113.00 112.60 117.90 161.30 per inhabitant 70.60 54.00 36.90 53.60 59.70 as % of GDP 2.60 2.70 2.70 2.20 2.60 as % of GDP 5.30 4.50 4.00 5.40 4.90 as % of M11 28.50 27.50 25.90 23.40 21.70 as % of M1 53.60 51.00 53.20 48.30 45.40 Colombia Peru per inhabitant 77.10 84.60 79.60 96.50 127.80 per inhabitant 49.60 50.60 59.60 67.80 88.90 as % of GDP 3.90 4.40 4.30 5.40 5.90 as % of GDP 2.40 2.70 2.80 3.00 3.60 as % of M1 43.50 44.60 46.20 48.00 47.50 as % of M1 64.00 65.90 68.50 68.40 64.70 Costa Rica Trinidad and Tobago per inhabitant 114.70 115.50 111.00 108.30 107.60 per inhabitant 160.10 172.00 186.90 211.60 240.70 as % of GDP 2.80 2.80 2.70 2.60 2.50 as % of GDP 2.50 2.50 2.70 2.60 2.70 as % of M1 32.30 32.50 28.80 26.90 29.60 as % of M1 26.00 20.50 20.50 23.40 23.40 Dominican Republic Uruguay per inhabitant 110.40 116.50 120.10 89.90 125.10 per inhabitant 175.20 142.90 83.90 95.30 120.60 as % of GDP 4.60 4.50 4.70 4.70 5.90 as % of GDP 2.90 2.60 2.30 2.90 3.10 as % of M1 42.50 40.30 41.70 41.10 42.70 as % of M1 50.20 50.20 52.10 47.90 48.50 ECCU Venezuela, R.B. de per inhabitant 251.70 240.50 252.30 273.90 309.40 per inhabitant 115.50 120.80 107.10 115.70 129.10 as % of GDP 7.70 7.50 7.90 8.30 9.10 as % of GDP 2.50 2.60 3.50 3.50 3.10 as % of M1 32.10 30.10 29.90 28.50 25.80 as % of M1 24.50 25.10 34.80 25.10 23.30 Guatemala per inhabitant 82.50 88.90 99.40 113.50 121.20 as % of GDP 4.90 5.00 4.80 5.30 5.40 as % of M1 40.80 41.50 40.30 40.70 40.10 Source: Working Group on Payment System Issues of Latin America and the Caribbean. 1. Figures estimated with the M1A. 224 Payments and Securities Settlement Table A.3 Banknotes and Coins in Circulation, 2000­04 U.S. dollars and percentages 2000 2001 2002 2003 2004 2000 2001 2002 2003 2004 Argentina Jamaica per inhabitant 203.00 186.70 96.00 150.30 197.90 per inhabitant 256.90 286.00 292.50 250.10 294.40 as % of GDP 2.60 2.60 4.70 6.50 7.90 as % of GDP 8.50 9.20 9.10 8.10 8.90 as % of M1 36.70 42.70 41.90 38.00 39.50 as % of M1 63.20 65.30 65.70 63.20 64.30 Bolivia Mexico per inhabitant 33.20 41.10 37.10 42.30 27.10 per inhabitant 356.80 435.40 424.80 448.70 468.60 as % of GDP 3.30 4.20 4.10 4.70 2.90 as % of GDP 6.70 7.50 7.80 8.30 7.30 as % of M1 44.70 49.10 47.70 48.30 34.30 as % of M1 64.70 66.70 66.00 66.40 64.60 Brazil Nicaragua per inhabitant 136.50 123.60 105.10 128.70 157.50 per inhabitant 23.70 31.70 29.70 34.80 41.70 as % of GDP 3.90 4.20 4.00 4.50 4.70 as % of GDP 3.10 4.00 3.90 4.70 5.10 as % of M1 61.50 59.50 60.70 60.70 59.30 as % of M1 47.30 54.00 52.60 54.30 55.10 Chile1 Paraguay per inhabitant 306.70 297.70 322.50 385.80 580.30 per inhabitant 61.30 51.90 32.50 57.40 71.70 as % of GDP 6.60 7.00 7.60 7.20 9.30 as % of GDP 4.60 4.40 3.50 5.80 5.90 as % of M1 71.50 72.50 74.10 76.60 78.30 as % of M1 46.40 49.00 46.80 51.70 54.60 Colombia Peru per inhabitant 100.10 105.20 92.80 104.60 141.10 per inhabitant 27.90 26.20 27.40 31.30 48.50 as % of GDP 5.10 5.50 5.00 5.80 6.50 as % of GDP 1.40 1.40 1.30 1.40 1.90 as % of M1 56.50 55.40 53.80 52.00 52.50 as % of M1 36.00 34.10 31.50 31.60 35.30 Costa Rica Trinidad and Tobago per inhabitant 240.70 240.00 274.10 295.00 256.00 per inhabitant 455.40 667.00 725.40 693.40 789.70 as % of GDP 8.70 8.70 9.40 9.60 8.40 as % of GDP 7.00 9.50 10.40 8.40 8.90 as % of M1 67.70 67.50 71.20 73.10 70.40 as % of M1 74.00 79.50 79.50 76.60 76.60 Dominican Republic Uruguay per inhabitant 149.10 172.50 167.70 128.60 167.60 per inhabitant 173.90 141.70 77.00 103.70 128.10 as % of GDP 6.20 6.70 6.60 6.70 8.00 as % of GDP 2.90 2.60 2.10 3.10 3.30 as % of M1 57.50 59.70 58.30 58.90 57.30 as % of M1 49.80 49.80 47.90 52.10 51.50 ECCU Venezuela, R.B. de per inhabitant 533.50 558.20 590.60 687.30 890.90 per inhabitant 355.90 360.60 200.40 345.60 424.70 as % of GDP 16.30 17.50 18.50 20.90 26.10 as % of GDP 7.60 7.60 6.60 10.60 10.30 as % of M1 67.90 69.90 70.10 71.50 74.20 as % of M1 75.50 74.90 65.20 74.90 76.70 Guatemala per inhabitant 120.00 125.40 146.90 165.20 180.70 as % of GDP 7.10 7.00 7.10 7.70 8.00 as % of M1 59.20 58.50 59.70 59.30 59.90 Source: Working Group on Payment System Issues of Latin America and the Caribbean. 1. Figures estimated with M1A. Table A.4 Payment Media Used by Deposit-Taking Entities, year-end 2004 Transferable Deposits Reserves at the Central Reserves at the Central in Other Entities Bank (US$ millions)1 Bank as % of M1 (US$ millions) Domestic Foreign Domestic Foreign Domestic Foreign Currency Currency Currency Currency Currency Currency Bolivia 89 285 12 39 n.a. n.a. Brazil 10,100 . . . 21 . . . . . . . . . Chile2 1,525 619 13 5 n.a. n.a. Colombia 2,056 . . . 17 . . . . . . . . . Costa Rica 424 330 27 21 n.a. n.a. Guatemala 1,016 120 28 3 15 . . . Jamaica 52 125 n.a. n.a. . . . . . . Mexico3 . . . . . . . . . . . . . . . . . . Nicaragua 121 236 29 56 . . . . . . Paraguay 241 267 32 36 . . . . . . Peru 101 2,915 3 77 . . . . . . Trinidad and Tobago 0.4 . . . 16 . . . 0.2 0.4 Uruguay 209 56 25 7 n.a. n.a. Venezuela, R.B. de 3,947 19 27 0.1 n.a. n.a. Source: Working Group on Payment System Issues of Latin America and the Caribbean. 1. Includes required reserves + excess reserves. 2. Figures estimated with M1A. 3. In Mexico, deposit-taking institutions are not required to hold reserves at the central bank. Table A.5 Payment Cards, year-end 2004 per 1,000 inhabitants Cards with a Cash Withdrawal Function Debit Cards Credit Cards Argentina 319 319 222 Bolivia 63 46 8 Brazil 1,018 821 295 Chile 455 290 166 Colombia 225 225 62 ECCU 659 10 114 Guatemala 370 259 111 Jamaica 409 409 75 Mexico 437 328 111 Peru 240 189 120 Trinidad and Tobago n.a. n.a. 138 Uruguay 213 213 337 Source: Working Group on Payment System Issues of Latin America and the Caribbean. 226 Payments and Securities Settlement Table A.6 ATMs and Cash Dispensers, 2000­04 2000 2001 2002 2003 2004 Argentina machines per 1 million inhabitants 146 161 155 158 164 transactions per inhabitant per year 12.30 17.00 n.a. n.a. n.a. average value of transactions (US$) n.a. n.a. n.a. n.a. n.a. Bolivia machines per 1 million inhabitants 45 52 47 50 55 transactions per inhabitant per year 1.20 1.50 1.40 1.10 1.10 average value of transactions (US$) 41.40 42.10 46.00 66.10 63.90 Brazil machines per 1 million inhabitants 569 641 736 758 768 transactions per inhabitant per year 16 22 26 32 34 average value of transactions (US$) 42.30 47.80 46.50 40.70 53.00 Chile machines per 1 million inhabitants 173 222 236 240 251 transactions per inhabitant per year 11 12 14 14 15 average value of transactions (US$) 53.50 46.80 45.30 52.90 58.70 Colombia machines per 1 million inhabitants 130 125 124 125 130 transactions per inhabitant per year 8 8 8 9 9 average value of transactions (US$) 30.70 31.20 29.40 28.30 32.90 Costa Rica machines per 1 million inhabitants 184 245 n.a. n.a. n.a. transactions per inhabitant per year 10 15 n.a. n.a. n.a. average value of transactions (US$) 65.80 38.60 n.a. n.a. n.a. ECCU1 machines per 1 million inhabitants n.a. n.a. n.a. n.a. 268 transactions per inhabitant per year n.a. n.a. n.a. n.a. 9 average value of transactions (US$) n.a. n.a. n.a. n.a. 173.40 Guatemala machines per 1 million inhabitants 16 19 23 67 n.a. transactions per inhabitant per year 1 1 2 2 n.a. average value of transactions (US$) 22.80 23.50 24.80 26.50 n.a. Jamaica2 machines per 1 million inhabitants n.a. n.a. n.a. n.a. 114 transactions per inhabitant per year n.a. n.a. n.a. n.a. 8 average value of transactions (US$) n.a. n.a. n.a. n.a. 58.30 Mexico machines per 1 million inhabitants n.a. 168 168 172 194 transactions per inhabitant per year n.a. 9 11 11 12 average value of transactions (US$) n.a. 62.40 76.50 70.90 74.70 Nicaragua machines per 1 million inhabitants 8 11 19 19 20 transactions per inhabitant per year n.a. 0.20 0.40 0.40 0.60 average value of transactions (US$) n.a. 40.30 40.40 48.90 49.20 Peru machines per 1 million inhabitants 41 n.a. n.a. n.a. n.a. transactions per inhabitant per year n.a. n.a. n.a. 3.15 3.14 average value of transactions (US$) n.a. n.a. n.a. 81.20 86.30 (Continued) Main Statistics of Payments and Securities Settlement Systems 227 Table A.6 ATMs and Cash Dispensers, 2000­04 (Continued)2000 2001 2002 2003 2004 2000 2001 2002 2003 2004 Trinidad and Tobago machines per 1 million inhabitants 218 234 236 n.a. 240 transactions per inhabitant per year 16 20 21 24 29 average value of transactions (US$) 26.80 27.90 31.90 34.60 37.60 Uruguay machines per 1 million inhabitants 103 115 107 185 207 transactions per inhabitant per year 5 6 6 7 8 average value of transactions (US$) 43.90 57.60 52.70 46.80 51.60 Venezuela, R.B. de2 Machines per 1 million inhabitants 166 168 171 172 172 transactions per inhabitant per year 4 7 6 6 2 average value of transactions (US$) 21.50 14.50 15.40 17.00 18.70 Source: Working Group on Payment System Issues of Latin America and the Caribbean. 1. Figures as of July 2004. 2. Information for number of machines corresponds to the interconnected network only, Suiche B and Conexus. All other information is only for Conexus. Table A.7 Indicators of Use of Cashless Payment Instruments, 2000­04 volume of transactions, in millions 2000 2001 2002 2003 2004 Argentina Cheques, local currency 111.00 100.80 91.10 68.70 77.80 Card payments n.a. n.a. n.a. n.a. n.a. Credit transfers 4.90 7.10 n.a. 3.40 4.50 Direct debits 2.20 8.00 n.a. n.a. 7.70 Bolivia Cheques, local currency 1.50 2.30 n.a. n.a. n.a. Card payments n.a. 1.90 2.40 2.60 3.30 Credit transfers neg n.a. n.a. n.a. n.a Direct debits . . . . . . . . . . . . . . . Brazil Cheques, local currency 2,847.40 2,855.90 2,616.10 2,731.60 2,494.10 Card payments 911.70 1,151.20 1,420.90 1,745.10 2,164.70 Credit transfers 697.60 767.80 849.10 907.30 1,016.20 Direct debits 322.50 385.80 438.20 626.80 657.40 Chile Cheques, local currency 305.10 293.20 285.10 291.90 284.30 Card payments 41.80 53.50 62.90 79.40 92.00 Credit transfers 81.90 158.40 247.30 345.30 506.70 Direct debits n.a. n.a. n.a. n.a. n.a. Colombia Cheques, local currency 130.00 106.70 104.60 93.20 85.80 Card payments 87.60 95.60 115.80 n.a. n.a. Credit transfers 3.30 5.10 n.a. n.a. n.a. Direct debits n.a. n.a. n.a. n.a. n.a. Costa Rica Cheques, local currency 11.40 11.10 10.70 10.20 10.00 Card payments 15.30 17.70 n.a. n.a. n.a. Credit transfers n.a. n.a. n.a. n.a. n.a. Direct debits n.a. n.a. n.a. n.a. n.a. 228 Payments and Securities Settlement Table A.7 Indicators of Use of Cashless Payment Instruments, 2000­04 (Continued) volume of transactions, in millions 2000 2001 2002 2003 2004 ECCU Cheques, local currency n.a. n.a. n.a. n.a. 8.80 Card payments n.a. n.a. n.a. n.a. 1.00 Credit transfers n.a. n.a. n.a. n.a. 0.10 Direct debits n.a. n.a. n.a. n.a. n.a. Guatemala Cheques, local currency 36.10 34.00 30.80 29.60 40.10 Card payments n.a. n.a. n.a. n.a. n.a. Credit transfers 0.01 0.01 0.01 0.01 0.01 Direct debits n.a. n.a. n.a. n.a. n.a. Jamaica Cheques, local currency n.a. n.a. n.a. n.a. 11.10 Card payments n.a. n.a. n.a. n.a. 30.60 Credit transfers n.a. n.a. n.a. n.a. n.a. Direct debits n.a. n.a. n.a. n.a. n.a. Mexico Cheques, local currency n.a. 609.60 597.10 588.40 595.10 Card payments n.a. 152.60 169.80 200.20 242.20 Credit transfers n.a. 130.60 146.10 149.90 169.40 Direct debits n.a. 5.30 9.10 25.10 31.40 Nicaragua Cheques, local currency 3.70 3.30 2.90 2.80 2.70 Card payments n.a. n.a. n.a. n.a. n.a. Credit transfers1 0.00 0.00 0.00 0.00 0.00 Direct debits n.a. n.a. n.a. n.a. n.a. Peru Cheques, local currency 5.10 4.90 n.a. 32.60 32.60 Card payments 37.00 41.00 n.a. 45.80 54.60 Credit transfers2 0.30 0.30 0.30 0.40 0.50 Direct debits n.a. n.a. n.a. 11.20 7.50 Trinidad and Tobago Cheques, local currency 5.90 6.70 n.a. n.a. n.a. Card payments n.a. n.a. n.a. n.a. n.a. Credit transfers n.a. n.a. n.a. n.a. n.a. Direct debits n.a. n.a. n.a. n.a. n.a. Uruguay Cheques, local currency 16.00 14.30 11.40 9.70 9.90 Card payments3 13.60 15.10 13.80 17.30 19.00 Credit transfers n.a. n.a. n.a. n.a. n.a. Direct debits n.a. n.a. n.a. n.a. n.a. Venezuela, R.B. de Cheques, local currency 107.60 107.00 79.10 65.80 74.90 Card payments3 42.00 39.00 n.a. n.a. n.a. Credit transfers1 0.12 0.13 0.19 0.17 0.37 Direct debits n.a. n.a. n.a. n.a. n.a. Source: Working Group on Payment System Issues of Latin America and the Caribbean. Note: Unless otherwise noted, the information includes both intrabank (on us) and interbank items. 1. The information includes only that of the large-value transfer system. 2. Includes interbank credit transfers only. 3. Includes credit card information only. Main Statistics of Payments and Securities Settlement Systems 229 Table A.8 Indicators of Use of Cashless Payment Instruments, 2000­04 value of transactions, US$ million 2000 2001 2002 2003 2004 Argentina Cheques, local currency 287,928 240,003 69,509 85,752 117,406 Card payments n.a. n.a. n.a. n.a. n.a. Credit transfers n.a. n.a. n.a. n.a. n.a. Direct debits 1,383 2,597 n.a. n.a. 473 Bolivia Cheques, local currency 4,386 3,985 n.a. n.a. n.a. Card payments n.a. 93 155 216 255 Credit transfers1 22,649 n.a. n.a. n.a. n.a. Direct debits n.a. n.a. n.a. n.a. n.a. Brazil Cheques, local currency 1,100,500 917,700 673,200 650,200 665,600 Card payments 30,000 29,500 28,800 34,700 46,000 Credit transfers 1,053,200 1,049,300 14,936,100 17,846,800 21,307,600 Direct debits 29,800 30,400 26,300 31,700 40,500 Chile Cheques, local currency 961,230 862,269 824,513 740,537 873,072 Card payments 1,762 1,869 2,019 2,655 3,901 Credit transfers n.a. n.a. n.a. n.a. n.a. Direct debits n.a. n.a. n.a. n.a. n.a. Colombia Cheques, local currency 212,226 173,493 164,514 140,746 160,172 Card payments 2,976 3,034 3,325 3,578 4,804 Credit transfers 228,562 598,648 783,615 827,084 1,342,976 Direct debits n.a. n.a. n.a. n.a. n.a. Costa Rica Cheques, local currency 23,389 20,136 17,976 15,579 14,696 Card payments 608 740 n.a. n.a. n.a. Credit transfers2 19,498 27,458 32,860 40,930 48,555 Direct debits3 0 neg 95 236 505 ECCU Cheques, local currency n.a. n.a. n.a. n.a. 12,534 Card payments n.a. n.a. n.a. n.a. 228 Credit transfers n.a. n.a. n.a. n.a. 3,278 Direct debits n.a. n.a. n.a. n.a. n.a. Guatemala Cheques, local currency 45,852 43,389 41,640 45,108 50,948 Card payments n.a. n.a. n.a. n.a. n.a. Credit transfers 9,957 10,167 9,457 7,631 11,388 Direct debits n.a. n.a. n.a. n.a. n.a. Jamaica Cheques, local currency n.a. n.a. n.a. n.a. 30,113 Card payments n.a. n.a. n.a. n.a. 1,632 Credit transfers n.a. n.a. n.a. n.a. n.a. Direct debits n.a. n.a. n.a. n.a. n.a. Mexico Cheques, local currency n.a. 1,083,365 912,594 822,311 840,052 Card payments n.a. 10,713 9,942 11,061 13,334 Credit transfers 7,875,127 10,720,101 11,469,437 9,600,505 10,891,446 Direct debits n.a. 429 922 3,042 4,415 230 Payments and Securities Settlement Table A.8 Indicators of Use of Cashless Payment Instruments, 2000­04 (Continued) value of transactions, US$ million 2000 2001 2002 2003 2004 Nicaragua Cheques, local currency 5,517 4,364 3,824 4,042 4,227 Card payments n.a. n.a. n.a. n.a. n.a. Credit transfers1 1,757 1,423 1,339 1,493 1,717 Direct debits n.a. n.a. n.a. n.a. n.a. Peru Cheques, local currency 32,621 32,199 n.a. 30,045 29,881 Card payments 1,760 1,992 n.a. 1,621 1,784 Credit transfers2 168,087 147,493 169,709 165,914 167,306 Direct debits . . . . . . n.a. 4,812 4,241 Trinidad and Tobago Cheques, local currency 3,943 4,603 n.a. n.a. n.a. Card payments n.a. n.a. n.a. n.a. n.a. Credit transfers n.a. n.a. n.a. n.a. n.a. Direct debits n.a. n.a. n.a. n.a. n.a. Uruguay Cheques, local currency 18,739 18,043 10,734 9,447 10,595 Card payments3 715 717 455 771 951 Credit transfers n.a. n.a. n.a. 4,816 5,731 Direct debits n.a. n.a. n.a. n.a. n.a. Venezuela, R.B. de Cheques, local currency 160,953 177,218 79,003 75,439 101,029 Card payments3 1,434 1,542 905 831 n.a. Credit transfers n.a. n.a. n.a. n.a. n.a. Direct debits n.a. n.a. n.a. n.a. n.a. Source: Working Group on Payment System Issues of Latin America and the Caribbean. Note: Unless otherwise noted, the information includes both intrabank (on us) and interbank items. 1. The information includes only that of the large-value transfer system. 2. Includes interbank credit transfers only. 3. Includes credit card information only. Main Statistics of Payments and Securities Settlement Systems 231 Table A.9 Features of Selected Interbank Funds Transfer Systems, year-end 2004 Owner or Number of Type Manager Participant Direct Processing Settlement Membership Argentina Cheque clearinghouse R AS n.a. n.a. ACH N O Retail credit transfers R AS n.a. n.a. ACH N O MEP L + R CB n.a. n.a. RTT RTGS O Bolivia Cheque clearinghouse R AS n.a. n.a. ACH N n.a. SIPAV L CB n.a. n.a. RTT RTGS n.a. Brazil STR L CB 144 144 RTT RTGS O SITRAF L AS 119 119 RTT HYBRID O COMPE R B 137 137 ACH MN O SILOC R AS 117 117 ACH MN O Tecban R AS 45 45 ACH MN O Chile LBTR L CB 26 26 RTT RTGS O Cheque clearinghouse R B + AS n.a. 26 ACH N O Colombia CUD L CB 152 152 RTT RTGS RM CEDEC R CB 28 28 ACH N RM CENIT R CB 25 25 ACH N RM ACH Colombia R AS 19 19 ACH N RM Costa Rica CLC L + R CB 20 20 ACH N RM TI L + R CB 57 57 RTT RTGS RM TT L + R CB 57 57 RTT RTGS RM CD/DD L + R CB 37 37 ACH N RM ECCU Large-value system L CB 39 39 M RTGS RM Guatemala MIT L CB 49 49 M RTGS RM Cheque clearinghouse L + R CB 28 28 M MN RM Mexico Cheque clearinghouse R AS n.a. n.a. ACH MN RM TEF R AS n.a. n.a. ACH MN RM SIAC L CB 86 86 RTT RTGS RM SPEUA L CB 36 36 RTT RTGS O SPEI1 L CB n.a. n.a. RTT RTGS O Nicaragua Cheque clearinghouse L + R CB 17 17 ACH MN RM TTS L + R CB 17 17 RTT RTGS O Peru LBTR L CB 31 16 RTT RTGS RM CCE R B 15 15 ACH N O Trinidad and Tobago Safe-tt L CB 21 7 RTT RTGS O LINX R AS 4 4 RTT N O Venezuela, R.B. de Cheque clearinghouse L + R CB 38 36 ACH MN RM SWIFT DC L + R CB 832 832 RTT RTGS/GS 232 Payments and Securities Settlement Table A.9 Features of Selected Interbank Funds Transfer Systems, year-end 2004 (Continued) Ratio of Closing Transactions Time for Number of Value of Value to Degree of Same-Day Transactions Transactions Annual GDP Centralization Pricing Transactions (thousands) (US$ billions) (times) Argentina Cheque clearinghouse C F NO 77,764 n.a. n.a. Retail credit transfers C F NO 4,511 5,154 0.20 MEP C N 20:00 1,097 n.a. n.a. Bolivia Cheque clearinghouse n.a. n.a. n.a. 1,860 7 2.30 SIPAV n.a. n.a. n.a. 69 24 7.70 Brazil STR C F 18:30 13,400 24,548 40.60 SITRAF C F 17:00 25,400 629 1.00 COMPE C F NO 3,003,400 708 1.20 SILOC C F NO 94,200 31 0.10 Tecban C F NO 88,900 3 0.00 Chile LBTR C V 17:30 197 1,282 12.90 Cheque clearinghouse C V NO n.a. n.a. n.a. Colombia CUD C V 21:00 1,547 1,365 14.00 CEDEC C V 21:00 59,770 113 1.20 CENIT C V 16:00 792 18 0.20 ACH Colombia C F 17:15 13,774 28 0.30 Costa Rica CLC C F NO 10,901 21 1.10 TI C F 17:00 43 34 1.80 TT C F 17:00 78 13 0.70 CD/DD C F NO 5,442 3 0.20 ECCU Large-value system C N 1 26 5 2.80 Guatemala MIT C N NO 8.30 52 2.00 Cheque clearinghouse C N NO 40,261.90 11 0.40 Mexico Cheque clearinghouse C F NO 163,479 252 0.40 TEF C F NO 12,599 45 0.10 SIAC C F 19:30 315 2,244 3.30 SPEUA C F 18:00 4,314 6,317 9.40 SPEI C F 18:00 212 1,551 2.30 Nicaragua Cheque clearinghouse C N NO 2,966 6 1.40 TTS C S 16:00 4 2 0.40 Peru LBTR C F 17:00 312 161 2.30 CCE n.a. n.a. 17:00 8,051 30 0.40 (Continued) Main Statistics of Payments and Securities Settlement Systems 233 Table A.9 Features of Selected Interbank Funds Transfer Systems, year-end 2004 (Continued) Ratio of Closing Transactions Time for Number of Value of Value to Degree of Same-Day Transactions Transactions Annual GDP Centralization Pricing Transactions (thousands) (US$ billions) (times) Trinidad and Tobago Safe-tt C F 14:45 /15:151 4 15 1.30 LINX C F 19:00 37,941 1 0.10 Venezuela, R.B. de Cheque clearinghouse C V NO 80,188 131 1.20 SWIFT DC C N 14:00 250 265 2.50 Source: Working Group on Payment System Issues of Latin America and the Caribbean. Note: L = large value payments system, R = retail payments system, L + R = large value and retail payments system. Owner/operator: CB = central bank, B = commercial bank, AS = services firm owned by the participating banks. Processing: M = manual, ACH = automated clearinghouse, RTT = real time transmissions. Membership: O = open membership, RM = restricted membership. Settlement: RTGS = real time gross settlement, GS = other gross settlement, MN = multilateral netting, BN = bilateral netting. Degree of Centralization: C = centralized access. Pricing: F = full costs (including investments), V = variable costs, S = symbolic costs (below variable costs), N = no charge. Closing Time for Same-Day Transactions: NO = no same-day transactions. 1. Closing time for consumer transactions and interbank transactions, respectively. 234 Payments and Securities Settlement Table A.10 Operating Hours of Selected Interbank Funds Transfer Systems, year-end 2004 Memo: Opening and Cutoff Cutoff for Standards Closing Times for All International Money for Same-Day Settlement Third-Party Correspondent Market Gross (G) Value Finality Payment Payment Hours or Net (N) (local time) (local time) Orders Orders (local time) Argentina MEP G n.a. n.a. n.a. n.a. n.a. Brazil STR G 6:30­18:30 Real time 17:30 . . . 6:30­18:30 SITRAF G/N 7:30­17:00 Real time 17:30 . . . 6:30­18:30 Chile LBTR B 9:00­18:15 Real time 15:45 9:00­18:00 Colombia CUD G 8:00­21:00 Real time 21:00 . . . 8:00­21:00 Costa Rica TI G 8:00­17:00 Real time 17:00 17:00 8:00­17:00 ECCU Large-value system G 8:00­15:00 3:00 13:30 15:00 8:00­15:00 Guatemala MIT G 9:00­16:00 Real time . . . . . . 8:00­16:00 Mexico SIAC G 9:00­19:30 Real time 19:30 . . . 9:00­19:30 SPEUA G 9:00­18:00 Real time 18:00 . . . 9:00­19:30 Nicaragua TTS N 8:30­16:00 16:00 . . . 16:00 . . . Peru Sistema LBTR G 9:30­17:001 Real time 17:00 1 9:30­16:30 Trinidad and Tobago Safe-tt G 8:30­15:15 Real time 14:45 . . . n.a. Venezuela, R.B. de Cuenta corriente G 8:00­14:00 Real time 14:00 14:00 8:00­14:00 Source: Working Group on Payment System Issues of Latin America and the Caribbean. 1. Operating hours can be extended until 18:00 to cover debit positions. Main Statistics of Payments and Securities Settlement Systems 235 Table A.11 Features of Selected Securities Settlement Systems, year-end 2004 Owner or Number of Settlement Type Operator Participants Direct of Cash Leg Delivery Argentina Merval G + E + O SE n.a. n.a. N N Argenclear G SE 78 78 N N Brazil SELIC G AS + CB 5,170 5,170 G G CETIP G + O1 AS 4,931 4,931 G/N G/N CBLC E AS 264 264 N N BM&F Activos2 G SE 92 92 N N Chile Sistema valores DCV G + E + O B + SE 149 149 G/N G/N Colombia DCV G CB n.a. n.a. G G DECEVAL G + E + O B + SE n.a. n.a. G G Costa Rica TEBEL E + O SE n.a. n.a. N G Mercado de liquidez G SE n.a. n.a. N G SITE E + O SE n.a. n.a. N G ECCU ECCSD G + E + O SE 8 8 N G Guatemala BVN G + E + O SE 25 25 G G Mexico SIDV G + E CB + B + SE/AS 495 495 G/N3 G/N4 Peru BVL G + E + O SE 21 21 N G Trinidad and Tobago TTSE G CB 18 18 N N Venezuela, R.B. de SICET G CB 113 108 G G CVV G + E + O AS 91 91 G N Ratio of Transactions Central Cash Number of Value of Value to Securities Settlement Transactions Transactions Annual GDP Delivery Depository Agent (thousands) (US$ billions) (times) Argentina Merval2 T + 3 Caja valores B 49 21 0.20 Argenclear n.a. Caja valores B 55 19 0.20 Brazil SELIC Real time CB CB 2.20 33,693 55.80 CETIP T + 15 CETIP CB 0.80 1,260 2.10 CBLC T + 36 CBLC CB 18.80 117 0.20 BM&F activos4 T + 1 CB CB 0.10 458 0.80 Chile Sistema valores DCV T + 1/T + 27 DCV B 1,735 349 3.50 236 Payments and Securities Settlement Table A.11 Features of Selected Securities Settlement Systems, year-end 2004 (Continued) Ratio of Transactions Central Cash Number of Value of Value to Securities Settlement Transactions Transactions Annual GDP Delivery Depository Agent (thousands) (US$ billions) (times) Colombia DCV T + 0 CB CB 4,555 1,668 17.10 DECEVAL T + 0 DECEVAL CB + B n.a. n.a. n.a. Costa Rica TEBEL T + 1 CEVAL CB n.a. n.a. n.a. Mercado de liquidez T + 0 CEVAL CB n.a. n.a. n.a. SITE T + 3 CEVAL CB n.a. n.a. n.a. ECCU ECCSD T + 1 ECCSD B 352 0.20 0.10 Guatemala BVN T + 2 Caja de valores n.a. n.a. n.a. n.a. Mexico SIDV T + 24 INDEVAL CB 1,509 25,804 38.30 Peru BVL T + 3 CAVALI B n.a. n.a. n.a. Trinidad and Tobago TTSE T + 0 GSS 50 n.a. Venezuela, R.B. de SICET Real time CB CB 94 113 0.90 CVV T + 3 BVC CB 73 n.a. n.a. Source: Working Group on Payment System Issues of Latin America and the Caribbean. Type: G = government securities, E = equities, O = other Owner/operator: CB = central bank, B = commercial bank, SE = stock exchange, AS = services firm owned by the participating banks Settlement: G = gross, N = net 1. Mainly corporate bonds. 2. Started operations in May 17, 2004. 3. For stock exhange transactions, both cash and securities are settled on a net basis. For over-the-counter transactions, both legs are settled gross. 4. For stock exchange transactions settlement occurs in T + 2. For over-the-counter transactions settlement generally occurs on real time or on T + 1. 5. For some types of securities, settlement occurs in real time. 6. Stands for spot markets. In the options market, settlement occurs in T + 1. 7. T + 2 is used for shares and T + 1 for all other types of securities. Main Statistics of Payments and Securities Settlement Systems 237 Table A.12 SWIFT Message Flows from and to Domestic Users, 2004 Total Messages Sent Total Messages Received Total Traffic to and from the Total Category I Category II Total Category I Category II Country Argentina 1,271,547 569,087 190,297 1,584,537 460,885 30,263 2,856,084 Bahamas, The 785,891 322,694 156,265 1,144,665 168,370 61,959 1,930,556 Bolivia 162,906 102,399 13,546 246,207 99,777 4,937 409,113 Brazil 4,085,545 1,479,989 431,013 5,005,631 1,688,508 283,977 9,091,176 Chile 1,784,603 482,564 510,261 1,809,650 340,663 356,416 3,594,253 Colombia 866,041 374,496 196,169 1,034,495 389,475 67,425 1,900,536 Costa Rica 275,504 195,218 18,795 427,068 211,365 5,110 702,572 Dominican Republic 171,799 95,229 22,635 298,064 109,263 6,531 469,863 ECCU 310,913 173,972 23,261 378,110 127,101 11,154 689,023 Ecuador 762,912 308,001 127,655 1,338,800 706,436 125,316 2,101,712 El Salvador 163,735 103,517 19,878 201,576 74,983 5,734 365,311 Guatemala 203,099 127,260 12,782 187,485 59,530 2,926 390,584 Jamaica 170,311 134,972 15,999 232,984 119,375 6,224 403,295 Mexico 4,238,655 1,566,086 562,387 5,168,479 1,869,045 865,645 9,407,134 Netherlands Antilles 605,050 371,825 68,159 765,481 256,315 31,929 1,370,531 Nicaragua 61,179 36,135 3,572 65,281 25,878 2,013 126,460 Paraguay 3,943 n.a. n.a. 16,950 n.a. n.a. 20,893 Peru 656,424 353,204 59,523 1,015,137 486,453 12,095 1,671,561 Trinidad and Tobago 263,328 182,510 35,292 268,772 111,477 9,949 532,100 Uruguay 559,862 335,656 49,656 831,420 360,609 19,366 1,391,282 Venezuela, R.B. de 1,984,293 1,394,734 149,717 2,119,590 1,446,095 106,853 4,103,883 Total 43,527,922 Global SWIFT traffic 2,299,074,199 Source: Working Group on Payment System Issues of Latin America and the Caribbean. 2 A P P E N D I X Scope, Elements, Participants, and Processes of Securities Settlement Systems1 A payment system can be defined as the collection of charge the payment leg of the obligation varies; the institutions, instruments, rules, procedures, standards, instrument is dependent on the participants of the trans- and technical means used to exchange financial value action and the value of the associated payment. This between two parties discharging an obligation (Listfield relationship underscores the importance of an efficient and Montes-Negret 1994). A securities clearance and and safe payments clearance and settlement system, and settlement system can be considered as part of the over- its interconnectivity with the efficiency and safety of all payment mechanisms of a country, in that it satisfies the securities clearance and settlement system. the main features of this overall definition. In this case, Rules refer to the required legal and administrative the exchange of financial value consists both of the framework, and include statutory, regulatory, and con- exchange of securities (equity, fixed income, or deriva- tractual rules that govern the rights and obligations of tives) and the exchange of liquid funds (usually cash parties to a transaction. A fundamental ingredient of or sight deposits). any efficient clearance and settlement system is a clear, The key attributes of a securities clearance and settlement comprehensible, sensible, and enforceable (at low cost) system can best be illustrated by examining each of the legal regime. Technological innovation is having a elements contained in the definition of a payments sys- major impact on the legal, regulatory, and administra- tem presented above--that is, institutions, instruments, tive arrangements--for example, on the need to ensure rules, procedures, standards, and technical means. that the judicial system accept electronic records as evi- dentiary material and that digital signatures have the Institutions provide the infrastructure to clear and set- same attached rights and obligations as physical written tle securities transactions. Two types of institutions signatures. are involved: participants that participate directly or indirectly in the clearance and settlement process The securities clearance and settlement procedures vary (clearinghouses, settlement agents, service providers), significantly from one country to another. In some cases, and regulatory bodies that provide the regulatory frame- the domestic procedures will differ depending on the work to clear and settle securities in an orderly and safe specific nature of the securities that are being traded. Typically, procedures have evolved over time and reflect way, and to provide oversight for the entire system. market practices, conditions, traditions, and culture. Instruments are the vehicles used for transferring value. Today, there is a clear trend toward the use of electronic Two types of instruments are used: securities that, in a clearance and settlement mechanisms. A cornerstone of broad sense, include equity, fixed income, and deriva- tives; and the payments instrument that is used to trans- 1 For more detailed information, see Guadamillas and Keppler (2001). fer funds from the buyer of the securities to the seller of 2For a detailed analysis of derivatives clearance and settlement, see the securities.2 The specific instrument used to dis- BIS (1998). 239 240 Payments and Securities Settlement such systems is the role played by central securities new challenges, especially with regard to the need for depositories (CSDs). Establishing a CSD results in appropriate legislative changes. increases in efficiency and safety through the immobi- lization of securities and their safe storage in the CSD, PARTICIPANTS IN SECURITIES CLEARANCE as contrasted with the old arrangements in which the AND SETTLEMENT SYSTEMS scrip was actually held by the investor. Another benefit A broad range of institutions and entities are involved in usually relates to the issue of securities in a dematerial- securities clearance and settlement systems. Regulatory ized or book-entry form. Despite this common evolu- authorities (mainly central banks, superintendencies of tionary path, there are many variations in the ways banks, and securities regulators) create the legal and CSDs operate at the detailed level. oversight environment within which the procedures are The most recent factor that has been introduced into the carried out. Sometimes they also provide clearance and world of clearance and settlement concerns the role of settlement services, mainly in the case of government standards. Standards are required to facilitate the effi- securities. Participants are those institutions that send cient exchange of data between computer systems, and or receive orders directly to or from the system, or that underpin the drive toward straight-through processing are directly bound by the rules governing securities in which the entire end-to-end or customer-to-customer transfer systems. Participants directly exchange trans- transaction flow can be computerized. The use of a fer orders with other participants in the system on behalf common set of standards is also essential in facilitating of themselves, their customers, or on behalf of indirect the integration of national systems into efficient and participants. Indirect participants are distinguished from closely integrated international systems. Today, a wide direct participants by their inability to perform certain variety of international institutions and organizations activities such as inputting transfer orders or acting as are involved with the development of standards. In a settlement agent. The typical participants, the func- some cases, these standards have been established to tions they perform, and the services they provide are realize specific purposes and relate primarily to a spe- described below. However, as will be noted, the roles of cific system or group of systems, and thus may not be participants are not unique and vary from country to applicable to all systems. In addition, it should be noted country and from system to system. For example, some that not every system, especially during the early evo- of the services or functions undertaken by a specific lution of securities markets in a country, can or must participant could be provided or performed by sepa- satisfy all of the standards that have been promulgated. rate entities, or some of the services or functions pro- From a practical perspective, the primary need is the vided or performed by several participants could be availability of a set of standards and implementation provided or performed by a single participant. guidelines that have applicability to securities markets at different stages of development in mature, transi- Final investors are the individual economic agents in an tional, and developing economies. To achieve this end, economy (households and firms) that invest surplus substantial work has been undertaken at the international funds or savings with the objective of earning an attrac- level regarding standards development. It is worth noting tive return on their investment. They normally trade that this work, quite appropriately, reflects the close inter- in securities markets through an intermediary, broker- relationship between securities transfer systems and dealer, or institutional investor. funds transfer systems. Institutional investors (mainly banks, mutual funds, Finally, the technical means provide the tools and oper- pension funds, and insurance companies) are playing an ational infrastructure for transmitting financial value increasingly important role in securities markets. The between participants and intermediaries throughout the high volume and value of transactions carried out by processing cycle. As mentioned above, technological these institutions place them in a pivotal role in the innovation is providing significant opportunities to clearing and settlement processes. International stan- reduce operational costs and improve the speed and dards recognize the importance of their role and rec- the security with which information can be processed. ommend that, although they usually are not direct However, technological innovation is also introducing participants in the trading mechanisms, they should Scope, Elements, Participants, and Processes of Securities Settlement Systems 241 have direct participation in the confirmation, compari- various domestic securities. They usually settle the trades son, or affirmation processes. in their own books or through direct or indirect links (through local agents) to domestic CSDs. Both final and institutional investors are customers of the securities clearance and settlement system. They are Exchanges and over-the-counter (OTC) markets are the buyers, sellers, or holders of securities and funds. How- mechanisms for trading activity carried out by broker- ever, they do not participate directly in the clearance dealers. Prices are determined by auction bidding on the and settlement arrangements. floor of an exchange or by negotiation (through tele- phone communications, computer-controlled networks Issuers are institutions that seek financing via the secu- of quotation terminals, and so on) between buying and rities markets, thus are obliged to pay interest or divi- selling broker-dealers, in the case of OTC markets. The dends and redeem the principal on securities issued by key factor from a clearing and settlement perspective is them. They are normally classified as public or private the way in which trading information is transmitted, issuers. This distinction is important because countries rather than the way in which trading takes place. often have different systems for processing trades in the public and private securities markets. In addition, The clearing agent is the entity that carries out the pro- the public securities market is normally regulated by the cedures of trade capture, matching, confirmation, and central bank, whereas private securities markets are reg- calculation of obligations relating to securities transfer ulated by a separate securities regulatory authority. How- instructions prior to settlement. These functions are nor- ever, in some countries, where securities regulators do mally provided by CSDs in addition to the depository not exist, central banks typically assume the overall reg- function, or they are provided by the exchange where ulatory responsibility. the trading takes place. Sometimes the clearing agent Broker-dealers undertake the primary intermediation assumes counterparty risk by netting the aggregate posi- role in securities market trading. For this reason, they tions of the participants in a process referred to as nova- also have a primary role in the clearance and settlement tion. In this case, the clearing agent also performs the procedures. It is worth mentioning that the evolution settlement function. and automation of the securities clearance and settle- A settlement agent manages the settlement process, ment systems deeply affects this segment of the indus- determines the settlement positions, and monitors the try. In particular, the design of the system, especially exchange of securities and payments. Again, this func- the design's impact on the liquidity needs that must be tion is sometimes provided by CSDs or exchanges. The funded by these institutions, can constitute a significant payment of funds is usually done through a settlement operational constraint. This can present particular diffi- bank (private bank or central bank), although in some culties for broker-dealers that focus on the retail sector. situations is directly done by the broker-dealer or its pay- Custodians are entities that undertake the safekeeping ing agent through a means of payment such as a cheque of securities and other financial instruments on behalf of or a certified cheque. others. They may provide other services such as clearance A correspondent bank provides payments and other ser- and settlement, securities lending, and so on. A global vices to another bank. Such services are primarily pro- custodian provides those services with respect to secu- vided across international boundaries. It is included in rities that are traded and settled not only in the country this list because of its relevance to cross-border securi- where the custodian is located, but also in other countries ties transactions and especially with regard to the role it throughout the world. plays in the payments leg of the transaction. CSDs provide facilities for holding securities in either immobilized or book-entry form. In addition to providing PROCESSES IN SECURITIES CLEARANCE this safekeeping role, a CSD may provide trade compari- AND SETTLEMENT SYSTEMS son services, and clearing and settlement services. After a trade is executed in an exchange or an OTC mar- International central securities depositories are institu- ket, there are still a number of stages to be followed to tions that settle trades in international securities and in achieve an effective transfer of value (securities versus 242 Payments and Securities Settlement payment) between the counterparties. These procedures or OTC market is not significant for clearance and set- can be quite different from one system to another. This tlement purposes. section describes the key aspects of this process. An Trade clearance refers to the procedures necessary to exhaustive treatment of the many variations and local determine the obligations of direct market participants conditions embedded in such systems around the world (broker-dealers and so on) to deliver securities and funds is not attempted. The primary purpose is to illustrate the following trade execution.4 It includes trade capture, key issues that authorities should consider when striv- matching, confirmation, comparison, and affirmation ing to achieve an appropriate balance between safety procedures (steps 4 to 6 in box A.1) and the calculation and efficiency. of settlement obligations (step 7 in box A.1). Once a trade Box A.1 presents the typical procedures that are under- is executed, the next step is to record (capture) the key taken in a securities clearance and settlement system. information relating to the trade and to ensure that the The life cycle of a securities transaction involves three counterparties agree on all of the terms of the transaction phases: trade execution, trade clearance, and trade settle- and are able to review and confirm these trade details ment (Stehm 1996). These procedures should be designed (matching and confirmation). If the exchange or OTC and developed to work within a specific legal and oper- market transmits locked-in trades, trade matching is done ating environment and thus take account of local regu- jointly with trade execution; all these procedures occur latory and oversight arrangements. An understanding simultaneously with the delivery of the information of these latter factors is essential, because they influ- by the exchange. If foreign investors participate in the ence the way in which the procedures are used, and trading, custodian banks normally act as agents for these thus contribute to any inherent risks embedded in the investors in the clearance and settlement process. In system. The nature of the operational environment is some cases, indirect market participants (institutional assuming increasing importance in most countries investors and custodians), due to the high volume of their because technological innovation is changing the way operations, participate in a trade comparison system that information is processed and managed; thus techno- with positive affirmation of trade details. logical innovation has an impact on all other factors. The The calculation of settlement obligations can be done way the authorities adapt to the new operational condi- on a gross (the settlement occurs individually on an order- tions is critical to maintaining efficient and safe systems. by-order basis), bilateral net (the debits and credits It is thus clear that both the legal and regulatory oversight between any two participants are set off), or multilateral arrangements need to evolve in line with technology- net (each participant's total debit and credits to the entire driven changes in operational procedures. system are set off, leaving the participant with a single The process begins with the trade execution phase. The net position in relation to the entire system) basis for two parties agree to exchange a certain amount of secu- both the securities balances and the funds balances. The rities for a certain amount of funds on a particular set- choice is not irrelevant. On the contrary, the choice has tlement date. The transaction details could be agreed an important impact on the efficiency and risk exposure directly between the two counterparties. Transactions of the system. In addition, this choice is influenced by between broker-dealers are normally carried out in an market characteristics, especially those relating to the exchange or OTC market.3 Box A.1 (steps 1 to 3) illus- availability of liquidity. The main strengths and weak- trates the case of a transaction processed through an nesses of the two methods require careful study and exchange. The fact that a trade is executed in an exchange always result in trade-offs between liquidity require- ments and risk mitigation, especially those risks relating to settlement failure. Gross settlement systems elimi- 3It is difficult to have disclosure of off-market transactions, those nate risk, but require more liquidity than net settlement dealt outside the rules and mechanisms of recognized stock systems. However, net settlement systems have increased exchanges or other recognized self-regulation markets and bodies. risk due to the deferred nature of the settlement process. This creates a difficulty in the performance of securities clearance and settlement systems due to the inability to monitor minimum cap- ital requirements, adequacy standards on the behavior in line with the code of conduct, and so on. 4This phase is sometimes referred to as trade processing. Scope, Elements, Participants, and Processes of Securities Settlement Systems 243 Box A.1. Securities Clearance and Settlement Procedures Buying 1,4,8 Buying 2,3 2,3 Selling 1,4,8 Selling Exchange customer broker broker customer 6,8 4,5,7,8 3 4,5,7,8 6,8 8 8 Clearing Custodian Custodian 6,7 agent 6,7 bank bank (depository) 7,8 8 8 Settlement 8 agent 8 Paying Paying 8 8 agent 9 agent Operating environment Legal environment Regulatory oversight Central bank TRADE EXECUTION 1. Buying and selling customers place their orders with their respective brokers. 2. Brokers executes clients' orders at the exchange. 3. The exchange sends to the clearing agent and brokers the detail of transactions executed. The trade execution could be done directly between the counterparties. Transactions between broker-dealers are normally carried over an exchange or over-the-counter market. The procedures could be paper based or electronic, processed through the com- munications systems. It is common that depositories also perform the function of clearing agents. Usually, trading details are sent from the exchange to the clearing agent on T. TRADE CLEARANCE Trade Capture, Matching, Confirmation, Comparison, and Affirmation 4. Brokers, both buying and selling, send trade details to the clearing agent . Brokers deliver a confirmation to their customers containing the details of the customer's executed orders. 5. The clearing agent compares each side of the trade and provides a report to each broker. 6. For large institutional investors, the confirmation is normally directed to an intermediary such as a custodian acting as agent for the investor in the clearing process. During this phase, the information flow continues until there are no mistakes in trade details. In some cases, those processes may occur outside the clearing agent as part of the trade execution process. When the trades are transmitted as locked-in transactions by the computer systems of the exchanges or over-the-counter markets, the details of the trades have already been matched. Ideally, all comparison of trades between market participants should be accomplished by T + 1. Calculation of Settlement Obligations 7. The clearing agent sends to the brokers, custodians, and settlement agent the securities balances (gross, bilateral net, or multi- lateral net) and the fund balances (gross, bilateral net, or multilateral net). In case of mistakes, the information flow continues until the balances are correct. (Continued) 244 Payments and Securities Settlement Box A.1. Securities Clearance and Settlement Procedures (Continued) The selling broker must provide availability of securities before the settlement time, and the buying broker must provide availability of funds before the settlement time. Availability of Securities Securities in book-entry form: Immobilized and dematerialized securities are available through the broker's accounts in the depository. Normally, the value of securities traded are blocked until the trade is settled, and cannot be used for other trades in subsequent days. Securities in physical form: The broker should make them available on the settlement day. Availability of Funds Payment through a settlement agent: In this case brokers or its paying agents have an account at the settlement agent (usually a bank) and the clearing agent communicates the balances to the settlement agent before settlement day. Broker's paying agents (usually banks) or custodians send the funds before settlement time. Direct payment by the broker: In this case, buying brokers directly provide the funds at settlement time by a means of payment (for example, a cheque or certified cheque) or instruct a direct payment through its paying agent to the selling broker. In some occasions the clearing agent guarantees the trade netting the delivery and receipt of settlement obligations. This is referred to as "novation" or the substitution of one party for another (the clearing agent becomes the buyer to every seller and the seller to every buyer). In most markets trade clearance typically ranges from T + 1 to T + 5. TRADE SETTLEMENT 8. Securities are delivered in exchange of funds. Delivery of Securities Through a depository (securities are previously immobilized in the depository or issued in a dematerialized form) Directly between the brokers (physical form of securities) Payment Through a settlement agent Directly between the brokers by a means of payment (for example, cheque or certified cheque) 9. The funds are finally registered in the central bank accounts. These funds will be final unless intercepted by judicial resolution. Securities are transferred through the clearing agent with physical delivery or through a book-entry system. In the latter case, if the depository is a different institution, the clearing agent instructs the depository, and the movement of the securities takes place through the depository accounts. Funds settlement could be done directly by the broker-dealers by a means of payment or through its payment agent, or funds settlement could be centralized in a settlement agent that receives and pay the funds directly through the brokers or its paying agents that pay or receive the money on the participant's behalf. Sometimes, mainly in the case of public securities, for both securities and funds, the settlement is done through Central Bank accounts. Ideally, securities should be delivered if, and only if, there is payment and vice versa, that is, on a delivery versus payment basis. Finally, settlement involves the discharge of settlement by the concept of delivery versus payment are critical.5 obligations through the final transfer of securities from This means that securities should be delivered if, and the seller to the buyer, and the final transfer of funds from the buyer to the seller. Again, this could be done 5This concept is referred sometimes as true or real delivery versus by a variety of procedures, but two elements represented payment. Scope, Elements, Participants, and Processes of Securities Settlement Systems 245 Box A.2 Trade Confirmation, Comparison, and Affirmation Trade comparison type Description Locked-in The exchange or over-the-counter market delivers its participants' trades on a locked-in basis-- that is, the trades are already matched. Matched The information on securities traded by its participants is submitted to the clearing agent by the exchange or over-the-counter market, which compares and matches the buy and sell sides of the trades. Comparison members submit the trade data, and the clearing agent sends confirma- tion reports to comparison members that validate the comparison of the trade data. only if, there is payment, and vice versa--that is, on a retail or wholesale dominance.6 As a consequence, gross delivery versus payment basis. But as important as the settlement systems are more frequently used to remove previous concept is that transactions are final--that is, the risks embedded in large-value funds transfers sys- that the securities and funds legs cannot be reversed-- tems, in which the main participants are banks that have it should also be noted that finality is affected by the access to intraday liquidity provided by the central bank particularities of legal and judicial systems. Thus, legal within carefully controlled arrangements. Well-designed issues such as the concept of nominee or the provisions gross settlement systems typically include queue man- embedded in bankruptcy laws should be seriously con- agement procedures and other mechanisms such as bilat- sidered by the authorities to ensure consistency with eral and multilateral offset arrangements to mitigate the securities laws, regulations, and operational procedures. impact of so-called gridlock in the system.7 A gross settlement system requires a critical mass of mar- Net systems, because of the deferred nature of settle- ketable securities and systemwide liquidity for its effi- ment, avoid the need for large amounts of intraday liq- cient operation. Systemic risk in gross settlement systems uidity; the specific volume and value of transactions is low, because transactions are not executed unless there flows should be studied to determine the potential for are securities and funds in the accounts of the counter- risk, however. By reducing the overall value of the final parties. The relatively recent and rapidly growing use of funds transfers that have to be made between partici- real-time gross settlement (RTGS) systems (that is, a pating financial institutions, netting can enhance the effi- gross settlement system in which processing and settle- ciency of national payments systems, but netting can also ment take place in real time, continuously) reduces credit contribute to an increase in systemic risk. This may be the and liquidity risk in comparison with batch processing case if, instead of achieving reductions in participants' systems (that is, processing of a group of securities trans- true exposures, it merely obscures the level of these fer instructions or payment orders at a set of discrete exposures. The true position becomes apparent only intervals of time). However, the associated liquidity when the net positions are identified at the end of the needs may represent a significant constraint to the adop- clearing cycle. At this point, shortages of either securities tion of these systems in securities markets, because par- or funds are identified. Should appropriate cover not be ticipants are mainly broker-dealers that typically lack the available, then--in the simple case--transactions have amount of liquidity required for the smooth operation of to be unwound with the obvious negative impact on sys- such systems, unless they are owned by or have a close relationship with a commercial bank. For this reason, the choice of settlement mechanism is not straightforward. It 6The debate about this issue is broader and covers other areas, such as equal regulatory treatment. could affect the evolution of the market in terms of the 7Gridlock is a situation in which the failure of some transfer instruc- dominant institutions (banks versus nonbank dependent tions to be executed prevents a substantial number of instructions broker-dealers) and the pattern of the market toward a from other participants from being executed. 246 Payments and Securities Settlement tem participants and market confidence. Well-designed effort to categorize the range of existing systems using netting systems can mitigate these implications by invok- different flavors of the concept of delivery versus pay- ing previously agreed settlement assurance procedures. ments, already mentioned (CPSS 1992). It should also be Such procedures can be costly and are sometimes difficult noted that the boundaries between RTGS systems and net to put in place. In some system arrangements, the clearing settlement systems are becoming blurred. An increasing agent guarantees settlement, and in effect becomes the number of net settlement systems now settle periodically counterparty to each trade. This mechanism is referred to during the day rather than solely at the end of the day. as novation, and requires a supporting legal environment. This reduces the potential for settlement failure by reduc- ing the progressive build-up of credit exposures between Operational systems, especially those in transition, often participants. Also, as noted earlier, gridlock-busting exhibit a combination of gross and net schemes. For routines in gross settlement arrangements make use of example, it is not uncommon to see systems that com- embedded net settlement offset concepts. This trend is bine securities gross settlement with funds net settle- continuing, and it is likely that some form of final con- ment. The Bank for International Settlements made an vergence between these mechanisms will take place. 3 A P P E N D I X CPSS Core Principles for Systemically Important Payment Systems I. The system should have a well-founded legal contingency arrangements for timely completion basis under all relevant jurisdictions. of daily processing. II. The system's rules and procedures should enable VIII. The system should provide a means of making participants to have a clear understanding of the payments, which is practical for its users and effi- system's impact on each of the financial risks cient for the economy. they incur through participation in it. IX. The system should have objective and publicly III. The system should have clearly defined procedures disclosed criteria for participation, which permit for the management of credit risks and liquidity fair and open access. risks, which specify the respective responsibilities X. The system's governance arrangements should of the system operator and the participants and be effective, accountable, and transparent. which provide appropriate incentives to manage and contain those risks. RESPONSIBILITIES OF THE CENTRAL BANK IV. The system should provide prompt final settlement IN APPLYING THE CORE PRINCIPLES on the day of value, preferably during the day and A. The central bank should define clearly its payment at a minimum at the end of the day. system objectives and should disclose publicly its V. A system in which multilateral netting takes place role and major policies with respect to systemically should be, at a minimum, capable of ensuring the important payment systems. timely completion of daily settlements in the event B. The central bank should ensure that the systems it of an inability to settle by the participant with the operates comply with the Core Principles. largest single settlement obligation. C. The central bank should oversee compliance with the VI. Assets used for settlement should preferably be a Core Principles by systems it does not operate and it claim on the central bank; where other assets are should have the ability to carry out this oversight. used, they should carry little or no credit risk and D. The central bank, in promoting payment system little or no liquidity risk. safety and efficiency through the Core Principles, VII. The system should ensure a high degree of secu- should cooperate with other central banks and with rity and operational reliability and should have any other relevant domestic or foreign authorities. 247 4 A P P E N D I X CPSS-IOSCO Recommendations for Securities Settlement Systems Recommendation 1. Securities settlement systems should Recommendation 8. Final settlement should occur no have a well-founded, clear, and transparent legal basis later than the end of the settlement day. Intraday or real- in the relevant jurisdictions. time finality should be provided where necessary to reduce risks. Recommendation 2. Confirmation of trades between direct market participants should occur as soon as pos- Recommendation 9. CSDs that extend intraday credit sible after trade execution, but no later than trade date to participants, including CSDs that operate net settle- (T+0). Where confirmation of trades by indirect market ment systems, should institute risk controls that, at a min- participants (such as institutional investors) is required, imum, ensure timely settlement in the event that the it should occur as soon as possible after trade execution, participant with the largest payment obligation is preferably on T+0, but no later than T+1. unable to settle. The most reliable set of controls is a combination of collateral requirements and limits. Recommendation 3. Rolling settlement should be adopted in all securities markets. Final settlement should Recommendation 10. Assets used to settle the ultimate occur no later than T+3. The benefits and costs of a set- payment obligations arising from securities transactions tlement cycle shorter than T+3 should be evaluated. should carry little or no credit or liquidity risk. If cen- tral bank money is not used, steps must be taken to pro- Recommendation 4. The benefits and costs of a central tect CSD members from potential losses and liquidity counterparty should be evaluated. Where such a mech- pressures arising from the failure of the cash settlement anism is introduced, the central counterparty should rig- agent whose assets are used for that purpose. orously control the risks it assumes. Recommendation 11. Sources of operational risk arising Recommendation 5. Securities lending and borrowing in the clearing and settlement process should be identi- (or repurchase agreements and other economically equiv- fied and minimized through the development of appro- alent transactions) should be encouraged as a method priate systems, controls, and procedures. Systems should for expediting the settlement of securities transactions. be reliable and secure, and have adequate, scalable capac- Barriers that inhibit the practice of lending securities for ity. Contingency plans and backup facilities should be this purpose should be removed. established to allow for timely recovery of operations Recommendation 6. Securities should be immobilized and completion of the settlement process. or dematerialized and transferred by book entry in CSDs Recommendation 12. Entities holding securities in cus- to the greatest extent possible. tody should employ accounting practices and safekeep- Recommendation 7. CSDs should eliminate principal ing procedures that fully protect customers' securities. risk by linking securities transfers to funds transfers in It is essential that customers' securities be protected a way that achieves delivery versus payment. against the claims of a custodian's creditors. 249 250 Payments and Securities Settlement Recommendation 13. Governance arrangements for Recommendation 17. CSDs and central counterparties CSDs and central counterparties should be designed to should provide market participants with sufficient infor- fulfill public interest requirements and to promote the mation for them to accurately identify and evaluate the objectives of owners and users. risks and costs associated with using the CSD or central counterparty services. Recommendation 14. CSDs and central counterparties should have objective and publicly disclosed criteria for Recommendation 18. Securities settlement systems participation that permit fair and open access. should be subject to transparent and effective regulation Recommendation 15. While maintaining safe and secure and oversight. Central banks and securities regulators operations, securities settlement systems should be cost- should cooperate with each other and with other rele- effective in meeting the requirements of users. vant authorities. Recommendation 16. Securities settlement systems Recommendation 19. CSDs that establish links to settle should use or accommodate the relevant international cross-border trades should design and operate such links communication procedures and standards in order to to reduce effectively the risks associated with cross- facilitate efficient settlement of cross-border transactions. border settlements. 5 A P P E N D I X CPSS-IOSCO Recommendations for Central Counterparties 1. Legal risk which it has the largest exposure in extreme but plausi- A central counterparty (CCP) should have a well-founded, ble market conditions. transparent, and enforceable legal framework for each 6. Default procedures aspect of its activities in all relevant jurisdictions. A CCP's default procedures should be clearly stated, 2. Participation requirements and they should ensure that the CCP can take timely A CCP should require participants to have sufficient action to contain losses and liquidity pressures and to financial resources and robust operational capacity to continue meeting its obligations. Key aspects of the meet obligations arising from participation in the CCP. default procedures should be publicly available. A CCP should have procedures in place to monitor that 7. Custody and investment risk participation requirements are met on an ongoing basis. A CCP should hold assets in a manner whereby risk of A CCP's participation requirements should be objec- loss or of delay in its access to them is minimized. tive, publicly disclosed, and permit fair and open access. Assets invested by a CCP should be held in instruments 3. Measurement and management of credit exposures with minimal credit, market, and liquidity risk. A CCP should measure its credit exposures to its partic- 8. Operational risk ipants at least once a day. Through margin requirements, A CCP should identify sources of operational risk and other risk control mechanisms or a combination of both, minimize them through the development of appropri- a CCP should limit its exposures to potential losses from ate systems, control, and procedures. Systems should defaults by its participants in normal market conditions be reliable and secure, and have adequate, scalable so that the operations of the CCP would not be disrupted capacity. Business continuity plans should allow for and nondefaulting participants would not be exposed to timely recovery of operations and fulfillment of a CCP's losses that they cannot anticipate or control. obligations. 4. Margin requirements 9. Money settlements If a CCP relies on margin requirements to limit its credit A CCP should employ money settlement arrangements exposures to participants, those requirements should be that eliminate or strictly limit its settlement bank risks, sufficient to cover potential exposures in normal mar- that is, its credit and liquidity risks from use of banks to ket conditions. The models and parameters used in set- effect money settlements with its participants. Funds ting margin requirements should be risk-based and transfers to the CCP should be final when effected. reviewed regularly. 10. Physical deliveries 5. Financial resources A CCP should clearly state its obligations with respect A CCP should maintain sufficient financial resources to to physical deliveries. The risks from these obligations withstand, at a minimum, a default by the participant to should be identified and managed. 251 252 Payments and Securities Settlement 11. Risks in links between CCPs and to support the objectives of owners and users. In CCPs that establish links either cross-border or domesti- particular, they should promote the effectiveness of the cally to clear trades should evaluate the potential sources CCP's risk management procedures. of risks that can arise, and ensure that the risks are man- 14. Transparency aged prudently and on an ongoing basis. There should A CCP should provide market participants with suffi- be a framework for cooperation and coordination between cient information for them to identify and evaluate the relevant regulators and overseers. accurately the risks and costs associated with using its 12. Efficiency services. While maintaining safe and secure operations, CCPs 15. Regulation and oversight should be cost-effective in meeting the requirements A CCP should be subject to transparent and effective of users. regulation and oversight. In both a domestic and inter- 13. Governance national context, central banks and securities regulators Governance arrangements for a CCP should be clear should cooperate with each other and with other rele- and transparent to fulfill public interest requirements vant authorities. 6 A P P E N D I X CPSS General Guidance for National Payments System Development A. BANKING SYSTEM Guideline 8. Involve relevant stakeholders: Encourage the development of effective consultation among rele- Guideline 1. Keep the central bank at the centre: Due to vant stakeholders in the national payment system. its overall responsibility for a sound currency, the cen- tral bank has a central role in the development of the use Guideline 9. Collaborate for effective oversight: Effec- of money as an effective means of payment. tive payment system oversight by the central bank often requires collaborative arrangements with other Guideline 2. Promote the role of a sound banking system: authorities. Payment accounts, instruments, and services available to end users are provided by banks and other similar finan- Guideline 10. Promote legal certainty: Develop a trans- cial institutions, which compete individually but often parent, comprehensive and sound legal framework for need to act cooperatively as a system. the national payment system. B. PLANNING D. INFRASTRUCTURES Guideline 3. Recognize complexity: Planning should Guideline 11. Expand availability of retail payment be based on a comprehensive understanding of all the services: Extend the availability and choice of efficient core elements of the national payment system and the and secure noncash payment instruments and services principal factors influencing its development. available to consumers, businesses, and government by Guideline 4. Focus on needs: Identify, and be guided expanding and improving retail payment infrastructures. by, the payment needs of all users in the national pay- Guideline 12. Let the business case guide the large-value ment system and by the capabilities of the economy. payment system: Develop a large-value payment system Guideline 5. Set clear priorities: Plan and priori- based primarily on the needs of financial markets and tize development of the national payment system the growth in time-critical interbank payments. strategically. Guideline 13. Align development of payment and secu- Guideline 6. Implementation is key: Ensure effective rities systems: Coordinate the development of securities implementation of the strategic plan. and large-value payment systems for safety and effi- ciency in the financial system. C. INSTITUTIONAL FRAMEWORK Guideline 14. Coordinate settlement of retail, large- Guideline 7. Promote market development: The expan- value and securities systems: The settlement processes sion and strengthening of market arrangements for pay- for the core systems should be operationally coordi- ment services are key aspects of the evolution of the nated to efficiently manage the interrelated liquidity national payment system. needs and settlement risks among them. 253 7 A P P E N D I X Recommendations of the Financial Action Task Force on Money Laundering The 40 Recommendations of the Financial Action Task 5. As provided in the Vienna Convention, the offense Force on Money Laundering (FATF) of money laundering should apply at least to know- ing money laundering activity, including the concept that knowledge may be inferred from objective A. GENERAL FRAMEWORK OF THE factual circumstances. RECOMMENDATIONS 6. Where possible, corporations themselves--not only their employees--should be subject to criminal 1. Each country should take immediate steps to ratify liability. and to implement fully, the 1988 United Nations Convention against Illicit Traffic in Narcotic Drugs and Psychotropic Substances (the Vienna Provisional Measures and Confiscation Convention). 7. Countries should adopt measures similar to those 2. Financial institution secrecy laws should be con- set forth in the Vienna Convention, as may be nec- ceived so as not to inhibit implementation of these essary, including legislative ones, to enable their recommendations. competent authorities to confiscate property laun- 3. An effective money laundering enforcement pro- dered, proceeds from, instrumentalities used in or gram should include increased multilateral coopera- intended for use in the commission of any money tion and mutual legal assistance in money laundering laundering offense, or property of corresponding investigations and prosecutions and extradition in value, without prejudicing the rights of bona fide money laundering cases, where possible. third parties. Such measures should include the authority to (1) identify, trace and evaluate prop- B. ROLE OF NATIONAL LEGAL SYSTEMS erty that is subject to confiscation; (2) carry out IN COMBATING MONEY LAUNDERING provisional measures, such as freezing and seizing, to prevent any dealing, transfer or disposal of such Scope of the Criminal Offense property; and (3) take any appropriate investigative of Money Laundering measures. In addition to confiscation and criminal 4. Each country should take such measures as may be sanctions, countries also should consider monetary necessary, including legislative ones, to enable it and civil penalties, and/or proceedings including to criminalize money laundering as set forth in the civil proceedings, to void contracts entered into by Vienna Convention. Each country should extend parties, where parties knew or should have known the offense of drug money laundering to one based that as a result of the contract, the State would be on serious offenses. Each country would determine prejudiced in its ability to recover financial claims, which serious crimes would be designated as money e.g., through confiscation or collection of fines and laundering predicate offenses. penalties. 255 256 Payments and Securities Settlement C. ROLE OF THE FINANCIAL SYSTEM IN ing either from a public register or from the cus- COMBATING MONEY LAUNDERING tomer or both, proof of incorporation, including information concerning the customer's name, legal 8. Recommendations 10 to 29 should apply not only form, address, directors, and provisions regulating to banks, but also to nonbank financial institutions. the power to bind the entity; (2) to verify that any Even for those nonbank financial institutions which person purporting to act on behalf of the customer are not subject to a formal prudential supervisory is so authorized and identify that person. regime in all countries, for example bureaux de 11. Financial institutions should take reasonable mea- change, governments should ensure that these sures to obtain information about the true identity of institutions are subject to the same anti-money the persons on whose behalf an account is opened laundering laws or regulations as all other finan- or a transaction conducted if there are any doubts as cial institutions and that these laws or regulations to whether these clients or customers are acting on are implemented effectively. their own behalf, for example, in the case of domi- 9. The appropriate national authorities should con- ciliary companies (i.e., institutions, corporations, sider applying Recommendations 10 to 21 and foundations, trusts, etc. that do not conduct any 23 to the conduct of financial activities as a com- commercial or manufacturing business or any other mercial undertaking by businesses or professions form of commercial operation in the country where that are not financial institutions, where such con- their registered office is located). duct is allowed or not prohibited. Financial activi- 12. Financial institutions should maintain, for at least ties include, but are not limited to, those listed in five years, all necessary records on transactions, the attached annex. It is left to each country to both domestic or international, to enable them to decide whether special situations should be defined comply swiftly with information requests from the where the application of anti-money-laundering competent authorities. Such records must be suffi- measures is not necessary, for example, when a cient to permit reconstruction of individual transac- financial activity is carried out on an occasional or tions (including the amounts and types of currency limited basis. involved if any) so as to provide, if necessary, evi- dence for prosecution of criminal behavior. Finan- Customer Identification and cial institutions should keep records on customer Recordkeeping Rules identification (e.g., copies or records of official iden- tification documents like passports, identity cards, 10. Financial institutions should not keep anonymous driving licenses, or similar documents), account accounts or accounts in obviously fictitious names: files, and business correspondence for at least five they should be required (by law, by regulations, by years after the account is closed. These documents agreements between supervisory authorities and should be available to domestic competent authori- financial institutions or by self-regulatory agree- ties in the context of relevant criminal prosecutions ments among financial institutions) to identify, on and investigations. the basis of an official or other reliable identifying 13. Countries should pay special attention to money document, and record the identity of their clients, laundering threats inherent in new or developing either occasional or usual, when establishing busi- technologies that might favor anonymity, and take ness relations or conducting transactions (in partic- measures, if needed, to prevent their use in money ular opening of accounts or passbooks, entering laundering schemes. into fiduciary transactions, renting of safe deposit boxes, performing large cash transactions). In order Increased Diligence of to fulfill identification requirements concerning Financial Institutions legal entities, financial institutions should, when necessary, take measures: (1) to verify the legal 14. Financial institutions should pay special attention existence and structure of the customer by obtain- to all complex, unusual large transactions, and all Recommendations of the Financial Action Task Force on Money Laundering 257 unusual patterns of transactions, which have no that local applicable laws and regulations permit. apparent economic or visible lawful purpose. The When local applicable laws and regulations pro- background and purpose of such transactions should, hibit this implementation, competent authorities as far as possible, be examined, the findings estab- in the country of the mother institution should be lished in writing, and be available to help supervisors, informed by the financial institutions that they auditors, and law enforcement agencies. cannot apply these Recommendations. 15. If financial institutions suspect that funds stem 21. Financial institutions should give special atten- from a criminal activity, they should be required to tion to business relations and transactions with report promptly their suspicions to the competent persons, including companies and financial insti- authorities. tutions, from countries that do not or insuffi- 16. Financial institutions, their directors, officers, and ciently apply these Recommendations. Whenever employees should be protected by legal provisions these transactions have no apparent economic or from criminal or civil liability for breach of any visible lawful purpose, their background and pur- restriction on disclosure of information imposed by pose should, as far as possible, be examined, the contract or by any legislative, regulatory, or admin- findings established in writing, and be available to istrative provision, if they report their suspicions in help supervisors, auditors, and law enforcement good faith to the competent authorities, even if they agencies. did not know precisely what the underlying crimi- nal activity was, and regardless of whether illegal Other Measures to Avoid Money Laundering activity actually occurred. 22. Countries should consider implementing feasible 17. Financial institutions, their directors, officers, and measures to detect or monitor the physical cross- employees, should not, or, where appropriate, should border transportation of cash and bearer nego- not be allowed to, warn their customers when infor- tiable instruments, subject to strict safeguards mation relating to them is being reported to the to ensure proper use of information and with- competent authorities. out impeding in any way the freedom of capital 18. Financial institutions reporting their suspicions movements. should comply with instructions from the competent 23. Countries should consider the feasibility and util- authorities. ity of a system where banks and other financial 19. Financial institutions should develop programs institutions and intermediaries would report all against money laundering. These programs should domestic and international currency transactions include, as a minimum (1) the development of inter- above a fixed amount, to a national central agency nal policies, procedures and controls, including the with a computerized data base, available to com- designation of compliance officers at management petent authorities for use in money laundering level, and adequate screening procedures to ensure cases, subject to strict safeguards to ensure proper high standards when hiring employees; (2) an use of the information. ongoing employee training program; (3) an audit 24. Countries should further encourage in general the function to test the system. development of modern and secure techniques of money management, including increased use of Measures to Cope with the Problem cheques, payment cards, direct deposit of salary of Countries with No or Insufficient cheques, and book entry recording of securities, Anti-Money-Laundering Measures as a means to encourage the replacement of cash 20. Financial institutions should ensure that the princi- transfers. ples mentioned above are also applied to branches 25. Countries should take notice of the potential for and majority owned subsidiaries located abroad, abuse of shell corporations by money launderers and especially in countries which do not or insuffi- should consider whether additional measures are ciently apply these Recommendations, to the extent required to prevent unlawful use of such entities. 258 Payments and Securities Settlement Implementation, and Role of Regulatory be given responsibility for gathering and dissemi- and other Administrative Authorities nating information to competent authorities about the latest developments in money laundering and 26. The competent authorities supervising banks or money laundering techniques. Central banks and other financial institutions or intermediaries, or bank regulators could do the same on their net- other competent authorities, should ensure that work. National authorities in various spheres, in the supervised institutions have adequate pro- consultation with trade associations, could then grams to guard against money laundering. These disseminate this to financial institutions in individ- authorities should cooperate and lend expertise ual countries. spontaneously or on request with other domestic judicial or law enforcement authorities in money laundering investigations and prosecutions. Exchange of information relating 27. Competent authorities should be designated to to suspicious transactions ensure an effective implementation of all these Recommendations, through administrative super- 32. Each country should make efforts to improve a vision and regulation, in other professions dealing spontaneous or "upon request" international infor- with cash as defined by each country. mation exchange relating to suspicious transac- 28. The competent authorities should establish guide- tions, persons, and corporations involved in those lines which will assist financial institutions in transactions between competent authorities. Strict detecting suspicious patterns of behavior by their safeguards should be established to ensure that this customers. It is understood that such guidelines exchange of information is consistent with national must develop over time, and will never be exhaus- and international provisions on privacy and data tive. It is further understood that such guidelines protection. will primarily serve as an educational tool for financial institutions' personnel. 29. The competent authorities regulating or super- Other Forms of Cooperation vising financial institutions should take the nec- Basis and means for cooperation essary legal or regulatory measures to guard against in confiscation, mutual assistance, control or acquisition of a significant participa- and extradition tion in financial institutions by criminals or their confederates. 33. Countries should try to ensure, on a bilateral or multilateral basis, that different knowledge stan- D. STRENGTHENING OF dards in national definitions--i.e., different stan- INTERNATIONAL COOPERATION dards concerning the intentional element of the Administrative Cooperation infraction--do not affect the ability or willingness of countries to provide each other with mutual legal Exchange of general information assistance. 30. National administrations should consider record- 34. International cooperation should be supported by a ing, at least in the aggregate, international flows of network of bilateral and multilateral agreements cash in whatever currency, so that estimates can and arrangements based on generally shared legal be made of cash flows and reflows from various concepts with the aim of providing practical mea- sources abroad, when this is combined with central sures to affect the widest possible range of mutual bank information. Such information should be assistance. made available to the International Monetary Fund 35. Countries should be encouraged to ratify and imple- and the Bank for International Settlements to facil- ment relevant international conventions on money itate international studies. laundering such as the 1990 Council of Europe Con- 31. International competent authorities, perhaps Inter- vention on Laundering, Search, Seizure and Confis- pol and the World Customs Organisation, should cation of the Proceeds from Crime. Recommendations of the Financial Action Task Force on Money Laundering 259 Focus of improved mutual assistance also be arrangements for coordinating seizure and on money laundering issues confiscation proceedings which may include the sharing of confiscated assets. 36. Cooperative investigations among countries' appro- 39. To avoid conflicts of jurisdiction, consideration priate competent authorities should be encouraged. should be given to devising and applying mecha- One valid and effective investigative technique in nisms for determining the best venue for prosecution this respect is controlled delivery related to assets of defendants in the interests of justice in cases that known or suspected to be the proceeds of crime. are subject to prosecution in more than one country. Countries are encouraged to support this technique, Similarly, there should be arrangements for coordi- where possible. nating seizure and confiscation proceedings which 37. There should be procedures for mutual assistance may include the sharing of confiscated assets. in criminal matters regarding the use of compul- 40. Countries should have procedures in place to extra- sory measures including the production of records dite, where possible, individuals charged with a by financial institutions and other persons, the money laundering offense or related offenses. With search of persons and premises, seizure and obtain- respect to its national legal system, each country ing of evidence for use in money laundering inves- should recognize money laundering as an extra- tigations and prosecutions, and in related actions in ditable offense. Subject to their legal frameworks, foreign jurisdictions. countries may consider simplifying extradition by 38. There should be authority to take expeditious allowing direct transmission of extradition requests action in response to requests by foreign countries between appropriate ministries, extraditing persons to identify, freeze, seize, and confiscate proceeds based only on warrants of arrests or judgments, or other property of corresponding value to such extraditing their nationals, and/or introducing a proceeds, based on money laundering or the crimes simplified extradition of consenting persons who underlying the laundering activity. There should waive formal extradition proceedings. 8 A P P E N D I X Systemically Important Payment Systems in Latin America and the Caribbean Results of the Self-Assessment Exercises The Committee on Payment and Settlement Systems' sponding central banks did not assign a specific grade, core principles for systemically important payment sys- either because such systems are currently being reformed tems (CPSIPS) has become a key component in the or because these central banks abstained from providing assessments of financial systems aimed at identifying such grades. potential weaknesses. Following up on the international At first glance, grades assigned by self-assessors tend debate, in 2002 and 2003 the Working Group on Pay- to be high. In most cases, countries report either an ment System Issues of LAC promoted among its mem- "observed" or "broadly observed" grade. Nevertheless, bers carrying out a self-assessment exercise of the participating central banks recognize deficiencies par- region's systemically important payment systems ticularly as regards to CPs I, II, and X, as well as in (SIPS) versus the Committee on Payment and Settle- responsibilities A, B, and C. ment Systems' CPSIPS. These grades neither fully coincide with the opinions of The general results of these exercises, together with an the authors (see figures A.1 and A.2), nor with some accompanying analysis of the current situation and the shortcomings expressed by the own self-assessors. potential future written by Arango C. and J. Bernal, were published in June 2003 in the Western Hemisphere Pay- Additionally, when these grades are compared to those ments and Securities Clearance and Settlement Initia- obtained from financial sector assessment program mis- tive's research series (Arango and Bernal 2003). This sions to developing countries worldwide, which include appendix summarizes the main outcome of this effort, LAC as well as other regions, it may be concluded that to which the central banks of the following 15 countries grades assigned by self-assessors tend to be more opti- contributed: Argentina, Belize, Bolivia, Brazil, Colom- mistic than those assigned by the international experts bia, Costa Rica, Chile, Ecuador, El Salvador, Guyana, comprising the financial sector assessment program team. Mexico, Organization of Eastern Caribbean States, Peru, In an attempt to show a simplified picture of the relative Trinidad & Tobago, and the República Bolivariana de positions of national SIPS throughout the region, the Venezuela. authors conceived a risk versus efficiency matrix and grouped those countries for which the combination of GENERAL ASSESSMENT OF THE CURRENT risk and efficiency, according to the relative weights SITUATION OF SIPS IN THE LATIN AMERICA given by the authors, produces a similar overall result. AND THE CARIBBEAN REGION The number of countries whose SIPSs fall under each Table A.13 summarizes the grades given by participat- risk-efficiency category is plotted on figure A.1.1 ing central banks regarding the degree of their compli- 1 ance with the 10 core principles and the four central In this context, "risk" refers to credit risks being faced by the cen- tral bank. In this matrix, the desired stages are those characterized bank responsibilities. It should be noted that out of 29 by increased efficiency and diminished risk (that is, the bottom right payment systems identified as SIPS, in nine the corre- corner). 261 262 Payments and Securities Settlement Table A.13 Observance of the Core Principles in the Latin America and the Caribbean Region According to the Self-Assessment Exercise Observance of Each Core Principle and Central Bank Responsibility Level of Observance I II III IV V VI VII VIII IX X A B C D Observed 25% 55% 35% 60% 35% 85% 60% 42% 70% 42% 50% 50% 8% 75% Broadly observed 35% 10% 20% 35% 5% 15% 30% 37% 15% 26% 14% 14% 17% 8% Partially observed 40% 35% 30% 5% 20% 0% 10% 21% 15% 32% 36% 36% 42% 17% Not observed 0% 0% 15% 0% 10% 0% 0% 0% 0% 0% 0% 0% 0% 0% Not applicable 0% 0% 0% 0% 30% 0% 0% 0% 0% 0% 0% 0% 33% 0% Total 20 20 20 20 20 20 20 19 20 19 14 14 12 12 Source: Working Group on Payment System Issues of Latin America and the Caribbean member central banks self-assessment reports. In figure A.1, countries whose SIPS are located in the ple, by implementing an early session for large-value upper-left-hand section are generally those in which cheques, but most important, by introducing RTGS sys- deferred net settlement systems based on cheques are pre- tems for time-critical, large-value payment transactions. dominant. Although probably fulfilling, at present, the This is particularly true for medium-sized economies. In majority of needs in smaller economies, these systems this context, their relative position would move to the nevertheless possess significant shortcomings, including right (that is, more efficiency) as they develop efficient the lack of appropriate mechanisms to ensure the timely intraday liquidity facilities secured with liquid collaterals. completion of daily settlements in the event of an inabil- The group of the larger countries shows a significant ity to settle by one or more participants, and lengthy set- heterogeneity. In one case, the system may well be con- tlement cycles (one and even two weeks, in some cases). sidered efficient, but it is characterized by high moral Countries whose SIPS are more in the center of the hazard and credit risk for the central bank because it is spectrum (that is, less risk and more efficiency) have compelled to ensure settlement finality by authorizing made greater efforts to increase efficiency--for exam- current account overdrafts. Within this group, there is also the case of a deferred net settlement system con- sidered safe, due to the existence of "sound loss sharing Figure A.1. Current Topography of SIPS in the guarantees." Finally, there is the case of a remarkably Latin America and the safe and very efficient system, which, in the authors' Caribbean Region opinion, may even be seen as a reference point for pay- ment systems worldwide. Number of countries Efficiency REFORM PROCESSES CURRENTLY UNDER WAY Low Medium Medium-high High Risk Along with their self-assessment exercises, the major- ity of the participating central banks, recognizing the 1 High existence of shortcomings in their SIPS and their effort toward achieving compliance with the CPSIPS, pro- Medium 4 3 1 vided information on reforms currently under way regarding their SIPS. Medium- 1 1 3 low In general, the most relevant aspects of the reforms being proposed throughout the LAC region are: Low 1 Enhanced operational efficiency Technological upgrades Systemically Important Payment Systems in Latin America and the Caribbean 263 Improved legal framework, including (1) further example, the implementation of algorithms for liq- clarification of the regulatory and oversight roles of uidity optimization (for example, offsetting queues to the central bank, (2) assurance of settlement final- produce an effect similar to that of hybrid systems), ity, and (3) in fewer cases, the protection of netting or in providing price incentives to the system's par- arrangements. ticipants to reduce risks and to have the system func- tioning more smoothly. Therefore, those countries that at present are highly dependent on cheques for large-value interbank payment Finally, larger countries are focusing their efforts on the transactions are moving toward increasing the operational approval of a payments system law that, among other efficiency of the cheque clearinghouse. For this purpose, features, would give certainty to settlement finality, pro- some are introducing magnetic ink character recognition tect netting arrangements, protect obligations in SIPS (MICR) technology to enable the electronic transmission from insolvency procedures, clarify the regulatory and of data that will facilitate the interbank exchange. Some oversight powers of the central bank regarding payment countries are also introducing tools to enable participants systems, and allow for a better allocation of risks among to have better control over their balances at the central the system's participants and operators. The authors bank (for example, real-time balances provided over the believe that, from the information that was received, telephone). Some others are introducing basic, low-cost these countries will be the first to arrive at the preferred (including semimanual) RTGS systems. risk-efficiency scenarios. Nevertheless, it must be stressed that some inefficien- Figure A.2 shows the new relative positions given by the cies and risks will persist even after the reforms for the authors to participating countries, having considered the countries located in the upper-left-hand section of the expected outcomes of the reforms in a period of two matrix. No major changes are being considered so far in years or less. The authors believe that, although some aspects such as prevailing high-reserve requirements legal risks and other risks for the central bank will per- and continued risk exposure of the central bank as sist, the reforms under way will greatly improve the lender of last resort, which is supposed to guarantee the observance with the CPs for most SIPS in the LAC finality of the cheque clearing arrangements. region. Nevertheless, according to the information avail- able, there are reasons to conclude that most of the coun- In addition, some of these countries have migrated to tries will still face shortcomings in their legal framework RTGS systems but their reform processes appear incom- and that much more has to be done to improve the risk plete because they do not seem to have given sufficient balance for cheque-based SIPS. consideration to the need for an efficient liquidity pro- visioning mechanism for such systems, which in turn requires an efficient interface with the securities settle- Figure A.2. Possible Risk-Efficiency Topography ment system (SSS). after Completion of Reforms Countries at the center of the risk-efficiency spectrum are mainly focusing their efforts in the following aspects: Number of countries Efficiency Countries in which deferred net settlement is the pre- Low Medium Medium-high High vailing SIPS are focusing on improving the soundness Risk of their legal framework, including the clarification of High the regulatory and oversight roles of the central bank. Countries that already have implemented RTGS sys- Medium 1 3 tems with no intraday liquidity facilities are focusing on the upgrade of their SSSs in order to achieve effec- Medium- 4 2 1 tive interoperability between the two, and to reduce low liquidity risks and costs. Countries that already have RTGS systems with Low 3 1 intraday liquidity facilities are paying more attention to increasing the efficiency of their SIPS through, for References Adams, R. M., P. W. Bauer, and R. C. Sickles. 2004. 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Index Argentina The Bahamas risk management tools and settlement clearing and settlement processes, 136 clearing and settlement processes, 136 asset, 144 cross-border payments, 94 cross-border payments, 94 securities CSDs' organizational arrangements, 174 CSDs' organizational arrangements, dematerialization and immobiliza- custody arrangements, 159 174 tion, 141 FX transactions, 94 custody arrangements, 159 depositories, links between, 182 government payments and collections, FX transactions, 94 market, 106 85 government payments and collections, SSSs, 114­115 interbank money market, 99 85 legal issues, 124 legal issues, 28­29 legal issues, 29 operational issues, 151 LVPS LVPS features, 46 regulatory and oversight issues, 166 features, 46 oversight and cooperative arrange- Brazil operational risk management, 60 ments, 188 clearing and settlement processes, 136 pricing policies, 63 retail settlement systems, 68 cross-border payments, 94 oversight and cooperative arrange- risk management tools and settlement CSDs' organizational arrangements, ments, 188 asset, 144 174­176 retail settlement systems, 67­68 securities custody arrangements, 159 risk management tools and settlement dematerialization and immobiliza- FX transactions, 94 asset, 144 tion, 141 government payments and collections, securities depositories, links between, 182 86 dematerialization and immobiliza- market, 106 interbank money market, 99 tion, 141 SSSs, 114 legal issues, 30­31 depositories, links between, 182 legal issues, 124 LVPS market, 106 operational issues, 151 features, 47­48 SSSs, 114 regulatory and oversight issues, 166 operational risk management, 60 legal issues, 124 banknotes and coins in circulation, pricing policies, 63 operational issues, 151 223­224 oversight and cooperative arrange- regulatory and oversight issues, 166 Bolivia ments, 189­190 Asociación Latinoamericana de Inte- gración, 93 clearing and settlement processes, 136 retail settlement systems, 69­70 assessment, SSSs cross-border payments, 94 risk management tools and settlement counterparts, 24 CSDs' organizational arrangements, asset, 144­145 criteria, 23 174 securities expert, 23 custody arrangements, 159 dematerialization and immobiliza- methodology, 24­25 FX transactions, 94 tion, 141 obstacles, 24 government payments and collections, depositories, links between, 182 preparation, 23­24 86 market, 107 process, 22­23 legal issues, 29­30 SSSs, 115 tools, 21­26 LVPS features, 47 legal issues, 124­125 ATMs and cash dispensers, 84, 226­227 oversight and cooperative arrange- operational issues, 151­152 automated clearing houses (ACHs), ments, 189 regulatory and oversight issues, 166 83­84, 85 retail settlement systems, 68­69 broker-dealers, 149, 241 271 272 Index capital, demand and supply, 17 infrastructure, 17­18 custody arrangements, 160 Caribbean Common Market, 93 key issues, 18 FX transactions, 95 cash, 7 observations, 135, 138­139 government payments and collections, banknotes and coins in circulation, processes, 134­139 86 223­224 status in the region, 135­138 interbank money market, 100 money settlements, CCP, 251 "Clearing and Settlement Best Practices legal issues, 32­33 payments, 11 Report," 14 LVPS cashless payment instruments, indicators Colombia features, 50 of use, 227­230 clearing and settlement processes, 136 operational risk management, 60 central banks, 22, 98, 217 cross-border payments, 95 oversight and cooperative arrangements, internal organization, 186 CSDs' organizational arrangements, 192 money, 7 176­177 retail settlement systems, 71­72 oversight function, 18­19, 202, 218, 219 custody arrangements, 160 risk management tools and settlement responsibilities, 18­19 FX transactions, 95 asset, 145 role/function, 148­149, 186, 215 government payments and collections, securities central counterparties (CCPs), 249 86 dematerialization and immobilization, CPSS­IOSCO recommendations, interbank money market, 100 141 15­16, 25­26, 251­252 legal issues, 31­32 depositories, links between, 182 risk, 139, 252 LVPS market, 108 trades, 139 features, 49­50 SSSs, 117 central securities depositories (CSDs), 210, operational risk management, 60 legal issues, 126 241, 249, 250 pricing policies, 63 operational issues, 153­154 context, 173 oversight and cooperative arrangements, regulatory and oversight issues, 167 cross-border links, 181 191 counterparties. See central counterparties cross-border trade, 250 retail settlement systems, 71 credit, 16 observations, 173, 181 risk management tools and settlement exposures, CCP, 251 SSSs, 173­181 asset, 145 risk, 139, 249 status in the regions, 173, 174­180 securities cross-border settlement and transactions, cheques dematerialization and immobilization, 11­12, 181­184 clearinghouse, 216 141 categories, 11 settlements, 64, 147 depositories, links between, 182 clearing and settlement barriers, 16 use, 83 market, 107­108 context, 181 Chile SSSs, 116 CSDs and, 250 clearing and settlement processes, 136 legal issues, 125­126 observations, 181 cross-border payments, 94 operational issues, 152­153 payments, 6, 93 CSDs' organizational arrangements, 176 regulatory and oversight issues, status in the region, 181, 182­184 custody arrangements, 159­160 166­167 custodians, 133, 158, 241, 249 FX transactions, 94 Committee of Wise Men, 16 custody risk, SSSs, 157­158 government payments and collections, Committee on Payment and Settlement CCP, 251 86 Systems (CPSS), vii, 261 context, 157­158 interbank money market, 99 core principles, 22, 64, 247 observations, 158 legal issues, 31 guidance for NPS development, 253 status in the region, 158, 159­165 LVPS integrated approach, 5­7 customers features, 48­49 remittance services, 92­93 assets, bankruptcy and, 218 pricing policies, 63 Committee on Payment and Settlement identification, 256 oversight and cooperative arrangements, Systems­International Organization message flows, from and to domestic 190­191 of Securities Commissions users, 237 retail settlement systems, 70­71 (CPSS­IOSCO) recommendations, needs, 84­85 risk management tools and settlement 249­250 securities services, 16 asset, 145 central counterparties, 25­26, 251­252 securities clearing and settlement processes, 134 Declaration of Nuevo León, 8 dematerialization and immobilization, SSSs, 24, 149 default procedures, CCP, 251 141 concentration risk, 149 deferred net settlement systems, 6 depositories, links between, 182 consumers. See customers delivery vs. payment (DvP), 139, 140, 147, market, 107 Continuous Link Settlement Bank (CLS 218 SSSs, 115­116 Bank), 6, 11­12 dematerialization and immobilization, legal issues, 125 correspondent bank, 241 securities, 140, 149 operational issues, 152 Costa Rica development priorities, PSSSs, 207 regulatory and oversight issues, 166 clearing and settlement processes, 136 digital signatures, 123 clearing and settlement, 17 cross-border payments, 95 see also electronic technologies context, 134­135 CSDs' organizational arrangements, 177 disaster preparedness, 9 Index 273 Dominican Republic government payments and collections, observations, 90­91 clearing and settlement processes, 137 87 status in the region, 85­90 cross-border payments, 95 interbank money market, 100 Guatemala CSDs' organizational arrangements, 177 legal issues, 34­35 clearing and settlement processes, 137 custody arrangements, 160 LVPS cross-border payments, 95 FX transactions, 95 features, 51 CSDs' organizational arrangements, 178 government payments and collections, pricing policies, 63 custody arrangements, 161 87 oversight and cooperative arrangements, FX transactions, 95 interbank money market, 100 193­194 government payments and collections, legal issues, 33 retail settlement systems, 74 87 LVPS features, 50 risk management tools and settlement interbank money market, 100 oversight and cooperative arrangements, asset, 146 legal issues, 35 192­193 securities LVPS retail settlement systems, 72­73 dematerialization and immobilization, features, 51­52 risk management tools and settlement 142 operational risk management, 60 asset, 145 depositories, links between, 182 oversight and cooperative arrangements, securities market, 109 194 dematerialization and immobilization, SSSs, 117 retail settlement systems, 74­75 142 legal issues, 127 risk management tools and settlement depositories, links between, 182 operational issues, 154 asset, 146 market, 108 regulatory and oversight issues, 168 securities electronic technologies, 158, 240 dematerialization and immobilization, SSSs, 117 communication networks, 12 142 legal issues, 126 digital signatures, 45, 123 depositories, links between, 182 operational issues, 154 documents, 45 market, 109 regulatory and oversight issues, 167 payment, 84, 216 SSSs, 117­118 systems, 2 legal issues, 127 Emerging Markets Committee, 14 operational issues, 154 Ecuador regulatory and oversight issues, 168 clearing and settlement processes, 137 cross-border payments, 95 financial systems CSDs' organizational arrangements, 177 diligence, 256­257 Honduras custody arrangements, 160 market liberalization, 2 clearing and settlement processes, 137 FX transactions, 95 money laundering, combating, 256 cross-border payments, 96 government payments and collections, payment system and, vii CSDs' organizational arrangements, 178 87 resources, CCP, 251 custody arrangements, 161 interbank money market, 100 sophistication, PSSSs, 207 FX transactions, 96 legal issues, 33­34 Financial Stability Forum, 14 government payments and collections, LVPS features, 51 fraud, reduction, 158 88 oversight and cooperative arrangements, funds transfer systems, 2 legal issues, 35­36 193 features, 232­233 LVPS features, 52 retail settlement systems, 73 interbank, 231 oversight and cooperative arrangements, risk management tools and settlement operating hours, 234 194 asset, 145­146 fungible securities, 140, 147 retail settlement systems, 75­76 securities FX transactions, 11­12, 91­98 risk management tools and settlement dematerialization and immobilization, context, 91­92 asset, 146 142 by country, 94­97 securities depositories, links between, 182 observations, 98 dematerialization and immobilization, market, 108­109 wholesale, 98 142 SSSs, 117 depositories, links between, 182 legal issues, 126­127 market, 109 operational issues, 154 Giovannini Group, 16 SSSs, 118 regulatory and oversight issues, 167 Global Equity Market, 12 legal issues, 127 El Salvador globalization, SSSs and, 16­18 operational issues, 154 clearing and settlement processes, 137 governance, 250 regulatory and oversight issues, 168 cross-border payments, 95 CCP, 252 CSDs' organizational arrangements, CSDs, 173, 181 177­178 remittance systems, 93 infrastructure custody arrangements, 161 government payments, 85­91 economic development and, 1 FX transactions, 95 context, 85 PSSSs, 207 274 Index infrastructure (continued) operational risk management, 60­62, 65 depositories, links between, 182­183 retail settlement systems, 67 pricing policies, 63­64 market, 110 securities settlement, 218 status in the region, 45­59 SSSs, 118­119 interbank money market, 98­103, 217 legal and regulatory framework, 28­43, legal issues, 128 context, 98­99 215­216 operational issues, 154 observations, 102­103 context, 113, 123 regulatory and oversight issues, PSSSs, 207 by country, 28­43, 124­132 168­169 status in the region, 99­102 CSDs, 181 migrant workers, remittances, 8­9 interbank payment obligations, 2 custody risk, 158 monetary policy, vii, 2, 207 International Monetary Fund­World Bank, definitions, 132 money laundering, 10, 217 core principles for SIPS, 22­23 enforceability, 134 international cooperation, 258­259 International Organization of Securities issues, 44­45 measures to avoid, 257 Commissions (IOSCO), 13, 14 money laundering, combating, 255 problem countries, 257 CPSS­IOSCO recommendations, 15­16, observations, 44­45, 132­134 provisional measures and confiscation, 25­26, 251­252 PSSSs, 206­207 255 International Securities Services Associa- remittance systems, 93 recommendations of the Financial tion, 13­14 retail payment systems, 66 Action Task Force, 255­259 International Standards for Securities Set- risk, CCP, 251 regulatory and administrative authori- tlement Systems, evolution of, 15 SSSs, 115­134 ties' roles, 258 intervention trigger, 44 updating, 134 scope, 255 liquidity, 10, 12 money settlements, CCP, 251 clearing and settlement processes, 135 Jamaica constraints, 148 clearing and settlement processes, 137 interbank money market, 102 national payment systems (NPS), 2­3, cross-border payments, 96 PSSSs, 207 208­210, 219­220 CSDs' organizational arrangements, 178 risk, 249 CPSS guidance for development, 253 custody arrangements, 161 principles, 209 FX transactions, 96 National Payments and Securities Settle- government payments and collections, margin requirements, CCP, 251 ment Council (NPSSC), 211­212 88 markets Netherlands Antilles interbank money market, 100 infrastructure, 10 clearing and settlement processes, 137 legal issues, 36 investors, clearing and settlement cross-border payments, 96 LVPS processes, 134 CSDs' organizational arrangements, 179 features, 53 performance, 66 custody arrangements, 163 operational risk management, 61 remittance systems, 93 FX transactions, 96 oversight and cooperative arrangements, securities, 106­113 government payments and collections, 195 SSSs and, 16­18 88 retail settlement systems, 76 Mexico interbank money market, 101 risk management tools and settlement clearing and settlement processes, 137 legal issues, 37­38 asset, 146 cross-border payments, 96 LVPS securities CSDs' organizational arrangements, features, 54­55 dematerialization and immobilization, 178­179 operational risk management, 61 142 custody arrangements, 161­162 pricing policies, 63 depositories, links between, 182 FX transactions, 96 oversight and cooperative arrangements, market, 110 government payments and collections, 196­197 SSSs, 118 88 retail settlement systems, 77­78 legal issues, 128 interbank money market, 101 risk management tools and settlement operational issues, 154 legal issues, 36­37 asset, 146 regulatory and oversight issues, 168 LVPS securities features, 53­54 dematerialization and immobilization, operational risk management, 61 143 knowledge base, increasing, PSSSs, 208 pricing policies, 63 depositories, links between, 183 oversight and cooperative arrangements, market, 110 195­196 SSSs, 119 Lamfalussy Recommendations, vii, 14 retail settlement systems, 76­77 legal issues, 128­129 large-value payment systems (LVPs), 6­7, risk management tools and settlement operational issues, 155 45­65, 217 asset, 146 regulatory and oversight issues, 170 context, 45 securities Nicaragua interbank money market, 102­103 dematerialization and immobilization, clearing and settlement processes, 137 observations, 64­65 142 cross-border payments, 96 Index 275 CSDs' organizational arrangements, 179 legal issues, 129 regulatory and oversight issues, 171 custody arrangements, 163 operational issues, 155 participation requirements, CCP, 251 FX transactions, 96 regulatory and oversight issues, payments government payments and collections, 170­171 cards, 225 88 oversight, 18­19, 44, 165, 173, 185, circuits, 84 interbank money market, 101 186­203, 218, 219, 250 cross-border nature, 11 legal issues, 38 CCP, 252 media, deposit-taking entities, 225 LVPS central bank's role, 186 payment settlement systems (PSSs), 13 features, 55 legal foundation, 201 payment systems, 1, 2 operational risk management, 61 over-the-counter markets, 138, 210, 241 1970s and 1980s, vii pricing policies, 63 assessment, 27­103 oversight and cooperative arrangements, country assessments and date, 27 197 Panama infrastructure, remittance systems, 92 retail settlement systems, 78 clearing and settlement processes, 137 objectives, 201­202 risk management tools and settlement cross-border payments, 97 reform, pillars of, 212 asset, 146 CSDs' organizational arrangements, 179 scope, 5 securities custody arrangements, 163 systemically important, 261­263 dematerialization and immobilization, FX transactions, 97 payments and securities settlement systems 143 government payments and collections, (PSSSs) reforms depositories, links between, 183 89 action plan, 212­213 market, 110­111 interbank money market, 101 assessment, 205­208 SSSs, 119 legal issues, 39­40 implementing, 205­213 legal issues, 129 LVPS features, 56 institutional roles, 210 operational issues, 155 oversight and cooperative arrangements, NPS role, 208­210 regulatory and oversight issues, 170 198 pillars of reform, 212 retail settlement systems, 79 private sector, engaging, 211­212 risk management tools and settlement statistics, 221­237 "Objectives and Principles of Securities asset, 146 Peru Regulation," 14 securities clearing and settlement processes, 137 operational issues, SSSs, 149­157 dematerialization and immobilization, cross-border payments, 97 context, 149­150 143 CSDs' organizational arrangements, observations, 150, 157 depositories, links between, 183 179­180 status of the region, 150, 151­157 market, 111 custody arrangements, 163 operational risk, 10, 249 SSSs, 120 FX transactions, 97 CCP, 251 legal issues, 129 government payments and collections, Organization of Eastern Caribbean States operational issues, 155 89 (OECS) regulatory and oversight issues, 171 interbank money market, 101 clearing and settlement processes, 137 Paraguay legal issues, 41 cross-border payments, 96 clearing and settlement processes, 137 LVPS CSDs' organizational arrangements, 179 cross-border payments, 97 features, 57­58 custody arrangements, 163 CSDs' organizational arrangements, 179 operational risk management, 62 FX transactions, 96 custody arrangements, 163 pricing policies, 63 government payments and collections, FX transactions, 97 oversight and cooperative arrangements, 89 government payments and collections, 198­199 legal issues, 38­39 89 retail settlement systems, 80­81 LVPS legal issues, 40 risk management tools and settlement features, 56 LVPS features, 57 asset, 146 operational risk management, 61 oversight and cooperative arrangements, securities pricing policies, 63 198 dematerialization and immobilization, oversight and cooperative arrangements, retail settlement systems, 79­80 143 197 risk management tools and settlement depositories, links between, 183 retail settlement systems, 78­79 asset, 146 market, 112 risk management tools and settlement securities SSSs, 121 asset, 146 dematerialization and immobilization, legal issues, 130 securities 143 operational issues, 155­156 dematerialization and immobilization, depositories, links between, 183 regulatory and oversight issues, 171 143 market, 111­112 physical delivers, CCP, 251 depositories, links between, 183 SSSs, 120 prime savers, 17, 18 market, 111 legal issues, 130 public policy goals, retail payment sys- SSSs, 120 operational issues, 155 tems, 66­67 276 Index public sector regulators, role, 165 clearing and settlement processes, 134 institutions, 216­217 services value chain, 17 international, 13­14, 15 payment systems and, 90­91 securities clearance and settlement sys- retail settlement systems, 66­67 tems, 1, 2, 239 settlement cycle, 135, 138 participants, 240­241 system operators, 173 real-time gross settlements (RTGS), 6, 14, procedures, 239­240, 241­242, 243 stock exchanges, clearing and settlement 64­65, 140, 216 securities depositories, 140, 147, 148­149, processes, 135, 138 interbank money market, 103 218 SWIFT message flows, from and to SSSs, 132 cross-border links, 218 domestic users, 237 recordkeeping rules, 256 securities markets, 106­113 systematically important payment systems reforms, 219­220 by country, 106­113 (SIPS) currently under way, 262­263 confirmation of trades, 135 core principles, 22­23 possible risk-efficiency topography after interbank money market, 103 self-assessment and, 261, 262, 263 completion, 263 laws, 132 regulatory and oversight issues mature and liquid, 135 agencies, securities, 165 securities settlement systems (SSSs), trade authorities, NPS, 210 13­14, 14­15, 105­184, 217 affirmation, 245 response, 10 assessment methodology, 24­25 clearance, 242, 243­244 SSSs, 98, 158­173 clearing and settlement process, clearing and settlement processes and, context, 158, 165 134­139, 217­218 134­135 observations, 165, 173 by country, 114­123 comparison, 245 status in the region, 165, 166­172 country assessments and date, 105 confirmation, 245, 249 remittances, 217 CPSS­IOSC recommendations, 24 execution phase, 242, 243 growing flows, 8­9 cross-border settlement, 181­184 matching, 134­135 specialized institutions, 98 CSDs' organizational arrangements, settlement, 244 remittance services 173­181 Trans-European Automated Real-Time costs, 8 custody risk, 157­158 Gross Settlement Express Transfer CPSS principles, 92­93 features, 235­236 System 2 (TARGET 2), 12 international policy coordination, 9 infrastructure, 157 transparency, 218­219, 250 providers, role, 93 integration, 148 arrangements, 188­201 task force on, 9 legal issues, 113­134 CCP, 252 repo, definition, 133 market infrastructure, globalization and, observations, 201­203 retail cross-border payments, 91, 216, 217 16­18 oversight and cooperation, 185­204 retail payment instruments and services, 84 operational issues, 149­157 remittance systems, 92 unclear directions, 7 regulatory and oversight issues, Trinidad and Tobago retail settlement systems 158­173 clearing and settlement processes, 137 context, 65­66 scope, elements, participants, and cross-border payments, 97 legal and regulatory framework, 66 processes, 239­246 CSDs' organizational arrangements, 180 observations, 83­85 settlement risk, 139­149 custody arrangements, 163­164 standards and infrastructure, 66­67 settlement FX transactions, 97 status in the region, 67­83 agent, 241 government payments and collections, risk, 44 arrangements, 14 89 CCP, 251 final, 249 interbank money market, 101­102 concentration, 149 finality, concept of, 44, 45 legal issues, 41­42 operational, 10, 249 obligations, calculation, 242­245 LVPS settlement, 139­149 procedure, 138 features, 58 risk management, 93, 147, 249 rolling, 249 operational risk management, 62 clearing and settlement processes, 135 systems pricing policies, 64 cross-border payments, 98 gross, 245 oversight and cooperative arrangements, FX transactions, 98 net, 245­246 199­200 operational reliability, resilience, and retail settlement systems, 81 integrity, 9­10 risk management tools and settlement securities settlement risk, SSSs, 139­149 asset, 146 automatic lending and borrowing facili- context, 139­140 securities ties, 138 observations, 140, 147­149 dematerialization and immobilization, dematerialization and immobilization, status in the region, 140, 141­147 143 149, 158 short-selling, 149 depositories, links between, 183­184 lending and borrowing, 133, 138­139, signatures, digital, 123 market, 112 249 Single European Payment Area, 12 SSSs, 121­122 ownership transfer, finality, 140 standards, vii, 240, 250 legal issues, 130­131 Index 277 operational issues, 156 dematerialization and immobilization, retail settlement systems, 82­83 regulatory and oversight issues, 143 risk management tools and settlement 171­172 depositories, links between, 184 asset, 147 market, 112­113 securities SSSs, 122 dematerialization and immobilization, legal issues, 131 143 Uruguay operational issues, 156 depositories, links between, 184 clearing and settlement processes, 138 regulatory and oversight issues, 172 market, 113 cross-border payments , 97 SSSs, 122­123 CSDs' organizational arrangements, 180 legal issues, 131­132 custody arrangements, 164 Venezuela, R.B. de operational issues, 156­157 FX transactions, 97 clearing and settlement processes, 138 regulatory and oversight issues, 172 government payments and collections, cross-border payments, 97 90 CSDs' organizational arrangements, 180 interbank money market, 102 custody arrangements, 164­165 legal issues, 42 Western Hemisphere Payments and Securi- FX transactions, 97 LVPS ties Clearance and Settlement Forum government payments and collections, features, 58­59 (WHF), vii, 3, 4 90 operational risk management, 62 assessments, vii interbank money market, 102 pricing policies, 64 Western Hemisphere Payments and Securi- legal issues, 43 oversight and cooperative arrangements, ties Clearance and Settlement Initia- LVPS 200 features, 59 tive (WHI), vii, 3, 4, 21 retail settlement systems, 82 operational risk management, 62 assessments, vii risk management tools and settlement pricing policies, 64 asset, 147 oversight and cooperative arrangements, securities 201 "Yellow Books," 21 Eco-Audit Environmental Benefits Statement The World Bank is committed to preserving Endangered Forests and natural resources. The Office of the Publisher has chosen to print Reforming Payments and Securities Settlement Systems in Latin America and the Caribbean on 30 percent postconsumer recycled paper, processed chlorine free. The World Bank has formally agreed to follow the recommended standards for paper usage set by Green Press Initiative--a nonprofit program supporting pub- lishers in using fiber that is not sourced from Endangered Forests. For more information, visit www.greenpressinitiative.org. The printing of this book on recycled paper saved the following: Trees* Solid Waste Waste Water Net Greenhouse Gases Energy 12 570 4,436 1,069 8 * Pounds Gallons Pounds 40" in height and BTUs (millions) 6-8" in diameter P ayments and securities settlement systems are considered critical for the safe and effective functioning of a financial system. In Latin America and the Caribbean, efforts to raise the awareness of the importance of modernizing national payments systems were formalized through the 1999 Western Hemisphere Payments and Securities Clearance and Settlement Initiative (WHI). Reforming Payments and Securities Settlement Systems in Latin America and the Caribbean extracts the main lessons and experiences of the WHI, describing trends in payments and securities settlement systems worldwide and assessing Latin American and Caribbean systems in relation to international standards and best practices. Assessments cover legal and regulatory frameworks, interbank exchange and settlement circuits, retail settlement systems, government payments, foreign exchange and cross-border settlement, the interbank money market, securities settlement systems, and the oversight role of the central bank and its coordination with other authorities and the private sector. ISBN 0-8213-6635-1