the strategic approach to reforming payments and securities settlement systems

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The Strategic Approach to The Strategic Approach to Reforming Payments and Reforming Payments and Securities Settlement Securities Settlement SystemsSystems

Massimo CirasinoMassimo CirasinoPayment System Development GroupPayment System Development Group

The World BankThe World BankCo-ChairmanCo-Chairman

CPSS/WB Task Force on CPSS/WB Task Force on General Principles for International General Principles for International

Remittance ServicesRemittance [email protected]@worldbank.org

Global Conference“Exploring Frontiers in Payment System Development”Washington, DC Tuesday May 29, 2007

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Why do we care?Why do we care?

““The Church of the Divine Payment”The Church of the Divine Payment”

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Securities systems, because of their close linkages with payment systems, are increasingly considered as integral part of the payment system.

A.What is a Payment System?A.What is a Payment System?

A payment system is the collection of procedures, rules, standards,instruments, institutions and technical means used to exchange financial value between two parties discharging an obligation.

Although the purpose is simple, payment systems evolve over a period of years. The different conditions in each country (size, legal systems, business practices, technological infrastructure, stages of development of financial sector institutions) make each set of payment mechanisms unique.

Appropriate payment systems will satisfy the “evolving needs and requirements” of both current and future users - all users - of the payments clearance and settlement mechanisms.

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A. The Importance of PSS SystemsA. The Importance of PSS Systems

Payment systems and securities Payment systems and securities settlement systems represent a basic settlement systems represent a basic infrastructure for the functioning of infrastructure for the functioning of market economiesmarket economies

PSSS are essential components for the PSSS are essential components for the smooth transmission mechanism of smooth transmission mechanism of monetary policy monetary policy

The soundness of PSSS is fundamental The soundness of PSSS is fundamental for the stability of the currencyfor the stability of the currency

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The soundness of the PSSS is indispensable The soundness of the PSSS is indispensable for the stability of financial markets - for the stability of financial markets - Financial market crises are likely to show Financial market crises are likely to show their first signs in the payments systemtheir first signs in the payments system

The soundness and, especially, efficiency of The soundness and, especially, efficiency of PSSS are fundamental factors in sustaining PSSS are fundamental factors in sustaining economic activity and economic economic activity and economic developmentdevelopment

The payment system infrastructure is a key The payment system infrastructure is a key component in developing more inclusive component in developing more inclusive financial systems financial systems

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A major source of banking costs and A major source of banking costs and profitsprofits

Many innovative products and servicesMany innovative products and services

Electronic technology is removing Electronic technology is removing traditional barriers of time and spacetraditional barriers of time and space

New players: a threat to traditional New players: a threat to traditional banksbanks

Trade-offs: competition and Trade-offs: competition and cooperation/ efficiency and riskcooperation/ efficiency and risk


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The Committee on Payment and The Committee on Payment and Settlement Systems (CPSS, Settlement Systems (CPSS,

Bank for International Bank for International Settlements), Settlements),

IOSCO and the World Bank have IOSCO and the World Bank have traditionally been the fora to traditionally been the fora to

discuss and develop discuss and develop international standards and international standards and

best practices in the payments best practices in the payments and securities settlement and securities settlement

arenaarena


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The CPSS issued Standards (Core The CPSS issued Standards (Core Principles) for sound and efficient Principles) for sound and efficient Systemically Important Payment Systemically Important Payment

Systems in January 2001Systems in January 2001

CPSS and IOSCO released CPSS and IOSCO released Recommendations for sound and Recommendations for sound and efficient Securities Settlement efficient Securities Settlement

Systems in November 2001Systems in November 2001


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CPSS and IOSCO released CPSS and IOSCO released Recommendations for sound and efficient Recommendations for sound and efficient Central Counterparties in November 2004Central Counterparties in November 2004

The CPSS, with very active support from The CPSS, with very active support from the Bank, developed a guidance for the the Bank, developed a guidance for the overall reform of the National Payments overall reform of the National Payments

System (2006)System (2006)

Upon request from G8, the WB and the Upon request from G8, the WB and the CPSS issued the General Principles on CPSS issued the General Principles on

International Remittance Services (2007)International Remittance Services (2007)


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QUO VADIS? SINLAND OR QUO VADIS? SINLAND OR DREAMLAND?DREAMLAND?

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SINLAND: TYPICAL SINLAND: TYPICAL SHORTFALLSSHORTFALLS

o The The Legal FrameworkLegal Framework for payments and for payments and securities settlement, presents important securities settlement, presents important deficiencies, regarding for example: the definition of deficiencies, regarding for example: the definition of finality, protection of the systems against bankruptcy finality, protection of the systems against bankruptcy procedures, improvement of the legal basis for procedures, improvement of the legal basis for custody arrangements, legal basis for netting custody arrangements, legal basis for netting arrangements, and the regulation of oversight arrangements, and the regulation of oversight powers of the central bankpowers of the central bank

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Systemically Important Payment Systems do not Systemically Important Payment Systems do not comply with the CPSS Core Principles in that:comply with the CPSS Core Principles in that:• Risk control management is weak: no sufficient provision of Risk control management is weak: no sufficient provision of

intra-day liquidity; no optimal integration with securities intra-day liquidity; no optimal integration with securities settlement systems; no or insufficient guarantee schemes for settlement systems; no or insufficient guarantee schemes for systems based on nettingsystems based on netting

• Operational reliability and business continuity measures might Operational reliability and business continuity measures might be insufficient in light of recent debate on the issuebe insufficient in light of recent debate on the issue

• Too many large value payments are still processed in relatively Too many large value payments are still processed in relatively risky systems (especially cheque systems)risky systems (especially cheque systems)

• Access is restricted to few participants without disclosure of risk Access is restricted to few participants without disclosure of risk considerations. Exit criteria are uncertainconsiderations. Exit criteria are uncertain

• Governance arrangements are not transparent and system Governance arrangements are not transparent and system participants do not have appropriate fora to express their needsparticipants do not have appropriate fora to express their needs

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Retail PaymentsRetail Paymentso Attention to retail issues is low Attention to retail issues is low o Instruments are not standardized and are, therefore, Instruments are not standardized and are, therefore,

processed with cumbersome proceduresprocessed with cumbersome procedureso Retail systems are characterized by a low degree of Retail systems are characterized by a low degree of

interoperabilityinteroperabilityo Payment instruments are used in a sub-optimal way, from Payment instruments are used in a sub-optimal way, from

the efficiency point of viewthe efficiency point of viewo Government payments are processed in a less than efficient way Government payments are processed in a less than efficient way

and have several negative implications for the payments system and have several negative implications for the payments system as a wholeas a whole

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TransparencyTransparencyo In many cases, conditions applied to payment services In many cases, conditions applied to payment services

are not transparent nor is it clear to the stakeholders and are not transparent nor is it clear to the stakeholders and the public the policies pursued by authoritiesthe public the policies pursued by authorities

o Banks and other Banks and other financial institutions are not forced to financial institutions are not forced to provide information to the public on the services they provide information to the public on the services they offer in the payments system and the general public nor offer in the payments system and the general public nor are able to resort to a bank’s Ombudsman and/or to the are able to resort to a bank’s Ombudsman and/or to the central bank and/or the consumers’ protection agencies central bank and/or the consumers’ protection agencies for resolution of conflicts related to payment servicesfor resolution of conflicts related to payment services

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FX and Cross-Border PaymentsFX and Cross-Border Paymentso Relevant financial risks are present in foreign exchange Relevant financial risks are present in foreign exchange

trading and settlement: true PvP is not achieved in the trading and settlement: true PvP is not achieved in the vast majority of foreign exchange transactionsvast majority of foreign exchange transactions

o Cross-border retail payments are costly and not Cross-border retail payments are costly and not adequately regulated (e.g. migrant’s remittances)adequately regulated (e.g. migrant’s remittances)

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Securities Settlement Systems (SSS) Securities Settlement Systems (SSS) • SSS SSS andand funds transfer (payment) systems funds transfer (payment) systems are notare not

adequately integrated creating disruptions to the adequately integrated creating disruptions to the payments system as a wholepayments system as a whole

• Many SSS around the world do not comply with the Many SSS around the world do not comply with the CPSS-IOSCO Recommendations for SSSCPSS-IOSCO Recommendations for SSS

• Central Counterparties (CCPs) are introduced without Central Counterparties (CCPs) are introduced without appropriate risk control mechanisms and concentrate a appropriate risk control mechanisms and concentrate a substantial amount of risksubstantial amount of risk

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CooperationCooperation o Cooperation (among authorities, between authorities Cooperation (among authorities, between authorities

and stakeholders, and among stakeholders) is and stakeholders, and among stakeholders) is largely insufficientlargely insufficient

o Lack of cooperation is characterized by the absence Lack of cooperation is characterized by the absence of joint bodies to address problems of common of joint bodies to address problems of common interest and/or appropriate memoranda of interest and/or appropriate memoranda of understanding among authoritiesunderstanding among authorities

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OversightOversight The central bank does not have clear legislative authority for The central bank does not have clear legislative authority for

the oversight of clearance and settlement systems. Nor is the oversight of clearance and settlement systems. Nor is secondary legislation (bylaws, circulars, etc.) implementedsecondary legislation (bylaws, circulars, etc.) implemented

The central bank does not disclose publicly its The central bank does not disclose publicly its implementation strategies to achieve its objectives relating to implementation strategies to achieve its objectives relating to all significant payment system mattersall significant payment system matters

The central bank in exercising its oversight role does not The central bank in exercising its oversight role does not have the ability to carryhave the ability to carry out this function effectively, out this function effectively, especially in terms of human and financial resourcesespecially in terms of human and financial resources

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OversightOversight The central bank does not verify that individual payment The central bank does not verify that individual payment

systems satisfy user needs as well as risk and efficiency systems satisfy user needs as well as risk and efficiency requirements through appropriate interventions both at the requirements through appropriate interventions both at the development stage and during the on-going system development stage and during the on-going system implementation and operational phasesimplementation and operational phases

The central bank does not define and implement appropriate The central bank does not define and implement appropriate actions should participants not comply with published rules actions should participants not comply with published rules and regulations (e.g. the application of pre-determined and regulations (e.g. the application of pre-determined penalties and sanctions for compliance failures) penalties and sanctions for compliance failures)

the central bank does not collect and distribute relevant the central bank does not collect and distribute relevant statistical information to demonstrate the use being made of statistical information to demonstrate the use being made of each system and the extent to which the systems are each system and the extent to which the systems are satisfying end-user and other market needssatisfying end-user and other market needs

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A. Banking systemA. Banking systemGuideline 1: Keep the central bank at the Guideline 1: Keep the central bank at the

centre: centre: due to its overall responsibility for a sound currency, due to its overall responsibility for a sound currency, the central bank has a central role in the development of the the central bank has a central role in the development of the use of money as an effective means of payment.use of money as an effective means of payment.

Guideline 2: Promote the role of a sound Guideline 2: Promote the role of a sound banking system: banking system: payment accounts, instruments and payment accounts, instruments and services available to end users are mainly provided by banks, services available to end users are mainly provided by banks, which compete individually but often need to act cooperatively which compete individually but often need to act cooperatively as a system.as a system.

B. Dreamland: The B. Dreamland: The Commandments for a strategic, Commandments for a strategic, holistic and integrated holistic and integrated approach to reformapproach to reform

*CPSS General Guidance for National Payment System Development – Jan 2006

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B. Planning*B. Planning*Guideline 3: Recognise complexity: Guideline 3: Recognise complexity:

planning should be based on a comprehensive planning should be based on a comprehensive understanding of all the core elements of the understanding of all the core elements of the system and the principal factors influencing its system and the principal factors influencing its development.development.

Guideline 4: Focus on needs: Guideline 4: Focus on needs: identify, identify, and be guided by, the payment needs of all users in and be guided by, the payment needs of all users in the system and by the capabilities of the economy.the system and by the capabilities of the economy.

Guideline 5: Set clear priorities: Guideline 5: Set clear priorities: plan plan and prioritise payment system development and prioritise payment system development strategicallystrategically..

Guideline 6: Implementation is key: Guideline 6: Implementation is key: ensure effective implementation of the strategic ensure effective implementation of the strategic plan.plan.

B. Dreamland: The Commandments B. Dreamland: The Commandments for a strategic, holistic and for a strategic, holistic and integrated approach to reformintegrated approach to reform

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C. Institutional framework*C. Institutional framework*Guideline 7: Promote market development: Guideline 7: Promote market development: the the

expansion and strengthening of market expansion and strengthening of market arrangements is a key aspect of the evolution of the arrangements is a key aspect of the evolution of the payment system.payment system.

Guideline 8: Involve relevant stakeholders: Guideline 8: Involve relevant stakeholders: encourage the development of effective consultation encourage the development of effective consultation among relevant stakeholders in the payment system.among relevant stakeholders in the payment system.

Guideline 9: Cooperate with other authorities: Guideline 9: Cooperate with other authorities: effective payment system oversight by the central effective payment system oversight by the central bank requires collaborative arrangements with other bank requires collaborative arrangements with other authorities.authorities.

Guideline 10: Promote legal certainty: Guideline 10: Promote legal certainty: develop a develop a transparent, comprehensive and sound legal transparent, comprehensive and sound legal framework for the system.framework for the system.

B. Dreamland: The Commandments B. Dreamland: The Commandments for a strategic, holistic and for a strategic, holistic and integrated approach to reformintegrated approach to reform

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D. Infrastructure*D. Infrastructure*Guideline 11: Retail – give more choice to more Guideline 11: Retail – give more choice to more

people: people: extend the coverage and choice of noncash extend the coverage and choice of noncash payment instruments and services available to end users payment instruments and services available to end users by expanding and improving infrastructures.by expanding and improving infrastructures.

Guideline 12: Large value – business case leads, Guideline 12: Large value – business case leads, technology follows: technology follows: develop a large-value payment develop a large-value payment system based primarily on the needs of financial markets system based primarily on the needs of financial markets and the growth in time-critical interbank payments.and the growth in time-critical interbank payments.

Guideline 13: Securities – plan securities and payment Guideline 13: Securities – plan securities and payment systems together: systems together: coordinate the development of the coordinate the development of the infrastructures for securities and large-value payments.infrastructures for securities and large-value payments.

Guideline 14: Retail, large value and securities – Guideline 14: Retail, large value and securities – coordinate settlement: coordinate settlement: coordinate settlement processes coordinate settlement processes for the core systems to effectively manage the interrelated for the core systems to effectively manage the interrelated liquidity needs and settlement risks among them.liquidity needs and settlement risks among them.

B. Dreamland: The B. Dreamland: The Commandments for a strategic, Commandments for a strategic, holistic and integrated holistic and integrated approach to reformapproach to reform

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The Long and Winding The Long and Winding RoadRoad

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C. Lessons from ExperienceC. Lessons from ExperienceImplementation: Typical ProblemsImplementation: Typical Problems

Absence of a vision and a strategyAbsence of a vision and a strategy

Technology driven decisions (e.g. Technology driven decisions (e.g. deciding on software before elaborating deciding on software before elaborating the vision and strategy)the vision and strategy)

Too many projects for too many systems Too many projects for too many systems (leading to lack of integration)(leading to lack of integration)

Finding Payment System Experts, very Finding Payment System Experts, very few reliable international consultants few reliable international consultants and insufficient training facilities in the and insufficient training facilities in the countrycountry

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Intra-organizational Politics (e.g. IT Dept. versus Intra-organizational Politics (e.g. IT Dept. versus Operations Dept., Monetary policy dept. versus Operations Dept., Monetary policy dept. versus Operations, etc.)Operations, etc.)

Inter-Organizational Politics (e.g. big banks versus Inter-Organizational Politics (e.g. big banks versus small banks, public banks versus private banks, small banks, public banks versus private banks, banks versus non bank financial institutions)banks versus non bank financial institutions)

Excessive trust in the progressive forces of the Excessive trust in the progressive forces of the marketmarket

Ineffective Communication within Participant Ineffective Communication within Participant OrganizationsOrganizations

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Insufficient scope Insufficient scope

Misperception of the complexity of the Misperception of the complexity of the processprocess

Changes in RepresentationChanges in Representation

Affinity towards Operational Issues Affinity towards Operational Issues (deviating from the strategic approach)(deviating from the strategic approach)

Questioning the Role of the Central Questioning the Role of the Central Bank Bank

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C. Lessons from Experience C. Lessons from Experience Implementation: Prerequisites for Implementation: Prerequisites for SuccessSuccess

A Driving Force - Top Level SponsorA Driving Force - Top Level Sponsor

Process Management SkillsProcess Management Skills

Project Management DisciplineProject Management Discipline

Patience with ProcessPatience with Process

Continuous Progress - manage sub-Continuous Progress - manage sub-projectsprojects

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C. Lessons from Experience C. Lessons from Experience Implementation: Prerequisites for Implementation: Prerequisites for SuccessSuccess

Continuity in Participation by Continuity in Participation by Senior PersonnelSenior Personnel

Wide and Active InvolvementWide and Active Involvement

Communication with StakeholdersCommunication with Stakeholders

PerseverancePerseverance

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The World Bank Role in The World Bank Role in Payment System DevelopmentPayment System Development

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The Payment System Development Group is at the The Payment System Development Group is at the center of an international network, whose main center of an international network, whose main objective is supporting countries to reform objective is supporting countries to reform Payments, Remittances and Securities Settlement Payments, Remittances and Securities Settlement SystemsSystems

The network comprises multilaterals, other standard The network comprises multilaterals, other standard setters, G-10 and non G-10 central banks, securities setters, G-10 and non G-10 central banks, securities commissions, regional groups and other donorscommissions, regional groups and other donors

The Group is in constant dialogue with the major The Group is in constant dialogue with the major stakeholders in the industry (e.g. SWIFT, Card stakeholders in the industry (e.g. SWIFT, Card networks, CLS Bank, commercial banks, other networks, CLS Bank, commercial banks, other financial institutions, payment system operators, financial institutions, payment system operators, vendors) at the global and domestic levelsvendors) at the global and domestic levels

The Group has developed innovative tools to sustain The Group has developed innovative tools to sustain the network (e.g. the regional initiatives)the network (e.g. the regional initiatives)

D. Overcoming Shortfalls: The World D. Overcoming Shortfalls: The World Bank Role in the Transformation Bank Role in the Transformation Process in Payment SystemsProcess in Payment Systems

Who we are …

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Providing a complete stocktaking analysis Providing a complete stocktaking analysis Helping create momentum for the reformHelping create momentum for the reform Supporting the country to adopt a holistic Supporting the country to adopt a holistic

approach to financial infrastructure reformapproach to financial infrastructure reform Supporting the country to develop the vision Supporting the country to develop the vision

and the strategyand the strategy Supporting the implementation of the Supporting the implementation of the

reform providing advice reform providing advice

D. Overcoming Shortfalls: The World D. Overcoming Shortfalls: The World Bank Role in the Transformation ProcessBank Role in the Transformation Process

Areas in which the PSDG intervenes:

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Providing the most updated expert Providing the most updated expert advice on all areas related to payment advice on all areas related to payment system reform:system reform: Legal FrameworkLegal Framework Retail systems with particular regard to the Retail systems with particular regard to the

widewide availability and efficient distribution of availability and efficient distribution of instruments, and access for the instruments, and access for the underserved populationunderserved population

Government Payments and their importance Government Payments and their importance for both large value and low value systemsfor both large value and low value systems

Cross-Border Payment Arrangements and Cross-Border Payment Arrangements and (for some countries) settlement of domestic (for some countries) settlement of domestic foreign exchange denominated transactionsforeign exchange denominated transactions

D. Overcoming Shortfalls: The D. Overcoming Shortfalls: The World Bank Role in the World Bank Role in the Transformation ProcessTransformation Process

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Large Value systems and their relations Large Value systems and their relations with interbank money market with interbank money market

International RemittancesInternational Remittances Securities settlement systems and their Securities settlement systems and their

interactions with other settlement systems interactions with other settlement systems Central Bank Oversight (both domestically Central Bank Oversight (both domestically

and at the international level)and at the international level) The role of other authorities in the reform The role of other authorities in the reform

process and in the on going oversight process and in the on going oversight activityactivity


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Cooperative arrangementsCooperative arrangements International Cooperation through International Cooperation through

regional initiativesregional initiatives Integration of payment system reform Integration of payment system reform

with the reform of other components of with the reform of other components of the financial infrastructure such as the financial infrastructure such as credit reporting, the development of credit reporting, the development of trading platforms and the enhancement trading platforms and the enhancement of the capital market structure.of the capital market structure.


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Funding through regular Bank loans Funding through regular Bank loans for system implementation for system implementation

Technical Assistance Technical Assistance Regional Initiatives and FSAPsRegional Initiatives and FSAPs OthersOthers


Typical Tools:

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Does the International payment system Does the International payment system community devote sufficient financial and community devote sufficient financial and human resources to assist countries?human resources to assist countries?

Do we have the proper institutions in place?Do we have the proper institutions in place? Are roles well defined? Are roles well defined? How vulnerable are we to shocks?How vulnerable are we to shocks? How much we depend on a restricted group of How much we depend on a restricted group of

individuals?individuals?

D. Overcoming Shortfalls: The D. Overcoming Shortfalls: The Response of the Payment System Response of the Payment System CommunityCommunity

Are we operating in an optimal or sustainable environment?

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Probably not and if we do not act…..

the strategic approach to reforming payments and securities settlement systems

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