LATIN AMERICA CARIBBEAN

Reforming

SETTLEMENT SYSTEMS IN

PAYMENTS AND SECURITIES

ANDTHE

MASSIMO CIRASINO

JOSÉ ANTONIO GARCÍA

MARIO GUADAMILLAS

FERNANDO MONTES-NEGRET

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

©2007 The International Bank for Reconstruction and Development / The World Bank1818 H Street NWWashington DC 20433Telephone: 202-473-1000Internet: www.worldbank.orgE-mail: feedback@worldbank.org

All rights reserved

1 2 3 4 5 10 09 08 07

This volume is a product of the staff of the International Bank for Reconstruction and Development / TheWorld Bank. The findings, interpretations, and conclusions expressed in this volume do not necessarilyreflect the views of the Executive Directors of The World Bank or the governments they represent.The World Bank does not guarantee the accuracy of the data included in this work. The boundaries, colors,denominations, and other information shown on any map in this work do not imply any judgement on thepart of The World Bank concerning the legal status of any territory or the endorsement or acceptance of suchboundaries.

Rights and PermissionsThe material in this publication is copyrighted. Copying and/or transmitting portions or all of this workwithout permission may be a violation of applicable law. The International Bank for Reconstruction andDevelopment / The World Bank encourages dissemination of its work and will normally grant permission toreproduce portions of the work promptly.

For permission to photocopy or reprint any part of this work, please send a request with completeinformation to the Copyright Clearance Center Inc., 222 Rosewood Drive, Danvers, MA 01923, USA;telephone: 978-750-8400; fax: 978-750-4470; Internet: www.copyright.com.

All other queries on rights and licenses, including subsidiary rights, should be addressed to the Office of the Publisher, The World Bank, 1818 H Street NW, Washington, DC 20433, USA; fax: 202-522-2422; e-mail: pubrights@worldbank.org.

ISBN-10: 0-8213-6635-1ISBN-13: 978-0-8213-6635-6eISBN: 0-8213-6637-8DOI: 10.1596/978-0-8213-6635-6

Cover design: Rock Creek Creative, Inc.

Library of Congress Cataloging-in-Publication Data has been applied for.

Preface vii

Contributors ix

Acknowledgments xi

Abbreviations xii

C H A P T E R

1 Introduction 12 Major Trends in Payments and Securities Settlement Systems 53 Assessment Tools 214 Payments Systems Assessment Findings in Latin America

and the Caribbean 27

5 Securities Settlement Systems Assessment Findings in Latin America and the Caribbean 105

6 Transparency, Oversight, and Cooperation in Payments Systems 1857 Implementing Payments and Securities Settlement Systems Reforms 2058 Concluding Remarks 215

Contents

v

A P P E N D I X

1 Main Statistics of Payments and Securities Settlement Systems in Selected Latin America and the Caribbean Countries 221

2 Scope, Elements, Participants, and Processes of Securities Settlement Systems 239

3 CPSS Core Principles for Systemically Important Payment Systems 2474 CPSS-IOSCO Recommendations for Securities Settlement Systems 2495 CPSS–IOSCO Recommendations for Central Counterparties 2516 CPSS General Guidance for National Payments System Development 2537 Recommendations of the Financial Action Task Force

on Money Laundering 255

8 Systemically Important Payment Systems in Latin America and the Caribbean: Results of the Self-Assessment Exercises 261

References 265

Index 271

Contentsvi

vii

The exponential growth in values transferredthrough the payment systems within national andacross international borders, as well as the inherentrisks in the clearing and settlement processes, haveincreased central and commercial banks’—as well assecurities commissions’—attention to payment andsecurities settlement systems and their influence on thestability and efficiency of financial intermediation. Asa result, payment systems issues have moved up the listof public policy priorities and have moved from thebackroom to the boardroom of financial institutions.

In the 1970s and 1980s, central banks focused mainlyon the influence of payment systems in the transmis-sion of monetary policy, but in recent years their atten-tion has broadened to deal more systematically with thegoals of efficiency, integrity, security, reliability, andaccessibility. An efficient, secure, and reliable paymentsystem reduces the cost of exchanging goods, securi-ties, and services, and is an essential tool for the effec-tive implementation of monetary policy and the smoothfunctioning of money and capital markets. Althoughpayment systems have traditionally focused on fundtransfers, value is also exchanged by means of securi-ties trading. Consequently, recent trends in paymentsystem development have resulted in new initiativesleading to increasing convergence and interoperabilityof banking, payment, and securities infrastructures.

Payments systems are considered critical for the safe andeffective functioning of the financial system. Safe sys-tems are, therefore, a key element for maintaining andpromoting financial stability. Poorly designed systems ortechnical and operational failures, combined with theincreasing interdependence of financial intermediaries,

Preface

could generate contagion and severe systemic disrup-tions in financial markets. Moreover, rapid technologi-cal changes, accompanied by evolving user needs, havetransformed the role of payment systems in the deliveryand efficient provision of financial services. The on-going revolution in payment systems has increased theopportunities to market participants and end users.

International organizations, national authorities, and,in general, payment system stakeholders have recentlylooked more carefully into payments and securities set-tlement issues. The first set of important standardscame with the release in 1989 of the Group of Thirtyrecommendations regarding securities clearance andsettlement and the 1990 Lamfalussy Report recom-mending minimum standards. Since then, many differ-ent organizations have issued international standards,principles, recommendations, and codified best prac-tices. At the end of the 1990s and the beginning of the2000s, a consensus emerged within the Committee onPayments and Settlement Systems (CPSS) of the Bankfor International Settlements (BIS) to introduce newstandards known as the core principles for systemicallyimportant payments systems, followed by the jointCPSS–International Organization of Securities Com-missions (IOSCO) recommendations for securities settlement systems. Furthermore, the work of interna-tional institutions is going beyond payments and secu-rities settlement systems assessment to advice on howto effectively implement a reform. The World BankRegional Initiatives on Payments and Securities Settle-ment Systems and the CPSS’s “General Guidance forNational Payments System Development,” publishedin its final version in January 2006, are clear examplesof these efforts.

In the Latin America and Caribbean (LAC) region, theWorld Bank started efforts as early as 1995 to raise theawareness of the importance of modernizing nationalpayments systems and of setting up a regional forumfor the exchange of information. Such efforts furtherevolved with the request of regional finance ministersfor the World Bank to launch a regional initiative to fos-ter such a process of transformation. The latter initiativewas formalized in 1999 into the Western HemispherePayments and Securities Clearance and Settlement Ini-tiative (WHI) and converted in 2003 into a regionalWestern Hemisphere Payments and Securities Clearanceand Settlement Forum (WHF), dedicated to the assess-ment of and exchange of information on payments andsecurities settlement systems in the LAC countries.

The WHI has been a coordinated effort supported bycentral banks and securities commissions inside and out-side the region, as well as international financial andstandard-setting institutions. In addition to the WorldBank and the Centro de Estudios Monetarios Latino-americanos, other institutions have supported the WHI,such as the Council of Securities Regulators of the Amer-icas and an International Advisory Council, the lattercomprising highly experienced institutions dealing withclearance and settlement of payments and securities.

Under the WHI, 23 country assessments were under-taken between May 1999 and December 2005. Coun-try assessments are prepared jointly by an internationalteam and their local counterparts. The so-called YellowBook typically consists of a comprehensive descriptionproviding a brief background of the economic andfinancial conditions in the country, key institutionalaspects related to the operation of the payments andsecurities settlement infrastructure—including thelegal and regulatory frameworks and the oversight roleof the central bank in coordination with other govern-mental organizations—and details on the major char-acteristics of both payments and securities settlementsystems. In addition, a confidential report is deliveredexclusively to the country authorities. This reportincludes an assessment of the risks and improvementopportunities as a contribution to the development ofan action plan for the reforms deemed necessary inexperts’ views. In several cases, follow-up activitieshave been undertaken to discuss the way in which therecommendations might be implemented. The overallobjective of the WHI—that is, the development of more

secure and efficient payments and securities clearanceand settlement systems in the respective member coun-try, systems that are capable of satisfying the needs ofthe local, regional, and international markets—hasbeen fostered by the work undertaken over the pastseven years. Moreover, the WHI has led to the establish-ment of a high-level regional policy forum for the dis-cussion of payments and securities settlement issues,which can be invaluable to foster increased coopera-tion as the LAC region becomes more integrated. TheWHI-WHF has also significantly contributed to thejoint World Bank–International Monetary Fund (IMF)Financial Sector Assessment Program.

This book intends to extract the main lessons and expe-riences of WHI-WHF from the assessments to theimplementation of the reforms. It benefited from thenumerous country assessments, as well as from follow-up work undertaken by the World Bank in the reform ofpayments and securities settlement systems in the LACregion. The book describes major trends in paymentsand securities settlement systems worldwide and pre-sents the assessment tools used in preparing the countryreports under WHI-WHF. In addition, the book providesa detailed summary of the main findings of the WHI-WHF assessments in the payments and securities settle-ment areas for each country in the following fields: (1) legal and regulatory framework, (2) main character-istics of the interbank exchange and settlement circuits,(3) retail settlement systems, (4) the role of the govern-ment as a major participant in the payments system, (5) foreign exchange and cross-border settlement, (6) the operation of the interbank money market, (7) aspects related to securities settlement such as thelegal framework, clearance and settlement processes,settlement risks, operational reliability, custody, depos-itories’ organizational arrangements, cross-border links,and (8) the oversight role of the central bank, coordina-tion with the regulatory and supervisory role over secur-ities settlement, and cooperation with the private sector.

Finally, the purpose of this book is not only to indicatethe situation derived from the assessments, but also topropose practical observations regarding the imple-mentation of payments and securities settlement sys-tems reforms in the LAC region. In some cases, theseobservations are also based on the experience gainedthrough the World Bank’s lending operations and tech-nical assistance projects in this area.

Prefaceviii

ix

Massimo CirasinoSenior Financial Sector Specialist Financial Sector Operations and Policy Department

Massimo Cirasino joined the World Bank in July 1998.He plays a leading role in the Financial Sector Opera-tions and Policy Department and has participated inmany of the group’s country and regional interventions.He coordinates regional initiatives (including the West-ern Hemisphere Payments and Securities Clearanceand Settlement Initiative and the Western HemisphereCredit and Loan Reporting Initiative) for the improve-ment of financial infrastructure and has led severalcountry studies. In 2004, Mr. Cirasino launched similarregional initiatives for the Commonwealth of Indepen-dent States and the Middle East. Mr. Cirasino repre-sents the World Bank on the BIS-CPSS task force,which developed the core principles for systemicallyimportant payments systems; the CPSS-IOSCO taskforce, which created the assessment methodology forsystemically important payments systems; and theCPSS-IOSCO task forces, which developed recom-mendations for central counterparties and guidelinesfor national payment system development. Mr. Cirasinois also the co-chair of the World Bank-CPSS task force,which drafted the General Principles for InternationalRemittance Systems. Additionally, he is the primaryWorld Bank contact for the assessment of paymentsand securities settlement systems in the context of theIMF-World Bank Financial Sector Assessment Pro-gram, and is responsible for World Bank training activ-ities in payment and securities systems. Mr. Cirasinoworked at Banca d’Italia from 1993–96 in the Payment

Contributors

System Department and, later on, in the RepresentativeOffice in New York. Prior to joining Banca d’Italia, heworked in Brazil as a journalist and a researcher inmonetary economics.

José Antonio GarcíaFinancial Sector Specialist Financial Sector Operations and Policy Department

José Antonio García joined the World Bank in March2004. In his current position, he provides technical andconceptual advice to World Bank financial sector oper-ations and research, and coordinates regional initiativesfor the improvement of financial infrastructure in LatinAmerica and the Caribbean, the Commonwealth ofIndependent States, and the Middle East and NorthAfrica. He has also led several country studies. Mr.García is a member of the secretariat of the joint WorldBank-CPSS task force, which drafted the General Prin-ciples for International Remittance Systems. Prior tojoining the World Bank, he was a senior economist atthe Centro de Estudios Monetarios Latinoamericanos,where he acted as the World Bank’s counterparty formanagement of the WHI, and served as technical secre-tary of the Working Group on Payment System Issues ofLatin America and the Caribbean. From 1997–2000, heworked in the corporate credit department of BancoInbursa in Mexico City, and from 1992–97 as technicalconsultant in banking supervision at Centro de EstudiosMonetarios Latinoamericanos. Mr. García received aB.A. in Economics and an M.A. in Business Economicsfrom Universidad Anahuac in Mexico City.

Mario GuadamillasSenior Financial Economist Finance, Private Sector, and InfrastructureLatin America and the Caribbean Region

Mario Guadamillas has worked for the World Banksince 1998. In his current position, he provides tech-nical and conceptual advice to World Bank financialsector operations and research on the region. He coor-dinates regional initiatives for the improvement offinancial infrastructure, including the WHI for pay-ment systems and the Western Hemisphere Credit andLoan Reporting Initiative for credit reporting systems,and has led several country studies. He is also involvedin the IMF-World Bank Financial Sector AssessmentProgram and represented the World Bank on the BIS-CPSS task force, which developed guidelines fornational payment system development; the CPSS-IOSCO task force, which developed the assessmentmethodology for the Securities Settlement SystemRecommendations; and the World Bank-CPSS taskforce, which drafted General Principles for Interna-tional Remittance Systems. Prior to joining the WorldBank, Mr. Guadamillas was an economist in the Min-istry of Finance of Spain. He also worked for the cen-tral bank of Spain as an economic and financialanalyst. From 1992–98, he lectured at UniversidadAutónoma, Universidad San Pablo CEU, UniversidadAlfonso X, Universidad Europea de Estudios Superi-ores, and Universidad Nacional de Educación a Dis-tancia, all in Madrid. Mr. Guadamillas earned an M.A.in business at Universidad Complutense, and a Ph.D. ineconomics at Universidad Nacional de Educación aDistancia in Madrid.

Fernando Montes-NegretSector Director Finance and Private Sector DevelopmentEurope and Central Asia Region

Fernando Montes-Negret is in charge of defining andimplementing the Bank’s strategy for the developmentof the financial and private sectors of client countriesin Europe and Central Asia. He joined the World Bankin October 1984 as an economist in the LAC region,where he worked on industrial development andfinance projects in Argentina, Chile, and Costa Rica.From 1986–89, he served as deputy governor of theBanco de la República (Colombia’s central bank).After returning to the Bank in June 1989, he held posi-tions as senior economist in the East Asia and Pacificregion (as country economist for China), the Europeand Central Asia region, and the Financial SectorDevelopment Department. In April 1994, he was pro-moted to principal financial economist. In August1997, he transferred to the LAC region and became sec-tor leader in Mexico City. He became sector manager inthe finance cluster of the Finance, Private Sector, andInfrastructure Sector Management Unit in October1999, and was appointed sector director in April 2004.Mr. Montes-Negret is a graduate of the Universidadde los Andes, Wisconsin University, and Rice Univer-sity. Prior to joining the Bank, he held various posts inColombia, including undersecretary of finance, advi-sor to the Monetary Board, and advisor to the Ministerof Development of Colombia.

Contributorsx

xi

The ideas presented in this book are those of theauthors and do not represent the World Bank’sposition, the WHI’s position, or the position of any insti-tution participating in the WHI. However, the authorsare grateful for the contribution of WHI InternationalAdvisory Council members, country authorities (centralbanks and securities regulators) from the LAC region,staff of private institutions who the authors visited tostudy the WHI, and especially the members of theWorking Group on Payments System Issues of LAC.We are especially grateful to the reviewers—RobertKeppler (World Bank), Jeff Stehm (Federal ReserveBoard), and Joaquín Bernal (Banco de la República,Colombia)—for their very useful comments. We alsowant to thank our colleagues in the World Bank—Mahktar Diop, Marilou Uy, and Susan G. Goldmark—for their support in the review process and the publicationphase of this book.

The successful experience of the WHI could have notbeen possible without the excellent contribution ofour regional partner, the Centro de Estudios Monetar-ios Latinoamericanos. We are especially grateful to Kenneth Coates (director general) and Luis Giorgio

Acknowledgments

(former deputy director general) for their enthusiasmand support of the project. We also want to thankother colleagues and friends for their very useful com-ments: Carlos Andrade (Banco Central del Ecuador),Augusto de la Torre (World Bank), Gustavo da MattaMachado (Brazilian Mercantile & Futures Exchange),Caramae Farmer (Central Bank of Trinidad andTobago), Catiana García (Consejo Monetario Centro-americano consultant), José Manuel Garrido (BancoCentral de Chile), Patricia Guajardo (Banco Centralde Chile), Francisco Guiñez (Depósito Central de Val-ores, Chile), Jim Hanson (World Bank), Gerson Lar-ios (Banco Central de Reserva del Salvador), JoseAntonio Marciano (Banco Central do Brasil), CarlosMelegatti (Banco Central de Costa Rica), GloriaMoya (Comisión Nacional de Bancos y Seguros deHonduras), María Inés Ordoñez (SuperintendenciaFinanciera, Colombia), Byron Sagastume (Banco deGuatemala), Francis Stenning (Caja de Valores deLima, Peru), and Fernando Yañez (Depósito Centralde Valores, Chile). Finally, we want to thank AnaLaura Sibaja (CEMLA) for statistics compilation andSantiago Pombo Bejarano (World Bank) and DanaVorisek (World Bank) for their support in the publica-tion process.

ACH automated clearinghouseADRs American depositary receiptsAFP Administradoras de Fondos de

PensionesALADI Asociación Latinoamericana de IntegraciónAMF Arab Monetary Fund ASIGNA Asigna Compensación y LiquidaciónASOBAN Asociación Bancaria ATM automated teller machineBACEN Banco Central do BrasilBANGUAT Banco de GuatemalaBBV Bolsa Boliviana de ValoresBCB Banco Central de BoliviaBCBA Bolsa de Comercio de Buenos AiresBCCH Banco Central de ChileBCCR Banco Central de Costa RicaBCE Banco Central del EcuadorBCH Banco Central de HondurasBCN Banco Central de NicaraguaBCP Banco Central del ParaguayBCR Banco Central de Reserva de El SalvadorBCRA Banco Central de la República ArgentinaBCRD Banco Central de la República DominicanaBCRP Banco Central de Reserva del PerúBCU Banco Central del UruguayBCV Banco Central de VenezuelaBCV Bolsa Centroamericana de Valores

(Honduras)BEVSA Bolsa Electrónica de Valores (Uruguay)BGP border gateway protocolBHV Bolsa Hondureña de ValoresBIS Bank for International SettlementsBISS Bahamas Interbank Settlement SystemBISX Bahamas International Stock ExchangeBITF Sistema Interbancario de Transferencia

de FondosBM&F Bolsa de Mercadorias e FuturosBMV Bolsa Mexicana de ValoresBNP Banco Nacional de PanamáBNV Bolsa Nacional de Valores (Costa Rica)BOJ Bank of JamaicaBOVESPA Bolsa de Valores de São Paulo BR Banco de la República (Colombia)BROU Banco de la República Oriental del UruguayBVC Bolsa de Valores de CaracasBVC Bolsa de Valores de Colombia

BVDN Bolsa de Valores de NicaraguaBvdNA Bank van de Nederlandse AntillenBVG Bolsa de Valores Global (Guatemala)BVL Bolsa de Valores de LimaBVM Bolsa de Valores de MontevideoBVN Bolsa de Valores Nacional (Guatemala)BVP Bolsa de Valores de PanamáBVPASA Bolsa de Valores y Productos de AsunciónCARICOM Caribbean Common MarketCAVALI Caja de Valores de LimaCBLC Companhia Brasileira de Liquidação

e CustodiaCBOB Central Bank of The BahamasCBTT Central Bank of Trinidad and TobagoCCAV Cámara de Compensación de Pagos de

Alto Valor (Chile)CCE Cámara de Compensación Electrónica

(Peru)CCP central counterpartyCD/DD Créditos Directos/Debitos Directos

(Costa Rica)CDs certificates of depositCECOBAN Centro de Compensación Bancaria

(Mexico)CEDEC Cámara Electrónica de Compensación

(Colombia)CEDEVAL Central de Depósito de Valores del SalvadorCEMLA Centro de Estudios Monetarios

LatinoamericanosCENIT Sistema de Compensación Electrónica

Nacional Internbancaria (Colombia)CENIVAL Central Nicaragüense de ValoresCENTRAL Centralclearing de Compensação

e Liquidação (Brazil)CEPROBAN Centro de Procesamiento Bancario

(Honduras)CETIP Central de Custódia e de Liquidação

Financeira de Títulos (Brazil)CEVAL Central de Valores de la Bolsa Nacional

de Valores S.A. (Costa Rica)CEVALDOM Central de Valores DominicanaCHIPS Clearing House Interbank Payments SystemCIFTS Customer Inquiry and Funds Transfer

System (Jamaica)CII Cámara de Intercambio de Imágenes

(Mexico)

Abbreviations

xii

Abbreviations xiii

CIP Cámara Interbancaria de Pagamentos(Brazil)

CLC Compensación y Liquidación de Cheques yOtros Valores (Costa Rica)

CLS continuous linked settlementCLS Bank Continuous Linked Settlement Bank CM clearing members CMCA Consejo Monetario CentroamericanoCMN Conselho Monetário Nacional (Brazil)CNBS Comisión Nacional de Bancos y Seguros

(Honduras)CNBV Comisión Nacional Bancaria y de Valores

(Mexico)CNMV Comisión Nacional del Mercado de Valores

(Spain)CNV Comisión Nacional de Valores (Argentina)CNV Consejo Nacional de Valores (Ecuador)CNV Comisión Nacional de Valores (Panama)CNV Comisión Nacional de Valores (Paraguay)CNV Comisión Nacional de Valores (Venezuela)COELSA Compensadora Electrónica S.A. (Argentina)COMPE Centralizadora da Compensação de

Cheques é Outros Papéis (Brazil)CONASEV Comisión Nacional Supervisora

de Empresas y Valores (Peru)CONASSIF Consejo Nacional de Supervision

del Sistema Financiero (Costa Rica)COSRA Council of Securities Regulators of the

AmericasCPSIPS core principles for systemically important

payment systems CPSS Committee on Payment and Settlement

SystemsCRYL Central de Registración y Liquidación de

Instrumentos de Endeudamiento Público(Argentina)

CSD central securities depositoryCUD Sistema Electrónico de Cuentas de Depósito

(Colombia)CVM Comissão de Valores Mobiliários (Brazil)CVV Caja Venezolana de ValoresDCV Depósito Central de Valores (Chile)DCV Depósito Central de Valores (Colombia)DECEVAL Depósito Centralizado de Valores de

ColombiaDECEVALE Depósito Centralizado de Valores

de EcuadorDIAN Dirección de Impuestos y Aduanas

NacionalesDNS deferred net settlement DPN Deuda Pública NacionalDTC Depository Trust CompanyDvP delivery versus paymentECCB Eastern Caribbean Central BankECCSD Eastern Caribbean Central Securities

DepositoryECCU Eastern Caribbean Currency UnionECH electronic clearinghouseECNs electronic communication networks

ECOFIN European Union’s Economic and FinanceMinisters

ECSE Eastern Caribbean Securities ExchangeECSM Eastern Caribbean Securities MarketECSRC Eastern Caribbean Securities Regulatory

CommissionEDV Empresa Depositaria de Valores (Bolivia)EFTPOS electronic funds transfer at the point of saleEMC Emerging Markets Committee EMI European Monetary Institute ESCB European System of Central BanksEU European Union FATF Financial Action Task Force on

Money LaunderingFDI foreign direct investmentsFDvP final delivery versus paymentFedwire Fedwire Funds Service FIAB Federación Iberoamericana de Bolsas

de ValoresFIBV Federation Internationale des Bourses

de ValeursFIFO first in, first outFIU Financial Intelligence UnitsFRBNY Federal Reserve Bank of New YorkFSAP Financial Sector Assessment Program

(World Bank-IMF)FSC Financial Services Commission (Jamaica)FSF Financial Stability Forum FX foreign exchangeG-7 Group of Seven G-8 Group of Eight G-10 Group of TenG-30 Group of ThirtyGEM Global Equity MarketIAC International Advisory CouncilIADB Inter-American Development BankICSD International Central Securities DepositoryIFIs international financial institutionsILI Información y Liquidación de ImpuestosIMF International Monetary FundINDEVAL Instituto para el Depósito de Valores

(Mexico)INVERLACE Sistema de Registro, Información y

Transacciones (Colombia)IOSCO International Organization of Securities

CommissionsISD Investment Services Directive ISIN International Securities Identification

NumberISL Infolink Services Limited (Trinidad

and Tobago)ISSA International Services Securities

AssociationJCSD Jamaica Central Securities DepositoryJETS Jamaica Electronic Transfers SystemJSE Jamaica Stock ExchangeLAC Latin America and the CaribbeanLATINCLEARCentral Latinoamericana de Valores

(Panama)

Abbreviationsxiv

LBTR Sistema de Liquidación Bruta en Tiempo RealLGB Ley General de Bancos (Chile)LGTOC Ley General de Títulos y Operaciones

de Crédito (Mexico)LGTOC Ley General de Títulos y Operaciones

de Crédito (Mexico)LINX Infolink Services Limited (Trinidad

and Tobago)LMF Ley Monetaria y Financiera (Dominican

Republic)LSE Liquidación de Servicios Externos

(Costa Rica)LVPS large-value payments systems MAE Mercado Abierto Electrónico (Argentina)MEC Mercado Electrónico de ColombiaMEP Medio Electrónico de Pago (Argentina)MERVAL Mercado de Valores de Buenos AiresMEXDER Mercado Mexicano de DerivadosMICR magnetic ink character recognitionMIT Mecanismo Interbancario de Transferencias

(Guatemala)MPLS multiprotocol label switchingNACHA National Clearinghouse Association

(United States)NACS Netherlands Antilles Clearing SystemNPS national payment systemNPSSC National Payments and Securities

Settlement CouncilOAL Obligación Adicional de Liquidación

(Mexico)OECD Organisation for Economic Co-operation

and DevelopmentOECS Organization of Eastern Caribbean StatesOTC over-the-counterPAC Pago Automático de Cuentas (Chile)PKI public key infrastructure POS point of salePROSA Promoción y Operación S.A. (Mexico)PSSS payments and securities settlement systemPvP payment versus paymentRG general resolutionRGSM Regional Government Securities Market

(Eastern Caribbean)RTGS real-time gross settlement system SADC Southern African Development CommunitySBL Sistema Bancario en LíneaSBOIF Superintendencia de Bancos y Otras

Instituciones Financieras (Nicaragua) SCC Sistema de Cámaras de Compensación

(Ecuador)SCT Sistema de Custodia de TítulosSEBRA Sistema Electrónico del Banco de la

República (Colombia)SEC Securities and Exchange CommissionSEDEC Sistema Electrónico de Comunicaciones

(Uruguay)SELIC Servico Especial de Liquidação e Custodia

(Brazil)SEN Sistema Electrónico de Negociación

(Colombia)

SENDI Sistema Electrónico de Negociación deDivisas (Honduras)

SEP Sistema de Ejecución PresupuestalSEPA single European payment areaSEPSA Sistema Electrónico de Pagos (Argentina)SERPRO Soluções para um Brasil de TodosSET Sistema Electrónico de Transferencia de

Fondos para Préstamos Interbancarios(Venezuela, R. B. de)

SFC Superintendencia Financiera de ColombiaSHCP Secretaría de Hacienda y Crédito Público

(Mexico)SIAC Sistema de Atención a Cuentahabientes

(Mexico)SIBE Sistema Integrado Bursátil ElectrónicoSICAM Sistema de Cámaras (Mexico)SICET Sistema de Custodia Electrónica de Títulos

(Venezuela, R. B. de)SICOF Sistema de Información Contable y

FinancieraSIDV Sistema Interactivo para el Depósito

de ValoresSIGALC Sistema Integrado de Garantías y Líneas

de Crédito (Venezuela, R. B. de)SILOC Sistema de Liquidação Diferida de Ordens

de Crédito Interbancárias (Brazil)SIMA Sistema Integrado de Mercado Abierto

(Venezuela, R. B. de)SINAC Sistema Integrado de Negociación Asistida

por Computador (Argentina)SINACOFI Sistema Nacional de Comunicaciones

Financieras (Chile)SINE Sistema Integrado de Negociaciones

ElectrónicasSINEDI Sistema de Negociación de DivisasSINPE Sistema de Negociación y Pagos

Electrónicos (Costa Rica)SIPAV Sistema de Pagos de Alto Valor (Bolivia)SIPS systemically important payment systemSISTRE Sistema de Tasas Referenciales

(Venezuela, R. B. de)SITE Sistema de Transferencias Electrónicas

(Bolivia)SITRAF Sistema de Transferéncia de Fundos (Brazil)SLE Sistema de Liquidación y Ejecución

(Ecuador)SML Securities Market LawSN-BVDN Sistema de Negociación de la BVDNSPEI Sistema de Pagos Electrónicos

Interbancarios (Mexico)SPEUA Sistema de Pagos Electrónicos de Uso

Ampliado (Mexico)SPI Sistema de Pagos Interbancarios (Ecuador)SPI Sistema de Pagos Interbancarios

(Venezuela, R. B. de)SPID Sistema de Pagos Interbancarios

para DivisasSPVS Superintendencia de Pensiones, Valores

y Seguros (Bolivia)SRO self-regulatory organization

SSF Superintendencia del Sistema Financiero(El Salvador)

SSS securities settlement systemSTP straight-through processingSTR Sistema de Transferência de Reservas

(Brazil) SUGEVAL Superintendencia General de Valores

(Costa Rica)SV Superintendencia de Valores (Bolivia)SV Superintendencia de Valores (Colombia)SVS Superintendencia de Valores y Seguros

(Chile)SWIFT Society for Worldwide Interbank Financial

TelecommunicationTEBEL online trading system in Costa RicaTECBAN Tecnología Bancária (Brazil)TEF Transferencia Electrónica de Fondos

(Mexico)

TI Sistema de Transferencias Interbancarias(Costa Rica)

TT Transferencia de Terceros (Costa Rica)TTCD Trinidad and Tobago Central DepositoryTTS Transferencia Telefónica Segura (Nicaragua)TTSE Trinidad and Tobago Stock ExchangeUSD U.S. dollarVALPRE Préstamo de Valores (Mexico)VAR value at riskWGPS Working Group on Payment System IssuesWGPS-LAC Working Group on Payment System Issues

of LACWHCRI Western Hemisphere Credit and Loan

Reporting InitiativeWHF Western Hemisphere Payments and Securities

Clearance and Settlement Forum WHI Western Hemisphere Payments and Securities

Clearance and Settlement Initiative

Abbreviations xv

To the extent that expanding production andexchange in a market economy requires an increas-ing interconnection of various, and usually anonymous,decisional units, economic development rests cruciallyon infrastructure that makes those interconnectionsefficient, stable, and reliable. This infrastructure includesthe whole complex of technical systems, actors, rules,and procedures that define the field of action whereagents negotiate and perform commercial and financialtransactions.

In contexts where many decisions are taken by multitudesof heterogeneous agents, an efficient, stable, and reliableinfrastructure is necessary to ensure that transactionsare carried out on the terms and conditions agreed onby their originating counterparts. Interconnecting theelements of infrastructure becomes even more essentialas modern communication and information technologiesmake markets independent of specific physical locations.Especially where exchange involves agent commitmentsto future obligations—as is typically the case with finan-cial contracts—elements of infrastructure such as thelegal system and contract enforcement mechanisms mustbe in place to provide trading counterparts with sufficientreassurance that commitments are fulfilled in accordancewith their agreed-on terms and conditions.1

The payments and securities settlement system is theinfrastructure (comprising institutions, instruments, rules,procedures, standards, and technical means) establishedto effect the transfer of monetary value between partiesdischarging mutual obligations. A securities clearance

and settlement system can be considered as part of theoverall payment mechanisms of a country, in that it sat-isfies the main features of this overall definition. In thiscase, the exchange of financial value consists of boththe exchange of securities (equity, fixed income, orderivatives) and the exchange of liquid funds (usuallysight deposits). The soundness and efficiency of a pay-ments system determines the efficiency with whichtransaction money is used in the economy, and the risksassociated with its use. An efficient system reduces thecost of exchanging goods and services, and it is indis-pensable to the functioning of the interbank, money, andcapital markets. A weak payments and securities settle-ment system may severely drag on the stability anddevelopmental capacity of an economy; its failures canresult in inefficient use of financial resources, inequitablerisk sharing among agents, actual losses for participants,and—at the extreme—loss of confidence in the financialsystem and in the very use of money.2

Many countries are embarking on projects to reformand modernize their payments and securities settlementsystems, and domestic policy makers are faced with theformidable task of designing payment system infrastruc-tures in fast-changing technological and institutionalenvironments. These tasks become increasingly complexbecause competition and innovation require an always-changing combination of efficiency, reliability, safety, andsystem stability in the provision of payment services tolarger numbers of individual users and institutions.

Introduction1

1

1Bossone and Cirasino (2001) expand on these concepts.

2Listfield and Montes-Negret (1994) discuss how an efficient pay-ment system contributes to the development of modern, market-based financial institutions and markets.

Historically, payment systems have been at the heart ofbanking. As more and more countries in the nineteenthand early twentieth centuries started to centralize money-issuing activities in single banking institutions, or centralbanks, the liabilities of these institutions became for mostcommercial banks the instrument to settle their interbankpayment obligations. It became natural for central banks toprovide clearing and settlement services for the paymentsdelivered by commercial banks. As a consequence, thepromotion of the efficiency and safety of payment arrange-ments became one of the raisons d’être of central banks(Padoa-Schioppa 1999). Yet in the middle of the twentiethcentury, as payment technology had settled down, pay-ment system issues were considered less important thanother aspects of the financial system, and were seenmostly as technical matters to be dealt with by subunitsof IT departments in the central and commercial banks.

It was not until the mid-1980s that the debate on pay-ment system reform policies took on greater weight in the countries with more advanced financial systems.Financial market liberalization led private sector agentsand national regulators to identify technical and institu-tional solutions to serve the increasing demand for newpayment services, while protecting the economy fromthe risks originating from rapidly growing volumes offinancial transactions. Also, the internationalization offinancial markets and episodes of severe financial crisisaround the world fostered closer cooperation amongindustrial countries—and among industrial countries andemerging economies—on how to set up and enforce stan-dards to improve payment system performance in termsof risk control and shock resilience.

Due to their historical involvement in payment systemsand the implications for an effective monetary policy ofa sound payment system, the central banks of the leadingindustrial countries have been the main actors in movingthe policy debate forward and in taking concrete stepsto improve domestic and cross-border payment systemperformance. It takes only a cursory look at the list ofstudies and reports under the aegis of the Committee onPayment and Settlement Systems (CPSS) of the Groupof Ten central banks to see the intensifying cooperativeeffort under way and its results to date.3 In practice, thespecific role filled by central banks in the payment system

differs from country to country, and can include the pro-vision of special purpose large-value, time-critical, fundstransfer systems; bulk low-value electronic systems,including automated clearing house services; and gov-ernment securities clearance and settlement services andsettlement agent for other payment systems. In addition,central banks increasingly perform the functions of reg-ulation and oversight of payment systems and services(Padoa-Schioppa 1999).

The private sector, in contrast, has traditionally pro-vided most of the payment services to end users. Inaddition, the private sector is normally involved in retailclearing services and clearance and settlement of non-governmental securities. In this latter regard, in somecountries—especially countries in the early stages ofcapital markets development—comprehensive and rig-orous attention to regulatory issues is sometimes lackingas initial major emphasis is placed, quite naturally, onmatters relating to operational efficiency and cost.

Today, securities clearance and settlement systems arerecognized as having the same inherent risks as thoseassociated with systemically important payment mech-anisms. Both the efficiency and the safety and soundnessaspects of these systems are now receiving closer atten-tion from domestic securities regulators as well as inter-national organizations.4 In essence, the initial prominentrole played by the private sector in the implementationand operation of securities systems is now being replacedby a combination of roles shared by the private and pub-lic sectors, with specific and well-defined roles beingassigned to the securities regulator.

In sum, a national payments system encompasses “theentire matrix of institutional and infrastructure arrange-ments and processes in a country for initiating and trans-ferring monetary claims in the form of commercial bankand central bank liabilities.”5 As such, payment systems

Payments and Securities Settlement2

3See the Bank for International Settlements’ Web site at .

4These concepts include speed of settlement, certainty of settlement(correct amount, correct party, correct date, clear understanding whenfinality occurs), reliability (availability, in accordance with rulesand regulations), safety and soundness (to ensure against fraud,credit and systemic risk, privacy), convenience (easy access, con-sistent with technological capabilities), cost (realistic, consistentwith the service provided), and universality (equitable basis by allfinancial institutions, interface with other systems).5In this book, a broad interpretation of a national payments systemis used to include both payments and securities settlement systems(CPSS 2006).

Introduction 3

are at the core of a country’s monetary and financialsystem. This system evolves continuously, reflectingthe changing needs of its stakeholders and the increas-ing number of options offered by rapid technologicaldevelopment. Such evolution can at times take the formof incremental change aimed at gradually improving thesystem’s safety and efficiency. In other cases, countriesembark in major revolutionary reforms that lead to quan-tum leaps in the design and components of the nationalpayments system.

As a result of the growing international interest in issuesrelated to payments and securities settlement systems,the World Bank and the International Monetary Fundhave increased their involvement in this area by assistingmember countries in setting up standards and in enforcingtheir implementation. In this respect, both institutionsoperate through a variety of instruments, including tech-nical assistance, project assistance, and, recently, theassessment of payment system vulnerabilities in indi-vidual member countries as part of the joint InternationalMonetary Fund–World Bank financial sector assess-ment program (FSAP).

In the Latin America and the Caribbean (LAC) region,efforts to raise the awareness of the importance ofmodernizing national payments systems and setting upa regional forum for the exchange of information werestarted by the World Bank as early as 1995. Such effortsfurther evolved with the request of regional financeministers to the World Bank to launch a regional initia-tive to foster such a process of transformation. The lat-ter initiative was formalized in 1999 into the WesternHemisphere Payments and Securities Clearance andSettlement Initiative (WHI), later converted in 2003 intoa regional Western Hemisphere Payments and SecuritiesSettlement Forum (WHF), dedicated to the assessment ofand exchange of information on payments and securitiessettlement systems in the LAC countries.

The WHI has been a coordinated effort supported bycentral banks and securities commissions inside andoutside the region, as well as international financial andstandard-setting institutions. Besides the World Bankand the Center for Latin American Monetary Studies,other institutions have supported the WHI, such as theCouncil of Securities Regulators of the Americas and anInternational Advisory Council, the latter comprisinghighly experienced institutions dealing with clearanceand settlement of payments and securities.

Under the WHI, 23 country assessments were under-taken between May 1999 and December 2005. Countryassessments are prepared jointly by an internationalteam and their local counterparts.

The purpose of this book is to (1) extract the mainlessons and experiences of the WHI-WHF regarding theimplementation of various reforms; (2) describe statusof and major trends in payments and securities settle-ment systems worldwide and their implications for theLAC region; (3) summarize the detailed assessment find-ings for each LAC country;6 and (4) propose practicalobservations regarding the implementation of paymentsand securities settlement system reforms in the LACregion.

ORGANIZATION OF THE BOOK

The rest of the chapters of this book are organized asfollows: Chapter 2 indicates some of the major trendsworldwide in the area of payments and securities set-tlement systems. The chapter analyzes the importanceof adopting an integrated approach in reforming pay-ment systems and describes the latest debate and evo-lution in issues such as large-value payment systems,the use of the central bank’s money, the direction ofadvances in retail payments systems, the growing flowof remittances and new players in the foreign exchangeand cross-border transactions such as the ContinuousLinked Settlement (CLS) Bank. In the area of securi-ties settlement systems, the chapter indicates the closerattention paid to those issues and a broader approachthrough the evolution of international standards. It alsoincludes the current debate about market infrastructure,globalization, and the new challenges for securities set-tlement systems. Finally, it covers the need for strength-ening the oversight function of the central bank overpayments systems.

Chapter 3 describes the tools used for the WHI assess-ments. They include working papers (especially WorkingPapers 2 and 3) produced by the WHI-WHF, the CPSScore principles for systemically important paymentsystems, the International Monetary Fund–World Bank

6The information included is based on the WHI-WHF findings andsubsequent updates. However, payments and securities settlementsystems are continuously evolving. Thus, information should bechecked with country authorities to ensure accuracy.

guidance note for assessing observance of core principlesfor systemically important payment systems, the CPSS–International Organization of Securities Commissions(IOSCO) recommendations for securities settlementsystems, the CPSS-IOSCO methodology for the securitiessettlement systems, and the CPSS-IOSCO recommenda-tions for central counterparties.

Chapter 4 covers the main findings of the WHI–WHFcountry assessments in the area of payment systems.Twenty-three countries have been assessed under theWHI-WHF. The issues covered include the legal basis,interbank exchange settlement circuits, retail paymentsystems, government payments, foreign exchange andcross-border settlement systems, and the functioningand settlement of the interbank money market.

Chapter 5 analyzes the main findings of the WHI–WHFcountry assessments in the area of securities settle-ment systems. The issues covered are the legal basis,clearing and settlement processes, settlement risk, settle-ment asset, operational issues, custody risk, depositories’organizational arrangements, regulatory and oversightframework, and cross-border settlement.

Chapter 6 indicates the main issues related to the over-sight role of the central bank, the coordination with otherregulators, and cooperation with the private sector. The

chapter covers the legal foundations of the oversightfunction; transparency and dissemination of information;objectives, scope, instruments, pricing, and access; andorganizational arrangements and cooperation.

For chapters 4, 5 and 6, the book follows a system-atized approach for each issue covered. First, it includesa brief context in which the main areas, normally iden-tified through international standards and best practices,are described. Second, a status subsection is includeddescribing the facts identified for each of the 23 coun-tries covered. Finally, the observations subsections sum-marize the findings often encountered in the systemsanalyzed or that, even if not identified in many sys-tems, are important due to their relevance (for exam-ple, issues related to dollarized systems).

Chapter 7 goes beyond the assessment exercise to indi-cate some practical steps in the way forward for a pay-ments system reform. The chapter starts on how to usethe assessment as a starting point for the reform effort,and then covers issues such as the role of a national pay-ments and securities settlement system, the differentinstitutional roles in a reform, how to engage the privatesector in the effort, and finally the preparation and imple-mentation of the reform.

Finally, chapter 8 presents the concluding remarks.

Payments and Securities Settlement4

Many trends can be identified in payment andsecurities settlement systems over the past fewyears. Many of the trends are captured in recent publi-cations from the Committee on Payment and SettlementSystems (CPSS), leading central banks, internationalfinancial institutions such as the World Bank and theInternational Monetary Fund, and payment systemspecialists. This chapter highlights the most visible ofthese trends.1

BROADENING THE SCOPE OF THE PAYMENTS SYSTEMS

The concept of payment systems has changed, or at leastthe payment systems area of influence has widened.A payment system can be defined as the collection ofinstitutions, instruments, rules, procedures, standards,and technical means used to exchange financial valuebetween two parties discharging an obligation (Listfieldand Montes-Negret 1994). Traditionally, payment sys-tems have focused on funds transfer systems. However,value can be transferred also by means of securities.Government securities traditionally have received closeattention from central banks due to the role that they playas the government’s bank as well as the government’sagent with regard to public debt management. However,private securities have normally been outside the influ-ence of central bank regulation and oversight. Today,securities clearance and settlement systems are recog-

nized as having the same inherent risks as those associ-ated with systemically important payment mechanisms.International organizations consider both payments andsecurities settlement as a joint area of analysis; the privatesector also looks at this issue as a unique area. Some newterminology incorporating concepts for payments andsecurities settlement has emerged.

Payments and securities settlement systems also haveimportant interrelations with other areas of the financialsector. Examples are bank-troubled resolution schemes(unwinding mainly in cheque systems that still settlelarge-value payments) and credit information systems.

ADOPTING AN INTEGRATED APPROACH TO PAYMENT SYSTEM REFORM

Recognizing the importance of an integrated approachto payment system reform, the CPSS published a reportcontaining general guidance for national payment systemdevelopment. The report acknowledges that there is nosingle recipe for effective payment system development,but the questions that countries undergoing a reformprocess ask themselves are largely similar. For example,who should be involved and who should initiate theprocess? What are the priorities in which to invest andare they based on a solid understanding of the paymentsystem? What are the different infrastructures needed andwhat are their supporting institutional arrangements?

The CPSS report provides expertise in payment systemsand the consensus view of central banks and inter-national financial institutions. However, the priorities ofCPSS member countries need not be the same as thoseof other countries. Indeed, reform priorities differ from

Major Trends in Payments and Securities

Settlement Systems

2

5

1For an analysis of change drivers in the payment systems area seeMontes-Negret (2006).

country to country based on each country’s needs andcapabilities. Drawing on a comparison with the trans-portation system, buying the most expensive technol-ogy to build an airport would be pointless if the restof the system were not sufficiently developed to makeeffective use of that airport. Alternatively, the airportmay provide only a modest contribution to the overalltransport system if most people still use ground trans-portation. Indeed, the objective of the payment system,just like that of the transportation system, should beto develop an appropriate mix of infrastructures and aninstitutional framework to connect people in an effi-cient and safe way.

The CPSS report aims to give assistance in and advice onthe planning and implementation of reforms in the pay-ment system as a whole. It underlines that the centralbank is always a driving force in the development of thenational payment system. However, reforms in this fielddepend on a parallel development of the banking system,and should therefore be a cooperative effort, involvingstakeholders from, for example, the banking sector andregulatory agencies. An adequate understanding of thedifferent infrastructures and their institutional frame-work is needed and is indispensable for getting the pri-orities right.

The report includes 14 guidelines (see appendix 6)and accompanying explanatory text on payment systemdevelopment. The report also includes implementationsections, which illustrate the guidelines with practicalexamples, issues, and possible approaches to implemen-tation. In preparing the report, the CPSS drew on thecontribution of a working group, which consisted of abroad range of central bank experts from industrial anddeveloping countries around the world, as well as fromthe International Monetary Fund and the World Bank.

DEVELOPMENTS IN LARGE-VALUE PAYMENT SYSTEMS

Large-value payment systems (LVPS) play a key rolein the financial infrastructure by discharging paymentobligations between banks. The 1990s experienced amajor transformation in the design of these systems: fromdeferred net settlement systems, which settled only atthe end of the day, to real-time gross settlement (RTGS)systems, which settle on a continuous basis. This revo-lution was largely due to the possibilities offered by

information and communication technology and to themeasures taken by central banks to reduce systemicrisks in these systems. The CPSS of the central banks ofthe Group of Ten (G-10) countries reflected these changesby publishing the report Real-Time Gross SettlementSystems in 1997 (CPSS 1997b).

The purpose of a new report by the CPSS, published inMay 2005, is to present the state of the art in LVPS, tak-ing stock of the developments that have taken place sincethe 1997 report. It is written to be free standing and doesnot require reference to previous reports. The central mes-sage of the report is that interbank payments today settlefaster, with a lower amount of liquidity (mainly, centralbank money), and at a lower cost. Indeed, whereas thekey achievements in the 1990s were speed and safety ofpayments, the focus since the turn of the century hasbeen to reduce liquidity costs and to provide users withmore flexible intraday liquidity management.

In parallel, new systems have emerged to meet an expand-ing demand for cross-border payments. The primaryexample is Continuous Linked Settlement Bank, whichwas established to reduce credit risk in the settlement offoreign exchange (FX) transactions (see below). Anotherexample is the emergence of new infrastructures in coun-tries where a foreign currency plays an important role.Standardized arrangements have been established thatenable financial institutions to settle foreign currencytransactions through a correspondent bank while usingthe same system design as the local RTGS system.

While certain trade-offs exist between achieving lowerrisks and achieving lower costs, recent developments inLVPS design allow more flexibility in addressing variousrisk and cost trade-offs than were available in traditionalarchitectures. Central banks, on their side, have continuedto seek a balance between more stringent risk controlsand the need for systems to be cost efficient.2

The analysis in the new CPSS report shows that the com-plexity of trade-offs between risks and costs implies awide range of possibilities for the design of an LVPS.There is therefore no single solution fitting all markets

Payments and Securities Settlement6

2For an interesting analysis on the practical implications in termsof liquidity in an RTGS system and some measures to reduce theliquidity pressure and increase liquidity distribution, see Bernal andMerlano (2006).

Major Trends in Payments and Securities Settlement Systems 7

and all participants’ preferences. Hence, the reportdoes not prescribe the adoption of any specific featureor design element introduced in a given LVPS in theCPSS countries. It is the responsibility of the owner ofeach LVPS to come up with the design that best fits theuser’s needs, and achieve an optimal balance of risksand costs, while meeting the relevant policy objectives.

THE USE OF CENTRAL BANK MONEY

As a result of the launch of RTGS systems in manycountries around the world, there is a growing use ofcentral bank’s money to settle transactions, in particularof large value. However, the role of central bank moneyin payment systems raises a number of questions. Indus-trial economies have complex and interdependent pay-ment arrangements in which there is a combination ofcompetition and cooperation between the many institu-tions involved. The use of central bank money is thuspart of the underlying issue of the balance between theservices provided by central banks and those providedby commercial banks in the payment system. Given thewidespread and fundamental changes that have occurredover the past decade or so and that continue today, it isuseful to consider whether an appropriate balance is beingmaintained and how the composite use of both moniescan best be achieved.

A 2004 CPSS report looks at a range of practical policyquestions. For example, which institutions should haveaccounts at the central bank? What services should cen-tral banks provide to meet the needs of account holders?When should central banks insist that payment or secu-rities settlement systems settle in central bank moneyor—when this is not practicable—what sufficiently safealternatives exist to mitigate credit and liquidity risks?What are the possible benefits and risks of the concen-tration of payments through a few large banks, and howmight central banks approach this issue? Finally, to whatextent can the supply of central bank money, normallyconfined to the area of jurisdiction of the central bank,meet the demands of global players who are active inmultiple currencies?

The report shows that there is much common groundamong CPSS central banks in their objectives as well as inthe main tenets of their policy concerning the role of cen-tral bank money in payment systems. These collectiveviews and practices are presented in the form of 10 propo-

sitions. At the same time, however, there are often differ-ences when it comes to the implementation of policy.

UNCLEAR DIRECTIONS REGARDING THE USEOF RETAIL PAYMENT INSTRUMENTS

Around the world, retail payment instruments are diverse,both within and between countries. The diverse natureof the transaction types, counterparties, and paymentvolumes and values has given rise to several differentpayment instruments. For example, in G-10 countries,although all the countries use all the noncash retail pay-ment instruments to some extent, they fall into one oftwo groups that rely heavily on a particular class of non-cash instrument: Many European countries and Japan relymostly on credit transfers, whereas Australia, Canada,the United States, and a few European countries dependheavily on cheque payments.

The most significant trends in retail payments commonto the selected countries are the continued primacy ofcash (in volume terms) for face-to-face payments, despitea long-standing movement toward noncash payments;growth in payment cards, primarily for face-to-facepayments; increased use of direct funds transfers, espe-cially direct debit transfers, for remote payments; andsubstantial changes in the market arrangements for pro-viding and pricing the retail payment instruments andservices delivered to end users.

Retail payments in the selected countries are experi-encing an increased pace of experimentation and inno-vation. Although the most recently emerging paymenttechnology and its specific applications have not yetbeen adopted as core payment methods, research anddevelopment, and market experimentation continue.At the same time, more traditional forms of paymentinstruments, technology, and banking arrangementsare evolving. Over the long term, some of these marketdevelopments may well alter traditional payment prac-tices and contribute to increased efficiency and conve-nience in retail payment systems.

GROWING FLOWS OF REMITTANCES

International remittances initiated by migrant workersare an important source of family income in many dev-eloping economies as well as a significant share of therecipient’s GDP. Originators of such remittances through-out the world generally comprise low-income migrants

who regularly send money to family members in labor-exporting countries. Often, beneficiaries depend on remit-tance income to cover day-to-day living expenses, andremittances provide a cushion to mitigate the shocksassociated with emergencies, and in some cases to cre-ate investment in sustainable employment opportunities.

Remittance payments are cross-border retail paymentswith particular access requirements on both the payingand the receiving sides. Remitters and recipients fre-quently do not have access to banks as payment agents,and instead rely on systems set up by non-bank remit-tance service providers, with service agents as inter-mediaries. Therefore, remittance systems may differfrom other payment systems in that, normally, therewill be a multitude of international remittance systemsoperating in a country. Whereas a LVPS frequently willinclude all operators that process large-value transac-tions, remittance systems tend to be proprietary with alimited set of operators, which again provide a limitednumber of products. Remittance systems typically donot entail systemic risk, but they have a great impacton the welfare of consumers and, potentially, on thedevelopment of countries.

Because remittance services are a subset of the broaderretail payment systems, to ensure that remittance transfersprovide the best value and certainty to the end users thereis a need for regulations for remittance service providersand appropriate minimum standards for the provisionof these services. To ensure compliance with the stan-dards, there is a need for a framework to guide oversightpractices in areas such as supervision, monitoring, inspec-tion, enforcement, cooperation, information sharing, dis-closure, and system and service requirements.

In January 2004, the presidents of the Americas in theDeclaration of Nuevo León, Mexico, stated, “We recog-nize that remittances are an important source of capitalin many countries of the Hemisphere. We commit to takeconcrete actions to promote the establishment, as soonas possible, of necessary conditions, in order to achievethe goal of reducing by at least half the regional averagecost of these transfers no later than 2008 and report onprogress achieved at the next Summit of the Americas inArgentina in 2005. We will adopt, as needed or appro-priate, measures such as: the promotion of competitionbetween the providers of these services, the eliminationof regulatory obstacles and other restrictive measures

that affect the cost of these transfers, as well as the useof new technologies, while maintaining effective finan-cial oversight.”

Furthermore, at their meetings in Boca Raton, Florida,in February 2004, the general statement from the Groupof Seven finance ministers and central bank governorsincluded the commitment, “We aim to reduce the imped-iments that raise the cost of sending remittances.”

During the Group of Eight Summit in the United States, inJune 2004, Group of Eight countries stated the following:3

“G8 [Group of Eight] countries will work with theWorld Bank, IMF, and other bodies to improve data onremittance flows and to develop standards for data col-lection in both sending and receiving countries. G8countries will also lead an international effort to helpreduce the cost of sending remittances. The develop-mental impact of these flows may be fostered by increas-ing financial options for the recipients of these flows.The G8 programs will:

(i) Make it easier for people in sending and receivingcountries to engage in financial transactions throughformal financial systems, including by providing accessto financial literacy programs, where appropriate, andby working with the private sector to extend the rangeand reach of these services.

(ii) Reduce the cost of remittance services through thepromotion of competition, the use of innovative pay-ment instruments, and by enhancing access to formalfinancial systems in sending and receiving countries.In some cases, remittance costs between sending andreceiving countries have been reduced by up to 50 per-cent or more. G8 countries believe that similar reduc-tions of high costs could be realized in the case of othercountries.

(iii) Promote better coherence and coordination of inter-national organizations that are working to enhance remit-tance services and heighten the developmental impact ofremittance receipts in developing countries.

(iv) Encourage cooperation between remittance serviceproviders and local financial institutions, including micro-

Payments and Securities Settlement8

3G8 Action Plan: Applying the Power of Entrepreneurship to theEradication of Poverty, Sea Island, June 9, 2004.

Major Trends in Payments and Securities Settlement Systems 9

finance entities and credit unions, in ways that strengthenlocal financial markets and improve access by recipientsto financial services.

(v) Encourage the creation, where appropriate, ofmarket-oriented local development funds and creditunions that give remittance-receiving families moreoptions and incentives for productively investing remit-tance flows.

(vi) Support dialogue with governments, civil society,and the private sector to address specific infrastruc-ture and regulatory impediments. For example, gov-ernments should ensure non-discriminatory access topayment systems for the private sector, consistent withstrong supervisory standards, and work together to mod-ernize overall financial infrastructure.”

Against this background, the World Bank and the CPSSconvened a task force in November 2004 to address theneeds of international policy coordination for remittancesystems.

Following its mandate, in March 2006 the task forcepublished for public comments some general principleson remittances describing key features and functionsthat should be satisfied by remittance systems, provid-ers, and financial intermediaries. These principles areintended to be clear and universally applicable interna-tional standards; the principles’ main focus being toidentify the main characteristics of sending and receiv-ing remittances and the related infrastructures, with aview to improving them.

The task force pursued the following streams of work:

� Mapped and compared the remittance market in dif-ferent countries, as well as the respective cross-borderarrangements in these countries in the form of coun-try reports. This analysis allowed the task force todefine stylized structures of remittance systems andto determine principles that could be applied.

� Identified principles to ensure an appropriate level ofconsumer protection and transparency.

� Discussed the appropriate level of access to pay-ment systems infrastructure preserving the safetyand integrity of the infrastructure. Appropriate mech-anisms for educating the remittance agents and oper-ators will also be considered.

� Defined the appropriate regulatory framework for theremittance market.

� Discussed the role of authorities and remittance serviceproviders’ bank in the application of the principles.

The task force, in addition to CPSS and World Bankrepresentatives, comprised representatives from centralbanks of both sending and receiving countries, as wellas from multilateral institutions such as the Inter-national Monetary Fund, development banks, and theArab Monetary Fund. The task force benefited from thework carried out by several institutions worldwide, andconstantly pursues coordination with other internationalfora involved on this matter.

AN INCREASING ATTENTION TOOPERATIONAL RELIABILITY, RESILIENCE, AND INTEGRITY OF SETTLEMENT SYSTEMS

Responses to disaster risk involve the adoption of mea-sures that would allow continuous operation in a suffi-ciently controlled environment at a level that will permitthe ongoing management of existing positions and pay-ments. To make this possible, robust contingency plansneed to be prepared and tested, including establishingbackup computer centers, frequent updating of backupdata, backup power sources, and so on. After the Sep-tember 11, 2001, disaster important vulnerabilities wereidentified in liquidity management caused by operationaland telecom problems among major financial institutionsand their customers, resulting in important bottlenecksfor several days. This happened despite the resilienceshown by the U.S. payment system thanks to the FederalReserve’s market participants’ extraordinary cooperation.Lost and disrupted transactions caused uncertainty. As aresult, U.S. regulatory agencies and industry participantslearned important lessons, pointing to the fundamentalflaw that continuity plans were developed at the level ofindividual institutions, in general, with a focus on single-site outage scenarios.

As a result of the disruption of all services to lowerManhattan from the 9/11 terrorist attacks, major playersmust now recast their plans to deal with the potential forwide area disruptions, making evident the importance ofgeographical diversification and focusing more on desiredoutcomes than on specific scenarios. There also is a newemphasis on availability of critical staff and distributionof business and technical expertise. The 9/11 crisis made

clear the importance of testing within and across insti-tutions, with emphasis on ongoing communications dur-ing a crisis (governance during emergencies), the risksof geographical concentration of service providers andkey staff, as well as the need to better understand the webof interdependencies between market participants andclients, banks, utility companies, and so on.

One of the main conclusions of the ongoing review is theneed to coordinate plans across the industry, domesticallyand even internationally, more closely than previouslyanticipated. The regulatory response has been fast inproviding a number of initiatives to identify sound prac-tices for business continuity. These initiatives are con-tained in two reports: the “Interagency White Paper onSound Practices to Strengthen Resilience of the U.S.Financial System,” and the “Interagency White Paperon Structural Change in the Settlement of GovernmentSecurities: Issues and Options.” Other work include thenew guidelines from the Payments Risk Committee,enhanced contingency testing of Fedwire Funds Serviceand the Clearing House Interbank Payments System, andfurther enhancement of Fedwire funds and securitiesservices. Extensive work in these areas has been carriedout also by U.K. authorities.

Obviously, emphasis needs to be put on the market infra-structure and the larger institutions that can create sys-temic risk.4 Proper focus has been given to the resilienceand continuity of critical markets and firms that playsignificant roles in those markets beyond the nationalborders of major financial centers.5

Setting higher standards for security and recovery ofcore settlement systems is having major cost impli-cations for banks and other financial participants. Majorinvestments in what is known as “high availabilityarchitecture” (which might include “synchronous mir-roring,” that is, the simultaneous copying of transac-tions at primary and recovery centers to avoid any lossof data; data mirroring, clustering, data replication, loadbalancing between processing centers, and so on) areunder way.6

In summary, the response to geographic diversificationis being built around a capability model with three com-ponents: (1) split operations in an active-active mode(White Paper recommendations); (2) splitting of opera-tions in such a manner that they take place in two distinctgeographic areas; and (3) traditional backup recoverycapabilities.7

Operational risks must be dealt with not only at the levelof payment system operators, but also at the level ofsystem participants. In this regard, within Basle II a newemphasis on operational risk is focusing the attention ofboards, bank managers, and bank regulators. The BasleCommittee on Banking Supervision defines this risk as“the risk of direct or indirect loss resulting from inade-quate or failed internal processes, people, or systems orfrom external events.” Operational risk is also definedas the “risk that deficiencies in information systems orinternal controls will result in unexpected loss: fraud,non-deliberate incorrect information, disaster risk andpersonnel risk” (CPSS 2003c).

Finally, in October 2004, the Financial Action TaskForce on Money Laundering revised the 40 recommen-dations and introduced nine special recommendations(see appendix 3), all aimed at fighting money launderingand terrorist financing. The Financial Action Task Forceon Money Laundering comprises a broad spectrum ofinternational authorities, including financial intelligenceunits, central banks, and law enforcement entities. Formore information, see http://www.fatf-gafi.org.

Payments and Securities Settlement10

4It is interesting to note the huge increase in liquidity support following the 9/11 events. Commercial bank borrowings from theFederal Reserve discount window rose from $200 million to about$45 billion on September 14, 2001, with daylight overdrafts peak-ing at $150 billion on September 14, the highest level ever and morethan 60 percent the usual level.5In the United States, critical markets have been defined to encompassthe operation of the federal funds market, the FX and commercialpaper markets, as well as the government, corporate, and mortgage-backed securities markets. Although “core clearing and settlementorganizations” consist of market utilities that provide critical clear-ing and settlement services for financial markets and large paymentsystem operators, “firms that play significant roles in critical finan-cial markets” are those that participate in sufficient volume or valuesuch that their failure to perform critical activities by the end of thebusiness day could present systemic risk. See U.S. Securities andExchange Commission (2002).

6Monks (2003). This technology is still limited to distances of nomore than 100 kilometers (60 miles) between the recovery centerand the primary center.7For an interesting discussion of some private sector perspectives,see ECB-CPSS (2003).

Major Trends in Payments and Securities Settlement Systems 11

A NEW APPROACH TO FX AND CROSS-BORDERTRANSACTIONS: THE LAUNCH OF THE CLS

A broad definition would regard a cross-border paymentas a transaction that involves individuals, corporations,settlement institutions, central banks, or a combinationthereof in at least two different countries. Followingthis definition, at least three major categories of cross-border payment transactions can be identified:

� Payments that originate in some country and for whichthe destination (that is, the final beneficiary) is someother country. Major examples in this category wouldbe the payments (typically made by corporations)associated with the international trade of goods andservices, as well as the unilateral transfers from anindividual residing in country X to an individual res-ident of country Y (that is, personal remittances). Thistype of payments is what most people would regardas a “payments of a cross-border nature.”

� Payment transactions in which the origin and desti-nation are both in the same country, but which usethe payments infrastructure of at least some othercountry for settlement. For example, two banks oper-ating in the same country and that make trades in thelocal FX market usually settle the foreign currencyleg through foreign bank correspondents. Anotherexample in this category could be the payments a res-ident of country X makes with a credit or debit card(issued in country X) while traveling in country Y.As far as the payer and the payee are concerned, thetransaction would be domestic in nature, althoughthe payments infrastructure of at least these twocountries would be used to process and settle thepayment.

� Cash payments. Major examples here are the pay-ments made by a resident of country X in country Ywith the legal tender of the latter, or payments madethrough some remittances companies in which theoriginator gives cash in country X to be paid to a ben-eficiary (typically in cash) in country Y.8

Literature on cross-border payment systems is relativelyrecent and in most cases the attention has been centeredin the risk features of these transactions. Not surprisingly,much of the systematic work carried out in recent yearsby policy makers and international institutions has focusedon cross-border payments associated with transactionsin financial markets, because this particular type of cross-border transactions is regarded as having the potentialof producing systemic risk effects due to their large-value nature.

Particularly relevant in this area is the work of theCPSS of the G-10 countries. Two of the specific top-ics studied by the CPSS have been cross-border secu-rities settlements and settlement risk in FX transactions(CPSS 1995, 1996a). In particular, as a result of thework in the latter area, commonly known as the Allsopp Report, in 1996 the G-10 central bank gover-nors launched a comprehensive strategy to reduce thesystemic risks in settling FX transactions.9 In LatinAmerica and the Caribbean, settlement risks in the FX domestic markets, which are the most relevant inthe region in terms of their cross-border implications,are currently being studied by Latin America and theCaribbean central banks in the context of the WorkingGroup on Payment System Issues of Latin America andthe Caribbean.

In particular, when in 1996 governors of the central banksof the G-10 countries endorsed a comprehensive strategyto reduce risks, particularly systemic risks, in settlingFX transactions, they agreed on a three-track strategyproviding for

� Action by individual banks to control FX settlementexposures;

� Action by industry groups to provide risk-reducingmulticurrency services; and

� Action by central banks to induce rapid private sec-tor progress.

The most important action, which can be considered arevolution in the world of FX and cross-border marketwas the launch, in September 2002, of the ContinuousLink Settlement Bank (CLS Bank). CLS Bank started its8Resident of country X could be carrying cash all the way or could

withdraw cash with a card issued in country X from an ATM incountry Y to make payments in this latter country. According to thedefinition given above, one could even think of including the cashpayments made between residents of the same country with thelegal tender issued by some other country.

9A progress report on this issue was produced in July 1998. SeeCPSS (1998a).

CLS, settling FX transactions in seven currencies (theAustralian dollar, the Canadian dollar, the U.S. dollar, theeuro, the Swiss franc, the Japanese yen, and the Britishpound) on a payment versus payment basis on the booksof the seven respective central banks. At the time of itslaunch, CLS had 66 of the world’s largest financial insti-tutions participating as shareholders. In 2005, FX dealswith a total of 15 currencies (the former plus the Danishkrone, the Norwegian krone, the Swedish krona, theHong Kong dollar, the Korean won, the Singaporedollar, the South African rand, and the New Zealanddollar) were being settled through the CLS Bank. Bythe end of 2005, the CLS Bank had a total of 56 mem-ber banks (shareholders, with settlement accounts)and 674 member customers (third parties sponsoredby a member bank), and nearly 80 percent of total mem-ber volume was being settled through it. The CLS Bankis subject to the cooperative oversight of central banksinvolved and it is under the direct oversight of theU.S. Federal Reserve.

Some of the most relevant features of the CLS servicefollow:

� Counterparty risk is eliminated through a form ofpayment versus payment, although liquidity risk isnot eliminated.

� Settlement members hold accounts at the CLS Bank.● Single multicurrency account on CLS Bank’s

books.● Individual currency balances calculated, monitored.

� FX trades settle gross on CLS Bank’s books.● Final, simultaneous debits and credits to Settle-

ment Member’s accounts: Achieves payment ver-sus payment.

� Pay-ins and pay-outs are via CLS Bank accounts andRTGS systems.● CLS Bank holds accounts at central bank of issue.● Participants’ funding and defunding of these

accounts is on the basis of the net amounts in eachcurrency of the trades they are settling that day.

INCREASING IMPLEMENTATION OFINTEGRATED INITIATIVES IN PAYMENT AND SECURITIES SETTLEMENT SYSTEMS

In addition to the CLS Bank, industry groups and gov-ernment agencies have launched or are studying several

important global initiatives that have the potential toincrease efficiency or reduce payment risks, or both. Suchnew networks and vehicles are having an importantimpact on the operation of banking and non-bankinginstitutions. Some examples are cited below:

� In Europe, authorities and market players are strug-gling to achieve the Single European Payment Areaand interesting efforts to integrate financial systemsand capital markets, including settlement and depos-itory institutions are taking place. The launch of theTrans-European Automated Real-Time Gross Settle-ment Express Transfer System 2 (TARGET 2) is alsomoving in the same direction of rationalization of thepayment infrastructure.

� In Central America, a project is under way to inte-grate the LVPSs of Costa Rica, Dominican Republic,Honduras, Guatemala, and Nicaragua.

� In the securities area, there are also a number ofglobal initiatives. The projected Global Equity Mar-ket initiative of the New York Stock Exchange toestablish a common stock market among 10 majorcountries, including Brazil and Mexico, would allow24-hour trading around the world.

“The automation of trading systems, led by the EuropeanExchanges and US ‘electronic communication networks’(or ECNs), combined with the growth of online trading,has led to significant declines in trading costs, massiveincreases in turnover, internationalization of trading andsettlement systems’ operations, and a major reform inthe structure and governance of securities exchanges.Reductions in trading costs lowered the cost of raisingequity capital and shifted issuance of trading activity tolower cost centers” (IMF 2003, 131).

The same concern about the fragmentation of the banks’liquidity applies to the use of their collateral: “Largebanks want to be able to approach several markets froma single access point enabling them to make the mostefficient use of collateral and to minimize costs” (Sabatini2003). Within the Trans-European Automated Real-TimeGross Settlement Express Transfer System 2 this concernwill be reduced, because there will be less need for col-lateral movements.

Cross-border issues in payments and securities tradingare being studied by a Cross-Border Collateral TaskForce established by the New York Payments Risk

Payments and Securities Settlement12

Major Trends in Payments and Securities Settlement Systems 13

Committee.10 One of the task force’s recommendationscontains a request to the G-10 central banks to “expandthe range of acceptable collateral to include (more) foreigndenominated collateral.”11 Within the EU, central banksbegan accepting securities collateral from any of theother EU markets in two eligible currencies (the euroand the U.K. pound) provided that agreeable custodian orcollateral arrangements are put in place. As internationalcentral securities depositories develop, we will see furtherchanges in this area.

On the retail side of the payments system, some inte-gration initiatives are taking place, in particular inEurope (for example, STEP2),12 or links between dif-ferent domestic automated clearinghouses (for exam-ple, the link between the Mexico and U.S. automatedclearinghouses).

CLOSER AND BROADER ATTENTION TOSECURITIES SETTLEMENT SYSTEMSTHROUGH THE EVOLUTION OFINTERNATIONAL STANDARDS

In the area of securities settlement systems (SSSs), therehas been an important process of consolidation and gen-eralization of international accepted standards worldwide.The first set of internationally recognized standards wasincluded in the document, “Group of Thirty Recommen-dations Regarding Securities Clearance and Settlement,”published in 1989 and targeted to “reducing risk, improv-ing efficiency and promoting greater standardization ininternational settlement.”13 Soon after and throughout thedecade of the 1990s this document became a key refer-

ence for the assessment of SSSs. Major SSSs around theworld were assessed against these recommendations andsome upgraded in order to observe with the recommen-dations included in this document. The Group of Thirty(G-30) report focused on the areas of trade comparison,trade confirmation/affirmation, central securities deposi-tories, netting schemes, delivery versus payment,14 same-day-funds, rolling settlement cycle, securities lending, andcommon message standard. In addition, the LamfalussyMinimum Standards (CPSS 1990) issued for the pur-pose of cross-border and multicurrency netting andsettlement schemes were not only relevant for pay-ments settlement systems (PSSs), as mentioned before,but also for SSSs. These six standards refer to the legalbasis, financial risks, management of credit and liq-uidity risks, admission criteria, and operational relia-bility of netting schemes.

In 1990, the technical committee of the InternationalOrganization of Securities Commissions (IOSCO) issueda report on clearing and settlement. Its objective is to“contribute to the process of creating an efficient centralsecurities depository from a national regulatory point ofview and, at the international level, offering views onhow to create links in accordance to the recommendationsissued on the subject.” The report is intended to be applic-able for both spot and derivatives markets. The reportdeals with a broad range of issues related to securitiessettlement, mainly regulatory (including the role of self-regulatory organizations), liquidity risk, and industryorganizational arrangements and operational reliability.In addition, it endorses the G-30 recommendations aspractical, feasible, short-term goals and supports itsprompt implementation.

In 1995, the International Securities Services Associationamended the G-30 recommendations. The main amend-ments