Reforming Payments and Securities Settlement Systems

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Reforming Payments and Securities Settlement
Systems

• THE WORLD BANK FINANCE FORUM 2004PAYMENT AND
  SECURITIES SETTLEMENT SYSTEMS REFORMWashington,
  D.C., September 22-24, 2004

Massimo Cirasino Mario Guadamillas Fernando
Montes-Negret
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Reforming Payments and Securities Settlement
Systems
Presentation structure

• Reforming Funds Transfer Systems and the Role of
  the World Bank (Massimo)
• Reforming Securities Settlement Systems and the
  Role of the Bank (Mario)
• Regional Efforts in Reforming Payments and
  Securities Settlement Systems (Fernando)

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Reforming the National Payments System
Presentation structure

• The Importance of Payment Systems
• Typical Reform Objectives
• Payments and Securities Settlement Systems Major
  Trends and Shortfalls Worldwide
• Lessons from Reform Experience
• The Role of the World Bank in the transformation
  process in payments and securities settlement
  systems

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What is a Payment System?
1.
2.
3.
4.
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The Importance of PSS Systems

• Payment systems and securities settlement
  systems represent a basic infrastructure for the
  functioning of market economies
• PSSS are essential components for the smooth
  transmission mechanism of monetary policy
• The soundness of PSSS is fundamental for the
  stability of the currency

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The Importance of PSS Systems

• The soundness of the PSSS is indispensable for
  the stability of financial markets - Financial
  market crises are likely to show their first
  signs in the payment systems
• The soundness and, especially, efficiency of
  PSSS is a fundamental factor in sustaining
  economic activity and economic development

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International Standards for PSSS

• The Committee on Payment and Settlement Systems
  (CPSS, Bank for International Settlements) and
  IOSCO have traditionally been the forum to
  discuss and develop international standards and
  best practices in the payments and securities
  settlement arena

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International Standards for PSSS

• The CPSS issued Standards (Core Principles) for
  sound and efficient Systemically Important
  Payment Systems in January 2001
• CPSS and IOSCO released Recommendations for sound
  and efficient Securities Settlement Systems in
  January 2001

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International Standards for PSSS

• CPSS and IOSCO are releasing (November 2004)
  Recommendations for sound and efficient Central
  Counterparties
• The CPSS, with very active support from the Bank,
  is developing a guidance for the overall reform
  of the National Payments System

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Payment Systems Influencing Factors

• A major source of banking costs and profits
• Many innovative products and services
• Electronic technology is removing traditional
  barriers of time and space
• New players a threat to traditional banks
• Trade-offs competition and cooperation/
  efficiency and risk

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Payment System Reform Objectives

• Payment system requirements
• Speed of payment
• Certainty of payment
• Reliability
• Safety and soundness
• Convenience
• Cost
• Universality

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Payment System Reform Objectives
Speed of payment

• Payments used to take as long as 30 days in some
  emerging countries
• Most payments should require no longer than 2 to
  5 days for clearing and settlement
• Some payments (usually high value but low volume)
  require same-day settlement

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Payment System Reform Objectives

• Certainty of payment
• User confidence must be established that
• The correct amount will be paid
• The correct party will be paid
• Payment will be made on the correct date
• Clear understanding when payments finality
  (non-revocability) occurs

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Payment System Reform Objectives
Reliability

• System must be available 99 during
• the hours of operation

• System must work according to the published rules
  and regulations

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Payment System Reform Objectives

• Safety and soundness
• System must have adequate controls
• to ensure against
• Fraud
• Credit and systemic risk
• Unauthorized disclosure of payment data
  consistent with the need to address money
  laundering issues

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Payment System Reform Objectives

• Convenience
• System must provide for easy access
• of Payer to his/her deposited funds
• System must allow for ease of deposit
• by recipient
• System must be consistent with
• technological capabilities and skills of
• originator, receiver and intermediate
• Processor
• System must meet users need and be consistent
  with the market economy and structure

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Payment System Reform Objectives

• Costs
• Capital and implementation costs must be
  realistic
• Operating costs must be consistent with the
  level of service provided
• Operating costs must be consistent with users
  ability and willingness to pay

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Payment System Reform Objectives

• Universality
• Systems must be usable on an equitable basis by
  all financial depository institutions
• System must interface with all banks intra-bank
  customer accounting systems

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Payment System Reform Objectives

• International Standards
• Systems should meet international standards to
  put the country in condition to play a role in
  the global marketplace
• Core Principles for SIPS and SSS Recommendations
  are part of the list of standards and codes of
  the Financial Stability Forum and countries are
  being assessed with them

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Payment Systems Trends and Shortfalls legal
framework

• A growing attention is being given to the legal
  framework for payments and securities settlement,
  which, however, in many countries still presents
  important deficiencies
• Typical shortfalls include the definition of
  finality, protection of the systems against
  bankruptcy procedures, improvement of the legal
  basis for custody arrangements, legal basis for
  netting arrangements, and the regulation of
  oversight powers of the central bank

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Payment Systems Trends and Shortfalls
sytemically important payments systems (SIPS)

• In many countries, SIPS are being designed
  following the CPSS Core Principles for SIPS
• The backbone of the National Payments System is
  increasingly represented by an RTGS system
  operated by the central bank
• Some RTGS systems are characterized by the
  presence of liquidity saving mechanisms, based on
  a combination of gross and net features

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Payment Systems Trends and Shortfalls
sytemically important payments systems (SIPS)

• However, in some systems, some important issues
  have not been assessed properly
• Apart from the legal issues presented above,
  other typical shortfalls include
• Risk control management is weak no sufficient
  provision of intra-day liquidity no optimal
  integration with securities settlement systems
  no or insufficient guarantee schemes for systems
  based on netting

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Payment Systems Trends and Shortfalls
sytemically important payments systems (SIPS)

• Operational reliability and business continuity
  measures might be insufficient in light of recent
  debate on the issue
• Too many large value payments are still processed
  in relatively risky systems (especially cheque
  systems)
• Access is restricted to few participants without
  disclosure of risk considerations. Exit criteria
  are uncertain
• Governance arrangements are not transparent and
  system participants do not have appropriate fora
  to express their needs

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The Core Principles
As a result of these weaknesses, too many SIPS
are still not compliant with international
standards
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Payment Systems Trends and Shortfalls retail
systems

• Attention to retail issues is still low worldwide
• In many countries, despite the existence of an
  electronic funds transfer system, cheques are
  still often used as an instrument for the
  exchange of large value interbank payments
• In some countries, cheques are not standardized
  and are, therefore, processed with cumbersome
  procedures
• In many countries retail systems are
  characterized by a low degree of interoperability
• In most of the countries, payment instruments are
  used in a sub-optimal way, from the efficiency
  point of view

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Payment Systems Trends and Shortfalls government
payments

• In many countries government payments are
  processed in a less than efficient way and have
  several negative implications for the payments
  system as a whole
• For example, collection and disbursements of the
  public sector are not processed electronically
  and timely through current and envisaged
  automated systems. It must be noted that, in many
  cases, the gains in efficiency and cost
  reductions for government payments have been the
  main result of the reform effort, being able to
  recover the initial investment in a very short
  time-span

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Payment Systems Trends and Shortfalls Transparency

• In many cases, conditions applied to payment
  services are not transparent nor is it clear to
  the stakeholders and the public the policies
  pursued by authorities
• Banks and other financial institutions are not
  forced to provide information to the public on
  the services they offer in the payments system
  and the general public nor are able to resort to
  a banks Ombudsman and/or to the central bank
  and/or the consumers protection agencies for
  resolution of conflicts related to payment
  services

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Payment Systems Trends and Shortfalls FX and
cross-border settlement

• Attention of these issues is still too low, and
  the consequences potentially disrupting
  especially in countries with significant volumes
  of cross-border activities
• Financial risks are present in foreign exchange
  trading and settlement. In particular, in some
  countries, true PvP is not achieved in the vast
  majority of foreign exchange transactions
• In many countries, cross-border retail payments
  are costly and not adequately regulated

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Payment Systems Trends and Shortfalls interbank
money market

• In many countries, interbank money markets are
  not deep since they are characterized by the
  heavy use of bilateral and OTC unregulated
  arrangements
• This deficiency creates liquidity pressures in
  the payments system
• On the other hand, insufficient integration of
  payments and securities is one cause of the
  insufficient development of these markets

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Payment Systems Trends and Shortfalls
Cooperation

• In many countries cooperation (among authorities,
  between authorities and stakeholders, and among
  stakeholders) is largely insufficient
• Lack of cooperation is characterized by the
  absence of joint bodies to address problems of
  common interest and/or appropriate memoranda of
  understanding among authorities

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Payment Systems Trends and Shortfalls Oversight

• Many central banks are in the process of
  strengthening their oversight function. However,
  in many countries

• The central bank does not have clear legislative
  authority for the oversight of clearance and
  settlement systems. Nor is secondary legislation
  (bylaws, circulars, etc.) implemented
• The central bank does not disclose publicly its
  implementation strategies to achieve its
  objectives relating to all significant payment
  system matters
• The central bank in exercising its oversight role
  does not have the ability to carry out this
  function effectively, especially in terms of
  human and financial resources

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Payment Systems Oversight

• the central bank does not verify that individual
  payment systems satisfy user needs as well as
  risk and efficiency requirements through
  appropriate interventions both at the development
  stage and during the on-going system
  implementation and operational phases
• the central bank does not define and implement
  appropriate actions should participants not
  comply with published rules and regulations (e.g.
  the application of pre-determined penalties and
  sanctions for compliance failures)
• the central bank does not collect and distribute
  relevant statistical information to demonstrate
  the use being made of each system and the extent
  to which the systems are satisfying end-user and
  other market needs

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Trends and Shortfalls Securities Settlement
Systems (SSS)

• In many countries SSS and funds transfer
  (payment) systems are not adequately integrated
  creating disruptions to the payments system as a
  whole
• Many SSS around the world do not comply with the
  CPSS-IOSCO Recommendations for SSS
• Some countries are considering the introduction
  of Central Counterparties (CCPs)

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Trends and Shortfalls
The good news Many countries in the world have
implemented or are in the process of implementing
reforms of the payments system
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Trends and Shortfalls
The bad news in many cases the reform has not
been conducted or designed following a strategic
approach. This has led or is likely to lead to
sub-optimal equilibria
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Overcoming Shortfalls The Role of the Central
Bank in the Payments System

• The Central Bank normally plays a crucial role in
  reforming the payments system and guaranteeing
  its smooth functioning
• A new function is emergingPayments System
  Oversight

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Lessons from ExperienceImplementation Typical
Problems

• Technology driven decisions (e.g. deciding on
  software before elaborating the vision and
  strategy)
• Finding Payment System Experts
• Intra- and Inter-organizational Politics
• Ineffective Communication within Participant
  Organizations

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Lessons from ExperienceImplementation Typical
Problems

• Changes in Representation
• Affinity towards Operational Issues (deviating
  from the strategic approach)
• Questioning the Role of the Central Bank

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Lessons from Experience Implementation
Prerequisites for Success

• A Driving Force - Top Level Sponsor
• Process Management Skills
• Project Management Discipline
• Patience with Process
• Continuous Progress - manage sub-projects

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Lessons from Experience Implementation
Prerequisites for Success

• Continuity in Participation by Senior Personnel
• Wide and Active Involvement
• Communication with Stakeholders
• Perseverance

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Overcoming Shortfalls The World Bank Role in the
Transformation Process
Who we are

• Financial Sector Policy and Operations
• Technology, Financial Infrastructure and Access
  to Finance Group
• Head Robert Keppler, Rkeppler_at_worldbank.org
• Reforming Payments and Securities Settlement
  Systems is one of our groups main activities

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Overcoming Shortfalls The World Bank Role in the
Transformation Process
Areas in which we intervene

• Providing a professional and complete stocktaking
  report
• Helping create momentum for the reform
• Supporting the country to adopt a holistic
  approach to financial infrastructure reform
• Supporting the country to develop the vision and
  the strategy
• Supporting the implementation of the reform
  providing advice

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Overcoming Shortfalls The World Bank Role in the
Transformation Process

• Providing the most updated expert advice on all
  areas related to payment system reform
• Legal Framework
• Retail systems with particular regard to the wide
  availability and efficient distribution of
  instruments, and access for the underserved
  population
• Government Payments and their importance for both
  large value and low value systems
• Cross-Border Payment Arrangements and (for some
  countries) settlement of domestic foreign
  exchange denominated transactions

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Overcoming Shortfalls The World Bank Role in the
Transformation Process

• International Remittances
• Large Value systems and their relations with
  interbank money market
• Securities settlement systems and their
  interactions with other settlement systems
• Central Bank Oversight (both domestically and at
  the international level)
• The role of other authorities in the reform
  process and in the on going oversight activity

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Overcoming Shortfalls The World Bank Role in the
Transformation Process

• Cooperative arrangements
• International Cooperation through regional
  initiatives
• Integration of payment system reform with the
  reform of other components of the financial
  infrastructure such as credit reporting, the
  development of trading platforms and the
  enhancement of the capital market structure.

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Overcoming Shortfalls The World Bank Role in the
Transformation Process
Typical Tools

• Funding through regular Bank loans (support to
  the Regions in preparing and supervising the
  loan)
• Fee-based services (agreed with the Regions)
• Regional Initiatives (support to the Regions in
  launching and managing the programs)

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The World Bank Rolein the Transformation Process
What we do Typical modernization objectives

• Provide the foundation for improved banking
  products and services, and geographical coverage
• Ensure greater efficiency and liquidity in the
  banking system
• Reduce risk and establish a sound risk management
  process
• Optimize the costs of funds transfer transactions

• Provide support for international funds transfer
• Enhance the financial performance of the
  commercial sector
• Lay the technical and procedural foundation for
  future developments, such as Electronic Commerce
• Promote integration of payments and securities
  settlement systems

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The World Bank Rolein the Transformation process

• Comprehensive initiatives
• Algeria, Angola, Azerbaijan, Bahamas, Barbados,
  BCEAO, BCEAC, China, Ecuador, Tanzania, Trinidad
  and Tobago, Uzbekistan, Venezuela, Vietnam, West
  Bank Gaza, etc.
• Undertaking initial diagnostics and developing
  reform strategies
• Costa Rica, Dominican Republic, El Salvador,
  Guatemala, Haiti, Honduras, India, Indonesia,
  Jamaica, Libya, Madagascar, Morocco, OECS,
  Poland, Thailand, Tunisia, etc.
• Providing specific technical advice
• Brazil, Chile, Colombia, Estonia, Hong Kong,
  Netherlands Antilles, Peru, Russia, Ukraine,
  Mongolia, Moldova, etc.

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The World Bank Rolein the Transformation Process

• Coordinating and managing multi-country and
  regional initiatives
• BCEAO, Central Bank of West Africa
• BCEAC Central Bank of Central Africa
• Southern African Development Community (SADC)
• Western Hemisphere Initiative
• Commonwealth of Independent States Initiative
• Arab Initiative
• Commercial bank operational procedural
  improvements
• MIS, Decision Support, Products Services,
  Global Modernization (India)

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The World Bank Rolein the Transformation process

• Supporting the launch of cooperative arrangements
  (e.g. Payments Councils)
• Organizing Training Activities
• Preparing support and educational materials
  including study methodologies - copies of several
  booklets are available
• Conducting Research in Innovative areas (e.g
  Oversight)
• Preparing and publishing case studies

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The World Bank Rolein the Transformation process

• Participating in CPSS and IOSCO Task Force(s) and
  other influential bodies
• Supporting (with Fund colleagues), the Financial
  Sector Assessment Program and developing its
  methodology for assessments of payments and
  securities settlement systems
• Coordinating reform efforts with other areas in
  the financial sector network (e.g. credit
  reporting, access to financial services, capital
  markets)