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PAYMENTS AND SECURITIES CLEARANCE AND SETTLEMENT SYSTEMS IN PERU AUGUST 2000 CENTRE FOR LATIN AMERICAN MONETARY STUDIES 46259 vol. 1 Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized

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Page 1: PAYMENTS AND SECURITIES CLEARANCE AND …documents.worldbank.org/curated/en/284201468046165187/pdf/462590...payments and securities clearance and settlement systems in peru august

PAYMENTS AND SECURITIES

CLEARANCE AND

SETTLEMENT SYSTEMS

IN PERU

AUGUST 2000

CENTRE FOR LATIN AMERICAN MONETARY STUDIES

46259vol. 1

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PAYMENTS AND SECURITIES CLEARANCE ANDSETTLEMENT SYSTEMS IN PERU

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Primera edición, 2000

Derechos exclusivos en español reservados conforme a la ley© Centro de Estudios Monetarios Latinoamericanos, 2000

Durango 54, México, D.F. 06700ISBN 968-6154-68-X

Impreso y hecho en MéxicoPrinted and made in Mexico

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WORLD BANK

CENTRE FOR LATIN AMERICAN MONETARY STUDIES

WESTERN HEMISPHERE PAYMENTS AND SECURITIES CLEARANCE ANDSETTLEMENT INITIATIVE

PAYMENTS AND SECURITIESCLEARANCE AND

SETTLEMENT SYSTEMSIN PERU

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Foreword

Following a request from the Western Hemisphere Finance Ministers, the World Bank launched in January1999 the Western Hemisphere Payments and Securities Clearance and Settlement Initiative. The WorldBank (WB) in partnership with the Centre for Latin American Monetary Studies (CEMLA) leads this initiative.Its objective is to describe and assess the payments systems of the Western Hemisphere with a view toidentifying possible improvement measures in their safety, efficiency and integrity. To carry out this mandatean International Advisory Council (IAC) was established in March 1999 comprised of experts in the field fromseveral institutions. In addition to representatives from the WB and CEMLA this Council includes membersfrom the: Bank for International Settlements, Bank of Italy, Bank of Portugal, Bank of Spain, Council of SecuritiesRegulators of the Americas (COSRA), European Central Bank, Federal Reserve System, Federal Reserve Bankof New York, Inter-American Development Bank, International Monetary Fund, International Organizationof Securities Regulators (IOSCO), Securities Commission of Spain and U.S. Securities Commission (SEC).

To assure quality and effectiveness, the Initiative includes two important components. First, all studies areconducted with the active participation of country officials and the project builds on the existing work beingundertaken in the respective countries. Second, the Initiative draws on international and national expertiseon the subject, through the IAC, to provide guidance, advice and alternatives to current practices.

The initiative has undertaken a number of activities in order to respond to the Western Hemisphere FinanceMinisters’ request. These include: the preparation of public reports containing a systematic in-depth descriptionof each country’s payments clearance and settlement systems; the delivery of recommendations reports tocountry authorities on a confidential basis; the organization of IAC meetings to review country studies andprovide input for future work; the organization of workshops focusing on issues of particular interest; thecreation of a web-page (www.ipho-whpi.org) to present the outputs of the Initiative and other information ofinterest in the payments systems area; and the promotion of working groups to ensure a continuation of theproject activity.

CEMLA has been acting as Technical Secretariat of the Initiative and is playing a major role in making theprocess sustainable and capable of extension to all the countries in the Hemisphere. To this end, the Initiativehas helped strengthen CEMLA’s in-house expertise. Additionally, practitioners in payments and securitiesclearance and settlement in some countries in the Region have participated in the studies under the Initiative,through CEMLA coordination, and this has contributed to the broadening of knowledge and the transfer ofknow-how within the Region. The endeavors of the working groups in coordination with CEMLA will maintainthe infrastructure created under the Initiative and provide a permanent forum for the countries in the Regionto discuss, coordinate, and add a collective impetus to the work in the area of payments and securitiesclearance and settlement systems.

This Report “Payments and Securities Clearance and Settlement Systems in Peru” is one of the public reportsin the series and was prepared with the active support of the Banco Central de Reserva del Perú and theComisión Nacional Supervisora de Empresas y Valores (CONASEV), the Bank of Spain, the Comisión Nacionaldel Mercado de Valores of Spain and the Inter-American Development Bank participated directly in itspreparation.

Sergio GhigliazzaDirector General

CEMLA

David de FerrantiVice President, LAC Region

World Bank

Manuel ContheVice President, Financial Sector

World Bank

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Acknowledgements

The mission preparing this report visited Peru in June 1999 and consisted of two teams that worked on acoordinated basis in the area of payments and securities clearance and settlement. The payments team wascoordinated by Hook, Andrew T., World Bank (WB) and included Linares, Francisco José, Bank of Spain. Thesecurities team included: De la Lastra, Iñigo, Comisión Nacional del Mercado de Valores of Spain; Dowers,Kenroy, InterAmerican Development Bank (IADB); Guadamillas, Mario, (WB); and Holttinen, Eija, (IADB).Cirasino, Massimo, (WB), and Gallego, Sonsoles, (WB), also assisted in preparing this report. The BancoCentral de Reserva del Perú (BCRP) and the Comisión Nacional Supervisora de Empresas y Valores (CONASEV)also participated in the preparation of this report. Choy Chong, Marilyn coordinated the team of the BCRPthat also included Abanto, Teodoro and Menéndez, Pedro. Pérez Núñez, María coordinated the team fromCONASEV that included: Loncharich, Ivanna; Nakamura, Graciela; and Seraylan, Marcela.

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PAYMENTS AND SECURITIES CLEARANCEAND SETTLEMENT SYSTEMS IN PERU

1 INTRODUCTION ...................................................................................................................11.1 MACROECONOMIC BACKGROUND ..........................................................................................11.2 FINANCIAL SECTOR DEVELOPMENTS ........................................................................................21.3 PAYMENT SYSTEMS DEVELOPMENTS .........................................................................................21.4 SECURITIES MARKETS AND CLEARANCE AND SETTLEMENT .............................................................3

2 INSTITUTIONAL ASPECTS .....................................................................................................52.1 GENERAL LEGAL FRAMEWORK ...............................................................................................5

2.1.1 Payments ............................................................................................................52.1.2 Securities ............................................................................................................62.1.3 Derivatives .........................................................................................................7

2.2 ROLE OF FINANCIAL INSTITUTIONS: PAYMENTS ..........................................................................82.2.1 Banking Institutions ............................................................................................82.2.2 Other Institutions that Provide Payment Services ................................................8

2.3 ROLE OF FINANCIAL MARKETS PARTICIPANTS: SECURITIES ..........................................................102.3.1 Securities Market Participants ...........................................................................10

2.3.1.1 Public and private issuers ...................................................................102.3.1.2 Brokerage firms ..................................................................................102.3.1.3 Institutional investors .........................................................................12

2.3.2 Stock Exchanges ...............................................................................................132.3.3 Securities Clearing and Settlement Institutions .................................................14

2.4 MARKET STRUCTURE AND REGULATION .................................................................................162.5 ROLE OF CENTRAL BANK ...................................................................................................16

2.5.1 Issuance of Coins and Notes ............................................................................172.5.2 Payment Services ..............................................................................................172.5.3 Regulation and Supervision ..............................................................................172.5.4 Monetary Policy Implementation .....................................................................17

2.6 SUPERINTENDENT OF BANKING AND INSURANCE .....................................................................172.6.1 Anti-Money Laundering Measures ....................................................................18

2.7 ROLE OF THE NATIONAL COMMISSION FOR THE SUPERVISION OF COMPANIES AND SECURITIES ..........192.8 ROLE OF OTHER PUBLIC AND PRIVATE ENTITIES ......................................................................19

2.8.1 Payment System Inter-banking Commission (CISPA) ..........................................192.8.2 Peruvian Bankers Association (ASBANC) ...........................................................20

3 PAYMENT MEANS USED BY NON-FINANCIAL INSTITUTIONS.........................................213.1 CASH ............................................................................................................................21

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Perú Report August 2000

iv

3.2 PAYMENT MEANS AND INSTRUMENTS OTHER THAN CASH .........................................................223.2.1 Checks and Direct Debits ................................................................................223.2.2 Funds Transfers.................................................................................................223.2.3 Credit and Debit Cards ....................................................................................22

4 PAYMENTS: INTERBANK AND SETTLEMENT CIRCUITS .....................................................244.1 LOW VALUE PAYMENT SYSTEMS ...........................................................................................24

4.1.1 Check Clearing Networks ................................................................................244.1.1.1 Operations .........................................................................................244.1.1.2 Pricing ...............................................................................................25

4.1.2 Automated Teller Machines and Point-of-sale Networks ...................................254.2 LARGE VALUE PAYMENT TRANSFER SYSTEMS ...........................................................................25

4.2.1 BCRP funds Transfer System (Interbank Payments) ............................................254.2.1.1 System operation ...............................................................................264.2.1.2 Pricing ...............................................................................................284.2.1.3 Risk management ...............................................................................28

4.2.2 Real-Time Gross Settlement System (RTGS) .......................................................284.3 MAIN PROJECTS ...............................................................................................................30

4.3.1 Electronic Clearinghouse Project (CCE) ............................................................30

5 MARKET STRUCTURE AND SECURITIES TRADING ...........................................................325.1 FORMS OF SECURITIES .......................................................................................................32

5.1.1 Securities Represented by Physical Instruments ................................................325.1.2 Book-entry Securities .......................................................................................32

5.2 TYPES OF SECURITIES .........................................................................................................325.2.1 Shares and Securities Representing Equity Rights .............................................335.2.2 Long-term Debt ................................................................................................34

5.2.2.1 Types of bonds ...................................................................................345.2.2.2 Mortgage notes ..................................................................................34

5.2.3 Short-term Debt ...............................................................................................345.3 SECURITIES IDENTIFICATION CODE ........................................................................................355.4 CLASSIFICATION OF SECURITIES ACCORDING TO TYPE OF TRANSFER .............................................35

5.4.1 Nominative Securities ......................................................................................355.4.2 Bearer Securities ..............................................................................................365.4.3 Nominee and Beneficiary ................................................................................36

5.5 TRANSFER OF OWNERSHIP ..................................................................................................365.5.1 Securities Registered with the ICLV ..................................................................365.5.2 Securities not Registered with the ICLV ............................................................37

5.6 PLEDGE OF SECURITIES AS COLLATERAL ..................................................................................375.7 TREATMENT OF STOLEN OR LOST SECURITIES ..........................................................................38

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Perú Report August 2000

5.8 LEGAL MATTERS CONCERNING CUSTODY ...............................................................................385.8.1 Fungibility ........................................................................................................395.8.2 Elimination of Physical Delivery .......................................................................39

5.9 PRIMARY MARKET .............................................................................................................395.10 SECONDARY MARKET ........................................................................................................405.11 STOCK EXCHANGE TRADING ...............................................................................................40

5.11.1 Trading Hours ..................................................................................................415.11.2 Electronic Trading System ................................................................................415.11.3 Types of Transactions ........................................................................................425.11.4 Registration Requirements ................................................................................43

5.12 OVER THE COUNTER MARKET (OTC) ...................................................................................445.12.1 Trading Desk ....................................................................................................445.12.2 Rest of Over-The-Counter Market .....................................................................44

5.13 MARKET SIZE ...................................................................................................................455.13.1 Primary Market ................................................................................................455.13.2 Secondary Market ............................................................................................45

5.14 RECENT TRENDS ...............................................................................................................465.14.1 LSE Designated as “Designated Offshore Securities Market” ............................465.14.2 Cross-border Securities Trading ........................................................................47

6 SECURITIES CLEARANCE AND SETTLEMENT .....................................................................496.1 ORGANIZATIONS AND INSTITUTIONS .....................................................................................49

6.1.1 Clearing and Settlement Institutions .................................................................496.1.2 Central Securities Depository ...........................................................................496.1.3 Participants of Clearing and Settlement Institutions ..........................................50

6.2 SECURITIES REGISTRATION AND CUSTODY PROCEDURES .............................................................516.2.1 Registration and Custody Procedures ...............................................................516.2.2 Securities Deposits in Custody .........................................................................516.2.3 Securities Withdrawal from the System ............................................................526.2.4 Securities Dematerialization ............................................................................52

6.3 SECURITIES CLEARING AND SETTLEMENT PROCESSES ..................................................................536.3.1 Types of Transactions by Trading Circuits .........................................................536.3.2 Flow Chart of Clearing and Settlement Processes .............................................546.3.3 Settlement Stages .............................................................................................56

6.3.3.1 Spot transactions on the Trading-Floor ...............................................566.3.3.2 Repo operations on the Trading-Floor ................................................606.3.3.3 Operation at the Trading Desk ...........................................................61

6.3.4 Repurchase Procedures to Cover Defaults ........................................................616.3.5 New Mechanisms Established by ICLV Regulations to Reinforce Security

in Settlement Procedures .................................................................................62

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Perú Report August 2000

vi

6.3.5.1 Fund provision mechanism: compulsory credit agreementsbetween each direct participant and the respective settlementbank ...................................................................................................62

6.3.5.2 Securities provision mechanism: automated securities loan ...............636.3.5.3 Market risk coverage mechanism: Settlement Fund............................63

6.3.6 Special Settlement Requirements for Foreign Investors.....................................636.3.7 Legal Issues Concerning Clearing and Settlement ............................................64

6.4 SECURITIES LENDING .........................................................................................................656.5 DERIVATIVES CLEARING AND SETTLEMENT ...............................................................................656.6 INTERNATIONAL LINKAGE AMONG CLEARING AND SETTLEMENT INSTITUTIONS ................................656.7 GOVERNMENT SECURITIES ...................................................................................................65

7 THE ROLE OF THE CENTRAL BANK IN INTERBANK SETTLEMENT SYSTEMS....................687.1 RESPONSIBILITIES ..............................................................................................................687.2 PROVISION OF SETTLEMENT SERVICES ....................................................................................687.3 THE ROLE OF THE BCRP IN CROSS-BORDER PAYMENTS ............................................................69

7.3.1 Cross-border Payments Through ALADI ............................................................697.4 PRICING POLICIES .............................................................................................................71

8 SUPERVISION OF SECURITIES CLEARING AND SETTLEMENT SYSTEMS ..........................738.1 CONASEV SUPERVISORY AND STATUTORY RESPONSIBILITIES ......................................................73

8.1.1 THE LIMA STOCK EXCHANGE ...................................................................................738.1.2 CAVALI , ICLV ......................................................................................................738.1.3 The LSE and other Members Participating in the Securities Clearing

and Settlement Processes .................................................................................748.2 CAVALI SUPERVISORY AND STATUTORY RESPONSIBILITY.............................................................758.3 THE LSE SUPERVISORY AND STATUTORY RESPONSIBILITY ............................................................768.4 SAFEGUARD AND SECURITY SYSTEM ......................................................................................76

8.4.1 Physical Safeguard ............................................................................................768.4.2 Integrity of the Information Automated Systems ...............................................788.4.3 Recovery Procedures of Operating Capacity and Contingency Planning ..........78

APPENDIX: STATISTICAL TABLES OF PERU ............................................................................79

TABLES IN THE TEXT:TABLE 1: Macroeconomic Indicators ......................................................................................2TABLE 2: Major Developments in Securities Market Legislation ..............................................6TABLE 3: Financial System: Institutional Framework, 1999 ...................................................10TABLE 4: The Ten Largest SABs ..............................................................................................13TABLE 5: CAVALI Statistical Summary .....................................................................................15

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Perú Report August 2000

TABLE 6: Notes and Coins in Circulation ..............................................................................21TABLE 7: Settlement at the BCRP, 1999 .................................................................................26TABLE 8: Sectoral Market Capitalization at the LSE ................................................................45TABLE 9: Securities Registered and Traded at LSE ..................................................................46TABLE 10: Trading Volume in the Secondary Market ..............................................................47TABLE 11: Market Capitalization and CAVALI Holdings ...........................................................53

CHARTS IN THE TEXT:CHART 1: Regulatory Structure ...............................................................................................16CHART 2: Structure of Securities Markets ................................................................................39CHART 3: Clearing and Settlement Done through Brokerage Firms (SABs) ..............................55CHART 4: Clearing and Settlement Using a Custodian ............................................................57CHART 5: Assuring Settlement ................................................................................................63CHART 6: Cash Transfers .........................................................................................................67CHART 7: Diagram of Payments and Clearing Via ALADI ........................................................71CHART 8: Banco Central de Reserva del Perú .........................................................................72CHART 9: CONASEV Organization Chart .................................................................................77

BOXES IN THE TEXT:BOX 1: Safety Nets for Securities Investors .............................................................................12BOX 2: Deposit Insurance Fund .............................................................................................18BOX 3: Interaction of Securities and Payment Clearing and Settlement Systems .....................66

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Perú Report August 2000

1 INTRODUCTION

1.1 MACROECONOMIC BACKGROUND

A series of economic and financial reforms which started in 1990 have greatly benefited thePeruvian economy during the last decade. Tight fiscal and monetary policies drastically reducedthe rate of inflation to single digits in the latter part of the decade. Shocks from the Asian crisis,climatic effects (e.g., El Niño), and the crisis in Russia set back economic growth in 1998, but arecovery started in 1999 with further improvement expected in 2000. Important progress hasbeen made in strengthening the financial sector, although key elements related to marketdevelopment remain to be addressed.

The beginning of the decade, however, was not as auspicious. Peru entered the 1990s with fallingper capita incomes, hyperinflation and one of the most uneven income distributions in Latin America.By the time of the change in Government in mid-1990, per capita income was below that of 1966;prices had risen by a factor of 27 million over three decades, including almost 7,700% in 1990itself; tax collections had fallen to less than 5% of GDP; the country was in default on most of itsexternal debt. The immediate priorities of the new Government that took office in July 1990 wereto reestablish the authority of the state, to bring inflation under control, to restore the functioning ofthe market system, and to provide minimum protection to the most disadvantaged groups from theexpected heavy social costs of the necessary adjustment process.

Among the stringent monetary and fiscal measures adopted were the establishment of the fullautonomy of the central bank, the prohibition of central bank credit to the public sector, theelimination of credit subsidies, and drastic reductions in the deficits of the state enterprises. As aresult the combined public sector deficit was reduced from 7.5% of GDP in 1990 to zero by1997. Deficits in the interim were fully financed by external funds, including those from theInternational Financial Institutions (IFIs), with which relations were reestablished. Structural reformsincluded the elimination of controls on prices, interest rates, and foreign exchange transactions;the reduction of tariffs, removal of administrative trade barriers, and liquidation of state marketingagencies; and the strengthening of private property rights and a far-reaching program ofprivatization.

Stabilization, structural reform and the restoration of public order had the hoped-for results.Incomes grew an average 6.5% per year in 1990-1998, while inflation decelerated rapidly,falling to 3.7% by 1999. Increasing price stability encouraged the remonetization of the economyin both soles and US dollars, and interest rates declined. Reflecting the improving performanceof public finance, domestic savings rose steadily from less than 12% of GDP in 1990 to morethan 18% in 1999. Investment, spurred largely by the private sector, rose from under 16% tomore than 21% of GDP over the same period. Net capital inflows went from US$300 million toUS$2.2 billion in 1998. The net international reserves of the BCRP rose from around US$300million at the beginning of 1990 to more than US$8.4 billion by end-1999, providing animportant cushion in face of the high degree of dollarization of the economy and the opennessof the capital account.

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Table 1: Macroeconomic Indicators

1.2 FINANCIAL SECTOR DEVELOPMENTS

In the early 1990’s financial sector reforms included the liquidation of the public developmentbanks, the privatization of state-owned commercial banks, the elimination of state interventions inthe allocation of credit, the strengthening of bank and capital markets regulation and supervision,the opening of the financial system to private pension funds, and first steps toward covering theunfunded liabilities of the public pension system. The negotiation of debt reduction and restructuringagreements with the Paris Club and commercial bank creditors completed Peru’s reintegration intothe international financial system.

Both banking and non-bank financial sectors have experienced rapid growth over the past severalyears. The Peruvian banking system experienced very high loan growth. The ratio of bank assets toGDP rose from 21% at the end of 1994 to above 40% by the end of 1998. The non-bank financialinstitutions and Peru’s capital market have also grown rapidly over the same period, but thesesectors remain relatively small compared to many other emerging market economies, and thecommercial banks continue to account for more than 80% of the system’s assets and loans andalmost three-fourths of shareholders’ equity. Concentration is also high within the banking sector.The banks, through their financial groups, dominate other segments of the systems as well.

The Peruvian financial system is characterized by the virtual absence of public debt from the domesticmarket, as a consequence of strict fiscal discipline and the reopening of Peru’s access to externalfinancing, including from the IFIs. The policy against borrowing internally has itself been an importantelement of Peru’s impressive fiscal performance. The small size and the lack of liquidity of capitalmarkets, the internal nature of many of its transactions and the lack of a benchmark yield curve tendto slow market development and encourage increased dependence of large borrowers on the banks.

1.3 PAYMENT SYSTEMS DEVELOPMENTS

Payments and Securities Clearance and Settlement Systems in Peru are undergoing significantimprovements. In the 1990’s these systems were relatively unchanged, as the private sector continued

1999

3.8

0.9

-12.3

-17.1

7.5

3.5

7.7

-2.6

-3.6

1998

0.3

-0.4

-1.5

0.1

3.3

7.3

7.7

-0.7

-6.0

1997

6.9

4.0

12.4

11.4

12.7

8.5

7.7

0.1

-5.0

1996

2.4

1.5

-3.3

0.6

10.2

11.5

7.0

-1.0

-5.9

1995

7.3

8.1

20.3

26.8

6.9

11.1

NA

-2.9

-7.3

Real GDP (annual growth rate, %)

Consumption (annual growth rate, %)

Gross investment (annual growth rate, %)

Imports (annual growth rate, %)

Exports (annual growth rate, %)

Consumer Price Index (annual average growth, %)

Unemployment rate (%)

Public surplus/deficit (% of GDP)

Current account balance (% of GDP)

Source: BCRP Annual Report.

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Perú Report August 2000

to use traditional payment instruments, in particular the check, and did not seek to introduce newproducts or systems to improve efficiency. The legacy of high inflation meant that dollar instrumentscontinued to be important in payments, even increasing in the most recent years.

Recognizing the importance of improved efficiency and reliability, the Banco Central de Reservadel Peru (BCRP) established a Payment System Inter-bank Commission (CISPA) in 1998 to spearheadchange in the payment systems. CISPA has provided a forum for developing a consensus on paymentssystem reform, assisting the central bank in the development of a Real-Time Gross Settlement (RTGS)system, and providing leadership for the planned Electronic Clearinghouse. These projects seek toincrease efficiency in payments and also to minimize risk.

Reflecting the country’s historical experience with high rates of inflation, Peru remains highlydollarized, even though stabilization increased general confidence in the economy, and a gradualshift occurred after 1993 in favor of domestic-currency assets. In broad terms, Peruvians hold soleslargely for small day-to-day transactions, with most large-ticket items (e.g., mortgages, importedconsumer durables and other imports) priced in dollars. Savings are held largely in dollars. Morethan three-fourths of private deposits in the banking system and bank credits to the private sectorwere denominated in dollars at the end of 1999.1

Cash continues to be an important payment instrument for individuals and households, although itis difficult to measure even the level of holding of cash, due to the lack of accurate data on USdollars in circulation.

Non-cash payments instruments in Peru are in the process of significant improvements, with theintroduction of the RTGS system in early 2000, and the installation of an Electronic Check ClearingSystem expected to be in operation in 2000. The inter-bank payment circuits are through checkclearing and transfers using current accounts held at the central bank. The major non-cash paymentinstrument for individuals is the check, followed at some distance by debit cards. Credit cards havenot yet become popular.

Checks are the payment instrument that has the highest value and volume of transactions in Peru. In1999, some 9 million checks were cleared through the clearinghouses operated by the BCRP, for avalue of nearly S/290 billion. Three quarters of this value was accounted for by US dollar-denominatedchecks. Transfers made through banks’ accounts at the BCRP in 1999 came to S/478 billion, with41% of the total being accounted for by dollar transactions. In total, S/766 billion of payments wereexecuted through the BCRP in 1999, a relatively low share, 4% of GDP for the year.

1.4 SECURITIES MARKETS AND CLEARANCE AND SETTLEMENT

The Lima Stock Exchange (LSE) is the only stock exchange in Peru. Under the self regulatory regimein Peru the exchange is supervised by the National Commission for the Supervision of Companies

1 In addition, two-thirds of outstanding private bond issues were denominated in dollars (including bondsdenominated in local currency but whose principal is indexed to the exchange rate).

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and Securities (CONASEV ). CAVALI2 is the newly formed clearance and settlement company providingcentralized operations to support trading. CAVALI is developing internal regulations for theseoperations. At the end of 1998, there were 29 brokerage firms that participated in the exchange. Inaddition to exchange cleared and settled trades, there is an over-the-counter (OTC) market, but thisappears to be rather limited in scope.

As indicated earlier there is not an active debt market in Peru, although some private sector bondsare issued and traded. The bulk of the trading supported by the LSE is in equities. Stock marketcapitalization was US$11 billion at the end of 1998, while trading on the secondary market wasUS$8.8 billion. These figures suggest a low level of trading, with a turnover period of about oneyear for the entire market value. In 1998, 42% of the turnover on the LSE was in dollar-denominatedissues.

Clearing and settlement of trades is executed either through CAVALI, or through bilateral arrangements.There are requirements for dematerializing equities traded on an exchange, and 52% of the marketcapitalization were dematerialized in 1998 with CAVALI. Some 44% of the securities held withCAVALI are owned by foreigners. The settlement period is typically 3 days with the settlement on agross basis for the securities and a net basis for payments, cleared through CAVALI (close to Model IIfrom the BIS classification). There is one settlement bank, and the procedures allow for an unwindingof transactions if a participant has insufficient funds on settlement day.

The largest source of funds to the Peruvian capital markets is the private pension system, consistingof five private pension fund administrators (AFPs), managing the individual accounts of over 1.5million workers. Unlike the other actors in the financial system, the AFPs are largely invested in sol-denominated instruments. Moreover, despite their potential importance as suppliers of long-termfunds to the market, AFP investments are predominantly short-term, responding both to regulatoryconstraints and to the absence of appropriate long-term instruments in the domestic market.

2 Caja de Valores de Lima, Institución de Compensación y Liquidación de Valores (CAVALI, ICLV).

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2 INSTITUTIONAL ASPECTS

2.1 GENERAL LEGAL FRAMEWORK

2.1.1 Payments

The legal framework for payments in Peru is based on the following laws and regulations:

• The Financial and Insurance Systems General Law and the Organic Law of theSuperintendent of Banking and Insurance (SBS) (Banks Law), regulated by Act N° 26702and modified by Act N° 27008 and Act N° 27102, in which the requirements for theconstitution and operation of the participating companies and the allowed operations areset forth, as well as the main powers granted to the Banking and Insurance Control Authorityas the agency in charge of regulating, supervising and controlling the companies in thePeruvian financial system.

• The Organic Law of the BCRP, enacted by Decree-Law N° 26123, specifying the powersand duties related to its functions as a monetary authority.

• The Securities Market Law as approved by Executive Decree N° 861, containing the rulesregulating the issuance, placement, trading and registration of the serial issued securities;as well as the centralized mechanisms for trading and settling these securities and, broadly,the criteria that regulate the performance of the different participants in the securities market.

• The Securities Law ruled by Act N° 16587 containing regulations on major payment instru-ments including check, bill and promissory notes.

• Regulations issued by the BCRP that refer principally to the clearing mechanism for checks,to the real-time gross settlement system, procedures for monetary transfers using accountsheld at the Central Bank, and instruments used to implement monetary policy.

• Regulations issued by the Banking and Insurance Control Authority, which regulate thefinancial and insurance systems operations.

This legal framework covers everything concerning non-cash payment instruments, which com-prise checks, interbank transfers and credit and debit cards. It establishes the general frameworkfor financial system participants: banks (the only institutions empowered to perform all kindsof operations permitted under the law) and other financial institutions. It also regulates allthose companies that provide complementary services to the financial system such as trans-port, custody and administrative services for nominees; card issuers; and clearinghouses orfunds transfer systems.

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2.1.2 Securities3

In the 1990’s, the capital markets in Peru underwent significant development, including manychanges in the legal structure. During the first half of the decade, changes were principally incapital market development and in the liberalization and creation of appropriate rules for thedevelopment of market activities. In the second half of the decade, attention was focused primarilyon market stability and soundness.

The principles which govern the functions of securities markets are found in the Securities MarketLaw (SML), Executive Decree No. 861, issued on October 22, 1996, which became effective onDecember 6, 1996. This Act superseded the former Executive Decree No. 755 and added importantchanges aimed at improving the instruments and institutions (see Table 2).

Table 2: Major Developments in Securities Market Legislation

1991 — Introduction of credit risk rating agencies

— Removal of the government representative on the Board of Directors of the Stock Exchange

— Creation of the Securities and Brokers Public Record-Book*

— Protection of the rights of individual investors

1996 — Support to the clearing and settlement process through the separation of the Securities

— Payment and Settlement Institution (ICLV) from the Stock Exchange

— Definition of the role and operating rules for closed end investment funds

— Introduction of the legal framework for securitization

* Today Security Market Public Record Book.

The SML establishes the regulatory framework for the securities market and addresses issues such asmarket transparency, primary and secondary market, stock exchange functions and features, brokers,clearance and settlement, mutual fund managers, credit risk rating agencies, asset securitization,conflict resolution and disciplinary actions. The SML4 also specifies that the institution in charge ofsupervising and controlling the fulfillment of its regulations be the National Commission forSupervision of Enterprises and Securities (CONASEV). Pursuant to the Organic Law of the NationalCommission for Companies and Securities Supervision, Decree Law Nº 261265 , CONASEV isresponsible for supervising the public unregistered securities’ operations, as well as all securitiesmarket participants. By virtue of its regulatory power, CONASEV established a number of Regulationsso as to complement the SML. Among the principal regulations are the following:

• Regulation of Stockbrokers.6

3 The legal aspects related to the transfer of securities are developed in section 4 to 8 of chapter 5.4 Vid. Tít. I, Sec. 7.5 Published on 12.30.962 and effective 12.31.92.6 Approved by CONASEV Resolution Nº 843-97-EF-94.10 (published on 27.12.97, effective on 01.01.98).

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• Regulation of Securities Mutual Funds and their Managing Firms.7

• Regulation of the Public Registrar of Securities.8

• Regulation of Mutual Funds and of their Administrators.9

• Regulation of Primary Public Offering and Sale of Unregistered Securities.10

• Regulation of Important Facts and Confidential Information to which securities issuers aresubject.11

• Regulations on the Asset Securitization Process.12

• Regulations on Credit Risk Rating Agencies.13

• Regulations on Securities Clearing and Settlement Institutions (ICLVs).14

• Internal Regulation of the Lima Stock Exchange

• Regulation of the Trading-Floor of the LSE.15

The national legal system includes a number of other acts which affect the securities market. TheBusiness Company Act N° 26887 (published on 09.12.97, effective on 01.01.98), for example,governs the procedures that can be adopted by firms, including joint stock, which also require theauthorization of CONASEV to operate16 , as in the case of ICLVs.

2.1.3 Derivatives

At present, no centralized derivatives trading mechanism exists in Peru.

7 Approved by CONASEV Resolution Nº 084-98-EF-94.10 (published on 12.05.97, effective on 13.05.98). 8 Approved by CONASEV Resolution Nº 079-97-EF-94.10 (published on 14.02.97, effective on 15.02.97).

9 Approved by CONASEV Resolution Nº 002-97-EF-94.10 (published on 09.01.97, effective on 10.01.97).10 Approved by CONASEV Resolution Nº 141-98-EF-94.10 (published on 21.10.98, effective on 22.10.98).11 Approved by CONASEV Resolution Nº 307-95-EF-94.10 (published on 24.08.95, effective on 25.08.95).12 Approved by CONASEV Resolution Nº 001-97-EF-94.10 (published on 09.01.97, effective on 10.01.97).13 Approved by CONASEV Resolution Nº 074-98-EF-94.10 (published on 25.04.98, effective on 26.04.98).14 Approved by CONASEV Resolution N° 031-99-EF-94.10 (published on 05.03.99, effective on 06.03.99).15 Approved by CONASEV Resolution N° 021-99-EF-94.10 (published on 27.01.99, effective on 01.03.99).16 Except the Lima Stock Exchange, that in accordance to the Law, it adopts the form of civil associationsregulated by the Civil Code.

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2.2 ROLE OF FINANCIAL INSTITUTIONS: PAYMENTS

2.2.1 Banking Institutions

Private banksPrivate banks undertake the classical functions of financial intermediaries in the short,medium and long term. Among the permitted functions related to the payment systemare: payment operations and funds transfers; drafts, checks and payment orders; creditand debit card issuance and administration. Banks can participate in the CheckClearinghouse and are authorized to hold current accounts with the central bank. Subjectto the relevant requirements and limitations, banks also have access to BCRP’s short termliquidity facilities. The 21 banks in operation in December 1999 had 928 offices operatingin Peru. Only four banks operate at a national level and there are only two foreign banksubsidiaries. Banking in Peru is highly concentrated (over 65% of the deposits is withthree institutions after the recent merger of the third and fifth institutions). This percentagerises to 75% if the four largest institutions are considered. The average staff per office isrelatively high (26 per office), in spite of the fact that the number of ATMs (AutomatedTeller Machines) has increased and that significant technological improvements have beenimplemented.

The Banco de la NaciónThe Banco de la Nación is responsible for the public treasury functions for the Governmentof Peru. It is in charge of the collection of tax revenues, collected between the tenth andthe fifteenth working day of each month. Starting in August 1999, the term was extendedfor ten working days so as to mitigate commercial banks’ liquidity problems on taxcollection days. The Banco de la Nación is also responsible for making the followingTreasury payments: public debt, salaries, goods and services, ordinary transfers andfinancial expenses. The Banco de la Nación has, in addition to a head office, 23 branches,317 agencies and 146 ATMs at the national level. Because of the magnitude and importanceof its transactions, the execution of some of these (foreign currency purchases for debtpayment, for instance) may be coordinated with the BCRP.

2.2.2 Other Institutions that Provide Payment Services

The Corporación Financiera de Desarrollo (COFIDE)COFIDE is a public corporation with administrative, economic and financial autonomy,whose main object is to contribute to the country’s development through raising fundsand subsequently placing them through financial institutions. It raises funds inside andoutside the country, through bonds and other obligations. COFIDE is a wholesale bank. Atthe end of 1998 COFIDE was given the power to provide financing to national financialcompanies through a program that entails the swap of its portfolio for Public Treasurybonds. At the end of December 1999, COFIDE had one head office in Lima, with fivesubsidiaries in the provinces.

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Financial CompaniesThese private institutions participate in the raising and channeling of financial resources.They facilitate the primary placement of securities, deal with securities, provide financialadvice and may collect, pay or transfer funds, among other operations. However, they cannottake demand deposits. In December 1999, there were six of these companies, with 31offices (6 subsidiaries and 25 agencies).

Rural Credit and Savings Funds: These entities obtain resources from the public and grantfinancing to small and medium enterprises (SMEs) and undertake micro credit operations inrural areas. They can accept term and savings deposits in order to grant direct credit, per-form credit operations with local companies and foreign banks and financial institutions,trade in foreign currency, collect, pay and transfer funds, draw drafts against their ownoffices and or corresponding banks, etc. In December 1999 there were 13 rural funds inthe whole country with a total of 49 agencies.

Municipal Credit and Savings Funds: These are legal entities, with economic, financial andadministrative autonomy. They capture resources from individuals and specialize in plac-ing loans to small- and micro-sized companies, supporting credit decentralization. Theycan also act as trustees. In December 1999 there were 13 of these entities with 61 offices inPeru.

Municipal Popular Credit Fund: This entity specializes in granting collateralized creditto the general public and undertakes operations with municipal boards and theirdependent companies. At the end of December 1998, there was only one such entity,with 13 offices.

Savings and Credit Co-operative Funds Authorized to Collect Resources From The Public:The savings and credit co-operative funds can operate with resources from individualsother than their depositors, provided that they adopt the legal form of a co-operative withshares. They can collect term and savings deposits and provide direct credit, discount bills,perform credit operations with companies, accept bills of exchange, collect, pay and transferfunds, etc.

Companies for the Development of Small and Micro Companies (EDPYMES)The key function of these companies is to grant financing, preferably to businessmen fromsmall- and micro-sized companies. They may grant direct credit, discount promissory notes,provide guarantees, trade in foreign currency, charge, pay and transfer funds, etc. TheEDPYMES are not authorized to raise funds from individuals through deposits or other kindof contracts.

Specialized Financial FirmsThese firms do not act as traditional financial intermediaries. Their activities are basicallyrelated to specialized financial services, such as real estate, financial leasing, factoring,contract of guarantee, among others.

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Table 3: Financial System: Institutional Framework, 1999

2.3 ROLE OF FINANCIAL MARKETS PARTICIPANTS: SECURITIES

2.3.1 Securities Market Participants

2.3.1.1 Public and private issuers

Only joint stock companies may undertake primary public offerings of stock, but other legal entitiesmay issue debt through primary public offering. Primary public offering require that, prior to issuingthe securities, the issuer must register the security with the CONASEV, in order to ensure propertransparency. This disclosure includes documents that support the issuance and, in case of debt,the issuance contract terms and conditions. The primary issuance of securities executed by theBCRP, as well as those by the Central Government, are not subject to prior registry with CONASEV.When the Central Government, Regional Governments, Local Governments or the BCRP issue andtrade securities, these are subject to regulations contained in the relevant governing law.

2.3.1.2 Brokerage firms

Brokerage firms are joint stock companies that must be authorized by CONASEV in order to operate.17

These companies may take the form of securities intermediaries companies or stock brokeragefirms (stock brokers). However, at present, there are no securities intermediaries companies operatingand there is no request for such before CONASEV. The main objective of Brokerage Firms (SAB)18 is

Value ofAccounts(b)

N.A.

45,218,771

2,973,772

132,093

78,299

344,821

48,747,756

843,754

Number ofaccounts

N.A.

5,338,909

976,164

17

552

102,811

150,758

6,569,211

16,384

Number ofoffice(a)

7

909

343

6

29

8

45

74

1,421

2

Number ofinstitutions

1

20

1

1

5

9

13

13

63

2

Central Bank

Commercial banks

Banco de la Nación

Financial Development Corp.

Financial institutions

Leasing companies

Rural credit and savings banks

Municipal savings and credit banks

Total

Offices of foreing banks

December 31, 1999

17 Vid. SML, Tit. VII, Chap. I Sec. 167.18 Vid. SML, Tit. VII, Chap. II.

Source: Superintendency of Banking and Insurance (Statistical bulletin of the SBS).(a) Including agencies.(b)

In thousands of nuevos soles.

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to act as securities intermediaries in one or more centralized mechanisms operating in the stockexchanges of which they are members. The minimum capital these firms should hold to tradeduring 1999 was S/.923,484, updated annually based on the Wholesale Price Index for MetropolitanLima.

Under the SML, Brokerage Firms are entitled to buy and sell securities on their own behalf or forthird parties either within or outside of centralized mechanisms. They may make placements in thenational or international market, sell in Peru securities issued abroad, and underwrite temporarilyall or part of a securities primary issuance. The SML also establishes that the SABs may act as marketmakers. In addition to their core activity, they are empowered by the SML to perform a wide rangeof activities, namely to: advise on matters related to securities and stock exchange transactions;stand surety; sell the obligations they issue in the market; manage mutual or investment funds;prepare their clients’ registry, without prejudice to the rights and obligations of the ICLV; buy andsell foreign currency; act in international markets with external debt instruments for their ownaccount or on behalf of their parties; operate with repos or securities loans; act as trustees insecuritization trusts; to trade in options, futures and other derivatives;19 and carry out all otheractivities and trades related to the securities market intermediation, previously and generally au-thorized by CONASEV.

Within the duties and obligations of Brokerage Firms are included: verifying the identity and legalcapacity of their clients, the accuracy and integrity of the securities traded as well as verifying thatthe last holder is correctly entered in the issuers’ registry. They must also arrange for payment forsecurities being sold for clients and for the delivery of securities being purchased by clients. TheSML allows securities intermediaries companies to support the intermediation of securities notregistered on the Stock Exchange. The minimum capital required for this kind of corporation for1999 was of S/. 615,656. This amount is updated annually on the base of the Wholesale PriceIndex for Metropolitan Lima. These corporations are obligated to constitute a guarantee in favor ofCONASEV to back any obligation arising from their participation in the securities market. They canalso perform a wide range of operations.

By the end of 1998 there were 29 SABs20 operating in the market compared with 51 in 1996 and 28in 1992. The increase observed in the period 1992-1995 is the result of flexible access require-ments while the decline in the period 1996-1998 reflected the financial crisis. In 1998, half of theSABs had losses, since the drop in trading operations meant that fees did not cover operating costs.There is a high degree of concentration, since the first six SABs in size account for around 60% oftotal fees. About 50% of SABs are linked to different banking groups and out of those not related tobanks, only three work with foreign investors.

19 Although this kind of market has not been developed in Peru for the time being.20 One of which is an individual broker. At the time of preparing this report one of the SABs has been closedand the other three are suspended.

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Box 1: Safety Nets for Securities Investors

In regard to the responsibilities of Brokerage Firms relating to their role in the securities market,the following guarantee system has been established:

• The Guarantee Fund21 managed by the LSE covers any liability arising from the BrokerageFirms’ participation in deals executed on the Stock Exchange, except the risks covered bythe future Settlement Fund. It is used to replace the securities to be sold or the money tobuy securities in the centralized mechanisms operating in the Stock Exchange. TheGuarantee Fund’s equity capital should be equal to 0.83% of the monthly average of thetotal trading volume in the centralized trading mechanisms during the last fiscal year. TheGuarantee Fund’s total amount was S/.13 million at the end of March 1999.

• The guarantee constituted by the Brokerage Firm in favor of CONASEV22 is intended tosupport any obligation to the clients arising from its participation in securities trades executedoutside the centralized trading mechanisms of the LSE. This guarantee should be kept forsix months after the brokerage firm has ceased to exist or until resolution of any judicialaction brought within that period. The margin should be equal to 0.38% of the totalvolume traded by the respective intermediary outside the centralized trading mechanismsduring the 12 previous months. The total amount of margin required for the second half of1999 is S/.16.2 million.

• The Contingency Fund23 addresses any liability arising from the Brokerage Firm caused byexchange or off-exchange activities, which could not be covered by the Guarantee Fundor the guarantee constituted in favor of the CONASEV, respectively. This fund was createdby CONASEV and the LSE contributions. It is a temporary fund and it will be liquidated onOctober 23, 2001. The total amount of the Contingency Fund was S/.5.9 million on May18, 1999. The total amount paid out as of that date was S/.1,6 million.

The participation certificate issued by the LSE24 to a brokerage firm is to guarantee the obligationsarising from its participation in the securities market. This guarantee is executed in the event thatthe resources available in the Contingency Fund for the respective Brokerage Firm have not beenenough to meet the total amount of liabilities held by the brokerage firm.

2.3.1.3 Institutional investors

The key institutional investors in Peru are banks, pension funds (AFP), insurance companies andmutual funds. By the end of 1998, institutional investors held 95% of the portfolio of fixed income

21 Vid. Tit. VI, Chap. V from the SML, Executive Decree No. 183-98-EF published on 03.01.98, effective on04.01.98 and Regulation CONASEV No. 060-98-EF/94.11 published on 18.02.98, effective on 19.02.98.22 Vid. Sec. 190, 191, 192 y 206 of SML and Regulation CONASEV No. 629-97-EF/94.10 published on 11.10.97,effective on 12.10.97.23 Vid. Fifth temporary Regulation of SML and CONASEV Regulation No. 629-97-EF/94.10.24 Vid. Art. 136 of SML and CONASEV Regulation No. 629-97-EF/94.10.

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instruments available in the market, AFPs accounting for 50% and Mutual Funds for 30%. Insurancecompanies, with about 9% of the bonds issued in their portfolio, are not very significant at themoment, although they are beginning to gain importance. The AFPs represent the private sector inthe pension system development and are playing a key role in the development of the capitalmarket. About 2 million employees entered industry in 1993 and the value of assets increased fromUS$30 million in 1993 to US$1.8 billion in 1998. Thus, the AFPs are the largest investors in marketinstruments.

In 1996 Mutual Funds25 experienced a significant increase in growth in a relatively short period oftime. Funds under administration grew from US$140 million in December 1996 to a peak in July1998 of about US$730 million, before the international financial crisis (and certain changes in thepricing convention) caused a drop to US$340 million in January 1999.

Insurance companies are currently rather small in size, but their importance in the capital market isgrowing rapidly, particularly driven by life insurance sales. In the middle of 1998 they had investedUS$270 million in capital market instruments.

2.3.2 Stock Exchanges

Under the SML26 , the stock exchanges are associations formed by Brokerage Firms. Their objectiveis to facilitate the trading of securities, and to provide adequate services, systems and mechanisms

25 Its operations are ruled in Tit. IX of the SML.26 Vid. Tit. VI, Chap. I, Sec. 130.

Table 4: The Ten Largest SABs

Ranking as per Trading Volume at the Variable Income Market1998 Cash and Repo Trades

Share (%)

12.1

11.2

10.1

8.7

6.3

6.3

5.5

5.3

4.7

4.0

74.2

100.0

Billions of Nuevos Soles

2.9

2.6

2.4

2.0

1.5

1.5

1.3

1.2

1.1

0.9

17.4

23.6

Brokerage firms

Credibolsa

Wiese

Santander

Argos (Note)

Interfip Bolsa

Continental Bolsa

MGS y Asociados

Intercapital

Seminario y Cía.

Provalor

Total Ten SABs

Total SABs

1

2

3

4

5

6

7

8

9

10

Source: The Lima Stock Exchange.

Note: CONASEV cancelled Argos’ authorization to operate in April 1999.

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for the securities trading intermediation to take place in a fair, competitive, ordered, continuousand transparent way. In a self regulatory mode, they must establish rules for their own operationsand those of their members. In 1999, the stock exchange had to have a minimum equity capital ofS/.4,950,555. This amount must be updated annually on the base of the Wholesale Price Index forMetropolitan Lima, and must be contributed by at least ten associates Brokerage Firms.

Each associate must have a participation certificate from the corresponding stock exchange. Thiscertificate serves as the final guarantee that the Brokerage Firm will comply with the obligationsarising from its participation in the securities market. In the case of execution, this certificate will besold under CONASEV’s mandate through an auction. Only associates have the right to vote in theirown stock exchange.

In Peru, there is only one Stock Exchange, the LSE, authorized by CONASEV. This Exchange wasestablished in 1970 and currently the Shareholders’ (Associates) Meeting is taking steps to convertthe LSE to a Joint Stock Company. On December 31, 1998, the equity capital of LSE was S/.37.8million, represented by 43 participation certificates. These participation certificates do not haveany nominal value and they can be transferred to Brokerage Firms or third parties, or they can beredeemed.

At the end of 1998, LSE had a staff of 146 people. Out of this total, 12 were executive staff, 33administrative staff, 82 qualified technical staff and 19 other. The LSE is exempted from Income Taxuntil December 2000.

The amounts traded through the LSE in their different modes reached a total value of US$7,7 billionin 1998, with a daily average of 1,252 operations. In LSE there are two indexes: the General Index(IGBVL) and the Selective Index (ISBVL). The stock exchange capitalization at the end of 1998 wasUS$11 billion.

2.3.3 Securities Clearing and Settlement Institutions

Securities depositories, in their capacity as book-entry service providers, have been recognized asICLV since the SML of 1991, approved by Decree-Law No. 755, as well as in the current SML27 . As ofMay 1997, a single entity CAVALI ICLV28 was formed to provide centralized clearing and settlementfor the exchange. Before that date one of the stock exchange departments, the Securities andSettlement Depository, provided clearing and settlement services.

Under the SML29 , ICLVs are joint stock companies whose exclusive objective is the recording, custody,clearing, settlement and transfer of securities. Among its main functions are the recording, transfer,clearing and settlement of securities traded on stock exchanges or, if applicable, through centralized

27 Sec SML, Vid. tit. VIII, Chap. III.28 Despite the fact that the SML in its Tit. VIII Chap. III and its following regulations, the Regulations forSecurities Clearing and Settlement Institutions, set for the existence of several institutions.29 Vid. Tit. VIII, Chap. III, Sec. 223.

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Table 5: CAVALI Statistical Summary

Total market:Capitalization:

Equity 11,034 -36Debt instruments 1,740 72

Total 12,774 -31Monthly trading amounts:

Equity 252 -49Debt instruments 220 -37

Total 472 -44

CAVALI ICLV S.A.Equity capitalization 4,373 -32Debt instruments capitalization 1,605 59

Total capitalization 5,978 -20Residents amount:

Equity 1,825 -38Debt instruments 1,515 57

Total 3,340 -14Non-residents amount:

Equity 2,548 -27Debt instruments 90 101

Total 2,638 -26

Number of accounts and securities registered at CAVALI

Total registered accounts 430,259 -9Number of registered securities 482 19Number of owners registered with balanceabove zero 338,596 -12Percent dematerialized securities: 44.9% 8

Residents:Number of registered accounts 425,475 -9Out of total capitalization 55.9% 7Dematerialization 24.8% 17

Non-residents:Number of registered accounts 4,784 -13Out of total capitalization 44.1% -7Dematerialization 20.1% -4

By December 1997(Variation %)

December 1998(US$ Millions)

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mechanisms operating outside the exchanges, as well as the corresponding cash clearing andsettlement. In addition, they issue reports on key functions, manage the settlement fund; verify thatdata kept in their books are consistent with records kept by participants, the stock exchanges orother entities in charge of centralized mechanisms and the issuers; provide the issuers withinformation related to securities transfers and manage the margins corresponding to trades settledthere.

The total value of holdings registered with CAVALI ICLV S.A. reached almost US$6 billions at theend of 1998. A statistical summary of CAVALI’s operations is shown in Table 5.

2.4 MARKET STRUCTURE AND REGULATION

The following chart shows the distribution of the regulation and supervisory responsibilities amongPeruvian authorities.

2.5 ROLE OF CENTRAL BANK

The new Organic Law of BCRP, which grants the central bank the necessary autonomy to fulfill itsobjective of maintaining price stability, came into effect in January 1999. The 1994 Constitutionratifies the basic principles of the Law of the BCRP and clearly sets out its autonomy. The objectiveof the central bank is to maintain monetary stability. Its functions are to regulate the amount ofcurrency, administer the international reserves, issue notes and coins and provide information onnational financial sector.

Central ReserveBank of Peru

Superintendent forBanking and

Insurance

Ministry ofFinance and

Economy

NationalCompanies

and Securities

Superintendency ofPrivate Pensions

Funds Administrators

DirectIntermediation

Private SystemsPension fundsAdministrators

IndirectIntermediation

SecuritiesMarket

Non-BankingSystem

Banking System

Chart 1: Regulatory Structure

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2.5.1 Issuance of Coins and Notes

The central bank has the exclusive responsibility of issuing coins and notes. The bank is alsoresponsible for replacing damaged notes at sight and at par.

2.5.2 Payment Services

The BCRP offers payments services to financial institutions through the accounts that those institutionsmaintain in the Central Bank. Interbank operations and operations with the Central Bank areconducted through these accounts. It also operates the check clearing and settlement (in local andforeign currency) through a clearinghouse at the central bank.

2.5.3 Regulation and Supervision

Among its functions, the BCRP has the power to regulate all operating aspects related to its functionsas a monetary authority through circulars (circulares). The BCRP does not supervise the banks. Asstipulated in the Banks Law, this task is the responsibility of the SBS.

2.5.4 Monetary Policy Implementation

Since the end of 1990, the BCRP has been implementing its monetary policy through marketinstruments that substituted the direct intervention on the credit, interest rates and exchange rate bythe BCRP. The current strategy is based on monetary aggregates control and a flexible exchangerate. The instruments include: exchange rate transactions, open market operations, rediscountswindow and margin reserve requirements for foreign denominated deposits.

2.6 SUPERINTENDENT OF BANKING AND INSURANCE

The principal functions of the SBS are defined under the law of the Financial System (No. 26702) tobe the regulation, supervision and control of the institutions that make up the Peruvian financialsector. The Superintendent is in charge of defending the public interests, supervising the economicand financial soundness of the companies overseen, and ensuring the fulfillment of the legal,regulatory and statutory rules related to the operation of the financial system, to which effect itexercises the widest control over its operations and dealings. Through resolutions and regulations,it sets the scope of banks’ actions and the limits to be observed for the efficient functioning of thefinancial system. In addition, it approves the organization and operation of new financial institutions,taking into account the views of the BCRP.

The standard covering the capital adequacy of financial organizations’ creditworthiness is particularlyimportant. The banks are required to make both general and specific provisions of credits and toclassify all credits. The rules applied are based on the work of the Basle Committee on BankingSupervision and are continuously updated. The SBS also supervises services offered by institutions,the most relevant referring to credit cards, current accounts, factoring operations, discounts andtrust agreements. The Superintendent has approved the Regulation of Special Rules and Liquidation

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of entities under its jurisdiction related to the establishment of the real equity of the entity and theparticipation in the Deposit Insurance Fund. This regulation permits the SBS to adjust the equity bymeans of application of utilities, contributions of third parties and participation by the DepositInsurance Fund, in case of a lower real equity than the established limit.

Box 2: Deposit Insurance Fund

The Deposit Insurance Fund was created in Peru in 1992 with the objective of protecting depositorsin the financial system. In December 1998, the coverage of this fund was S/.62,000 per depositor,and is updated quarterly in reference to the Wholesale Price Index. The Fund may act as atemporary rehabilitator for financial institutions. At the creation of the Fund, the BCRP made aninitial contribution of US$5 million. The Fund’s resources have increased with mandatory quarterlypremiums paid by its members, which are applied to the total amount of deposits covered. Thepremiums are determined according to the rating given to Fund members by private credit riskrating agencies. The chairman of the Fund’s Management Board is an officer of the SBS.

The Superintendent has a variety of means of protecting consumers. A user-friendly risk centerwhere all payment defaults and creditworthiness of individuals and companies are recorded ismaintained by SBS. For similar reasons, the SBS shares with the National Institute for ConsumerProtection and Copyright (INDECOPI) the reception of complaints and their treatment. However,this organization lacks any means of enforcement. Another measure to protect the customer will bethe creation of a Consumer Protector in each financial institution, to whom customers can resort incase of problems.

Stricter identification requirements have been established, in response to the high level of crimeassociated with multiple identification schemes. Higher penalties are sought for the use of badchecks (imprisonment), in addition to the existing fine as well as the “moral penalties” entailed bythe disclosure of closed accounts, bad checks and credit card cancellations aimed at improving thereliability and transparency of the financial system. Another measure to protect customers, is theDeposit Insurance Fund. The SBS is also responsible for monitoring and supervising the controlexercised by dominant positions over companies. To fulfill this function it has defined concepts of“linkedness” for family linkages, ownership or management. A dominant position can occur if morethan 4% of the equity is controlled, or 50% is owned by an economic group or if control is heldthrough other companies. In such cases, the SBS sets operating limits and takes additional steps.

2.6.1 Anti-Money Laundering Measures

In December 1997, the “Rules to Prevent Money Laundering in the Financial System” were approvedby the SBS. The rules allow for a permanent flow of information to be used by the authorities inorder to detect illegal activities related to money laundering.

The Rules have been issued under certain criteria to make it effective and to help for the developmentof the Financial System. The most important criteria are: prudential perspective, establishment of ageneral framework within the financial entities can develop their own prevention systems andactive participation of the firms in the design and implementation of prevention programs.

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2.7 ROLE OF THE NATIONAL COMMISSION FOR THE SUPERVISION

OF COMPANIES AND SECURITIES

The National Commission for the Supervision of Companies and Securities (CONASEV) is an agencyof the Ministry of Finance and Economy, whose objective is to promote the securities market,oversee the adequate management of companies and their accounting. It is a public legal entityand has operational, administrative and economic autonomy. The functions of the CONASEV are to:

(a) study, promote and establish securities market rules and to control the individuals andcompanies participating in these markets;

(b) supervise the companies organized under the Business Companies Law30

and the subsidiariesof foreign companies and co-operatives located within the limits set by the CONASEV itself;

(c) establish the rules and control the activities of collective investment funds;

(d) monitor securities market transparency, the appropriateness of price formation and theproduction of investors’ to disclose information necessary for such purposes;

(e) investigate and encourage claims or requests submitted by stockholders, investors or otherinterested parties about related matters, indicating the requirements to be met;

(f) prepare and disseminate the national statistics on securities;

(g) take part in international organizations related to matters under its jurisdiction and to signagreements with them and with securities market regulatory entities of other countries;

(h) keep the Securities Market Public Registry;

(i) assure that joint stock companies act pursuant to the Business Companies’ Law;

(j) regulate and control the activities of mutual funds investing in securities and those of theirmanaging firms;

(k) verify that individuals and companies under its supervision comply with accounting practices,establishing rules for the submission of their financial statements; and

(l) oversee the performance of auditing organizations designated by the individuals or legalpersons under its supervision; to set forth rules about the contents of their reports and torequest any information or evidence related to the fulfillment of their functions.

2.8 ROLE OF OTHER PUBLIC AND PRIVATE ENTITIES

2.8.1 Payment System Inter-banking Commission (CISPA)

The CISPA was created by the BCRP as a forum for the discussion and co-ordination of all mattersrelated to the payment system within the framework of the payment system reform. The CISPA is

30 Business Companies Act Nº 26887.

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composed of seven commercial banks’ representatives and one from the Banco de la Nación(treasury financial institution). Also participating, but with no voting rights, are: one SBSrepresentative, the General Manager of the Peruvian Bankers Association (ASBANC), and twoBCRP representatives, one of whom is the chairman.

In practice, the CISPA has not been deeply involved in the new payments project for the RTGSSystem, which has been led by the central bank. However, the CISPA is taking an important role inthe project of the electronic clearinghouse. It is coordinating the work on the project and workingwith the future operator of the system. This is consistent with the plan to have the clearinghouse bea separate company jointly owned by the banks.

Not only does the CISPA propose and co-ordinate with all participants the necessary actions toachieve the objectives and measures of reform, but it also disseminates all relevant agreementsthrough the publication of a monthly “Bulletin”. This bulletin also includes topics and issues relevantfor the improvement of payment systems. Although the CISPA was initiated by the BCRP, it is intendedthat the banking community will play a major role in the CISPA to improve and strengthen paymentsystems in the country.

2.8.2 Peruvian Bankers Association (ASBANC)

The ASBANC is a non-profit legal entity, independent of the particular interest of individualmembers and without any political role. Its key objectives are to represent its members inmatters common to all the banking community. It defends their legitimate interests, promotesstrengthening of the financial system, co-operates with the authorities with regard to studiesand creation of standards; develops banking, financial and tax research work; provides data toits members and shares banking problems services and information with its members and thegeneral public. It is also in charge of international relations with similar organizations andpromotes the education of banking employees through its Banking Training Institute.

All commercial banks and financial institutions are members of ASBANC. Financial leasing andfactoring companies authorized to operate by the SBS can also be members. The Banco de laNación is not a member. ASBANC can form specialized committees chaired by members’representatives to deal with specific matters. At present, one of the major undertakings is a projectfor creating an electronic clearinghouse, for which purpose it has a representative at the CISPA.ASBANC also performs a number of activities such as the publication of periodic statistical bulletins,specialized books and basic information about banking products and services.

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3 PAYMENT MEANS USED BY NON-FINANCIALINSTITUTIONS

3.1 CASH

The legal currency in Peru is the Nuevo Sol (S/.) issued by the BCRP under the constitution. Thenuevo sol is legal tender in Peru. However, payments in foreign currency are allowed. In fact, theUS dollar is often used, which results in an almost bi-monetary economy. The amount of notes andcoins in circulation in nuevos soles is below the average in other countries.31

The notes are printed abroad by an institution determined by a public auction. The BCRP has itsown mint “Casa de la Moneda” for minting coins.

The level of coins and notes as a share of GDP is relatively low, at around 2%, with little variationover the last few years. Deposits available for payments are also rather low, so that M1 has remainedaround 3-3.3% of GDP since the early 1990’s. Information on the level of cash held in US dollars isnot available. However, the total level of deposits transferable in foreign currencies is known, andhas risen from 10.2% of GDP in 1993 to 16.2% in 1999. It is likely that the bulk of these deposits

1999

5,341.2

346.0

2,576.1

1,486.0

528.4

404.7

471.4

864.0

4,631.0

Table 6: Notes and Coins in Circulation

1998

4,368.6

283.4

2,113.9

1,215.0

435.7

320.6

454.6

673.0

3,946.0

1997

4,235.9

186.0

2,008.4

1,238.8

477.8

324.9

407.2

623.0

3,827.0

1996

3,565.9

1,684.3

1,134.6

458.5

288.5

393.4

604.0

3,245.0

1995

3,234.5

1,654.4

921.9

425.7

232.5

348.4

460.0

3,043.0

1994

2,407.9

954.4

849.7

407.4

196.4

170.0

222.0

2,385.0

Total currency issued

Of which:

200

100

50

20

10

Coins issued

Notes and coins in creditinstitutions(a)

Notes and coins circulatingoutside banks(b)

At the end of the year

Source: Treasury Department of BCRP, for details on currency and coins.(a) Refers to cash held by banks.(b) Refers to cash held outside the banking system.

31 Notes and coins in circulation in Peru were 1.9% of GDP at the end of 1999.

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is in U.S. dollars. The total of such deposits has been running at about five and a half times the levelof transferable deposits in soles. If the ratio between soles and US dollars were similar to that fordeposits, then the level of cash in US dollars would be around 11% of GDP, and total cash to GDParound 13%. In any case, currently available statistics underestimate the importance of cash in thePeruvian economy.

3.2 PAYMENT MEANS AND INSTRUMENTS OTHER THAN CASH

3.2.1 Checks and Direct Debits

The check is the most widely used non-cash low value payment instrument in Peru, in terms ofvolume and value. During 1999, 9 million checks with a value of almost S/287.2 billion wereexchanged through the clearinghouse. This reflects a change in rising trend which has been observedin the amounts settled during the recent years, as a consequence of the contraction of internaldemand in 1999. A large share (76%) of the value of checks cleared is accounted for by U.S. dollarchecks. One reason for this large share is that there is a fee charged for the transfer of foreigncurrency funds at the central bank using interbank transfers, while there is no charge for solesdenominated transfers. In fact, interbank transfers in soles make up 80% of the total value; as seenin Table A9.

At present, funds are available in 72 hours in those locations where the BCRP has branches, whilein other locations the period is longer, mainly because of the time necessary to transport the checksto the appropriate clearinghouse. Currently, a project on electronic clearing is being developedwhich, among other enhancements, will introduce truncation. Related legal and institutional modi-fications are also being undertaken to support the new system.

Payments through direct debit do not account for an important share of transactions in the Peruvianeconomy yet, due to the limited amount of financial deepening. They are only used for a fewutilities (water, electricity, telephone) and always upon prior authorization by the owner of theaccount.

3.2.2 Funds Transfers

Low value fund transfers such as salaries, pensions and others are not very developed.

3.2.3 Credit and Debit Cards

Bank credit cards are not much used in Peru. In 1998, there were 675,000 cards issued (out ofwhich 381,000 were by commercial banks), accounting for 27 credit cards per every 1,000inhabitants. There exists an operator (VISANET) for the acceptance and processing of interbankpayment orders for participating banks. However, some banks undertake all of the administration oftheir credit cards (issuing, collecting and clearance). In some cases these credit cards also work asdebit cards.

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The use of debit cards is more popular in Peru because of the lower risks they present. By the endof 1998, there were about 2.3 million cards (94 per 1000 inhabitants) that could be used fromany linked terminal (ATMs as well as linked point-of-sales), even from outside the country. Animportant new payments project is the establishment of an electronic clearinghouse. This willreplace the current manually oriented clearinghouse and is intended to support other paymentsinstruments besides checks, such as low value transfers, direct debit and receipts, bank cards,among others.

The use of pre-paid cards is not yet popular and is limited to telephone service. Credit cards issuedby large companies are booming. Their use is restricted to purchases at the issuing firm or theiraffiliated companies. Finally, the banking services offered by alternative means (through telephone,Internet) show limited development in Peru at the current time.

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4 PAYMENTS: INTERBANK AND SETTLEMENTCIRCUITS

4.1 LOW VALUE PAYMENT SYSTEMS

4.1.1 Check Clearing Networks

4.1.1.1 Operations

Check Clearing and Settlement procedures are governed by the Clearinghouse Operating Rules(one for national currency and another for foreign currency, US$) approved by the BCRP through itscircular N. 007/2000-EF/90, under Organic Law 26123 (Section. 68). The clearinghouses areoperated by the BCRP and sessions take place in its facilities, both in its head office and its sevenbranches. For each currency, the regulations cover check submissions and check returns, althougha small volume of returns is observed, both in number of operations and in value. The structure ofboth sessions is identical and the hours are listed below.

Local currency:Submissions 8:30 AM 8:50 AMRejects 2:00 PM 2:30 PM

Foreign currency:Submissions 9:00 AM 9:20 AMRejects 2:30 PM 3:00 PM

Under current procedures, the banks’ duly accredited representatives arrive with the checks to beexchanged and with a spreadsheet and a diskette containing all the relevant data. They then proceedto the physical exchange of documents and determine net multilateral balances. Once these balancesare obtained, settlement of the respective accounts the banks hold with the BCRP is made. Balancesresulting from the clearance of foreign-currency denominated checks are always settled in accountsdenominated in US dollars held with the BCRP head office.

Returns of dollar-denominated checks have only one specific scheduled session in Lima. The returnsfrom other locations are submitted in the following clearance session. The period of time from thesubmission of a check until the funds are available is usually three days in those markets where theBCRP has branches. In exceptional situations, and where the BCRP does not offer its services, thatperiod can last for 15 days.

The banks’ participation in the Clearinghouse is voluntary and the only requirement is observanceof the clearinghouse rules. In December 1999, 20 out of the 21 banking institutions channeled

Hours

From To

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their operations through the clearinghouse. Apart from the BCRP itself, the Banco de la Nación alsoparticipates in the sessions. As Treasury agent, the Banco de la Nación has a very significant influenceon the final balances of the Clearinghouse, particularly on tax payment dates, because large valuepayments in Peru are mostly made using checks, (the main taxpayers accounted for about 85% oftax revenues in 1998).

In tax payment periods the Clearinghouse registers a large increase in the value of payments, andpresents many characteristics of a large value system. This fact is particularly important because ofthe operating procedures and the difficulties of unwinding a settlement. Considering that in practice,the balances resulting from the Clearinghouse operations are taken as final, the BCRP fully assumesthe settlement risk until the close of operations. No measures to limit credit, liquidity or systemicrisk exist, such as bilateral limits, maximum limit per participant or loss-sharing agreements toshare losses.

4.1.1.2 Pricing

The fees participants have to pay for the services rendered by the Clearinghouse are established bythe BCRP twice a year and are charged directly to their accounts. When determining these fees, nospecific criteria are taken into account, such as the number of cleared checks or cost recoveries,among others. A flat rate (S/.6,700 in the fourth quarter of 1999) is simply charged to each participant.

4.1.2 Automated Teller Machines and Point-of-sale Networks

The only network, besides the already-mentioned clearinghouses, that clears other payment instrumentsat a private level is UNIBANCA. This is a system of ATMs for cash withdrawals and points-of-saleequipment. A group formed by 14 banks (none of the three largest ones are included) owns thisnetwork. One member manages system administration – selected on a rotating basis – to determinethe balances resulting from the clearance to proceed with the settlement of the respective accountsheld with the BCRP by participants. A number of other banks have their own networks of ATMs, butwith no interlinkages. Currently, there is no interoperability across the major networks in Peru.

4.2 LARGE VALUE PAYMENT TRANSFER SYSTEMS

4.2.1 BCRP Funds Transfer System (Interbank Payments)

Until January 2000, the only system to process large value payments in Peru was managed by theBCRP and operated through a manual system of interbank transfers between current accounts theparticipants held with the central bank. Settlement was considered final only with the closing ofoperations at the end-of-day.

Interbank transfers through the BCRP are called “large value” transfers (above a minimum of S/.50,000or US$15,000). During 1999, with volume of some 150,000 operations, these transfers amounted toS/.478.5 billion in value, which accounts for some 62% of the total value settled at the BCRP that year(corresponding to 60% of the transfers in domestic currency).

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Table 7: Settlement at the BCRP, 1999(billions of nuevos soles and percentages)

Amount Percentage

Checks in nuevos soles 70.1 9.2

InterbankTransfers 284.4 37.1

Sub-Total in nuevos soles (A) 354.5 46.3

Checks in dollars 217.1 28.4

InterbankTransfers (US$) 194.1 25.3

Sub-Total in dollars (B) 411.2 53.7

Total (A + B) 765.7 100.0

GDP 1999 193.3

Adding the amount of checks cleared to these figures, the total for payments settled at the BCRPcame to S/.765.7 billion. This amount represents a relatively low proportion (4 times) of GDP (S/.193.3 billion).

4.2.1.1 System operation

(a) Hours:

From ToDomestic Currency:

9:15 AM 14:30 PM Among branches of the BCRP

9:15 AM 16:30 PM Among domestic financial institutions

(b) Transfer orders:

The means used for the communication of transfer orders was the facsimile although, on anexception basis, entities could send their transfer instructions by mail. Mail was also used as analternative in case of an emergency. The format of these facsimiles was not standardized, althoughthe information they should contain had been established.

— Name of the institution— Type of operation

— Own account— Third parties’ account— Internal transfer

— Beneficiary— Amount

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— Date— Signatures authorizing the operation, and— Authentication Password.

The last two elements made the transaction secure, and they had to be duly verified by thecentral bank against the signature books of authorized persons and should conform to the codeclause agreed upon (different for each entity). The central bank also had to verify that the orderwas legible, that it contained all the data and that the amount was within the established limits,a minimum of S/.200,000 or US$75,000 in the case of transfer operations for the account ofcustomers.

Once the preliminary verifications were made, the BCRP informed the instructing bank that thetransfer had been received and processed, it stamped a seal, added the date, time and signatureof the person in charge of the service at the BCRP, and assigned a sequential number.

At this point, the order was entered into the computing system. This operation did not alwayshappen immediately after the receipt of the instruction. Sometimes orders were processed inbatch form, especially during the last hours of activity, where there was a higher concentrationof transfer orders for the day.

The transfer process did not take into account whether the order-issuing entity had balances inits accounts. Once the operation was in the system, the entities linked to the BCRP could checktheir account movements and balances in their screens. The balances reflected on the screenswere not final because the final settlement was performed only at the closing of operations.

As an end-of-day reconciliation process, system data was compared against data collectedmanually to verify the accuracy of the entries made during the day.

(c) Closing:

Once transfer orders were entered into the central bank’s system and the definitive verificationwas done, the balances of each institution were determined and reported to the beneficiary byscreen or phone (until 5:30 PM). From that time until 6:30 PM the other BCRP’s operative areaswere being closed out. From 5:00 PM to 7:00 PM the entities had an opportunity to cover anyresulting negative balances. The accounts were closed at about 6:00 PM in normal conditions,but they might be closed as late as 8:00 PM in exceptional cases. The above mentioned processwas identical for foreign currency transfers. As a final stage of the process, on the following day,the BCRP made a detailed report of account activity available for all participating banks.

Most of the above-mentioned processes were manual (reception, verification, order introductionand end-of-day settlement), without contingency mechanisms for recording the operations in caseof disruptions in the information system. In this end-of-day net settlement system, account balanceswere not verified during the daily operations. This allowed entities to overdraw without strict limitsand effectively the risk of a possible failure in the settlement is assumed by the BCRP. This implicit

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intraday overdraft was not collateralized, nor was there a fee charged. Adding to the uncertainty isthe fact that the closing of positions did not have a fixed time-frame as sometimes the closing mightbe delayed for several hours.

4.2.1.2 Pricing

Transfers in local currency were exempt from commissions. Transfers in dollars within the domesticterritory were subject to a 0.02% commission over the transfer amount, with a minimum of US$5and a maximum of US$100 per transaction. The rate for cross-border transactions in foreign currencyis of US$5 per transaction.

4.2.1.3 Risk management

Apart from the absence of alternative means (back-up) for contingency situations, the major settlementrisk was fully assumed by the BCRP. There was no guarantee mechanism for intraday overdrafts,which might be significant. Operations were not final until the close of the day, and until thatmoment they could be unwound, so there also existed an underlying potential systemic risk. Beforestarting an unwind operation the institutions with negative (debit) balances at the end of operationscould seek to meet their positions through loans from the interbank market, or selling foreigncurrency. Secondly, these institutions could make swaps “nuevo sol/dollar” with the BCRP or requestduly collateralized overnight credits. Exceptionally, if they could not cover the overdraft, the BCRPmight step in and unwind the transactions, generally in co-ordination with the involved institutions,to minimize the impact. There were also operational risks because of the heavy dependence onmanual processes.

In regards to intraday exposures, the BCRP had established an informal process of verifying accountoverdrafts during the day so that if the overdraft exceeded 10% of the institution’s equity, BCRPofficers would contact the treasury officers of the bank involved. This unwritten rule might beimplemented with some flexibility, depending on the liquidity situation of the financial system.Mitigating the risk of overdrafts was the high percentage of average reserve requirement held by thefinancial institutions in their foreign currency accounts with the BCRP (38.3% in December 1998).These high balances made overdrafts less frequent in these accounts than in those observed in localcurrency accounts.

4.2.2 Real-Time Gross Settlement System (RTGS)

The primary objective of the BCRP in introducing the RTGS mechanism is to provide real-timesettlement, making the transactions final as soon as they are accepted by the system, whichacceptance depends on the funds availability at the banks participating in the RTGS. Another basicobjective is to eliminate the settlement risk currently assumed by the BCRP and thus reduce moralhazard. The RTGS will also allow all RTGS operating areas to work in an integrated way. In fact, theCredit and Financial Regulation Department, the Foreign-Currency Operations, and the Treasuryand Accounting Departments will be directly linked to the RTGS.

The communication structure for the RTGS chosen has been type ‘V’, offering greater simplicity tothe message flow, eliminating the need for an additional agent and requiring a lower number of

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messages and exchange of communications among participants, as it informs the beneficiary onlywhen the order has been processed and is already final. There is one connection point betweeneach participant and the RTGS, which will make transactions more secure. Another security aspectof the system are contingency procedures for order communications. BCRP will have terminalsavailable for use by entities experiencing problems in accessing the system, facsimiles will be usedonly as a last resort.

The software is owned by the central bank and will be under its control. The central bank willestablish the message format, the operating rules and any other criteria it may consider appropriateas system administrator. It is the banks’ responsibility to have the necessary equipment for on-lineconnections, allowing the treasury officers to have better control over transactions, and avoidingoperative risks and making real-time information about current account status more accessible.

In December 1999, the BCRP approved the Operating Rules of the Real-Time Gross SettlementSystem (Circular N° 033-99-EF-90). These rules include the directives regulating the operation ofthe system: participants, operative cycle, characteristics of the transfer orders, intraday credit andallowed guarantees. The timing of the operative cycle is as follows:

OPERATION TIME

Initial collateral 08:30-10:00

BCRP credit and debits 08:30-16:30

Collateral Increase:

With US$ 11:00-16:00

With BCRP Certificates of Deposit (CDs) 11:00-14:00 With other Securities 11:00-14:00

Collateral Reduction:

With BCRP Certificates of Deposit (CDs) 11:00-14:00

With other Securities 11:00-14:00

Transfer Orders Sent to Participants 10:00-16:30

Pre-closing and Calculation of Participants Balances 16:30-17:00

Cancellation of Collateral of Participants with Zero or Credit Balances 17:00-17:30

Finance to Cover Debit Balances 17:00-18:00

Collateral Execution 18:00-18:30

Closing of Operations 18:30

Under the RTGS system, transfers are processed only if the originating account to be debited hasenough funds or sufficient intraday credit. (intraday credit is only provided to banking entities).Following this mechanism the BCRP settlement risk is almost totally covered.

With regard to operations, apart from better treasury management, more operations will be pro-cessed in real time, offering greater liquidity and continuity to the payment flow, since the RTGS

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plans the creation of a fully collateralized intraday credit facility. To establish such a facility, rulesdescribing eligible collateral and the method for valuing each asset category have been estab-lished. Maximum overdraft rules have also been established to ensure transparency in RTGS op-eration. The extension of intraday credit is required to be repaid at the close of operations. Failureto repay results in the application of overnight credit procedures which carry a high penalty.

In addition, a queuing mechanism will be used by the RTGS to manage non accepted paymentinstructions. Payments in the queue will be processed using a “FIFO” priority criterion.32 This willbe effective when the available intraday credit has been used up (or interrupted by the BCRP’sdecision of general nature or particularly for one institution). Payment instructions in the queuemay be cancelled by the originating entity. Priority in processing will be given to those instructionsthat relate to the payment of monies owed to BCRP.

The approved fees are of S/.700 as a flat monthly commission (not applicable to institutions stillusing the manual method), plus S/.6 per transaction, which becomes S/.9 if the operation takesplace after 3:30 PM. These rates will be revised quarterly depending on the variations of the CPI.The participants signed a ‘Participants Agreement’ in which all the conditions for the use of thesystem are clearly set out.

The RTGS arrangements were introduced in February 2000. As of May 31st of year 2000, thenumber of transfers processed through the large value arrangements increased twofold comparedto the same period in1999 (with the old system operating). In terms of value the increase was41%.

4.3 MAIN PROJECTS

Recognizing weaknesses in the current payment system, the BCRP is upgrading payment systems inPeru so as to increase their efficiency and reduce risk. The BCRP is focusing on the recentimplementation of the RTGS system for large value payments and the creation of an ElectronicClearinghouse (CCE) for processing low value payments. The role played by the central bank isdifferent in each project. The central bank took a lead role in all phases of the new system for largevalue. For the electronic clearinghouse project, on the other hand, the BCRP is proposing that thebanking community assumes the leadership role. The central bank would, however, retain authorityto oversee and supervise, together with the Superintendent, the new entity.

4.3.1 Electronic Clearinghouse Project (CCE)

The replacement of the present clearinghouse by a new electronic one is the second major paymentsystem project. In contrast to the RTGS project, the commercial banks are expected to play a leadingrole in this effort, within CISPA’s framework and under the oversight scope of the BCRP. The BCRP hasthe power to issue regulations or approved the characteristics of the systems adopted by the banks.

32 The bypass means that certain types of transactions, such as the payment of fees or other obligations to thecentral bank, will bypass all other transactions to go to the head of the line.

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• Objectives: The basic objective of this project is to reduce the operating costs of the exist-ing check processing system and to increase efficiency. At the same time, the project aimsto speed up funds availability for checks and to introduce new payments instruments thatwill increase the level of bankarization.

An additional objective is the progressive introduction of check truncation (for which changesin the law are already underway) and the strengthening of clearing through the introductionof a guarantee mechanism that would cover risks generated in the clearing. Considerablework, however, remains to be done in identifying appropriate mechanisms.

• Characteristics: The CCE will be organized as a joint stock company, with an exclusivepurpose. It is to be owned by the banks under a mixed capital contribution scheme (onepart proportional to the use of the clearinghouse, and the other in equal portions). Its orga-nization and operation will be supervised by the relevant authority. Participation, which isoptional, may take two forms: stockholders or a represented member who participatesthrough the stockholders.33

The CCE will start operations with checks from within Lima and it will gradually includeother instruments and checks from different marketplaces. It is expected to begin withouttruncation, but this feature will be introduced at a future date. The clearinghouse has al-ready obtained the services of an operator for the CCE. Settlement of the clearinghouse willbe through the RTGS operated by the BCRP. Safety measures and back-up procedures foremergency situations will be provided as well. The CCE will negotiate the rates with theoperator and will have enforceable powers under the Regulations that must be approved bythe central bank.

• Status of the project: The CCE is expected to be established in the near future. An agree-ment between the future CCE and the operator already elected by public tender (TelefónicaServicios Financieros S.A.), whose mandate will last for eight years is expected to befinalized in 2000. The monthly rate is consistent with a breakeven volume of around fourmillion documents a year. The operator is expected to make the initial investment andcover the operating expenses, as well as the cost of developing the programs. The opera-tor will also provide the personnel and equipment that will be needed, including back-up. The new electronic clearinghouse should start operating in 2000. Since the end of1999, banks have initiated their systems adequacy and initial tests. The tests in “parallel”are estimated for the second quarter of year 2000 in order to have the CCE operating inthe year 2000.

33 All banks have chosen to take part in the CCE as stockholders.

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5 MARKET STRUCTURE AND SECURITIES TRADING

5.1 FORMS OF SECURITIES

The SML34 establishes that securities may take the form of physical securities or book-entry securi-ties as decided by the issuer. This form is subject to modification.

5.1.1 Securities Represented by Physical Instruments

In Peru’s securities market, the registry of ownership for securities represented by certificates andtransfers and applications or guarantees constituted over these securities are managed by the issuer,who is in charge of issuing the ownership certificates and delivering them to holders in evidence oftheir purchase.

5.1.2 Book-entry Securities

The Regulations for ICLVs35 establishes that if securities are to be in book entry form, then allsecurities from the same series, class or issue must be included under this discipline, which impliesthat securities from a same series with different representation forms are not permitted. However,partial representation through book-entry securities is permitted when the issuer has chosen torepresent his securities through physical instruments, and the book-entry representation form is arequirement for trading the securities in centralized mechanisms.36

The SML37 establishes that for a security to be traded on the trading-floor, it should be previouslyregistered with a securities clearing and settlement institution, for its book-entry representation,and so that the transmission of these securities can be done through accounting transfers. CONASEVis empowered to require, for all securities or for certain categories of them, that their book-entryform constitute a prerequisite to be accepted to trade in a centralized mechanism.38 CONASEV hasso far not established dematerialization as a mandatory requirement for the trading of securities atthe Trading Desk.

5.2 TYPES OF SECURITIES

A distinction must be made between the following categories of securities: shares and other securitiesrepresenting equity rights and short and long-term debt.

34 Vid. Tit. VIII, Chap. I, Sec. 209 from SML.35 Vid. Sec. 42 from ICLV Regulations.36 Vid. Sections 209 and 210 from Securities Market Law and Sec. 43 from ICLV Regulations.37 Vid. Section 218 from SML.38 Vid. Sec. 210 from SML.

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5.2.1 Shares and Securities Representing Equity Rights39

• Ordinary stocks (capital stock). Stocks represent proportional shares of a company’s capital,and grant rights to their holders over the company’s equity.

• Types of shares. These difference between the types of shares lies in the rights and dutiesthey grant to their holders.

(a) Voting shares. These provide the right to vote at the company’s General Shareholders’Meeting.

(b) Non-voting preferred shares provide the right to collect preferred dividends establishedin the company’s bylaws.

(c) Golden shares are those shares issued in the name of the state after a privatizationprocess, and these carry veto rights on certain issues.

• Investment shares (Acciones de inversión) Unlike capital shares, investment shares, formerlycalled working shares, are securities representing participation by a company’s equity account.They are not part of the capital stock, and they do not carry voting rights and constitute theInvestment Shares Account. Investment shares grant their holder the following rights:

(a) To take part in the distribution of the equity resulting from the company’s liquidation.

(b) To participate in the distribution of dividends, although differently than in the case ofpreferred shares.

(c) To maintain their existing proportion in the Investment Shares Account in the event ofan increase in the capital stock due to new contributions.

(d) To increase the Investment Shares Account by the capitalization of equity accounts.

(e) To redeem shares in the case of: merger, spin-off or other reorganization form set forthin paragraph IV, Second Article of the Business Companies Law, as well as in cases ofmodification of the corporate object and address to a foreign country.

• Preferred certificate rights to grant the company’s shareholders the preferential right to sub-scribe to new shares issued by the company as a result of capital increments through newcontributions, on a pro rata basis. The certificate can be negotiated by transferring the right tosubscribe new shares to a third party. Company shareholders will also be entitled on a prorata basis, to preferential subscription right for convertible bonds issued by the company.

39 Vid. SML Tit. IV, Chap. II and IV.

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5.2.2 Long-term Debt

According to the SML40 the public offering of securities representing debt with a maturity longerthan one year can only be done using bonds, except for banking or financial institutions. Bonds areinstruments representing a proportional share of a legal entity’s debt towards third parties. Thematurity is necessarily longer than one year. Normally, bonds grant their holders the right to collectperiodical or implicit returns, in addition to the payment of the principal at maturity.

5.2.2.1 Types of bonds

• Financial leasing bonds - fixed rate securities issued by financial leasing firms, with a minimummaturity term of three years. The assets subject to financial leasing transactions constitutethe collateral for the payment of interests and principal.

• Subordinated bonds - fixed rate securities issued by financial firms, with a minimum term offive years. They are counted as effective capital up to and equal to 50% of accountableequity, excluding long-term accrued and/or redeemable preferred shares, if any, and fromunencumbered assets. In addition, these bonds cannot be guaranteed, payment on themcannot be before maturity, and they may not be redeemed at random.

• Corporate bonds - issued to finance corporate transactions and projects. They are issued ata nominal value that will be paid to holders at the end of the maturity term. They includepayment of a series of coupons.

• Treasury bonds - issued in local currency by the Public Treasury for self-financing. Theirimportance is limited in Peru since the Treasury normally borrows abroad.

• Securitized bonds - created through the conversion of financial leasing and bank creditassets into negotiable instruments. These are very recent instruments and of limitedimportance in the Peruvian negotiable capital market.

5.2.2.2 Mortgage notes

These are financial instruments issued by institutions authorized by the Banking and InsuranceControl Authority, with the purpose of facilitating the granting of long-term credits for real estatebuilding and purchase.

5.2.3 Short-term Debt

These are securities representing debt at a maturity of less than one year. They can be in physical orbook entry form. They include:

40 Vid SML Tit. IV, Chap. III., sec.86.

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• Commercial bills - bills of exchange endorsed and accepted by different companies.They are traded in the market according to the quality of the endorser (endorsed bills)or to the quality of the endorsed (accepted bills). Likewise, they can be traded accordingto the collateral offered by the issuer (guaranteed bills, secured bills or collateralizedbills).

• Company promissory notes - promissory notes issued by companies on behalf of a thirdparty. They are freely traded at a discount. The most common type of promissory notes arethose issued by banks.

• Banker’s acceptances - bills of exchange accepted by banks, allowing firms to access financingthrough discount in the money market.

• Certificates of deposit - negotiable certificates issued by commercial banks or financialfirms backed by a short- or medium-term deposit. They are issued for a specified period andwith a pre-established interest rate.

• Commercial papers - companies’ unsecured promissory notes, issued in bearer form, tofinance working capital. The issuing cannot exceed 10% of capital stock and its term cannotbe longer than 180 days.

5.3 SECURITIES IDENTIFICATION CODE

The securities identification code is the internationally known ISIN code (International SecuritiesIdentification Number). In Peru, the LSE became a member of the Association of National NumberingAgencies (ANNA) in October 1994. From January 1, 1995, it has had the role of assigning saidcodes as a National Agency of Securities Coding. ISIN codes contains twelve alphanumeric characterswith the following structure:

Country prefix : 2 characters

Basic code : 9 characters

Verifying digit41 : 1 character

5.4 CLASSIFICATION OF SECURITIES ACCORDING TO TYPE OF TRANSFER

5.4.1 Nominative Securities

A nominative security is one issued in favor of, or on behalf of, a certain person, who is its holder.It is transferred by assignment of rights. For the transfer of a registered security to be effective with

41 The verification digit enables to link a certain negotiable security to a single code at a local and internationallevel. It is calculated as from the data of the other characters from the assigned code.

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regard to the issuer, notification has to be received of the assignment for its entry in the company’sregistry of holders. In the case of book-entry securities, the transfer must be registered with the ICLV.

5.4.2 Bearer Securities

Bearer securities are physical securities to which ownership is granted through mere possession.The following can be bearer instruments: BCRP financial leasing bonds, subordinated bonds,corporate bonds, treasury bonds, securitized bonds, promissory notes, commercial paper, bills ofexchange and certificates of deposit. For taxation reasons, Peruvian regulations have not allowedthe issuing of shares in bearer form after 1968.42

5.4.3 Nominee and Beneficiary

The Peruvian legislation does not contain the definition of nominee, except in the case of foreigninvestors.

5.5 TRANSFER OF OWNERSHIP

5.5.1 Securities Registered with the ICLV

Pursuant to the Civil Code, the ownership transfer of personal property (within which securities areincluded) is done with physical delivery. In the case of physical securities, the ownership transfer isequivalent to the delivery of the certificate. According to the SML,43 in the case of dematerializedsecurities, the entry in favor of the buyer causes the same effects as the physical delivery of securities,and it is enforceable before third parties from the moment it is executed. Thus, the ICLV44 Regulationestablishes that the ownership of securities registered with the ICLV is done with the respectiveentry at the accounting record in favor of the buyer on its settlement date.45 However, for the buyerto enjoy the associated rights, registration in the issuer’s books is necessary. In the case of book-entry securities, information contained in an ICLV accounting record prevails with reference to anyinformation held at the company registry or other record.46

Issuers can oppose to good faith buyers of book-entry securities only in the case of objectionsresulting from the entry in relation to the respective issuing public deed or legal instrument, fromthe value features contained in these documents and those that could have been used if the bonds

42 Vid. Executive Order N  287-HC.43 Vid. SML, Tit. VIII, Chap. I, sec. 213.

44 Vid. ICLV Regulation, Tit. IV, Chap. I, sec. 48.45 However, when the case is about foreign issuers, the conveyance of property is done as per provisions ofagreements signed with foreign entities. Vid. ICLV Regulation, sec. 103.46 Vid. SML, Tit. VIII, Chap. I, sec. 215 and ICLV Regulation, Tit. IV, Chap. I, sec. 50.

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were represented by securities.47 Authentication certificates, which can include all or part of aholder’s securities, will have a maximum validity term of three days from issuing date.48

5.5.2 Securities not Registered with the ICLV

The ownership transfer of securities not registered with the ICLV is governed is by the terms of thetransfer agreement, or in case this does not exist, by the relevant regulations.

5.6 PLEDGE OF SECURITIES AS COLLATERAL

The pledge procedure is as follows:

1. The participant submits the pledge entry application as requested by its customer/client toCAVALI.

2. As a result of the pledge agreements review, CAVALI proceeds to determine if the real collateralcovers the pledged securities, as in the case of released shares, cash dividends, subscriptionrights certificates and interest.

3. No later than the day after receiving the necessary documentation for the entry, the operatorimmobilizes the shares in the system.49

4. Once the immobilization of the corresponding shares is done, the participant who requestedthe pledge’s entry is notified in writing.

The repossession procedure is similar, with the difference that the entity requesting the repossessionentry is necessarily the Judiciary or an execution body. In addition, in a repossession entry, there isno instruction evaluation by CAVALI.

The procedure to remove the pledge is as follows:

1. The participant submits to CAVALI the application to remove the pledge as required by hiscustomer/client, enclosing the respective notification from the creditor.

2. In this case, CAVALI shall proceed to determine if the corresponding creditor is requestingthe pledge removal.

47 Vid. SML, Tit. VIII, Chap. I, sec. 214 and ICLV Regulation, Tit. IV, Chap. I, sec. 49.48

Vid. SML, Tít. VIII, Chap. I, sec. 216 and ICLV Regulation, Tit. IV, Chap. I, sec. 60.49 According to Sec. 59 from ICLV Regulation, the taxes or burdens over securities registered with the ICLV,must be registered as soon as the necessary documentation to complete the entry is received, no later thanthe following day of receiving said necessary documentation.

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3. No later than the next day after receiving the necessary documentation to lift the pledge,the operator unblocks the pledged securities.

The removal of the repossession is similar, with the difference that the removal instruction is givenby the Judiciary or by an execution body directly to CAVALI. Issuers must communicate to the ICLVimmediately after learning about any action affecting the securities entered into the accountingregistry, enclosing the necessary documentation.

When securities are pledged, they are no longer fungible and the relevant individualization mustbe executed. The constitution of tax must be understood together with the accounting entry, that isto say, it is enforceable before third parties as from the registry entry. In addition, in the case ofpledges, the entry is equivalent to ownership transfer of the security, which proves compliance withthe necessary requirement to constitute real collateral right over personal property.

5.7 TREATMENT OF STOLEN OR LOST SECURITIES

The SML50 establishes that within the day following the learning of impairment, loss, or robbery ofa security or of any legal measure or act affecting the security, the issuer or custodian must notifythe Stock Exchange or the institution responsible for the operation of the centralized mechanism inwhich they were registered, as well as CONASEV. For lost or stolen securities, the above mentionedinstitutions must give adequate publicity to such events. The LSE provides a report of the securitiesimpaired, lost or robbed through its Daily Bulletin. This OVL51 provides the rules for the adequatedisclosure in the market of impairment, loss or robbery cases of securities registered with CONASEV.

5.8 LEGAL MATTERS CONCERNING CUSTODY

Under the SML, custody as a service is the responsibility of brokerage firms,52 mutual funds53 and itis also set forth as part of the ICLV’s54 purpose. CAVALI’s bylaws list custody as one of its functions55

the custody of securities registered with another include ICLV or similar institution. Likewise, custodyis established as one of the functions that banks can perform, according to the General Law of theFinancial System and Insurance System and under the Organic Law of the SBS.56

50 Vid. Section 33 from SML.51 Vid. CONASEV Regulation N° 902-91-EF/94.10. This regulation was enacted under Legislative Decree N°755, former SML, in order to better apply section 61 of the mentioned law.52 Vid. SML, Tit. VII, Chap. II, Sub-chap. III, sec. 194.53 In the case of mutual funds, there is an obligation of custody for securities or documents representing theassets in which mutual fund resources are invested. Vid. SML, Tit. IX, Chap. I, Sub-chap. II, sec. 253.54 Vid. SML, Tit. VIII, Chap. III, sec. 223.55 At present, CAVALI does not perform custody of physical securities. The Fifth Final Provision of ICLVRegulations, point out that while the rules applicable to physical securities registered with ICLV are notenacted, the rules as regards the accounting registry contained in the Law and Regulation, are applied tobook-entry securities and those issued by a foreign issuer.56 Vid. Tit. III, Chap. I, Section 221 number 33.

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5.8.1 Fungibility

Book-entry securities of a same issue, class or series with equal features are considered fungible.Therefore, the holder of a security at the accounting registry will be such for a certain amount ofthem without individual identification of the securities. The securities registered with the ICLV forwhich real rights or taxes have been constituted are no longer fungible. Such securities cannot betraded in centralized57 mechanisms.

5.8.2 Elimination of Physical Delivery

The transfer of securities on the trading-floor must necessarily be done by means of book entrysystem as previously indicated in section 6.5. However, the investor has the option of returning tophysical securities, provided that the latter representation form was an issuing condition.58

5.9 PRIMARY MARKET

Chart 2 shows the structure of the Peruvian securities markets.

Private and public companies issue securities in the Primary Market to raise funds, to constitute orenlarge their capital or as an alternative to borrowing from banks. It is divided into:

Chart 2: Structure of Securities Markets

Securities Markets

Primary Market Secondary Market

Public Offering Lima StockExchange Over the Counter

Private Offering Rueda de Bolsa

Mesa deNegociación

57 Vid. SML, Tit. VIII, Chap. I and ICLV Regulation, Tit. VI, Chap. I.58 Vid. Tit. I, Art. 4 and Tit. III, SML Chap. II.

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• Public Offering59 is a widely disclosed invitation made by one or more natural or legalpersons to the general public, or to certain segments of it, to purchase new securities,issued for that purpose. In Primary public offerings, the securities must be registered, priorto placement, with the Securities Market Public Registry which is operate by CONASEV.

• Private Offering60 is an offer solely directed to institutional investors. The SML defines theconditions that the institutional investors participating in this type of offering should meet:

(a) The securities purchased by these investors cannot be transferred to third parties for atwelve-month term after acquisition, unless these are transferred to another institutionalinvestor institution or unless the securities have been previously registered in theSecurities Market Public Registry.

(b) In the case of an offering of securities whose lowest nominal or placement value wereequal or higher than S/.250,000 per unit, the original buyer must not transfer securitiesto third parties at a lower nominal or placement value.

5.10 SECONDARY MARKET

Already issued securities are traded in the secondary market. Bidders, prospective buyers and sellersof the outstanding securities participate in this market. This segment consists of the Centralized TradingMechanisms (at present, the Stock Exchange Trading-Floor and the Trading Desk61 ) and the rest of theover-the-counter (OTC) market, where securities purchase/sale transactions are executed with nocentralized mechanisms. The terms Rueda de Bolsa and Mesa de Negociación have very specificmeanings in Peru, but there are no exact translations in English. The terms used in this report arerespectively Trading-Floor and Trading Desk. For the Trading-Floor, all settlement of securities is bybook entry, whereas for the Trading desk, it is possible to submit physical instruments for settlement.More details on these can be found in sections 6.2 and 6.3. The institution in which the stock marketis centralized in Peru is the LSE and the broker-dealer entities are called Brokerage Firms. In line withthe self regulatory regime, CONASEV oversees the organization operation of the Brokerage Firms.

5.11 STOCK EXCHANGE TRADING

The Trading-Floor (Rueda de Bolsa)62 is the traditional centralized mechanism for the trading ofsecurities, where the SABs buy and sell securities previously registered with the Stock Exchange.

59 Vid. SML, Tit. VIII, Chap. I and ICLV Regulation, Tit. VI, Chap. I.60 Vid. Tit. I, Art. 4 and Tit. III, SML Chap. II.61 The Regulation of the Trading-Floor of the LSE, CONASEV Resolution Nº 021-99-EF/94.10, Sec. 7 disposesthe cancellation of operation authorization of the Trading-Desk of the LSE, from September 1st, 1999. At themoment CONASEV and the LSE are coordinating the processing of dispositions in order that the securitiesnegotiated in the Trading-Desk are transferred to the Trading-Floor.62 Vid. Tit. V, Chap. II, Sec. 117 of the SML. Centralised trading mechanisms are those that gather or interconnectseveral buyers and sellers simultaneously so as to trade their securities. The trading-session and others arecentralised trading mechanisms (currently, only the LSE’s Trading Desk).

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Trading is executed through the Electronic Trading System (ELEX), although in the case of equityshares, it is possible to negotiate trades on the floor of the exchange. Securities to be traded in thissystem can be equity or debt instruments: common or equity shares, investment shares, certificatesof preemption (preferred certificate rights), corporate bonds and bonds in general. At the LSE, theTrading Desk also operates a centralized mechanism established to support OTC transactions andmake the trading of securities not registered with the exchange easier.

5.11.1 Trading Hours

Exchange trading-sessions are held every business day at the hours described. For variable incomespot transactions,63 orders are entered into the ELEX between 9:00 AM and 9:30 AM (Pre-OpeningStage). During this period bids cannot be withdrawn. The trading session is from 9:30 AM until1:30 PM. In this period bids entered into ELEX can be withdrawn one minute after entry, unless it isa price formation proposal. The closing session is from 1:30 PM to 2:00 PM. Bids entered into thesystem may be withdrawn after one minute.

5.11.2 Electronic Trading System

The ELEX64 started operating in August 1995 to facilitate trades executed on the LSE. This systemallows the user to interact in real time with the LSE. The System supports a trading mechanismthat offers the coexistence of floor trading at the Trading Room and remote trading throughterminals. This mechanism has been established for the equity market. Thus, the orders andtransactions with equities registered on the Stock Exchange are entered into the systemsimultaneously, through an ELEX terminal or through the Trading-Floor by means of slips, whichare read by an optical scanner. The repo and debt instrument trades are exclusively done throughELEX. This means that transactions of this kind can not be executed on the floor (Trading-Floor).65

As regards the equity market, stockbrokers may enter their orders and trade securities throughELEX from the terminals located at their offices and on the Trading-Floor. On the trading-floor, theelectronic trading is mainly performed through the following groups:

(a) Equity Group: Equity, American Depositary Receipts (ADRs), Investment and Mutual FundParticipation Certificates and Certificates of Preemption are traded under the continuoustrading segment, automatically applied by the system.

(b) Repo Group: Equities and debt operations are traded under a continuous trading proceduredirectly applied by the user.

63 Repo operations take place between 9:00 AM and 2:00 PM.64 The LSE bought the Electronic Trading System (ELEX) from Effectinvest Bank AG, Austria.65 All operations at the Trading Desk are exclusively made through ELEX.

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5.11.3 Types of Transactions

The following transactions may be currently executed on the LSE’s Trading-Floor.66

Spot transactions: These transactions are realized through an automated system of securitiespurchase/sale orders at a specified price, to be settled at a term not longer than three businessdays from trade execution. (In case of equity or securities representing rights over shares, theyare settled on the third day. In the case of spot transactions with instruments representing debt,they are settled up to the third day.) Spot transactions may be executed under the continuoustrading session in the case of equity or securities representing rights over shares or underperiodical trading procedure in case of debt instruments.

Repurchase agreements: These transactions with either equities or debt involve two simultaneousoperations. One is a spot transaction, where a lender purchases a security from a prospectiveborrower or seller, and the second is a forward trade, through which both participants bindthemselves to resell or repurchase the same security, respectively, on a future date at an agreedupon price. This operation allows the purchaser to benefit from the interest rate paid by theseller to obtain the requested money. That profit is reflected in the spread between the price ofthe spot transaction and the price of the forward transaction. The total term of the operationcannot exceed 360 days.

Repurchase agreements can be executed in local currency (nuevos soles) or in foreign currency(US dollars) at the LSE. There is an additional procedure, the secondary repurchase agreement(REPOS), whose main objective is to provide liquidity to the repo investor, so he can transfer hisposition to a new participant before the operation’s maturity, in exchange for an agreed uponpremium.

In addition, there are also other kinds of transactions such as:67 Acquisition Public Offering(OPA), Sale Public Offering (OPV), Purchase Public Offering (OPC) and Exchange PublicOffering (OPI).

Forwards and Securities loans are mechanisms already defined in the regulation but not yet inoperation.68

Forward trades: These are transactions where the buyer and seller agree upon a future predeter-mined date for settling the operation that must exceed the term set for spot transactions but beless than 360 days. These transactions are executed under the continuous trading session andthey may take the form of simple forward trades or forward operations with a premium. In theformer, the forward trades are settled on the date agreed upon by the parties, while in the latter

66 Both types of operations, cash and repos, can also be made through the Trading Desk.65 Vid. SML, Tit. III, Chap. III.66 Vid. Regulations for Operations at the LSE’s Trading Session, Tit. III, Chap. II y IV.

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operations, the buyer can settle the operation unilaterally before the agreed upon settlementdate, in exchange for the payment of a premium.

Securities lending: Securities lending can be in either equities or bonds,69 and it involves twosimultaneous transactions: (i) in cash, where the prospective securities buyer or borrowerpurchases an instrument from a money buyer or lender; and (ii) forward trade, through whichboth participants bind themselves to repurchase or resell the same security, respectively, at afuture date and at a price previously agreed upon. This operation allows the lender of securitiesto earn the rate of interest that the borrower is paying in order to obtain the desired securities.The rate reflects the spread between the spot transaction and the term transaction of the sale ofsecurities. The total maturity of the operation shall not exceed 360 days.

5.11.4 Registration Requirements

The procedure to enter previously issued securities in the Securities Market Public Registry starts inthe Stock Exchange. After verifying compliance with registration requirements (submission of financialstatements, Corporate Bylaws, list of stockholders, directors and managers of the issuer, affiliatesand economic groups, registration at the Public Registry, etc.), the Stock Exchange forwards thedossier to CONASEV to register it with the Securities Market Public Registry.

Stockholders representing at least 25% of the capital stock of the issuer may request the registrationof their shares. In this case, registration is limited to the shares belonging to the applicants, whichform a new series or class. In the case of investment shares, the registration application must besupported by the owners of shares representing at least 25% of the capital stock and in this case thewhole issuance is registered. The issuer may request share registration with the prior consent ofStockholders at a General Meeting or similar meeting, or following the issuance agreement termsor equivalent legal instrument. Seventy-two hours after share registration, shares may be negotiatedon the trading-session.

As of May 24, 1997, the Stock Exchange was authorized to register securities representing rightsissued and placed abroad conforming to ADR or GDR programs. In this regard, foreign currencyshares from Credicorp (BAP), Newmont Mining Corporation (NEM) and Southern Peru CopperCorporation (PCU) are currently traded on the New York Stock Exchange (NYSE). In addition, ADRsissued by the Banco Wiese Ltdo. (BWP), Compañía de Minas Buenaventura – Series “B” (BVN) andTelefónica del Perú – Series “B” (TDP) are traded. Offerings in Peru of equity of companies incorpo-rated abroad can be undertaken once the securities have been registered with the Securities MarketPublic Registry.

69 These type of transactions may not be executed at the LSE yet.

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5.12 OVER THE COUNTER MARKET (OTC)

The OTC market in Peru is composed of transactions executed on the Trading Desk and thoseoperations that are negotiated outside any centralized mechanism, known as the rest of the OTCmarket. The Trading Desk70 was established in order to encourage the centralization and orderingof securities transactions through one mechanism.

5.12.1 Trading Desk

One of the purposes of the Trading Desk was to provide this portion of the OTC market with theadvantages of a stock market, particularly in terms of price formation and market conditions, ensuringtrade liquidity, security and transparency.

At the Trading Desk, two circuits through which negotiations are executed (ELEX) can be distinguished.

Money Market: The main characteristic of this circuit is that trades are continuous and matchingof bids and offers is done automatically. The instruments traded in this market are bonds, mortgagenotes, short-term instruments’ programs, bills of exchange, promissory notes and certificates ofdeposit.

Auction Market: Trades in this circuit are executed under the periodic auction mode, i.e., aftergathering bids and offers, orders are matched. Bonds and mortgage notes can be traded in thismarket. However, the transaction of debt instruments has been centralized in the Money Market.

At the LSE two auctions are held daily, with the following schedules:

5.12.2 Rest of Over-the-Counter Market

The rest of the OTC market is composed of those transactions executed with instruments registeredon the Trading-Floor or the Trading Desk, but which are traded outside these centralized mechanisms,and those transactions executed with securities not registered in any centralized mechanism.Brokerage firms undertaking such transaction are obligated to inform the CONASEV of theseactivities.71

70 Resolution Vid. CONASEV Nº130-82-EFC/94.10 dated October 19, 1982.71 Resolution Vid. CONASEV Nº027-95-EF/94.10.0 dated January 19, 1995.

Adjudication

11:15 AM

1:45 PM

Enterring ofadditional orders

10:30 AM

1:00 PM

Pre-application

10:00 AM

12:30 PM

Enterringof proposals

9:00 AM

11:30 AM

Adjudication

First

Second

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5.13 MARKET SIZE

5.13.1 Primary Market

In 1997 to 1998, growth in the value of securities issues was just under 7%, much less than the62% annual growth rate from 1995 to 1997, or the 210% increase in 1994. Out of the total ofprimary issues registered with the Securities Market Public Registry in 1998, US$408 million wereplaced, and the balance (US$630 million) was not issued. Only 42% of the total registered wasabsorbed by the market. If the issues outstanding registered in 1997 (US$230 million) are takeninto consideration there could be potential securities offering of almost US$1,000 billion.

5.13.2 Secondary Market

After nine years of continuous growth, market capitalization fell by 36% in 1998, to US$11,035million, against US$17,383 million recorded for 1997 (See table 8). Investment shares registereda decline of 46%, considerably more than the drop in equity shares. This higher decline reflectsnot only a price effect, but also a reduction in Investment Share Accounts. This decline is mainlyexplained by the public offerings of investment shares in exchange for equity shares, as the onesmade by Cía. Minera Buenaventura S.A., Southern Peru Copper Corporation and Volcán Cía.Minera.

Table 8: Sectoral Market Capitalization at the LSE(US$ millions)

1994 1995 1996 1997 1998

Equity shares 6,648.30 9,476.55 11,200.24 13,941.26 9,060.97

P.F.A. (pension funds) 68.20 164.81 245.67 146.06 173.63

Banks and financial institutions 2,243.70 2,099.25 2,410.99 2,593.71 1,754.94

Industrial sector 1,512.80 2,001.12 2,205.26 3,059.51 1,938.81

Mining sector 521.50 765.42 1,104.97 1,451.99 1,084.62

Insurance 424.40 380.69 357.10 397.72 254.09

Rural sector — — — 440.78 227.01

Utilities 1,666.20 3,706.53 4,465.00 5,185.52 2,995.08

Others 211.50 358.73 411.25 665.97 632.79

Investment shares 1,514.10 1,338.92 1,341.58 1,464.16 788.83

Industrial sector 894.10 756.45 653.93 774.09 403.13

Mining sector 617.50 580.78 686.30 688.72 379.39

Others 2.50 1.69 1.35 1.35 6.31

Securities issued abroad — 885.77 1,300.35 1,977.55 1,185.53

LSE capitalization 8,162.40 11,701.24 13,842.17 17,382.97 11,035.33

Source: The Lima Stock Exchange.

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In 1998 out of 180 equity shares registered with the LSE, 118 were traded, accounting for a 3%reduction versus the previous year. At the same time, the investment share trading decreased from106 securities to 98, down 5.75% (see Table 9).

Table 9: Securities Registered and Traded at LSE

The total amount traded on the securities secondary market in 1998 (US$8,853 million) fell by30.3% versus 1997. Some 48% out of the total trading volume on the LSE in 1998 resulted fromdollar-denominated transactions (30% from Trading Session operations and 70% from Trading Deskoperations. See Table 10). For the period 1998 the security with the highest liquidity ratio wasTelefónica del Perú Series “B”, followed by the investment shares of Unión de Cervecerías PeruanasBackus & Johnston and the securities issued by Credicorp abroad. In terms of market capitalization,the largest company was Telefónica del Perú Series “B” (US$1.8 billion), followed by CredicorpLimited (US$793 million), Banco de Crédito (US$501 million) and Unión de Cervecerías PeruanasBackus & Johnston (US$501 million).

5.14 RECENT TRENDS

5.14.1 LSE Designated as “Designated Offshore Securities Market”

As a general rule, every offer or sale of a security in the United States must be registered with theUnited States Securities and Exchange Commission (SEC), or qualify for an exemption fromregistration. Regulation S provides a safe harbor from registration for sales and resale of securitiesthat are made offshore (outside the United States) to non-US persons, as long as certain conditionsare satisfied. A seller can satisfy the resale provisions of Regulation S by selling the securities offshoreon a “designated offshore securities market.” On May 14, 1998, the SEC granted the LSE status as a“designated offshore securities market.” As a result of this designation, securities that have not been

1994 1995 1996 1997 1998

Registered securities

Equity shares 124 144 150 170 180

Investment shares 143 154 137 123 120

ADRs 0 0 0 1 1

Mutual funds 0 0 0 1 2

Traded securities:

Equity shares 88 94 120 122 118

Investment shares 121 128 127 106 98

ADRs 0 0 0 0 0

Mutual funds 0 0 0 0 1

Debt instruments (series) 79 142 221 293 498

Source: The Lima Stock Exchange.

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registered with the SEC and that were sold to US Qualified Institutional Buyers (QIBs)72 - certainlarge institutional investors - under Rule 144A may now be resold on the LSE. Normally, becauseRule 144A securities are considered restricted, they can only be resold to other QIBs and cannot besold in the public markets for two years.73

Table 10: Trading Volume in the Secondary Market

1998Total Transactions

1997 transactions in US$Stock Exchange Trading-Session 6,699.76 4,357.84 1,298.21

Cash transactions 4,980.07 3,345.12 312.87Corporate bonds 684.71 264.24 84.57Capital shares 3,025.15 2,381.03 228.30*Investment shares 1,270.21 685.93 —Others — 13.92 —

Repurchase agreements 1,719.69 1,012.72 985.34Trading Desk 5,351.33 3,378.39 2,378.55

Cash transactions 4,750.09 3,005.60 2,045.18Bonds 1,949.02 1,827.62 N.A.Short-term instruments 515.40 187.92 N.A.Certificate of deposit 2,162.87 900.51 N.A.Mortgage notes 122.81 89.55 N.A.

Repo 435.35 289.44 273.43Repurchase agreements 165.89 83.35 59.94

Total Traded at LSE 12,051.09 7,736.23 3,676.76OTC securities registered at LSETrading Session** 291.14 678.00 N.A.Rest of OTC market *** 283.90 438.85 N.A.

Total Secondary Market 12,626.13 8,853.08 3,676.76Source: The Lima Stock Exchange. * This figure includes cash transactions in equity shares, investment shares, and other instruments. ** Off-exchange trading of securities registered with the Lima Stock Exchange.*** Off-exchange trading of securities not registered on the Lima Stock Exchange.

5.14.2 Cross-border Securities Trading

To provide investors with additional options, the LSE is promoting the registration and trading offoreign securities in its registry. This has been embodied in the Regulations for Registration and

72 Under Rule 144A, a QIB is a large institutional buyer (such as a bank or pension fund) that in the aggregateowns and invests on a discretionary basis at least $100 million in the securities of issuers that are not affiliatedwith it. Broker-dealers that are registered with the SEC and that in the aggregate own and invest on adiscretionary basis at least $10 million in securities of issuers that are not affiliated with them may alsoqualify as QIBs.73 Rule 144A provides a safe harbor from registration for resale to QIBs of privately placed or other restrictedsecurities.

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Exclusion of Securities in the Stock Exchange Trading Session.74 The registration will allow threekinds of securities: (i) securities that are eligible for trading at Organized Stock Exchanges orMarkets of countries participating in the Technical Committee for International Organization ofSecurities Commissions (IOSCO); (ii) those eligible for trading at Organized Stock Exchanges orMarkets of the countries that do not participate in the Technical Committee of IOSCO (non IOSCO);and (iii) securities to be privately placed, offered through Rule 144-A of the SEC or similarregulations. A list of these securities may be requested by the securities issuer or by a SponsoringAgent.75

74 CONASEV’s Resolution 125-98-EF/94.10 published on 10.10.98, effective on 11.10.98.75 The description of Sponsor Agent is included in the Regulations for Operations at the LSE’s Trading-Session(in July 1999 there exists a sponsor agent: Progress SAB).

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6 SECURITIES CLEARANCE AND SETTLEMENT

6.1 ORGANIZATIONS AND INSTITUTIONS

Securities trading takes place at the LSE. CAVALI ICLV S.A is responsible for securities clearing andsettlement. The funds settlement bank is Banco Financiero.76 Trading-Floor registered securitiescan also be traded outside the central mechanism. In these cases, the participation of a SAB isrequired, who certifies the transaction and its settlement. This certificate should be delivered to theissuer and also to CONASEV, the stock exchange and the ICLVs where the securities are registered.77

Both physical and book-entry securities can be traded outside the Trading-Floor.78 The settlementof these trades should not exceed two business days after execution.

In the case of dematerialized securities and for OTC settlement, CAVALI transfers the securities on thesame day of the SAB request, which should occur within the settlement period of such operations,(i.e., until T+2). In the case of operations with physical securities, the SAB should notify the issuerwithin two business days after execution. The issuer should register them within the following fivebusiness days. In both cases, the cash settlement is done directly between the counterparts. In thecase of securities not registered at the Trading-Floor and traded outside the LSE, CAVALI takes part inthe securities settlement only if they are dematerialized. The clearing and settlement process forsecurities registered and traded at the LSE (Trading Session or Trading Desk) is described below.

6.1.1 Clearing and Settlement Institutions

The Securities Market Law79 defines the clearing and settlement institutions as stock companieswhose exclusive objective is the registration, custody, clearing, settlement and transfer of securities.Thus, the SML does not recognize the separation of deposit functions from those of clearing andsettlement. At this time CAVALI is the only authorized ICLV in Peru.

6.1.2 Central Securities Depository

CAVALI keeps the security registry in a comprehensive and exclusive manner. ICLV80 Regulationestablishes that each market participant must open a main account (cuenta matriz) with CAVALI.This account, unique for each participant, brings together securities owned by the participant or byhis clients, in individual sub-accounts. Thus, the main account is divided into a series of sub-accounts: one for the securities owned by the participant, and one for each of the participant’sclients. Issuers can open an account at CAVALI’s registry, with the purpose of facilitating the delivery

76 At the time of writing the report the settlement bank was Banco Financiero and after January 2000 is BancoSudamericano.77 Vid. Section 123 from the LMV and Section 7 of CONASEV Resolution Nº 027-95-EF/94.10.0.78 Vid. Section 9 of CONASEV Resolution Nº 027-95-EF/94.10.0.79 Vid. Section 223 from SML.80 Vid. Section 53 from ICLV Regulation.

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of securities to the holders.81 However, in order to trade securities registered with an issuer’s account,it is necessary for these to be previously registered with a participant’s main account.

Physical instruments can also be registered at CAVALI’s accounting registry, provided these instru-ments are traded on the Peruvian and the international market and registered with a foreign institu-tion whose corporate object is the registration, custody, clearing, settlement or transfer of securitiesand who has entered an agreement with CAVALI, or are securities issued by foreign issuers admittedto trade on a Peruvian exchange, represented by physical instruments.82 In these cases, the immo-bilization is necessary in order to trade securities. To date, there are no rules governing the immo-bilization procedures of physical instruments registered with CAVALI. CAVALI must ensure the con-trol of the securities entered in its registry, as well as the exact matching between global balances ofthe issues registered and the securities positions registered with its participants accounts.83

6.1.3 Participants of Clearing and Settlement Institutions

The SML allows broker-dealer agents, banking and financial firms, insurance and reinsurancecompanies, mutual funds, investment and pension funds, as well as other legal persons, local orforeign alike, proposed by CONASEV through general provisions,84 to participate in the ICLV. TheSML also establishes the existence of direct and indirect participants, whose features are describedin the ICLV85 Regulations. Direct participants can clear and settle transactions. Indirect participantsmust have an agreement with a direct participant responsible for their settlement. At this time, theonly direct participants are the SABs.86 The participation of indirect participants depends on thedevelopment and approval of CAVALI’s future Internal Regulations, its related provisions and itsmanual of internal rules.87

The possibility of becoming a direct participant will remain restricted to brokerage firms, securitiesdealer firms, banks, other ICLVs, institutions incorporated abroad, whose corporate purpose isequivalent to that of the ICLV, and other institutions authorized in general by the CONASEV, providedthat the requirements set forth in CAVALI’s future Internal Regulations are accomplished.88 Therequirements that must be met to become a direct or an indirect participant and the rights andduties thereto are established by the ICLV89 Regulation, and these must be enforced during thedevelopment of CAVALI’s future Internal Regulation.

81 Vid. Section 52 from ICLV Regulations.82 Vid. Sections 51 and 102 from ICLV Regulations.83 Section 65 from ICLV Regulations establishes a number of steps to control: security situation (status),security availability, agreement between the positions by holders and the global position of each issue,registry of securities movements with evidence documentation and agreement between CAVALI’s centralregistry and that of the issuer.84 Vid. Section 224 from SML.85 Vid. Section 32 from ICLV Regulations.86 At present, custodians can take part in a securities settlement transactions, but they do not settle funds.87 Vid. Section 10.e from ICLV Regulations.88 Vid. ICLV Regulations, sec. 32.89 See Sections 35, 36 and 37 ICLV Regulations.

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6.2 SECURITIES REGISTRATION AND CUSTODY PROCEDURES

6.2.1 Registration and Custody Procedures

To operate or register ownership of securities with CAVALI, the investor must already be registeredwith the Stockholders Registry (Registro Único de Titulares, RUT). When registering with the RUT,the investor receives a unique code that must be used when executing his transactions. Every investor,whether local or foreign, holds at CAVALI one or more accounts with all his securities, all identifiedwith the same RUT, although the investor can only have one unique account. In order to carry outtransactions, the investor must have his securities registered in a main account. Also the participants,at present the SABs, must have a RUT to identify securities held for their own account. In order tomaintain due confidentiality of the ownership, each participant can only have access to theinformation contained in the individual accounts opened under his main account. The registryoperates by means of a book-entry system. CAVALI registers the securities transfers resulting from thetransactions crediting the buyer’s account, and debiting the seller’s account.

CAVALI provides the issuers with securities registered in the system with ordinary custody servicessuch as delivery of subscription rights, performance of economic rights (payment of dividends,coupons and redemption). The relationship between CAVALI and the issuers are generically governedby the ICLV90 Regulation, and further detail will be developed in CAVALI’s Internal Regulations andthe respective contracts with the issuers. Issuers with securities registered with CAVALI receive dailyprinted reports concerning transactions involving their securities. In addition, they receive the monthlysecurities positions of their shareholders at the end of each month, or at the time of a benefitdelivery, or corporate action affecting the securities (mergers, spin-offs, etc.) for reconciliation purposesor for a given date, upon request. To facilitate issuers’ monitoring of their shareholders’ orbondholders’ positions, and in general to support their activities, CAVALI offers, under individualagreement with the issuer, daily reporting of holders’ positions through its electronic system.Participants can also receive daily, and by electronic means, the balances of the sub-accounts heldin their main accounts.

6.2.2 Securities Deposits in Custody

Any investor may have their dematerialized securities deposited with a custodian’s main account.When instructing CAVALI about the settlement details, the participant must indicate whether or notthe securities settlement is effected through the custodian. In the case of a sale settled through acustodian, the securities are debited directly from the custodian’s account. For this purpose, thecustodian must have confirmed from his terminal the acceptance of said transaction settlement. Inthe case of a purchase, securities will be directly credited to the custodian’s account on the day ofthe transaction settlement.91

90 Vid. Title V from ICLV Regulations.91 For sale cases where securities sold are in another SAB (not with a custodian) and in purchase cases wheresettlement is done through the SAB and later the holder wants to transfer the securities to a custodian, the needexists to perform a transfer. For safety reasons, some SABs request their customers to perform the transfer beforecompleting the sale, but in this case it would be an ordinary settlement and not through a custodian.

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6.2.3 Securities Withdrawal from the System

Any investor may decide to withdraw his securities from the system. To do so, the investor mustaddress the request to the participant where the securities are registered. It is also possible torematerialize securities under book-entry form into physical instruments, so as to withdraw themfrom the system, as per the circumstances specified in the regulations.92 Any investor may requestthe rematerialization of his registered securities into physical instruments, provided that the issuanceis represented by physical instruments. The conversion into physical instruments implies thewithdrawal of securities from the system.

6.2.4 Securities Dematerialization

The SML establishes that the securities representation form is a voluntary decision of the issuer, andconstitutes a condition of the issue subject to modification.93 The representation of book entrysecurities takes place by means of its registration with the registry of a single ICLV (at present, withCAVALI), even when they are not registered for the trading-session.94 The SML allows the form initiallyselected to represent securities to be changed. In order to dematerialize a series or issuancerepresented by physical instruments into book-entry or vice versa (materialization), it is necessaryto have the issuer’s consent as per the requirements set forth in the company bylaws, issuanceagreement or other equivalent legal instrument.95

Holders may also request the dematerialization of their physical instruments, provided they wish torenegotiate them in a centralized mechanism. On the other hand, an investor may request thematerialization of his book-entry securities, provided the issuance is represented in physicalinstruments and the investor wishes to withdraw them from the ICLV registry in which they are held.By the end of 1998, book-entry balances registered at CAVALI accounted for 52% of the total marketcapitalization.96 This percentage has grown during the last years, with non-resident investors owningan important share of dematerialized securities (see Table 11).97

92 Vid. Section 44 from ICLV Regulations.93 Vid. Section 42 from ICLV Regulations.94 Vid. Sections 211 and 212 from SML.95 Vid. Section 209 from SML.96 Data from the chart “Registered Holdings at CAVALI ICLV”, at the LSE, December, 1998.97 Statistics about the value of physical securities held by foreigners are not available.

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Table 11: Market Capitalization and CAVALI Holdings(US$ millions)

1996 1997 1998

Market capitalization 11,983.0 15,575.5 11,548.6

Value of holdings in CAVALI 5,132.3 7,203.8 5,978.1

Dematerialized (%) 42.8 46.3 51.8

Value of non-resident holdings at CAVALI 2,972.6 3,546.0 2,638.5

Non-resident holdings in CAVALI (%) 57.9 49.2 44.1

Source: The Lima Tock Exchange.

6.3 SECURITIES CLEARING AND SETTLEMENT PROCESSES

6.3.1 Types of Transactions by Trading Circuits

It is important to make a distinction between two trading circuits in the LSE: the Trading-Floor andTrading Desk.98 Transactions are matched among SABs, either for their own account or for thirdparties’ account.

The Trading-Floor (La Rueda de Bolsa): This is a centralized trading mechanism in whichtransactions take place when bids and offers are matched. Likewise, orders may be introducedcontinuously or else be grouped by time intervals (auction mechanism). For orders continuouslyintroduced, the ELEX system may match (execute) the counter-orders automatically or directly ifrequested by the buying or selling broker,99 since these are always firm offers. The ordersintroduced by batches can only be executed automatically.

Spot or repo transactions can be executed through the trading-floor. Spot transactions are settledon T+3 through CAVALI, by means of a payments netting process and special accounts with thesettlement bank or, in case of defaults, on an order by order basis (traditional settlement). Intraditional settlements, the transfer of securities is always through CAVALI, but generally thepayment of funds can be done either through CAVALI or directly among dealers (direct settle-ment). However, it is not possible for spot transactions to settle directly.

In traditional settlement, CAVALI proceeds to transfer the securities after collecting paymentfrom the buying SAB or, in the case of bilateral settlement, after verifying that the payment hasbeen carried out among the parties. In the latter case, brokers must submit to CAVALI a formsigned by both parties reporting the payment of the transaction, since CAVALI is in charge of thesecurities transfer. Repurchase agreements (repos) are settled transaction by transaction through

98 The Regulations for Operations at the LSE’s trading-floor, CONASEV’s Resolution N° 021-99-EF/94.10, sec7 orders the cancellation of the authorisation for LSE’s Trading Desk’s operation, effective as from September1st 1999. At present, CONASEV and LSE are making joint efforts to prepare the regulations for the securitiestraded at the Trading Desks to be moved to the Trading-Floor.99 In this case, the dealer applies directly a buy or sell order registered at the Order Book.

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CAVALI, or outside the system (bilateral settlement), as agreed by the parties. Given that theobjective of this operation is to obtain liquidity, the first transaction settlement often takes placetoday (on T), although it is possible to do it on T+1 or T+2. It is possible for both counterpartsto cover the open positions by means of a secondary repo. Cash settlement can be done throughCAVALI or directly among participants, as per agreement of the involved parties. In the case of alltransactions executed on the trading-floor, the traditional settlement of securities is always bookentry as per the SML.

The Trading Desk (La Mesa de Negociación): This is a centralized trading system, in whichtransactions are agreed upon between the parties. In this system spot, repurchase agreementsand repo transactions can be executed. Settlement of spot transactions at the trading desk isdone via traditional settlement (order by order). The settlement proceedings for repurchaseagreement and repo transactions is similar to that for repos in the trading-floor. For transactionsexecuted at the Trading Desk, it is also possible to submit physical instruments for settlement.

6.3.2 Flow Chart of Clearing and Settlement Processes

The following charts describe the clearing and settlement process for transactions settled throughCAVALI by means of the payments netting process. The timing is similar to that of spot transactions,whose settlement is done on T+3. In the Chart 3 the clearing and settlement is done through a SAB,while in the Chart 4 the selling party settles the transaction through a custodian. Both examples aresimplified as they assume that neither modifications nor withdrawals of transactions are necessaryduring the clearing and settlement process. Repurchase agreements at trading-sessions or thoseexecuted at the Trading Desk are not exactly the same as in the flow chart represented in thediagrams and the timing of settlement stages is different.

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T: 1. SAB executes client’s orders at the LSE. 2. LSE sends CAVALI the detail of transactions executed. 3. CAVALI sends the SAB those transactions involving movements in the sub-accounts of its main accounts. 4. SAB provide CAVALI the client’s RUT. 5. As a result of multilateral netting, CAVALI sends each SAB its credit or debit position, which must be settled at T+3. 6. CAVALI verifies whether the Client A seller has enough securities to be delivered to the Main Account of SAB A. If

affirmative, it registers as seller to Client A, debiting the corresponding securities from his individual account. 7. CAVALI registers the securities purchased at the main account of SAB B to the order of Client B (without granting

availability).

T+3, before 9:30 AM: 8. The funds from SAB B buyer must be available in its special account with Banco Financiero.

T+3, at 12:00 AM: 9. After performing the final payment clearing, CAVALI instructs Banco Financiero to transfer the funds between SABs

special accounts therein.10. Banco Financiero performs the payment settlement. At the same time, CAVALI settles the securities, granting availability

to the purchased securities.

Chart 3: Clearing and Settlement Done through Brokerage Firms (SABs)

Principal Seller A Principal Buyer B

SAB A SAB B

L S E

Clearing and Settlement

CAVALI

Master Account of SAB A Master Account of SAB BRegistry

BANCO FINANCIEROSpecial Account

of SAB ACAVALI

Centralizing AccountSpecial Account

of SAB B

1 1

2

4 3, 5 3, 5 4

6 7 8

6 7, 10

9

10 10

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6.3.3 Settlement Stages

6.3.3.1 Spot transactions on the Trading-Floor

Procedures on T

Assignment of ownership (up to 6:00 PM)At the end of T, the LSE sends to CAVALI the details of transactions executed (orders are notsubmitted) (see Chart 3, point 2 and Chart 4, point 2). Submission is done by means of filetransfers through dialog interface between the ELEX and the Reflection systems. In turn, CAVALIsubmits by file to the SABs transactions indicating securities movements in the sub-accounts ofits main account (see 3,3 and 4,3). The SAB verifies transactions’ details, incorporating thenumeric codes of buyers and sellers ownership (3,4). If necessary, it specifies whether securitiessettlement will be done through a custodian (4,4). They send to CAVALI the verified informationwith the new data incorporated. The assignment process ends on T at 6:00 PM.

Transaction balance (at 6:00 PM)CAVALI proceeds to match the transactions received from the SAB, verifying the counterpart’sexistence. Then, it submits to the SAB any mistakes and mismatching, so the SAB can make thenecessary adjustments.

Preliminary calculation of SAB funds positions (as from 6:00 PM)

Taking into account the transactions verified by the system, CAVALI performs a multilateral nettingof payments to be debited and credited from each SAB, obtaining a preliminary estimate of thesettlement amount. This calculation is processed from 6:00 PM on T, and CAVALI submits toeach SAB its credit or debit position, which must be settled on T+3 (3,5 and 4,5). The SABs withnet debit balances, must have funds available to cover the amount at the special accountsopened with Banco Financiero no later than 9:30 AM on T+3 (3,8 and 4,9).

Balance verification on SAB matrix accounts with sale transactionsAt 6:00 PM, CAVALI verifies whether the seller has enough securities deliverable at the mainaccount of the SAB which has been handling the sale. If there are enough securities, it willregister the holder as seller, debiting the corresponding securities in its individual account(3,6). Debit is done through securities book entry debits, and the securities will no longer beavailable for the seller as of that time.

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T: 1. SABs execute Clients’ orders at the LSE. 2. LSE sends CAVALI a detailed report of the transactions executed. 3. CAVALI submits to SAB the transactions implying movements in the sub-accounts of its main accounts. 4. SABs provide CAVALI with the clients RUT. In the case of Client A, who wants to settle the sale through his Custodian

A, the SAB A specifies that securities delivery will be done through the custodian. 5. As a result of the multilateral netting, CAVALI submits to each SAB its credit or debit position, which must be settled

on T+3. 6. CAVALI verifies that Client A seller has enough securities deliverable with Custodian A Main Account. Debit is not

possible since it needs confirmation from Custodian A. 7. CAVALI registers the purchased securities with the main account of SAB B to the order of Client B (without granting

availability) as a purchase not settled.

T+3, before 9:30 AM: 8. Custodian A confirms to CAVALI the settlement, and then the debit of securities sold is done in Client A’s sub-

account in the main account of Custodian A, keeping the non-available nature of securities registered with ClientB’s account.

9. The funds of SAB B buyer must be available at its special account with Banco Financiero.

T+3, at 12:00 AM:10. After performing the final payment clearing, CAVALI instructs Banco Financiero to transfer funds among the SABs

special accounts therein.11. Banco Financiero performs the payments settlement. At the same time, CAVALI settles the securities, granting availability

to purchased securities.

Chart 4: Clearing and Settlement Using a Custodian

Principal Seller A Principal Buyer B

SAB A SAB B

L S E

Clearing and Settlement

CAVALI

Master Account of SAB A Master Account of SAB B

BANCO FINANCIEROSpecial Account

of SAB ACAVALI

Centralizing AccountSpecial Account

of SAB B

1 1

24 3, 5 3, 5 4

6 78

8 7, 11

10

11 11

9

CustodianA

Registry

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If the seller can not cover the total of securities sold with his securities in the main account ofthe SAB seller, the CAVALI system will verify balances in favor of the holder in other accountswith other SABs. If the position cannot be covered, the system will automatically register thedifference in a temporary account to the order of the SAB where the securities may be, so thatthe selling holder orders the transfer to the SAB seller. If the holder has ordered the sale withsecurities settlement through the custodian, the system will charge the securities directly fromthis account, having previously received previous confirmation from the custodian acceptingsettlement of this transaction (B6).

Treatment of purchasesAt 6:00 PM on T CAVALI registers the securities purchased at the stock brokers’ main account tothe order of the buying holder, but without granting availability (3,7). If the purchase has beenexecuted with settlement through the custodian, CAVALI will pay the securities directly at themain account of the custodian to the order of the buying holder, but without granting availability(4,7). Securities will be available as from the moment the transaction is settled.

Processes involved on T+1In the morning of T+1, CAVALI submits to the SAB and the custodians the information pertainingto the balance verification result in their securities positions accounts. Throughout T+1, thesystem participants continue with the outstanding processes to complete settlement at theforeseen term (T+3) in particular by executing the necessary securities and funds transfers.

Processes involved on T+2Cancellation of transactions, rectification of ownership and other corrections(up to 5: 00 PM)Transactions can be cancelled up to 5:00 PM on T+2, if they have not complied with LSEprovisions and rules or lack the LSE100 Market Authorities’ authorization. The LSE will informCAVALI, which then proceeds to recalculate the positions of the participating SAB. The MarketAuthorities of the LSE may authorize the cancellation of transactions up to 5:00 PM on thesecond day following execution, provided the application is duly justified and contains writtenrepresentation consent duly authorized by both SABs.101 In this case, the intervening partiesmust request the modification of data in a transaction, this possibility being subject to MarketAuthorities’ approval.102 Although the final deadline for modifications is the time of settlement103

on T+3, CAVALI only accepts modifications up to 5:00 PM of T+2.

100 Section 18 art. c) from the Market Surveillance Regulations by the LSE, approved through CONASEV’sResolution Nº086-98-EF/94.10 published on 27.05.98, effective on 01.08.98.101 CONASEV’s Resolution Nº032-99-EF/94.10 published on 06.03.99, effective 07.03.99 approving provisionsabout transaction systems and hypothesis to amend transactions at the trading-session on the LSE.102 The modifications regarding clients’ assignment and settlement through a custodian should not be requestedto the Market Authority but directly to CAVALI.103 Section 9, par. 4, from Transactions Regulations at trading-session on the LSE, approved by CONASEVResolution Nº021-99-EF/94.10.

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Confirmation of securities transfersThe preliminary securities transfers and custodian confirmations accepting the transactionsettlement must be executed before 10:00 PM on T+2, or before 9:30 AM on T+3, respectively(4,8). Otherwise, this is considered to be a settlement failure for omission to deliver the securities.The transaction will be withdrawn from the system and it must be settled through the traditionalmethod. At the time of receiving confirmation, CAVALI debits the securities from the account.

Procedures on T+3Transactions withdrawal from clearing due to lack of securities (9:30 AM)From 9:30 AM the withdrawal from the clearing of those transactions where the seller does nothave enough securities available takes place. These transactions will be settled through thetraditional procedure (see 6.3.4.) Once these transactions have been withdrawn, securitiesdebit positions are fully covered.

Transactions withdrawal from clearing due to lack of funds (11:00 AM)Once the above process is finished, the SAB with net debit payments positions must have sufficientbalances in the special accounts opened with Banco Financiero. Otherwise, they have until11:00 AM104 to cover an overdraft to the settlement bank. At that time, if the cash debit positionis not fully covered, CAVALI will withdraw from the clearing enough transactions until the balanceavailable in the special account with Banco Financiero fully covers the debit position. Thetransactions withdrawn (unwound) will be settled through the traditional procedure (see 6.3.4.).In order to withdraw these transactions CAVALI uses a selection process according to the followingcriteria, described in decreasing order of priority.

1. Sale transactions of the most liquid securities are selected for withdrawal, so as to facilitateits subsequent settlement, especially in case of failure.

2. The selection tries (given some securities of similar liquidity) to reduce the number ofcounterpart SABs that would be affected by transactions withdrawal.

3. Along with the above two criteria, the unwinding follows an order of first in first out (FIFO).

Final Payments netting (12:00 AM)Between 11:00 and 12:00, respectively, the SAB must cover any overdrafts at Banco Financiero.At 12:00 AM CAVALI performs a final netting in order to determine the transactions that will bedefinitively settled. These transactions will be those for which the delivery of securities againstcash payment will take place. Should it be necessary to withdraw new transactions, the procedurewill be in accordance with criteria mentioned above.

Settlement (12:00 AM)Once the final clearing of securities and funds positions is performed, CAVALI proceeds to carryout the settlement. For funds settlement, CAVALI instructs the Banco Financiero to perform the

104 In case of having a great amount of overdraft requests, the time schedule will be extended up to 11:30 AM.

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transfers thereto among the special accounts held by the SAB (3,10 and 4,10). At the same time,CAVALI settles the securities, granting availability in the accounts of buying holders (3,10 and4,11).

6.3.3.2 Repo operations on the Trading-Floor

Repurchase agreements consist of two simultaneous operations. The first transaction can be spotor forward. The offsetting transaction is a reverse operation by which the counterpart agrees toresell or repurchase at a later date the same securities traded in the first transaction, at a pricepreviously agreed upon. The selling SAB in the first transaction is known as the seller. The buyingSAB is known as the purchaser. These transactions help the SABs solve their cash and securitiesshort positions.

The settlement for the first transaction is agreed between counterparts, who are able to choosebetween T (settlement for today or on T), T+1 or T+2. The processes to assign ownership, balanceof transactions and balance verification at the main accounts of the seller SAB, agreement of positionsand treatment of modifications, are identical to those described for spot transactions. The flow ofinformation between participating agents can be seen on the chart previously described, with thedifference that transactions are always settled individually. In any of the terms agreed upon for thefirst transaction, counterparts may settle directly (outside the system) or through CAVALI. However,CAVALI is currently developing its system so as also to settle these transactions with financial nettingpositions.

On T+1105 , the seller SAB receives a transfer letter at CAVALI’s cashiers window, which they will useto settle the securities sold and the collateral margin previously agreed. Once the payment of fundsand the delivery of the collateral margin are verified, CAVALI executes the charges and payment ofsecurities, blocking these at the purchaser SAB account as pledge, in the concept of collateral infavor of the seller SAB. Securities will remain frozen until settlement of the offsetting transaction.CAVALI calculates daily whether the collateral margin supplied by the seller is enough to cover thetransaction (mark-to-market). If a margin call were necessary, CAVALI will request the seller SAB tofurnish it.

The final cash settlement of the transaction can be directly done between the parties or throughCAVALI, which receives the funds of the seller SAB and supplies them to the purchaser. Once cashpayment is proved, CAVALI debits the securities from the purchaser account and it credits them tothe seller account, including the charges that may have arisen during the validity of the repo trans-action. Payment is delivered through a check to the purchaser SAB. At the same time, CAVALI lifts thepledge over the securities assigned as collateral, and returns the cash supplied as collateral, includinginterest, to the seller.

105 Except for repo operations with settlement date agreed on T.

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6.3.3.3 Operation at the Trading Desk

The procedures for assigning ownership, balance of transactions, and balance verification in theseller SAB securities account and position conciliation, are similar to those described for spottransactions in the trading-session. The flows of information between participating agents correspondto the chart previously shown, except that transactions are always settled case by case. Modificationsare only authorized throughout the same day. Cash settlement can be done directly between partiesor through CAVALI, in which case CAVALI writes the checks. To verify the data, numbered purchaseshare certificates are used. These are cleared by CAVALI once it registers the checks supplied bybuyers. When the financial settlement is done directly between the parties, CAVALI only receivesfrom the SAB the stock exchange commissions.

When securities traded on the desk are in book-entry form, CAVALI performs the correspondingcredit and debit entries in the SAB main accounts. When securities are represented by physicalinstruments, there are two sets of procedures, depending on whether they are deposited with aninstitution (custodian or SAB) or not. In the first case, the selling SAB must provide CAVALI with thecustody certificate issued by the custodian and signed by both, as well as a copy of the holder titleand sale document. In the second case, the SAB must give CAVALI the sale document and the originalof the title. Securities settlement is done once CAVALI has verified fulfillment of payments (whetherit is a direct settlement or not) and availability of the securities.

6.3.4 Repurchase Procedures to Cover Defaults

Spot transactions withdrawn from the automated clearing must be settled one by one, as per thetraditional proceeding.106 When the transaction is withdrawn due to lack of funds, cash short positionsmust be covered at CAVALI through submission of Banco Financiero checks, deposits in CAVALI’saccount with Banco Financiero or interbank transfer bills to CAVALI’s account with Banco Financiero,until 4:30 PM on T+3.

When the withdrawal is due to lack of securities, short positions must be covered with the transferof the necessary securities to the main accounts held by the SAB counterpart at CAVALI or to theassigned custodian. CAVALI must inform the affected SAB about the failed transactions at the sametime that failure takes place. The affected SAB may opt either to complete the operation undercompulsion or to abandon it. CAVALI must also inform the LSE Market of all details of the failedtransactions. The decision of the affected SAB must be notified to the LSE Market Authority no laterthan 5:00 PM on the default day. If this notification is not provided, the compulsory execution of thetransaction will be adopted ex officio.

The failure notice of one SAB by CAVALI will mean that the failing SAB must halt trading as from thenext session of the trading-floor, and for the time established by the Advisory Board. For resolutionsof compulsory execution, the exclusion is maintained until the affected SAB receives the agreed

106 In repurchase agreements at the Trading-Floor and those at the Trading Desk there is not transactionwithdrawal from the clearing, since payments netting is not used but transactions are settled one by one.

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upon securities or cash plus interests, as applicable. For waivers, the trading halt of the failing SABwill take place as from the next trading-session. In those failed transactions in which the affectedSAB opts for the compulsory execution, the Market Authority will decide which contract to beapplied in the transaction, taking into account market circumstances.

If Market Authorities select the continuous trading procedure, the execution will take place onthe day following the day that CAVALI receives the notice of failure. If execution is not possible atthis market session, then periodic negotiation procedures will be adopted. If the periodicnegotiation proceeding is selected, this must be published for two consecutive days, the firstnotice to be issued on the day following CAVALI’s communication of failure. The auction will takeplace on the day of the second notice. Settlement of transactions executed under this proceedingwill take place at a maximum term of two days. Once the transaction is executed, the LSE willprovide CAVALI with the relevant details, so that the ICLV can determine the amount to be requestedfrom the failing SAB, which must include interest accrued up to payment date. If cash paid by theSAB is not enough to cover the requested amount, CAVALI will inform the Market Authority andthe failing SAB accordingly, and the latter must fulfill payment no later than the following day. Incases where the amount affected by the executed transaction is lower than that of the firsttransaction, CAVALI will reimburse the difference to the failing SAB. If CAVALI informs the MarketAuthority of the resolution of the failure before the compulsory execution of the failed transaction,the Authority will halt said execution.

6.3.5 New Mechanisms Established by ICLV Regulations to Reinforce Security in SettlementProcedures

The ICLV Regulations have established new mechanisms to increase the assurance of settlement,even while the implementation and development of CAVALI Internal Regulations and other relatedrules are pending. The Regulations introduce two new automated mechanisms for securities andfunds which allows the participation in the system of several settlement banks, instead of only oneas currently. The Regulations also establish the creation of a Settlement Fund, with the purpose ofcovering the price risks generated in the market by the compulsory execution of those transactionswithdrawn from the clearing.

6.3.5.1 Fund provision mechanism: compulsory credit agreements between each directparticipant and the respective settlement bank

On the funds side, the Regulations establish that all future direct participants must have immediatelyavailable credit agreements with their respective settlement banks, so as to cover cash, shortpositions at the time of settlement. In this regard, when not enough funds are available at thedirect participant account with the settlement bank, the deficit is covered, up to the amount ofavailable credit, by means of credit agreements. Thus, the Regulations envision the possibility ofseveral settlement banks, instead of only one as at present. Cash not covered by the credit facilitywill be treated as per the current proceedings for cash overdrafts (compulsory execution ortransaction waiver).

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6.3.5.2 Securities provision mechanism: automated securities loan

When future direct participants do not have the necessary securities to settle their transactions, theymust obtain them through the newly created method of prearranged automatic loans of securities.The loan will be limited to a list of eligible securities. This is only contemplated for the centralizedtransaction mechanisms and for spot transactions. The securities short positions not covered by thismechanism, either for lack of available securities to lend or for not being included in the eligiblelist, will be settled according to the procedures currently followed (compulsory execution or waiver).

6.3.5.3 Market risk coverage mechanism: Settlement Fund

In order to cover the price variation risk (currency differences) that may arise by the compulsoryexecution of the failed transactions, the resulting cash differences will be covered with resourcesfrom a Settlement Fund107 to be introduced in the near future. The ICLV108 Regulations establish thegeneral criteria for determining the minimum Fund amount and contributions to be met by futuredirect participants in the settlement system as well as the use and management of Fund resources,granting in all these aspects significant responsibilities to the ICLV in charge of the settlement system,at present, CAVALI.

6.3.6 Special Settlement Requirements for Foreign Investors

In principle, there are no special requirements for settling transactions of non-resident investors.However, in order to facilitate participation in the system, non-resident investors may settle theirtransactions through a custodian. In this case, CAVALI debits (pays) the sold (purchased) securitiesdirectly at the centralized account of the custodian with the system.

Chart 5: Assuring Settlement

Current situation New provision means for securitiesand funds and risk coverage

Reasonfor failure

Lack of cash

Lackof securities

Provisionmechanism

Creditagreements

Nonexisting

Possibleresult

Execution

Waiver

Execution

Waiver

Market riskcoverage

Provisionmechanism

Compulsory creditagreements (notcompulsory before)

Automaticsecurities lending

Possibleresult

Execution

Waiver

Execution

Waiver

Market riskcoverage

Settlementfund

Settlementfund

107 Vid. SML Section 231.108 For more details, see Title VII, Chapter IV, from ICLV Regulations.

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Foreign ICLVs with similar functions to those of a local ICLV may participate in CAVALI as directparticipants in the settlement system. In the case of foreign Central Securities Depositories whichhave a direct link with CAVALI through an agreement, as the current case of the Depository TrustCompany (DTC) in the U.S., the settlement is further facilitated.

The main account held by a foreign ICLV with the system may operate as an omnibus account,while the participant assumes the responsibility of keeping appropriate records of holders.

6.3.7 Legal Issues Concerning Clearing and Settlement

(a) Delivery versus payment method: According to the ICLV109 Regulations, one of the prin-ciples that the clearing and settlement system must respect is simultaneity of securitiesdelivery and funds payment., i.e., securities transfer should happen at the same time as thecorresponding counterpart funds transfer and vice versa. Although it is true that currentlythe exchange of securities and cash does not occur simultaneously, the delivery versuspayment mechanism used in spot transactions executed in the trading-session and settledthrough the payments netting process, is close to Model II from the Bank of InternationalSettlement classification. Securities purchased are available to the buyer, prior to unblock-ing, only after funds settlement. Also in traditional settlement, buyer may access the securi-ties purchased only after CAVALI has verified fulfillment of the cash payment.

(b) Netting: The ICLV110 Regulations establish that the ICLV must incorporate netting proce-dures to promote market efficiency. At present, CAVALI calculates participants’ net paymentobligations, which are settled through the settlement bank, currently the Banco Financiero.In contrast, securities deliveries are cleared over a gross basis.

(c) Novation and substitution: The SML111 allows the ICLV to act as counterpart in all securitiespurchase and sale transactions in which it takes part, as per general provisions stipulated byCONASEV. However, CAVALI does not intervene in the transactions it settles, i.e., it does notassume obligations with its participants. Peruvian laws do not recognize the novation andsubstitution concepts. Consequently, net payment obligations resulting from the clearingprocess do not become legal obligations for participants. Thus, gross payment obligationsremain outstanding throughout the day.

(d) Bankruptcy and insolvency laws: Peruvian laws do not grant a preferred position to obliga-tions arising from securities clearing and settlement in case of participants’ bankruptcy(bankrupt or failed).

109 Vid. Section 71.f from ICLV Regulations.110 Vid. Section 72.b from ICLV Regulations111 Vid. Section 227 from SML.

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6.4 SECURITIES LENDING

At present the only operating procedure for securities lending involves the mutual securities loans,consisting of a bilateral loan among two SABs through private agreement between the parties.Under this procedure securities can be lent for one’s own account or for the account of the client,who may obtain additional profit from his securities portfolio. Existing regulations permit two othertypes of security lending, whose implementation is awaiting CAVALI’s development of operationalguidelines.

• Stock Lending: The purpose of this lending procedure is to help cover securities shortpositions. It will also help dealers to improve the organization of their investment strategies.In the existing regulation,112 pending implementation, stock lending is defined assimultaneous spot forward or forward forward, in which the lending SAB (lender) is theseller (buyer) in the first transaction. Loan duration term is limited to 360 days.

• Automatic Lending of Securities: This is a securities mechanism governed by the ICLVRegulations and pending implementation.113 It is a mechanism centralized at CAVALI andmanaged by CAVALI, which will operate automatically so as to prevent failures in securitiesdeliveries at settlement. The objective is to reduce the impact caused by lack of securitiesdeliveries during settlement, as long as there are securities available for loan.

6.5 DERIVATIVES CLEARING AND SETTLEMENT

At present there is no centralized mechanism to trade financial derivatives in Peru.

6.6 INTERNATIONAL LINKAGE AMONG CLEARING AND SETTLEMENT INSTITUTIONS

On December 11, 1998 CAVALI’s account as a direct participant in the Depositary Trust Company(DTC) was activated. This facilitates the settlement of securities transactions listed simultaneouslyon the LSE and the New York Stock Exchange (NYSE). The securities listed on this account are:Credicorp LTD, Southern Peru Copper Corporation, Newmont Mining Corporation, General Electric,ADR’s from Banco Wiese, ADR’s from Telefónica del Perú and ADR’s from Cía de Minas Buenaventura.

6.7 GOVERNMENT SECURITIES

The quantitative importance of government securities in Peru is limited and for this reason thisreport does not include a separate section or chapter on public securities clearing and settlement.

112 The rules are developed in Title III, Chapter IV from Transaction Regulations at trading-session on the LSE,approved by CONASEV it its Resolution 021-99-EF/94.10.113 See ICLV Regulations, Title VII, Chapter III.

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Box 3: Interaction of Securities and Payment Clearing and Settlement Systems

Settlement Banks

The ICLV114 Regulations specify that settlement banks have the function of transferring funds inthe settlement operation, as well as of maintaining credit agreements with direct participants. Itis the responsibility of the ICLV to appoint the settlement bank, which must comply with therequirements set forth by the ICLV.115 Apart from these requirements, the ICLV internal regulationsmust specify the functions and duties of settlement banks, the procedures for becoming a settlementbank and those for ceasing to be one. At the time of writing this report, there was only onesettlement bank, the Banco Financiero, which has performed this role for the last ten years. Thedevelopment of more settlement banks is awaiting the finalization of CAVALI’s Internal Regulations.At the end of 1998, the total assets of Banco Financiero were of S/.847.0 million, while its capitalwas S/.65.6 million.

CAVALI participants must hold accounts with Banco Financiero exclusively dedicated to thesettlement of transactions done through CAVALI.116 The accounts are used both for transactionsettlement for the participating institutions own account, as well as for the account of thirdparties. CAVALI must also have accounts with Banco Financiero to be exclusively used for collateralsettlement and management of liquidity. The agreements reached between the settlement bankand direct participants and the ICLV must allow the exclusive use of these accounts for settlementand collateral purposes with securities transactions. These accounts should not be used for otherpurposes or used to settle other obligations.

Co-ordination of Securities Payment and Settlement

In the case of spot transactions executed on the trading-floor, the dealer performs a net paymentof funds, paying or debiting in special accounts with the settlement bank. Most dealers do notkeep funds with Banco Financiero, but with their own agent banks. Thus, it is necessary to useinterbank transfers via the BCRP. Such transfers, called large value transfers, are executed throughthe current accounts held by financial institutions with the Central Bank.

Every day, dealers must transfer to Banco Financiero enough immediately available funds tocover their respective debit balances. The method most frequently used is the interbank transferto the settlement bank. This transfer must be done through the BCRP. At present this bank acceptsthe submission of inter-bank transfer orders during the day, but funds are not finally availableuntil the close of the day (never before 6:00 PM), after the settlement term of payment on thetrading-floor (12:00 PM). Thus, the funds transferred from another bank during the T+3 are notimmediately available at the settlement time of transactions executed on the trading-session.

In this context, and to avoid the withdrawal of dealer’s transactions between 10:00 AM and 11:00AM, dealers often request intraday credits from the Banco Financiero, which according to the riskevaluation performed and requesting the corresponding collateral, may grant credit to the SABs.When Banco Financiero does not grant the credit, it waits for transfer confirmation from the BCRP.In this case, the transactions involved117 are withdrawn from the clearing to be settled under the

114 Vid. Sec. 79 from ICLV Regulations.115 Vid. Sec. 80 from ICLV Regulations.116 Vid. Sec. 82 from ICLV Regulation

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traditional system. At 12:00 PM CAVALI instructs Banco Financiero to transfer payments betweenthe SAB special accounts through CAVALI central account. As per the SAB request, Banco Financierothen transfers the funds to the accounts held by the net credit SABs with other banks, through theBCRP interbank transfer system. The following chart shows the cash transfers needed for the financialsettlement of securities transactions, in the case when purchasing and selling SABs do not keepbalances of the settlement bank.

Chart 6: Cash Transfers

1. The buying SAB B transfers the funds for payment of the purchased securities to its specialaccount with Banco Financiero by means of the interbank transfer mechanism via the CentralBank.

2. Banco Financiero transfers the funds from SAB B special account to the selling SAB A specialaccount.

3. Upon SAB A request, Banco Financiero transfers the funds to SAB A account with its bank.

Traditional settlement is done transaction by transaction, on a gross basis and checks are used tomake the related payments. Thus, the funds movement is more related to low value transfers(checks clearing). This method is applied to the settlement of securities withdrawn from automaticclearing, to repurchase agreements in trading-session, and transactions at the Trading Desk. Forthe purpose of traditional settlement, CAVALI only accepts checks from Banco Financiero, forwhich availability of funds in Banco Financiero is granted in T+3.

117 Strictly, transactions withdrawn from clearing for lack of funds are not necessarily failed transactions,instead a transaction selection method for the “unwinding” is applied. This tries to reduce the withdrawaleffects of such transactions.

Principal Seller A Principal Buyer B

B C R P

BANCO FINANCIERO

Special Accountof SAB A

CAVALICentralizing

Account2Special Account

of SAB B2

3 1

3 1

SAB A Accountin its Bank

SAB B Accountin its Bank

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7 THE ROLE OF THE CENTRAL BANK IN INTERBANKSETTLEMENT SYSTEMS

7.1 RESPONSIBILITIES

One of the key responsibilities of the BCRP is to establish monetary policy, as well as to approve thenecessary regulations for its implementation (see Section 2.4 in Chapter 2). In addition, the BCRPdetermines and sets the limits and general conditions of its credit transactions with the FinancialSector. It can also authorize the issuance of financial instruments, as in the case of Certificates ofDeposit of the BCRP, and govern transactions between banks.

7.2 PROVISION OF SETTLEMENT SERVICES

Central bank participation in the payment systems is critical for the regulation and operation of thesystems. In this context, the Central Management for Technical Affairs develops the planning andcontrol through its subordinate departments. The purpose of the Credit and Financial RegulationManagement is to achieve the objectives set forth in the Monetary Program. Another function ofthis Management is to maintain an adequate regulatory framework for financial institutions, withinthe BCRP jurisdiction, and to promote the necessary and sufficient conditions for a well-functioningand sound financial system.

In order to accomplish these objectives, the Credit and Financial Regulation Management performsthe following activities:

(a) participates in the Monetary-Exchange Committee so as to coordinate liquidity managementand monetary instruments application, such as rediscounts and open market transactions;

(b) coordinates with other departments discussions on credit policies, interests rates andminimum requirements;

(c) supervises the administration, control and operational management of the different creditand monetary instruments;

(d) evaluates and coordinates with the SBS, the Ministry of Economy and Finance and otherorganizations, the adoption of rules governing the financial system;

(e) reports to the Board of Directors on the condition of financial institutions and BCRPtransactions, prepares technical reports in which it evaluates and comments on the requestof new financial entities’ organization and operation, the application of new instruments tothe financial system, etc.; and

(f) supervises and controls the current account system maintained for financial institutions atthe BCRP, particularly those linked to the large value transfer mechanism through the RTGS

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system and those related to the check exchange mechanism at the Clearinghouse which isalso a BCRP responsibility.

These regulations and controls by the BCRP help the banking industry to have a sound managementof high and low value payments. At present, modernization of the payment systems is in progress toeliminate settlement risks and underlying inefficiencies in existing systems.

7.3 THE ROLE OF THE BCRP IN CROSS-BORDER PAYMENTS

Most cross border payments for Peru are executed through traditional correspondent bankingrelationships. Banks in Peru can use SWIFT or telex for making payments outside of the country,using either their own foreign branches or other banks. There is no specialized or centralizedsystem for cross border payments in Peru, with transactions typically being bilateral. In addition tothe interbank or large value cross-border payments, it is likely that there are also some proprietarysystems operated by individual banks for retail payments, as well as the services of Western Unionand similar operators. The Central Bank has an important in cross border payments since it managesthe ALADI system described below.

7.3.1 Cross-border Payments Through ALADI

Since 1963 a clearing and settlement cross-border multilateral payment system related to foreigntrade (ALADI) has operated in Latin America. There are twelve countries (their central banks)participating in ALADI system: Argentina, Bolivia, Brazil, Colombia, Chile, Dominican Republic,Ecuador, Mexico, Paraguay, Peru, Uruguay and Venezuela.118 Under ALADI, the central banks ofthose countries accept payment documents related to trade, especially letters of credit in US dollars.Under ALADI enforcement, the central bank in the country where the export begins, provides fundsto the commercial bank participating in the foreign trade transaction, for the account of the centralbank of the country importing the goods. These transactions result in net positions accrued indollars among central banks. A multilateral netting occurs among central banks every four months.Central banks can also perform advance payments (advance settlement) to limit the size of their netdebt positions. In order to minimize the risks that central banks incur in the system by guaranteeingthe operations, in 1997 ALADI members have implemented a system (Sistema de Compromiso aFuturo, SICOF) in which the operators have to indicate in advance the amount of the operations thatthey will introduce in the system. In addition, since 1998, the BCRP requires that all operations inthe system be collateralized.

During the sixties, about one-third of all interregional trade payments for participating countrieswas cleared and settled through ALADI. At that time, only some of the country members wereexport-oriented economies, and ALADI helped use the international reserves more efficiently insome of these countries. By the end of the seventies, the proportion had risen to 75% of the total,

118 The agreement is administered by the Banco Central de la Reserva del Perú through the Sistema deInformación Computerizado de Apoyo al Convenio de Pagos y Créditos Recíprocos (SICAP). The secretariatof ALADI is located in Montevideo, Uruguay.

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reaching a peak of 90% by the end of the eighties. However, during the last ten years the proportionof international payments done through ALADI has decreased significantly, reaching only 16.6% in1997 out of a total of US$7.9 billion, as per recent data. This decrease reflects the existence of othermore attractive financing methods as well as higher levels of international reserves at central banks.In 1998, Brazil had the greatest payment participation through ALADI, 37.8%; followed by Argentina,22.6%; Uruguay, 11.4% and Chile with 9.2%. Peru participated with 4.9%. This percentage accountsfor 16.9% of the total interregional payments done by Peru during that year, a substantial decreaseconsidering that during the previous year the participation was of 24.3%.

Chart 7 shows how ALADI performs a transaction. This example is about the payment of animport done by a company in Brazil from a company in Peru. As a result of the commercialagreement, a Brazilian importer requests a letter of credit to his bank, Banco Itau, in favor ofBanco de Crédito, which is the Peruvian exporter bank. The Peruvian bank examines the documentsand sends them to the BCRP, which in turn processes it through the ALADI communicationssystem and sends it to Banco Central do Brasil (BCB). As previously agreed, on receipts of alldocumentation, Peru’s Banco de Crédito provides the Peruvian exporter with the funds. TheBCRP then performs a transfer to Banco de Crédito, and the latter sends the correspondingdocuments to Banco Itau. BCB’s account is credited and accrued with other charges for similartransactions taking place during the period, through transactions between central banks.Subsequently, Banco Itau’s account with BCB is debited by this for the amount of the letter ofcredit. Finally, the Brazilian importer is debited.

The complete process that begins with the sending of shipping documents to the exporter’s bankonly takes a few days, since communication is done through a communications network, managedby Peru, which calculates net balances daily. As a result of this transaction, BCB owes to the BCRPthe amount in dollars of the letter of credit. Such positions are accrued for a four month settlementperiod. Advance payments may be made to reduce interest costs. In addition to letters of credit,other payment instruments related to trade, such as payment orders, are accepted within the scopeof ALADI’s agreement.

In terms of risk management, each central bank is free to determine how it oversees the banksin its country. However, among each pair of central banks, there are limits over the net debitamounts considered acceptable (credit facilities) and when this limit is exceeded, the relevantcentral bank must make advance payments to reduce the total and remain among the limitagreed bilaterally. Likewise, in recent years and partly due to favorable developments in inter-national reserves, certain central banks have made advance payments even in situations inwhich the maximum debit limits allowed (in net terms) had not been exceeded. By doing this,central banks were able to reduce their financial costs, since debit balances are subject tointerest payment.

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1. Trade Agreement 2. Request to open a letter of credit (L/C) 3. Opens letter of credit 4. Exporter forms its BCRP of receipt of L/C 5. BCRP reports to the Importer’s central bank of receipt of L/C 6. Delivery of the loading documentation 7. Payment to the exporter 8. Reimbursement of exporter’s bank, credit to its account 9. Transmission of the loading documents10. Charge to the importer’s central bank11. Debit to the importer’s bank (debit to its account)12. Payment of the L/CSICAP: Sistema de Información Computarizado de Apoyo al Convenio de Pagos-Computerized InformationSystem to Support Payments Agreement.

SICOF: Sistema de Información de Compromisos Asumidos a Futuro-Information System of Agreements forFuture Operations.

7.4 PRICING POLICIES

For the settlement systems provided by the BCRP to financial institutions, a fixed rate for the use ofthe Clearinghouse (S/.7,000 on 2000 first quarter) applies, as well as a fee of S/.0.6 for transferorders executed before 3:30pm or S/0.9 if the transfer is executed after 3:30pm. In addition, there isa fixed charge of S/.700 to connected participants. Overseas transfers have a charge of US$5 pertransaction.

Chart 7: Diagram of Payments and Clearing Via ALADI

Brazilian Importer Peruvian exporter

Banco Itau Banco de Crédito

Banco Central doBrasil

BCRP

SICAP

SICOF

1

2 12 6 7

4 8

3

9

11 10

5

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Chart 8: Banco Central de Reserva del Perú

Boardof Directors

NationalDefenseOffice

Chair

InternalAuditingOffice

LegalCouncil

GeneralManagement

ManagementBoard

GeneralManagement

forAdministrative

Affairs

GeneralSecretary

EconomicResearch

Management

LegalOffice

TechnicalAffairsCentral

Management

Branches

InstitutionalRelations

Office

IT Management Branch Linking Office

Administrative Management

Treasury Management

ACC & SupervisionManagement

International Operations Management

Credit & Financial RegulationManagement

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8 SUPERVISION OF SECURITIES CLEARINGAND SETTLEMENT SYSTEMS

8.1 CONASEV SUPERVISORY AND STATUTORY RESPONSIBILITIES

CONASEV has supervisory responsibility over stock exchanges (at this time, the LSE), the ICLV (at thistime, CAVALI), the SABs, the issuers and other institutions participating in the clearing and settlementprocess. Although the main supervisory responsibility for banks and insurance companies falls onthe SBS, CONASEV is also responsible for supervising these institutions in those activities related tosecurities clearing and settlement. For this reason, CONASEV also supervises the custodians andsettlement banks. In the rest of this section all references will be to the institutions mentioned,although in the future there could be additional stock exchanges, the ICLV, or settlement banks. Allpersons and institutions subject to CONASEV’s supervision may be subject to penalty in case offailures envisioned in the rules.119

8.1.1 The Lima Stock Exchange

To start operating, stock exchanges must obtain an organization and operation authorization fromCONASEV.120 This is the case of the LSE, which at present is the only stock exchange authorized inPeru. The LSE bylaws, its internal regulations and modifications also require CONASEV priorapproval.121 The dissolution of the LSE also requires prior CONASEV authorization.122 The generalsupervisory powers granted by law to CONASEV must be understood in the context of a self-regulatingconcept of securities market supervision. In this sense, without excluding CONASEV from having itsown supervision systems for the LSE supervision, the Securities Market Law leaves a wide domain tothe LSE so that in turn it exercises the supervision of its own activities and those of their members,the Brokerage firms.

8.1.2 CAVALI, ICLV

The authorization for the ICLV operation, and therefore for CAVALI’s, must be granted by CONASEV,as per provisions of the SML and ICLV Regulations. Likewise, CONASEV is empowered to superviseCAVALI123 activities and to approve its Bylaws and Internal Regulations and modifications.124 CONASEVis also empowered to approve the rates and commissions to be applied for services provided,125 todesignate the auditors acting as CAVALI settlement agents, in case of dissolution and termination of

119 Vid. Section 113 from ICLV Regulations.120 Vid. Section 139 from SML.121 Vid. Section 145 from SML.122 Vid. Section 165 from SML.123 Vid. Section 228 from SML and Title II, Chapters I and II from ICLV Regulations.124 Vid. Section 26 from ICLV Regulations.125 Vid. Section 235 from SML y Sections 22 from ICLV Regulations.

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this institution,126 and to audit the institution in charge of clearing and settlement, if this is necessaryto guarantee market security.127

It is also CONASEV’s function to authorize the operation of accounting records and identificationand control systems applicable to the book-entry process, as well as the rules governing relationsbetween CAVALI, its direct participants and the issuers themselves.128 Likewise, CONASEV must approvethe settlement fund regulations.129 Models of contracts governing legal relationships between CAVALI

and its participants, as well as its modifications, must also be approved by CONASEV.130 The sameapplies to contracts between CAVALI and the issuers.131

To allow CONASEV to fulfill its supervision responsibilities, the ICLV132 Regulations establish theinformation that the ICLV must provide to CONASEV. Among other duties, it must submit auditedfinancial reports at the end of every fiscal year (and unaudited quarterly reports), an annual reportand the reports of an annual external audits from the Settlement Fund. Likewise, the updates ofinternal manuals and internal regulations, risk evaluation reports, failures in transaction settlementsand the necessary contributions to the Settlement Fund, modifications to voting shares from CAVALI,and its directors, managers and those responsible for internal control are also required.

8.1.3 The LSE and other Members Participating in the Securities Clearing and SettlementProcesses

The authorization and operating requirements for broker-dealers, at this time Brokerage Firms,must be granted and determined by CONASEV.133 CONASEV must also determine debt margins andother minimum liquidity and equity solvency requirements in relation to the activities undertakenand instruments used by Brokerage firms.134 Likewise, CONASEV must appoint the auditors in thecase of a SAB liquidation, if this occurs.135 Within the supervisory schedule oriented to self-regulation,the Securities Market Law allows CONASEV to empower the ICLV (at present CAVALI) with one ormore of the supervisory powers over participants settlement activities, i.e., brokerage firms.136 TheLaw grants the LSE137 self-regulating powers with regard to its members. Although at present only

126 Vid. Section 237 from SML y Sections 107 to 109 from ICLV Regulations.127 Vid. Section 228 from SML .128 Vid. Section 236 from SML .129 Vid. Section 231 from SML .130 Vid. Section 38 from ICLV Regulations.131 Vid. Section 41 from ICLV Regulations.132 Vid. Section 112 from ICLV Regulations.133 Vid. Section 168 from SML .134 Vid. Section 172 from SML .135 Vid. Section 184 from SML .136 Vid. Section 230 from SML .137 Vid. Section 131 from SML .

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Brokerage firms can take part in the financial settlement, in the future, when CAVALI’s InternalRegulations are developed, other institutions will be direct participants, including custodians. Inthis sense, CONASEV’s supervisory powers described above may be extended to these newparticipating entities.

8.2 CAVALI SUPERVISORY AND STATUTORY RESPONSIBILITY

The ICLV Regulations empower CAVALI to develop its own Internal Regulations and related rules.Furthermore, it grants the institution in charge of the clearing and settlement the supervision of itsparticipants and the power to sanction them if they do not observe the appropriate rules.138 Whenthe affected person is under CAVALI and the SML jurisdiction, the Regulations establish the need tocoordinate procedures and disciplinary structures between both organizations.

At present, CAVALI does not have a set of Internal Regulations. Their development and approval issubject to an adjustment plan.139 CAVALI’s Internal Regulations must cover at least access andwithdrawal from trade requirements, rights, functions and duties140 with regard to participants,issuers and settlement banks. In addition, they must contain detailed rules of everything related tothe accounting records and CAVALI’s clearing and settlement operation. In order to provide a bettercontrol by the supervisory authority, the ICLV141 Regulations stipulate that the ICLV must keep recordof rules non-fulfillment from participants, issuers and settlement banks, including obligations toinform to CONASEV.

In accordance with the self-regulation approach to supervision, the ICLV142 Regulations require thatCAVALI implement an internal control system. To this effect, it is agreed that CAVALI will have anindividual in charge of internal control, to monitor compliance with the regulation in force, withspecial emphasis on its own internal proceedings. One of the most important functions of theinternal auditor is to keep CAVALI’s board of directors continuously informed of internal controlactivities, proposing the necessary modifications, if applicable. The most specific powers grantedby the regulation to CAVALI, with regard to the supervision of agents participating in the clearingand settlement, are described below.

• Participants: CAVALI143 internal regulations must specify the requirements to be a systemparticipant, e.g., economic, financial and operating capacity, and existence of a supervisoryorganization of the entity.

138 Vid. Section 13.b, 14 and 27 from ICLV Regulations.139 Vid. Third Temporary Provision from ICLV Regulations.140 Vid. Section 25 from ICLV Regulations.141 Vid. Title IX from ICLV Regulations.142 Vid. Section 17 from ICLV Regulations.143 Vid. Section 33 from ICLV Regulations.

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• Settlement banks: CAVALI144 must select the settlement banks, establishing the requirementsthey must fulfill to be allowed to act as such. The settlement organization must permanentlyensure that the settlement banks comply with the mentioned requirements.

• Issuers: the regulations in force145 set forth that issuers must provide CAVALI with all theinformation for the sound development of its activity. Issuers, as well, must make sure theirrecords agree with those of CAVALI’S central record, informing it immediately of any factorsaffecting the securities registered in the system.

8.3 THE LSE SUPERVISORY AND STATUTORY RESPONSIBILITY

In the context of a self-regulated supervisory regime, the regulation grants the LSE the power togovern its activities and those of its members, monitoring its strict fulfillment.146 On the other hand,the LSE must seek an adequate supervision of its institutional members, so as to guarantee compliancewith the regulation in force. The Law grants disciplinary powers to the LSE,147 without prejudice ofthe prerogatives given to such effect to CONASEV. Likewise, the LSE148 establishes the minimumcontents of the LSE future Internal Regulations, currently being developed. Among them, it is worthmentioning the SABs and issuing institutions’ rights and duties, and everything related to thedevelopment, operation and limits of stock activities, including all matters related to the GuaranteeFund. At present, the regulation governing the rights and duties of issuers of securities registered atthe LSE is under development. This will specially emphasize the detailed and adequate informationthey must provide to the market.

8.4 SAFEGUARD AND SECURITY SYSTEM

8.4.1 Physical Safeguard

According to the ICLV149 Regulations, the ICLV must have safe premises, capable of adequatelypreserving the information, avoiding any loss or alteration thereof and granting it confidentiality.Safeguard systems must include access controls to the information contained in the accountingrecord and to any other information of non-public nature, so as to avoid third parties’ access therein.They must have backup copies kept in different places to those of the respective ICLV, controls toavoid removal, loss or modification of the information, and restricted access to users.

144 Vid. Section 80 and 81 from ICLV Regulations.145 Vid. Section 39 from ICLV Regulations.146 Vid. Section 131 from SML.147 Vid. Section 132 from SML.148 Vid. Section 146 from SML.149 Vid. Section 18 from ICLV Regulations.

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Chart 9: CONASEV Organization Chart

Director

AdministratorTribunal

Office ofInternal Audit

GeneralManager

SecretaryGeneral

Administratorand FinanceDepartment

SystemsInformationDepartment

Division ofPublic Registry

SystemsDepartment

OperationsDivision

Issuers andEnterprisesDivision

Intermediariesand Funds

Department

Office ofSanctions

Office ofJudicial Advisor

Investigation andDevelopmentDepartment

IntermediariesDivision

FundsDivision

MarketsDivision

Market ProductsDivision

PlacementsDivision

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8.4.2 Integrity of the Information Automated Systems

The ICLV150 Regulations require the ICLV to provide measures to specifically cover system operationalrisks. These include alteration or destruction of records, communications disruption, availability ofsecurities or funds by non-authorized people and data manipulation.

8.4.3 Recovery Procedures of Operating Capacity and Contingency Planning

The ICLV151 Regulations require the ICLV to have contingency plans for the recovery of its operatingcapacity as soon as possible, to ensure that the normal development of the market is not affected.Contingency plans must include alternative power supplies, auxiliary equipment for data processingand communication, among others. These plans must be reviewed, updated and tested at leastonce a year, and any substantial modification thereto must be duly reported to CONASEV.

150 Vid. Section 19 from ICLV Regulations.151 Vid. Section 20 from ICLV Regulations.

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APPENDIX:STATISTICAL TABLES

The first series of tables are statistics on payments and securities clearance and settlement in Peru,while the second series are more general statistics related to the financial sector.

SERIES: APayments and Securities Clearance and Settlement Statistics

A1 Basic Statistical Data .................................................................................................80 A2 Settlement Media Used by Non-banks ......................................................................80 A3 Settlement Media Used by Deposit Taking Institutions .............................................80 A4 Institutional Framework ............................................................................................81 A5 Bank Notes and Coins ..............................................................................................81 A6 Cash Dispensers, ATMs, and EFTPOS Terminals .........................................................82 A7 Number of Payment Cards in Circulation .................................................................82 A8 Indicators of Use of Various Cashless Payment Instruments (no. of transactions) .......83 A9 Indicators of Use of Various Cashless Payment Instruments(value of transactions) ....83A10 Payment Instructions Handled by Selected Interbank Transfers Systems (volume) .....84A11 Payment Instructions Handled by Selected Interbank Transfer Systems (value) .........84A12 Securities and Accounts Registered in Securities Settlement Systems ........................84A13 Securities Holdings in Securities Settlement Systems ................................................84A14 Transfer Instructions Handled by Securities Settlement Systems (volume) .................85A15 Transfer Instructions Handled by Securities Settlement Systems (value) ....................85A16 Participation in SWIFT by Domestic Institutions ........................................................85A17 SWIFT Message Flows To/From Domestic Users ........................................................85

SERIES: BGeneral Statistics

B1 Number of Financial Entities ....................................................................................86 B2 Number of Branches .................................................................................................86 B3 Number of Employees ..............................................................................................86 B4 Financial System: Assets ...........................................................................................87 B5 Financial System: Deposits .......................................................................................87 B6 Financial System: Loans ............................................................................................87 B7 Financial System: Equity ...........................................................................................88 B8 Stock Exchange Operations (volume) .......................................................................88 B9 Stock Exchange Operations (value) ...........................................................................89B10 Market Capitalization by Type of Instrument .............................................................89

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Table A1: Basic Statistical Data

1995 1996 1997 1998 1999 Feb.2000

Population(a)

23,532 23,932 24,339 24,829 25,315 25,828

GDP(b)

133,236 149,659 173,669 183,842 193,336 —

Exchange rate S./US$(c)

2.33 2.45 2.66 2.93 3.38 3.47(d)

Source: BCRP annual and weekly reports.(a)

In thousands.(b)

In millions of new soles.(c)

Annual average rate.(d)

First quarter average.

Table A2: Settlement Media Used by Non-banks(Millions of New Soles)

1995 1996 1997 1998 1999 Feb.2000

Notes and coins 3,043 3,245 3,827 3,946 4,631 3,762

Transferrable deposits 4,451 6,916 9,830 10,863 13,970 14,250

Household sector/Other 3,103 4,448 5,722 5,467 5,626 5,429

Mutual funds 1,348 2,468 4,108 5,396 8,344 8,821

Narrow money supply M1 4,606 5,420 6,475 6,493 7,313 6,267

Deposits transferrablein foreign currency 14,547 21,445 24,652 28,511 32,117 31,849

Broad money aggregate 23,949 33,781 40,957 45,867 53,400 52,411

Source: BCRP annual and weekly reports.

A3: Settlement Media Used by Deposit Taking Institutions(a)

Year ended (in millions of new soles)

1995 1996 1997 1998 1999 Feb-00

Required reserves at the Central Bank:

In domestic currency 496 670 715 752 811 786

In foreign currency 2,791 3,653 3,948 3,518 3,446 3,438

Of which usable for settlement:

In domestic currency 496 670 715 752 811 786

In foreign currency 2,791 3,653 3,948 3,518 3,446 3,438

Excess reserves at the Central Bank:

In domestic currency 71 51 93 187 143 48

In foreign currency 68 41 23 37 28 9

Transferrable deposits in other institutions N.A. N.A. N.A. N.A. N.A. N.A.

Source: BCRP annual and weekly reports.(a)

Reserves: Daily average of the last half of December (until 1997 the period was for two weeks, then monthly). These accountsare used by the banks to make payment and to maintain average monthly required reserves.

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Table A4: Institutional Framework

December 31, 1999

Number Number Number Value of institutions of offices

(a)of accounts of Accounts

(b)

Central Bank 1 7 N.A. N.A.

Commercial banks(c)

20 909 5,338,909 45,218,771

Banco de la Nación 1 343 976,164 2,973,772

Financial Development Corp. 1 6 17 —

Financial institutions(d)

5 29 552 132,093

Leasing companies(e)

9 8 — —

Rural credit and savings banks 13 45 102,811 78,299

Municipal savings and credit banks(f)

13 74 150,758 344,821

Total 63 1,421 6,569,211 48,747,756

Offices of foreign banks 2 2 16,384 843,754

Source: Superintendency of Banking and Insurance (Statistical Bulletin of the SBS).(a)

Including agencies.(b)

In thousands of new soles.(c)

Many banks, excluding Banco de la República, in liquidation.(d)

Solución, Daewoo, CMR, Volvo Finance and Cordillera.(e)

Leading leasing companies: Wiese Leasing, Lima Leasing, Latino Leasing, Citi Leasing, America Leasing. Santánder Leasing, CrediLeasing (Oficinas del Bco. De Crédito), Leasing-Total y Mitsui Masa Leasing S.A.(f) Includes the Caja Municipal de Crédito Popular.

Table A5: Bank Notes and Coins(Millions of New Soles)

At the end of the year

1994 1995 1996 1997 1998 1999

Total currency issued 2,407.9 3,234.5 3,565.9 4,235.9 4,368.6 5,341.2

Of which:

200 — — — 186.0 283.4 346.0

100 954.4 1,654.4 1,684.3 2,008.4 2,113.9 2,576.1

50 849.7 921.9 1,134.6 1,238.8 1,215.0 1,486.0

20 407.4 425.7 458.5 477.8 435.7 528.4

10 196.4 232.5 288.5 324.9 320.6 404.7

Coins issued 170.0 348.4 393.4 407.2 454.6 471.4

Notes and coins in credit institutions(a)

222.0 460.0 604.0 623.0 673.0 864.0

Notes and coins circulating outsidebanks

(b)2,385.0 3,043.0 3,245.0 3,827.0 3,946.0 4,631.0

Source: Treasury Department of BCRP, for details on currency and coins.(a)

Refers to cash held by banks.(b)

Refers to cash held outside the banking system.

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Table A6: Cash Dispensers, ATMs, and EFTPOS Terminals

1997 1998 1999

Cash dispensers and ATMs

Number of networks: 6 7(a)

7(a)

Number of machines 658 958 1050

EFTPOS N.A. N.A. N.A.

Source: Banks Association (ASBANC).(a)

Includes: Telebanco (Banco de Crédito y Sudamericano), B-24 (Continental),Unicard (interbank net of 14 banks: Banco Sur, Banex, Bif, Citibank, Comercio,Financiero, Lima-Sudameris, Norbank, Nuevo Mundo, Progreso, Santánder, Solventa,Standard Chartered y Trabajo), Wiese Cash (Bco. Wiese), Redactiva 24 (Interbank),Latino Cajero Automático (Bco. Latino) y Conexión 24 horas (Bco. Sudamericano). Itdoes not include 146 ATMs of the network Multired of Bco. de la Nación.

Table A7: Number of Payment Cards in Circulation

1998 1999

Cards with a debit/credit function 3,006,737 3,160,388

Of which:

Debit cards 2,331,799 2,400,364

Credit cards 674,938 760,024

Source: Banks Association (ASBANC).

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Table A8: Indicators of Use of Various Cashless Payment Instruments(Number of transactions, average size)

1996 1997 1998 1999 Feb-2000

Monthly Monthly Monthly Monthly MonthlyYear average Year average Year average Year average average

Checks in local currency:

Checks received

Number (in thousands) 6,507.7 542.3 6,225.5 518.8 5,775.2 481.3 4,801.9 400.2 347.7Amount (millionsof nuevos soles) 46,023 3,835 55,958 4,663 62,465 5,205 63,587 5,298 4,571Average size 7.1 7.1 9.0 9.0 10.8 10.8 13.2 13.2 13.1

Rejected checks

Number (in thousands) 155.0 12.9 191.1 15.9 107.2 8.9 47.7 4.0 2.8Amount (millionsof nuevos soles) 456.6 38.1 743.9 62.0 472.7 39.4 233.9 19.5 16.4Average size 2.9 2.9 3.9 3.9 4.4 4.4 4.9 4.9 5.9

Checks in foreign currency:

Checks received

Number (in thousands) 3,544.8 295.4 3,604.4 300.4 3,530.3 294.2 3,178.7 264.9 245.3Amount (millionsof nuevos soles) 86,573 7,214 136,799 11,399 221,599 18,466 214,291 17,857 4,734Average size 24.4 24.4 38.0 38.0 62.8 62.8 67.4 67.4 19.3

Rejected checks

Number (in thousands) 84.4 7.0 85.5 7.1 53.3 4.4 26.1 2.2 1.5Amount (millionsof nuevos soles) 690.8 57.6 927.9 77.3 512.6 42.7 256.8 21.4 13.8Average size 8.2 8.2 10.9 10.9 9.6 9.6 9.8 9.8 9.2

LIMA Clearing House.

Source: BCRP annual and weekly reports.

Table A9: Indicators of Use of Various Cashless Payment Instruments(Value of transaction, thousands of millions of nuevos soles)

1996 1997 1998 1999 Feb-2000

Monthly Monthly Monthly Monthly MonthlyYear average Year average Year average Year average average

Domestic Currency 171.2 14.3 171.2 23.2 278.8 373.9 354.5 29.5 29.9Checks 53.9 4.5 53.9 5.4 64.5 70.9 70.1 5.8 5.0Interbank transfers 117.3 9.8 117.3 17.9 214.3 303 284.4 23.7 24.9Foreign Currency 98 8.1 169.4 14.1 301.3 25.1 411.2 34.3 25.2Checks 89.2 7.4 140.1 11.7 225.2 18.8 217.1 18.1 4.9Interbank transfers 8.8 0.7 29.3 2.4 76.1 6.3 194.1 16.2 20.3 Total 269.2 22.4 448.2 37.4 675.2 56.3 765.7 63.8 55.1

LIMA and Provinces

Source: BCRP annual and weekly reports.

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Table A10: Payment Instructions Handled by Selected Interbank Transfer Systems(Volume)

1995 1996 1997 1998 1999

Checks 10,483 10,052 9,829 9,305 7,981

Large value transfers N.A. N.A. N.A. 140 141

Source: BCRP.

Table A11: Payment Instructions Handled by Selected Interbank Transfer Systems(Value, thousands of millions of nuevos soles)

1995 1996 1997 1998 1999

Checks 105.3 143.1 204.6 296.1 287.2

Large value transfers 74.7 126.1 243.6 379.1 478.5

Source: BCRP.

Table A12: Securities and Accounts Registered in Securities Settlement Systems

Registration 1995 1996 1997 1998 Mar-99

CAVALI

Number of securitiesregistered 236 341 407 483 487

Number of accounts 83,285 492,870 474,943 430,259 407,360

Number of foreigninvestors 5,451 5,973 5,484 4,784 4,653

Source: Cavali, S.A.

Table A13: Securities Holdings in Securities Settlement Systems(Millions of US$)

Securities Holdings 1995 1996 1997 1998 Mar-99

CAVALI

Value of registeredholdings 2,594.00 5,132.00 7,204.00 5,978.00 6,577.00

Market Capitalization 11,701.00 11,983.00 15,575.00 11,584.00 12,283.00

% of marketcapitalizationregistered at CAVALI 22.17 39.02 46.25 51.76 53.55

Source: Cavali, S.A.

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Table A14: Transfer Instructions Handled by Securities Settlement Systems(volume)

At the moment of preparation of this report the information was not available in this format.

Table A15: Transfer Instructions Handled by Securities Settlement Systems(value)

At the moment of preparation of this report the information was not available in this format.

Table A16: Participation in SWIFT by Domestic Institutions

1995 1996 1997 1998 1999

SWIFT users 21 23 24 24 23

Of which:

Members 20 18 18 18 9

Sub-members 1 4 4 4 7

Participants — 1 2 2 7

Total SWIFT worldwide 5,474 5,918 6,372 6,771 6,991

Of which:

Members 2,845 3,014 3,070 3,052 2,230*

Sub-members 2,314 2,500 2,621 2,781 2,825

Participants 315 404 681 938 1,936*Source: Users Association of SWIFT, Peru.

* Major changes in numbers of members and participants are due to the introduction of a newcategory of participant shareholding banks. As a result, a number of smaller banks have chosen toswitch to this new category.

Table A17: SWIFT Message Flows to/from Domestic Users

1995 1996 1997 1998 1999

Total messages sent 461,270 498,778 564,195 573,669 560,727

Of which:

Category I 204,805 215,930 247,757 260,788 256,785

Category II 65,994 77,355 96,326 100,509 87,861

Participants

Sent and received to/fromdomestic users N.A. 15,089 18,717 18,722 17,438

Total messages received 677,927 767,903 846,636 822,931 839,596

Of which:

Category I 260,912 292,217 318,206 327,567 348,147

Category II 9,854 15,085 19,386 19,203 17,782

Global SWIFT traffic 603,575,374 687,785,294 812,117,556 937,039,995 1,058,836,425

Source: Users Association of SWIFT, Peru.

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Table B1: Number of Financial Entities

December Number of Financial Entities 1997 1998 1999 Feb-2000

Total financial system

Commercial Banks 25 26 20 20

Banco de la Nación 1 1 1 1

Financial Development Corp. 1 1 1 1

Financial institutions 7 7 5 5

Leasing companies 9 10 9 9

Rural credit and savings banks N.A. 14 13 13

Municipal savings and credit banks N.A. 14 14 14

Source: Statistical Bulletin of the Superintendent of Banking and Insurance (SBS).

Table B2: Number of Branches

December Number of Branches 1997 1998 1999 Jan-2000

Total financial system 1,427 1,478 1,418 1,301

Commercial Banks 939 960 909 910

Banco de la Nación 341 341 343 343

Financial Development Corp. 12 9 6 6

Financial institutions 16 33 29 34

Leasing companies 8 9 8 8

Rural credit and savings banks 57 60 49 N.A.

Municipal savings and credit banks 54 66 74 N.A.

Source: Statistical Bulletin of the Superintendent of Banking and Insurance (SBS).

Table B3: Number of Employees

December Number of Employees 1997 1998 1999 Jan-2000

Total financial system 31,966 30,841 26,596 24,760

Commercial Banks 26,069 24,907 20,747 20,301

Banco de la Nación 2,618 2,601 2,668 2,662

Financial Development Corp. 125 121 121 121

Financial institutions 1,895 1,751 1,533 1,529

Leasing companies 134 151 148 147

Rural credit and savings banks 384 458 461 N.A.

Municipal savings and credit banks 741 852 918 N.A.

Source: Statistical Bulletin of the Superintendent of Banking and Insurance (SBS).

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Table B4: Financial System: Assets(Millions of Nuevos Soles)

December Assests 1997 1998 1999 Feb-2000

Total financial system 74,565 86,796 92,428 91,304

Commercial Banks 59,884 69,021 72,502 71,577

Banco de la Nación 7,537 6,847 7,945 7,764

Financial Development Corp. 3,255 4,457 5,462 5,461

Financial institutions 880 1,359 860 864

Leasing companies 3,009 4,342 4,683 4,625

Rural credit and savings banks N.A. 268 276 284

Municipal savings and credit banks N.A. 502 700 729

Source: Statistical Bulletin of the Superintendent of Banking and Insurance (SBS).

Table B5: Financial System: Deposits(Millions of nuevos soles)

December Deposits 1997 1998 1999 Jan-2000

Total financial system 39,709 45,661 47,862 47,473

Commercial Banks 36,750 40,876 44,196 44,017

Banco de la Nación 2,721 3,586 3,082 2,815

Financial Development Corp. 6 479 6 6

Financial institutions 232 414 123 138

Leasing companies 0 0 0 0

Rural credit and savings banks N.A. 62 83 87

Municipal savings and credit banks N.A. 244 372 410

Source: Statistical Bulletin of the Superintendent of Banking and Insurance (SBS).

Table B6: Financial System: Loans(Millions of nuevos soles)

December Deposits 1997 1998 1999 Feb-2000

Total financial system 42,300 53,579 50,925 49,352

Commercial Banks 34,586 41,693 38,303 37,274

Banco de la Nación 2,482 3,716 4,031 3,664

Financial Development Corp. 2,091 3,109 3,499 3,497

Financial institutions 539 943 590 561

Leasing companies 2,602 3,662 3,926 3,778

Rural credit and savings banks N.A. 166 169 173

Municipal savings and credit banks N.A. 290 407 405

Source: Statistical Bulletin of the Superintendent of Banking and Insurance (SBS).

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Table B7: Financial System: Equity(Millions of nuevos soles)

December Assests 1997 1998 1999 Feb-2000

Total financial system 6,854 8,386 9,354 9,405

Commercial Banks 5,080 6,028 6,489 6,510

Banco de la Nación 592 777 756 759

Financial Development Corp. 703 766 1,225 1,228

Financial institutions 163 248 206 207

Leasing companies 316 442 524 545

Rural credit and savings banks N.A. 44 46 45

Municipal savings and credit banks N.A. 81 108 111

Source: Statistical Bulletin of the Superintendent of Banking and Insurance (SBS).

Table B8: Stock Exchange Operations(Volume)

Stock exchanges 1993 1994 1995 1996 1997 1998 1999(1)

Trading Floor (a) + (b) 215,390 368,598 450,874 471,168 470,691 302,794 —

Cash transactions (a) 207,580 353,471 431,412 451,052 450,376 289,826 —

Debt — — — 73 717 360 —

Shares 61,869 123,977 187,075 218,756 215,857 169,607 148,108

Investment shares 145,694 229,297 244,337 231,993 233,561 119,840 74,329

Other 17 197 — 230 241 19 521

Repurchase operations (b) 7,810 15,127 19,462 20,116 20,315 12,968 7,844

Trading Desk (c) + (d) + (e) 859 1,296 1,539 8,089 10,391 6,848 —

Cash transactions (c) 735 1,107 1,376 7,684 9,678 6,508 —

Bonds 283 527 744 2,677 2,957 3,898 2,674(2)

Short-term investment 370 134 74 274 622 321 89

Certificates of deposit & CUCT — 412 460 4,455 5,656 2,074 448

Securitized mortgages — 34 98 278 443 215 91

Other 82 — — — — — —

Forward operations (d) 124 189 163 380 541 182 —

Repurchase operations (e) — — 0 25 172 158 143

Total 216,249 369,894 452413 479,257 481,082 309,642 234,247

Source: The Lima Stock Exchange.(1)

Since September 1999, the Trading Desk was eliminated. Thus, for 1999 the distinction between Trading Floor and Trading Deskdisappears.(2)

Bonds operations are presented in this row. For previous years it was as well included under the row Debt of the Trading Floor.

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Table B9: Stock Exchange Operations(Value, millions of US$)

Stock exchanges 1993 1994 1995 1996 1997 1998 1999(1)

Trading Floor (a) + (b) 1,906.10 3,691.90 4,754.32 5,064.70 6,699.76 4,357.84 —

Cash transactions (a) 1,629.30 3,071.00 3,925.98 3,904.09 4,980.07 3,345.12 —

Debt — — — 63.92 684.71 264.24 —

Shares 860.10 1,800.82 2,868.04 2,748.75 3,025.15 2,381.03 2,428.90

Investment shares 769.14 1,270.18 1,057.94 1,091.42 1,270.21 685.93 312.79

Other 0.06 — — — — 13.92 5.20

Repurchase operations (b) 276.80 620.90 828.34 1,160.61 1,719.69 1,012.72 430.76

Trading Desk (c) + (d) + (e) 75.44 362.70 525.40 3,426.39 5,351.34 3,378.39 —

Cash transactions (c) 73.98 327.19 507.08 3,236.99 4,750.10 3,005.60 —

Bonds 31.57 152.85 204.02 1,378.78 1,949.02 1,827.62 9,944.37(2)

Short-term investment 29.41 10.83 7.20 64.30 515.40 187.92 24.41

Certificates of deposit & CUCT — 158.75 286.66 1,765.42 2,162.87 900.51 330.72

Securitized mortgages — 4.76 9.20 28.49 122.81 89.55 43.31

Other 13.00 — — — — — —

Forward operations (d) 1.46 35.51 18.32 163.86 435.35 289.44 —

Repurchase operations (e) — — — 25.54 165.89 83.35 124.00

Total 1,981.54 4,054.60 5,279.72 8,491.09 12,051.10 7,736.23 13,644.46

Source: The Lima Stock Exchange.(1)

Since September 1999, the Trading Desk was eliminated. Thus, for 1999 the distinction between Trading Floor and Trading Deskdisappears.(2)

Bonds operations are presented in this row. For previous years it was as well included under the row Debt of the Trading Floor.

Table B10: Market Capitalization by Type of Instrument(Millions of US$)

1995 1996 1997 1998 1999 Mar-2000

Shares 10,362 12,501 15,919 10,247 11,107 11,613

Investment shares 1,339 1,341 1,464 789 2,300 2,033

Total 11,701 13,842 17,383 11,035 13,407 13,646

End of year data except for year 2000.

Source: The Lima Stock Exchange.

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