Brazilian Payment System Implementation Aspects

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Brazilian Payment SystemImplementation Aspects
Brazilian Payment System Implementation Aspects

Mr. Eduardo Fernandes Head of Department
Mr. Eduardo Fernandes
Eduardo Fernandes Central Bank of Brazil
Washington D.C., November 2003
World Bank
Washington D.C., November 2003
World Bank
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Outline

• 1) Background
• 2) Challenges
• 3) The Reform
• 4) The Process

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Background

• Brazils efficient payment system is a legacy of
  the high inflation period that has reduced
  settlement lags
• Achievement of a sound financial system after the
  restructuring of the banking industry (1995-1998)
  
• Internationalization of financial markets
• Macroeconomic stability

4
Challenges

• Absence of a sound legal basis
• No secured large-value funds transfer system
• Clearinghouses without proper risk control
• No final settlement possibility of unwinding
• Inadequate contingency arrangements
• Solving payment system problems without making
  noise to monetary policy

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Challenges

• High credit risk incurred by the CB, since
  intraday credit (overdraft) was available without
  collateral and unlimited
• Central Bank was not prepared to monitor intraday
  balances
• Reduce systemic risk without efficiency loss
• Shift credit risk from the CB to the market
• Avoid moral hazard

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The Reform - I

• Establishment of a sound legal basis (Law 10,214)
• Recognition of multilateral netting
• Collateral pledged at clearinghouses is outside
  of the bankruptcy law
• Systemically important payment and settlement
  systems become central counterparties
• CB has a mandate to designate them
• Central counterparties must assure final
  settlement
• Adequate contingency arrangements

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The Reform - II

• Systems in the CB will operate under RTGS mode
• Reserve and settlement accounts (STR)
• Government securities book-entry system (SELIC)
• Systemically important clearings with settlement
  accounts in CB
• Bank reserve and clearing settlement accounts
  monitored in real-time
• No overdrafts allowed
• Accountholders must authorize all debits on their
  reserve accounts

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The Reform - III

• Sources of intraday liquidity (2003) US100
  billion
• Interest free intraday credit in the CB through
  repo operations (US75 billion)
• Reserve requirements intraday available (US25
  billion)
• Demand of intraday reserves (2003) US14
  billion
• The STR system will be message driven
• Adoption of the best international practices

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The Reform - IV

• Improvement of clearinghouses risk control
  devices through adopting
• credit limits
• collaterals
• DvP or PvP methods
• Certainty of settlement (in case of systemically
  important payment systems)
• Data processing systems with robust contingency
  plans

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The Process - I

• Cost of reserves accounts fragilities, which
  amounted billions of dollars in 1994-1998s
  banking crises
• In 1998 diagnosis of all risks involved in
  internal (CB) and external (market) systems
• Systemic risk involved in rejecting overdrafts of
  participants net positions from clearinghouses
• Each diagnosis was sent to the internal and
  external systems managers for their remarks

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The Process - II

• CB was invited to join CPSS Task Force on
  Payment System Principles and Practices, which
  considered what principles should govern the
  design and operation of payment systems in all
  countries.
• In 1999 presentation of the diagnosis to CBs
  Board of Directors
• The Board created a full time Working Group for
  restructuring Brazilian Payment System

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The Process - III

• Board of Directors announced the beginning of
  Brazilian payment system restructuring
• Other CBs areas involved in the process
  Accounting, IT, Open Market, Foreign Exchange,
  Legal Department, Banking, Supervision etc.
• Partnership with financial system, clearinghouses
  and other participants
• Smooth transition without any contracts breakdown
• Disclosure the new roles and major policies
• Approbation of the new legal basis (Law 10,214)

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The Process - IV

• May 2000, disclosure of a Technical Note on
  Monetary Policy rebuilding the instruments
• Announcement of the implementation schedule
• Setting up of new private clearinghouses and
  adaptation of the existing ones as a result of
  the reform process
• Test of the new technological environment
  (network, digital certificate, cryptography,
  queuing, optimization routine etc) to CB and
  market systems

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The Process - V

• August 2000, public hearing of clearinghouses
  regulation
• Revision of the Technical Note on Monetary
  Policy adding market feedback
• Disclosure of Technical Note on retail payments
  in order to take large values away from
  clearinghouse of checks and other documents

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The Process - VI

• In order to monitor the network operating and to
  promote its continuous development, 3 technical
  working groups have been constituted in
  partnership with the market, dealing with
  network, messages and security
• CB is the responsible for their coordination
• Adoption of the best international practices

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The Process - VII
Involvement
100
90
Technical Note-
Compe
80
70
60
Revision Technical Note-
Monetary Policy
50
40
30
Clearings Regulation-
Public Hearing
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Legal Basis
Announcement
Technical Note-
10
Monetary Policy
0
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abr/00
jun/00
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fev/01
abr/01
jun/01
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Further Information

eduardo.fernandes_at_bcb.gov.br
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Further Information

Thank you very much