PAYMENT SYSTEMS WORLDWIDE

Transcription

1 FINANCIAL INFRASTRUCTURE SERIES PAYMENT SYSTEMS POLICY AND RESEARCH PAYMENT SYSTEMS WORLDWIDE A SNAPSHOT Outcomes of the Global Payment Systems Survey 2010

2 2011 The International Bank for Reconstruction and Development / The World Bank 1818 H Street NW Washington DC Telephone: Internet: [email protected] All rights reserved. This volume is a product of the staff of the International Bank for Reconstruction and Development/ The World Bank. The findings, interpretations, and conclusions expressed in this volume do not necessarily reflect 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 the part of The World Bank concerning the legal status of any territory or the endorsement or acceptance of such boundaries. Rights and Permissions The material in this publication is copyrighted. Copying and/or transmitting portions or all of this work without permission may be a violation of applicable law. The International Bank for Reconstruction and Development / The World Bank encourages dissemination of its work and will normally grant permission to reproduce portions of the work promptly. For permission to photocopy or reprint any part of this work, please send a request with complete information to the Copyright Clearance Center Inc., 222 Rosewood Drive, Danvers, MA 01923, USA; telephone: ; fax: ; Internet: 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: ; [email protected]. Book cover and interior design by Michele de la Menardiere.

3 FOREWORD The underlying foundation of a country s financial system including all institutions, information, technologies, rules and standards that enable financial intermediation is its financial infrastructure. A poor financial infrastructure imposes a considerable constraint upon financial institutions in many developing countries, hindering their efforts to offer financial services to underserved segments of the population and the economy. It also creates risks that can threaten the stability of the financial system as a whole. The World Bank Group is a leader in financial infrastructure development in emerging markets, including payment systems and remittances, credit reporting and secured lending. Moreover, the Bank Group is intensifying its commitment to promote and disseminate the policy and research debate on these and other topics in the realm of financial infrastructure. The World Bank also plays the role of international standard-setter in this space. The Financial Infrastructure Policy and Research Series has been created to host original contributions in the form of policy notes, studies and essays led by Bank Group experts, as well as initiatives carried out in cooperation with or by other experts and relevant institutions in the various fields of financial infrastructure. The first document that appeared in this Series is Payment Systems Worldwide: A Snapshot Outcomes of the Global Payment Systems Survey The report was prepared by a team of experts within the Bank s Payment Systems Development Group (PSDG). Over the last 15 years, the Bank, through the PSDG a part of the Financial and Private Sector Development Vice Presidency has been active in more than 100 countries. It carries out its work through a variety of instruments, such as: 1) supporting comprehensive reform programs in individual countries; 2) undertaking initial diagnostics and developing reform strategies; 3) providing specific technical advice on a broad range of topics; and 4) coordinating and managing multi-country and regional initiatives that position the Bank at the center of a network of more than 150 relevant institutions in the field of payment systems. In addition, the Bank has been active in launching cooperative arrangements, organizing training activities, supporting the joint World Bank-International Monetary Fund Financial Sector Assessment Program (FSAP), participating actively in task forces of the Committee on Payment and Settlement Systems (CPSS) and International Organization of Securities Commissions (IOSCO), and conducting research. Payment Systems Worldwide: A Snapshot. Outcomes of the Global Payment Systems Survey 2010 presents the results of the second survey among national central banks that collected information on the status of national payment and securities settlement systems worldwide. Areas covered by the survey include: i) Legal and Regulatory Framework; ii) Large-Value Funds Transfer Systems; iii) Retail Payment Instruments and Systems; iv) Foreign Exchange Settlement System; v) Cross-border Payments and International Remittances; vi) Securities Settlement Systems; vii) Payment System Oversight and Cooperation; and, viii) Planned and On-going Reforms to the National Payments System. The 2010 Survey, like the previous report of 2008, provides a snapshot of the payment and securities settlement systems in both advanced and emerging economies. The outcomes of this survey are expected to identify the main issues that should guide the agenda of authorities and multilaterals in the payment systems field in the years ahead. Janamitra Devan Vice President & Head of Network Financial and Private Sector Development World Bank Group

4 ACKNOWLEDGMENTS This study Payment Systems Worldwide: A Snapshot presenting the outcomes of the second iteration of the World Bank Global Payment Systems Survey is the result of collective efforts of the Payment Systems Development Group (PSDG) of the World Bank. The various products presented in this study, including the detailed questionnaire that was used to survey central banks worldwide, were produced by a team under the leadership of Massimo Cirasino (Head, PSDG) who supervised the process and provided guidance on various steps of this project. Alice Zanza acted as the project team leader. Maria Teresa Chimienti provided key support in the processing and analysis of country qualitative and quantitative data, and was instrumental in ensuring overall consistency. Single chapters of this publication were produced by PSDG colleagues as follows: Maria Chiara Malaguti (Legal and Regulatory Framework), Massimo Cirasino (Large Value Payment Systems), Luchia Christova (Large Value Payment Systems, Foreign Exchange Settlement Systems, Payment Systems Oversight and Cooperation), Harish Natarajan (Retail Payment Instruments and Systems), Carlo Corazza and Isaku Endo (International Remittances and other Cross-border Payments), Froukelien Wendt (Securities Settlement Systems), Alice Zanza (Reforming the National Payments System). Corina Arteche, Hemant Baijal, Sean O Connor, and Ceu Pereira also participated in the process of reviewing countries questionnaires and provided comments and suggestions. The PSDG wishes to thank Jose Antonio Garcia, who acted as peer reviewer of the 2010 iteration and led the publication of the first iteration of this study. The PSDG also thanks European Central Bank (ECB) colleagues, Daniela Russo and Tom Kokkola, for providing specific information on European systems features and arrangements. Finally, the PSDG also wishes to thank each and every central bank that participated in this effort.

5 TABLE OF CONTENTS Executive Summary Abbreviations Introduction Methodological Note v xiii xv xix I LEGAL AND REGULATORY FRAMEWORK 1 I.1 BACKGROUND, 1 I.2 SURVEY OUTCOMES, 1 I.2.1 Payment Systems and Related Matters, 2 I.2.2 Central Bank Licensing and Payment System Oversight Powers, 6 II LARGE-VALUE PAYMENT SYSTEMS 13 II.1 BACKGROUND, 13 II.2 SURVEY OUTCOMES, 13 II.2.1 Real Time Gross Settlement Systems, 15 II.2.2 Special Procedures for Large-Value Cheques, 36 II.2.3 Non-RTGS Large-Value Payment Systems, 36 III RETAIL PAYMENT INSTRUMENTS AND SYSTEMS 39 III.1 BACKGROUND, 39 III.2 SURVEY OUTCOMES, 42 III.2.1 Cheques and Cheque Clearinghouses, 43 III.2.2 Credit Transfers, Direct Debits and Automated Clearinghouses, 49 III.2.3 P ayment Cards and Related Systems, 56 III.2.4 Affordability of Non-Cash Payment Instrument and Services for Individuals, 65 III.2.5 Government Payments, 69 IV SETTLEMENT OF FOREIGN EXCHANGE TRANSACTIONS 71 IV.1 BACKGROUND, 71 IV.2 SURVEY OUTCOMES, 74 iii

6 iv PAYMENT SYSTEMS WORLDWIDE V INTERNATIONAL REMITTANCES AND OTHER CROSS-BORDER PAYMENTS 81 V.1 BACKGROUND, 81 V.2 SURVEY OUTCOMES, 81 V.2.1 Remittance Service Providers, 82 V.2.2 Payment Instruments in International Remittances, 88 V.2.3. Transparency, Consumer Protection, and Competition in International Remittances, 89 V.2.4. Cross-Border Payments, 97 VI SECURITIES SETTLEMENT SYSTEMS 99 VI.1 BACKGROUND, 99 VI.2 SURVEY OUTCOMES, 99 VI.2.1 General Features of Securities Markets, 101 VI.2.2 Central Securities Depositories and Securities Settlement Systems, 106 VI.2.3 Central Counterparties, 111 VI.2.4 Regulatory and Oversight Issues, 114 VII PAYMENT SYSTEM OVERSIGHT AND COOPERATION 115 VII.1 BACKGROUND, 115 VII.2 SURVEY OUTCOMES, 115 VII.2.1 General Issues, 116 VII.2.2 Objectives of Payment System Oversight, 118 VII.2.3 Scope of Payment System Oversight, 119 VII.2.4 Instruments of Payment System Oversight, 121 VII.2.5 Cooperation with Other Relevant Authorities and Other Stakeholders, 124 VII.2.6 Involvement of Central Banks in the Pricing of Payment Services, 126 VIII REFORMING THE NATIONAL PAYMENTS SYSTEM 129 VIII.1 BACKGROUND, 129 VIII.2 SURVEY OUTCOMES, 129 IX CONCLUDING REMARKS 137 ANNEX I: The Questionnaire, 139 ANNEX II: Classification of Countries According to Level of Per Capita Income, 173 ANNEX III: Classification of Countries According to Geographical Region, 175 ANNEX IV: Classification of Countries According to Population Size, 177 ANNEX V: Chronological List of Country Responses to the Global Payment Systems Survey, 178

7 EXECUTIVE SUMMARY Payment systems have moved from the backroom to the boardroom of all financial institutions due to the recognition of the critical role that a well functioning payment system plays in supporting the financial and real economies, and also because of the increasing attention bank boards pay to the automation of banking operations and services and their impact on bank income and profits. From a broader perspective, a less than optimal use of payment instruments and/or inefficient or poorly designed systems to process these instruments may ultimately have an impact on systemic stability, economic development and growth. Payment systems are moving from being a narrow channel for transferring funds to a much wider integrated network for transferring additional forms of value. Moreover, the creation of networks and systems for retail payments can have a substantial role in supporting financial access in developing countries. Indeed, modern retail payment technologies and innovative programs to channel recurrent payments efficiently can, and are already being used to, integrate the previously underserved and non-served population into the formal financial sector. A well-functioning infrastructure to efficiently and safely process modern payment instruments is necessary to successfully enhance a country s population access to, and widespread use of, such modern payment instruments. For all these reasons, for more than 15 years the World Bank has been paying increasing attention to payment system development as a key component of the financial infrastructure of a country, and has provided various forms of assistance to over 100 countries. In April 2007, the World Bank s Payment Systems Development Group (PSDG) launched the first World Bank Global Payment Systems Survey among national central banks to collect information on the status of national payment and securities settlement systems worldwide. The outcomes of the first Global Payment Systems Survey were published in June 2008, and are available on the PSDG website at paymentsystems. Based on the feedback received by central banks, the Global Payment Systems Survey has greatly enhanced the knowledge on payment systems matters worldwide, and helped guide reform efforts over the last three years. In line with the undertaking made by the World Bank to periodically update the information collected through this Survey, the PSDG has conducted the second Global Payment Systems Survey, which was launched in July A total of 132 central banks representing 139 countries 1 worldwide participated in this second iteration. The 2010 questionnaire included the following sections: i) Legal and Regulatory Framework; ii) Large- Value Funds Transfer Systems; iii) Retail Payment Systems; iv) Foreign Exchange Settlement Systems; v) Cross-border Payments and International Remittances; vi) Securities Settlement Systems; vii) Payment System 1 The General Bank of West African States (BCEAO) represents eight countries. v

8 vi PAYMENT SYSTEMS WORLDWIDE Oversight and Cooperation; and, viii) Planned and On-going Reforms to the National Payments System. While keeping the design and structure of the 2008 questionnaire, the 2010 questionnaire was expanded to allow for the collection of more detailed information especially on retail payment instrument and services, 2 securities settlement arrangements, and international remittance services. Global survey outcomes presented in this publication are divided into two main sections: Chapters I through VIII analyze the survey results and identify trends using various variables for cross-country comparisons. In addition to worldwide totals, three broad country characteristics exogenous to payment system development are used as a basis for comparisons: i) level of per capita income; ii) geographical location; iii) population size. Details of the methodology used for the analysis are covered in the Methodological Note. The Appendix contains the full set of countryby-country answers to each of the questions included in the questionnaire. MAIN OUTCOMES OF THE GLOBAL SURVEY Improvements continue to be made worldwide to the legal and regulatory framework underpinning payment and settlement systems. More than 70% of the countries indicate that their legal framework cov- ers key issues such as settlement finality, netting, and electronic payment processing. The Survey confirms that other important areas such as the non-existence of a zero hour rule, the enforceability of security interest in pledged collateral or repurchase agreements ( repo ), and the protection of collateral pledged in a payment or other type of settlement system are less covered in general; on the other hand, such provisions are increasingly more common. Coverage of consumer protection and competition issues is limited to high income countries. As in 2008, high income and upper-middle income countries tend to have stronger legal systems for payment systems. From a regional perspective, the European Union is confirmed as the area with the strongest and most comprehensive legal framework, especially for securities settlement systems, followed by ODCs. Significant improvements have been made in the LAC region. Large-value payment systems are typically the most significant component of the national payments system due to their potential to generate and transmit disturbances of a systemic nature to the financial sector. In this area, a total of 116 countries report having a real-time gross settlement (RTGS) system in place, allowing for a significant reduction of systemic risk in such countries when compared to previous arrangements for processing large-value payments, such as cheque systems. 3 The 2010 survey outcomes in this area show little variation from the 2008 iteration. Most of the RTGS systems in place are secure and have been designed around international standards and best practices. For example, central bank liquidity facilities 2 In recognition of the relevant innovation taking place in the retail payments arena and the interest on this matter expressed by local authorities as well as international bodies such as the G-8 and the G-20, a dedicated questionnaire to capture developments in this space has been added as an Annex to the Survey (Annex 1: Questionnaire for Collecting Information on Innovations in Retail Payment Instruments and Methods Worldwide ). The outcomes will be discussed in a separate World Bank publication. 3 Some of these countries share one system, as in the case of the countries comprising the West Africa Monetary Union, and the euro-area countries. According to survey data, 19 RTGS systems were implemented since The PSDG is also aware that RTGS systems are currently being implemented in Honduras, Papua New Guinea, Macao (China), and Paraguay. The RTGS component of the Rwanda Automated Transfer System (ATS) went live in February The Ethiopia ATS was launched in May These are not reflected in Table II.1.

9 Global Survey 2010 are available to manage payment flows smoothly within the operating day (in about 90% of cases) with high quality collateral being required in 90% of cases of this subset. Optimization tools such as queuing mechanisms are available in 88% of the cases. Survey outcomes also show that RTGS operators have placed operational risk management at the top of their list of priorities over the last few years, resulting in significantly stronger resilience and business continuity practices. Adoption of modern, safe and efficient large-value systems is highest among high income and upper-middle income countries (more than 90% in each case); on the other hand, percentages for lower-middle income and low income countries have increased since The EAP region shows the lowest adoption of RTGS systems. Compared to 2008, a relatively smaller number of countries still indicate that large-value payments are being processed, exclusively or in parallel to the RTGS system, through cheque clearing systems (23%) or vii other non-rtgs large value systems (13%). It is wellknown that cheque systems have special difficulties for complying with international standards for large-value payment systems, in particular with regard to management of risks, settlement finality, effectiveness and efficiency. Settlement of large-value payments through cheque systems is especially common in lower-middle and low income countries. From a regional perspective, cheque systems are used alongside RTGS systems especially in the SA, MNA, and SSA regions, while a significant reduction from the previous survey was observed in the LAC region. The retail payment systems area is where the largest differences continue to exist between higher income and lower income countries, and between developed and developing regions. While the vast majority of countries indicate they are already operating one or more cashless payment systems, differences in volumes and value of transactions handled through such systems are still extremely large when comparing developed countries/regions to developing ones. While, Executive Summary

10 viii PAYMENT SYSTEMS WORLDWIDE CASHLESS RETAIL PAYMENT TRANSACTIONS PER CAPITA (FOR YEAR 2009) % % 80% 70% % 60% 55% 50% % 50% 40% Average number of per capita cashless transac ons 14% % EAP ECA LAC MNA SA SSA Euro-area countries Growth 2009 vs % 27% Other EU members 16% Other Developed Countries 30% 20% 10% 0% for example, in the EU and ODC regions an individual performs on average 100 or more cashless transactions per year (and even 300 or more in several cases), this same indicator is around 13 for EAP, 20 for LAC and ECA, and less than 1 for the SSA region (South Africa excluded). Survey results show that this situation may be explained by, among others, the following factors: i) the slow development of access channels to initiate and deliver cashless payments e.g. point of sale (POS) terminals in many developing countries, coupled with limited interoperability of the infrastructure already deployed; ii) iii) iv) limited access by individuals to modern payment instruments in most developing countries, especially outside urban areas; limited competition among banking institutions and, where available, between banks and other payment services providers, typically resulting in higher costs and more limited coverage of these services; the specific needs of the government as one of the major originators and receivers of payments in the economy, and/or these same needs of utilities and other large commercial firms not being adequately addressed by those in charge of reforming the national payments system, resulting in a preference for cash transactions.

11 Global Survey 2010 ix Another relevant point arising from the survey results is that, notwithstanding some improvement, risk management in cheque systems and automated clearinghouses (ACHs) is still weak. While some operators may argue that tough risk control mechanisms are not necessary for a system that is no longer systemically important, facts and data in the survey point at cheque systems still having some degree of systemic importance in several countries, and/or cheque systems being the only system for retail payments or the most relevant ones. On the other hand, regardless of their implications for systemic risk, ACHs are a key tool to facilitate commercial as well as person-to-person payment transactions, and as such have a significant impact in the overall efficiency of the national payments system. In the area of settlement of foreign exchange transactions, there are 41 organized markets for the trading and settlement of foreign currencies (FX) worldwide. 4 Similarly to 2008 results, in the majority of these cases it was reported that settlement is made on a payment versus payment (PVP) basis using either central bank accounts only (12 cases), or a combination of accounts in the central bank for the local currency and accounts in foreign correspondent banks for the foreign currency leg. However, in bigger markets the over-thecounter (OTC) market for FX transactions is far more prevalent. In the latter case, 44 countries reported that a mechanism is in place to achieve PVP. Most euroarea countries, 2 non-euro EU members, 8 ODCs and one country from the SSA region specifically indicated the use of the CLS Bank as a major mechanism for reducing FX settlement risk. Approximately half of all central banks either responded partially or did not respond at all to the various questions related to FX settlement. This appears to be a clear indication that central bank awareness 4 Based on survey responses. of settlement risks in foreign exchange markets is, in general, still low, particularly in developing countries and regions. The following trends have emerged in the area of international remittances and other cross-border payments: i) In about 79% and 77% of all countries commercial banks and, to a lesser extent, international money transfer operators (MTOs) are considered the most relevant types of remittance service providers (RSPs) for sending and receiving remittances, respectively. On the other hand, the role of the Postal Service (as well as other nonbank financial institutions such as microfinance institutions) is confirmed generally limited, with some exceptions for specific regional markets. It is also interesting to note that no central bank ranked mobile phone providers as the most relevant RSP; ii) iii) RSPs require a license in 66% of the countries. The number of countries where there are no registration or licensing requirements for all entities acting as RSPs decreased to 28 from 47 in Registration is less common in EAP and ECA regions, and non-euro EU members, while licensing is less common in the LAC region and in ODCs. From an income perspective, licensing requirements are more common in low income countries; Survey results show very clearly that cash and current account transfers are regarded as the most relevant payment instruments for both sending and receiving remittances. As for prepaid cards and mobile payments, while there are recent and rapid developments of such products, no central bank indicated that prepaid cards are the most relevant payment instrument for send- Executive Summary

12 x PAYMENT SYSTEMS WORLDWIDE iv) ing/receiving remittances, and only one country indicated that mobile payments are the most relevant instrument for sending/receiving remittances (along with current account transfers). The relevance of cash is clearly lower in high income countries, especially in ODCs; on the other hand more than 60% of central banks in the ECA region and a similar percentage in the SSA region indicated that cash is the most relevant payment instrument for both sending and receiving remittances. With regard to transparency and consumer protection, only in 56% of the countries are RSPs legally required to disclose all transaction details before the transaction itself is performed. Although 57% of the countries have legislation on consumer protection, in less than a third consumer protection legislation for financial services is in place. These results are correlated to a significant extent: in many cases inadequate transparency in the market for remittance services (e.g. RSPs being legally required to disclose fees and other charges, and/or complaint mechanisms) is the result of the lack of an appropriate consumer protection framework for financial services users. The 2010 survey provides a more detailed picture of the securities settlement systems (SSSs) worldwide. While 102 countries reported having one or more stock exchanges, in general, these tend to exist in high income countries and countries with a larger population. The securities market is still at a nascent stage in 35 countries which are mainly located in the SSA and ECA regions. Securities immobilization or dematerialization have been largely accomplished in 71% of the countries, compared to the 66% reported in the 2008 survey. This has been accomplished in all SA countries, in all noneuro EU members, and in all but one country of the euro area. 5 The SSA countries show the lowest level of securities dematerialization. Since 2008, the LAC and EAP regions have made significant progress in the level of dematerialization. In 49 countries there is a single central securities depository (CSD) handling all types of securities that are traded in the country, while in 48 other cases there are two or more specialized CSDs. A single CSD is more common in high income countries, although different regions seem to have their own preferred model. The majority of countries have one or more specialized clearing institutions for the clearing of securities transactions. Only a minority of countries (34%) has a central counterparty (CCP) operating either for securities or derivatives products. Large differences are visible across country types: most high income countries have a CCP, whereas this is the case only for 14% of lower-middle income and 6% of low income countries. The use of DVP as a measure to reduce principal risk is widespread. In the EAP region and EU countries all transactions are settled on a DVP basis. Overall, only 8% of responding CSDs do not use a DVP model at all. Significant improvements have been made in the area of resilience and business continuity arrangements for SSSs and CSDs since Notwithstanding these improvements, when compared with RTGS systems, CSDs and SSSs have weaker business continuity practices. Recent PSDG experience shows, however, that CSDs are increasingly investing in operational reliability, which should lead to further convergence of RTGS and CSD systems with regard to this specific feature. As for CCPS, at present throughout the EU, LAC and EAP regions, these deal with business continuity issues more thoroughly than in other regions. 5 Countries surveyed.

13 Global Survey 2010 xi The development of the payment system oversight function has been one of the key features of recent payment system reforms. The survey confirms that 99 central banks (7 more than in 2008) have already established the payment system oversight function, and this function is performed on an on-going basis. Regions lagging behind in the previous survey show significant improvements, especially in the LAC and SA regions, and the non-euro EU members. In 85% of the cases there is a specific unit at the central bank in charge of payment system oversight duties. To some extent, the 2010 survey shows a shift in the objectives of payment system oversight, from safety and efficiency solely to broader goals, such as promoting higher levels of competition in the market for payment services, consumer protection, and others. In the same vein, more central banks are moving towards a wider scope, overseeing all relevant payment systems in a country regardless of who the operator of the system is (64% compared to 57% in 2008). Only 11% of central banks limit their oversight scope to central bank-operated systems. In general, central banks continue to prefer soft oversight instruments, such as monitoring, dialogue and moral suasion, and publication of statistics/reports. Only about one-fourth of central banks reported using more formal oversight instruments, such as the application of sanctions. A trend worth noting is the increase in the number of countries that rated on-site inspections as a highly relevant instrument for payment system oversight. Cooperation remains an issue, since only about half of the countries surveyed state that the relevant authorities have established formal mechanisms to exchange information and coordinate actions with relevant stakeholders. Nevertheless, 49 formal National Payments Councils (NPCs) have been created in order to promote a more structured cooperation. The SSA region continues to show the highest percentage of NPCs in place. Unsurprisingly, central banks play a limited role with regard to the pricing of payment services, especially in retail payments (including remittances). In contrast, 47% of central banks indicate that they actively regulate prices of large-value payment systems. The major factor behind this result is that almost all central banks operate the large-value payment system in their respective countries and, as such, play a major role in pricing the corresponding payment services. The 2010 survey confirms that most countries are engaging in reforming payment and securities settlement systems as an on-going effort. More than 80% of countries of all income levels and from all regions are currently reforming at least one component of their national payments system. Two-thirds of all countries are currently reforming retail payment systems and/ or the legal and regulatory framework. While legal reforms are being undertaken mainly, though not exclusively, in lower income countries, reforms to retail payment systems are present with practically the same frequency across all country income categories. This last outcome is especially relevant given that only a few years ago most central banks were involved solely in reforming systemically important payment systems. Nonetheless, a relatively large number of countries are still involved in the reform of large-value payment systems. KEY CONCLUSIONS Of the three variables used throughout the survey to classify countries and make cross-country comparisons, the income per capita variable and the geographical location variable still have a significant correlation Executive Summary

14 xii PAYMENT SYSTEMS WORLDWIDE with the level of payment system development. 6 On the other hand, with a few exceptions a country s population size does not appear to have any significant correlation with development in the various areas of the payment system. The factors mentioned above, however, do not mean that payment system development will necessarily move pari passu with a country s overall economic development. The Global Survey 2010 shows that many countries, regardless of income level, are making important progress, mainly in those areas where the central bank is able to exert an important degree of intervention. Together with the World Bank, other international financial institutions such as the Bank for International Settlements and the International Monetary Fund, as well as peers from the central bank community, have directly supported these efforts in many cases. However, in the area of retail payment systems, progress is much slower. The Global Survey 2010 results confirm the very high correlation between the level of development in this subcomponent of the national payments system and the overall economic development of any given country. In the retail sector, intervention from the central bank not only as operator but even as payment system regulator or overseer is generally very limited and in many cases subject to substantial controversy. Moreover, the traditionally dominant position of commercial banks over retail payment systems and services is being increasingly challenged by a variety of non-bank payment service providers. This translates into additional difficulties for payment system overseers and regulatory authorities in defining and carrying out their policy goals in the area of retail payment systems. Faster progress at a system-wide level in key aspects such as efficiency and accessibility does not seem likely under the current circumstances. For the World Bank, the Global Survey 2010 exercise has been particularly useful to confirm that the increasing attention paid by authorities and market players to payment system development has resulted in numerous concrete reforms contributing to the improvement of the safety and efficiency of financial systems, and that of the overall economy, in many countries around the world. The recent financial crisis also raised awareness on the role of safe and efficient payment systems in mitigating risks in financial markets: domestic payment system (e.g. RTGS systems) and global payment infrastructure (e.g. CLS Bank) were instrumental in facilitating immediate authorities action and shock absorbance. The survey results also show encouraging improvement in areas where national central banks and the World Bank s PSDG have increasingly focused their efforts over the last few years, such as legal and regulatory framework and payment system oversight. On the other hand, the Global Survey 2010 confirms that more work is still needed in the areas of retail payment systems, including international remittances. The World Bank, together with its partners in the international community, will continue to support reform efforts for the years to come. 6 These two variables are also correlated between them, given that the various countries in any region would typically, though not necessarily, exhibit a similar level of per capita income.

15 ABBREVIATIONS ACH Automated Clearinghouse AML Anti-Money Laundering API Arab Payments and Securities Settlement Initiative ATM Automated Teller Machine ATS Automated Transfer System BEAC Banque des Etats de l Afrique Centrale BCEAO Banque Centrale des Etats de L Afrique de l Ouest BCP Business Continuity Plan BIS Bank for International Settlements CCP Central Counterparty CFTC Commodity Futures Trading Commission CIS Commonwealth of Independent States CISPI Commonwealth of Independent States Payments and Securities Settlement Initiative CLS Continuous Linked Settlement CPSS Committee on Payment and Settlement Systems CSD Central Securities Depository DTCC Depository Trust & Clearing Corporation DVP Delivery versus Payment ECB European Central Bank EPC European Payments Council EU European Union FIFO First in, First out FSAP Financial Sector Assessment Program (World Bank-IMF) FX Foreign Exchange GPs General Principles for International Remittance Services IMF International Monetary Fund IOSCO International Organization of Securities Commissions IT Information Technology MOU Memorandum of Understanding MTO Money Transfer Operator NPC National Payments Council OTC Over-the-Counter PAPRI Pacific Payments and Remittances Initiative POS Point of Sale PSDG Payment Systems Development Group (World Bank) PVP Payment versus Payment RSP Remittance Service Provider RTGS Real Time Gross Settlement SADC Southern African Development Community SAPI South Asia Payment and Securities Settlement Initiative SEC Securities and Exchange Commission SEPA Single Euro Payments Area SIPS Systemically Important Payment Systems SML Securities Market Law SRO Self-Regulatory Organization SSS Securities Settlement System SWIFT Society for Worldwide Interbank Financial Telecommunication T2S TARGET2-Securities USD U.S. dollar WHI Western Hemisphere Payments and Securities Clearance and Settlement Initiative xiii

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17 INTRODUCTION The payments system is the infrastructure (comprised of various components which include institutions, instruments, rules, procedures, standards, and technical means) established to enable the transfer of monetary value between parties discharging mutual obligations. Its technical efficiency determines the efficiency with which transaction money is used in the economy, and the risks associated with its use. An efficient payments system reduces the cost of exchanging goods and services, and is indispensable to the functioning of the interbank, money, and capital markets. A weak payments system may severely hamper the stability and developmental capacity of an economy; its failures can result in inefficient use of financial resources, inequitable risk-sharing among agents, actual losses for participants, and loss of confidence in the financial system and in the very use of money. Historically, payment systems have lain at the heart of banking. Yet still in the middle of the 20th century, as payment technology stabilized, payment system issues were considered less important than other aspects of the financial system, and were seen mostly as technical matters to be dealt with by subunits of information technology (IT) departments in both the central banks and the commercial banks. It was not until the mid-1980s that the debate on payment system reform policies took on greater weight in countries with more advanced financial systems. First, early in this decade it became widely recognized that payment systems are a primary channel of central and commercial bank credit extensions. Moreover, financial market liberalization led private sector agents and national regulators to identify technical and institutional solutions to serve the increasing demand for new payment services, while protecting the economy from the risks originating from rapidly growing volumes of financial transactions. Also, the internationalization of financial markets and episodes of financial crisis around the world fostered closer cooperation among industrial countries, and between the latter and emerging economies, on how to set up and enforce standards to improve payment system performance in terms of risk control and shock resilience. Over the last 15 years the World Bank s Payment System Development Group (PSDG) has supported payment system reforms in more than 100 countries. In addition, the PSDG has facilitated the production of descriptive reports and statistical information in many of these countries. 7 In more recent years, the PSDG 7 Descriptive reports are available for Europe ( blue books ), G-10 and other countries ( red books ), Latin America and the Caribbean ( yellow books ), the Commonwealth of Independent States ( silver books ), the Arab region ( white books ), the Southern Africa Development Community ( green books ), South East Asia ( orange books ), and South Asia ( purple books ). References are available at xv

18 xvi PAYMENT SYSTEMS WORLDWIDE COUNTRIES THAT PARTICIPATED IN THE GLOBAL PAYMENT SYSTEMS SURVEY 2010 Albania Angola Argentina Armenia Australia Austria Azerbaijan Bahamas, The Belgium Belize Benin Bolivia Bosnia and Herzegovina Botswana Brazil Bulgaria Burkina Faso Burundi Cambodia Canada Cayman Islands Chile China Colombia Congo, Dem. Rep. of Costa Rica Cote d Ivoire Croatia Cyprus Czech Republic Denmark Dominican Republic Ecuador Egypt, Arab Rep. of El Salvador Eritrea Estonia Ethiopia Fiji Finland France Georgia Germany Ghana Greece Guatemala Guinea Bissau Honduras Hong Kong (China) Hungary India Indonesia Iran, Islamic Rep. of Iraq Ireland Israel Italy Jamaica Japan Jordan Kazakhstan Kenya Korea, Rep. of Kosovo Kuwait Kyrgyz Republic Latvia Lebanon Lesotho Libya Lithuania Luxembourg Macao (China) Macedonia FYR Madagascar Malawi Malaysia Mali Malta Mauritania Mauritius Mexico Moldova Mongolia Montenegro Morocco Mozambique Namibia Nepal Netherlands New Zealand Niger Nigeria Norway Oman Pakistan Peru Philippines Poland Portugal Romania Russian Federation Rwanda Samoa San Marino Saudi Arabia Senegal Serbia Seychelles Sierra Leone Singapore Slovak Republic Slovenia South Africa Spain Sri Lanka Sudan Swaziland Sweden Switzerland Taiwan (China) Tanzania Thailand Timor-Leste Togo Trinidad and Tobago Turkey Uganda Ukraine United Arab Emirates United Kingdom United States Uruguay Vanuatu Venezuela, R. B. West Bank and Gaza Yemen, Republic of Zambia Zimbabwe has conducted comparative analysis in some regions or sub-regions. 8 In April 2007, the World Bank launched the first Global Survey among national central banks to collect information on the situation of national payment and 8 See Cirasino and Guadamillas, Payment and Securities Settlement Systems in Central America, - Structural Foundations for Regional Financial Integration, IMF, 2006; and Cirasino, Garcia, Guadamillas and Montes-Negret, Reforming Payments and Securities Settlement Systems in Latin America and the Caribbean, World Bank, securities settlement systems worldwide and provide a snapshot in both advanced and emerging economies with a view to identifying the main issues that should guide the agenda of authorities, multilaterals and market players in the field over the next few years. As part of the process of refining this survey and updating information collected in the 2008 survey, a second iteration of the survey was initiated in July The questionnaire was sent to all countries, regardless of whether they had participated in the first survey or not. The preliminary results were presented during the

19 Global Survey 2010 xvii World Bank Global Payments Week, which took place in Amsterdam, The Netherlands, from the 19 th to the 22 nd of October This publication therefore constitutes detailed outcomes of the 2010 Global Payment Systems Survey, based on the 132 responses involving 139 countries. Countries that participated in the 2010 survey are shown at left in alphabetical order. As in the 2008 survey, the detailed questionnaire consists of eight sections covering a broad set of topics considered an integral part of the national payments system. Areas covered by the questionnaire are as follows: Part I: Part II: Legal and Regulatory Framework Large-Value Funds Transfer Systems Methods Worldwide ). The questionnaire captures innovations resulting in new products as well as innovations in processing; 98 central banks completed the Annex on Innovations. The outcomes of the Annex will be the subject of a future publication. The study is organized as follows: Chapters I through VIII analyze the main results and trends derived from the responses to the survey. The outcomes are discussed both at the worldwide level and on the basis of country classifications as discussed in the Methodological Note. The questionnaire that was distributed to national central banks is presented in Annex I. Part III: Part IV: Retail Payment Systems Foreign Exchange Settlement Systems The full set of tables with country-by-country answers to each of the questions included in the questionnaire is shown in the Appendix. Part V: Part VI: Part VII: Cross-border Payments and International Remittances Securities Settlement Systems Payment System Oversight and Cooperation Part VIII: Planned and On-going Reforms to the National Payments System In recognition of the relevant innovation taking place in the retail payments arena and the interest on this matter expressed by local authorities as well as international bodies such as the G-8 and the G-20, a dedicated questionnaire to capture developments in this space was added as an Annex to the survey (Annex 1: Questionnaire for Collecting Information on Innovations in Retail Payment Instruments and The World Bank s PSDG has made an attempt to strike the right balance between presenting all relevant issues in a level of depth that is appropriate for the various interested audiences, and making the information and data stemming from the Global Survey available to the overall public as soon as practicable. For more detailed or more area-specific analysis, payment system practitioners and scholars have at their disposal the Appendix with the full dataset of country responses. In the following months the World Bank s PSDG will also produce additional studies and research papers based on this information. Introduction

20

21 METHODOLOGICAL NOTE I). THE QUESTIONNAIRE The primary focus of the questionnaire was to identify the main qualitative features of each national payments system. The scope of the questionnaire included the legal and regulatory framework, large-value payment systems, retail payment systems, foreign exchange settlement systems, cross-border payment systems and international remittances, payment system oversight and cooperation features, and securities settlement systems. 9 The questionnaire also aimed at obtaining information on on-going reforms, and opinions on the main factors that hinder or facilitate reforms to the national payments system. The questionnaire does not aim at obtaining systematic statistical information on the number of payments and total value settled for each component of the national payments system. While some specific data on the total number and value of payment transactions through the various payment instruments and systems available were requested, the main purpose of 9 This broad scope and the classification of the various components of a national payments system are consistent with the PSDG methodology used worldwide,(e.g. see the Working Papers produced in the context of the World Bank-led Western Hemisphere Payments and Securities Settlement Forum at and follow the comprehensive approach of the CPSS General Guidance for National Payment System Development (BIS, January 2006). this information was to provide a sense of magnitude rather than to build a thorough statistical database for cross-country comparisons. The questionnaire identified specific features or characteristics that have been observed as part of the World Bank s operational work in the area of payments, remittances, and securities settlement systems in countries with varying degrees of sophistication. In the great majority of questions, respondents were requested to answer yes or no, or to mark with an X all possibilities that may apply. In most case respondents provided comments whenever a question did not fully adapt to the reality in their country. Such comments are presented in the Appendix in the corresponding tables with country-by-country answers to the questionnaire. II). COUNTRY ANSWERS Despite the fact that in some cases specific answers provided by various countries did not fully coincide with the information the PSDG had collected in the previous iteration of this survey and through country assessments, country answers were taken as given by respondents to the extent possible. Solely for the purpose of comparative analysis, the PSDG adjusted some specific answers of a few countries based on di- xix

22 xx PAYMENT SYSTEMS WORLDWIDE rect knowledge of the systems features and/or updates and additional comments provided by such countries. It is also worth mentioning that since the survey was carried out through electronic means rather than through bilateral person-to-person interviews with respondents, it was difficult to ensure a consistent interpretation of all the various choices in all the questions of the survey. While most questions were answered as expected, in a few others, mainly those in which central banks were asked to give an opinion or make a judgment on a given issue, the specific manner in which those questions had to be answered was not uniform. By level of per capita income: countries were classified following the World Bank s income classifications: i) high income; ii) upper-middle income; iii) lowermiddle income; and iv) low income. 11 A list of the countries that fall under each of these subcategories is shown in Annex II. By geographical region: developing/emerging countries were classified according to the World Bank s regional country classifications: i) East Asia and Pacific; ii) Europe and Central Asia; iii) Latin America and the Caribbean; iv) Middle East and North Africa; v) South Asia; and, vi) Sub-Saharan Africa. III). THE ANALYSIS Apart from providing information on worldwide totals for each of the features or characteristics identified in the survey, this study also aims at identifying trends on the basis of certain broad variables to determine whether such variables appear to have an explanatory effect on each country s national payments system features and overall development. Three broad country characteristics have been selected for this purpose, all of which are considered exogenous to national payments system development: i) level of per capita income; ii) geographical location; and, iii) population size. 10 Accordingly, for sections I through VIII of the survey, countries were classified into each of these categories on the following basis: One exception is that of the countries in Eastern Europe that are also members of the European Union: these countries were excluded from the Europe and Central Asia region and were assigned to one of the two European sub-categories (see below). Members of the European Union were divided into two sub-categories: Euro area countries and other European Union members (non-euro area). 12 This represents an important deviation from 2008 methodology, where European Union member countries were divided into EU-15 (the older 15 members) and EU-NM (the newer members or EU accession countries ). For all other developed nations, in order to avoid an excessive number of categories with very few observations, all these countries were also classified into a single separate sub-category denominated here as other developed countries. 10 These and other factors have also been identified in the CPSS General Guidance for National Payment System Development. More specifically, this report identifies four general factors influencing national payment system development: i) environmental factors, ii) economic factors; iii) financial factors; and iv) public policy factors. Following the CPSS classification, two of the categories selected for analysis in this Working Paper (geographical location and population size) would fall under the environmental factors group, while the level of income category would fall under the economic factors group. 11 A case that deserves special treatment is that of the countries belonging to the West Africa Economic and Monetary Union. The questionnaire was sent to, and received from the Central Bank of West African States (BCEAO). Whenever the issue under discussion related to number of countries, answers received from the BCEAO were allocated individually to each of the member countries. In those cases in which the issue under discussion relates to the number of systems or number of central banks, answer from the BCEAO are counted as one. 12 For the purposes of this survey, Estonia, who adopted the Euro in January 2011, is not included in the Euro area sub-category.

23 Global Survey 2010 xxi Annex III shows the list of countries that fall under of each of these sub-categories related to geographical region. By population size: countries were classified as follows: i) large population over 30 million; ii) midsize population between 5 million and 30 million; iii) small population less than 5 million. World Bank data on country populations for year 2009 were used for this purpose. The definition of these sub-categories was driven solely on the objective of having a relatively similar number of countries in each of them, and/or with a distribution lightly skewed to the sub-category in the middle. Classification of countries according to population size is shown in Annex IV. A case that deserves a special treatment is that of the countries belonging to the Western Africa Monetary Union for which, in the absence of individual national central banks, the questionnaire was sent to, and received from, the Central Bank of Western African States (BCEAO). The following cases and exceptions are noted: Throughout chapter I, whenever the issue under discussion relates to number of countries, answers received from the BCEAO were allocated individually to each of their 8 member countries. In those cases in which the issue under discussion relates to number of systems or number of central banks, answers from the BCEAO were each counted as one. The two possibilities noted above do not affect the categories under which BCEAO member countries are classified, as a group or individually, for what concerns the geographical region. 13 For the income level, the following criteria were used: i) whenever a topic is discussed in terms of number of countries, the BCEAO answer is distributed as 6 low income countries and 2 lower-middle income countries; ii) on the other hand, whenever a topic is discussed in terms of number of systems or number of central banks, the prevalent income level is considered and therefore the answer for BCEAO falls under the low income definition. For the population size category, the following criteria were used: i) whenever a topic is discussed in terms of number of countries, the BCEAO answer is distributed as 7 mid-size countries and 1 small country ; ii) on the other hand, whenever a topic is discussed in terms of number of systems or number of central banks, the answer for BCEAO falls under the large country definition. Number and percentages presented throughout the study and the comparative tables are based on the simple addition of the number of countries in each of the previously mentioned categories and worldwide totals. Different weights to each country on the basis of a country s economic size, territory or other variables or country features are not applied throughout this study. Caution must be used when comparing the 2010 results with the 2008 results: the number of countries/systems under the geographical, income, and population categories may have changed consistently. Additionally, in some instances, the above-mentioned change in the geographical classification of European Union member countries, as well as institutional and infrastructure developments in this area may complicate or even invalidate comparison of the current results to the past iteration. These cases have been brought to attention in Sections I through VIII of the survey. 13 All BCEAO countries share the same geographical location. Methodological Note

24 xxii PAYMENT SYSTEMS WORLDWIDE IV). NOTATION AND CONVENTIONS How to read comparative tables throughout Sections I to VIII For tables showing comparative information on the basis of worldwide totals, country income levels, region, and population size, figures should be interpreted as follows: a. In the first column, the number in parenthesis indicates the total number of countries in each category. In several tables, however, comparisons refer to specific features of systems rather than countries. In the latter case, numbers in parenthesis in the first column refer to the total number of systems with that particular feature for which comparisons are being made. b. Columns headed with # show the number of countries/systems that answered positively to this item. When read vertically, these columns show at the top the total numbers of countries that answered positively to the specific issue detailed in the header of that column. Moving downwards, the column then shows the distribution of the total for each of the three country classifications being used. c. Columns headed with a % denote the number of countries/systems with a positive answer as a percentage of all countries in the respective sub-category. d. When read horizontally, each row shows the number of countries/systems in each sub-category, together with the corresponding percentages, that answered positively to the aspect detailed in the header of that column. For individual country answers, readers should refer to the Appendix in which tables for each of the questions of the survey have been prepared with countryby-country answers. It should be noted that contrary to the previous iteration, totals have been calculated for each section, rather than for the whole survey. Totals in each section, unless otherwise indicated, represent the number of countries that completed the relative section of the survey questionnaire. STATISTICAL TABLES In the various statistical tables presented in the text and in the Appendix, the following notation and conventions are used: Volume of transactions: means number of transactions. Value of transactions: means the amount of transactions. USD: means U.S. dollars. nav: means data is not available. nap: means data is not applicable. neg: is used when data are very small and negligible relative to other relevant data in the table concerned. Where data is exactly zero, this is indicated with 0. All value figures were converted into USD using the World Bank s Development Data Platform (DDP) Exchange Rates for the yearly average. ACRONYMS FOR REGIONS EAP East Asia Pacific ECA Europe and Central Asia 14 LAC Latin America and the Caribbean MNA Middle East and North Africa ODC Other Developed Countries SA South Asia SSA Sub-Saharan Africa Euro area countries and non-euro EU members have not been assigned an acronym and are referred to as euro-area countries and other EU members. 14 As noted earlier, for analytical purposes the ECA region does not include Eastern European countries that have joined the European Union.

25 SECTION I LEGAL AND REGULATORY FRAMEWORK I.1 BACKGROUND A sound and appropriate legal framework is generally considered the basis for an efficient payments system. The legal environment should include (i) laws and regulations of broad applicability that address issues such as insolvency and contractual relations between parties; (ii) laws and regulations that have specific applicability to payment systems (such as legislation on electronic signature, validation of netting, and settlement finality); and (iii) the rules, standards, and procedures agreed by the participants of a payments system. The legal infrastructure should also cover other activities carried out by both public and private sector entities. For example, the legislative framework may establish clear responsibilities for the central bank or other regulatory bodies, such as oversight of the payment systems or the provision of liquidity to participants in these systems. Other relevant pieces of legislation that have impact on the soundness of the legal framework on the payments system include laws on transparency and security of payment instruments, terms and conditions; antitrust legislation for the supply of payment services; and legislation on privacy. While laws are normally the appropriate means to enforce a general objective in the payments field, in some cases regulations might be a more efficient way to react to a rapidly changing environment. In other cases, specific agreements among participants might be adequate; however, in such cases, an appropriate professional assessment of the enforceability of these arrangements is usually required. Finally, because the payments system typically includes participants incorporated in foreign jurisdictions and might also operate with multiple currencies or across borders, it may be necessary to address issues associated with foreign jurisdictions. I.2 SURVEY OUTCOMES This chapter first discusses the basic legal references for payment and securities settlement issues, and the key legal concepts covered in the national legal frameworks, and makes comparison with the earlier survey. It also looks at the applicability of such concepts to the various types of payment systems. It then turns to the analysis of the formal empowerment of the central bank to oversee the national payments system. Finally, this chapter analyses the licensing requirements for payment service providers. Tables shown in this section and the related analysis include information on the countries that provided answers for Part I: Legal and Regulatory Framework of the 1

26 2 PAYMENT SYSTEMS WORLDWIDE TABLE I.1: PIECES OF LEGISLATION WITH EXPLICIT REFERENCES TO PAYMENT SYSTEMS Central Bank Law Banking Law Payment Systems Law Securities Markets Law Civil Code/ Commercial Code Central Bank Regulation with power of Law Consumer Competition Protection Law Law AML/CFT Other Countries # % # % # % # % # % # % # % # % # % # % Worldwide total (138) % 86 62% 66 48% 96 70% 57 41% 89 64% 35 25% 35 25% 97 70% 73 53% By income High income (46) 43 93% 31 67% 24 52% 35 76% 19 41% 27 59% 13 28% 8 17% 31 67% 23 50% Upper-middle income (32) 29 91% 15 47% 18 56% 22 69% 13 41% 19 59% 8 25% 6 19% 21 66% 20 63% Lower-middle income (35) 33 94% 22 63% 12 34% 25 71% 17 49% 27 77% 11 31% 8 23% 27 77% 16 46% Low income (25) 17 68% 18 72% 12 48% 14 56% 8 32% 16 64% 3 12% 13 52% 18 72% 14 56% By region East Asia and Pacific (11) % 5 45% 2 18% 8 73% 3 27% 7 64% 4 36% 3 27% 8 73% 5 45% Europe and Central Asia (16) % 12 75% 8 50% 12 75% 10 63% 12 75% 3 19% 4 25% 15 94% 12 75% Latin America & Caribbean (20) 18 90% 10 50% 7 35% 14 70% 8 40% 9 45% 7 35% 2 10% 9 45% 12 60% Middle East & North Africa (12) 9 75% 8 67% 2 17% 7 58% 9 75% % 3 25% 3 25% 10 83% 4 33% South Asia (4) 4 100% 1 25% 3 75% 3 75% 1 25% 4 100% 1 25% 0 0% 3 75% 2 50% Sub-Saharan Africa (34) 24 71% 22 65% 20 59% 19 56% 10 29% 22 65% 4 12% 16 47% 24 71% 17 50% Euro area (16) % 13 81% 9 56% 11 69% 7 44% 9 56% 7 44% 2 13% 13 81% 11 69% Other EU members (11) % 7 64% 6 55% % 2 18% 5 45% 2 18% 1 9% 6 55% 7 64% Other developed countries (14) 13 93% 8 57% 9 64% 11 79% 7 50% 9 64% 4 29% 4 29% 9 64% 3 21% By population size >30 million (35) 34 97% 25 71% 14 40% 30 86% 22 63% 27 77% 14 40% 14 40% 28 80% 20 57% >5 million, <30 million (56) 47 84% 41 73% 31 55% 40 71% 20 36% 34 61% 14 25% 17 30% 38 68% 32 57% 5 million or less (47) 41 87% 20 43% 21 45% 26 55% 15 32% 28 60% 7 15% 4 9% 31 66% 21 45% Questionnaire for Collecting Information to Depict the Situation of Payment and Securities Settlement Systems Worldwide I.2.1 Payment Systems and Related Matters At a worldwide level, the Central Bank Law is clearly the basic legal reference for payment and settlement issues, as indicated by 88% of all countries that participated in the survey. 15 While the same overall trend is observed in general for each of the various country categories, the relevance of the Central Bank Law is highest in EAP, ECA, SA and EU countries, and lowest in the SSA and MNA regions. In the latter case, central bank regulations with power of law were considered as the most relevant legal support to payment systems. 15 In the 2008 survey, this percentage was 91%. An important reason behind the reduction of this percentage for the 2010 survey is that while in 2008 the BCEAO, which comprises eight different countries, answered positively to this particular item, this was not the case for the actual survey.

27 Global Survey Although Payment System Laws are a relatively new phenomenon, a total of 66 countries (48%) indicated that they have one. 16 Payment System Laws are present in high, middle and low income countries. According to PSDG experience, in countries with a weak legal infrastructure for financial transactions enacting a Payment System Law is seen as a straight forward solution compared to reforming the Central Bank Law or the Banking Law. This is particularly true in low income countries. 17 On the other hand, 53% of countries indicate that relevant payment system concepts can be found in laws and regulations other than the ones mentioned in this question of the survey. This figure is highest in EU and ECA countries. The survey also shows that, from the various legal pieces mentioned in this question, the Civil Code and/or the Commercial Codes are not relevant laws for payment systems. Indeed, PSDG field work confirms that, over the years, many countries have evolved from general references to payment instruments and concepts such as netting in Civil or Commercial Codes, to more explicit descriptions in laws that are more specific to payment systems and in general to financial activities. The influence of Consumer Protection Laws and Competition Laws in payment systems is still low. One clear exception is that of low income countries, particularly those in the SSA region, where Competition Laws do have explicit references to payment systems and related issues. 16 Albania, Fiji, Lesotho, Philippines, Tanzania, and West Bank and Gaza indicated that a Payment Systems Law was in the process of being drafted or promulgated. The current status of these drafts is not known. In June 2011, the State Duma of the Russian Federation adopted a federal law On the National Payment System. 17 It should be noted, however, that some countries have recently adopted a payment systems law for other reasons. Commonly, a Payment System Law can be designed as an overarching law that ensures the consistency of the various elements of the legal and regulatory framework already contained in other legal pieces (e.g. Central Bank Law, the Banking Law, etc.). Another relevant outcome of the 2010 survey is the significant increase in the number of Securities Markets Laws that now include payment and settlement issues (70% 18 of all countries compared to only 51% in the 2008 survey). The relevance of Securities Markets Laws for payment systems is higher in larger countries, possibly explained by the presence of deeper securities markets in such countries. Table I.2 analyzes the extent to which some of the key payment and securities settlement concepts are covered in the legal framework. Worldwide, most countries indicate that their legal framework provides proper provisions for settlement finality (72%), netting (81%), or the electronic processing of payment orders (77%). These percentages are slightly higher compared to Figures are somewhat lower for other important concepts such as the non-existence of zero hour rule, the enforceability of security interests in pledged collateral or repo agreements, and the legal protection to collateral pledged through such agreements. Additional concepts such as consumer protection issues and fair and competitive practices in the provision of payment services were included in the 2010 survey. Due coverage of such issues is highest among high income countries, especially those in the EU. Altogether, ODCs rank higher than the worldwide figure, but significantly lower when compared to EU countries. Provisions to grant legal protection of collateral pledged in a payment system from third-party claims are becoming increasingly common: from slightly more than half of the total in 2008, 64% of respondents answered positively to this question in the current iteration. This last element is particularly noticeable in SSA countries (62% compared to 37% in 2008), and 18 At the time of data collection, Swaziland s Securities Act 2010 was still to be assented by the Head of State. Section I. Legal and Regulatory Framework

28 4 PAYMENT SYSTEMS WORLDWIDE TABLE I.2: PAYMENT SYSTEM CONCEPTS COVERED IN THE LEGAL FRAMEWORK Settlement finality Bilateral and multilateral netting Electronic processing of payments Nonexistence of zero hour rules Enforceability of security interests in repos/ collateral arrangements Protection of collateral pledged in a payments system Consumer protection for retail payment services Fair and competitive practices in the provision of payment services Countries # % # % # % # % # % # % # % # % Worldwide total (138) 99 72% % % 68 49% 90 65% 88 64% 75 54% 80 58% By income High income (46) 41 89% 39 85% 38 83% 37 80% 41 89% 37 80% 35 76% 35 76% Upper-middle income (32) 27 84% 29 91% 27 84% 19 59% 22 69% 20 63% 19 59% 19 50% Lower-middle income (35) 18 51% 24 69% 24 69% 8 23% 13 37% 17 49% 16 46% 14 40% Low income (25) 13 52% 20 80% 17 68% 4 16% 14 56% 14 56% 5 20% 15 60% By region East Asia and Pacific (11) 5 45% 8 73% 5 45% 3 27% 4 36% 5 45% 6 55% 5 45% Europe and Central Asia (16) 11 69% 14 88% 14 88% 10 63% 8 50% 8 50% 8 50% 9 56% Latin America & Caribbean (20) 17 85% 15 75% 15 75% 8 40% 12 60% 9 45% 9 45% 6 30% Middle East & North Africa (12) 6 50% 7 58% 7 58% 2 17% 5 42% 6 50% 4 33% 5 42% South Asia (4) 3 75% 3 75% 4 100% 2 50% 2 50% 3 75% 2 50% 3 75% Sub-Saharan Africa (34) 19 56% 28 82% 23 68% 7 21% 20 59% 21 62% 10 29% 19 56% Euro area (16) % 15 94% 15 94% % % % % 14 88% Other EU members (11) % % % % % % % 10 91% Other developed countries (14) 11 79% 11 79% 12 86% 9 64% 12 86% 9 64% 9 64% 9 64% By population size >30 million (35) 21 60% 29 83% 30 86% 20 57% 22 63% 22 63% 22 63% 21 60% >5 million, <30 million (56) 43 77% 48 86% 48 86% 29 52% 38 68% 38 68% 30 54% 36 64% 5 million or less (47) 35 74% 35 74% 28 60% 20 43% 30 64% 28 60% 23 49% 23 49% especially in low income countries (56% compared to 27% in 2008). When viewed from a country income perspective, high income and upper-middle income countries tend to have stronger legal systems for payment systems. From a regional perspective, legal aspects related to payment systems are covered extensively in EU member countries, and slightly less in ODCs, and in the ECA and SSA regions. The weakest legal frameworks are, according to survey data, those of the EAP, MNA and LAC regions, although in the latter case some progress is evident from the 2008 survey. In general terms, the identified trends confirm PSDG field work experience. On the other hand, the numbers in Table I.2, based on self-ratings, seem a bit too optimistic when compared

29 Global Survey TABLE I.3: APPLICABILITY OF PAYMENT SYSTEM CONCEPTS COVERED BY THE LEGAL FRAMEWORK Apply only to payment systems operated by the Central Bank Apply to all systemically important payment systems in the country Apply to all payment systems in the country Countries # % # % # % Worldwide total (138) 22 16% 59 43% 88 64% By income High income (46) 5 11% 17 37% 31 67% Upper-middle income (32) 4 13% 15 47% 20 63% Lower-middle income (35) 10 29% 14 40% 23 66% Low income (25) 3 12% 13 52% 14 56% By region East Asia and Pacific (11) 2 18% 5 45% 4 36% Europe and Central Asia (16) 4 25% 5 31% 11 69% Latin America & Caribbean (20) 3 15% 10 50% 10 50% Middle East & North Africa (12) 1 8% 2 17% 6 50% South Asia (4) 0 0% 1 25% 3 75% Sub-Saharan Africa (34) 8 24% 22 65% 23 68% Euro area (16) 1 6% 4 25% 14 88% Other EU members (11) 2 18% 6 55% 9 82% Other developed countries (14) 1 7% 4 29% 8 57% By population size >30 million (35) 5 14% 15 43% 23 66% >5 million, <30 million (56) 5 9% 28 50% 35 63% 5 million or less (47) 12 26% 16 34% 30 64% Note: Some countries provided more than one answer to this question. For instance, while laws dealing with finality may be applicable only to systemically important payment systems, other laws are applicable to all payment systems in the country. Hence, the percentages for each row do not necessarily add up to 100%. to numbers obtained through World Bank country assessments as part of Regional Initiative programs and through the IMF-World Bank Financial Sector Assessment Program (FSAP) The World Bank s PSDG has gained detailed knowledge of many countries through Regional Initiatives on Payment and Securities Settlement Systems. There are active programs of this kind in: ECA (Commonwealth of Independent States Payment and Securities Settlement Initiative CISPI); LAC (Western Hemisphere Payments and Securities Settlement Forum WHF, see org); MNA (Arab Payments and Securities Settlement Initiative, API); SA (South Asia Payments and Securities Settlement Initiative, SAPI); EAP (Pacific Payments and Remittances Initiative, PAPRI); SSA of various nature (Bank of Central African States-BEAC, Central Bank of West African States-BCEAO). Table I.3 shows the types of systems to which the key payment system concepts discussed earlier are applicable. A clear trend shown in the survey is that, through legal enhancements, more countries are requiring all payment systems within their jurisdiction to observe such key payment system provisions. While this trend had already been observed in the 2008 survey, it is more noticeable in the current iteration. Indeed, 64% Section I. Legal and Regulatory Framework

30 6 PAYMENT SYSTEMS WORLDWIDE of all countries now indicate that key legal concepts are applicable to all payment systems in the country, regardless of who the operator of such systems is or the nature of the systems in terms of their systemic importance. This figure is highest for EU countries (86%) and lowest for EAP countries (36%). As for those key legal concepts that are more closely related to securities settlement systems, the EU countries show the strongest legal framework. Table I.4 shows that in approximately 3 out of every 4 countries worldwide, the legal underpinning for the dematerialization of securities, for transferring securities ownership by means of book entries and for ensuring the finality of such transfers exists. Percentages are higher for high and upper-middle income countries and lower for lower-middle and low income countries. Overall, these results are almost identical to those of the 2008 survey. Regarding the legal protection for custody arrangements, 64% of all countries pointed out that their legal framework provides adequate legal protection. This figure shows an improvement compared to the 2008 survey where only 50% of countries responded positively to this item. While the 2010 survey shows that high income countries still maintain the lead in providing adequate legal protection to securities under custody, there is significant improvement in low income countries (48% in 2010 vs. only 23% in 2008). Notwithstanding this positive development, faster progress in this particular area is desirable. Indeed, the PSDG stresses that guaranteeing the protection of customer assets in the event of bankruptcy or insolvency of the custodian is a key element for the development of a deeper secondary market for securities, including in particular the retail market. I.2.2 Central Bank Licensing and Payment System Oversight Powers While Section VIII: Payment System Oversight and Cooperation analyzes the payment system oversight function in detail, issues related to the formal empowerment of the central bank to perform this function are included here as part of the analysis of the legal and regulatory framework. Table I.5 shows six variables that relate to the legal basis of the payment system oversight function. These can be grouped into two broad categories: i) the law or laws where oversight powers are conveyed to the central bank, and ii) whether such powers are implicit or explicit. Only 8 countries, 3 of which are in the LAC region, indicate that their central banks have no formal legal powers to perform the payment system oversight function. This figure is lower than that of the 2008 survey where 12 countries, 8 of which in LAC, indicated such a situation. Payment system oversight powers are to be found mainly in Central Bank Laws (71%), followed by Payment Systems Laws and other laws (34% and 26%, respectively). In the 2008 survey, the corresponding percentages were 60%, 35% and 25% respectively. The issue of whether the payment system oversight function is stated explicitly or only implicitly in the legal framework is subject to a wide range of interpretations. Indeed, the PSDG experience shows that many Central Bank Laws around the world contain one or more articles with very similar or even identical text in relation to payment system oversight. In some countries this text is regarded as explicitly stating the oversight function, while other countries interpret this as the opposite.

31 Global Survey TABLE I.4: SECURITIES SETTLEMENT CONCEPTS COVERED IN THE LEGAL FRAMEWORK Dematerialization Immobilization of securities of securities Securities ownership transfers through book entries Finality of settlement (securities and funds transfers) Protection of custody arrangements Securities lending arrangements Novation Protection of the operation in the event of a participant s insolvency Countries # % # % # % # % # % # % # % # % Worldwide total (138) 99 72% 74 54% % % 88 64% 63 46% 39 28% 79 57% By income High income (46) 35 76% 26 57% 41 89% 39 85% 37 80% 28 61% 22 48% 37 80% Upper-middle income (32) 26 81% 21 66% 27 84% 24 75% 21 66% 14 44% 8 25% 17 53% Lower-middle income (35) 23 66% 14 40% 25 71% 25 71% 18 51% 15 43% 8 23% 17 49% Low income (25) 15 60% 13 52% 15 60% 15 60% 12 48% 6 24% 1 4% 8 32% By region East Asia and Pacific (11) 7 64% 3 27% 7 64% 7 64% 5 45% 6 55% 3 27% 4 36% Europe and Central Asia (16) 14 88% 10 63% 13 81% 12 75% 10 63% 8 50% 3 19% 6 38% Latin America & Caribbean (20) 12 60% 10 50% 14 70% 14 70% 9 45% 8 40% 7 35% 10 50% Middle East & North Africa (12) 6 50% 5 42% 9 75% 8 67% 6 50% 5 42% 1 8% 6 50% South Asia (4) 3 75% 1 25% 4 100% 3 75% 3 75% 3 75% 1 25% 3 75% Sub-Saharan Africa (34) 23 68% 19 56% 23 68% 23 68% 19 56% 7 21% 2 6% 15 44% Euro area (16) 15 94% 10 63% % % 14 88% 12 75% 9 56% 15 94% Other EU members (11) % 9 82% % 10 91% % 8 73% 5 45% % Other developed countries (14) 8 57% 7 50% 11 79% 10 71% 11 79% 6 43% 8 57% 9 64% By population size >30 million (35) 29 83% 26 74% 31 89% 27 77% 26 74% 21 60% 17 49% 20 57% >5 million, <30 million (56) 40 71% 30 54% 45 80% 44 79% 39 70% 29 52% 13 23% 37 66% 5 million or less (47) 30 64% 18 38% 32 68% 32 68% 23 49% 13 28% 9 19% 22 47% At a global level, 50% of the countries indicate that the payment system oversight powers are explicitly stated in the law, while 46% indicated that such powers are only implicit, slightly reversing the trend observed in the previous survey where 48% of countries indicated that empowerment was explicit and 50% stated it was implicit Some countries indicated both the implicit empowerment and explicit empowerment options, and few others did not respond this question. For further details refer to individual country answers in the Appendix. Table I.6 shows those authorities other than central banks that are empowered to oversee payment and securities settlement systems. By far, securities regulators were the most frequently identified in this instance. Percentages are clearly higher for higher income and larger countries, which, as earlier observed, can be explained by securities markets being more relevant in such countries. According to the survey, the relevance of Ministries of Finance and Anti-Trust Authorities for payment system oversight is practically negligible. Section I. Legal and Regulatory Framework

32 8 PAYMENT SYSTEMS WORLDWIDE TABLE I.5: CENTRAL BANK LEGAL POWERS TO OVERSEE PAYMENT SYSTEMS Central Bank has no formal powers for oversight Oversight powers are in Central Bank Law Oversight powers are in Payment Systems Law Oversight powers to be found in other laws Empowerment is implicit/in general terms only Empowerment is explicit Countries # % # % # % # % # % # % Worldwide total (138) 8 6% 98 71% 47 34% 36 26% 63 46% 69 50% By income High income (46) 2 4% 34 74% 15 33% 16 35% 26 57% 22 48% Upper-middle income (32) 1 3% 21 66% 14 44% 9 28% 13 41% 24 75% Lower-middle income (35) 4 11% 24 69% 8 23% 7 20% 18 51% 14 40% Low income (25) 1 4% 19 76% 10 40% 4 16% 6 24% 9 36% By region East Asia and Pacific (11) 2 18% 8 73% 2 18% 2 18% 5 45% 3 27% Europe and Central Asia (16) 0 0% 12 75% 6 38% 2 13% 11 69% 8 50% Latin America & Caribbean (20) 3 15% 12 60% 5 25% 8 40% 8 40% 11 55% Middle East & North Africa (12) 1 8% 4 33% 0 0% 5 42% 6 50% 6 50% South Asia (4) 0 0% 3 75% 3 75% 0 0% 2 50% 4 100% Sub-Saharan Africa (34) 1 3% 26 76% 17 50% 5 15% 6 18% 16 47% Euro area (16) 1 6% 15 94% 5 31% 6 38% 9 56% 8 50% Other EU members (11) 0 0% 9 82% 3 27% 3 27% 8 73% 7 64% Other developed countries (14) 0 0% 9 64% 6 43% 5 36% 8 57% 6 43% By population size >30 million (35) 3 9% 26 74% 10 29% 13 37% 18 51% 19 54% >5 million, <30 million (56) 2 4% 41 73% 21 38% 13 23% 23 41% 27 48% 5 million or less (47) 3 6% 31 66% 16 34% 10 21% 22 47% 23 49% Finally, among the 38 countries that answered other authorities to this question, 16 indicated that the central bank shares responsibility with the financial/ banking supervision authorities for the oversight of payment and securities settlement systems. Regarding licensing powers over non-bank payment service providers, in the 2008 survey the relevant question focused on central banks as the key licensing authority. In the current survey, the aim was to determine whether such non-bank payment services providers were required to be licensed by either central banks or other authorities. Non-traditional payment service providers such as mobile phone operators and telecoms were also included. For traditional payment service providers, Table I.7 shows figures that are very similar to those of the 2008 survey. One interpretation is that licensing powers for payment services are heavily concentrated in central banks. Specialized service providers such as clearinghouses, central counterparties (CCPs), central securities depositories (CSDs), money transfer operators (MTOs) and payment card processing companies re-

33 Global Survey TABLE I.6: OTHER AUTHORITIES LEGALLY EMPOWERED TO SUPERVISE OR OVERSEE PAYMENT AND SECURITIES SETTLEMENT SYSTEMS Securities regulator Ministry of Finance Anti-trust authority Other Countries # % # % # % # % Worldwide total (138) 67 49% 13 9% 5 4% 38 28% By income High income (46) 26 57% 6 13% 1 2% 16 35% Upper-middle income (32) 18 56% 2 6% 2 6% 5 19% Lower-middle income (35) 16 46% 5 14% 2 6% 8 23% Low income (25) 7 28% 0 0% 0 0% 8 32% By region East Asia and Pacific (11) 5 45% 1 9% 1 9% 2 18% Europe and Central Asia (16) 9 56% 1 6% 0 0% 4 25% Latin America & Caribbean (20) 11 55% 2 10% 2 10% 4 20% Middle East & North Africa (12) 5 42% 1 8% 1 8% 1 8% South Asia (4) 3 75% 1 25% 0 0% 0 0% Sub-Saharan Africa (34) 10 29% 2 6% 0 0% 12 35% Euro area (16) 9 56% 2 13% 1 6% 6 38% Other EU members (11) 6 55% 0 0% 0 0% 3 27% Other developed countries (14) 9 64% 3 21% 0 0% 6 43% By population size >30 million (35) 29 83% 10 29% 2 6% 10 29% >5 million, <30 million (56) 21 38% 0 0% 2 4% 19 34% 5 million or less (47) 17 36% 3 6% 1 2% 9 19% quire a license in about half of all countries. Licensing is generally less frequent in lower income and smaller countries, possibly explained by the fact that some market infrastructures such as CCPs and CSDs do not exist in these countries. In the 2008 survey it was highlighted that the results shown for MTOs 61% of countries requiring MTOs to be licensed in order to engage in payment services were relatively surprising given that, according to PSDG experience, the overall awareness about these types of firms was typically low. While the overall results for the 2010 survey are similar (57%), a significant change is evident. The previous survey showed that licensing MTOs was a common feature mainly in lower income countries; in the current iteration, the EU has taken the lead. Largely as a result of the adoption of the Payment Services Directive (see Box 1), more than 90% of EU countries answered positively to this question, compared to 65% in The licensing of mobile phone operators and other telecoms for payment services purposes is relatively frequent only in EAP and EU countries. By far, the lowest figures are those of ECA and LAC. Section I. Legal and Regulatory Framework

34 companies 10 PAYMENT SYSTEMS WORLDWIDE TABLE I.7: LICENSING OF NON-BANKS PROVIDING PAYMENT SERVICES Non-bank financial institutions Clearing houses Central counterparties Central securities depositories Money transfer operators Payment card processing companies Mobile phone operators Telecommunication companies Countries # % # % # % # % # % # % # % # % Worldwide total (138) % 66 48% 41 30% 71 51% 79 57% 59 43% 59 43% 53 38% By income High income (46) 35 76% 24 52% 24 52% 26 56% 32 70% 22 48% 26 57% 25 54% Upper-middle income (32) 26 81% 18 56% 9 28% 23 72% 17 53% 11 34% 12 38% 8 25% Lower-middle income (35) 26 74% 17 49% 6 17% 16 46% 16 46% 18 51% 11 31% 9 26% Low income (25) 24 96% 7 28% 2 8% 6 24% 14 56% 8 32% 10 40% 11 44% By region East Asia and Pacific (11) 9 82% 5 45% 3 27% 7 64% 4 36% 5 45% 7 64% 7 64% Europe and Central Asia (16) 11 69% 8 50% 4 25% 12 75% 3 19% 3 19% 2 13% 1 6% Latin America & Caribbean (20) 17 85% 9 45% 5 25% 13 65% 10 50% 8 40% 2 10% 1 5% Middle East & North Africa (12) 9 75% 7 58% 2 17% 6 50% 9 75% 9 75% 4 33% 4 33% South Asia (4) 4 100% 3 75% 1 25% 1 25% 3 75% 3 75% 3 75% 1 25% Sub-Saharan Africa (34) 30 88% 12 35% 2 6% 7 21% 19 56% 11 32% 13 38% 12 35% Euro area (16) 14 88% 8 50% 11 69% 11 69% 15 94% 8 50% 13 81% 13 81% Other EU members (11) % 8 73% 6 55% 7 64% 9 82% 7 64% 9 82% 9 82% Other Developed Countries (14) 6 43% 6 43% 7 50% 7 50% 7 50% 5 36% 6 43% 5 36% By population size >30 million (35) 25 71% 19 54% 18 51% 21 60% 17 49% 14 40% 13 37% 11 31% >5 million, <30 million (56) 51 91% 28 50% 15 27% 30 54% 33 59% 28 50% 27 48% 27 48% 5 million or less (47) 35 74% 19 40% 8 17% 20 43% 29 62% 17 36% 19 40% 15 32%

35 Global Survey BOX 1: LEGAL ARRANGEMENTS IN THE EUROPEAN UNION Within the European Union (EU), EU legislation provides for the harmonization of the legal frameworks within all 27 EU Member States (it also extends to the European Economic Area, which comprises Iceland, Norway and Liechtenstein in addition to the EU27). The main legally binding instruments used as the European Union s legislature are Regulations (directly applicable throughout the EU i.e. without any further action or involvement on the part of national parliaments) and Directives (must be implemented at the national level i.e. transposed into national legislation and approved by the respective national parliaments). These legislative instruments are used to harmonize existing rules at the EU level or to establish new legislation where national rules do not exist, but are deemed necessary. A single market for financial services has been under construction in the EU since An important achievement was the 1986 Single European Act, which inter alia provides for a single license ( free passport ) for banking services in the EU (a bank licensed in one Member State can provide its services and participate in systems in all EU Member States on the basis of that single license). In the area of payments, since the mid-1990s a number of binding legal instruments have been adopted in the EU. The Directive on Payment Services (2007/64/EC) creates a harmonized legal framework for payments (seeking in particular to establish a legal basis for credit transfers, direct debits and card payments), thereby ensuring that cross-border payments within the EU are as safe and secure as national payments within the various Member States. The Regulation (EC) No 924/2009 on cross-border payments in the Community provides for the principle of equal charges for national and cross-border payments and strengthens the role of the competent national authorities in the areas of supervision and resolution of complaints, and provides for the establishment of out-of-court redress procedures. The Regulation (EC) No 1781/2006 on information on the payer accompanying transfers of funds aims to prevent, investigate and detect money laundering and the financing of terrorism. The E-Money Directive (2009/110/EC) on the taking up, pursuit and prudential supervision of the business of electronic money institutions provides for a specific light supervisory regime for e-money institutions. Concerning market infrastructure, a key pillar to maintain systemic stability in the EU is the Settlement Finality Directive (98/26/EC), which stipulates that transfer orders and netting are legally enforceable and binding on third parties and allows systems designated under the Directive to operate within a safe legal environment in all Member States. The Financial Collateral Directive (2002/47/EC) harmonized the legal rules governing the provision of financial collateral in the EU. Further relevant provisions regulating the clearing and settlement of financial instruments can be found in the Directive on markets in financial instruments or MiFID (2004/39/EC). It establishes a comprehensive regulatory framework governing the organized execution of investors transactions by exchanges, other trading systems and investment firms. To some extent, specific provisions on solvency ratios in the Banking Directive (2006/48/EC) relating to the taking up and pursuit of the business of credit institutions and Capital Requirements Directive (2006/49/EC) are also relevant. Finally, some of the provisions of Directive 2001/24/EC on the reorganization and winding up of credit institutions, and the Regulation (EC) No 1346/2000 on insolvency proceedings have a bearing on protecting certain financial transactions, ensuring that there is a clear protection of certain risk management features (such as netting and set-off), as well as clear procedures for dividing up assets in the event of the insolvency or reorganization of credit institutions established in the EU. Further important EU legislative initiatives are under way. The European Commission has prepared a comprehensive legislative proposal, in the form of a Regulation on European market infrastructure (EMIR), establishing, among other things, common safety, regulatory and operational standards for over-the-counter (OTC) derivatives, CCPs and trade repositories. The Commission has also been working on a draft directive to harmonize the law governing securities holding and transfers (Securities Law Directive) and also plans to put forward a proposal for a regulation on CSDs and a legal act to clarify the protection of netting arrangements. Furthermore, the Commission has issued a proposal for a regulation setting end dates for migration to SEPA credit transfers and SEPA direct debits by means of establishing technical requirements for credit transfers and direct debits in Euro. The European Central Bank (ECB) takes a close interest in the relevant legal acts, particularly through its advisory role in the EU s legislative process. Section I. Legal and Regulatory Framework

36

37 SECTION II LARGE-VALUE PAYMENT SYSTEMS II.1 BACKGROUND Large-value systems are the most significant component of the national payments system. This is because large-value systems are able to generate and transmit disturbances of a systemic nature to the financial sector. In order to cope with these systemic risks, several measures are adopted, depending on the nature of the large-value payment system. If the system is characterized by a deferred net settlement of payment transactions, risk control measures include the introduction of bilateral and multilateral caps, the implementation of loss-sharing agreements, and the pledging of collateral to cope with the inability of one or more participants to pay. Until not very long ago the concept of large-value systems was related almost exclusively to the value of the individual payments that are channeled through it. More recently, large-value systems are also related to the processing of time-critical payments. While in general the average value of each individual payment that is processed by these systems is high when compared to other systems (e.g. clearinghouses or payment cards), many so-called large-value systems now also process payments of relatively low value. The development of real-time gross settlement (RTGS) systems is one response to the growing awareness of the need for sound risk management in large-value funds transfer systems. RTGS systems can offer a powerful mechanism for limiting settlement and systemic risks in the interbank settlement process because they can effect final settlement of individual funds transfers on a continuous basis during the processing day. In addition, RTGS systems can contribute to the reduction of settlement risk in securities and foreign exchange transactions by facilitating the delivery versus payment (DVP) and payment versus payment mechanisms (PVP). Variants of the basic RTGS system, the so-called hybrid systems that take into account liquidity-saving features that exist in net settlement systems have been introduced in some countries over recent gears. II.2 SURVEY OUTCOMES The questionnaire gave three options for central banks to indicate system(s) through which large-value payments are channeled: RTGS systems, cheque systems, and other systems. Answers related to RTGS systems are analyzed in sub-section II.2.1. Special cheque clearing procedures are revised in sub-section II.2.2, while selected features of the non-rtgs large-value systems qualified as other are discussed in sub-section II.2.3. The tables in this section and related analysis report information on all countries that have responded 13

38 14 PAYMENT SYSTEMS WORLDWIDE TABLE II.1: MAIN SYSTEM(S) USED FOR LARGE-VALUE FUNDS TRANSFERS RTGS system Cheque clearinghouse Other Countries # % # % # % Worldwide total (139) % 32 23% 18 13% By income High income (46) 43 93% 4 9% 4 9% Upper-middle income (33) 31 94% 8 24% 4 12% Lower-middle income (35) 27 77% 11 31% 5 14% Low income (25) 15 60% 9 36% 5 20% By region East Asia and Pacific (11) 7 64% 3 27% 2 18% Europe and Central Asia (16) 15 94% 0 0% 2 13% Latin America & Caribbean (20) 17 85% 7 35% 3 15% Middle East & North Africa (13) 11 85% 6 46% 2 15% South Asia (4) 3 75% 2 50% 1 25% Sub-Saharan Africa (34) 24 71% 13 38% 5 15% Euro area countries (16) % 0 0% 0 0% Other EU members (11) % 0 0% 0 0% Other developed countries (14) 12 86% 1 7% 3 21% By population size >30 million (35) 32 91% 6 17% 3 9% >5 million, <30 million (57) 48 84% 14 25% 7 12% 5 million or less (47) 36 77% 12 26% 8 17% to Part II: Large-value Funds Transfer Systems of the Questionnaire for Collecting Information to Depict the Situation of Payment and Securities Settlement Systems Worldwide 2010, and on those systems for which information was provided. Results for the type of system that processed largevalue payments are shown in Table II.1. Answers do not necessarily add up to 100% since several countries indicated more than one system through which largevalue payments are executed. As shown in Table II.1, a total of 116 countries out of 139 (83%) advised that they were using at least one RTGS system as of December The equivalent figure for the 2008 survey was 79%. According to survey data, 19 new RTGS systems have been implemented since The percentage of countries with a RTGS system is higher in high and upper-middle 21 In both the BCEAO and the Euro area there is currently only one RTGS system. However, data in Table II.1 reflects, respectively, 8 and 16 different countries using each of these. 22 The PSDG is also aware that RTGS systems are currently being implemented in Honduras, Papua New Guinea, Macao (China), and Paraguay. The RTGS component of the Rwanda Automated Transfers System (ATS) went live in February The Ethiopia ATS was launched in May These are not reflected in Table II Including TARGET2. Previous euro-area individual or country systems are not reflected in this number. Migration dates to TARGET2 vary between 2007 and Details are available in the Annex.

39 Global Survey TABLE II.2: RTGS SYSTEMS WORLDWIDE Number of countries using a RTGS system Number of countries where the Central Bank is the operator of the RTGS system Number of countries where the Central Bank is the settlement agent for the RTGS Number of systems that also process transactions in foreign currency Countries with more than one RTGS system 116 countries 112 countries Exceptions: Canada, Hong Kong (China), Malaysia, Switzerland 115 countries Exception: Namibia 10 systems Brazil, China, Ecuador, Hong-Kong income countries. From a regional perspective, RTGS systems exist in all EU countries and in most of ODCs, ECA and LAC. The lowest percentage of RTGS systems is observed in the EAP region, where only 7 out of 11 countries have implemented such a system. Interestingly, contrary to the 2008 survey, adoption of a RTGS system shows some correlation with a country s population size: 92% of large countries report to have a RTGS, compared to only 77% of small countries. Less than one-fourth of the countries surveyed in 2010 report that cheque systems are still used for large-value payments, against about one third (34%) in Table II.1 shows that cheque systems continue to be used for large-value payments especially in some lower income economies. In the SA, MNA and SSA regions, cheques are used for large-value payments jointly with the RTGS system, while a significant reduction from the previous survey can be observed in LAC. In this regard, it is worth keeping in mind that cheque systems that process large-value payments face special difficulties to comply with international standards (i.e. the forthcoming CPSS-IOSCO Principles for Financial Market Infrastructures 24 ), in particular with regard to the management of credit and liquidity risk (Principles 4 and 7), prompt final settlement and completion of timely settlement if the participant with the largest net debt fails to settle (Principle 8), and the system providing a means of making payments that is practical to its users and efficient for the economy (Principle 21). A total of 18 countries indicated that they use a system other than RTGS or cheques for large-value payments. PSDG experience in developing countries shows these are usually systems that process payments on a gross basis with deferred settlement (e.g. end-of-day), using extensive manual procedures. In other cases, e.g. CHIPS in the United States or Euro 1, these systems are highly sophisticated. More detailed analysis of these systems will follow in section II.2.3. II.2.1 Real-Time Gross Settlement Systems As shown in Tables II.1 and II.2, a total of 116 countries out of 139 (or 83%) informed they were using a RTGS system as of December To clarify this figure, several caveats are necessary: 24 The CPSS and the International Organization of Securities Commissions (IOSCO) have issued new standards for public consultation. The new Principles for Financial Market Infrastructures are expected to be finalized in The consultative report is available at In both the BCEAO and the euro area there is only one RTGS system, however, figures in Section II. Large-Value Payment Systems

40 16 PAYMENT SYSTEMS WORLDWIDE Tables II.1 and II.2 reflect each of the countries using these systems. 25 and where entities other than central banks seem to have a bigger role. 27 The World Bank PSDG is aware that RTGS systems are currently being implemented in Honduras, Macao (China), Papua New Guinea, and Paraguay. 26 The RTGS component of the Rwanda Automated Transfer System (ATS) went live in February The Ethiopia ATS was launched in May These are not reflected in the total of 116 countries. Four countries indicated that they have more than one RTGS system (see Table II.2). Bulgaria, Estonia, Latvia, Poland have a TARGET2 component for the settlement of transactions in euro in addition to their domestic RTGS systems. Brazil s SITRAF is a hybrid RTGS-like system. Canada defines its large-value system as a RTGS equivalent. The Canadian large-value system is however included here in Table II.2 and throughout section II.2.1. With regard to the year of implementation, survey information shows that 19 RTGS systems were implemented between 2007 and 2010, 32 systems between 2003 to 2007, and 25 systems between 2000 to The rest were implemented in 1999 or before, though many have since undergone substantial upgrades. The second and third columns of Table II.2 indicate, respectively, the number of countries using a RTGS system where the central bank acts as operator and settlement agent for such system. Overwhelmingly, central banks play the key role as both operators and settlement agents when it comes to RTGS systems. Numbers in these columns do not reflect those few cases which reported more than one RTGS system, 25 For the purpose of this Survey, Estonia is not considered part of the Euro area. The euro replaced the kroon as the official currency of Estonia on January 1st, These projects are in different stages of development. A total of 10 countries indicated that their RTGS system handles transactions both in local currency and in at least one foreign currency. These are: Argentina, Armenia (ADD), Bolivia, Costa Rica, Dominican Republic, Guatemala, Jordan, Republic of Korea, Peru, and Uruguay. In addition there are designated foreign currency systems in China and Hong Kong (China). 28 As mentioned above, Bulgaria, Estonia, Latvia, Poland have a TARGET2 component for the settlement of transactions in euro in addition to their domestic RTGS systems. UK CHAPS Euro ceased operations in May Table II.3 shows some basic statistics for RTGS systems worldwide for year Though figures for previous years are not presented here, total settlement throughput in RTGS systems is expanding at a fast pace in almost every country. Indeed, in U.S. dollar terms, in the three-year period of total settlement throughput increased by an average of slightly more than 100%, 29 with a median value of about 40%. The last column to the right in Table II.3 indicates the number of times an amount equivalent to the value of 27 For these other RTGS systems, the operators and settlement agents are as follows: Brazil-Sitraf (operator and settlement agent: CIP a private clearinghouse); Ecuador Sistema Swift (operator: Central Bank; settlement agent: Central Bank) Hong Kong-USD RTGS (operator: Hong Kong Interbank Clearing Limited; settlement agent: HSBC); Hong Kong-Euro RTGS (operator: Hong Kong Interbank Clearing Limited; settlement agent: Standard Chartered Bank); Hong Kong-RMB RTGS (operator: Hong Kong Interbank Clearing Limited; settlement agent: BOC- HK); Malaysia (operator: MyClear; settlement agent: Central Bank); Namibia (operator: Central Bank; settlement agent: Payment Clearing House). Note that the Hong Kong Interbank Clearing Limited, the system operator of HKD CHATS, USD CHATS, EUR CHATS and RMB CHATS is jointly owned by the Hong Kong Monetary Authority and the Hong Kong Association of Banks. In United Kingdom, CHAPS is operated by the CHAPS Company, but this outsources technical operations to the Central Bank. 28 In Hong Kong (China), there are three designated foreign currency systems: one for US dollar, one for euro, and one for Chinese yuan. 29 Simple average. Calculated for 87 countries for which the necessary information was available.

41 Global Survey TABLE II.3: BASIC STATISTICS FOR RTGS SYSTEMS WORLDWIDE (2009) Number of transactions/ settled payments Total value settled (in USD million) Average value of each payment (in USD) Turnover of GDP Albania 55,701 49, , Angola 117, ,385 2,330, Argentina 1,333, , , Armenia 2,614, ,094 40, Australia 7,990,698 41,279,314 5,165, Austria 1,374,968 12,925,775 9,400, Azerbaijan 393,000 90, , Bahamas, The 53,227 10, , * BCEAO 460, , , Belgium 2,180,243 37,545,668 17,220, Bolivia 45,473 21, , Bosnia and Herzegovina 629,669 37,136 58, Botswana 63, , Brazil (STR) 10,500,000 70,620,191 6,725, Brazil (SITRAF) 67,400,000 2,650,758 39,329 Bulgaria 993, , , Canada 5,607,000,000 33,852,052 6, Chile 283,908 2,824,746 9,949, China (Hi-Value) 248,000, ,684, , China (Domestic-Foreign Currency) 565,900 50,154 88,627 Colombia 2,010,000 3,693,700 1,837, Costa Rica 1,431,669 93,090 65, Croatia 291, ,475 1,980, Cyprus 92, ,731 4,573, Czech Republic 450,000,000 6,924,409 15, Denmark 750,000 13,104,971 17,473, Dominican Republic 151, ,162 2,272, Ecuador (Pago en Linea) 458,304 22,499 49, Ecuador (SWIFT) 206,068 29, , Egypt, Arab Rep. of 1,200,000 2,615,179 2,179, Estonia 50, ,880 2,431, Euro area countries (TARGET 2) 87,600, ,488,435 8,430, Fiji 47,121 38, , Finland 714,932 14,385,213 20,121, France 7,618, ,246,391 17,095, Georgia 5,756,658 20,309 3, Germany 44,698, ,967,049 5,323, Ghana 199, , , Greece 1,457,164 10,368,399 7,115, Guatemala 49,372 55,696 1,128, Hong Kong, China (HKD) 5,158,467 16,881,865 3,272, Hong Kong, China (USD) 2,616,206 2,134, ,685 Hong Kong, China (EUR) 62, ,935 3,402,660 Hong Kong, China (RMB) 127,149 14, ,673 Hungary 980,752 4,645,257 4,736, India 33,240,000 8,150, , Indonesia 11,200,000 4,127, , Iran, Islamic Rep. of 4,663, ,166 92, Section II. Large-Value Payment Systems

42 18 PAYMENT SYSTEMS WORLDWIDE TABLE II.3: BASIC STATISTICS FOR RTGS SYSTEMS WORLDWIDE (2009) (continued) Number of transactions/ settled payments Total value settled (in USD million) Average value of each payment (in USD) Turnover of GDP Iraq 13, , Ireland 1,234,879 10,769,010 8,720, Israel 197,649 15,843,930 80,161, Italy 8,658,900 44,788,911 5,172, Jamaica 97,430 84, , Japan 12,314, ,219,131 23,649, Jordan 358, ,731 1,076, Kazakhstan 9,990,600 1,064, , Kenya 390, , , Korea, Rep. of 2,754,291 36,100,192 13,106, Kuwait 710, , , ** Kyrgyz Republic 109,000 9,733 89, Latvia 200, ,322 1,654, Lesotho 16,605 2, , Lithuania 302, , , Luxembourg 754,980 14,015,549 18,564, Macedonia FYR 4,718,965 31,584 6, Madagascar 24,197 2, , Malawi 144,949 27, , Malaysia 3,001,700 10,571,391 3,521, Malta 14, ,044 8,931, Mauritius 280,976 48, , Mexico 62,213,271 9,509, , Moldova 626,400 68, , Mongolia 280,349 5,849 20, Montenegro 5,099,093 11,659 2, Morocco 124, ,133 2,525, Namibia 40,515 53,529 1,321, Netherlands 9,385,778 88,467,858 9,425, New Zealand 1,812,888 5,795,688 3,196, Norway 265,233 7,474,158 28,179, Oman 301, , , Pakistan 258, ,710 3,130, Peru 573,000 1,109,505 1,936, Philippines 749,591 3,953,088 5,273, Poland 1,811,899 13,521,637 7,462, Portugal 1,520,000 7,942,700 5,225, Romania 2,521,876 1,677, , Russian Federation 63,000 3,359 53, Saudi Arabia 32,830,000 16,329, , Serbia 119,800, ,947 3, Singapore 3,630,000 9,380,448 2,584, Slovak Republic 155,000 1,222,660 7,888, Slovenia 784, ,060 1,011, South Africa 2,844,028 8,831,344 3,105, Spain 9,356, ,161,874 14,552, Sri Lanka 232, ,443 1,240, Swaziland 19,069 7, , Sweden 2,581,871 22,807,176 8,833,

43 Global Survey TABLE II.3: BASIC STATISTICS FOR RTGS SYSTEMS WORLDWIDE (2009) (continued) Number of transactions/ settled payments Total value settled (in USD million) Average value of each payment (in USD) Turnover of GDP Switzerland 381,650,000 52,222, , Taiwan (China) 726,534 9,453,508 13,011, Tanzania 283,332 51, , Thailand 2,067,121 14,397,947 6,965, Trinidad and Tobago 46,166 62,768 1,359, Turkey 129,450,000 15,290, , Uganda 294,117 34, , Ukraine 311,222, ,669 2, United Arab Emirates 1,687,000 2,542,446 1,507, United Kingdom 31,926, ,662,192 3,152, United States 124,731, ,127,108 5,059, Uruguay 238,262 36, , Zambia 148,147 41, , Zimbabwe 678,321 6,700 9, Notes: *calculated using 2007 GDP; **calculated using 2008 GDP 1. Only those countries with a RTGS system in place as of end-2009 were included in this Table. Madagascar s system went live in October Czech Republic and Switzerland systems process both large-value and retail payments. 3. All figures in local currency were converted into USD at the official exchange rate (LCU per US$, period average). 4. Source for GDP data: World Bank DDP time series. Source for exchange rates: World Bank DDP time series. the gross domestic product (GDP) in each country is settled in a year by the RTGS system. In general, the GDP turnover of RTGS systems is higher in high income/developed countries where RTGS systems support the settlement of transactions in very active securities markets. Nevertheless, many middle-income countries also show large numbers, which, when viewed in conjunction with growth trends, stress the increasingly systemic importance of RTGS systems all over the world. The column showing the average value of a payment that goes through the RTGS system indicates important differences between countries. One would naturally expect higher per transaction values in higher income countries, and the data in Table II.3 does reflect this to a large extent. Interestingly, this average is much smaller in many of the countries in the ECA region. While, to some extent, a smaller average value of individual payments is due to the fact that RTGS systems are the only interbank payment system in several of these countries, in several other cases the RTGS system was expressly designed to handle both large-value and small-value transactions. Indeed, as technological advances increase the flexibility of RTGS systems, and the cost of telecommunications and data processing keep decreasing on a per transaction basis, an increasing number of countries are designing their systems with this principle in mind. II Detailed Features of RTGS Systems Worldwide The discussion below shifts the basis of the analysis from countries to systems. In other words, each individual RTGS system, regardless of how many countries or financial systems it serves, is counted as one for comparison purposes. The percentages presented throughout this sub-section, including Tables II.4 through II.11, are related to the number of systems Section II. Large-Value Payment Systems

44 20 PAYMENT SYSTEMS WORLDWIDE with a given feature (this number is shown in parenthesis in the first column) and not to the total number of countries participating in the survey. Some of the percentages shown in Tables II.4 through II.11 are not comparable to those of the 2008 survey since in the latter euro-area RTGS systems were analyzed separately for each of the countries comprising the euro area, while in the current survey only one system (i.e. TARGET2) is reflected for all these 16 countries. 30 This affects primarily inter-survey comparisons for worldwide totals, high income countries, and, naturally, euro area countries. Once the various exceptions are accounted for, the survey presents information on 94 RTGS systems worldwide. 31 Communication Channels for the RTGS System The questionnaire explicitly asked for the primary means through which direct RTGS participants send their payment orders to the RTGS systems. Despite this, several countries indicated more than one option. One possible interpretation of those responses is that central banks are stressing the fact that it is now relatively common for RTGS systems to have two or even more access channels, one serving as the primary channel and the other as a back-up. The World Bank s PSDG has observed that several developing countries that are already operating a proprietary network are also increasingly opting for SWIFT s international network as a back-up channel, in substitution of other electronic and paper-based procedures. Duplicate responses make it somewhat difficult to extract a detailed analysis from the data, shown here 30 For the purpose of this Survey, Estonia is not considered part of the euro area. The euro replaced the kroon as the official currency of Estonia on January 1 st, In this number, TARGET2 is considered, and euro area countries are counted as one. The 8 BCEAO countries are served by one RTGS system. BOX 2: TARGET2 THE RTGS FOR THE EURO The Trans-European Automated Real-Time Gross Settlement Express Transfer 2 system or TARGET2 is a Eurosystem service that provides real-time gross settlement in central bank money of euro payment transactions. TARGET2 is implemented as a single shared platform system, which is jointly operated by three euro area national central banks on behalf of the entire Eurosystem. It provides harmonized RTGS services to all TARGET2 participants based on a single pricing structure. TARGET2 can be considered as the backbone for all payment and settlement arrangements in euro. A unique feature of TARGET2 is the option for central banks and banking communities of EU Member States outside the euro area to connect to TARGET2 (this option is being used by Bulgaria, Denmark, Latvia, Lithuania, Poland and, as of mid-2011, Romania). Once a Member State joins the euro area, participation in TARGET2 becomes mandatory. Although primarily designed to settle large-value and urgent payments (including monetary policy and money marketsrelated operations), TARGET2 can be used for all credit transfers in euro, as there is no upper or lower limit on the value of payments. The use of TARGET2 is mandatory for payments involving the Eurosystem, and all euro large-value net settlement systems have to settle in the system. For any other payments in euro, such as customer payments, market participants are free to use alternative payment arrangements. TARGET2 has about 930 direct and about 3,600 indirect participants, while approximately 52,000 BICs are addressable via those participants. Some 67 ancillary systems, such as large-value and retail payment systems, securities settlement systems or central counterparties settle in TARGET2. In 2010, TARGET2 processed a daily average of more than 340,000 payments with a value of about 2,300 billion euro. This represents a market share of 60% in volume and 90% in value of all payments settled through euro area largevalue payments systems.

45 Global Survey TABLE II.4: PRIMARY MEANS THROUGH WHICH PAYMENT ORDERS ARE SENT TO THE RTGS SYSTEM SWIFT International Network SWIFT closed users group Proprietary telecommunications network Other electronic means ( , etc.) Other paper means RTGS systems # % # % # % # % # % Worldwide total (94) 14 15% 43 46% 50 53% 6 6% 3 3% By country income level High income (28) 3 11% 16 57% 13 46% 1 4% 1 4% Upper-middle income (31) 5 16% 12 39% 19 61% 0 0% 0 0% Lower-middle income (25) 3 12% 9 36% 14 56% 4 16% 1 4% Low income (10) 3 30% 6 60% 4 40% 1 10% 1 10% By region East Asia and Pacific (7) 1 14% 2 29% 6 86% 0 0% 1 14% Europe and Central Asia (15) 2 13% 4 27% 10 67% 1 7% 0 0% Latin America & Caribbean (17) 3 18% 5 29% 9 53% 3 18% 0 0% Middle East & North Africa (11) 2 18% 2 18% 8 73% 0 0% 0 0% South Asia (3) 0 0% 1 33% 2 67% 0 0% 0 0% Sub-Saharan Africa (17) 5 29% 13 76% 5 29% 1 6% 1 6% Euro area countries (1) 0 0% 1 100% 0 0% 0 0% 0 0% Other EU members (11) 1 9% 7 64% 4 36% 1 9% 1 9% Other developed countries (12) 0 0% 8 67% 6 50% 0 0% 0 0% By country population size >30 million (30) 3 10% 11 37% 21 70% 2 7% 2 7% >5 million, <30 million (34) 4 12% 19 56% 15 44% 4 12% 1 3% 5 million or less (30) 7 23% 13 43% 14 47% 0 0% 0 0% in Table II.4. Nevertheless, some broad trends can be observed. At a global level, SWIFT closed-user groups and proprietary telecommunications networks are by far the most common alternatives, each serving approximately half of all RTGS systems. Some differences are observed when the information is analyzed from a country s population size angle, with larger countries favoring proprietary networks while smaller countries preferring SWIFT closed-user groups. SWIFT closeduser groups are more common throughout the EU and ODCs, and also in SSA. In the latter case, one could speculate that limitations in local infrastructure in many of the countries in this region have prompted central banks to turn to the infrastructure provided by SWIFT. Another point for discussion is to what extent countries that use SWIFT-like message formats over a proprietary telecommunications network actually indicated the SWIFT closed-user group option. Judging from World Bank experience in developing countries, this seems to be the case in at least 10 countries. Section II. Large-Value Payment Systems

46 22 PAYMENT SYSTEMS WORLDWIDE TABLE II.5: PRICING AND CHARGES IN RTGS SYSTEMS Operator makes no charges Charges applied have no particular relation to cost recovery Partial recovery of operational costs Full recovery of operational costs Full recovery of operational costs + partial recovery of investment Full recovery of operational and investment costs Full recovery of operational costs and investment plus profit RTGS systems # % # % # % # % # % # % # % Worldwide total (94) 10 11% 14 15% 24 26% 12 13% 9 10% 27 29% 4 4% By countryincome level High income (28) 2 7% 3 11% 8 29% 3 11% 3 11% 10 36% 2 7% Upper-middle income (31) 4 13% 3 10% 4 13% 4 13% 3 10% 13 42% 2 6% Lower-middle income (25) 3 12% 5 20% 7 28% 5 20% 1 4% 4 16% 0 0% Low income (10) 1 10% 3 30% 5 50% 0 0% 2 20% 0 0% 0 0% By region East Asia and Pacific (7) 0 0% 0 0% 2 29% 1 14% 0 0% 4 57% 0 0% Europe and Central Asia (15) 1 7% 1 7% 4 27% 2 13% 2 13% 6 40% 1 7% Latin America & Caribbean (17) 4 24% 3 18% 1 6% 2 12% 2 12% 5 29% 1 6% Middle East & North Africa (11) 2 18% 3 27% 3 27% 3 27% 1 9% 0 0% 0 0% South Asia (3) 2 67% 0 0% 1 33% 0 0% 0 0% 0 0% 0 0% Sub-Saharan Africa (17) 1 6% 6 35% 8 47% 1 6% 2 12% 0 0% 0 0% Euro area countries (1) 0 0% 0 0% 0 0% 0 0% 0 0% 1 100% 0 0% Other EU members (11) 0 0% 1 9% 1 9% 2 18% 0 0% 8 73% 0 0% Other developed countries (12) 0 0% 0 0% 4 33% 1 8% 2 17% 3 25% 2 17% By country population size >30 million (30) 4 13% 4 13% 7 23% 5 17% 2 7% 9 30% 2 7% >5 million, <30 million (34) 2 6% 6 18% 8 24% 4 12% 4 12% 9 26% 2 6% 5 million or less (30) 4 13% 4 13% 9 30% 3 10% 3 10% 9 30% 0 0% Pricing and Charges Table II.5 shows seven pricing options that try to accommodate the various alternatives observed in developed and developing countries when it comes to the RTGS operator applying charges for the services provided. Reading this table from left to right, the alternatives range from the operator making no charges at all to the operator seeking full recovery of all costs plus obtaining a profit. In only 10 out of 94 RTGS systems (or 11%) the operators apply no charges. The same figure in 2008 was 8, representing 8% of the total. Although the questionnaire did not include a similar question for cheque systems or other large-value systems operated by the central bank, the World Bank s PSDG has observed that charging for central bank payment and settlement services is much less common in cases where a RTGS system does not exist. In many such cases, a common explanation for that situation would be that due to

47 Global Survey tradition, commercial banks and other participants were used to having payment and settlement services for free. One possible interpretation of the results in Table II.5 is that the implementation of a RTGS system helped break this inertia, and gave central banks a chance to price their services and recover costs. Results concerning the objective of the pricing policy in relation to cost recovery vary widely. PSDG experience indicates that while some central banks/operators may emphasize cost recovery from a financial perspective, others are more interested in the social benefits stemming from the implementation of such a system, in particular the reduction of systemic risk. In the latter case, the recovery of operational and investment costs from a financial perspective is not a priority. The option with more responses was that of full recovery of both operational and investment costs: 27 cases or 29% of the total. Only 4 systems aim at obtaining a profit. More systems in higher income countries aim at full cost recovery, particularly in the European Union member countries, while 30% of RTGS operators in low income countries (40% in 2008) indicate their pricing policy does not have a particular relation to cost recovery. In the SSA region, for instance, 35% of RTGS operators (the highest percentage observed in the regional grouping) indicate their pricing policy falls in this last category. At the same time, none of the operators in the SSA region aims at recovering operational and investment costs in full. Interestingly, the percentage of systems aiming at full recovery of operational costs and partial recovery of investment has almost doubled since Contrary to the 2008 results, the population size does not seem to be related to the pricing policy adopted. In 2008, it was concluded that full cost recovery was more difficult to achieve in countries with a smaller number of transactions going through the RTGS, either because of the small size of the population or because of the developing nature of the economy. Whatever the conclusion on the country size is, it is interesting to see that central banks in smaller (5 million or less) or low income countries continue to embrace RTGS systems, with the 77% and 60% respectively (see Table II.1). Of the 54 countries 32 that answered positively to one of the three last columns to the right in Table II.5 (i.e. partial to full recovery of investment costs), 45 provided additional information on the number of years in which such costs are expected to be recovered. On average, the recovery period is 6 years, with a maximum of 30 years in the case of Chile and a minimum of 1 year in the case of Serbia. The same results were observed in The median value was 5 years. Additionally, of the countries that also aim at obtaining a profit, Serbia and Switzerland indicated 2 years, Moldova 4 years, Malaysia and Indonesia 6 years each, and Kyrgyz Republic more than 7 years to start generating profit. Individual country responses are available in the Appendix. Liquidity With regard to liquidity in RTGS systems, operators were asked to indicate the main source(s) of transferable funds in their systems. Results are summarized in Table II.6. With very few exceptions (7 out of 94), opening balances and funds received from other participants during the day can be used as a source of liquidity for executing payments. In 80 out of 94 systems, participants can mobilize their reserve requirements either fully or partially during the operating day as an important source of liquidity. Central banks/operators that allow RTGS participants 32 Euro area countries individually considered. Detailed responses can be found in the Appendix. Section II. Large-Value Payment Systems

48 24 PAYMENT SYSTEMS WORLDWIDE TABLE II.6: SOURCES OF LIQUIDITY IN RTGS SYSTEMS Opening balances and funds received from other participants during the day Participants can use part of their reserve requirements Participants can use all their reserve requirements balance Lines of credit between banks The RTGS operator allows collateralized current account overdrafts The RTGS operator grants collateralized credit, either in the form of a loan or a repo The RTGS operator allows uncollateralized credit RTGS systems # % # % # % # % # % # % # % Worldwide total (94) 87 93% 31 33% 49 52% 44 47% 21 22% 71 76% 3 3% By country income level High income (28) 26 93% 5 18% 13 46% 10 36% 12 43% 21 75% 1 4% Upper-middle income (31) 27 87% 10 32% 17 55% 15 48% 6 19% 26 84% 2 6% Lower-middle income (25) 24 96% 11 44% 14 56% 12 48% 2 8% 17 68% 0 0% Low income (10) % 5 50% 5 50% 7 70% 1 10% 7 70% 0 0% By region East Asia and Pacific (7) 6 86% 4 57% 4 57% 3 43% 1 14% 6 86% 0 0% Europe and Central Asia (15) % 8 53% 8 53% 7 47% 3 20% 10 67% 0 0% Latin America & Caribbean (17) 15 88% 4 24% 9 53% 7 41% 3 18% 14 82% 1 6% Middle East & North Africa (11) 9 82% 3 27% 3 27% 6 55% 3 27% 8 73% 1 9% South Asia (3) 3 100% 2 67% 3 100% 1 33% 0 0% 3 100% 0 0% Sub-Saharan Africa (17) 16 94% 8 47% 8 47% 11 65% 2 12% 13 76% 0 0% Euro area countries (1) 1 100% 0 0% 1 100% 0 0% 0 0% 1 100% 0 0% Other EU members (11) 10 91% 0 0% 7 64% 3 27% 3 27% 9 82% 0 0% Other developed countries (12) % 2 17% 6 50% 6 50% 6 50% 7 58% 1 8% By country population size >30 million (30) 29 97% 8 27% 18 60% 16 53% 9 30% 22 73% 2 7% >5 million, <30 million (34) 31 91% 11 32% 16 47% 19 56% 7 21% 26 76% 1 3% 5 million or less (30) 27 90% 12 40% 15 50% 9 30% 5 17% 23 77% 0 0% to use reserve requirements in full are a majority: 49 compared to 31 that allow participants to use only a portion of their reserve requirements. From a regional perspective, flexibility in the use of required reserves is lowest in MNA countries: in only about one-half of the systems participants can use their reserve requirements either partially or fully to execute payments during the day in the RTGS system. In general, low income countries, especially throughout the SSA region, tend to rely more on lines of credit between banks as a source of liquidity in the RTGS system, although according to survey data this liquidity source is also commonly used 50% or more of the systems in MNA and ODCs. Where credit facilities are provided by the RTGS operator as a means to enhance system liquidity, one

49 Global Survey TABLE II.7A: OPERATOR S MANAGEMENT OF ITS CREDIT RISK EXPOSURE Suitable collateral required in all cases Collateral required in all cases, but quality not always suitable Account overdrafts and/ or credit is limited, but no collateral required No limits or collateral requirements for overdrafts/credit RTGS systems where credit is granted by operator # % # % # % # % Worldwide total (86) 77 90% 6 7% 1 1% 2 2% By country income level High income (28) 25 89% 1 4% 1 4% 0 0% Upper-middle income (29) 26 62% 2 10% 0 0% 1 3% Lower-middle income (20) 18 90% 3 15% 0 0% 1 5% Low income (9) 8 89% 0 0% 0 0% 0 0% By region East Asia and Pacific (7) 6 86% 1 14% 0 0% 1 14% Europe and Central Asia (12) % 1 8% 0 0% 1 8% Latin America & Caribbean (14) 13 93% 0 0% 0 0% 0 0% Middle East & North Africa (10) 8 80% 2 20% 0 0% 0 0% South Asia (3) 2 67% 1 33% 0 0% 0 0% Sub-Saharan Africa (16) 14 88% 0 0% 0 0% 0 0% Euro area (1) 1 100% 0 0% 0 0% 0 0% Other EU members (11) % 0 0% 0 0% 0 0% Other developed countries (12) 10 83% 1 8% 1 8% 0 0% By country population size >30 million (26) 22 85% 4 15% 1 4% 0 0% >5 million, <30 million (32) 30 94% 2 6% 0 0% 0 0% 5 million or less (28) 25 89% 0 0% 0 0% 2 7% would expect such credit facilities to exist in RTGS systems that experience a relatively high daily turnover ratio (i.e. total value of payments processed/average required reserves). According to PSDG experience, in many developing countries this ratio is clearly less than 1 (i.e. average required reserves are more than enough to cover the average daily payments needs of participants). Yet, as shown in Table II.6, many of these countries report that credit facilities are available. Indeed, at a global level, the vast majority of RTGS systems rely on the central bank providing some form of credit, either in the form of a loan or repo (76%), or collateralized account overdrafts (22%). 33 As a group, ODCs 33 The third and fourth columns to the right in Table II.6 do not necessarily exclude each other: several central banks indicated they provide credit both through loans/repos, and through account overdrafts. Section II. Large-Value Payment Systems

50 26 PAYMENT SYSTEMS WORLDWIDE are outliers for this particular issue, with the highest percentage (50%) of cases where collateralized current account overdrafts are used, and the lowest (58%) for liquidity being provided through a loan or repo. ticipant, the system operator typically applies penalty rates (in more than half of the respondents). In only 18 systems, the participant is charged the market overnight rate. Central banks were also asked whether the RTGS operator allows uncollateralized credit: only 3 central banks answered positively, one of which is in LAC, one in MNA and one is ODC. From a regional perspective and excluding the case of TARGET2, transforming intraday loans into overnight loans at penalty rates is more common in ODCs, followed by the MNA and SA regions. Further details on the features of credit facilities provided by RTGS operators are analyzed in Tables II.7A and II.7B. These two tables contain information only for the 86 RTGS systems in which the operator grants some form of credit. Results in Table II.7A are quite straightforward: in all but 9 RTGS systems where participants have access to credit facilities, the operator demands high quality collateral to minimize its own credit exposure. According to survey data, there are only two systems in which the central banks grant unlimited credit and do not require any collateral from the participants to protect themselves from credit exposures. Table II.7B refers to issues related to how the operator handles those intraday loans/repos/overdrafts that are not repaid by the end of the day. If a participant in a RTGS system is unable to repay the intraday credit or overdraft by the end of the systems operating day, the system operator can seize the collateral (if such collateral is required by the rules of the system) immediately thereafter. Such approach aims at containing counterparty risk of the provider of intraday liquidity (typically the central bank) and is reportedly used in 10 systems. In most cases, however, intraday credit can be converted into overnight credit (in 65 systems). 34 To penalize the defaulting par- 34 The sum of the second and third column of table II.7b is 67. However, two systems have indicated both options. In some countries, more than one option or a combination of options is applied: the approach varies depending on the frequency of such failure, or of the participant s preference. For example, both market and penalty rates can apply, and in one system the participant can choose between immediate seizing of collateral and borrowing funds overnight at penalty rate. Among systems that reported other options (13), 6 central banks indicated that the intraday credit is transformed into overnight in the form of central bank standing facilities and the respective standing facilities overnight rates, or other interest rates set by the central bank in implementing its monetary policy, are applied. If a participant does not have access to the central bank lending facility and is unable to reimburse the intraday credit at the end of the day, it is subject to penalties. The penalty rate may be increased if the same participant defaults more than once within a specific period of time. One central bank reported that in the rare case where intraday liquidity may be needed this is effectively provided on an overnight basis. Some operators apply transaction cancellation charges in addition to seizing the collateral (one case). When asked what mechanism becomes applicable if a participant does not have enough balance (or credit) in its current account with the RTGS operator to process new payments, 85% of central banks responded that the payment order would go into a queue for later processing. In these cases, liquidity optimization algo-

51 Global Survey TABLE II.7B: NON-REPAYMENT OF INTRADAY LIQUIDITY AT THE END OF OPERATIONAL DAY Operator seizes the collateral immediately thereafter Operator transforms the intraday credit into overnight at market rates Operator transforms the intraday credit into overnight at penalty rates Other RTGS systems where credit is granted by operator # % # % # % # % Worldwide total (86) 10 12% 18 21% 49 57% 13 15% By country income level High income (28) 4 14% 4 18% 19 68% 3 11% Upper-middle income (29) 2 7% 8 28% 14 48% 8 28% Lower-middle income (20) 2 10% 4 20% 10 50% 2 10% Low income (9) 2 22% 1 11% 6 67% 0 0% By region East Asia and Pacific (7) 0 0% 2 29% 3 43% 2 29% Europe and Central Asia (12) 0 0% 3 25% 4 33% 4 33% Latin America & Caribbean (14) 3 21% 2 14% 9 64% 3 21% Middle East & North Africa (10) 0 0% 2 20% 8 80% 0 0% South Asia (3) 1 33% 0 0% 2 67% 0 0% Sub-Saharan Africa (16) 2 13% 5 31% 8 50% 1 6% Euro area (1) 0 0% 0 0% 1 100% 1 100% Other EU members (11) 4 36% 4 36% 3 27% 1 9% Other developed countries (12) 0 0% 0 0% 11 92% 1 8% By country population size >30 million (26) 3 12% 2 8% 22 85% 1 4% >5 million, <30 million (32) 4 13% 7 22% 17 53% 6 19% 5 million or less (28) 3 11% 9 32% 10 36% 6 21% rithms can be used once or more times a day in order to settle as many transactions as possible with the limited amount of intraday funds. The payment order is rejected immediately in 23% of the cases: this is more prevalent in low income countries and SSA region. 35 In some systems various types of payments can be processed in different ways. For example, for certain types 35 Detailed information and countries answers are available in the Appendix. of payments such as net clearing positions originating from other systems, central bank credit facilities may be available automatically or upon request. In some systems, participants can choose whether to initiate a payment for immediate processing and subject to rejection by the system if funds are not available, or to send the payment to a central queue. In most of those cases, payments placed in the queue can be settled Section II. Large-Value Payment Systems

52 28 PAYMENT SYSTEMS WORLDWIDE TABLE II.8A: QUEUING ARRANGEMENTS, PRIORITIZATION, PRICING POLICY A centralized queuing facility is in place in the RTGS system Participants can set priorities to their payment orders Participants can change priorities to their payment orders while these are waiting in the queue Pricing policy is used to incentivize a smooth flow of payment throughout the day RTGS systems # % # % # % # % Worldwide total (94) 83 88% 70 74% 64 68% 33 35% By country income level High income (28) 27 96% 21 75% 18 64% 6 21% Upper-middle income (31) 26 84% 24 77% 23 74% 13 42% Lower-middle income (25) 22 88% 18 72% 16 64% 6 24% Low income (10) 8 80% 7 70% 7 70% 8 80% By region East Asia and Pacific (7) 7 100% 7 100% 7 100% 1 14% Europe and Central Asia (15) 14 93% 13 87% 13 87% 7 47% Latin America & Caribbean (17) 13 76% 7 41% 6 35% 7 41% Middle East & North Africa (11) 10 91% 9 82% 7 64% 1 9% South Asia (3) 3 100% 3 100% 3 100% 0 0% Sub-Saharan Africa (17) 13 76% 11 65% 11 65% 11 65% Euro area countries (1) 1 100% 1 100% 1 100% 0 0% Other EU members (11) % % 9 82% 2 18% Other developed countries (12) 11 92% 8 67% 7 58% 4 33% By country population size >30 million (30) 26 87% 24 80% 22 73% 11 37% >5 million, <30 million (34) 31 91% 26 76% 23 68% 14 41% 5 million or less (30) 26 87% 20 67% 19 63% 8 27% through liquidity optimization algorithms. Typically, all transactions that remain unsettled by the end of the day are rejected. One central bank that applies limits on the intraday credit reported that overdrafts are generally monitored ex-post, allowing the payment to go through. In this particular system, in limited circumstances a participant s intraday position may be monitored in real time and any payment order that would result in a breach of that cap would be rejected. Queuing Facilities and other Liquidity Management Tools The tables in this sub-section show some of the tools that RTGS operators may include as part of system design and/or system operation in order to facilitate a smoother flow of payments in the system throughout the operational day.

53 Global Survey TABLE II.8B: FEATURES OF QUEUING RESOLUTION MECHANISMS IN RTGS SYSTEMS A FIFO resolution algorithm is used Bilateral offsetting used as resolution algorithm Multilateral offsetting used as resolution algorithm Both bilateral & multilateral offsetting are used Offsetting triggered automatically every certain period of time Offsetting triggered automatically by non-timeparameters Offsetting can be triggered manually by the operator RTGS systems with centralized queuing facilities # % # % # % # % # % # % # % Worldwide Total (83) 74 89% 3 4% 28 34% 21 25% 33 40% 12 14% 44 53% By country income level High income (27) 22 81% 2 7% 8 30% 11 41% 13 48% 8 30% 14 52% Upper-middle income (26) 23 88% 0 0% 10 38% 4 15% 12 46% 2 8% 13 50% Lower-middle income (22) % 1 5% 7 32% 5 23% 5 23% 1 5% 11 50% Low income (8) 7 88% 0 0% 3 38% 1 13% 3 38% 1 13% 6 75% By region East Asia and Pacific (7) 6 86% 0 0% 0 0% 1 14% 3 43% 1 14% 3 43% Europe and Central Asia (14) % 0 0% 6 43% 2 14% 4 29% 0 0% 6 43% Latin America & Caribbean (13) 12 92% 0 0% 4 31% 0 0% 6 46% 1 8% 6 46% Middle East & North Africa(10) 8 80% 0 0% 7 70% 3 30% 2 20% 2 20% 6 60% South Asia (3) 3 100% 0 0% 2 67% 0 0% 0 0% 0 0% 3 100% Sub-Saharan Africa (13) 12 92% 1 8% 4 31% 3 23% 3 23% 1 8% 7 54% Euro area (1) 1 100% 0 0% 0 0% 1 100% 1 100% 1 100% 1 100% Other EU members (11) 8 73% 0 0% 4 36% 4 36% 5 45% 1 9% 8 73% Other developed countries (11) 10 91% 2 18% 1 9% 7 63% 9 82% 5 45% 4 36% By country population size >30 million (26) 23 88% 0 0% 9 35% 9 35% 11 42% 7 27% 14 54% >5 million, <30 million (31) 27 87% 2 6% 13 42% 4 13% 13 42% 2 6% 18 58% 5 million or less (26) 24 92% 1 4% 6 23% 98 31% 9 35% 3 12% 12 46% Centralized queuing facilities are the most common liquidity management tool, with 83 of 94 systems (or 88%) allowing payment orders to wait in a queue until all the required conditions for the processing of such payment orders are met. As observed in the 2008 survey, centralized queuing exists in all types of countries. According to survey information, RTGS systems that do not have this facility are those of Argentina, Armenia, Bolivia, Costa Rica, Namibia, South Africa, Uganda, United States, Venezuela R. B., West Bank and Gaza, and Zimbabwe. 36 Queuing mechanisms are discussed in more detail below (see Table II.8B). Another common tool for liquidity management generally embedded in the RTGS system is the ability for participants to set priorities for the processing of their payment orders. Priority setting is used in many RTGS 36 Queuing arrangements in Zimbabwe have been suspended since the introduction of the multicurrency system in Section II. Large-Value Payment Systems

54 30 PAYMENT SYSTEMS WORLDWIDE systems around the world (74%). Moreover, in 64 out of 70 cases in which priority setting is available, participants are able to change the priorities for payments already sent but which are waiting in the central queue to be processed by the system. While priority setting is now a standard feature in offthe-shelf RTGS systems, PSDG experience shows this is not necessarily the case for some systems developed in-house, especially those that were developed some 10 years ago or more. This might explain why priority setting is less common in countries in the LAC region and ODCs. 37 The use of the pricing policy by RTGS operators to promote a smooth flow of payment throughout the day (i.e. using differentiated charges according to the time of the day in which payment orders are sent to the system for processing, with lower charges applying to those payments sent during RTGS off-peak hours usually early in the morning) is less common at a worldwide level, with only slightly more than a third of RTGS operators relying on this tool. Nevertheless, PSDG experience in developing economies over the last few years shows that the number of central banks/ operators that have adopted this practice is growing. Table II.8B contains further information on the specific features of centralized queuing mechanisms used in RTGS systems. At the outset, it should be noted that many RTGS system operators use a combination of the alternatives stated in each of the columns of this table. Moreover, Table II.8B does not allow drawing conclusions on what specific combination(s) are more commonly used. Readers interested in this last issue can refer to individual country answers in the Appendix for this purpose. 37 Implementation dates for individual RTGS systems are presented in the Appendix. The basic FIFO (first-in, first-out) queuing resolution mechanism is present in most queuing facilities (89%). In the previous survey it had been noted that offsetting of payment orders waiting in a queue had become increasingly popular. The current survey shows that it is currently used in approximately half of all RTGS systems with queuing facilities. Within the various options for offsetting of payment orders, multilateral offsetting ranks at the top. Bilateral offsetting is only present in 2 ODCs and in 1 country from the SSA region, while using both bilateral and multilateral offsetting is only common in ODCs and in TARGET2. The survey also collected information on whether the offsetting is executed manually by the RTGS operator, or triggered automatically based on either time-related parameters (i.e. every certain period of time) or otherwise. 38 While survey data show that either alternative is not uncommon, more RTGS operators are still able to trigger the offsetting mechanism manually based on their monitoring of the system. The relevant percentage dropped from 61% in the 2008 survey to 53%, which is basically explained by euroarea countries now being counted as one. 39 Manual offsetting is more common in low income countries: 6 out of 8 systems or 75%. Automatic offsetting, on the other hand, is more common in higher income countries, especially in ODCs and in TARGET2. RTGS System Resilience and Business Continuity Ever-increasing attention is being paid to the topic of enhancing the resilience and ensuring proper business continuity of systems that are critical for the financial system. 40 In this area, the survey aimed to collect information on some of the key practices performed by 38 Caution should be exercised when analyzing these features. For example, while three out of three systems in the SA region can only trigger the offsetting mechanism manually, euro area countries can also trigger the offsetting mechanism manually (i.e. in the latter case offsetting is also triggered automatically). 39 In the 2008 survey 8 individual responses euro-area countries were counted in the total. 40 Some relevant papers and policy documents in this area include those issued by the Bank of England, the European Central Bank (ECB), and the Federal Reserve System of the United States. See for instance, Payment Systems Oversight Report and Financial Stability Report (Bank of England, various years), Payment Systems Business Continuity (ECB, 2006), and Business Continuity Oversight Expectations for Systemically Important Payment Systems (ECB, 2006), Payments System Risk (The Federal Reserve Board, 2007).

55 Global Survey TABLE II.9: RESILIENCE AND BUSINESS CONTINUITY Routine procedures are in place for periodical data back-ups Data storage media kept in sites other than the main processing site Back-up servers have been deployed at the main processing site A fully equipped alternate processing site exists Operator has documented formal Business Continuity Plan (BCP) BCP includes procedures for information dissemination and for crisis management Business continuity arrangements are regularly tested RTGS systems # % # % # % # % # % # % # % Worldwide total (94) 92 98% 83 88% 71 76% 79 84% 81 86% 79 84% 73 78% By country income level High income (28) % 27 96% 25 89% 23 82% 26 93% 25 89% 25 89% Upper-middle income (31) % 28 90% 24 77% 26 84% 26 84% 25 81% 23 74% Lower-middle income (25) 23 92% 20 80% 15 60% 21 84% 21 84% 20 80% 17 68% Low income (10) % 8 80% 7 70% 9 90% 8 80% 9 90% 8 80% By region East Asia and Pacific (7) 7 100% 5 71% 5 71% 7 100% 7 100% 7 100% 6 86% Europe and Central Asia (15) % 11 73% 8 53% 11 73% 12 80% 11 73% 11 73% Latin America & Caribbean (17) 16 94% 15 88% 14 82% 13 76% 13 76% 12 71% 11 65% Middle East & North Africa (11) % 10 91% 7 64% 9 82% 8 73% 8 73% 8 73% South Asia (3) 3 100% 3 100% 3 100% 3 100% 3 100% 3 100% 3 100% Sub-Saharan Africa (17) 16 94% 15 88% 13 76% 14 82% 14 82% 15 88% 10 59% Euro area countries (1) 1 100% 1 100% 1 100% 1 100% 1 100% 1 100% 1 100% Other EU members (11) % % 9 82% 9 82% % % % Other developed countries (12) % % 11 92% % % 11 92% % Bycountry population size >30 million (30) 29 97% 27 90% 24 80% 29 97% 29 97% % 29 97% >5 million, <30 million (34) 33 97% 30 88% 27 79% 30 88% 30 88% 29 85% 28 82% 5 million or less (30) % 26 87% 20 67% 20 67% 22 73% 20 67% 16 53% central banks that operate RTGS systems. In Table II.9, these practices are organized, from left to right, beginning with those that are more basic to the more sophisticated ones. In general, the outcomes are quite positive, showing high percentages for all of the selected practices. Indeed, once the effect of the euro area being counted as only 1 system is accounted for, the 2010 survey shows significantly stronger resilience and business continuity practices. Especially noteworthy are the cases of the European Union (both euro and non-euro areas), ODCs, and the SA region. Significant improvements are also evident in the ECA, LAC and MNA regions. Section II. Large-Value Payment Systems

56 32 PAYMENT SYSTEMS WORLDWIDE TABLE II.10A: RTGS SYSTEM ACCESS RULES AND POLICIES There is an explicit access/exclusion policy for the system Access is granted on the basis of institutional standing Access is granted on the basis of the fulfillment of a set of objective criteria Formal rules exist to allow operator to exclude a participant timely RTGS systems # % # % # % # % Worldwide total (94) 88 94% 76 81% 59 63% 79 84% By country income level High income (28) 25 89% 25 89% 16 57% 26 93% Upper-middle income (31) 30 97% 24 77% 20 65% 26 84% Lower-middle income (25) 23 92% 19 76% 16 64% 18 72% Low income (10) % 8 80% 7 70% 9 90% By region East Asia and Pacific (7) 7 100% 6 86% 4 57% 7 100% Europe and Central Asia (15) 13 87% 11 73% 6 40% 11 73% Latin America & Caribbean (17) 16 94% 14 82% 11 65% 12 71% Middle East & North Africa (11) % 8 73% 8 73% 10 91% South Asia (3) 3 100% 2 67% 2 67% 2 67% Sub-Saharan Africa (17) 16 94% 13 76% 13 76% 15 88% Euro area countries (1) 1 100% 1 100% 0 0% 1 100% Other EU members (11) 9 82% % 7 64% % Other developed countries (12) % 10 83% 8 67% 10 83% By country population size >30 million (30) % 23 77% 21 70% 28 93% >5 million, <30 million (34) 32 94% 27 79% 23 68% 27 79% 5 million or less (30) 26 87% 26 87% 15 50% 24 80% A total of 79 operators (84%) report they have implemented a fully-equipped alternate processing site for the RTGS system. Such alternate sites are more common in large countries (97% versus only 67% in small countries), reflecting, probably, the availability of larger financial and human resources. No significant differences are evident when this issue is viewed from the country-income perspective. Eighty-six percent of RTGS system operators inform they have already documented a formal business continuity plan (BCP), and that in the majority of cases where such a BCP exists (73 out of 94), it is tested on a regular basis. These practices are more common throughout the EU, ODCs, and the EAP and SA regions. On the other hand, while numbers are still relatively high, the SSA, ECA, LAC and MNA regions lag behind in this particular area.

57 Global Survey TABLE II.10B: PARTICIPANTS IN THE RTGS SYSTEM All commercial banks have direct access to the RTGS All commercial banks have direct access to Central Bank credit Banks (other than commercial banks) have direct access to the RTGS Banks (other than commercial banks) have direct access to Central Bank credit Non-bank institutions have direct access to the RTGS Non-bank institutions have direct access to Central Bank credit RTGS systems # % # % # % # % # % # % Worldwide total (94) 88 94% 68 72% 51 54% 34 36% 60 64% 24 26% By country income level High income (28) 24 86% 22 79% 18 64% 12 43% 22 79% 10 36% Upper-middle income (31) % 23 74% 18 58% 13 42% 19 61% 7 23% Lower-middle income (25) 24 96% 17 68% 10 40% 6 24% 16 64% 5 20% Low income (10) 9 90% 6 60% 5 50% 3 30% 3 30% 2 20% By region East Asia and Pacific (7) 7 100% 5 71% 4 57% 4 57% 5 71% 2 29% Europe and Central Asia (15) % 8 53% 5 33% 1 7% 11 73% 1 7% Latin America & Caribbean (17) % 13 76% 13 76% 10 59% 13 76% 5 29% Middle East & North Africa (11) 10 91% 7 64% 6 55% 3 27% 5 45% 1 9% South Asia (3) 3 100% 3 100% 2 67% 1 33% 3 100% 2 67% Sub-Saharan Africa (17) 16 94% 13 76% 7 41% 4 24% 3 18% 3 18% Euro area countries (1) 1 100% 1 100% 1 100% 1 100% 1 100% 1 100% Other EU members (11) 10 91% 9 82% 5 45% 3 27% 7 64% 1 9% Other developed countries (12) 9 75% 9 75% 8 67% 7 58% % 8 67% By country population size >30 million (30) 27 90% 21 70% 22 73% 16 53% 22 73% 9 30% >5 million, <30 million (34) 33 97% 26 76% 19 56% 14 41% 22 65% 11 32% 5 million or less (30) 28 93% 21 70% 10 33% 4 13% 16 53% 4 13% Finally, RTGS system operators were asked to provide a target time for recovery of the system in case of failure. A total of 79 responses were received for this particular question. On average, the recovery period is 104 minutes, with a maximum of 240 minutes, and a minimum of 5 minutes (mainly those cases that refer to system recovery in the primary site). The median value is 120 minutes. Individual country answers to this last question are presented in the Appendix. Participation in the RTGS System In this area, the survey aimed at obtaining information on two main issues: i) what are the rules that govern access to the RTGS systems, and ii) what broad types of participants are allowed direct access to the system. Survey outcomes for the first issue are reflected in Table II.10A. 94% of all RTGS system operators indicate there is an explicit policy statement that deals with granting direct access to, and excluding partici- Section II. Large-Value Payment Systems

58 34 PAYMENT SYSTEMS WORLDWIDE pants from, the system upon the fulfillment of a certain set of criteria. The same figure in the previous survey was 85% which, based on PSDG experience, was judged unexpectedly high, leading to warning against different interpretations central banks may give to the concept of explicit. This same disclaimer is still valid in the current iteration. In the majority of cases (81%), direct access to the RTGS system depends on the institutional standing of participants, i.e. whether participants are banks or other types of financial or even non-financial institutions. A total of 59 RTGS system operators (63%) indicate direct access is also related to the fulfillment of a set of objective criteria (e.g. minimum capital or technological requirements). It is worth noting that this number had a relevant increase from the last survey which, excluding euro-area countries totaled 47 positive responses to this item (54%). Out of the 59 central banks that grant access on the basis of objective criteria, 49 also indicated the other option (i.e. direct access being based on institutional standing). The issue of the RTGS operator having formal rules that allow it to exclude a participant from the system in a timely fashion seems to be increasingly relevant as well. In the current survey, 79 operators or 84% answered positively to this question while the equivalent figure for the 2008 survey was 67 (excluding euro-area countries). Table II.10B focuses on direct access to RTGS systems by banks and non-banks as well as direct access to central bank credit. It should be noted that the 2008 survey implicitly assumed that commercial banks always had access to RTGS systems and to central bank credit, wherever such credit existed. Therefore, in that regard the particular question reflected in Table II.10B focused on non-banking institutions only. The 2010 survey requested information for commercial banks and other institutions alike. All commercial banks have direct access to the RTGS systems in all but 6 systems worldwide. Such systems are located in ODCs (3), MNA (1), SSA (1), and other EU members (1). Sixty responses indicated that the RTGS operator also grants direct access to non-banks, while only 51 systems can be accessed directly by banks other than commercial banks (e.g. investment banks). Direct access by non-banks is significantly more limited in low income countries. Direct access by both non-banks and banks other than commercial banks is relatively more restricted in the SSA and MNA regions, and in smaller countries. In the latter case, one possible explanation is that smaller countries usually have a less diversified financial system, therefore relying more heavily on commercial banks. Access to central bank credit is granted to commercial banks by 72% of the systems, to banks other than commercial by 36% of the systems, and to non-banks by 26% of the systems. Interestingly, notwithstanding a higher number of systems granting access to non-banks compared to banks other than commercial banks, access to central bank credit is more limited for non-banks than for banks other than commercial banks. In line with what was observed in the previous survey, the number of systems granting credit to entities other than commercial banks is especially low in the ECA, SSA and MNA regions, and in non-euro EU members. The survey also asked for the types of non-banks having direct access to the RTGS system. In most cases these are payments clearinghouses, card processing companies, stock exchanges, securities depositories, government agencies, and other similar entities. RTGS System Governance Most of the aspects that affect the governance of a payments system are heavily dependent on interpretations and require a thorough knowledge of the system

59 Global Survey TABLE II.11: MAIN FEATURES OF SPECIAL PROCEDURES FOR LARGE-VALUE CHEQUES As part of this procedure, large-value cheques can be settled with same-day value As part of this procedure, large-value cheques are processed on a gross basis As part of this procedure, net balances are calculated and settled more than once a day Guarantee fund for cheques processed under the special procedure (on a net basis) is in place Central banks with special procedures for large-value cheques # % # % # % # % Worldwide total (24) 18 75% 10 42% 2 8% 2 8% By income High income (10) 8 80% 4 40% 1 10% 0 0% Upper-middle income (2) 1 50% 1 50% 0 0% 0 0% Lower-middle income (9) 6 67% 4 44% 0 0% 1 11% Low income (3) 3 100% 1 33% 1 33% 1 33% By region East Asia and Pacific (3) 3 100% 1 33% 0 0% 0 0% Europe and Central Asia (0) nap nap nap nap nap nap nap nap Latin America & Caribbean (4) 2 50% 2 50% 0 0% 0 0% Middle East & North Africa (3) 2 67% 1 33% 1 33% 1 33% South Asia (1) 1 100% 0 0% 0 0% 0 0% Sub-Saharan Africa (5) 4 80% 2 40% 1 20% 1 20% Euro area countries (6) 4 67% 3 50% 0 0% 0 0% Other EU members (0) nap nap nap nap nap nap nap nap Other developed countries (2) 2 100% 1 50% 0 0% 0 0% By population size >30 million (5) 2 40% 4 80% 0 0% 1 20% >5 million, <30 million (9) 6 67% 4 44% 1 11% 1 11% 5 million or less (10) % 2 20% 1 10% 0 0% and the related institutional and regulatory settings. Modeling these types of variables in a questionnaire of the sort that was used for this survey is a difficult task. Hence, in this area, the questionnaire focused on gathering information on the existence of so-called RTGS Users Groups. 41 A total of 77 countries (16 more than in the previous survey) indicated that such a group has been created for the RTGS operator to better address participant needs. 41 The typical core objective of a RTGS Users Group is to promote a more active involvement and empowerment of participants in the decision-making framework of the system in order to better address the needs of the financial market on an on-going basis. Section II. Large-Value Payment Systems

60 36 PAYMENT SYSTEMS WORLDWIDE RTGS Users Groups are quite common in all country income groups, ranging from 80% of high income countries to 60% of lower-middle income countries. Central banks in the euro area and SSA and EAP regions seem to have found more usefulness in having such groups. in 75% of all cases. The equivalent figure for the 2008 survey was 81%. Processing large-value cheques on a gross basis rather than on a net basis is observed in 42% of the cases. Two central banks reported the objective is to have cheques cleared and settled more than once in one day. II.2.2 Special Procedures for Large-Value Cheques Earlier in this section it was discussed that in 35 countries throughout the world some or all large-value payments are channeled through cheque clearinghouses (see Table II.1). While cheque systems will be analyzed in detail in section III of this study, the survey included one question on the special procedures that central banks may use for the clearance and settlement of large value cheques in what is usually an attempt to by-pass the limitations of cheque systems as safe and efficient means to settle payments discussed earlier. It has therefore been deemed convenient to discuss this specific sub-set of cheque systems in the current section of large-value systems. A total of 24 central banks replied that they have instituted a special procedure for the clearance and settlement of large-value cheques. Special procedures for large-value cheques seem to be especially relevant in those high income and lower-middle income countries that use cheques for large-value payments. Some of the objectives that are typically sought for through the implementation of this type of arrangements are depicted in Table II.11, which contains information exclusively for the 24 central banks that reported they have instituted the mentioned procedures for large-value cheques. Achieving same-day settlement is clearly the main objective of special procedures for large-value cheques, II.2.3 Non-RTGS Large-Value Payment Systems Based on Table II.1, some or all large-value payments in 18 countries worldwide are channeled through other systems. The 2010 survey included four new questions on non-rtgs large-value payment systems. The following paragraphs analyze the responses provided by 18 central banks on non-rtgs large-value payment systems. The regional distribution of the 18 central banks which provided information on non-rtgs large-value systems varies widely, as do the corresponding country income levels and country population size. The only regional groups not represented in this group of 18 central banks are ECA region and other EU members. In half of the non-rtgs large-value systems for which information was provided, settlement of payments is executed on a gross basis but not in real time; another half settle payments on a net basis at the end of the day. In 33% of these latter cases there are multiple clearing sessions during the day. No specific regional or income-related trend is observed. The vast majority of these systems (89%) settle through accounts held at the central bank. Settlement through the RTGS system was reported for only 11% of the cases or 2 systems, one in the euro area and one in the LAC region. Three other non-rtgs large-value payment systems have opted for settlement in commercial bank money.

61 Global Survey The survey also asked respondents to indicate the primary means through which participants in these systems send their payment orders for processing. As highlighted in the analysis of communication channels for the RTGS systems, some countries indicated more than one option. From answers to this question, no clear preference is noticeable: more than a third of the central banks have opted for SWIFT international network, while another third operate a proprietary network. Other paper-based procedures are more common in SSA and low income countries. Credit facilities of such systems were also investigated. In about 40 % of the cases, the system operator extends some form of credit. In case a participant does not have enough balance to process new payments, 83% of central banks indicate that the payment order is delayed until funds are available. Finally, central banks were asked to indicate which dependencies are applicable to non-rtgs large-value payment systems. Network availability (56%) is the most selected dependency, followed by electricity (44%), and central bank liquidity (39%). The latter appears to be more common in high income (ODCs) and low income countries. Section II. Large-Value Payment Systems

62

63 SECTION III RETAIL PAYMENT INSTRUMENTS AND SYSTEMS III.1 BACKGROUND The existence of a wide range of payment instruments is essential to support customers needs in a market economy. A less than optimal use of payment instruments may ultimately have a negative impact on economic development and growth. Moreover, the safe and efficient use of money as a medium of exchange in retail transactions is particularly important for the stability of the currency and a foundation of the trust people have in it. The use of retail payment instruments differs among countries due to a variety of factors, including cultural, historical, economic, and legal reasons. However, the supply of different payment instruments to customers depends, to a significant extent, on the levels of financial inclusion, the existence of certain infrastructure like centralized automated customer account management systems core banking systems, and the development at the interbank level of specific circuits and systems for the exchange of relevant information and for the settlement of payment transactions. Thus, efforts to significantly and successfully expand the range of available payment instruments rely on the existence of efficient, convenient and safe payment systems and circuits. Indeed, the existence of efficient, secure and reliable payment systems to process these payment instruments reduces the cost of exchanging goods and services. Setting up such circuits does not just require efforts to improve technology and networks; it implies also that banks and payment service providers, who are competitors in the end-user market, agree on the features of a shared infrastructure and on basic common rules to exchange and settle the payment transactions, thus overcoming possible coordination problems. Cooperation problems may be especially important when considering interbank clearing and settlement systems. Most recently, the emergence of new types of non-bank intermediaries acting as payment service providers has strengthened the need for a comprehensive level of cooperation in the payments system. In recognition of the importance of such issues, and to help countries design and implement holistic and coherent reforms, the World Bank s PSDG has developed guidelines for a comprehensive retail payments strategy to be discussed in an upcoming publication (details are in Box 3 below). 39

64 40 PAYMENT SYSTEMS WORLDWIDE BOX 3: WORLD BANK GUIDELINES FOR DEVELOPING A COMPREHENSIVE RETAIL PAYMENTS STRATEGY Efficient retail payments systems have a significant positive impact on the broader economy. There are a number of public policy objectives that need to guide the policies and actions of national authorities in countries with under-developed retail payments systems, the key public policy objectives being: (i) Safety and efficiency; (ii) Affordability and ease of access to payment instruments and services; (iii) Availability of an efficient infrastructure to process electronic payment instruments; and, iv) Availability of a socially optimal mix of payment instruments. These public policy goals should guide the actions of the public authorities, specifically the central bank, to positively impact the drivers of retail payments system development. In this regard, the following six guidelines can be used by the central bank to develop its national retail payments development agenda: Guideline I: The market for retail payments should be transparent, have adequate protection of payers and payees interests and be cost-effective. Guideline II: Retail payments require a reliable underlying financial, communications and other types of infrastructure; these infrastructures should be put in place to increase the efficiency of retail payments. These infrastructures include, at a minimum, interbank electronic funds transfer systems, interbank card payment platforms, credit bureaus, data sharing platforms, interbank real-time gross settlement systems, reliable communications infrastructure and also a national identification system for individuals. Guideline III: Retail payments should be supported by a sound, predictable, non-discriminatory and proportionate legal and regulatory framework. Guideline IV: Competitive market conditions should be fostered in the retail payments industry, with an appropriate balance between cooperation and competition to foster, among other things, the proper level of interoperability in the retail payment infrastructure. Guideline V: Retail payment systems and services should be supported by appropriate governance and risk management practices. Guideline VI: Public authorities should exercise effective oversight over the retail payments market and consider proactive interventions where appropriate. Implementing the retail payments system development agenda requires public authorities, in particular the central bank, to take an active role in coordinating and catalyzing action from all the stakeholders including not only retail payments industry but also the other corporate and government authorities. Creating a national retail payment systems development plan and entrusting its implementation to an energized National Payments Council (NPC) would ensure orderly and self-sustaining reforms. The key components of an effective plan would need to include: (i) stock-taking of current situation; (ii) establishment of internal organizational arrangements; (iii) development of a co-ordination framework to involve all stakeholders; (iv) development of a common vision, objectives and standards; (v) agreement on actions that need to be taken; (vi) development of an implementation plan; and, (vii) monitoring progress. Source: World Bank

65 Global Survey TABLE III.1: CASHLESS RETAIL PAYMENT TRANSACTIONS PER CAPITA (2009) Country Number Growth 2009 vs Country Number Growth 2009 vs Country Number Growth 2009 vs Albania 2.2 nav Hungary % Oman % Angola 2.4 nav India % Pakistan 2.0 7% Argentina % Indonesia % Peru % Armenia 2.2 nav Iran, Islamic Rep. of 22.7 nav Philippines 1.8 2% Australia % Iraq % Poland % Austria % Ireland % Portugal % Azerbaijan % Israel nav Romania % Bahamas, The % Italy % Russian Federation % BCEAO % Jamaica 28.4 nav Rwanda % Belgium % Japan 11.9 nav San Marino % Belize 5.1 nav Jordan 66.5 nav Saudi Arabia % Bolivia % Kazakhstan % Serbia 55.5 nav Botswana 6.3 nav Kenya neg 15% Seychelles 8.2 nav Brazil 94.5 nav Korea, Rep. of % Sierra Leone 0.1 nav Bulgaria % Kosovo % Singapore % Canada % Kuwait % Slovak Republic % Cayman Islands % Kyrgyz Republic % Slovenia % Chile % Latvia % South Africa 21.8 nav China % Lebanon % Spain % Colombia % Lesotho % Sri Lanka 3.4 7% Congo, Dem. Rep. of neg nav Libya neg nav Sudan % Costa Rica % Lithuania % Swaziland 5.2 nav Croatia % Luxembourg % Sweden % Cyprus % Macao (China) % Switzerland % Czech Republic % Macedonia FYR % Taiwan (China) % Denmark % Madagascar % Tanzania % Dominican Republic 21.3 nav Malawi % Thailand % Ecuador 3.2 nav Malaysia % Timor-Leste neg 55% Egypt, Arab Rep. of % Malta % Trinidad and Tobago % El Salvador 2.2 nav Mauritius 4.2 nav Turkey % Eritrea neg -10% Mexico % Uganda 0.9 nav Estonia % Moldova 7.5 nav United Arab Emirates 26.8 nav Ethiopia neg 123% Mongolia 0.3 nav United Kingdom % Finland % Montenegro % United States % France % Morocco % Uruguay % Georgia 7.5 nav Mozambique % Venezuela, R. B % Ghana % Nepal neg nav West Bank and Gaza 1.4 nav Greece % Netherlands % Yemen, Republic of % Guatemala 1.9 nav Nigeria % Zambia % Hong Kong (China) nav Norway % Zimbabwe 0.1 nav Notes: 1.This table includes information for all the countries that provided relevant data. Data may not include all payment instruments in use in the country. In particular, figures on credit cards are not available for Japan and Singapore. 2. Growth rates were calculated based solely on the information provided in the context of the 2010 survey. Section III. Retail Payment Instruments and Systems

66 42 PAYMENT SYSTEMS WORLDWIDE TABLE III.2: RELATIVE IMPORTANCE OF NON-CASH PAYMENT INSTRUMENTS (Based on Number of Transactions) Direct credits/credit transfers Direct debits Debit cards Credit cards Cheques Central banks # % # % # % # % # % Worldwide total (123) 31 25% 4 3% 42 34% 10 8% 34 28% By Income High income (45) 11 24% 2 4% 20 44% 5 11% 6 13% Upper-middle income (31) 10 32% 2 6% 9 29% 4 13% 6 19% Lower-middle income (30) 8 27% 0 0% 9 30% 1 3% 11 37% Low income (17) 2 12% 0 0% 4 24% 0 0% 11 65% By region East Asia and Pacific (8) 2 25% 0 0% 2 25% 2 25% 2 25% Europe and Central Asia (14) 7 50% 0 0% 1 7% 6 43% 0 0% Latin America & Caribbean (19) 3 16% 0 0% 2 11% 6 32% 8 42% Middle East & North Africa (13) 3 23% 1 8% 1 8% 4 31% 4 31% South Asia (4) 1 25% 0 0% 0 0% 1 25% 2 50% Sub-Saharan Africa (25) 1 4% 1 4% 0 0% 7 28% 15 60% Euro area (15) 7 47% 0 0% 2 13% 4 27% 2 13% Other EU members (11) 5 45% 0 0% 0 0% 6 55% 0 0% Other developed countries (14) 2 14% 2 14% 2 14% 6 43% 1 7% By population size >30 million (34) 8 24% 0 0% 13 38% 4 12% 9 26% >5 million, <30 million (47) 12 26% 2 4% 16 34% 4 9% 12 26% 5 million or less (42) 11 26% 2 5% 13 31% 2 5% 13 31% Note: This table is based on the 2009 number of cashless retail payments transactions, and reflects the number of countries that provided the necessary information. Each payment instrument has been ranked in terms of relative importance based on the number of transactions reported by each central bank, from 1 to 5 with 1 being the most important (highest number of transactions per instrument) and 5 being the least important (lowest number of transactions per instrument). This table shows the results for score 1, i.e. illustrates the number and percentage of countries worldwide in which each payment instrument is to be considered the most important based on the number of transactions. III.2 SURVEY OUTCOMES The tables in this section and related analysis report information on all countries that have responded to Part III: Retail Payment Systems of the Questionnaire for Collecting Information to Depict the Situation of Payment and Securities Settlement Systems Worldwide 2010, and on those systems for which information was provided. Table III.1 shows the number of cashless payment transactions per capita during 2009, together with growth rates for this variable for the period The number represents the sum of payment transactions made with cheques, direct credit transfers, direct debits, and payments with debit cards and credit cards. Payments made with e-money and prepaid and stored-

67 Global Survey value cards will be discussed in a separate upcoming publication. 42 The first observation that emerges when examining Table III.1 is that the extreme values observed in the 2008 survey when comparing developed countries with many developing ones persist. While in most euro-area countries and ODCs it is typical to see 100 or more cashless transactions per capita in a year, in many low income countries this number is still less than 1. transfers, credit cards, debit cards and cheques. On a worldwide basis, debit cards are the most used means of payment in 34% of countries, followed by cheques. An analysis by income level shows that cheques are the most used payment instrument in 65% of low income countries compared to only 13% in high income countries, 19% in upper-middle income countries, and 37% in lower-middle income countries. In geographical terms, cheque usage is substantial in SSA, SA and LAC regions. With very few exceptions, the number of cashless transactions per capita grew in 2009 when compared to Many low and lower-middle income countries have seen very high growth rates in cashless transactions per capita, though to a certain extent such high growth rates reflect a lower starting point or comparison base. Caution should be exercised when analyzing the data in Table III.1. Several countries did not provide information for all payment instruments, and in a few cases figures might be significantly altered by the lack of information on one or more payment instrument. A separate forthcoming publication will provide details on non-traditional retail payment products such as e-money, prepaid cards, and stored-value cards, among others (for preliminary key findings refer to Box 4). Moreover, while information on both interbank and intra-bank transactions was requested, some countries provided information only on interbank transactions. For detailed information on exceptions, readers are urged to refer to the statistical tables in the Appendix. The remainder of this section analyzes the availability of processing infrastructure and access channels, clearing and settlement arrangements for the most relevant payment instruments for retail transactions. Two new sub-sections have been added in the 2010 survey: i) central banks opinions on the cost of non-cash payment instruments and services for individuals; and, ii) basic information on retail payments made to/from governments. III.2.1 Cheques and Cheque Clearinghouses Countries reported the existence of a total of cheque clearinghouses serving 112 countries. 44 Countries without a cheque clearinghouse totaled 28, and are mainly concentrated in Eastern Europe (Bosnia and Herzegovina, Bulgaria, Croatia, Hungary, Czech Republic and Slovenia), the three Baltic Republics, and the CIS region, where cheques are not heavily used or not used at all. Other countries without a cheque clearinghouse are Austria, Finland, 45 Libya, Luxembourg, Mongolia, Netherlands and Switzerland. Table III.2 analyzes the relative importance of different payment instrument in terms of usage (number of transactions). The payment instruments included in this analysis are: direct credits/credit transfers, debit 43 Greece provided answers for two cheque clearing systems. Both have been included. 44 For number of countries, BCEAO is counted as eight. 45 Cheques are bilaterally cleared in Finland, in a system called POPS and 42 See Box 4 below. settled in the RTGS system. Section III. Retail Payment Instruments and Systems

68 44 PAYMENT SYSTEMS WORLDWIDE BOX 4: WORLD BANK SURVEY ON INNOVATIVE PAYMENT PRODUCTS In recognition of the relevant innovation taking place in the retail payments arena as well as the interest on this matter expressed by local authorities and international bodies such as the G-8 and the G-20, a dedicated questionnaire to capture developments in this space has been added as an annex (Annex 1: Questionnaire for Collecting Information on Innovations in Retail Payment Instruments and Methods Worldwide ) to the World Bank Global Payment Systems Survey A total of 101 central banks completed the Annex and reported 173 innovative retail payment products/product groups. Most of the central banks provided information on a product group basis and not on individual products. The questionnaire was based on the 2004 CPSS Survey of Developments in Electronic Money and Internet and Mobile Payments. 1 The purpose was to collect information on innovative payment instruments and products such as electronic money, mobile and internet payments as well as prepaid card services and process-related innovations. In order to capture all the different types of innovations, for the purposes of the survey, innovative products were defined as products that are not based on cheques, traditional credit and debit cards or traditional direct credit and debit services. Therefore, prepaid cards, card-based e-money products and other types of e-money products including those developed around mobile phones and mobile technology, among others, are all intended to be captured under the previous definition. The questionnaire covered general information on the types of innovative products and on innovative access channels to bank accounts used in a country, as well as more specific information on the design features of the relevant innovations (e.g. protection of the monetary value created, stakeholders, usage of the product, pricing, clearing and settlement, security and fraud issues). In addition, several legal and regulatory issues were covered (e.g. legal provisions, main regulator and overseer, licensing and reporting requirements, consumer protection) and some statistical data was requested. Central banks were also asked to provide information on whether reforms on any of these matters are being sought. Some preliminary findings are discussed below: There is a fairly widespread adoption of electronic payment channels for initiation of payment transactions and in particular for retail payments. A total of 91 countries reported having internet banking services and 76 countries reported having mobile-based access to bank accounts. Practically all central banks reported having the traditional payment channels of ATMs and POS terminals. While non-banks have an important role in the provision of innovative retail payment products/ mechanisms, banks still remain a significant player in this field. In 73% of the innovative retail payment mechanisms, banks are actively involved in the provision of the services. Collaboration amongst various types of entities is widespread, with over one-third of the products involving joint provision of products/ services, of which almost all involve a bank and a telecom company. In over 65% of the cases, the underlying account of the customer is a bank account. Over 38% of the reported products use agent services, with two-thirds using non-banking agents, like retailers. Customer funds are protected fully in about 60% of the cases. For one-third of the products, customer funds are protected by deposit insurance and in an additional one-fourth of the cases customer funds are fully backed-up by deposits. Around one-fifth of the products however are not protected at all. 1 CPSS, Survey of Developments in Electronic Money and Internet and Mobile Payments, Bank for International Settlements, Basel, Switzerland, 2004.

69 Global Survey Innovative payment products appear to have fairly well-developed pricing models. Only around 10% of the products were reported to have no fees. Around 80% of the products have a per-transaction fee, with a higher proportion of multiple fee components in products that use a collaborative model involving multiple entities. Merchant payments, utility bill payments and personto-person transfers are the most common transaction types supported by the innovative payment mechanisms. Less than 10% of the products support government-to-person payments. A majority of the innovative products/mechanisms have very limited interoperability. Less than 20% of the products were reported to be fully or partially interoperable. Around 25% of the products/mechanisms have some form of interface with traditional payment products. only around 24% settle in central bank money. Less than 40% of the products settle on T+0. Security and fraud risks seem to be getting inadequate attention. In general, central banks do not seem to have formed a clear opinion on the likelihood of fraud and other security risks related to innovative payment products. For over 60% of the products, central banks reported having no specific views on the fraud and security risk perception and for around 10% of the products the fraud risk perception was reported as being higher than for traditional payment products. Central banks identified themselves as the overseers for around 60% of the products. About 10% of the products are subject to collaborative oversight. A small percentage around 6% were identified as not being overseen by any public authority. Innovative products generally do not use the traditional interbank clearing and settlement infrastructure. More than 50% of the innovative products reported in the survey are settled in the books of the issuer, while Source: World Bank In 53% of all cases, the central bank is the operator of the cheque clearinghouse. This percentage is very similar to that of the 2008 survey (57%). Particularly noteworthy are low income countries, where in 16 out of 19 cases (84%) the central bank operates the system, while for upper-middle income and high income countries this percentage is less than 40%. Regions with heavy involvement of the central bank as the operator of the cheque clearing system are MNA and SSA, and to a lesser extent EAP. Regarding efficiency issues, cheques are standardized in the great majority of cases (80%), which should allow for a more intensive and efficient use of processing devices such as readers and sorters. Percentages are particularly high in ECA and the non-euro EU members (both 100%) as well as in euro-area countries (92%), while the lowest are seen in SA. The last two columns to the right in Table III.3 show that automated cheque processing is increasingly common (91%). In particular, compared to the 2008 survey there is an increase in the percentage of countries where cheque truncation is used (35% vs. 28%). The largest increase in the number of clearinghouses with cheque truncation features is in low income countries (32% compared to only 16% in the 2008 survey). Despite these results, percentages for this particular Section III. Retail Payment Instruments and Systems

70 46 PAYMENT SYSTEMS WORLDWIDE TABLE III.3: CHEQUE SYSTEMS WORLDWIDE BASIC OPERATIONAL FEATURES Cheque clearinghouse is operated by the Central Bank Cheques are standardized Processing of cheques is automated, but physical exchange is required Processing of cheques is automated, and cheque truncation is used Cheque clearinghouses # % # % # % # % Worldwide total (106) 56 53% 85 80% 59 56% 37 35% By country income level High income (36) 14 39% 30 83% 18 50% 20 56% Upper-middle income (24) 8 33% 19 79% 15 63% 6 25% Lower-middle income (27) 18 67% 25 93% 18 67% 5 19% Low income (19) 16 84% 11 58% 8 42% 6 32% By region East Asia and Pacific (10) 6 60% 8 80% 6 60% 2 20% Europe and Central Asia (3) 1 33% 3 100% 1 33% 2 67% Latin America & Caribbean (20) 9 45% 17 85% 16 80% 4 20% Middle East & North Africa (12) 10 83% 10 83% 5 42% 2 17% South Asia (4) 2 50% 2 50% 3 75% 2 50% Sub-Saharan Africa (27) 20 74% 19 70% 14 52% 6 22% Euro area countries (12) 5 42% 11 92% 5 42% 8 67% Other EU members (5) 0 0% 5 100% 1 20% 4 80% Other developed countries (13) 3 23% 10 77% 8 62% 7 54% By country population size >30 million (34) 18 53% 30 88% 21 62% 15 44% >5 million, <30 million (40) 19 48% 31 78% 20 50% 16 40% 5 million or less (32) 19 59% 24 75% 18 56% 6 19% feature are still low. PSDG experience in this particular area points at legal and regulatory issues as a key barrier impeding further adoption of cheque truncation. Throughout Table III.3, a country s population size only seems to make a difference when it comes to the adoption of cheque truncation. Only 19% of small countries have adopted this technology compared to 40% or more for larger countries. This might be an indication that budget constraints are also an important obstacle. It is also worth noting that 50% of the central banks representing low income countries that have adopted cheque truncation do not have an automated clearinghouse (ACH) for fully electronic instruments such as electronic credit transfers and direct debits. This perhaps indicates the fact that such central banks prioritize cheque truncation over the implementation of an ACH, despite the fact that the latter is a more efficient option for the processing of retail payments.

71 Global Survey TABLE III.4: CHEQUE SYSTEMS WORLDWIDE BASIC SETTLEMENT FEATURES Multilateral net balances are calculated Net balances are calculated and settled once a day Net balances are calculated and settled more than once each day Final settlement takes place through RTGS Final settlement takes place in Central Bank money, but not through RTGS Customer accounts are credited no later than T+2 Cheque clearinghouses # % # % # % # % # % # % Worldwide total (106) 71 67% 76 72% 30 28% 80 75% 21 20% 79 75% By country income level High income (36) 20 56% 26 72% 7 19% 29 81% 5 14% 30 83% Upper-middle income (24) 18 75% 17 71% 8 33% 22 92% 0 0% 18 75% Lower-middle income (27) 19 70% 17 63% 13 48% 20 74% 8 30% 20 74% Low income (19) 14 74% 16 84% 2 11% 9 47% 8 42% 11 58% By region East Asia and Pacific (10) 5 50% 8 80% 4 40% 7 70% 3 30% 6 60% Europe and Central Asia (3) 2 67% 3 100% 0 0% 3 100% 0 0% 2 67% Latin America & Caribbean (20) 15 75% 12 60% 7 35% 16 80% 3 15% 15 75% Middle East & North Africa (12) 9 75% 10 83% 3 25% 9 75% 3 25% 11 92% South Asia (4) 3 75% 3 75% 2 50% 3 75% 2 50% 4 100% Sub-Saharan Africa (27) 20 74% 18 67% 7 26% 17 63% 6 22% 15 56% Euro area countries (12) 7 58% 9 75% 3 25% 11 92% 2 17% 8 67% Other EU members (5) 2 40% 4 80% 2 40% 4 80% 1 20% 5 100% Other developed countries (13) 8 62% 9 69% 2 15% 10 77% 1 8% % By country population size >30 million (34) 24 71% 24 71% 12 35% 29 85% 5 15% 27 79% >5 million, <30 million (40) 30 75% 32 80% 9 23% 29 73% 11 28% 33 83% 5 million or less (32) 17 53% 20 63% 9 28% 22 69% 5 16% 19 59% Table III.4 discusses some of the most relevant settlement issues associated with cheque clearinghouses. In the majority of the cases (72%), net balances are calculated and settled once every day; two or more clearing sessions per day occur only in 30 systems or 28% of all cases. The latter represents an important improvement compared to the 2008 survey, where only 23 systems reported this feature (none in ECA, MNA or in the EU). Also, 35% of clearinghouses in larger countries now settle more than once a day compared to only 13% in the 2008 survey. Multilateral net balances are calculated in 67% of all cases, compared to 76% in the 2008 survey. The survey did not ask for information on what the clearing mechanism is in all other cases, but the PSDG has observed that several countries still use bilateral netting, either due to legal restrictions or as a risk management tool. The final settlement of participant positions in the cheque clearinghouse is made in a RTGS system in 75% of the systems, a significant increase versus the 67% observed in the previous survey. Although not Section III. Retail Payment Instruments and Systems

72 48 PAYMENT SYSTEMS WORLDWIDE TABLE III.5: CHEQUE SYSTEMS WORLDWIDE RISK CONTROL MECHANISMS No specific risk management mechanism is in place Should a participant be unable to settle its debit position, an unwinding procedure is initiated Participants have access to information on their preliminary position in the clearinghouse during the day There are limits in place to protect netting systems from significant exposures There is a specific guarantee fund in place for the system Risk management mechanisms ensure completion of daily settlements in case of inability to settle by the participant with the largest obligation The Central Bank/ operator provides ultimately liquidity to the system Cheque clearinghouses # % # % # % # % # % # % # % Worldwide total (106) 20 19% 45 42% 67 63% 21 20% 18 17% 34 32% 40 38% By country income level High income (36) 7 19% 17 47% 17 47% 5 14% 5 14% 11 31% 7 19% Upper-middle income (24) 4 17% 13 54% 18 75% 1 4% 2 8% 9 38% 13 54% Lower-middle income (27) 4 15% 10 37% 16 59% 9 33% 8 30% 8 30% 10 37% Low income (19) 5 26% 5 26% 16 84% 6 32% 3 16% 6 32% 10 53% By region East Asia and Pacific (10) 3 30% 3 30% 5 50% 4 40% 3 30% 3 30% 3 30% Europe and Central Asia (3) 0 0% 3 100% 1 33% 0 0% 0 0% 0 0% 1 33% Latin America & Caribbean (20) 4 20% 11 55% 16 80% 4 20% 5 25% 7 35% 9 45% Middle East & North Africa (12) 1 8% 3 25% 8 67% 2 17% 3 25% 6 50% 4 33% South Asia (4) 1 25% 3 75% 3 75% 0 0% 0 0% 0 0% 1 25% Sub-Saharan Africa (27) 5 19% 7 26% 19 70% 8 30% 3 11% 7 26% 17 63% Euro area countries (12) 2 17% 5 42% 5 42% 2 17% 1 8% 4 33% 2 17% Other EU members (5) 1 20% 0 0% 3 60% 0 0% 1 20% 4 80% 1 20% Other developed countries (13) 3 23% 10 77% 7 54% 1 8% 2 15% 3 23% 2 15% By country population size >30 million (34) 6 18% 16 47% 21 62% 5 15% 8 24% 14 41% 12 35% >5 million, <30 million (40) 8 20% 17 43% 29 73% 9 23% 7 18% 14 35% 17 43% 5 million or less (32) 6 19% 12 38% 17 53% 7 22% 3 9% 6 19% 11 34% through a RTGS system, settlement is done in central bank money in 20% of the systems. In any case, according to survey information, the settlement of cheque clearinghouse obligations in commercial bank money is extremely rare, with only 9 countries not choosing either of the options pertaining to settlement in central bank money. The last column to the right in Table III.4 shows that customer accounts are credited by T+2 in 75% of all

73 Global Survey TABLE III.6: AUTOMATED CLEARINGHOUSE INFRASTRUCTURE WORLDWIDE Worldwide total By income By region By population size 87 systems High income (35 of 46) Upper middle income (26 of 33) Lower middle income (18 of 33) Low income (8 of 20) EAP (6 of 11) ECA (10 of 16) LAC (16 of 20) MNA (6 of 13) SA (2 of 4) SSA (13 of 27) Euro area (12 of 16) Other EU (11 of 11) ODC (11 of 14) Large size (31 of 36) Medium size (31 of 50) Small size (25 of 46) cases. Increasingly, according to PSDG experience, cheque clearinghouse operators and/or authorities are setting a time limit for banks to credit customer accounts. Until recently, many operators (including many central banks) did not have a standard limit, as it was felt that customer-related issues such as this were solely the domain of commercial banks and other cheque system participants. Table III.5 shows some improvement, albeit little, in relation to risk control mechanisms used in cheque clearing and settlement systems. No risk control mechanism is used to limit credit and liquidity risks in cheque clearing systems in 19% of the systems (24% in the previous survey). Moreover, in 42% of all cases, if a participant is unable to settle, net positions are recalculated after removing some or all of the payments involving that failed participants. This so-called unwinding procedure is quite common in cheque systems in the ECA and SA regions as well as in ODCs. Moreover, survey information shows that in many cases (38%) the central bank or other cheque system operator would ultimately provide liquidity if the system is not able to close settlement positions. Other risk management mechanisms such as limits and guarantee funds are still relatively rare in cheque systems. The same figures observed in the 2008 survey, i.e. 20% of systems using limits and 17% of systems using a guarantee fund, are also shown in the current one. Overall, Table III.5 shows that risk management in cheque systems is still weak. While some operators may argue that tough risk control mechanisms are not necessary for a system that is no longer systemically important, facts and data in the survey point at cheque systems still having some degree of systemic importance in several countries, and/or cheque systems being the only system for retail payments or the most relevant one. III.2.2 Credit Transfers, Direct Debits and Automated Clearinghouses Survey results show that a total of 87 automated clearinghouses (ACH) systems serve 92 countries for the processing of retail electronic credit transfers and direct debits. 46 With the exception of MNA and SA, this percentage is relatively similar across regions. Moreover, ACH systems are more common in larger countries. It should be noted, however, that in some countries where an ACH does not exist, interbank retail elec- 46 This total includes the ACH system of the BCEAO which serves eight different countries. Colombia and the United Kingdom reported having two ACHs each. Section III. Retail Payment Instruments and Systems

74 50 PAYMENT SYSTEMS WORLDWIDE BOX 5: THE SINGLE EURO PAYMENTS AREA (SEPA) The SEPA project is a major undertaking in the creation of an integrated retail payments market in euro. SEPA consists of a series of initiatives aimed at the introduction of common instruments, standards and practices, and interoperable infrastructures for retail payments in euro, allowing users to make euro payments throughout Europe from a single bank account, using a single set of payment instruments, as easily and securely as in the national context. To coordinate all work, banks established the European Payments Council (EPC) in June Today, the EPC consists of members (banks, banking associations and payment institutions) from 32 countries (the 27 EU countries, plus Iceland, Liechtenstein, Norway, Switzerland and Monaco). The Eurosystem and the European Commission set public policy objectives and facilitate the project. The focus of SEPA is payments in euro, and so it is primarily a euro area project. Nevertheless, the non-euro area countries represented in the EPC have chosen to adopt the SEPA standards and practices for their payments in euro. They may also adopt them for payments in their national currency. The SEPA project focuses on three payment instruments: credit transfers, direct debits and cards. In addition, a cash payment framework was set up in order to improve cash handling services in the euro area. For credit transfers and direct debits the EPC has developed new payment schemes (launched in January 2008 and November 2009 respectively), which cover the rules, practices and standards applicable to the new SEPA payment instruments. They define a common service level and maximum time frame for processing. For card payments, a set of high-level principles were developed with which card schemes, together with their issuers, acquirers and operators should comply. The card framework seeks to achieve euro area-wide acceptance for the various card schemes. The SEPA payment instruments are designed to eventually replace national euro payment instruments existing today. In this respect it is expected that cheques will be gradually phased out, as SEPA does not support their cross-border use. roles and procedures of the processing infrastructures that provide clearing and settlement services. This forms the basis for cooperation between schemes and infrastructures and should ensure that providers of processing services can compete with one another and offer their services to schemes throughout SEPA. Based on the new SEPA schemes, banks and service providers will be able to develop and offer tailored products to their clients all over the euro area, and can compete with each other in terms of price, the level of service or any of the other features of those products.zeved. Therefore, end-2010 the European Commission made a legislative proposal to establish one or more binding end dates for migration by means of legislation at EU level. With SEPA well under way, the EPC s focus was broadened from the bank-to-bank domain to also address inefficiencies in the customer-to-bank and bank-to-customer domains. The ultimate aim is to allow all payments in euro to be made solely electronically and be entirely cleared and settled via straight-through processing. The EPC is working on common rules and standards for online payments and developing a framework for mobile payments, while also initiatives to align existing e-invoicing solutions and to set up pan-european e-invoicing are under way. This should avoid that innovation leads to new fragmentation, as new euro payment solutions should be offered not only in the national context, but throughout Europe, with the same user experience and high level of service. Source: ECB A common feature of all three payment instruments is the separation between schemes and processing infrastructures. To this end, the EPC has established a framework which clarifies the

75 Global Survey TABLE III.7: ACH SYSTEMS WORLDWIDE BASIC OPERATIONAL AND SETTLEMENT FEATURES The ACH is operated by the Central Bank ACH processes both direct credits and direct debits Non-bank institutions can be direct participants Net balances calculated and settled at least once every day Final settlement takes place through RTGS Final settlement in Central Bank money, but not through RTGS Automated clearinghouses for direct debits / direct credits # % # % # % # % # % # % Worldwide total (87) 35 40% 67 77% 32 37% 77 89% 75 86% 10 11% By country income level High income (35) 10 29% 29 83% 13 37% 31 89% 30 86% 4 11% Upper-middle income (26) 12 46% 21 81% 11 42% 23 88% % 0 0% Lower-middle income (18) 7 39% 11 61% 5 28% 16 89% 13 72% 4 22% Low income (8) 6 75% 6 75% 3 38% 7 88% 6 75% 2 25% By region East Asia and Pacific (6) 3 50% 2 33% 1 17% 4 67% 5 83% 0 0% Europe and Central Asia (10) 8 80% 5 50% 7 70% 9 90% 9 90% 1 10% Latin America & Caribbean (16) 4 25% 15 94% 5 31% 15 94% 14 88% 2 13% Middle East & North Africa (6) 4 67% 4 67% 2 33% 6 100% 6 100% 0 0% South Asia (2) 1 50% 2 100% 0 0% 2 100% 2 100% 1 50% Sub-Saharan Africa (13) 5 38% 9 69% 4 31% 10 77% 10 77% 2 15% Euro area countries (12) 6 50% 11 92% 3 25% 11 92% 11 92% 1 8% Other EU members (11) 3 27% 9 82% 6 55% 10 91% 8 73% 2 18% Other developed countries (11) 1 9% 10 91% 4 36% 10 91% 10 91% 1 9% By country population size >30 million (31) 11 35% 24 77% 10 32% 28 90% 27 87% 3 10% >5 million, <30 million (31) 12 39% 28 90% 12 39% 29 94% 26 84% 5 16% 5 million or less (25) 12 48% 15 60% 10 40% 20 80% 22 88% 2 8% tronic credit transfers are nevertheless common. In most of these countries (e.g. Czech Republic, Saudi Arabia, Turkey or Ukraine) retail credit transfers are processed through the RTGS system. ACH infrastructures worldwide are undergoing significant changes. In some European Union countries, local ACHs have already been discontinued and moved to the pan-european platform. In other countries, especially where direct debits are not very popular, older RTGS and ACH systems are being replaced by new or upgraded RTGS systems which handle both large-value and retail payments. Elsewhere, however, new ACHs are being implemented in some countries (e.g. West Bank and Gaza). Table III.7 analyzes operational and settlement features of ACH systems for electronic payment instruments. At the worldwide level, the central bank is the operator of the ACH in 40% of the cases. This number is significantly smaller than the one reported for cheque clearing systems (53%). As noted in the 2008 survey, most cheque clearinghouses were originally operated by central banks, and this tradition still endures, with Section III. Retail Payment Instruments and Systems

76 52 PAYMENT SYSTEMS WORLDWIDE TABLE III.8: ACH SYSTEMS WORLDWIDE RISK CONTROL MECHANISMS No specific risk management mechanism is in place Participants have access to information on their preliminary positions in the clearinghouse during the day There are limits in place to protect netting systems from excessive exposures There is a specific guarantee fund in place for the system Risk management mechanisms ensure completion of daily settlement in case of inability to settle by the participant with the largest obligation The Central Bank or the operator provides liquidity to the system ultimately Automated clearinghouses for direct debits/direct credits # % # % # % # % # % # % Worldwide total (87) 26 30% 67 77% 32 37% 19 22% 42 48% 28 32% By country income level High income (35) 12 34% 26 74% 13 37% 7 20% 17 49% 8 23% Upper-middle income (26) 10 38% 24 92% 7 27% 6 23% 12 46% 11 42% Lower-middle income (18) 3 17% 11 61% 7 39% 5 28% 9 50% 6 33% Low income (8) 1 13% 6 75% 5 63% 1 13% 4 50% 3 38% By region East Asia and Pacific (6) 0 0% 3 50% 0 0% 1 17% 3 50% 2 33% Europe and Central Asia (10) 2 20% % 6 60% 2 20% 6 60% 3 30% Latin America & Caribbean (16) 10 63% 15 94% 3 19% 4 25% 6 38% 9 56% Middle East & North Africa (6) 1 17% 5 83% 6 100% 3 50% 3 50% 2 33% South Asia (2) 1 50% 1 50% 0 0% 0 0% 1 50% 1 50% Sub-Saharan Africa (13) 2 15% 8 62% 7 54% 2 15% 6 46% 4 31% Euro area countries (12) 4 33% 9 75% 2 17% 3 25% 4 33% 1 8% Other EU members (11) 1 9% 8 73% 5 45% 3 27% 7 64% 3 27% Other developed countries (11) 5 45% 8 73% 3 27% 1 9% 6 55% 3 27% By country population size >30 million (31) 8 26% 23 74% 11 35% 9 29% 19 61% 7 23% >5 million, <30 million (31) 11 35% 24 77% 9 29% 4 13% 11 35% 13 42% 5 million or less (25) 7 28% 20 80% 12 48% 6 24% 12 48% 8 32%

77 Global Survey many central banks having dedicated clearinghouse departments. Also, while cheque systems in many countries were systemically important not so long ago (and some still are), ACHs have been identified with low-value payments. This may explain why more central banks have refrained from having an operator role in ACH systems. A clear exception to this are low income countries, where in 6 out of the 8 cases or 75% the central bank is the ACH operator. From a regional perspective, the ECA region shows the highest percentage (80%) of central banks assuming this role. Approximately 3 out of 4 ACH systems worldwide can process both electronic credit transfers and direct debits. The proportion is practically the same as in the previous survey: 77% vs. 76%.With few exceptions, mostly in European Union countries, electronic credit transfers are far more popular than direct debits. 47 Direct debits, as well as other debit instruments, are less common in the countries of the ECA and EAP regions. Clearing and settlement features are, in general, similar to those of cheque clearing systems. When compared to the latter, fewer ACHs clear transactions more than once every day. Despite the fact that fewer central banks are acting as ACH operators, 86% of ACHs settle final positions in a RTGS system (compared to 75% in the case of cheque systems). As in the case of cheque systems, the percentage of systems settling in a RTGS system has increased significantly over time. The largest increases are in the LAC and MNA regions, with LAC moving from 50% to 88%, and MNA from 60% to 100%. Table III.8 shows survey outcomes on the types of mechanisms used in ACH systems to control or limit credit and liquidity risks. In general, management of credit and liquidity risks in ACHs is even weaker than in the case of cheque systems. Two aspects in particular are worth noting. First, the percentage of ACHs without any form of risk management is higher than cheque systems (30% compared to 19%). However, in comparison to the 2008 survey, the number of ACHs without any form of risk management has decreased from 40% to 30%. On the one hand, the absence of these mechanisms is more evident in high income countries. At the other extreme, risk management tools are very common in SSA, MNA, EAP and ECA and non-euro EU members. 48 This could perhaps be explained by the fact that the majority of the newer ACHs were implemented already incorporating risk management features. Second, the percentage of central banks that would ultimately provide liquidity to the ACH is smaller than the equivalent for cheque systems (32% compared to 38%), one possible explanation being, once again, that a smaller percentage of central banks worldwide are ACH operators. However, the percentage of ACH systems with access to central bank liquidity increased (from 25% in the 2008 survey). In 48% of the ACH systems, there are risk management mechanisms in place to handle the inability of the participant with the largest net debit position to settle. There are few differences across regions and practically none when viewed from the income level perspective. Also, just like it is the case with cheque systems, settlement of ACH obligations in commercial bank money is extremely rare: only 3 out of 87 cases according to survey data. In the 2008 survey it was argued that the various numbers and percentages shown in Table III.8 seemed consistent with the idea that ACH systems are perceived to be of little systemic importance, and therefore do not 47 For detailed information on number of transactions for the various payment instruments used in retail transactions refer to the Appendix. 48 SSA and ECA are, at the same time, the regions where more central banks act as ACH operators. Section III. Retail Payment Instruments and Systems

78 54 PAYMENT SYSTEMS WORLDWIDE TABLE III.9: STATISTICS ON AVAILABILITY OF ATMS AND POS TERMINALS (per 1 million inhabitants, as of end-2009) Country ATMs Growth 2009 vs POS terminals Growth 2009 vs Country ATMs Growth 2009 vs POS terminals Growth 2009 vs Albania % 1, % Libya 3 nav 0 nav Angola % % Lithuania % 11,606 90% Argentina % nav nav Luxembourg 940 2% 21,372 16% Armenia % % Macao (China) 1, % nav nav Australia 1,237-1% 31,900 16% Macedonia FYR % 15, % Austria 1,004 4% 11,956 0% Madagascar 8 70% 59 31% Azerbaijan % % Malawi 13 85% 120 nav Bahamas, The nav nav nav nav Malaysia nav nav 5,841 63% BCEAO nav nav nav nav Malta % 27,563 37% Belgium 1,415 1% 12,520 15% Mauritania nav nav nav nav Belize % 12,005 57% Mauritius % nav nav Bolivia 87 58% % Mexico % 4,159 42% Bosnia and Herzegovina % 4,317 46% Moldova nav nav nav nav Botswana % 1,464 4% Mongolia 104 nav 1,266 nav Brazil 855 9% 17,589 70% Montenegro % 11, % Bulgaria % 7,838 91% Morocco % nav nav Burundi nav nav nav nav Mozambique 27 53% % Cambodia % 223 nav Namibia 186 nav 6,788 nav Canada 1,808 5% 21,014 16% Nepal % % Cayman Islands nav nav nav nav Netherlands 515 4% 20,577 27% Chile % nav nav New Zealand nav nav nav nav China % 1, % Nigeria 58 nav nav nav Colombia % 3,031 71% Norway 467-3% 27,155 29% Congo, Dem. Rep. of 1 nav 14 nav Oman 303 nav 2,247 nav Costa Rica % 20,155 nav Pakistan 25 99% % Croatia % 19,360 56% Peru % nav nav Cyprus % 24,873 19% Philippines 92 17% nav nav Czech Republic 341 7% 7,416 23% Poland % 6,044 31% Denmark 533-6% 18,809-5% Portugal 1,614 18% 25,531 56% Dominican Republic % 4,901 38% Romania % 4, % Ecuador % nav nav Russian Federation % 2, % Egypt, Arab Rep.of 50 74% % Rwanda 3-20% 9-33% El Salvador % 2,693 51% Samoa 123 nav 2,091 nav Eritrea nav nav nav nav San Marino 1,876 11% 60,507 2% Estonia % 13,184 21% Saudi Arabia % 3,254 35% Ethiopia 1 370% 6 465% Serbia % 8,068 24% Fiji % 2,102 46% Seychelles 341 nav 10,844 nav Finland 317 0% 32,969 51% Sierra Leone 6 nav 4 nav

79 Global Survey TABLE III.9: STATISTICS ON AVAILABILITY OF ATMS AND POS TERMINALS (continued) Country ATMs Growth 2009 vs POS terminals Growth 2009 vs Country ATMs Growth 2009 vs POS terminals Growth 2009 vs France % 22,225 19% Singapore 431 6% 16,336 4% Georgia 320 nav 1,358 nav Slovak Republic % 6,636 48% Germany 1,030 57% 7,242 3% Slovenia % 16,094 10% Ghana nav nav nav nav South Africa 426 nav 4,798*** nav Greece % 42,219 36% Spain 1,335 1% 30,306 4% Guatemala nav nav nav nav Sri Lanka 97 67% % Honduras nav nav nav nav Sudan % 36 nav Hong Kong (China) 429 9% 55,115* nav Swaziland % 480 nav Hungary % 7,080** 56% Sweden % 19,739 1% India % % Switzerland 806 5% 18,549 19% Indonesia nav nav nav nav Taiwan (China) 1,101 1% nav nav Iran, Islamic Rep. of % 15, % Tanzania % % Iraq 6 nav 15 nav Thailand % 3,657 16% Ireland 763 6% 17,976 45% Timor-Leste 6 6% % Israel 435 nav 14,125 nav Trinidad and Tobago % 9,450 56% Italy % 21,079 6% Turkey % 23,240 31% Jamaica % 4,942-3% Uganda % % Japan 1,086 0% 13,510 11% Ukraine % 2,240 69% Jordan % nav nav United Arab Emirates 783 nav 11,191 nav Kazakhstan % 1,494 88% United Kingdom 1,006 1% 19,069 13% Kenya % nav nav United States 1,384 5% nav nav Korea, Rep. of 2,083 17% nav nav Uruguay 242 nav 22,788 nav Kosovo % 2, % Vanuatu 83 nav 250 nav Kuwait % 8,052 55% Venezuela, R.B. nav nav nav nav Kyrgyz Republic % % West Bank and Gaza 75 86% % Latvia % 10,554 49% Yemen, Republic of % 91 27% Lebanon % 4,189 43% Zambia % % Lesotho 32 46% nav nav Zimbabwe 47 12% % Notes: * Total number of POS points instead of POS terminals. Some terminals can be used to process different types of payment cards. ** Includes POSs installed at bank branches and post offices for cash withdrawals. *** Refers to bank owned POS devices only. The number of POS devices that the retailers own is unknown. Section III. Retail Payment Instruments and Systems

80 56 PAYMENT SYSTEMS WORLDWIDE seem to warrant risk management techniques similar to those intended for a system processing larger shares of the total settlement throughput in the country. It was also argued back then that regardless of their implications for systemic risk, PSDG field work had confirmed that ACHs are a key tool to facilitate commercial as well as person-to-person payment transactions, and as such have a significant impact in the overall efficiency of the national payments system. 49 The current survey shows some improvements in the area of ACH risk management, precisely reflecting the growing importance of ACHs as a key component of the national payments system in many countries. III.2.3 Payment Cards and Related Systems This section presents the analysis of the survey questions covering payment cards, payment card switches 50 and other related aspects. Table III.9 shows data on the number of ATMs and POS terminals per every 1 million inhabitants, and growth rates over a three-year period for these devices. 51 Some of the general trends that can be identified are as follows: Availability of ATMs and POS terminals is clearly higher in high income countries, though within this group of countries there are significant differences, particularly with regard to POS terminals (e.g. Spain or Greece compared to Germany). * For a few upper-middle income economies like Brazil, Croatia, Serbia, or Turkey, to name only some, the infrastructure for payment cards is comparable to that of high income economies, in particular with regard to the availability of POS terminals. However, many other upper-middle income economies still lag far behind high income countries in this area. In all regions and throughout all country income levels, the payment card business continues to expand. ATMs and POS terminals are growing at a very fast pace in many lower-middle income economies, though in some cases the very high growth rates observed in the period seem to have moderated. To a great extent, this moderation reflects the very low levels of these variables as of 2002, used as a basis for comparisons in the previous survey. 49 See, for example, the Bank of England Payment System Oversight Reports for discussions on retail payment systems and the concept of system-wide importance. 50 For the purposes of this report, a payment card switch is defined as a mechanism that connects various institutions allowing interchange of payment cards transactions of participating institution cardholders at other participating institution merchants, ATMs and other card acceptance devices. A payment card switch is typically used for routing authorization and authentication-related messages between participating institutions, and can also generate and distribute clearing and settlement files. In some settings, the individual institutions could themselves have payment card switches to connect their own ATMs and POS terminals to their own internal card processing systems, and these payment card switches are then connected to a central inter-institution payment card switch. This is also referred to as a payment card network. Payment card switches are also beginning to be used for processing of card transactions initiated through other channels like internet and mobile phones. 51 Detailed per country statistics on ATMs, POS terminals and payment cards, among others, are presented in the Appendix. Growth in upper-middle income economies is more stable, with growth rates of two, or in a few cases low three digits (equivalent to between 10% and 30% per annum). Growth rates are lower in high income countries and also in low income economies. Moreover, in most high income economies POS terminals are growing at a faster rate than ATMs, while the opposite is true for low income economies. This appears to be correlated with the significantly higher per capita cashless transactions for high income countries.

81 Global Survey TABLE III.10: ATM SERVICES Cash withdrawals Bill payments Cash deposits Purchases (e.g. tickets, airtime) Credit transfers Other Central banks # % # % # % # % # % # % Worldwide total (132) % 81 61% 82 62% 67 51% 79 60% 52 39% By income High income (46) % 31 67% 39 85% 21 46% 33 72% 18 39% Upper-middle income (33) % 21 64% 23 70% 21 64% 22 67% 18 55% Lower-middle income (33) % 21 64% 15 45% 18 55% 18 55% 8 24% Low income (20) 19 95% 8 40% 5 25% 7 35% 6 30% 8 40% By region East Asia and Pacific (11) % 8 73% 6 55% 9 82% 8 73% 2 18% Europe and Central Asia (16) % 11 69% 9 56% 7 44% 6 38% 7 44% Latin America & Caribbean (20) % 10 50% 15 75% 10 50% 13 65% 8 40% Middle East & North Africa (13) % 7 54% 6 46% 6 46% 9 69% 5 38% South Asia (4) 4 100% 3 75% 3 75% 1 25% 2 50% 2 50% Sub-Saharan Africa (27) 26 96% 13 48% 9 33% 16 59% 13 48% 11 41% Euro area countries (16) % 12 75% 12 75% 7 44% 13 81% 9 56% Other EU members (11) % 7 64% % 5 45% 6 55% 4 36% Other developed countries (14) % 10 71% 11 79% 6 43% 9 64% 4 29% By population size >30 million (36) % 29 81% 26 72% 23 64% 23 64% 13 36% >5 million, <30 million (50) 49 98% 26 52% 28 56% 20 40% 26 52% 27 54% 5 million or less (46) % 26 57% 28 61% 24 52% 30 65% 12 26% The first two bullet points above suggest that factors other than country income have an important influence in the development and expansion of payment card circuits. This may include the level of competition in the banking industry, government programs promoting the use of payment cards, or the wide use of other payment instruments such as direct debits, among others. According to PSDG experience, obstacles for a faster development of payment card systems, especially in lower income countries include the very limited accessibility of bank accounts for individuals, limited competition and innovation in the banking industry, and lack of knowledge and trust by the average customer in payment cards and related systems. Fortunately, survey data shows that some lower income countries appear to be overcoming these obstacles. Table III.10 shows the types of services offered at the ATM. 52 Information on such services was not included in the previous survey. Over 60% of the ATMs offer at 52 For further information on the payment services offered by ATMs, see Guadamillas, et. al., Balancing Cooperation and Competition in Retail Payment Systems, World Bank, Section III. Retail Payment Instruments and Systems

82 58 PAYMENT SYSTEMS WORLDWIDE TABLE III.11: CENTRAL BANKS OPINION ON INTEROPERABILITY OF ATMS AND POS TERMINALS Interoperability of ATMs Interoperability of POS terminals Full Partial Low Full Partial Low Central banks # % # % # % # % # % # % Worldwide total (132) 75 57% 25 19% 18 14% 60 45% 36 27% 22 17% By income High income (46) 36 78% 6 13% 2 4% 32 70% 8 17% 4 9% Upper-middle income (33) 22 67% 8 24% 2 6% 16 48% 13 39% 3 9% Lower-middle income (33) 15 45% 7 21% 7 21% 12 36% 10 30% 7 21% Low income (20) 2 10% 4 20% 7 35% 0 0% 5 25% 8 40% By region East Asia and Pacific (11) 4 36% 3 27% 1 9% 1 9% 5 45% 2 18% Europe and Central Asia (16) 6 38% 8 50% 2 13% 7 44% 6 38% 3 19% Latin America & Caribbean (20) 12 60% 4 20% 3 15% 8 40% 6 30% 5 25% Middle East & North Africa (13) 8 62% 2 15% 3 23% 7 54% 3 23% 3 23% South Asia (4) 3 75% 0 0% 1 25% 2 50% 2 50% 0 0% Sub-Saharan Africa (27) 8 30% 5 19% 5 19% 5 19% 6 22% 7 26% Euro area countries (16) 13 81% 2 13% 1 6% 13 81% 1 6% 2 13% Other EU members (11) 10 91% 0 0% 1 9% 9 82% 2 18% 0 0% Other developed countries (14) 11 79% 1 7% 1 7% 8 57% 5 36% 0 0% By population size >30 million (36) 25 69% 3 8% 4 11% 18 50% 9 25% 5 14% >5 million, <30 million (50) 30 60% 7 14% 10 20% 23 46% 13 26% 11 22% 5 million or less (46) 20 43% 15 33% 4 9% 19 41% 14 30% 6 13% Note: Results show the opinion of the respondents. Percentages may not add up to 100% as not all countries responded this question. least one non-cash payment service, which contributes to the efficiency of the payments system. The difference between high income and low income counties is significant for all ATM services with the exception of cash withdrawals. From a regional perspective, ATMs in ECA and SSA offer less non-cash payment services. Other services such as cash deposits are extended mainly in LAC, the EU and ODCs. With the possible exception of bill payments, country population size does not seem to have a clear effect on the type of services offered through ATMs. Table III.11 is the first of a set of tables throughout the survey in which central banks were asked to provide their opinion on a particular matter that is either difficult to measure or for which a straight answer covering all possibilities is simply not possible. In the specific case of Table III.11 central banks were asked to assess

83 Global Survey TABLE III.12: PAYMENT CARDS IN CIRCULATION 1 (per 1000 inhabitants, as of end-2009) Country Number Growth 2009 vs Country Number Growth 2009 vs Country Number Growth 2009 vs Albania % Honduras nav nav Norway 3,583 22% Angola 32 nav Hong Kong (China) 2,070** nav Oman 794 nav Argentina % Hungary 877*** 7% Pakistan 54 71% Armenia 188 nav India % Peru % Australia 1,808 22% Indonesia % Philippines nav nav Austria 1,088 10% Iran, Islamic Rep. of % Poland % Azerbaijan 453 nav Iraq Nav nav Portugal 1,891 14% Bahamas, The nav nav Ireland 1,222 38% Romania % BCEAO nav nav Israel 719** nav Russian Federation % Belgium 1,785 13% Italy 1,148 6% Rwanda 3 nav Belize 300* nav Jamaica % Samoa 616 nav Bolivia % Japan nav nav San Marino 1,618 5% Bosnia and Herzegovina 466** 57% Jordan % Saudi Arabia 540* 29% Botswana % Kazakhstan % Serbia % Brazil 1,929 40% Kenya nav nav Seychelles nav nav Bulgaria 1,013 30% Korea, Rep. of 2,197 15% Sierra Leone nav nav Burundi nav nav Kosovo 299 nav Singapore 1,344** nav Cambodia 31 nav Kuwait 1,027 0% Slovak Republic % Canada 2,848 13% Kyrgyz Republic 32* 386% Slovenia 1,993 11% Cayman Islands nav nav Latvia 1,078 21% South Africa nav nav Chile % Lebanon % Spain 1,621 2% China 1,552 80% Lesotho Nav nav Sri Lanka % Colombia % Libya 2 nav Sudan 10* 686% Congo, Dem. Rep. of 1* nav Lithuania 1,286 26% Swaziland Nav nav Costa Rica 1,203 14% Luxembourg 1,993-5% Sweden 433** nav Croatia 1,925 17% Macao (China) 668** nav Switzerland 1,630 17% Cyprus 1,336 33% Macedonia FYR % Taiwan (China) 10,810 11% Czech Republic % Madagascar % Tanzania % Denmark 1,245 29% Malawi nav nav Thailand % Dominican Republic 559 nav Malaysia 1,496 41% Timor-Leste 8 9% Ecuador 59** -22% Malta 1,540 23% Trinidad and Tobago 1,472 7% Egypt, Arab Rep. of % Mauritania nav nav Turkey 1,458 22% El Salvador % Mauritius 805-2% Uganda 38 nav Eritrea nav Mexico % Ukraine 633-9% Estonia 1,377 14% Moldova 207 nav United Arab Emirates 1,837 nav Ethiopia 1* 1739% Mongolia nav nav United Kingdom 2,221-3% Fiji nav nav Montenegro % United States 4,516-15% Finland 1,794 26% Morocco 197** 74% Uruguay 952 nav France 1,681 21% Mozambique 61 28% Vanuatu Nav nav Georgia 929 nav Namibia 122 nav Venezuela, R.B. Nav nav Germany 1,536 17% Nepal 35* 522% West Bank and Gaza % Ghana nav nav Netherlands 1,827-6% Yemen, Republic of 19 nav Greece 1,344 15% New Zealand nav nav Zambia Nav nav Guatemala Nav nav Nigeria nav nav Zimbabwe 81 nav 1 Includes debit cards, credit cards and other non-prepaid products, where available. Notes: *Includes only debit cards information. **Includes only credit cards information. ***Includes also charge cards. Section III. Retail Payment Instruments and Systems

84 60 PAYMENT SYSTEMS WORLDWIDE TABLE III.13: PROCESSING OF DOMESTIC ATM AND POS TRANSACTIONS International payment networks dominate the processing of domestic transactions Domestic payment networks dominate the processing of domestic transactions There are no domestic payment networks ATM POS ATM POS ATM POS Central banks # % # % # % # % # % # % Worldwide total (132) 33 25% 59 45% 88 67% 67 51% 16 12% 18 14% By income High income (46) 7 15% 17 37% 36 78% 30 65% 3 7% 3 7% Upper-middle income (33) 11 33% 15 45% 21 64% 17 52% 5 15% 4 12% Lower-middle income (33) 8 24% 15 45% 20 61% 15 45% 5 15% 7 21% Low income (20) 7 35% 12 60% 11 55% 5 25% 3 15% 4 20% By region East Asia and Pacific (11) 0 0% 4 36% 8 73% 5 45% 2 18% 2 18% Europe and Central Asia (16) 12 75% 12 75% 2 13% 2 13% 4 25% 4 25% Latin America & Caribbean (20) 2 10% 5 25% 16 80% 14 70% 2 10% 1 5% Middle East & North Africa (13) 1 8% 5 38% 10 77% 7 54% 1 8% 2 15% South Asia (4) 0 0% 2 50% 4 100% 2 50% 0 0% 1 25% Sub-Saharan Africa (27) 11 41% 16 59% 15 56% 9 33% 4 15% 5 19% Euro area countries (16) 1 6% 2 13% 14 88% 13 81% 1 6% 1 6% Other EU members (11) 4 36% 6 55% 7 64% 5 45% 1 9% 2 18% Other developed countries (14) 2 14% 7 50% 12 86% 10 71% 1 7% 0 0% By population size >30 million (36) 7 19% 20 56% 29 81% 18 50% 2 6% 6 17% >5 million, <30 million (50) 9 18% 18 36% 36 72% 27 54% 4 8% 5 10% 5 million or less (46) 17 37% 21 46% 23 50% 22 48% 10 22% 7 15% the interoperability of ATMs and POS terminals in three categories. 53 Overall, slightly more than half of central banks participating in the survey indicated that both ATMs and POS terminals are fully interoperable. The number of 53 High interoperability of ATMs is described as all payment and cash withdrawal cards being used seamlessly (though probably at a cost) in all ATMs in the country. Similarly, full interoperability of POS terminals means all payment cards can be used seamlessly in any POS terminal. central banks indicating full interoperability for ATMs (57%) is higher than that for POS (45%). These figures are similar to those of the previous survey. Numbers for full interoperability are significantly higher in high income economies. From a regional perspective, although there are some differences in the ratings between ATMs and POS terminals, full in-

85 Global Survey teroperability is higher in the euro area and ODCs. 54 The regions with the highest percentages for partial or low interoperability are SSA, EAP and ECA. In the case of POS terminals, low interoperability is also evident in LAC and SA. From the country population size perspective, full interoperability of ATMs is more common in larger countries, while partial interoperability is observed more frequently in smaller countries. For POS terminals, the effect of a country s population size is less clear as only minor differences are shown across the three classifications within this category. Table III.12 shows statistical data on payment cards per every 1000 inhabitants. Practically in all high income countries there is one payment card (credit card, debit card and other non-prepaid cards) or more per every inhabitant, with extreme values observed in cases like Taiwan (China) and the United States with more than 4 payment cards per inhabitant. Interestingly, while figures for upper- and lower-middle countries are indeed lower than those for high income countries, when compared with the data in Table III.9 the relative differences between the two sets of countries are much smaller. For instance, while the typical ratio of cards per inhabitant in high income countries compared to middle income countries is 2-3 to 1, this same ratio in the case of POS terminals is 8-10 to 1. Together with other variables such as financial literacy, the latter may help explain why payment cards are used much more intensively in high income countries, despite the fact that these payment products are well established also in most middle income economies. 54 It should be noted here that, as mentioned in the Methodological Note, individual countries are aggregated here without considering their relative size in terms of territory or the size of the economy. A weighted average may yield results quite different from those mentioned in this paragraph. In the survey, central banks were also asked to express their opinion on the extent to which payment cards are used as payment instruments (at POS terminals) and not only for cash withdrawals at ATMs. Forty-six central banks (35% of the total) indicated that payment cards are used extensively as payment instruments at POS terminals. The great majority are ODCs and EU countries. On the other hand, central banks in EAP, MNA, SA and SSA regions reported low usage of payment cards at POS terminals. All these results are almost identical to those of the previous survey. Table III.13 shows information on the processing arrangements for payment cards. International brands like Visa, MasterCard and others dominate domestic POS transaction processing in 45% of the responding countries, while domestic networks are dominant in 51% of the cases. In the case of ATMs, domestic networks are significantly more dominant. International brands are dominating the market in lower income countries, especially in the case of POS transaction processing. Domestic networks are more dominant in euro-area countries, ODCs and LAC. Interestingly, while it could be expected that international brands would be dominant in countries with smaller populations because of the large investment costs associated with setting up a processing network, survey data does not show any evidence on this regard. Central banks were also asked to provide an opinion on whether the interchange fees prevailing in their jurisdictions are high, and what actions, if any, have or are being taken to address this issue. A total of 106 central banks responded to the first question with the following overall results: 48% consider the interchange fees to be high while 32% do not consider the interchange fees to be high. The remaining 20% did not express a particular opinion on this issue. Several of the central banks in the latter group mentioned that they coordi- Section III. Retail Payment Instruments and Systems

86 62 PAYMENT SYSTEMS WORLDWIDE TABLE III.14: PAYMENT SWITCHES OWNERSHIP STRUCTURE Consortium of a few large banks Consortium of all major banks (say 80% of all banks) Central Bank Other government bodies Other private sector entities Payment switches # % # % # % # % # % Worldwide total (164) 30 18% 58 35% 20 12% 14 9% 50 30% By county income level High income (59) 8 14% 28 47% 8 14% 4 7% 19 32% Upper-middle income (42) 11 26% 15 36% 3 7% 2 5% 13 31% Lower-middle income (37) 9 24% 12 32% 7 19% 3 8% 9 24% Low income (26) 2 8% 3 12% 2 8% 5 19% 9 35% By region East Asia and Pacific (14) 1 7% 4 29% 3 21% 0 0% 5 36% Europe and Central Asia (11) 0 0% 3 27% 3 27% 1 9% 6 55% Latin America & Caribbean (31) 14 45% 10 32% 0 0% 2 6% 6 19% Middle East & North Africa (13) 3 23% 5 38% 4 31% 2 15% 1 8% South Asia (8) 2 25% 1 13% 0 0% 0 0% 0 0% Sub-Saharan Africa (30) 4 13% 6 20% 4 13% 5 17% 12 40% Euro area countries (21) 0 0% 11 52% 3 14% 0 0% 7 33% Other EU members (14) 1 7% 6 43% 3 21% 1 7% 5 36% Other developed countries (22) 5 23% 12 55% 0 0% 3 14% 8 36% By country population size >30 million (63) 13 21% 24 38% 7 11% 2 3% 16 25% >5 million, <30 million (61) 10 16% 21 34% 9 15% 8 13% 18 30% 5 million or less (40) 7 18% 13 33% 4 10% 4 10% 16 40% nate with the relevant players (e.g. domestic payment networks) for the purpose of setting interchange fees. With regard to the second question on whether any actions are being taken, 34 central banks answered simply with a yes and 12 others with a no. A few provided further details on the actions being taken or planned, among which the most common ones are: (i) moral suasion and discussion with industry; (ii) detailed study being undertaken by the public authorities; and, (iii) establishing domestic payment card networks. Payment card switches are an important contributor to enabling interoperability for the payment card transactions in the country. In order to obtain a more complete picture of these systems, the 2010 survey covered several additional issues and detailed questions. Highlights from the analysis of these responses are discussed below; a more detailed analysis will be

87 Global Survey TABLE III.15: PAYMENT SWITCHES SETTLEMENT FEATURES Final settlement of net positions takes place through RTGS Final settlement takes place in Central Bank money, but not through RTGS Final settlement takes place in commercial bank money Final settlement takes place in another country Payment switches # % # % # % # % Worldwide total (164) 91 55% 20 12% 51 31% 3 2% By county income level High income (59) 40 68% 3 5% 15 25% 0 0% Upper-middle income (42) 24 57% 0 0% 14 33% 0 0% Lower-middle income (37) 16 43% 9 24% 15 41% 0 0% Low income (26) 11 42% 8 31% 7 27% 3 12% By region East Asia and Pacific (14) 7 50% 3 21% 4 29% 0 0% Europe and Central Asia (11) 4 36% 1 9% 4 36% 0 0% Latin America & Caribbean (31) 17 55% 0 0% 12 39% 0 0% Middle East & North Africa (13) 7 54% 1 8% 5 38% 0 0% South Asia (8) 1 13% 3 38% 5 63% 0 0% Sub-Saharan Africa (30) 17 57% 9 30% 6 20% 3 10% Euro area countries (21) 14 67% 1 5% 4 19% 0 0% Other EU members (14) 10 71% 2 14% 2 14% 0 0% Other developed countries (22) 14 64% 0 0% 9 41% 0 0% By country population size >30 million (63) 43 68% 6 10% 16 25% 3 5% >5 million, <30 million (61) 32 52% 10 16% 19 31% 0 0% 5 million or less (40) 16 40% 4 10% 16 40% 0 0% published in a forthcoming World Bank publication on payment card switches. Eighty-seven central banks responded to the questions of this sub-section, reporting a total of 164 payment card switches. 55 Overall, 75% of the central banks in whose jurisdiction domestic payment card switches exist provided detailed information on the operational 55 Central banks were requested to provide information for the three main payment card switches in their country. features of such systems, while 16 central banks indicated that there are no domestic payment card switches operating in their country. Table III.14 describes the ownership structure of the payment card switches. The most common ownership structure reported is a consortium of a large banks (35%), followed by a consortium of other private sector players (30%). Only 12% of the payment card switches are operated by central banks, which is a significantly lower figure than the corresponding one Section III. Retail Payment Instruments and Systems

88 64 PAYMENT SYSTEMS WORLDWIDE TABLE III.16: SUMMARY OF CENTRAL BANK PERCEPTION OF COSTS Payments/Associated Services Cost is negligible and low (%) Cost is high (%) Worldwide High income countries Low income countries Worldwide High income countries Opening a bank account Maintaining a bank account Direct credit Direct debit Cheque related services Credit cards Annual fees Credit cards Individual transactions Debit cards Annual fees Debit cards Individual transactions Prepaid cards Annual fees Prepaid cards Individual transactions ATM withdrawals at own bank ATM withdrawals at another bank Other ATM services at own bank Other ATM services at another bank Other payment instruments Note: Percentages of high and low income countries are intended on the total of respondent central banks. Low income countries for cheque clearinghouses and ACHs. Payment card switches being owned by a large number of banks is more common in higher income countries, especially in euro-area countries and ODCs, and slightly less in other EU members, while ownership by a small number of large banks prevails in LAC. Ownership of the payment card switch by central banks was reported to be more common in MNA countries (31%), and to a lesser extent in ECA (27%). According to the survey, a country s population size does not appear to have a relevant effect on ownership structure. Payment card switches were historically established for processing ATM and POS transactions. Over the years, the scope of payment card switches was expanded to include other transaction types like credit transfers. In the survey, central banks reported a total of 64 switches performing this transaction type. Moreover, the expansion of the usage of payment cards to other transaction channels like internet and mobile phones is also reflected in the survey data: 92 switches were reported to be also used for processing transactions initiated on the internet, and 54 switches were reported to be used for processing transactions initiated through mobile phones. Table III.15 shows data on some of the basic clearing and settlement features of payment card switches. Although not through a RTGS system, central bank money for the final settlement or participant positions is used in 12% of the cases. Final settlement through a RTGS system shows an increase from 42% in the 2008 survey to 55%. These figures are significantly lower than the corresponding ones for other retail systems

89 Global Survey like cheques and ACHs, in which the use of central bank money for the final settlement of participant positions is close to 95%. On the other hand, the use of commercial bank money for this purpose is common in SA (63%). In only three countries, all of which belong to the SSA region, final settlement takes place in another country. III.2.4 Affordability of Non-Cash Payment Instrument and Services for Individuals In the 2008 survey central banks were asked to provide their opinion on the easiness or difficulty for individuals to have access to non-cash payment services offered by commercial banks, non-banking financial institutions and the postal system. For the 2010 survey, the focus of this question changed, from accessibility of non-cash payment services to affordability of such services. Still, qualitative data based on central banks opinions was collected. Central banks were asked to provide a rating of the cost of payments and associated services on a scale of 1 to 4 (negligible, low, medium and high). A total of 114 central banks responded to this sub-section of the questionnaire. A brief summary of the responses is presented in Table III.16. A majority of the central banks (67%) assessed the cost of opening a bank account as negligible or low, though fewer central banks (58%) indicated the cost of maintaining a bank account as negligible or low. Only 39% of central banks consider the costs of direct credit being negligible/low, though the majority (57%) consider the cost of a direct debit being negligible/low. Given that there are ACHs and payment cards switches in operation in many countries, this could represent an opportunity for creating cost incentives to promote a BOX 7: INTERNATIONAL ADVISORY GROUP FOR GOVERNMENT PAYMENTS Government payments can play a critical role in the development of a national payment system especially in developing economies. Government payments can facilitate economic growth and innovation in the underlying retail payments infrastructure and enhance public policy goals such as efficiency, transparency, security of payments as well as financial inclusion. The International Advisory Group (IAG) for Government Payments, under the auspices of the World Bank, has been convened with a central mandate of supporting member governments in their efforts to improve the efficiency of government payment systems. Key goals for the IAG are to help facilitate the development of General Guidelines for Government Payments, as well as work towards assessment tools for government payments reform for all categories, such as: (i) Government Transfers or government to government (G2G) payments, which involve transfers from one government agency to another for budgetary or operational purposes through central treasury systems; (ii) Government Expenditures in the form of cash transfers, salaries and social benefits payments made by a government to a person (G2P) payments, and, expenditures made by government agencies for procurement and other business related expenses (G2B) payments; and (iii) Government Collections of revenues, fees, duties and other dues collected by a government from persons (P2G) or businesses (B2G). Development of the General Guidelines for Government Payments was done through analysis and synthesis of existing material, expertise and quantitative data to extrapolate a set of best practices for government payments and by multi-stakeholder consultations. The members of the IAG Secretariat at the World Bank were primary authors of this report (with input from experts from partner organizations), which was developed via periodic review and constant dialogue with the membership of the IAG. The public comment period will start in January 2012 (details here: paymentsystems/iag). Source: International Advisory Group for Government Payments, The World Bank Section III. Retail Payment Instruments and Systems

90 66 PAYMENT SYSTEMS WORLDWIDE TABLE III.17: PAYMENT INSTRUMENTS FOR GOVERNMENT PAYMENTS Mainly cash Mainly paper-based payment instruments-cheques, payment orders Mainly electronic payment instruments such as payment cards, electronic funds transfers, etc. Government-to-person payments Public sector salaries 11% 24% 76% Pensions and transfer payments 14% 26% 67% Cash transfers and social benefits 22% 31% 52% Person-to-government payments Taxes 40% 48% 44% Utility payments 55% 33% 42% Payment for services, etc. 54% 35% 34% Government-to-business payments Procurement of goods and services 2% 50% 61% Tax refunds 2% 49% 50% Business-to-government payments Taxes 11% 58% 57% Utilities 16% 53% 50% Benefits transfers 9% 52% 46% Note: Central banks were asked to indicate which is the payment mechanism mainly used for the specific types of government payments. In certain cases more than one payment mechanisms were chosen, hence the totals may add up to more than 100%. Note that this table reflects information provided by 129 central banks worldwide. large scale shift to use of direct credits and direct debits. Seventy-six central banks assessed the cost of cash withdrawals at own bank as negligible/low. The cost of ATM transactions conducted at other banks is an indicator of the level of inter-operability of the ATM networks in the country: 20% consider the cost of ATM withdrawals at other banks high, implying potentially low usage of other bank ATMs. The figures for this attribute for high income and low income countries indicate higher likelihood of customers using another bank s ATMs in high income countries in comparison to low income countries. When viewed in conjunction with significantly higher per capita ATMs in high income countries in comparison to low income countries, this indicates an even lower level of utilization of the ATM infrastructure in the low income countries. The central banks perceptions recorded in the survey do not show any apparent trend based on the size of the country, income level or region. However, a relatively higher proportion of central banks of low income countries have indicated that the costs of the various payment-related activities are high. On the other hand, a higher percentage of low income countries has reported the cost of cheques being negligible or low (45% against 41% of high income countries); the same could be said regarding credit cards annual fees and other payment instruments. Another interesting observation is that only 17% of central banks assessed the cost of other payment instruments like mobile payments as negligible/low. The percentage of central banks in low income countries assessing the cost of other payment instruments/mechanisms (such as mobile phone based e-money products) as negligible/

91 Global Survey TABLE III.18: PAYMENT INSTRUMENTS FOR GOVERNMENT TO PERSON PAYMENTS Public sector salaries Pensions and transfer payments Cash transfers and social benefits Mainly cash Mainly paper-based payment instruments Mainly electronic payment instruments Mainly cash Mainly paperbased payment instruments Mainly electronic payment instruments Mainly cash Mainly paperbased payment instruments Mainly electronic payment instruments Central banks % % % % % % % % % Worldwide total (129) 11% 24% 76% 14% 26% 67% 22% 31% 52% By income High income (45) 2% 11% 91% 9% 18% 80% 9% 20% 78% Upper-middle income (31) 3% 23% 84% 16% 19% 74% 23% 26% 58% Lower-middle income (33) 15% 33% 70% 9% 30% 64% 33% 30% 27% Low income (20) 35% 40% 40% 30% 45% 35% 30% 65% 25% By region East Asia and Pacific (11) 18% 27% 64% 9% 36% 64% 36% 27% 45% Europe and Central Asia (16) 13% 19% 69% 31% 13% 56% 25% 19% 44% Latin America & Caribbean (19) 0% 37% 79% 5% 37% 68% 16% 42% 47% Middle East & North Africa (12) 25% 33% 58% 8% 33% 50% 17% 42% 33% South Asia (4) 0% 75% 50% 0% 75% 50% 75% 25% 0% Sub-Saharan Africa (27) 22% 37% 59% 19% 37% 56% 26% 59% 30% Euro area countries (16) 6% 6% 100% 13% 19% 88% 13% 19% 88% Other EU members (11) 0% 0% 100% 27% 0% 73% 27% 0% 73% Other developed countries (13) 0% 0% 100% 0% 0% 100% 0% 8% 92% By population size >30 million (36) 22% 17% 81% 14% 19% 81% 25% 19% 61% >5 million, <30 million (47) 11% 23% 72% 17% 28% 62% 26% 34% 49% 5 million or less (46) 2% 30% 76% 11% 28% 63% 15% 37% 48% Section III. Retail Payment Instruments and Systems

92 68 PAYMENT SYSTEMS WORLDWIDE TABLE III.19: PAYMENT INSTRUMENTS FOR PERSON TO GOVERNMENT PAYMENTS Taxes Utility payments Payment for services, etc. Mainly cash Mainly paperbased payment instruments Mainly electronic payment instruments Mainly cash Mainly paperbased payment instruments Mainly electronic payment instruments Mainly cash Mainly paperbased payment instruments Mainly electronic payment instruments Central banks % % % % % % % % % Worldwide total (129) 40% 48% 44% 55% 33% 42% 54% 35% 34% By income High income (45) 18% 30% 75% 23% 25% 68% 27% 25% 64% Upper-middle income (31) 41% 56% 28% 63% 31% 22% 59% 44% 13% Lower-middle income (33) 64% 55% 30% 70% 42% 39% 67% 39% 27% Low income (20) 45% 65% 25% 90% 40% 20% 85% 35% 15% By region East Asia and Pacific (11) 64% 73% 18% 82% 45% 36% 91% 45% 18% Europe and Central Asia (16) 50% 38% 25% 56% 31% 31% 50% 38% 25% Latin America & Caribbean (19) 47% 53% 47% 58% 42% 37% 53% 42% 32% Middle East & North Africa (12) 33% 58% 25% 42% 33% 42% 50% 33% 25% South Asia (4) 100% 25% 25% 100% 25% 25% 75% 25% 25% Sub-Saharan Africa (27) 44% 63% 22% 89% 33% 15% 85% 33% 11% Euro area countries (16) 13% 31% 88% 25% 31% 81% 25% 31% 69% Other EU members (11) 27% 18% 73% 27% 9% 55% 27% 9% 45% Other developed countries (13) 15% 46% 77% 15% 38% 69% 23% 46% 69% By population size >30 million (36) 42% 47% 58% 58% 31% 47% 64% 31% 39% >5 million, <30 million (47) 40% 43% 49% 57% 36% 47% 53% 30% 38% 5 million or less (46) 37% 54% 28% 50% 33% 33% 48% 43% 26%

93 Global Survey low is 35%, compared to 13% for high income countries. This may indicate that other payment instruments are perceived as more relevant in low income countries. III.2.5 Government Payments For the 2010 survey, a new sub-section on payments made from/to the government and its agencies was included. For many years, the PSDG has asserted that government payments play a critical role in the development of a national payments system given their scale and volume, and the positive role they play in facilitating innovation in the underlying retail payments infrastructure. The efficiency, transparency, security and cost effectiveness of payments made or collected by government entities largely depends upon the type of payment instruments used for distribution and collection purposes. Payment processes that use cash or paper-based payment instruments are more inefficient in terms of both processing time and cost effectiveness. In contrast, countries that have successfully adopted electronic payment instruments such as payment cards (e.g. for the disbursement or subsidies, other social benefits, etc.) or electronic credit transfers, among others, have been able to improve the efficiency at the disbursing or collecting government entities. Additionally, in many cases this has had a profound impact on the retail payments industry as a whole. In recognition of the strategic importance of government payments, the World Bank s PSDG has convened an International Advisory Group to develop guidelines for making government payments more efficient (details in Box 7). Broadly defined, government payments include four key categories of payments: (i) cash transfers, salaries and social benefits payments made by a government entity to a person or G2P payments; (ii) payments collected by a government entity from persons or businesses including taxes and payments for government services such as utilities, etc., also known as P2G and B2G payments; (iii) payments made by a government entity to businesses for operational or procurement purposes or G2B payments; and, (iv) intra-governmental payments involving payments from one government agency to another for budgetary or operational purposes or G2G payments. In the survey, central banks were asked to identify the payment mechanisms used for government payments. The responses to this set of questions are summarized in Table III.17. Amongst the various types of government payments, G2P universally had the highest rate of usage of electronic payment methods. Most importantly, payment of salaries to public sector employees included electronic payment methods in over 75% of the responding countries. Further, pensions and social benefit transfers were mainly executed by electronic payment methods in 67% and 52% of the countries, respectively. Conversely, P2G universally had the lowest rate of use of electronic payment methods. On average, 50% of the responding countries reported collecting revenues from taxes, utilities, etc. via cash and 40% using other paper-based methods. In terms of governments making payments to businesses for procurement of services and tax refunds, the response was balanced between electronic and paper-based based payment methods (mainly cheques). Collections of taxes, utilities payment, etc. by governments from businesses also saw balanced responses between electronic and paper-based based payment methods with nearly 50% incorporating each type of payment method. More details on G2P and P2G payments are provided in Tables III.18 and III.19. Section III. Retail Payment Instruments and Systems

94

95 SECTION IV SETTLEMENT OF FOREIGN EXCHANGE TRANSACTIONS IV.1 BACKGROUND Foreign exchange (FX) transactions add complexity to the clearing and settlement process seen at the domestic level since they have a multicurrency dimension and, typically, involve more than one jurisdiction. Settlement of FX transactions gives rise to several types of risk. First, FX settlement risk has a credit risk dimension. For each FX trade, there are two payment delivery legs, one in the domestic currency and the other in foreign currency. If a bank cannot make the payment of the currency it sold conditional on its final receipt of the currency it bought, it faces the possibility of losing the full principal value of the transaction (so called principal risk). FX settlement risk also has an important liquidity risk dimension. Even temporary delays in settlement can expose a receiving bank to liquidity pressures if unsettled funds are needed to meet obligations to other parties. In addition, in the case of FX deals legal risk can be complicated by the fact that settlement normally takes place in more than one jurisdiction. Most banks do not participate directly in payment systems outside their country of incorporation and therefore need another institution to act as intermediary to settle the foreign currency leg. In 1996, the G-10 central banks endorsed a strategy to reduce the systemic risk arising from the settlement of foreign exchange trades. This strategy called for: i) action by individual banks to control the FX settlement exposures; ii) action by industry groups to provide risk-reducing multicurrency services; and, iii) action by central banks to induce rapid private sector progress. As one of the major results of these efforts, CLS Bank International (CLS Bank) started its continuouslinked settlement-cls service in 2002, eliminating principal risk for FX transactions in the currencies that are settled in it. Currently, the CLS Bank settles FX transactions in 17 currencies: Australian dollar, British pound, Canadian dollar, Danish krone, euro, Japanese yen, Hong Kong dollar, Israeli shekel, Korean won, Mexican peso, New Zealand dollar, Norwegian krone, Swedish krona, Singapore dollar, South African rand, Swiss franc, and the U.S. dollar. CLS Bank is subject to the cooperative oversight of the central banks involved and is directly overseen by the U.S. Federal Reserve. In May 2008 the CPSS issued a report on Progress in reducing foreign exchange settlement risk. This report analyses the progress made over the past ten years and concludes that the central bank strategy has achieved significant success. However, a notable share of FX transactions is settled in ways that still generate significant potential risk across the global financial system and so further action is needed. 71

96 72 PAYMENT SYSTEMS WORLDWIDE TABLE IV.1: STATISTICS ON OTC FX TURNOVER FROM THE BIS TRIENNIAL CENTRAL BANK SURVEY OF FOREIGN EXCHANGE AND DERIVATIVES MARKET ACTIVITY IN 2010

97 Global Survey TABLE IV.1 (continued) Source: Bank for International Settlements, Triennial Central Bank Survey of Foreign Exchange and Derivatives Market Activity in 2007 Final Results, Basel, Switzerland, December Section IV. Settlement of Foreign Exchange Transactions

98 74 PAYMENT SYSTEMS WORLDWIDE TABLE IV.2: FOREIGN EXCHANGE MARKETS: GENERAL FEATURES One foreign currency accounts for 90% or more of total FX transactions Central Bank offers current account services in at least one major foreign currency There are restrictions on FX dealings, and the FX market is not very active FX markets # % # % # % Worldwide total (108) 47 44% 52 48% 16 15% By income High income (38) 13 34% 11 29% 1 3% Upper-middle income (28) 15 54% 16 57% 3 11% Lower-middle income (26) 13 50% 14 54% 7 27% Low income (16) 6 38% 11 69% 5 31% By region East Asia and Pacific (8) 4 50% 1 13% 3 38% Europe and Central Asia (14) 7 50% 6 43% 3 21% Latin America & Caribbean (16) 11 69% 12 75% 3 19% Middle East & North Africa (9) 6 67% 6 67% 1 11% South Asia (4) 2 50% 2 50% 1 25% Sub-Saharan Africa (21) 8 38% 12 57% 5 24% Euro area (12) 1 8% 3 25% 0 0% Other EU members (10) 1 10% 7 70% 0 0% Other developed countries (14) 7 50% 3 21% 0 0% By population size >30 million (31) 18 58% 14 45% 4 13% >5 million, <30 million (42) 16 38% 21 50% 7 17% 5 million or less (35) 13 37% 17 49% 5 14% Note: For the purpose of this table, member countries of the BCEAO are counted as one. The latest information on foreign exchange turnover worldwide can be found in the BIS Triennial Central Bank Survey of Foreign Exchange and Derivatives Market Activity, 2010 (see Table IV.1). IV.2 SURVEY OUTCOMES The World Bank survey collected information regarding the organization of FX markets, central bank services provided for the settlement of FX transactions, settlement arrangements used to reduce FX settlement risk, and average duration of FX exposures. In general terms the information that was received is incomplete. Not all central banks responded to this section of the survey; others provided answers to some and not all of the questions. As a consequence, cross-country comparisons, as well as comparisons with the previous survey, are difficult to make.

99 Global Survey While available information does not allow drawing clear conclusions regarding the progress in reducing FX settlement risk, some positive developments are evident. Two more currencies (Israeli shekel and Mexican peso) have been accepted for settlement on PVP basis in the CLS Bank. In addition, several new offshore systems for settlement of foreign currencies on a PVP basis started operations after the previous survey. in the countries of the European Union continue to be more diversified. One half of the responding central banks offer current account and or settlement services in at least one major foreign currency. This does not necessarily mean that the main interbank payment systems process transactions in currencies other than the national/official currency. 56 The following tables only include information on the countries that have answered Part IV: Foreign Exchange Settlement Systems of the Questionnaire for Collecting Information to Depict the Situation of Payment and Securities Settlement Systems Worldwide. Furthermore, information in Tables IV.3A and IV.3B is limited to the central banks indicating the existence of organized FX market in their country. Not surprisingly, one foreign currency continues to dominate FX transactions in about half of the reporting countries. Table IV.2 shows that in 44% of the FX markets, one foreign currency accounts for 90% or more of total FX activity, a result that is almost identical to that of the 2008 survey. This concentration is significant in the LAC region, where most countries are closely linked to the U.S. dollar, as well as in MNA region. When compared to the 2008 survey, the number of countries in the LAC region that reported concentration of their FX markets in a single currency decreased from 78% to 69%, while in MNA this percentage increased from 42% to 67%. A significant increase in the concentration of FX trades was noted also in the EAP region where half of the countries answered positively to this question (only 10% in the previous survey). In the case of the ECA region, despite the reported percentage being 50%, PSDG field experience shows that CIS countries within this region usually have a very large concentration of FX trades in the U.S. dollar. In contrast, FX markets In some countries, the central bank is directly involved in the settlement of the foreign leg of FX transactions. This is the case in most of the countries where FX transactions are traded in a centralized market 57 and settled through foreign currency accounts kept at the central bank. Indeed, 12 of the countries where the central bank offers account and settlement services in foreign currencies also reported that the centralized FX market settles on PVP bases solely through settlement accounts at the central bank (see Table IV.3B, third column). The percentage of central banks offering settlement services in foreign currencies is higher in the LAC, MNA and non-euro EU member countries. In the latter case, central banks can provide settlement services to domestic banks for settlement in euro by joining TARGET2. The survey data also shows that the provision of accounts and settlement services by central banks is more common in low and middle income countries. The percentage of central banks indicating that the FX market operates with some type of restriction or is not very active has decreased only slightly from the 2008 survey (15% from 16%). As was the case in 2008, FX markets tend to operate more freely in higher income 56 Table II.2 shows that only 10 RTGS systems allow the processing of transactions in foreign currencies. 57 For the purpose of this survey, a centralized market is defined as a structured arrangement for trading at a central location, e.g. an Exchange. Section IV. Settlement of Foreign Exchange Transactions

100 76 PAYMENT SYSTEMS WORLDWIDE TABLE IV.3A: CENTRALIZED FOREIGN CURRENCY MARKETS Centralized foreign currency markets Number (#) % on the total respondents to Part IV Worldwide total 41 38% By income High income 10 26% Upper-middle income 12 43% Lower-middle income 11 42% Low income 8 50% By region East Asia and Pacific 4 50% Europe and Central Asia 6 43% Latin America & Caribbean 7 44% Middle East & North Africa 1 11% South Asia 2 50% Sub-Saharan Africa 12 57% Euro area 3 25% Other EU members 3 30% Other developed countries 3 21% By population ssize >30 million 16 52% >5 million, <30 million 16 38% 5 million or less 9 26% countries with only 1 country in this category indicating the existence of such restrictions. In contrast, about one-third of low income countries reported their FX market operating with some restrictions or not being very active. The existence of a centralized market for FX trading was indicated by 41 respondents (see Table IV.3A). Centralized FX markets are more common in middle and low income countries. Indeed, only 10 high income countries indicated the existence of such an arrangement. From a regional perspective, these types of markets are more common in the SSA, EAP, SA, LAC, and ECA (mostly CIS countries) regions. Table IV.3B provides details about settlement arrangements in organized FX markets. In the majority of the reporting countries settlement is made on a PVP basis. The most common method for settlement of FX trans-

101 Global Survey TABLE IV.3B: SETTLEMENT FEATURES IN ORGANIZED FX MARKETS One foreign currency accounts for 90% or more of total transactions Settlement of foreign currency deals at the exchange are settled by the exchange Settlement occurs on a PVP basis solely through settlement accounts at the Central Bank Settlement occurs on a PVP basis through combination Central Bank -foreign correspondent banks Settlement of FX deals occurs on a PVP solely through foreign correspondent banks There is no PVP procedure FX markets # % # % # % # % # % # % Worldwide total (41) 22 54% 6 15% 12 29% 20 49% 4 10% 11 27% By income High income (10) 3 30% 2 20% 2 20% 2 20% 1 10% 4 40% Upper-middle income (12) 8 67% 1 8% 4 33% 7 58% 0 0% 1 8% Lower-middle income (11) 8 73% 2 18% 3 27% 7 64% 2 18% 4 36% Low income (8) 3 38% 1 13% 3 38% 4 50% 1 13% 2 25% By region East Asia and Pacific (4) 2 50% 1 25% 0 0% 4 100% 0 0% 0 0% Europe and Central Asia (6) 4 67% 1 17% 2 33% 3 50% 0 0% 1 17% Latin America & Caribbean (7) 6 86% 2 29% 3 43% 4 57% 0 0% 1 14% Middle East & North Africa (1) 1 100% 0 0% 0 0% 0 0% 0 0% 0 0% South Asia (2) 1 50% 0 0% 0 0% 1 50% 1 50% 1 50% Sub-Saharan Africa (12) 6 50% 0 0% 5 42% 6 50% 2 17% 4 33% Euro area (3) 0 0% 0 0% 0 0% 0 0% 0 0% 3 100% Other EU members (3) 0 0% 0 0% 1 33% 2 67% 0 0% 1 33% Other developed countries (3) 2 67% 2 67% 1 33% 0 0% 1 33% 0 0% By population size >30 million (16) 11 69% 3 19% 1 6% 12 75% 2 13% 3 19% >5 million, <30 million (16) 7 44% 3 19% 5 31% 7 44% 2 13% 6 38% 5 million or less (9) 4 44% 0 0% 6 67% 1 11% 0 0% 2 22% actions, reported by half of the 41 countries with an organized FX market, uses a combination of accounts in the central bank for the local currency, and accounts in foreign correspondent banks for the foreign currency leg of the transaction. This result is similar to 2008 survey findings. As mentioned earlier in this chapter, in 12 countries out of 41, PVP is achieved by using settlement accounts/services of the central bank only. 58 This approach is more common in small and medium size countries. Four countries indicated that FX deals are settled on PVP basis through foreign correspondent banks, while 6 countries reported that FX trades at the exchange are also settled through the exchange. 58 In this case, the central bank offers current accounts in one or more foreign currencies and facilitates the PVP settlement against the domestic currency. As it is shown in Table IV.2, 52 central banks offer such services. Section IV. Settlement of Foreign Exchange Transactions

102 78 PAYMENT SYSTEMS WORLDWIDE TABLE IV.4: SETTLEMENT FEATURES IN OVER-THE-COUNTER (OTC) MARKETS There is an organized mechanism or procedure for FX trades to be settled on a PVP basis Time lag between confirmation of settlement of foreign currency leg and domestic currency leg does not exceed 2h Time lag between confirmation of settlement of foreign currency leg and domestic currency leg is less than 24h Time lag between confirmation of settlement of foreign currency leg and domestic currency leg exceeds 24h No significant information is available on the risks in the foreign currency market FX markets # # # # # Worldwide total (108) By income High income (37) Upper-middle income (29) Lower-middle income (26) Low income (16) By region East Asia and Pacific (8) Europe and Central Asia (14) Latin America & Caribbean (16) Middle East & North Africa (9) South Asia (4) Sub-Saharan Africa (21) Euro area (12) Other EU members (10) Other developed countries (14) By population size >30 million (32) >5 million, <30 million (41) million or less (35) Note: Due to many countries not providing an answer to this question, columns with percentages were omitted in this table to avoid confusion or improper comparisons within and across the various country categories Eleven out of the 41 countries with an organized FX market (4 of which are in the SSA region and 3 in the Euro area) reported that FX transactions are settled through traditional correspondent banking arrangements and there is no specific procedure in place for trades to be settled on a PVP basis. In this regard, according to the new survey data, no progress was made in reducing FX settlement risk. With regard to the settlement risk in OTC FX markets, 44 out of 108 countries reported that a PVP settlement mechanism is in place at least for some currency pairs. Most euro-area countries, 2 non-euro EU members, 8 ODCs and one country from the SSA region specifically indicated the use of the CLS Bank as a major mechanism for reducing FX settlement risk.

103 Global Survey In the EAP region, 3 countries reported the use of offshore 59 systems for same-day settlement in foreign currencies: such systems settle foreign currencies on PVP basis in the time zone of the domestic market. The rest of the countries indicating the use of PVP settlement for OTC FX market transactions are located in the LAC, MNA, SSA and ECA regions. PVP settlement for OTC-traded foreign currencies is more common in high income countries. Seven countries reported a lack of sufficient information about the mechanisms used by banks to reduce FX settlement risk of OTC transactions. The World Bank survey also asked for data on FX turnover for both exchange-traded and OTC contracts over the period of five years ( ). With few exceptions, the information that was received was very limited. This appears to be an indication of insufficient awareness in several central banks regarding settlement risks in FX markets. This is particularly true for many central banks in developing countries and regions, as seen through PSDG field work in such countries. 59 These are RTGS systems that are established in a country different from the country of the currency settled. PVP settlement is achieved through a direct link with the domestic RTGS system. Such systems have been established in Asia, North America, Latin America and Africa. In the specific case of Hong Kong, RTGS systems in other countries can access Hong Kong s systems for settlement in USD, euro or Renminbi. Section IV. Settlement of Foreign Exchange Transactions

104

105 SECTION V INTERNATIONAL REMITTANCES AND OTHER CROSS-BORDER PAYMENTS V.1 BACKGROUND Retail cross-border payments, notably trade-related payments and person-toperson international remittances, are increasingly relevant for economies and their societies as a result of current global realities particularly growing economic integration and interdependence among countries at all levels, and the increasing flow of immigrants throughout the world. From a policy making perspective, retail cross-border payments share many of the features of domestic retail payments. Remittances can be expensive relative to the often low incomes of migrant workers and to the rather small amounts sent (typically no more than a few hundred dollars or the equivalent at a time). Also, it may not be easy for migrants to access remittance services if they do not speak the local language or do not have the necessary documentation. Finally, the relatively undeveloped financial infrastructure in some countries may make it difficult for recipients to collect their remittances. In some cases, the services are unreliable, particularly when it concerns the time taken for the funds to be transferred. In addition, some markets are uncompetitive or have regulatory barriers that hamper competition. The World Bank and the CPSS co-chaired a Task Force to establish General Principles (GPs) of universal applicability that identify the features and functions that should be satisfied by remittance systems, providers, and financial intermediaries. 60 The GPs cover areas such as transparency and consumer protection, payment system infrastructure, legal and regulatory environment, market structure and competition, and governance and risk management. The GPs provide the first internationally recognized payment system framework for remittance transfers, and they are expected to facilitate international policy coordination in the area of remittance transfers. V.2 SURVEY OUTCOMES In the past decade the attention paid to remittances has increased exponentially, and research on remittances has been undertaken from a number of angles. The Global Payment Survey focuses on those aspects of international remittances deemed most relevant for payment systems. The GPs define international remittances as cross-border person-to-person payments of relatively low value. 61 On this basis, the survey ques- 60 Committee on Payment and Settlement Systems and The World Bank, General Principles for International Remittance Services, Basel, Switzerland, January See CPSS and The World Bank,

106 82 PAYMENT SYSTEMS WORLDWIDE tionnaire aimed at obtaining information on what types of remittance service providers operate in various countries, how these providers are regulated, and what the main payment instruments used to channel international remittances are. Information to Depict the Situation of Payment and Securities Settlement Worldwide Countries are grouped according to the standard country classifications such as income levels, regions, and population sizes throughout this chapter. Due to methodological complexity, the survey does not report statistics on the amounts of remittances that are sent and/or received by each country, 62 or on the cost of sending remittances from one country to another. The costs of sending remittances are available at the World Bank s Remittance Prices Worldwide database. 63 This year s survey expanded the scope of questions. First, as central banks views on remittances may differ according to the direction of remittance flows, a distinction between inbound and outbound remittances was introduced in several of the survey s questions for this section. Also, in line with the GPs, questions on transparency of remittance services, consumer protection and the competition environment were added. This chapter first discusses the relative importance of the various types of remittance service providers (RSPs) for both inbound and outbound remittances, and analyzes in further detail the answers for the top four RSPs. This same approach is used to analyze the use of different payment instruments for sending and receiving remittances. Transparency, consumer protection, and competition in the provision of remittance services are the subjects of Tables V.6, V.7, and V.8, and related analysis. The two final tables in this Chapter discuss the integration of payment systems for cross-border payments and the use of SWIFT network. The tables in this section and related analysis report information on all countries that have responded to Part V: Cross-border Payments and International Remittances of the Questionnaire for Collecting 62 For data on remittance flows, please refer to the World Bank Migration and Remittances Team at 63 See Remittance Prices Worldwide at V.2.1. Remittance Service Providers The first aspect surveyed is the relative importance of the various types of remittance service providers (RSPs). Nine institutional RSP types were included in the questionnaire: commercial banks, international money transfer operators (MTOs), local MTOs, exchange bureaus, credit unions, microfinance institutions, post offices, mobile phone operators, and retail stores (acting as agents of MTOs). The survey requested that central banks rank the importance of different types of RSPs in their country from 1 to 10, with 1 being the most relevant and 10 being the least relevant. Results are summarized in Table V.1A for inbound remittances and Table V.2A for outbound remittances. Tables V.2A and V.2B analyze in further detail the answers for the top four RSPs for inbound and outbound remittances. For inbound remittances, Table V.2A shows that commercial banks and to a lesser extent international MTOs are considered by far the most relevant RSP type by central banks at the global level. Fifty-three percent of respondents consider commercial banks to be the most relevant RSP. International MTOs follow in a distant second with 24%. Local MTOs and post offices are considered to have a limited role (around 6%). In all regions, commercial banks are ranked as the most relevant RSP for inbound remittances. However, the degrees of perceptions towards commercial banks vary across the regions. The highest percentages are in the EAP and the SA regions. To a large extent, these results reflect the specific situation of remittance mar-

107 Global Survey TABLE V.1A: RELEVANCE OF THE VARIOUS RSPs FOR INBOUND REMITTANCES (Number of Central Banks that rated each option with the corresponding ranking) Ranking Commercial banks International MTOs Local MTOs Exchange bureaus Credit Unions Microfinance institutions Post Office Mobile phone operators Retail stores as agents of MTOs Others 1 (highest) (lowest) No rating or no answer TABLE V.1B: RELEVANCE OF THE VARIOUS RSPs FOR OUTBOUND REMITTANCES (Number of Central Banks that rated each option with the corresponding ranking) Ranking Commercial banks International MTOs Local MTOs Exchange bureaus Credit Unions Microfinance institutions Post Office Mobile phone operators Retail stores as agents of MTOs Others 1 (highest) (lowest) No rating or no answer Section V. International Remittances and Other Cross-Border Payments

108 84 PAYMENT SYSTEMS WORLDWIDE kets in those regions. In Bangladesh, 64 for example, only banks have access to foreign exchange services, and money transfer companies act as agents of commercial banks in distributing remittances. In India, commercial banks lead the remittance business. Some Indian commercial banks have established subsidiaries abroad in order to attract more remittances business; some of these subsidiaries are non-bank RSPs such as money service businesses in the United States and Canada. From a country income perspective, about half of the central banks in high income and upper-middle income countries view commercial banks as the most relevant RSPs. On the other hand, about 70% of central banks of lower-middle income view commercial banks as the most relevant RSP. Other RSP types such as international MTOs, local MTOs, foreign exchange bureaus and post offices are also viewed as important by central banks of upper middle income and low income countries for incoming remittances. Still, in these countries, commercial banks appear to dominate the remittance markets. PSDG assessments and studies show that international MTOs often enter into joint ventures with commercial banks and post offices. It may also be the case in some countries that recipients only go to commercial banks where they receive remittances through their accounts, or cash remittances through international MTOs, if they do not have bank accounts. The fact that RSPs other than commercial banks play a larger role in remittance receiving countries can be explained to some extent by less developed banking industries in such countries, particularly with regard to the deployment of infrastructure and access points. PSDG experience confirms this overall trend. 64 Bangladesh did not participate in the Global Payment Systems Survey The role of post offices in the market for inbound remittances is also limited: post offices were rated as the most important RSP (i.e. ranked as 1 ), by only 6 central banks, 3 of which are in the SSA region. However, in the MNA region the Post Office is deemed the most relevant RSP in the same magnitude as international or local MTOs. It is interesting to note that no central bank ranked mobile phone providers as 1, only two central banks ranked them as 2 and three central banks as 3 for inbound remittances. Despite the growing attention on the use of mobile phones for remittances, their relevance, as viewed from the perspective of central banks, is still negligible compared to commercial banks, international MTOs, and other RSP types. Worldwide totals shown in Table V.2B are almost identical to those of Table V.1B. Percentages do differ for some of the country categories, although not significantly. For example, in the LAC region and noneuro EU members, a larger number of central banks rated commercial banks as the most relevant RSP for inbound remittances than they did for outbound remittances (50% vs. 39% and 55% vs. 45% respectively). The opposite is true for the MNA, SA and SSA regions. Interestingly, in the case of euro-area countries and ODCs, typically regarded as net remittance sending countries, the percentages for Table V.1B and Table V.2B are practically the same. In the case of outbound remittances, two central banks ranked mobile phone operators and retail stores as 1. On the other hand, not a single central bank rated microfinance institution 1 for outbound remittances, while only one did so for inbound remittances. Comparing these outcomes to those of the last survey, it appears that the relevance of commercial banks as RSPs has significantly increased in lower-middle income countries and decreased slightly in higher in-

109 Global Survey TABLE V.2A: RSPs REGARDED AS THE MOST RELEVANT FOR INBOUND REMITTANCES Commercial banks International money transfer operators Local money transfer operator Post office Central banks opinions # % # % # % # % Worldwide total (125) 67 53% 30 24% 7 6% 6 5% By country income level High income (46) 24 52% 10 22% 2 4% 1 2% Upper-middle income (29) 12 41% 9 31% 4 14% 2 7% Lower-middle income (32) 22 69% 3 9% 0 0% 2 6% Low income (18) 9 50% 8 44% 1 6% 1 6% By region East Asia and Pacific (11) 8 73% 1 9% 0 0% 0 0% Europe and Central Asia (16) 8 50% 5 31% 1 6% 0 0% Latin America & Caribbean (18) 9 50% 4 22% 2 11% 0 0% Middle East & North Africa (11) 5 45% 2 18% 2 18% 2 18% South Asia (4) 3 75% 0 0% 1 25% 0 0% Sub-Saharan Africa (24) 13 54% 10 42% 0 0% 3 13% Euro area countries (16) 6 38% 4 25% 1 6% 0 0% Other EU members (11) 6 55% 1 9% 0 0% 0 0% Other developed countries (14) 9 64% 3 21% 0 0% 1 7% By country population size >30 million (33) 18 55% 7 21% 1 3% 1 3% >5 million, <30 million (46) 26 57% 9 20% 2 4% 1 2% 5 million or less (46) 23 50% 14 30% 4 9% 4 9% Notes: 1. This table reflects the number of central banks that rated each RSP type 1 i.e. the most relevant. For further details refer to the questionnaire in Annex Percentages do not add up to 100% as not all countries responded this question, while others selected more than one option as equally important. come countries. In turn, the relevance of international MTOs decreased significantly for lower-middle income countries, from 41% in the 2008 survey to only 9% in the current one for inbound remittances and 16% for outbound remittances. These findings illustrate the fast changing landscape of remittance markets. Overall, commercial banks began to offer remittance products different from traditional wire transfer services and have expanded their presence in the market. At the same time, international MTOs continue to make efforts to gain market share with lower costs. Table V.3 discusses licensing and regulatory requirements for RSPs. The survey explicitly required respondents to indicate each feature listed in this question was applicable to all RSPs. Section V. International Remittances and Other Cross-Border Payments

110 86 PAYMENT SYSTEMS WORLDWIDE TABLE V.2B: RSPs REGARDED AS THE MOST RELEVANT FOR OUTBOUND REMITTANCES Commercial banks International money transfer operators Local money transfer operators Post office Central banks opinions # % # % # % # % Worldwide total (125) 69 55% 30 24% 6 5% 5 4% By country income level High income (46) 23 50% 11 24% 3 7% 1 2% Upper-middle income (29) 12 41% 8 28% 3 10% 2 7% Lower-middle income (32) 23 72% 5 16% 0 0% 1 3% Low income (18) 11 61% 6 33% 0 0% 1 6% By region East Asia and Pacific (11) 8 73% 2 18% 0 0% 0 0% Europe and Central Asia (16) 8 50% 6 38% 1 6% 0 0% Latin America & Caribbean (18) 7 39% 3 17% 1 6% 0 0% Middle East & North Africa (11) 7 64% 2 18% 2 18% 1 9% South Asia (4) 4 100% 0 0% 0 0% 0 0% Sub-Saharan Africa (24) 15 63% 8 33% 0 0% 3 13% Euro area countries (16) 6 38% 4 25% 1 6% 0 0% Other EU members (11) 5 45% 2 18% 0 0% 0 0% Other developed countries (14) 9 64% 3 21% 1 7% 1 7% By country population size >30 million (33) 18 55% 7 21% 1 3% 0 0% >5 million, <30 million (46) 27 59% 9 20% 0 0% 1 2% 5 million or less (46) 24 52% 14 30% 5 11% 4 9% Notes: 1. This table reflects the number of central banks that rated each RSP type 1 i.e. the most relevant. For further details refer to the questionnaire in Annex Percentages do not add up to 100% as not all countries responded this question, while others selected more than one option as equally important. Survey results show that in 56% of all countries RSPs are required to be registered with a competent authority, while in 66% of the cases RSPs have to be licensed by a competent authority. Both items increased from the previous survey. Registration is less common in EAP and ECA regions, and non-euro EU members, while licensing is less common in the LAC region and in ODCs. It should be noted, however, that 57 countries indicated both options in table V This means that out of the total of 132 countries that answered this section of the questionnaire, in 28 there are no registration or licensing requirements for all RSPs. The equivalent figure in the 2008 survey was 47 countries. 65 Including individual answers for BCEAO members.

111 Global Survey TABLE V.3: LICENSING AND REGULATION OF REMITTANCE SERVICE PROVIDERS All RSPs have to be registered with a competent authority All RSPs have to be licensed by a competent authority All RSPs need only to comply with Anti-Money Laundering (AML) regulations RSPs are not required to comply with any particular law or regulation other than those of general applicability Countries # % # % # % # % Worldwide total (132) 74 56% 87 66% 71 54% 11 8% By income High income (46) 30 65% 31 67% 21 46% 3 7% Upper-middle income (29) 14 48% 17 59% 16 55% 3 10% Lower-middle income (34) 18 53% 20 59% 19 56% 5 15% Low income (23) 12 52% 19 83% 15 65% 0 0% By region East Asia and Pacific (11) 3 27% 8 73% 5 45% 0 0% Europe and Central Asia (16) 7 44% 8 50% 10 63% 0 0% Latin America & Caribbean (18) 11 61% 8 44% 12 67% 6 33% Middle East & North Africa (11) 7 64% 8 73% 6 55% 0 0% South Asia (4) 3 75% 3 75% 2 50% 0 0% Sub-Saharan Africa (31) 16 52% 23 74% 19 61% 2 6% Euro area countries (16) 12 75% 13 81% 6 38% 1 6% Other EU members (11) 5 45% 8 73% 3 27% 0 0% Other developed countries (14) 10 71% 8 57% 8 57% 2 14% By population size >30 million (32) 21 66% 23 72% 16 50% 2 6% >5 million, <30 million (53) 28 53% 35 66% 31 58% 7 13% 5 million or less (47) 25 53% 29 62% 24 51% 2 4% The last two columns to the right in table V.3 expand upon the type of requirements that apply to all RSPs. The purpose of this to determine whether RSPs are only subject to Anti-Money Laundering (AML) regulations, or if they only need to comply with other laws of general applicability. Slightly more than half (54%) of central banks responded that RSPs are only subject to AML regulation, and in 8% of the cases RSPs only need to comply with general laws. In this last regard, it should be noted that 11 countries do not appear to have any specific legal and regulatory framework applicable to RSPs. The LAC region shows the highest percentage (33%), followed by ODCs (14%). The equivalent figure in the 2008 survey was 26 countries. In summary, Table V.3 shows that in general terms registration and/or licensing requirements for RSPs are becoming more common, and also that more coun- Section V. International Remittances and Other Cross-Border Payments

112 88 PAYMENT SYSTEMS WORLDWIDE TABLE V.4A: RELEVANCE OF THE VARIOUS PAYMENT INSTRUMENTS FOR SENDING REMITTANCES (Number of Central Banks that rated each option with the corresponding ranking) Ranking Cash Cheques or similar payment instruments Current account transfers International payment cards linked to a current account International prepaid cards Mobile payments Other 1 (highest relevance) (lowest relevance) No rating/answer tries have adopted specific regulations or laws for RSPs and/or for remittance activities. V.2.2. Payment Instruments in International Remittances Tables V.4A and V.4B respectively show the relative importance of the various payment instruments, as rated by central banks, for sending remittances and for receiving remittances. The survey requested central banks once again to rank each payment instrument, this time from 1 to 6, with 1 being the most relevant to 6 being the least relevant. Six different payment instruments were included: cash, cheques or similar payment instruments, current account transfers, international payment cards linked to a current account, international prepaid cards, and mobile payments. Respondents were also given an opportunity to indicate other in case none of the above fit their particular situation. Results summarized in both Tables V.4A and V.4B clearly demonstrate that cash and current account transfers are regarded as the most relevant payment instruments for both sending and receiving remittances. As for prepaid cards and mobile payments, while there are recent and rapid developments of such products, no central bank indicated that prepaid cards are the most relevant payment instrument for sending/receiving remittances. Only one country indicated that mobile payments are the most relevant instrument for sending/receiving remittances (along with current account transfers). In only three responses mobile payments were ranked as either second or third place. Tables V.5A and V.5B analyze in further detail the answers for the top three payment instruments for sending and receiving remittances, i.e. cash, current account transfers, and cheques (or similar payment instruments). These tables include the frequency with which these three payment instruments were ranked as either 1 or 2. For both sending and receiving remittances, cash is considered as the most relevant instrument by 44% and 46% of central banks respectively. Current account transfers were ranked a distant second by 26% and 32% of the respondents respectively. The relevance of cash is clearly lower in high income countries, especially in ODCs. This is also the case in the SA region where only 25% of central banks rated

113 Global Survey TABLE V.4B: RELEVANCE OF THE VARIOUS PAYMENT INSTRUMENTS FOR RECEIVING REMITTANCES (Number of Central Banks that rated each option with the corresponding ranking) Ranking Cash Cheques or similar payment instruments Current account transfers International payment cards linked to a current account International prepaid cards Mobile payments Other 1 (highest relevance) (lowest relevance) No rating/answer cash as the most relevant payment instruments for either sending or receiving remittances. On the other hand, more than 60% of central banks in ECA region indicated that cash is the most relevant payment instrument for both sending and receiving remittances, and so did a similar percentage of central banks in the SSA region. This can be interpreted in many ways. The large use of cash generally signifies an inadequate level of payment system development. In the case of remittances, the large use of cash for remittances is explained to a large extent by a lack of access to banking services in some countries and, as a consequence, by the dominant role that international MTOs play in such markets. Current account transfers are the most relevant payment instrument for remittances especially in ODCs, with 43% of such countries having provided a 1 ranking for this instrument viewed from a remittance-sending perspective, and 50% doing the same from a remittance-receiving perspective. At the other extreme, less than 20% of LAC countries and noneuro EU members gave such a ranking to current account transfers. Cheques were rated the top payment instrument for remittances mainly in 3 countries belonging to the MNA region, 2 countries in the SSA region, and 1 in the SA region. Tables V.5A and V.5B also show that in most cases in which cash was rated 1, current account transfers were rated 2, and vice versa. V.2.3. Transparency, Consumer Protection, and Competition in International Remittances Table V.6 below illustrates central banks responses with regard to transparency of remittance services. A question was added to the 2010 survey questionnaire in order to assess the current situation with regard to transparency in remittance services vis-à-vis General Principle 1 on Transparency and Consumer Protection. 66 Central banks were asked to specify which legal requirements on transparency (e.g. disclosure of information such as fees, foreign exchange rate, taxes, speed, complaint mechanisms, and transactions details) apply to the RSPs in the country. 66 See also Table V.7. Section V. International Remittances and Other Cross-Border Payments

114 90 PAYMENT SYSTEMS WORLDWIDE TABLE V.5A: RELEVANCE OF CASH, CURRENT ACCOUNT TRANSFERS AND CHEQUES FOR SENDING REMITTANCES Cash Current account transfers Cheques or similar payment instruments Ranking of 1 Ranking of 2 Ranking of 1 Ranking of 2 Ranking of 1 Ranking of 2 Central banks opinions # % # % # % # % # % # % Worldwide total (125) 55 44% 14 11% 33 26% 32 26% 8 6% 17 14% By country income level High income (46) 15 33% 6 13% 12 26% 11 24% 3 7% 3 7% Upper-middle income (29) 17 59% 2 7% 5 17% 11 38% 3 10% 5 17% Lower-middle income (32) 15 47% 3 9% 10 31% 7 22% 1 3% 6 19% Low income (18) 8 44% 3 17% 6 33% 3 17% 1 6% 3 17% By region East Asia and Pacific (11) 5 45% 2 18% 3 27% 3 27% 0 0% 4 36% Europe and Central Asia (16) 10 63% 2 13% 4 25% 9 56% 1 6% 0 0% Latin America & Caribbean (18) 10 56% 0 0% 2 11% 6 33% 0 0% 3 17% Middle East & North Africa (11) 4 36% 1 9% 3 27% 4 36% 3 27% 1 9% South Asia (4) 1 25% 0 0% 1 25% 0 0% 1 25% 0 0% Sub-Saharan Africa (24) 13 54% 3 13% 8 33% 3 13% 2 8% 5 21% Euro area countries (16) 5 31% 1 6% 4 25% 5 31% 1 6% 1 6% Other EU members (11) 4 36% 1 9% 2 18% 2 18% 0 0% 2 18% Other developed countries (14) 3 21% 4 29% 6 43% 0 0% 0 0% 1 7% By country population size >30 million (33) 14 42% 5 15% 8 24% 8 24% 1 3% 2 6% >5 million, <30 million (46) 17 37% 3 7% 16 35% 10 22% 1 2% 7 15% 5 million or less (46) 24 52% 6 13% 9 20% 14 30% 6 13% 8 17% Note: Percentages do not add up to 100% as not all countries responded this question, while other countries gave the same ranking to two or even more options. At the global level, in 56% of the respondent countries RSPs are legally required to disclose all transaction details before the transaction itself is performed. The percentage of countries requiring RSPs to disclose such information after the transaction is completed through a customer receipt containing all transactions details is higher, at 68%. region is explained to a large extent by the disclosure and consumer protection requirements under the EU Payment Services Directive 2007/64/EC. 67 On the other hand, LAC and SA regions show the lowest percentages. ODCs and countries from the EAP region follow in a distant second place as the most transparent markets for remittance services. Overall, euro-area countries show the highest percentages in table V.6. The high level of transparency in this 67 Available at: psd_en.htm. See also Box 1.

115 Global Survey TABLE V.5B: RELEVANCE OF CASH, CURRENT ACCOUNT TRANSFERS AND CHEQUES FOR RECEIVING REMITTANCES Cash Current account transfers Cheques or similar payment instruments Ranking of 1 Ranking of 2 Ranking of 1 Ranking of 2 Ranking of 1 Ranking of 2 Central banks opinions # % # % # % # % # % # % Worldwide total (125) 57 46% 16 13% 40 32% 32 26% 5 4% 16 13% By country income level High income (46) 12 26% 5 11% 17 37% 8 17% 1 2% 6 13% Upper-middle income (29) 17 59% 3 10% 7 24% 11 38% 3 10% 5 17% Lower-middle income (32) 17 53% 6 19% 10 31% 7 22% 1 3% 3 9% Low income (18) 11 61% 2 11% 6 33% 6 33% 0 0% 2 11% By region East Asia and Pacific (11) 6 55% 2 18% 3 27% 3 27% 0 0% 3 27% Europe and Central Asia (16) 10 63% 3 19% 5 31% 8 50% 1 6% 0 0% Latin America & Caribbean (18) 10 56% 1 6% 3 17% 5 28% 0 0% 3 17% Middle East & North Africa (11) 4 36% 2 18% 4 36% 2 18% 1 9% 3 27% South Asia (4) 1 25% 1 25% 1 25% 0 0% 1 25% 0 0% Sub-Saharan Africa (24) 16 67% 2 8% 9 38% 7 29% 1 4% 3 13% Euro area countries (16) 3 19% 1 6% 6 38% 4 25% 1 6% 1 6% Other EU members (11) 4 36% 1 9% 2 18% 3 27% 0 0% 1 9% Other developed countries (14) 3 21% 3 21% 7 50% 0 0% 0 0% 2 14% By country population size >30 million (33) 14 42% 5 15% 11 33% 10 30% 0 0% 1 3% >5 million, <30 million (46) 18 39% 7 15% 15 33% 11 24% 2 4% 3 7% 5 million or less (46) 25 54% 4 9% 14 30% 11 24% 3 7% 12 26% Note: Percentages do not add up to 100% as not all countries responded this question, while other countries gave the same ranking to two or even more options. From a country income perspective, it is worth noting that low income countries show higher percentages than high income countries in the last two columns to the right, i.e. that RSPs must inform customers on the details of the transaction before they perform it, and that RSPs must provide customers with receipt containing the details of the transaction. One clear implication of the results in Table V.6 is that regulatory reforms are still needed in many countries across most regions in order to increase transparency in remittance services provision. As stated in GP1, along with transparency, consumer protection in remittance services helps in fostering a competitive and safe market for remittances. Table V.7 illustrates responses to the survey question related to the legislation supporting consumer protection in remittance services. Section V. International Remittances and Other Cross-Border Payments

116 92 PAYMENT SYSTEMS WORLDWIDE TABLE V.6: TRANSPARENCY OF REMITTANCE SERVICES RSPs are legally required to disclose fees applied RSPs are subject to different legal requirements as to fees disclosed, depending on the destination country RSPs are legally required to disclose FX rate applied RSPs are legally required to disclose taxes applied RPs are legally required to disclose speed of transfer RSPs are legally required to disclose available complaint mechanisms RSPs must inform customers on the details of the transaction before they perform it RSPs must provide customers with receipt containing the details of the transaction Countries # % # % # % # % # % # % # % # % Worldwide total (132) 74 56% 20 15% 69 52% 36 27% 43 33% 56 42% 74 56% 90 68% By income High income (46) 33 72% 5 11% 31 65% 19 41% 26 54% 27 57% 32 67% 33 70% Upper-middle 11 38% 5 17% 12 41% 6 21% 7 24% 11 38% 14 48% 18 62% income(29) Lower-middle 13 38% 7 21% 15 44% 4 12% 5 15% 8 24% 11 32% 19 56% income (34) Low income (23) 17 65% 3 13% 11 48% 7 30% 5 22% 10 43% 17 74% 20 87% By region East Asia and Pacific (11) 7 64% 1 9% 7 64% 1 9% 2 18% 3 27% 6 55% 7 64% Europe and Central Asia (16) 8 50% 4 25% 6 31% 5 31% 6 31% 5 25% 8 44% 9 50% Latin America & Caribbean (18) 4 22% 2 11% 8 44% 3 17% 2 11% 5 28% 7 39% 11 61% Middle East & North Africa (11) 5 45% 3 27% 7 64% 3 27% 2 18% 4 36% 5 45% 7 64% South Asia (4) 1 25% 0 0% 1 25% 0 0% 0 0% 1 25% 1 25% 3 75% Sub-Saharan Africa (31) 19 55% 5 16% 12 39% 6 19% 5 16% 14 45% 19 61% 23 74% Euro area countries (16) 15 94% 3 19% 14 88% 12 75% 14 88% 13 81% 14 88% 14 88% Other EU members (11) 6 55% 2 18% 6 55% 2 18% 7 64% 5 45% 5 45% 6 55% Other developed countries (14) 9 64% 0 0% 8 57% 4 29% 5 36% 6 43% 9 64% 10 71% By population size >30 million (32) 19 59% 5 16% 23 72% 9 28% 12 38% 15 47% 17 53% 21 66% >5 million, <30 million (53) 31 55% 7 13% 24 45% 15 28% 17 32% 23 43% 33 62% 41 77% 5 million or less (47) 24 52% 8 17% 22 46% 12 26% 14 28% 18 37% 24 50% 28 59%

117 Global Survey TABLE V.7: LEGISLATION SUPPORTING CONSUMER PROTECTION IN REMITTANCE SERVICES Legislation on consumer protection is in place A specific legislation on consumer protection for financial services is in place Best practices code for the protection of financial services users is in place Best practices code is applicable also to remittance services There is a public authority overseeing and implementing the legislation Countries # % # % # % # % # % Worldwide total (132) 75 57% 41 31% 27 20% 25 19% 64 48% By income High income (46) 29 63% 22 48% 12 26% 11 24% 28 61% Upper-middle income (29) 22 76% 8 28% 6 21% 5 17% 18 62% Lower-middle income (34) 17 50% 7 21% 5 15% 3 9% 12 35% Low income (23) 7 30% 4 17% 4 17% 6 26% 6 26% By region East Asia and Pacific (11) 5 45% 2 18% 2 18% 1 9% 5 45% Europe and Central Asia (16) 12 75% 4 25% 1 6% 2 13% 4 25% Latin America & Caribbean (18) 12 67% 5 28% 4 22% 4 22% 11 61% Middle East & North Africa (11) 4 36% 4 36% 4 36% 3 27% 4 36% South Asia (4) 3 75% 1 25% 1 25% 0 0% 3 75% Sub-Saharan Africa (31) 9 29% 4 13% 5 16% 5 16% 8 26% Euro area countries (16) 14 88% 10 63% 5 31% 4 25% 12 75% Other EU members (11) 10 91% 6 55% 1 9% 1 9% 10 91% Other developed countries (14) 6 43% 5 36% 4 29% 5 36% 7 50% By population size >30 million (32) 23 72% 16 50% 7 22% 8 25% 20 63% >5 million, <30 million (53) 29 55% 14 26% 11 21% 11 21% 27 51% 5 million or less (47) 23 49% 11 23% 9 19% 6 13% 17 36% At the global level, although 57% of the countries have legislation on consumer protection, in less than a third of the responding countries is consumer protection legislation for financial services in place. With regard to best practices codes, only 20% or less of the countries in Table V.7 rely on such tools for either remittance services or for financial services. General legislation on consumer protection is clearly less common in low income countries. Figures are even lower in such countries for consumer protection legislation that deals specifically with financial services. On the other hand, the latter type of legislation is more common in EU countries. In approximately 50% of the countries there is a public authority with oversight responsibilities for the imple- Section V. International Remittances and Other Cross-Border Payments

118 94 PAYMENT SYSTEMS WORLDWIDE TABLE V.8: COMPETITION ENVIRONMENT Exclusivity agreements/ conditions are present in the market Specific legislation is in place to address anticompetitive behaviors and conditions RSPs have to be incorporated as banks RSPs have to meet stipulated capital requirements Countries # % # % # % # % Worldwide total (132) 31 23% 39 30% 21 16% 52 39% By income High income (46) 6 13% 11 24% 4 9% 23 50% Upper-middle income (29) 3 10% 6 21% 2 7% 12 41% Lower-middle income (34) 11 32% 10 29% 6 18% 10 29% Low income (23) 11 48% 12 52% 9 39% 7 30% By region East Asia and Pacific (11) 3 27% 2 18% 2 18% 4 36% Europe and Central Asia (16) 2 13% 5 31% 3 19% 6 38% Latin America & Caribbean (18) 3 17% 4 22% 2 11% 5 28% Middle East & North Africa (11) 4 36% 2 18% 1 9% 8 73% South Asia (4) 1 25% 2 50% 0 0% 2 50% Sub-Saharan Africa (31) 13 42% 15 48% 10 32% 7 23% Euro area countries (16) 3 19% 5 31% 0 0% 11 69% Other EU members (11) 2 18% 2 18% 0 0% 6 55% Other developed countries (14) 0 0% 2 14% 3 21% 3 21% By population size >30 million (32) 7 22% 10 31% 3 9% 13 41% >5 million, <30 million (53) 18 34% 19 36% 15 28% 20 38% 5 million or less (47) 6 13% 10 21% 3 6% 19 40% mentation of consumer protection legislation. In all but one non-euro EU members such a public authority exists. Figures are also relatively high in euro-area and SA countries. The results of Tables V.6 and V.7 are correlated to a significant extent. In many cases inadequate transparency in the market for remittance services (e.g. RSPs being legally required to disclose fees and other charges, and/or complaint mechanisms) is the result of the lack of an appropriate consumer protection framework for financial services users. Moreover, according to PSDG experience, the mere existence of such a framework is unlikely to foster adequate transparency in the marketplace unless a properly empowered and capable authority oversees that its provisions are duly implemented. Table V.8 makes reference to GP4 on market structure and competition in remittance services, which, as stated in the GPs report, is likely to have an impact on the cost of sending remittances. The survey question

119 Global Survey TABLE V.9: INTEGRATION OF PAYMENT SYSTEMS FOR CROSS-BORDER PAYMENTS Links for cross-border settlements have been established Plans are in the pipeline to establish links within 2 years Plans are in the pipeline to establish links in more than 2 years Countries # % # % # % Worldwide total (132) 59 45% 21 16% 24 18% By income High income (46) 31 67% 3 7% 2 4% Upper-middle income (29) 11 38% 6 21% 6 21% Lower-middle income (34) 9 26% 5 15% 7 21% Low income (23) 8 35% 7 30% 9 39% By region East Asia and Pacific (11) 4 36% 1 9% 2 18% Europe and Central Asia (16) 3 19% 0 0% 7 44% Latin America & Caribbean (18) 3 17% 8 44% 0 0% Middle East & North Africa (11) 3 27% 2 18% 0 0% South Asia (4) 2 50% 0 0% 0 0% Sub-Saharan Africa (31) 11 35% 8 26% 14 45% Euro area countries (16) % 1 6% 0 0% Other EU members (11) % 1 9% 0 0% Other developed countries (14) 6 43% 0 0% 1 7% By population size >30 million (32) 16 50% 6 19% 2 6% >5 million, <30 million (53) 28 53% 9 17% 12 23% 5 million or less (47) 15 32% 6 13% 10 21% covered fair market practices, whether a level playing field exists, and the flexibility with which RSPs or their agents can service the marketplace. Exclusivity agreements/conditions are imposed by some international MTOs on their agents. An exclusivity condition is where RSP allows its agents (or other RSPs) to offer its remittance service subject to the condition that such agents do not offer any other remittance service. 68 According to PSDG field experience, in several countries the RSP with the largest network of branches is subject to an exclusivity agreement of this kind. In such cases, competition in the remittance market can be distorted. At the global level, exclusivity agreements/conditions exist in slightly less than a quarter of the countries. However, they are much more prevalent in low income 68 See CPSS and The World Bank, Section V. International Remittances and Other Cross-Border Payments

120 96 PAYMENT SYSTEMS WORLDWIDE TABLE V.10: USE OF THE INTERNATIONAL SWIFT NETWORK 90% or more of commercial banks are connected to SWIFT Less than 90% but more than 50% of commercial banks are connected to SWIFT Some banks or other financial institutions can use SWIFT through the Central Bank s own connection Some banks/financial institutions can use SWIFT through a SWIFT Service Bureau operated by the Central Bank or other institution Countries # % # % # % # % Worldwide total (132) % 15 11% 10 8% 30 23% By income High income (46) 36 78% 5 11% 1 2% 13 28% Upper-middle income (29) 23 79% 2 7% 2 7% 8 28% Lower-middle income (34) 27 79% 8 24% 4 12% 4 12% Low income (23) 22 96% 0 0% 3 13% 5 22% By region East Asia and Pacific (11) 7 64% 2 18% 1 9% 2 18% Europe and Central Asia (16) 12 75% 2 13% 1 6% 5 31% Latin America & Caribbean (18) 13 72% 3 17% 3 17% 3 17% Middle East & North Africa (11) 10 91% 2 18% 1 9% 1 9% South Asia (4) 4 100% 0 0% 0 0% 1 25% Sub-Saharan Africa (31) 30 97% 1 3% 3 10% 6 19% Euro area countries (16) 12 75% 2 13% 1 6% 4 25% Other EU members (11) 10 91% 1 9% 0 0% 4 36% Other developed countries (14) 10 71% 2 14% 0 0% 4 29% By population size >30 million (32) 19 59% 4 13% 8 25% 6 19% >5 million, <30 million (53) 48 91% 5 9% 3 6% 12 23% 5 million or less (47) 41 87% 1 2% 4 9% 12 26% countries (48%), particularly in the SSA region. A recent study shows that remittance markets in Africa lack competitive environments and that remittance costs are high, partially caused by exclusivity agreements. 69 On the other hand, none of the ODCs report- ed that exclusivity agreements/conditions exist in their jurisdictions. At the same time, 52% of low income countries have specific legislation to address anti-competitive behaviors and conditions. About half of the countries in the SA and SSA regions have such legislation. 69 Mohapatra and Ratha (ed). Remittance Markets in Africa, The World Bank, 2011.

121 Global Survey Requirements for RSPs to be incorporated as banks usually translate into an entry barrier in the remittance market. In this regard, the survey shows that such requirements are present in only 16% of the countries, though this figure rises to 39% for the specific case of low income countries. Indeed, a growing number of countries are opening remittance markets to nonbank RSPs. Examples of this approach include the EU Payment Services Directive and Japan s Payment Services Act. Disproportionately high capital requirements are also a potential barrier to market entry. Several countries require non-bank RSPs to comply with requirements similar to those that are applicable to commercial banks or other deposit-taking institutions. V.2.4. Cross-Border Payments A good level of cross-border integration of payment systems should translate into cross-border payments being settled more efficiently and safely, which could result in relatively lower costs and faster transactions. This, of course, includes international remittances as well. Examples of cross-border integration of payment systems include the Single Euro Payment Area (SEPA) and the Directo a México service established between the U.S. Federal Reserve s FedACH service and Banco de México. cross-border funds transfers. Survey results show that in over 80% of the countries, 90% or more of commercial banks are SWIFT users. The equivalent figure in the 2008 survey was 78%. Similar to the previous survey, results are higher in low income countries, especially in the SA and SSA regions, and also in non-euro area EU members. In the late 1990s and the first few years of the current century, banks and other users connecting to SWIFT via the central bank s own connection to this network was a common practice. The 2010 survey shows that this practice persists in only 8% of the countries. SWIFT Service Bureaus were designed as an alternative for smaller banks and other types of financial institutions to access the SWIFT network. Survey results show that this alternative is used in 30 countries or 23% of the total, which is a decrease compared to the 32% figure in the previous survey. The decrease is particularly noteworthy in low income countries, from 57% to only 22% in the current survey. Table V.9 shows that a total of 59 countries have established links for cross-border settlement, while another 21 expect to have such links established within two years. 70 In the case of the EU, all member countries have established such links. Table V.10 refers to the use of the international SWIFT network, which is largely used in connection with 70 Seven countries indicated that they have established cross-border links and there are plans to establish additional links in the next two years. Section V. International Remittances and Other Cross-Border Payments

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123 SECTION VI SECURITIES SETTLEMENT SYSTEMS VI.I BACKGROUND Securities clearing and settlement systems are of high importance for a country s financial sector and financial stability, because of their critical role in the capital market. 71 The fact that securities clearing and settlement systems typically handle large values creates the possibility that a failure in such systems could cause broader financial and economic instability. Market liquidity is critically dependent on confidence in the safety and reliability of the clearing and settlement arrangements. Hence, a financial or operational problem in such systems or affecting one of its major participants could result in significant liquidity pressures or credit losses for other participants including commercial and custody banks, brokers, investment dealers and managers, and the central bank. In addition, sound and efficient procedures for the clearing and settlement of securities are an essential element for the development of capital markets. Securities settlement systems are critical for the timely 71 For the purposes of the survey, securities clearing and settlement systems refer to those systems that facilitate the central clearing and settlement of securities, including derivatives. Three different types of securities settlement systems are central securities depositories (CSDs), securities settlement systems (SSSs) and central counterparties (CCPs). delivery of collateral for payments and other purposes. For example, government securities are used extensively to carry out monetary policy through open market operations. Clearing and settlement inefficiencies or other problems could disrupt the ability of the central bank to implement monetary policy effectively. Securities systems and large-value payment systems are mutually dependent. To achieve DVP, settlement of the securities leg in the securities settlement system is conditional on settlement of the cash leg, normally in a large-value payment system. In parallel, credit extensions in large-value payment systems are often dependent on the provision of collateral through a securities system. Therefore, the interaction between these infrastructures needs to be cost-efficient, reliable and secure. VI.2 SURVEY OUTCOMES This section analyzes some general features of securities markets and securities clearing and settlement systems in countries and regions worldwide. Based on the different tables shown below, the risk management and operational frameworks of central securities depositories (CSDs), securities settlement systems (SSSs) and central counterparties (CCPs) are discussed. This section concludes with regulatory and oversight issues of securities clearing and settlement systems. 99

124 100 PAYMENT SYSTEMS WORLDWIDE TABLE VI.1: GENERAL FEATURES OF SECURITIES CLEARING AND SETTLEMENT SYSTEMS WORLDWIDE The securities market is at a nascent stage One or more stock exchanges are currently operating in the country The great majority of negotiable securities are immobilized or dematerialized in one or more CSDs There is a single CSD for all types of securities in the country There are two or more CSDs, each handling only certain types of securities There are two or more CSDs, each handling all types of securities There is one or more clearing institution for securities There is one or more CCPs At least one SSS does not directly settle in Central Bank money Central banks # % # % # % # % # % # % # % # % # % Worldwide total (119) 35 29% % 84 71% 49 41% 48 40% 7 6% 71 60% 41 34% 40 34% By income High income (44) 5 11% 42 95% 41 93% 28 64% 12 27% 2 5% 30 68% 27 61% 14 32% Upper-middle income (29) 5 17% 27 93% 20 69% 10 34% 15 52% 3 10% 19 66% 9 31% 9 31% Lower-middle income (29) 13 45% 21 72% 15 52% 9 31% 13 45% 1 3% 16 55% 4 14% 11 38% Low income (17) 12 71% 12 71% 8 47% 2 12% 8 47% 1 6% 6 35% 1 6% 6 35% By region East Asia and Pacific (8) 2 25% 6 75% 4 50% 2 25% 5 63% 0 0% 3 38% 3 38% 5 63% Europe and Central Asia (15) 7 47% 14 93% 12 80% 5 33% 9 60% 2 13% 11 73% 4 27% 6 40% Latin America & Caribbean (17) 5 29% 13 76% 10 59% 5 29% 7 41% 2 12% 11 65% 5 29% 2 12% Middle East & North Africa (12) 4 33% 11 92% 8 67% 6 50% 5 42% 1 8% 8 67% 1 8% 2 17% South Asia (4) 1 25% 4 100% 4 100% 0 0% 4 100% 1 25% 2 50% 1 25% 3 75% Sub-Saharan Africa (23) 14 61% 16 70% 8 36% 5 22% 9 39% 0 0% 11 48% 1 4% 8 35% Euro area (16) 1 6% % 15 94% 11 69% 3 19% 0 0% 8 50% 10 63% 5 31% Other EU members (11) 0 0% % % 8 73% 2 18% 1 9% 7 64% 5 45% 3 27% Other developed countries (13) 1 8% 11 85% 12 92% 7 54% 4 31% 0 0% 10 77% 11 85% 6 46% By population size >30 million (33) 3 9% 32 97% 29 88% 11 33% 21 64% 1 3% 26 79% 20 61% 17 52% >5 million, <30 million (47) 17 36% 39 83% 31 66% 21 45% 15 32% 3 6% 25 53% 17 36% 15 33% 5 million or less (39) 15 38% 31 79% 24 62% 17 44% 12 31% 3 8% 20 51% 4 10% 8 21%

125 Global Survey BOX 8: INTEGRATING EUROPEAN SECURITIES SETTLEMENT: TARGET2-SECURITIES TARGET2-Securities (T2S) is a large infrastructure project launched by the Eurosystem. It will bring substantial benefits to the European post-trading industry by providing a single pan-european platform for securities settlement in central bank money. It will settle securities transactions in euro and is open for settlements in other currencies as well. T2S will therefore be a major step forward in creating a single market in securities, removing many of the barriers to efficient cross-border clearing and settlement, as well as acting as a catalyst for further harmonization in post-trading services. With T2S, cross-border settlement will be identical to domestic settlement in terms of cost, risk and technical processing. By providing a single IT platform, T2S will accommodate market participants dedicated central bank cash accounts and securities accounts in the same settlement facility. It is thus able to aggregate European settlement volumes in one platform. This will allow enormous economies of scale and significant liquidity savings to be achieved. Furthermore, the single T2S process will facilitate the streamlining of back office procedures and foster further harmonization of post-trade activities. The use of central bank money will eliminate risk on the settlement agent and thus contribute to financial stability. T2S will be owned and operated by the Eurosystem on a full cost-recovery basis and designed for the benefit of its users. The T2S migration phase will be composed of three migration waves and one contingency wave. The first migration wave is scheduled for September 2014, when T2S will begin operations. Source: ECB In the analysis in this section, each individual central bank that has responded to Part VI: Securities Settlement Systems of the Questionnaire for Collecting Information to Depict the Situation of Payment and Securities Settlement Systems Worldwide 2010, regardless of how many countries or financial systems it serves, is counted as one for comparison purposes. The results presented in Tables VI.2 to VI.8 and relative sub-sections are based on the number of systems reported, and not on the total number of central banks/countries that have participated in the survey. VI.2.1 General Features of Securities Markets Out of the 119 countries that responded to this section, 102 have one or more stock exchanges (see Table V.1). In general, the existence of stock exchanges is more likely in high income countries and countries with a larger population. The securities market is still at a nascent stage in 35 of the 119 countries. These countries are mainly located in the SSA (14 countries) and ECA (7 countries) regions, and also tend to be low income or lower-middle income countries. Securities immobilization or dematerialization at CSDs have been largely accomplished in 71% of the respondent countries, which is an increase compared to the 66% reported in the 2008 survey. As shown in Table VI.1, this has been accomplished in all SA countries, in all non-euro EU members, and in all but one country of the euro area. The SSA countries show the lowest level of securities dematerialization with only 36% of respondents. Since 2008, the LAC and EAP regions have made significant progress in the level of dematerialization. As for the types of CSDs that exist in the various countries, in 49 cases (41%) there is a single CSD handling all types of securities that are traded in the country, while in 48 other cases (40%) there are two or more Section VI. Securies Settlement Systems

126 102 PAYMENT SYSTEMS WORLDWIDE TABLE VI.2: CSDs GENERAL FEATURES The CSD handles government securities The CSD handles corporate securities The CSD handles both government securities and corporate securities The CSD is operated by the Central Bank The CSD is operated by the Stock Exchange The CSD is operated by another private entity The CSD is used to facilitate ownership transfers from secondary market transactions The CSD is used for securities traded at the Stock Exchange only The CSD is used to settle also OTC transactions CSDs # % # % # % # % # % # % # % # % # % Worldwide total (149) 51 34% 37 25% 72 49% 57 39% 43 29% 59 40% % 34 23% 98 66% By income High income (56) 11 20% 12 21% 36 64% 13 23% 17 30% 25 45% 52 93% 9 16% 45 80% Upper-middle income (39) 14 36% 14 36% 18 46% 14 36% 11 28% 21 54% 37 95% 11 28% 27 69% Lower-middle income (37) 16 43% 7 19% 14 38% 18 49% 9 24% 12 32% 29 78% 10 27% 19 51% Low income (17) 10 59% 4 24% 4 24% 12 71% 6 35% 1 6% 14 82% 4 24% 7 41% By region East Asia and Pacific (10) 3 30% 3 30% 6 60% 5 50% 4 40% 2 20% 9 90% 3 30% 8 80% Europe and Central Asia (24) 10 42% 10 42% 6 25% 9 38% 5 21% 12 50% 22 92% 6 25% 16 67% Latin America & Caribbean (22) 9 41% 6 27% 10 45% 10 45% 7 32% 10 45% 20 91% 7 32% 10 45% Middle East & North Africa (13) 3 23% 2 15% 7 54% 4 31% 7 54% 3 23% 10 77% 5 38% 9 69% South Asia (6) 3 50% 1 17% 3 50% 4 67% 3 50% 1 17% 6 100% 2 33% 2 33% Sub-Saharan Africa (21) 12 57% 4 19% 6 29% 13 62% 6 29% 3 14% 16 76% 6 29% 8 38% Euro area countries (20) 4 20% 4 20% 15 75% 3 15% 6 30% 11 55% 18 90% 2 10% 17 85% Other EU members (15) 3 20% 3 20% 10 67% 3 20% 2 13% 10 67% % 2 13% 11 73% Other developed countries (18) 4 22% 4 22% 9 50% 6 33% 3 17% 7 39% 16 89% 1 6% 17 94% By population size >30 million (50) 18 36% 14 28% 21 42% 19 38% 14 28% 21 42% 47 94% 11 22% 36 72% >5 million, <30 million (57) 21 37% 13 23% 30 53% 22 39% 15 26% 22 39% 49 86% 12 21% 33 58% 5 million or less (42) 12 29% 10 24% 21 50% 16 38% 14 33% 16 38% 36 86% 11 26% 29 69%

127 Global Survey TABLE VI.3: CSDs RISK MANAGEMENT FEATURES A rolling settlement cycle of T+3 or shorter is used for all securities trades A rolling settlement cycle of T+3 or shorter is used for the majority of the securities trades The CSD has a real-time interface with the RTGS Model 1 DVP is used Model 2 DVP is used Model 3 DVP is used No DVP is used A guarantee fund/other mechanism ensures settlement if participant with the largest debit obligation is unable to settle A securities lending mechanism has been implemented CSDs # % # % # % # % # % # % # % # % # % Worldwide total (149) 98 66% 26 17% 90 60% 97 65% 32 21% 36 24% 12 8% 43 29% 44 30% By income High income (56) 39 70% 13 23% 44 79% 44 79% 13 23% 15 27% 3 5% 19 34% 22 39% Upper-middle income (39) 29 74% 2 5% 23 59% 25 64% 10 26% 11 28% 4 10% 13 33% 13 33% Lower-middle income (37) 22 59% 7 19% 17 46% 21 57% 5 14% 9 24% 4 11% 9 24% 7 19% Low income (17) 8 47% 4 24% 6 35% 7 41% 4 24% 1 6% 1 6% 2 12% 2 12% By region East Asia and Pacific (10) 8 80% 1 10% 5 50% 7 70% 1 10% 1 10% 0 0% 2 20% 5 50% Europe and Central Asia (24) 15 63% 4 17% 9 38% 16 67% 4 17% 6 25% 2 8% 5 21% 4 17% Latin America & Caribbean (22) 14 64% 4 18% 13 59% 15 68% 4 18% 7 32% 3 14% 5 23% 5 23% Middle East & North Africa (13) 11 85% 0 0% 8 62% 6 46% 2 15% 3 23% 3 23% 4 31% 1 8% South Asia (6) 4 67% 1 17% 3 50% 3 50% 0 0% 2 33% 1 17% 1 17% 1 17% Sub-Saharan Africa (21) 12 57% 2 10% 9 43% 8 38% 5 24% 3 14% 2 10% 6 29% 4 19% Euro area countries (20) 14 70% 6 30% 17 85% 18 90% 5 25% 5 25% 0 0% 7 35% 10 50% Other EU members (15) 9 60% 4 27% 13 87% 11 73% 8 53% 4 27% 0 0% 8 53% 7 47% Other developed countries (18) 11 61% 4 22% 13 72% 13 72% 3 17% 5 28% 1 6% 5 28% 7 39% By population size >30 million (50) 31 62% 8 16% 34 68% 37 74% 10 20% 14 28% 3 6% 17 34% 16 32% >5 million, <30 million (57) 38 67% 11 19% 35 61% 33 58% 15 26% 12 21% 4 7% 13 23% 19 33% 5 million or less (42) 29 69% 7 17% 21 50% 27 64% 7 17% 10 24% 5 12% 13 31% 9 21% Section VI. Securies Settlement Systems

128 104 PAYMENT SYSTEMS WORLDWIDE TABLE VI.4: CSDs PARTICIPATION AND CUSTODY ARRANGEMENTS Commercial banks are direct participants in the CSD Broker-dealers are direct participants in the CSD Other financial institutions can be direct participants Beneficial owners are identified at the individual level in the CSD Beneficial owners cannot be identified, but direct participants are required to segregate their holdings from their customers CSDs # % # % # % # % # % Worldwide total (149) % 98 66% % 76 51% 60 40% By income High income (56) 50 89% 40 71% 46 82% 24 43% 29 52% Upper-middle income (39) 34 87% 30 77% 30 77% 25 64% 12 31% Lower-middle income (37) 28 76% 22 59% 14 38% 18 49% 14 38% Low income (17) 16 94% 6 35% 10 59% 9 53% 5 29% By region East Asia and Pacific (10) 7 70% 6 60% 6 60% 2 20% 4 40% Europe and Central Asia (24) 19 79% 15 63% 15 63% 12 50% 8 33% Latin America & Caribbean (22) 17 77% 18 82% 16 73% 16 73% 5 23% Middle East & North Africa (13) 9 69% 8 62% 2 15% 7 54% 5 38% South Asia (6) 5 83% 6 100% 5 83% 4 67% 1 17% Sub-Saharan Africa (21) 20 95% 6 29% 9 43% 16 76% 5 24% Euro area countries (20) 19 95% 15 75% 17 85% 7 35% 13 65% Other EU members (15) % 12 80% % 7 47% 8 53% Other developed countries (18) 17 94% 12 67% 15 83% 5 28% 11 61% By population size >30 million (50) 45 90% 34 68% 33 66% 19 38% 25 50% >5 million, <30 million (57) 51 89% 40 70% 42 74% 32 56% 21 37% 5 million or less (42) 32 76% 24 57% 25 60% 25 60% 14 33% specialized CSDs in the country. The specialized CSDs handle specific types of securities, with the most common division of the market being corporate securities on the one hand, and securities issued by the government and central bank on the other. Yet, in 7 other cases there are two or more CSDs handling all types of securities. A single CSD is more common in high income countries, although different regions seem to have their own preferred model. For example, for the last 20 years, central banks in the EU have shifted their CSD activity for government securities to the private sector, creating one CSD per country that handles all types of securities, whereas, in the United States, the Depository Trust & Clearing Corporation (DTCC) operates the CSD for corporate securities on the one hand while the Federal Reserve Bank operates the CSD for government bonds and mortgage-backed securities on the other hand. EAP, ECA and SA countries clearly

129 Global Survey TABLE VI.5: CSDs RESILIENCE AND BUSINESS CONTINUITY Routine procedures are in place for periodic data back-ups Tapes/other storage media are kept in sites other than the main processing site Back-up servers have been deployed at the main processing site A fully equipped alternate processing site exists The CSD operator has documented formal business continuity plan Procedures for crisis management and information dissemination are in place Business continuity arrangements are regularly tested CSDs # % # % # % # % # % # % # % Worldwide total (149) % % % % % % % By income High income (56) 54 96% 52 93% 43 77% 51 91% 52 93% 51 91% 50 89% Upper middle income (39) 35 90% 33 85% 30 77% 26 67% 34 87% 30 77% 29 74% Lower middle income (37) 29 78% 27 73% 24 65% 22 59% 27 73% 25 68% 22 59% Low income (17) 11 65% 10 59% 5 29% 8 47% 13 76% 10 59% 8 47% By region East Asia and Pacific (10) 9 90% 8 80% 6 60% 7 70% 7 70% 7 70% 7 70% Europe and Central Asia (24) 18 75% 16 67% 11 46% 10 42% 17 71% 14 58% 12 50% Latin America & Caribbean (22) 19 86% 19 86% 19 86% 18 82% 19 86% 17 77% 17 77% Middle East & North Africa (13) 12 92% 12 92% 11 85% 9 69% 11 85% 11 85% 9 69% South Asia (6) 5 83% 5 83% 5 83% 5 83% 6 100% 6 100% 5 83% Sub-Saharan Africa (21) 15 71% 14 67% 10 48% 12 57% 16 76% 12 60% 11 52% Euro area countries (20) % 19 95% 17 85% % % % 19 95% Other EU members (15) % 14 93% 10 67% 11 73% % % 14 93% Other developed countries (18) 16 89% 15 83% 13 72% 15 83% 15 83% 14 78% 15 83% By population size >30 million (50) 44 88% 41 82% 34 68% 40 80% 45 90% 43 86% 42 84% >5 million, <30 million (57) 48 84% 46 81% 39 68% 42 74% 51 89% 46 81% 43 75% 5 million or less (42) 37 88% 35 83% 29 69% 25 60% 30 71% 27 64% 24 57% tend towards two or more CSDs each handling specific types of securities. The majority of countries surveyed (60%) have one or more specialized clearing institutions for the clearing of securities transactions. Only a minority of countries (34%) has a CCP operating either for securities or derivatives products. Large differences are visible across country types. Most high income countries have a CCP, for example 85% of ODC and 63% of euro-area countries, whereas only 14% of lower-middle income and 6% of low income countries have one. Likewise, CCPs are far more common in large countries (61% vs. only 10% in small countries). A total of 40 countries out of 119 indicated that at least one SSS does not directly settle in central bank money, but uses one or more settlement banks to settle the payment obligations. The results differ highly per region, without clear relation to country income lev- Section VI. Securies Settlement Systems

130 106 PAYMENT SYSTEMS WORLDWIDE els. The majority of SA (75%) and EAP (63%) countries report that at least one system in their countries does not settle in central bank money, while the lowest percentages are found in the LAC (12%) and MNA (17%) regions. Also noteworthy is the fact that the majority of CSDs (66%) settle not only stock exchange transactions, but also OTC transactions. CSDs in high income countries tend to settle both stock exchange and OTC transactions. VI Risk Management of CSDs and SSSs VI.2.2 Central Securities Depositories and Securities Settlement Systems VI General Features of CSDs and SSSs Table VI.2 shows that the most common types of CSDs are CSDs that handle both government and corporate securities (49%) followed by specialized CSDs that only handle government securities (34%). PSDG experience shows that a CSD that handles both government and corporate securities is usually a private entity, whereas a CSD that handles only government securities is usually operated by a central bank. Clearly, the involvement of the central bank as the CSD operator is more common in low income countries than in high income countries, where private entities usually operate CSDs. These results illustrate an important feature observed worldwide through PSDG s field work: the central bank is usually heavily involved during the early stages of setting up a securities market; once the market reaches a certain level of development, the private sector usually takes over. CSDs are regularly used to transfer ownership following a transaction in the secondary market (132 out of 149 systems or 89%). 72 From a regional perspective, the figure exceeds 90% in all regions with the exception of MNA (77%) and SSA regions (76%), 73 and ODCs (89%). In the 2008 survey the analysis of the results was divided into central bank-operated CSDs and SSS on the one hand, and those operated by exchanges/private sector on the other. In the current iteration, results are presented for CSDs and SSSs altogether. Hence, most figures presented in sub-sections VI.2.3 and VI.2.4 will not be directly comparable with those of the previous survey. Table VI.3 analyzes some of the main risk management features related to the settlement of securities transactions in SSSs and CSDs. A rolling settlement cycle of T+3 or shorter is used for all trades in 98 out of the 149 CSDs, which is 66% of all CSDs. Another 26 CSDs use T+3 only for some of the securities trades. Ninety CSDs out of the 179 have a real-time interface with RTGS system. The use of DVP as a measure to reduce principal risk is widespread. In the EAP and EU countries all transactions are settled on the basis of a DVP arrangement. Only 8% of CSDs do not use a DVP model at all. The MNA, SA and LAC regions show the highest percentages of CSDs not using DVP with 23%, 17% and 14%, respectively. Most CSDs (65%) have implemented a DVP Model 1 arrangement to settle securities and cash obligations of its participants. 74 This is an increase compared to 2007, 72 Otherwise, ownership changes occur in a separate or independent registrar. 73 The total number of CSDs for the SSA region does not include the CSD component of the Rwandan ATS, which went live in July According to the classification of the CPSS-BIS (Vid Delivery versus Payment in Securities Settlement Systems, 1992, CPSS, BIS), in DVP Model 1 securities and funds are settled on a trade-by-trade (gross) basis, with final transfer of securities from the seller to the buyer (delivery) occurring at the same time as final transfer of funds from the buyer to the seller (payment); in DVP Model 2, securities are settled on a gross basis with final delivery occurring throughout the processing cycle, but funds are settled on a net basis, with final payment occurring at the end of the processing cycle; in DVP Model 3, securities and funds are settled on a net basis, with final transfers of both securities and funds occurring at the end of the processing cycle.

131 Global Survey TABLE VI.6: CCPs GENERAL FEATURES The CCP operates in more than one jurisdiction CCP rules clarify the contractual relationships between the CCP and participants The CCP legally becomes the buyer to every seller and the seller to every buyer (via novation or open offer ) The CCP provides multilateral netting facilities Commercial banks are direct participants in the CCP Broker-dealers are direct participants in the CCP Other financial institutions can be direct participants There are minimum capital requirements for participants CCPs # % # % # % # % # % # % # % # % Worldwide total (56) 16 29% 51 91% 50 89% 52 93% 46 82% 48 86% 33 59% 48 86% By income High income (36) 13 36% 34 94% 35 97% 34 94% 30 83% 33 92% 20 56% 34 94% Upper-middle income (10) 1 10% 9 90% % 9 90% % 8 80% 6 60% 8 80% Lower-middle income (7) 0 0% 5 71% 5 71% 7 100% 4 57% 5 71% 6 86% 6 86% Low income (3) 2 67% 3 100% 0 0% 2 67% 2 67% 2 67% 1 33% 0 0% By region East Asia and Pacific (4) 0 0% 4 100% 4 100% 4 100% 1 25% 3 75% 3 75% 3 75% Europe and Central Asia (6) 2 33% 5 83% 4 67% 5 83% 6 100% 4 67% 5 83% 3 50% Latin America & Caribbean (6) 1 17% 5 83% 5 83% 6 100% 6 100% 5 83% 4 67% 5 83% Middle East & North Africa (1) 0 0% 0 0% 0 0% 1 100% 1 100% 0 0% 1 100% 1 100% South Asia (2) 0 0% 2 100% 1 50% 1 50% 1 50% 2 100% 1 50% 1 50% Euro area countries (13) 10 77% 12 92% % 12 92% % 12 92% 9 69% % Other EU members (5) 2 40% 5 100% 5 100% 5 100% 5 100% 4 80% 2 40% 4 80% Other developed countries (19) 1 5% 18 95% 18 95% 18 95% 13 68% 18 95% 8 42% 18 95% By population size >30 million (29) 6 21% 27 93% 28 97% 28 97% 23 79% 25 86% 20 69% 26 90% >5 million, <30 million (23) 10 43% 20 87% 18 78% 20 87% 19 83% 19 83% 11 48% 18 78% 5 million or less (4) 0 0% 4 100% 4 100% 4 100% 4 100% 4 100% 2 50% 4 100% Section VI. Securies Settlement Systems

132 108 PAYMENT SYSTEMS WORLDWIDE when 61% of central bank-operated CSDs and 54% of CSDs operated by private entities or stock exchanges used this model. A clear relation exists between the income of a country and the preference for DVP Model 1, with higher income countries adopting this model more often. This may be related to the development of sophisticated optimization algorithms by CSDs in high income countries, which reduce the liquidity need during the settlement process and consequently decrease the draw backs of DVP Model 1. DVP Models 2 and 3 are equally popular among themselves, with 21% and 24% of CSDs using these models respectively. Regional preferences do exist however, with DVP Model 2 being dominant in the SSA region, the non-euro EU countries and ODCs. DVP Model 3 dominates in the ECA, LAC, MNA and SA regions, and is less popular in low income countries. It should be noted that CSDs may use different models at the same time. Often they combine DVP Model 1 for government securities and OTC transactions, and DVP Models 2 or 3 for the settlement of corporate securities. Different models may also be used during different moments of the settlement day. Furthermore, 29% of the CSDs surveyed use a guarantee fund or other risk management mechanism to ensure settlement takes place, for instance in the event that the participant with the largest debit obligation is unable to settle its position. Also, 30% of CSDs have implemented a securities lending mechanism to increase the settlement efficiency in the markets they serve. CSDs and SSSs also attempt to control the risks in their systems by defining access criteria for participants. Table VI.4 contains information on participation and custody arrangements in CSDs and SSSs. Eighty-six percent of the CSDs surveyed indicated that commercial banks are direct participants, whereas the corresponding figure for broker-dealers and others (e.g. central banks, stock exchanges, Ministry of Finance) is 66%. Direct participation of non-banks is more common in higher income countries (EU, ODCs), LAC and SA regions. With regard to the identification of beneficial owners in the CSD, in 76 cases (51%) all beneficial owners can be individually identified directly in the system. In 40% of the cases, beneficial owners cannot be identified individually in the CSD but only in the records of the direct participants of the CSD. This means that there is no clear preference for one model over the other. Indeed, countries value the benefits of both models differently, with the LAC (73%) and the SSA (76%) regions preferring to have the CSD being able to identify the beneficial owner, while in the EU (58%) and ODCs (61%) the beneficial owner is preferably identified at the level of the direct participant only. VI Resilience and Business Continuity Arrangements of CSDs and SSSs Table VI.5 depicts resilience and business continuity features in CSDs and SSSs. According to 2010 survey data, significant improvements have been made since the last survey exercise. Seventy-two percent of all systems have a fully equipped alternate processing site. 75 Likewise, 85% of CSD operators state they have a formal business continuity plan; 78% state that procedures for crisis management and information dissemination have been elaborated, while 73% advise regular testing of their business continuity arrangements. Notwithstanding these improvements, when compared with RTGS systems CSDs and SSSs have weaker business continuity practices. Recent PSDG experience shows, however, that CSDs are increasingly investing in operational reliability, which should lead to further convergence of RTGS and CSD systems with regard to this specific feature. 75 In 2008 the corresponding figures were 59% for central bank-operated systems and 68% for exchange/private sector-operated ones.

133 Global Survey TABLE VI.7: CCPs MANAGEMENT OF CREDIT EXPOSURES The CCP applies margin requirements to limit its credit exposures The CCP marks to market participants outstanding contracts at least once a day There is a guarantee fund, consisting of contributions of the participants of the CCP The CCP maintains other financial resources including own funds The CCP conducts regular stress tests The CCP holds securities in a manner that minimizes risk of loss and ensures prompt access to securities The CCP s default procedures define an event of default and the method for identifying that default Arrangements facilitate the prompt transfer, close out or hedging of defaulting participant s positions The CCP uses a CSD that provides DVP settlement for the transactions cleared Payment obligations are directly settled in Central Bank money CCPs # % # % # % # % # % # % # % # % # % # % Worldwide total (56) 41 73% 45 80% 48 86% 44 79% 40 71% 48 86% 52 93% 49 88% 46 82% 35 63% By income High income (36) 31 86% 33 92% 33 92% 32 89% 29 81% 33 92% 35 97% 34 94% 30 83% 21 58% Upper-middle income (10) 7 70% 8 80% 9 90% 8 80% 8 80% 8 80% % 9 90% 8 80% 8 80% Lower-middle income (7) 3 43% 4 57% 6 86% 4 57% 3 43% 5 71% 6 86% 6 86% 6 86% 5 71% Low income (3) 0 0% 0 0% 0 0% 0 0% 0 0% 2 67% 1 33% 0 0% 2 67% 1 33% By region East Asia and Pacific (4) 1 25% 2 50% 3 75% 3 75% 2 50% 3 75% 4 100% 4 100% 3 75% 2 50% Europe and Central Asia (6) 2 33% 2 33% 4 67% 1 17% 1 17% 5 83% 5 83% 4 67% 5 83% 4 67% Latin America & Caribbean (6) 4 67% 5 83% 5 83% 5 83% 5 83% 5 83% 5 83% 4 67% 5 83% 5 83% Middle East & North Africa (1) 1 100% 1 100% 1 100% 0 0% 0 0% 0 0% 1 100% 1 100% 1 100% 1 100% South Asia (2) 1 50% 1 50% 1 50% 1 50% 1 50% 1 50% 1 50% 1 50% 1 50% 1 50% Euro area countries (13) % % 12 92% 12 92% 12 92% % % % 12 92% 7 54% Other EU members (5) 4 80% 5 100% 4 80% 5 100% 5 100% 5 100% 5 100% 5 100% 5 100% 4 80% Other developed countries (19) 15 79% 16 84% 18 95% 17 89% 14 74% 16 84% 18 95% 17 89% 14 74% 11 58% By population size >30 million (29) 24 83% 26 90% 26 90% 25 86% 21 72% 25 86% % 28 97% 22 76% 17 59% >5 million, <30 million (23) 15 65% 16 70% 18 78% 16 70% 16 70% 20 87% 19 83% 17 74% 21 91% 16 70% 5 million or less (4) 2 50% 3 75% 4 100% 3 75% 3 75% 3 75% 4 100% 4 100% 3 75% 2 50% Section VI. Securies Settlement Systems

134 110 PAYMENT SYSTEMS WORLDWIDE TABLE VI.8: CCPs RESILIENCE AND BUSINESS CONTINUITY Routine procedures are in place for periodic data back-ups Tapes and other storage media are kept in sites other than the main processing site Back-up servers have been deployed at the main processing site A fully equipped alternate processing site exists The CCP has documented formal business continuity plan Business continuity arrangements include procedures for crisis management and information dissemination Business continuity arrangements are regularly tested CCPs # % # % # % # % # % # % # % Worldwide total (56) 46 82% 43 77% 36 64% 41 73% 44 79% 40 71% 42 75% By income High income (36) 29 81% 27 75% 23 64% 28 78% 28 78% 27 75% 28 78% Upper-middle income (10) 9 90% 9 90% 9 90% 6 60% 9 90% 7 70% 8 80% Lower-middle income (7) 6 86% 6 86% 4 57% 7 100% 6 86% 6 86% 5 71% Low income (3) 2 67% 1 33% 0 0% 0 0% 1 33% 0 0% 1 33% By region East Asia and Pacific (4) 4 100% 4 100% 3 75% 4 100% 4 100% 4 100% 3 75% Europe and Central Asia (6) 5 83% 4 67% 2 33% 2 33% 4 67% 2 33% 4 67% Latin America & Caribbean (6) 5 83% 5 83% 5 83% 6 100% 6 100% 3 50% 4 67% Middle East & North Africa (1) 1 100% 1 100% 0 0% 1 100% 0 0% 1 100% 1 100% South Asia (2) 1 50% 1 50% 1 50% 1 50% 1 50% 1 50% 1 50% Euro area countries (13) % 12 92% 10 77% % % % % Other EU members (5) 5 100% 5 100% 5 100% 3 60% 5 100% 5 100% 5 100% Other developed countries (19) 12 63% 11 58% 10 53% 11 58% 11 58% 11 58% 11 58% By population size >30 million (29) 23 79% 22 76% 18 62% 23 79% 22 76% 21 72% 21 72% >5 million, <30 million (23) 21 91% 19 83% 17 74% 16 70% 20 87% 18 78% 19 83% 5 million or less (4) 2 50% 2 50% 1 25% 2 50% 2 50% 1 25% 2 50%

135 Global Survey VI.2.3 Central Counterparties VI General Features of CCPs With the possible exception of exchange-traded derivatives, CCPs are a relatively recent phenomenon, especially in developing countries. Questions on CCPs were not included in the 2008 survey. For the current iteration, a total of 56 responses were received. Not surprisingly, CCPs are active mainly in larger countries (29), and especially in high income countries (36). By region, CCPs are more prevalent in the EU, ECA and LAC regions and in ODCs. As a first layer, CCPs usually attempt to control the risks in their systems by defining minimum access criteria for potential participants. Table VI.6 shows the different types of financial institutions which are more commonly accepted as direct participants of CCPs. Unlike CSDs, a very large percentage of CCPs accept broker-dealers as direct participants (86% compared to 66% of CSDs) than they do for commercial banks (82% compared to 86% of CSDs). 76 In the great majority of the cases (86%), the CCP imposes minimum capital requirements to its participants as a key risk management mechanism. This is especially true in the euro area, ODCs, LAC countries and also in non-euro EU members. As with stock exchanges and CSDs, CCPs were typically envisaged to serve a domestic market. Table VI.6 shows, however, that about one-third of CCPs currently operate in more than one jurisdiction. This is especially relevant in the EU, deriving from the creation of a single financial market across the Union which has encouraged competition between CCPs across borders. The great majority of CCPs (91%) have rules clarifying the contractual relationships between the CCP and its participants. In 50 out of 56 cases or 89%, CCPs legally become the buyer to every seller and the seller to every buyer (via novation or open offer). In addition, the majority of CCPs (93%) offer multilateral netting facilities to their participants, thereby reducing the net amount of obligations between the different participants, which contributes to the efficiency of the market. VI Risk Management of CCPs Table VI.7 discusses other risk management measures that CCPs use to mitigate counterparty credit risk. A guarantee fund is the most common risk measure among CCPs to cover possible credit losses (48 of 56 systems or 86%). Margin deposits to cover potential credit losses are required by 73% of CCPs, while 79% have additional funds, including own funds, as a third line of defense. Most CCPs (80%) mark to market their exposures to participants at least once a day, and 71% conduct regular stress tests. The vast majority of CCPs (93%) have defined procedures to quickly act in the event of a default of one of its participants. For this purpose, 88% of CCPs have arrangements to transfer, close-out or hedge promptly participants positions to which the CCP is exposed. To mitigate settlement risks, 82% of CCPs use a CSD that settles transactions according to a DVP mechanism, while 63% of CCPs settle their payment obligations (i.e. the cash leg) in central bank money. Due to the concentration of risks in CCPs, it is very important for it to have a sound risk management framework. Overall, a relatively high percentage of CCPs report they have taken a number of measures to manage their risks according to recognized practices. The weakest risk management frameworks for CCPs were 76 Excluding ODCs the percentages for commercial banks would be 89% and 81% for brokers-dealers. Section VI. Securies Settlement Systems

136 112 PAYMENT SYSTEMS WORLDWIDE TABLE VI.9A: SECURITIES CLEARING AND SETTLEMENT SYSTEMS REGULATORY AND OVERSIGHT There is a specific public sector agency in charge of regulating securities markets The Securities Market Law applies to all securities negotiated in the country The Securities Market Law applies only to securities issued by the private sector The securities regulator is empowered to license and supervise all Stock Exchanges The securities regulator is empowered to license and supervise all CSDs The securities regulator is empowered to license and supervise securities CCPs The securities regulator shares supervisory and oversight responsibilities with the Central Bank The securities regulator does not have oversight powers over the derivatives CCP Central banks # % # % # % # % # % # % # % # % Worldwide totals (119) 80 68% 72 61% 31 26% 78 66% 67 57% 42 36% 55 47% 1 1% By income High income (44) 32 73% 31 70% 8 18% 34 77% 29 66% 22 50% 25 57% 0 0% Upper-middle income (29) 21 72% 19 66% 12 41% 20 69% 20 69% 10 34% 14 48% 1 3% Lower-middle income (29) 17 59% 12 41% 9 31% 14 48% 11 38% 8 28% 8 28% 0 0% Low income (17) 10 59% 10 59% 2 12% 10 59% 7 41% 2 12% 8 47% 0 0% By region East Asia and Pacific (8) 4 50% 2 25% 4 50% 5 63% 3 38% 4 50% 5 63% 0 0% Europe and Central Asia (15) 11 73% 11 73% 6 40% 10 67% 9 60% 2 13% 6 40% 0 0% Latin America & Caribbean (17) 13 76% 11 65% 7 41% 11 65% 11 65% 8 47% 8 47% 1 6% Middle East & North Africa (12) 3 25% 2 17% 3 25% 3 25% 2 17% 2 17% 2 17% 0 0% South Asia (4) 4 100% 3 75% 2 50% 4 100% 3 75% 2 50% 2 50% 0 0% Sub-Saharan Africa (23) 14 61% 12 52% 2 9% 12 52% 11 48% 4 17% 8 35% 0 0% Euro area countries (16) 11 69% 13 81% 3 19% 14 88% 11 69% 7 44% 11 69% 0 0% Other EU members (11) 9 82% 8 73% 4 36% 10 91% 9 82% 6 55% 5 45% 0 0% Other developed countries (13) 11 85% 10 77% 0 0% 9 69% 8 62% 7 54% 8 62% 0 0% By population size >30 million (33) 28 85% 25 76% 9 27% 26 79% 24 73% 19 58% 22 67% 1 3% >5 million, <30 million (47) 32 68% 30 64% 12 26% 30 64% 23 49% 13 28% 22 47% 0 0% 5 million or less (39) 20 51% 17 44% 10 26% 22 56% 20 51% 10 26% 11 28% 0 0%

137 Global Survey TABLE VI.9B: SECURITIES CLEARING AND SETTLEMENT SYSTEMS REGULATORY AND OVERSIGHT The Stock Exchange has been granted the status of SRO Private CSDs have been granted the status of SRO The CCP has been granted the status of SRO Central banks # % # % # % Worldwide totals (119) 27 23% 14 12% 10 8% By income High income (44) 10 23% 6 14% 3 7% Upper-middle income (29) 9 31% 4 14% 4 14% Lower-middle income (29) 5 17% 3 10% 3 10% Low income (17) 3 18% 1 6% 0 0% By region East Asia and Pacific (8) 4 50% 3 38% 3 38% Europe and Central Asia (15) 3 20% 1 7% 0 0% Latin America & Caribbean (17) 6 35% 4 24% 5 29% Middle East & North Africa (12) 2 17% 1 8% 0 0% South Asia (4) 0 0% 0 0% 0 0% Sub-Saharan Africa (23) 4 17% 1 4% 0 0% Euro area (16) 3 19% 3 19% 1 6% Other EU members (11) 2 18% 1 9% 0 0% Other developed countries (13) 3 23% 0 0% 1 8% By population size >30 million (33) 13 39% 6 18% 7 21% >5 million, <30 million (47) 5 11% 3 6% 1 2% 5 million or less (39) 9 23% 5 13% 2 5% reported in low income countries, and in the ECA and SA regions, while the sounder ones are in the EU, ODCs and LAC. It should be noted, however, that the risk management arrangements and techniques surveyed are highly complex. This section of the global survey was designed to gather basic information on the extent to which CCPs have embraced such arrangements and techniques. It did not aim to assess whether the specific arrangements adopted by CCPs are actually adequate. VI Resilience and Business Continuity Arrangements of CCPs Table V.8 illustrates the resilience and business continuity features of CCPs. A large majority of CCPs have implemented measures to reduce operational risk. For example, 82% of CCPs have routine procedures for periodic data back-up; 73% have a fully-equipped alternate processing site, and 75% regularly test their business continuity arrangements. Section VI. Securies Settlement Systems

138 114 PAYMENT SYSTEMS WORLDWIDE When compared with RTGS and CSD systems, resilience and business continuity practices for central bank securities registries and depositories look somewhat weaker, especially since CCPs are mainly operated in high income and large countries that have long experience with resilience and business continuity arrangements. CCPs in the ODCs, the ECA and SA regions may continue improvements by establishing a fully equipped alternate site, documenting a formal business continuity plan and developing procedures for crisis management and information dissemination. At present, CCPs throughout the EU, LAC and EAP regions deal with business continuity issues more thoroughly than other regions do. VI.2.4 Regulatory and Oversight Issues Tables VI.9A and VI.9B show the regulatory and oversight issues of securities clearing and settlement systems worldwide. Securities markets in 80 countries (68%) are regulated by a specific public sector agency. In countries where this is not the case, it is usually because either a regulatory function does not exist at all, or because the existing functions, typically of a registration rather than a regulatory nature, lie in a department of the Ministry of Finance or the central bank. Having a specific public sector agency is more common in higher income countries and regions. Table VI.9A also shows information on the types of securities that are covered by the principles embedded in Securities Markets Laws (SML). In 72 countries or 61%, the SML applies to all securities that are traded in the country. In 31 countries, the SML applies only to securities issued by the private sector while, typically, securities issued by the government and/or the central bank are regulated by special laws or government decrees. In higher income countries and regions, and also in larger countries, it is more common for the SML to have a broader scope in terms of the various types of securities existing in the marketplace. Further, the survey outcomes show the basic regulatory and oversight powers of the securities regulator over stock exchanges and CSDs. Out of the 80 countries where securities markets are regulated by a specific public sector agency, that agency has the power to license and supervise all existing stock exchanges in 78 cases. Moreover, the securities regulator is empowered to license and supervise CSDs in 67 countries or 57%. Table VI.9A also shows that in 55 countries (47% of the total) the securities regulator shares responsibility with the central bank for the oversight of securities clearing and settlement systems. 77 Euro area countries show the highest relative percentage (69%), followed by the EAP region (63%) and ODCs (62%). The lowest percentages are observed in the MNA region (17%). 78 At a worldwide level, self-regulatory powers for stock exchanges, CSDs and CCPs are still not very common (see Table VI.9B). Compared to CSDs and CCPs, the self-regulatory organization (SRO) status is more common for stock exchanges (23%), followed by CSDs with 12%. It should be noted that the 2008 survey showed significantly higher numbers for both stock exchanges (30%) and CSDs (21%). The EAP and LAC regions most frequently provide stock exchanges, CSDs and CCPs with self-regulatory powers, whereas the SA region does not use this regulatory model at all. 77 Oversight activities of central banks increasingly relate to securities clearing and settlement systems, as relevant components of the overall national payment system. Central banks have an intrinsic interest in the safe and efficient functioning of securities settlement systems, because of their relevance to financial stability. 78 In the current survey only 2 out of 12 MNA countries answered positively to this question. In the 2008 survey, 4 countries did so.

139 SECTION VII PAYMENT SYSTEM OVERSIGHT AND COOPERATION VII.1 BACKGROUND Payment systems oversight has emerged as a key central bank function aiming to preserve the safety and efficiency of individual clearing and settlement systems and the safety of the market as a whole. Payment systems oversight involves monitoring of the reliability and efficiency of payment systems operating in the country on an on-going basis, assessing systems features and fostering changes when necessary. Several factors contribute to the effectiveness of payments system oversight: i) the adequacy of legal powers of the central bank in the payment systems arena; ii) the internal organization of the central bank in relation to payment systems activities; and iii) the range of instruments that the central bank has as its disposal to oversee systems. In addition, effective cooperation must be in place between the payment systems overseer and market players and among domestic regulators, and between domestic and foreign oversight agencies. Regarding the scope of central bank oversight, there is a consensus view at the international level that systems posing systemic risks should fall under the direct control of the overseer. Large-value funds transfer systems that serve wholesale financial markets belong to this category. Increasing attention is being given to securities clearing and settlement systems as well as to systems for clearing and settlement of foreign exchange transactions. The oversight of these systems might well be a cooperative effort of two or more regulatory agencies. In some countries, retail (low-value) systems also fall under the control of the oversight agency because of their importance to the overall efficiency of the payments system, their potential impact on the public confidence in money, and for their relevance to the ultimate objective of fostering economic growth and financial inclusion. VII.2 SURVEY OUTCOMES This chapter first explores some general aspects of payment system oversight with regard to the formality with which this function is performed and makes comparison with the earlier survey. Further on, it looks at more detailed aspects such as the objectives, scope and instruments of payment system oversight. It then turns to elements related to cooperation of the overseer with other authorities and stakeholders. The 2010 survey has been expanded to review also central bank involvement in the pricing of payment services. 115

140 116 PAYMENT SYSTEMS WORLDWIDE TABLE VII.1: PAYMENT SYSTEM OVERSIGHT GENERAL ISSUES The Central Bank s payment system oversight function has been established and is performed regularly and in an ongoing basis There is a specific unit or department at the Central Bank responsible for payment system oversight The payment system oversight function is segregated from payment system operational tasks Central banks # % # % # % Worldwide total (124) 99 80% % 85 69% By income High income (45) 40 89% 42 93% 38 84% Upper-middle income (32) 27 84% 27 84% 22 69% Lower-middle income (30) 22 73% 24 80% 16 53% Low income (17) 10 59% 13 76% 9 53% By region East Asia and Pacific (10) 7 70% 9 90% 6 60% Europe and Central Asia (15) 11 73% 12 80% 11 73% Latin America & Caribbean (18) 15 83% 16 89% 12 67% Middle East & North Africa (12) 7 58% 6 50% 5 42% South Asia (4) 4 100% 3 75% 2 50% Sub-Saharan Africa (24) 16 67% 19 79% 13 54% Euro area (16) % % % Other EU members (11) % % 10 91% Other developed countries (14) 12 86% % 10 71% By population size >30 million (35) 31 89% 32 91% 26 74% >5 million, <30 million (47) 38 81% 42 89% 33 70% 5 million or less (42) 30 71% 32 76% 26 62% In the analysis in this section, each individual central bank that responded to the questionnaire s Part VII: Payment System Oversight and Cooperation of the Questionnaire for Collecting Information to Depict the Situation of Payment and Securities Settlement Systems Worldwide 2010 is counted as one, regardless of how many countries or financial systems it serves. Survey results for 2010 show that 99 central banks (80% of the total) have already established the payment system oversight function, and this function is performed on an on-going basis (see Table VII.1). This represents an increase compared to the previous survey, where only 72% of central banks answered positively to the same question. Regions lagging behind in the previous survey show significant improvements, especially in the LAC and SA regions, and the non-euro EU members. VII.2.1 General Issues The percentage of respondent institutions indicating that there is a specific unit at the central bank in charge of payment system oversight duties has also increased from 78% to 85%.

141 Global Survey TABLE VII.2: OBJECTIVES OF PAYMENT SYSTEM OVERSIGHT The Central Bank has set down its objectives in a regulation or policy document Objectives only include the safety and efficiency of relevant payment systems Objectives also include competition issues, avoiding collusive practices, consumer protection, and others Central banks # % # % # % Worldwide total (124) 88 71% 71 57% 52 42% By income High income (45) 38 84% 29 64% 10 22% Upper-middle income (32) 22 69% 18 56% 17 53% Lower-middle income (30) 19 63% 18 60% 17 57% Low income (17) 9 53% 6 35% 8 47% By region East Asia and Pacific (10) 6 60% 5 50% 7 70% Europe and Central Asia (15) 10 67% 10 67% 6 40% Latin America & Caribbean (18) 12 67% 9 50% 9 50% Middle East & North Africa (12) 7 58% 6 50% 4 33% South Asia (4) 2 50% 2 50% 3 75% Sub-Saharan Africa (24) 14 58% 10 42% 13 54% Euro area (16) % 12 75% 4 25% Other EU members (11) 9 82% 7 64% 3 27% Other developed countries (14) 12 86% 10 71% 3 21% By population size >30 million (35) 28 80% 20 57% 18 51% >5 million, <30 million (47) 35 74% 26 55% 19 40% 5 million or less (42) 25 60% 25 60% 15 36% Higher income countries show the highest percentages, while lower income countries show little progress. From a regional perspective, all EU countries and all ODCs answered positively to the specific question on whether the central bank has a specific payment system oversight unit. LAC percentages on this particular issue increased from 57% in the 2008 survey to 89% in the current one. In contrast, less progress has been made in the MNA region. Payment oversight has been formalized in only 58% of the respondents central banks in this region, and only half of the central banks reported the establishment of a dedicated unit responsible for the oversight function. Regarding the separation of the oversight function from operational responsibilities, results do not differ significantly from the 2008 survey: 69% in the recent survey compared to 66%. This organizational separation of oversight from operations continues to be more evident in higher income countries, and in particular in the euro area where all countries stated that the separation of tasks exists, followed by non-euro EU Section VII. Payment System Oversight and Cooperation

142 118 PAYMENT SYSTEMS WORLDWIDE TABLE VII.3: SCOPE OF THE PAYMENT SYSTEM OVERSIGHT FUNCTION Performed over Central Bankoperated systems only Performed over all systemically important funds transfer systems Performed over all SIPS, including SSS and systems for settlement of FX transactions Performed over all relevant payment systems operated by commercial banks Performed over all relevant payment systems regardless of who operates them Central banks # % # % # % # % # % Worldwide total (124) 13 10% 72 58% 59 48% 15 12% 79 64% By income High income (45) 2 5% 35 85% 35 85% 2 5% 31 76% Upper-middle income (32) 4 14% 16 55% 13 45% 3 10% 20 69% Lower-middle income (30) 6 24% 15 60% 7 28% 5 20% 20 80% Low income (17) 1 7% 6 43% 4 29% 5 36% 8 57% By region East Asia and Pacific (10) 2 20% 4 40% 2 20% 3 30% 4 40% Europe and Central Asia (15) 1 7% 6 40% 2 13% 2 13% 11 73% Latin America & Caribbean (18) 2 11% 12 67% 10 56% 3 17% 12 67% Middle East & North Africa (12) 3 25% 3 25% 1 8% 1 8% 5 42% South Asia (4) 1 25% 2 50% 1 25% 2 50% 3 75% Sub-Saharan Africa (24) 2 8% 12 50% 8 33% 3 13% 13 54% Euro area (16)* 0 0% % % 0 0% % Other EU members (11) 0 0% 8 73% 8 73% 1 9% 7 64% Other developed countries (14) 2 14% 9 64% 11 79% 0 0% 8 57% By population size >30 million (35) 3 9% 20 57% 18 51% 2 6% 27 77% >5 million, <30 million (47) 1 2% 28 60% 24 51% 9 19% 34 72% 5 million or less (42) 9 21% 24 57% 17 40% 4 10% 18 43% Note: *For consistency reasons, the euro-area countries answers have been harmonized here. Individual countries answers are availale in the Appendix. members and ODCs. Meanwhile, SA, SSA and MNA regions lag behind the rest of the countries, and show little progress for this particular item when compared to In terms of country population, large and mid-size countries have reported significant improvements in the first and the second of the characteristics shown in Table VII.1, while figures for small countries have remained unchanged. VII.2.2 Objectives of Payment System Oversight Table VII.2 shows survey results with regard to the objectives of the payment system oversight function. The central bank oversight objectives have been formalized in slightly more than two thirds of the reporting

143 Global Survey TABLE VII.4: INSTRUMENTS OF PAYMENT SYSTEM OVERSIGHT (Number of Central Banks that rated each option with the corresponding ranking) Ranking Monitoring Dialogue and moral suasion Production and publication of statistics/payment system reports Issue of regulations Application of sanctions On-site inspections 1 (highest relevance) (lowest relevance) cases. In total, 88 central banks (71%) indicated that the objectives they pursue by carrying out the payment system oversight function have been specified either in a central bank regulation or in a policy document. The percentage is almost identical to that of the 2008 survey (70%). Higher income countries continue to show higher percentages with regard to this issue. Significant progress has been made in the non-euro EU members as well as in the LAC and EAP regions. In contrast, in about half of the countries in MNA, SA and SSA regions payment system oversight is still performed on an informal basis. 79 To some extent, the 2010 survey shows a shift in the objectives of payment system oversight, from solely including safety and efficiency to broader goals, such as promoting higher levels of competition in the market for payment services, consumer protection, and others. The 2008 survey showed that the percentage of central banks focusing solely on safety and efficiency was 63% of the total, while only 31% had broader objectives; for the 2010 survey the latter increased to 42%. The largest percentage of central banks with broad oversight objectives is in lower income countries. This appears to be a response by central banks to the existing shortcomings and other challenges encountered in retail payment systems in most developing nations as 79 Percentages for SA and SSA dropped significantly from the 2008 survey. evidenced in chapter III of this survey. These results could also be reflecting public sector strategies for promotion of financial inclusion of large rural population with low financial literacy. From a regional perspective, objectives other than safety and efficiency of payment systems subject to oversight are less common in the EU countries, ODCs and in the MNA region. The highest number of central banks with broad objectives was reported for SA and EAP countries. VII.2.3 Scope of Payment System Oversight The scope of central bank oversight depends on national specificities and could include large-value and retail payment systems, payment instruments, clearing and settlement systems for financial instruments, and central counterparties. In recent years, the scope of central banks oversight activities has evolved in response to various development factors, such as globalization, innovation and regulation. The survey looks at two aspects of the scope of the payment oversight function. First, the survey explores whether and how the scope depends on the type of system operator: the central bank itself, commercial banks, or other operators. The 2010 survey shows that more central banks are moving towards a wider scope, overseeing all relevant payment systems in a country regardless of the operator of the system (64% compared to 57% in 2008). In the same vein, only 10% Section VII. Payment System Oversight and Cooperation

144 120 PAYMENT SYSTEMS WORLDWIDE TABLE VII.5: OVERSIGHT INSTRUMENTS RATED MOST RELEVANT Monitoring Dialogue and moral suasion Production and publication of statistics/ payment system reports Issue of regulations Application of sanctions On-site inspections Central Banks # % # % # % # % # % # % Worldwide total (124) 90 73% 71 57% 53 43% 64 52% 26 21% 34 27% By income High income (45) 37 82% 30 67% 22 49% 13 29% 2 4% 8 18% Upper-middle income (32) 22 69% 18 56% 12 38% 24 75% 9 28% 7 22% Lower-middle income (30) 22 73% 12 40% 12 40% 18 60% 8 27% 13 43% Low income (17) 9 53% 11 65% 7 41% 9 53% 7 41% 6 35% By region East Asia and Pacific (10) 6 60% 3 30% 3 30% 7 70% 4 40% 4 40% Europe and Central Asia (15) 11 73% 8 53% 7 47% 11 73% 2 13% 4 27% Latin America & Caribbean (18) 11 61% 9 50% 7 39% 13 72% 4 22% 1 6% Middle East & North Africa (12) 9 75% 5 42% 5 42% 4 33% 5 42% 6 50% South Asia (4) 3 75% 4 100% 2 50% 2 50% 1 25% 2 50% Sub-Saharan Africa (24) 15 63% 13 54% 11 46% 15 63% 8 33% 10 42% Euro area (16) 14 88% 10 63% 9 56% 5 31% 1 6% 3 19% Other EU members (11) 9 82% 8 73% 5 45% 1 9% 0 0% 1 9% Other developed countries (14) 12 86% 11 79% 4 29% 6 43% 1 7% 3 21% By population size >30 million (35) 27 77% 22 63% 15 43% 19 54% 8 23% 11 31% >5 million, <30 million (47) 33 70% 31 66% 18 38% 24 51% 12 26% 11 23% 5 million or less (42) 30 71% 18 43% 20 48% 21 50% 6 14% 12 29% of central banks limit their oversight scope to central bank-operated systems, a clear decrease compared to the 17% figure of Higher income countries tend to oversee all payment systems, while a larger percentage of lower-middle and especially low income countries have a more limited scope, focusing more on payment systems operated by the central bank and commercial banks. Still, there is a significant increase in the percentage of lower middle income countries and low income countries that now extend their oversight to all relevant payment systems. From a regional perspective, the largest percentage of central banks with a broad scope of payment oversight is in the euro-area countries, ECA, SA and LAC regions. Table VII.3 shows that 77% of larger countries (with more than 30 million inhabitants) have adopted a broader scope for the oversight function, while this same percentage for small countries is the lowest (only

145 Global Survey %, practically the same as the 41% shown in the 2008 survey). This limitation in the scope of oversight observed in small countries can be partially explained with the limited availability of resources. Central banks were also asked to distinguish between various types of systems that are subject to oversight. As in the 2008 survey, a broad scope of payment system oversight is defined to include systems other than funds transfer systems, such as SSSs and in some cases also systems for settlement of FX transactions. From this perspective, a broad approach would typically mean overseeing all types of systemically important payment systems (SIPS) but not necessarily all retail payment systems. 80 Such approach is motivated by the increased interdependences between payment and other settlement systems, and the growing importance of such systems for monetary policy operations and financial stability. At a worldwide level, 48% of central banks reported that they have adopted this approach, which represents an increase compared to 39% in the previous iteration of survey. Moreover, some central banks indicated they have entered into cooperation agreements with other financial authorities in overseeing payment systems regarded as not being systemically important (see further in this section). High income (85%) and upper-middle income (45%) countries tend to include SSSs and/or FX settlement systems in their oversight responsibilities, in addition to large-value funds transfer systems. This is an increase compared to the 44% of the 2008 survey for both types of countries. In contrast, the majority (60%) of central banks in lower-middle income countries reported they 80 In the perspective of the World Bank s PSDG, a comprehensive payment system oversight function would cover all the elements of the national payments system, which include all relevant funds transfer systems (both large-value and small-value retail systems), SSSs, FX settlement mechanisms, and cross-border payments, including remittances. oversee systemically important funds transfer systems only, and only 28% indicated a broader approach to include SSSs and FX settlement systems. On the positive side, it should be mentioned that the number of lowermiddle income countries that oversee systemically important funds transfer systems increased substantially from 43% to 60%. Low income countries continue to lag behind the rest of the countries regarding oversight of SIPS. By region, the lowest percentages of involvement in the oversight of SSSs and settlement systems for FX transactions are reported by central banks in the EAP, ECA, MNA and SA regions. The LAC region shows significant progress from 22% in 2008 to 56% in VII.2.4 Instruments of Payment System Oversight As in the 2008 survey, central banks were asked to rank from 1 to 3 the instruments commonly used as part of payment system oversight, with 1 being the most relevant and 3 being the least relevant. Six common oversight instruments were included in the question in 2010 survey, ordered from soft instruments to tougher/more formal ones: monitoring, dialogue and moral suasion, publication of statistics and other payment systems reports, issue of regulations, application of sanctions, and on-site inspections. Results are summarized in Table VII.4. In general, central banks continue to prefer soft oversight instruments. The percentage of the central banks reporting a preference for soft instruments, such as monitoring, dialogue and moral suasion, and publication of statistics/reports have all increased to 73%, 57% and 43%, respectively (see also Table VII.5). The comparable figures in the 2008 survey were 65%, 42% and 38% respectively. Section VII. Payment System Oversight and Cooperation

146 122 PAYMENT SYSTEMS WORLDWIDE More central banks gave a 1 rating to monitoring and to dialogue and moral suasion compared to the previous survey (90 and 71 respectively compared to 83 and 55 in 2008). The number of respondent that gave a 1 to the usage of publications and statistics as an instrument for oversight also increased from 48 to 53. Given the importance of publications for the accountability of the central banks and as a powerful instrument to prompt compliance, this number is still deemed low. However, it is worth noting that this oversight instrument was rated either 1 or 2 by 73% of central banks. A significantly larger share of central banks about half compared to about one-third in 2008 now rate the issuance of regulations as a key oversight instrument. Issue of regulation was rated 3 only by 15 central banks. This result is consistent with the increased number of central banks now having formal powers to perform payment system oversight functions. Nevertheless, many central banks that are now well equipped with statutory and regulatory powers for oversight still prefer to rely mostly or solely on soft instruments. Only about one-fourth of central banks reported using more formal oversight instruments, such as the application of sanctions or on-site inspections (21% and 27% respectively). Application of sanctions was rated 3 by about one-third of central banks; while onefourth did so for on-site inspections. Answers rating the most relevant instruments of oversight are further disaggregated in Table VII.5. Several central banks indicated more than one instrument as equally important, while others rated only some instruments and not others, hence making it difficult to make cross-country or cross-region comparisons. However, for each of the various country categories, one of the key trends identified in the 2008 survey is confirmed: central banks in every country category prefer to use so-called soft instruments, in particular monitoring and dialogue and moral suasion in discharging their payment system oversight duties. Issuance of regulations was rated 1 by 60% of lowermiddle income countries and 75% of upper-middle income countries, which is a significant increase from Actually, for middle-income countries the issuance of regulations is considered as important as monitoring. As indicated in chapter I of this Report, 94% of reporting central banks have formal powers to regulate and oversee payment systems. 81 Issuing regulations is considered a primary instrument for oversight in EAP, ECA, LAC countries, with more than 70% of central banks answering positively to this specific issue. In contrast, this percentage is significantly lower than the preference for soft instruments throughout the EU and in the MNA region. Survey results show a significant increase in the relative number of countries in the LAC, ECA and SSA regions indicating that the issuance of regulation is a primary tool for payment system oversight, thus confirming the progress made in formalizing payments oversight responsibilities of central banks in those countries. EAP, SSA and MNA are the regions with the highest percentage of central banks that rated most relevant the application of sanctions. 81 Notable recent examples of enhancing the legal and regulatory framework for payment systems oversight can be found in major economies. In the US, with respect to private sector systems, under the Dodd-Frank Wall Street Reform and Consumer Protection Act (the DF Act, signed into law in July 2010), the Federal Reserve is granted authority to prescribe risk management standards for financial market utilities and payment, clearing, or settlement activities that have been designated as systemically important by the Financial Stability Oversight Council. An exception is the case of designated clearing entities that are registered with either the Commodity Futures Trading Commission (CFTC) or the Securities and Exchange Commission (SEC). Likewise, the objectives, scope, methodology and organization of the Eurosystem s oversight function, as well as details of the Eurosystem s interaction with other authorities, are set out in the Eurosystem s Oversight Policy Framework, which was published by the ECB in February In the UK, the Banking Act 2009, Part 5, sets out a statutory framework for the Bank of England s oversight function, including powers to support it.

147 Global Survey TABLE VII.6: COOPERATION WITH OTHER RELEVANT AUTHORITIES No significant cooperation with other relevant authorities Cooperation with other relevant authorities occurs in an informal/ad-hoc basis Cooperation with other relevant authorities is ensured through a formal mechanism Cooperation involves mostly regular meetings and exchange of opinions and views Cooperation also involves regular information exchanges, prior notice of regulatory action, joint inspections Central banks # % # % # % # % # % Worldwide total (124) 14 11% 56 45% 61 49% 61 49% 46 37% By income High income (45) 2 4% 22 49% 31 69% 26 58% 18 40% Upper-middle income (32) 4 13% 17 53% 14 44% 14 44% 10 31% Lower-middle income (30) 7 23% 12 40% 9 30% 12 40% 10 33% Low income (17) 1 6% 5 29% 7 41% 9 53% 8 47% By region East Asia and Pacific (10) 1 10% 3 30% 5 50% 5 50% 4 40% Europe and Central Asia (15) 2 13% 10 67% 6 40% 6 40% 4 27% Latin America & Caribbean (18) 6 33% 8 44% 5 28% 6 33% 5 28% Middle East & North Africa (12) 3 25% 4 33% 4 33% 6 50% 2 17% South Asia (4) 0 0% 2 50% 1 25% 1 25% 2 50% Sub-Saharan Africa (24) 2 8% 9 38% 8 33% 12 50% 12 50% Euro area (16) 0 0% 6 38% 15 94% 11 69% 7 44% Other EU members (11) 0 0% 6 55% 9 82% 5 45% 5 45% Other developed countries (14) 0 0% 8 57% 8 57% 9 64% 5 36% By population size >30 million (35) 2 6% 14 40% 20 57% 20 57% 18 51% >5 million, <30 million (47) 5 11% 17 36% 25 53% 25 53% 20 43% 5 million or less (42) 7 17% 25 60% 16 38% 16 38% 8 19% Another trend worth noting is the increase in the number of countries that rated on-site inspections as a highly relevant instrument for payment system oversight. The highest percentage of countries that prefer this instrument can be found in EAP, MNA, SA and SSA regions. PSDG experience shows that this oversight tool is often triggered by the formalization of oversight responsibilities of central banks, and reflects the improved institutional capacity of payment system units within central banks. Differences in population size do not appear to be relevant with regard to a central bank s preference for a particular instrument of payment system oversight. One exception is that of small countries, which seem to have less preference for the application of sanctions. Section VII. Payment System Oversight and Cooperation

148 124 PAYMENT SYSTEMS WORLDWIDE TABLE VII.7 COOPERATION WITH OTHER STAKEHOLDERS A formal National Payments Council is in place Though not formalized, Central Bank holds regular strategic meetings with stakeholders at a senior level Central Bank consults stakeholders on particular operational issues; may lead to creating ad-hoc task forces Central Bank consults stakeholders sporadically, mostly bilaterally Central Bank consults almost exclusively with the bankers association Central banks # % # % # % # % # % Worldwide total (124) 49 40% 68 55% 94 76% 38 31% 31 25% By income High income (45) 18 40% 28 62% 35 78% 14 31% 8 18% Upper-middle income (32) 13 41% 15 47% 25 78% 8 25% 11 34% Lower-middle income (30) 11 37% 15 50% 22 73% 9 30% 8 27% Low income (17) 7 41% 10 59% 12 71% 7 41% 4 24% By region East Asia and Pacific (10) 2 20% 5 50% 8 80% 4 40% 2 20% Europe and Central Asia (15) 5 33% 6 40% 11 73% 8 53% 4 27% Latin America & Caribbean (18) 7 39% 8 44% 12 67% 3 17% 4 22% Middle East & North Africa (12) 2 17% 10 83% 8 67% 4 33% 2 17% South Asia (4) 2 50% 1 25% 3 75% 0 0% 1 25% Sub-Saharan Africa (24) 15 63% 14 58% 21 88% 8 33% 9 38% Euro area (16) 8 50% 7 44% 12 75% 4 25% 4 25% Other EU members (11) 6 55% 6 55% 9 82% 2 18% 2 18% Other developed countries (14) 2 14% 11 79% 10 71% 5 36% 3 21% By population size >30 million (35) 12 34% 21 60% 29 83% 9 26% 6 17% >5 million, <30 million (47) 20 43% 25 53% 37 79% 14 30% 11 23% 5 million or less (42) 17 40% 22 52% 28 67% 15 36% 14 33% VII.2.5 Cooperation with Other Relevant Authorities and Other Stakeholders Tables VII.6 and VII.7 discuss the payment system overseers cooperation with other authorities and with other stakeholders, respectively. It is now widely recognized that effective payment system oversight requires cooperative arrangements between central banks and other public authorities. Cooperation mechanisms, such as advisory committees or memorandum of understanding (MOUs) support moral suasion, pre-empt the issuance of direct regulations and facilitate the exchange of information and perceptions, leading to mutually acceptable compromise solutions.

149 Global Survey TABLE VII.8 INVOLVEMENT OF CENTRAL BANK IN THE PRICING OF PAYMENT SERVICES No involvement Limited to collection of information Limited to voicing opinions Actively regulate Other Central banks # % # % # % # % # % Retail payments 44 35% 32 26% 19 15% 19 15% 11 9% Large value payments 24 19% 18 15% 11 9% 58 47% 11 9% Remittances 55 44% 29 23% 7 6% 7 6% 5 4% Notes: 1. All TARGET2 fees are set by the ECB Governing Council, while individual central banks have no independent price setting power. For consistency reasons, for all euro-area countries, large value payments have been considered actively regulated at a central level. Individual countries answers are available in the Appendix. 2. A few countries indicated No involvement and one or more other options.for consisntecy reasons, in some of these cases, the most active role indicated was considered. Individual countries answers are available in the Appendix. At the worldwide level, figures in Table VII.6 are almost identical to those of the 2008 survey. Only 11% of the central banks surveyed do not cooperate in a significant way with other authorities (9% in the previous survey). The LAC regions still concentrates about half of all central banks indicating this situation. In contrast, none of the central banks from the EU countries, ODCs and SA countries reported lack of cooperation with other authorities. Small and middle-size countries show some deterioration in terms of cooperation, while the figure for high income countries is higher compared to the 2008 survey. The number of central banks reporting formal cooperative arrangements with other authorities and/or arrangements backed by law remains comparatively low, although with a slight increase compared to 2008 (49% vs. 45%). The table also shows that the number of central banks that report cooperation occurring almost exclusively on an informal or ad hoc basis is slightly less than the number of central banks indicating cooperation based on formal arrangements, such as MOUs (56 vs. 61). Formal cooperation is more common in high income countries, with upper-middle income countries showing a relevant increase. From a regional perspective, EU and ODC countries prefer formal means of cooperation. In contrast, in the LAC and SA regions, less than 30% of the central banks indicated the existence of formal arrangements. This same variable equals to one-third in the case of MNA and SSA countries. The last two columns to the right in Table VII.6 give some additional details about the specific forms of cooperation between central banks and other authorities regarding payment and settlement systems oversight. One-half of the central banks indicated that cooperation involves less structured actions such as exchanges of opinions and views as part of regular meetings. A slightly lower percentage reported cooperative efforts also involving regular information exchanges, prior notice of regulatory action, or joint inspections, among others. 82 The latter is somewhat more common among low income countries. Comparisons by country population size show that small countries prefer less structured actions: the number of small countries indicating such preference is twice the number of small countries reporting regular information exchange or joint inspections. 82 Several countries gave a positive answer to the both options depicted in the last two columns in Table VII.7. Section VII. Payment System Oversight and Cooperation

150 126 PAYMENT SYSTEMS WORLDWIDE Finally, globalization and technological advancement that have led to the creation of global financial infrastructures operating in more than one country have called, in some cases, for international cooperative oversight. In the case of the EU and ODC countries, cross-border cooperation plays an important role. Notable examples of international cooperative oversight are oversight arrangements for CLS, SWIFT and Euroclear Group. The oversight for these systems is based on the principles of international cooperative oversight. 83 Within the EU, cooperative payment system oversight is performed for TARGET2. Table VII.7 provides details about various forms of cooperation between overseers and market players. The table shows that 49 formal National Payments Councils (NPC) have been created in order to promote a structured cooperation among relevant stakeholders. The SSA region and EU countries show the highest percentage of NPCs in place. The 2010 survey confirms the existing differences among developed countries: half of euro-area national central banks indicate there is a NPC in place, while this percentage is only 14% for ODCs. Table VII.7 also shows that central banks continue to prefer regular meetings at a senior level with other stakeholders instead of relying only on bilateral consultations. The number of central banks that engage in intensive cooperation with stakeholders outside of a formal NPC through regular meetings to discuss strategic and/or technical issues is significantly higher than the number of central banks that report only on sporadic bilateral consultations. Indeed, only 31% of central banks report they rely on bilateral consultations with individual stakeholders, and 25% almost exclusively on bilateral consultations with the bankers association, thus confirming results from the previous survey. 84 At regional level, significant increase in technical cooperation were indicated by countries from the SSA region. The number of central banks from this particular region now reporting having regular consultations with stakeholders on operational issues, including the creation of ad hoc task forces, has doubled compared to the 2008 survey. VII.2.6 Involvement of Central Banks in the Pricing of Payment Services In the 2010 survey, central banks were also asked to rate their involvement in the pricing of large-value payment services, retail payment services, and remittance services. Five options were included: No involvement, Limited to collection of information, Limited to voicing opinions, Actively regulate, and Others. Central banks that chose the Actively regulate option were also asked to list the types of fees that apply. Table VII.8 summarizes responses to this question. Unsurprisingly, central banks play a limited role with regard to the pricing of payment services, especially in retail payments (including remittances). About 60% of the central banks report either no involvement or only collection of statistical information. Only 15% of the reporting central banks indicated being actively involved in pricing of retail payment services. According to PSDG experience, this has to do mostly with the central bank itself being the operator of a retail payments system. In 19 cases out of 32, central banks that collect pricing information on retail payments can also influence such prices through discussions with the private sector. 83 See the CPSS report Central Bank Oversight of Payment and Settlement Systems, Several of the countries included in these totals indicated both options.

151 Global Survey In contrast, 47% of central banks indicate that they actively regulate prices of large-value payment systems. The major factor behind this result is that almost all central banks operate the large-value payment system in their respective countries and, as such, play a major role in pricing the corresponding payment services. 85 It is worth mentioning that central banks reporting active involvement in the pricing mostly refer to the fees charged by the operator of the large-value payment system to the participants in the system. Typically, the central bank does not influence or has limited influence over the fees that commercial banks charge their clients for processing payments that flow through the large-value payment systems. Low income countries report the lowest level of involvement in the pricing of large-value payment services, which may reflect the lack of a RTGS system or other centralized system for large-value payments in many of those countries. According to survey results, central banks exert very little influence over the pricing of remittances (referred to as low-value person-to-person cross-border payments in this survey). Only 6% selected the Actively regulate option to this question. Another 6% indicate that the involvement is limited to voicing opinions. This is the case across all regions. Although most of low and middle income countries are large net recipients of remittances, only 35% of the central banks in low income countries and 20% of the central banks in lower-middle income countries reported exerting some form of influence. 85 In the specific case of TARGET2, individual central banks do not have independent price setting power. However, they are involved in the pricing through their participation in the ECB Governing Council, which sets TARGET2 fees. The ECB Governing Council consists of the six members of the Executive Board, plus the governors of the national central banks of the Euro area countries. Section VII. Payment System Oversight and Cooperation

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153 SECTION VIII REFORMING THE NATIONAL PAYMENTS SYSTEM VIII.1 BACKGROUND Reforming any of the components of the national payments system is an important undertaking that will require an effort from all stakeholders over a number of years. Thus, it will constitute a medium-term endeavor normally led by public authorities, but with an important involvement of the private sector. Planned reforms should take into account the level of development in the financial sector and the actual needs of the various stakeholders. The first task should always be to prepare and agree upon a Strategic Document (Vision) for the overall payment system architecture in the country, including securities settlement systems. The document will represent an agreed set of initiatives that will be cooperatively implemented by all stakeholders and it is therefore important that it be subscribed to by all relevant stakeholders. For over 15 years, the World Bank s PSDG has been involved in the reform of payment systems in more than 100 countries, and has gained substantial experience and understanding of the elements that determine the success of a reform initiative. PSDG staff members have also participated in the Task Force Group that developed the CPSS General Guidance for National Payment System Development. 86 Many of the experiences of the World Bank in reforming payment systems worldwide were included and codified in the final Task Force document. VIII.2 SURVEY OUTCOMES The tables in this section and related analysis report information on all countries that have responded to Part VIII: Planned and On-going Reforms to the National Payments System of the Questionnaire for Collecting Information to Depict the Situation of Payment and Securities Settlement Systems Worldwide 2010, and on those systems for which information was provided. All but 19 countries reported that they are reforming one or more components of their national payments system. As shown in Table VIII.1, payment systems reforms are present in all regions regardless of income levels or population size. Results are very similar to those of the 2008 survey. Table VIII.2 identifies some of the main areas of the national payments system where reforms are being undertaken. Survey results show that two-thirds of the respondents countries are currently reforming re- 86 CPSS, General Guidance for National Payment System Development, January

154 130 PAYMENT SYSTEMS WORLDWIDE TABLE VIII.1: COUNTRIES REFORMING AT LEAST ONE COMPONENT OF THEIR NATIONAL PAYMENTS SYSTEM Total By Country Income Levels By Region By Country Population Size 120 countries High: 41 of 46 Upper-middle: 28 of 33 Lower-middle: 32 of 35 Low: 19 of 25 EAP: 10 of 11 ECA: 15 of 16 LAC: 19 of 20 MNA: 12 of 13 SA: 4 of 4 SSA: 25 of 34 Euro area: 14 of 16 Other EU members: 8 of 11 ODCs: 13 of 14 Larger: 33 of 35 Medium:44 of 57 Smaller:43 of 47 tail payment systems and/or the legal and regulatory framework. While legal reforms are being undertaken mainly, though not exclusively, in lower income countries, reforms to retail payment systems are present with practically the same frequency across all country income categories. This last outcome is especially relevant given that only a few years ago most central banks were involved solely in reforming systemically important payment systems. Nonetheless, a relatively large number of countries are still involved in the reform of large-value payment systems. While the SSA and SA regions showed the lowest percentages for this specific item in the 2008 survey, in the current iteration 84% of SSA countries and 75% of SA countries are now involved in reforms in this area. This seems to reinforce the facts discussed in chapter II, that modern large-value systems, including RTGS systems and other sophisticated systems such as hybrid solutions, continue to be implemented at both domestic and regional level. In contrast, percentages for euro-area countries dropped from 80% to 36%, mainly as a result of the completion of the TARGET2 project. Interestingly, none of the non-euro area EU members reported being involved in reforms in the large-value area (though 2 of them or 25% did report having reform projects for their securities settlement systems). Only 28 countries responded that they are reforming mechanisms related to FX settlement, with slightly more than half of these being in the SSA and EAP regions. The low percentages in the euro area and ODCs could be attributed to the existence of systems such as CLS which has significantly reduced risk in the FX settlement market. Finally, in the area of payment systems oversight, half of the countries indicated they are undergoing reforms in this area. Most of these countries are outside the EU and ODCs groups. Tables VIII.3, VIII.4 and VIII.5 provide further information on several aspects of the reforms being undertaken. Table VIII.3 identifies the stage at which those reforms were when central banks sent their responses to the current survey. 87 The first column to the left describes the number of countries reforming each individual aspect of the national payments system. These numbers may not coincide with those of Table VIII.1 above because some central banks did not answer the more detailed questions on the status of the reform process. 87 Reforms to the legal and regulatory framework and oversight are not included in Table VIII.3 as these areas do not fit in the various stages defined for other components.

155 Global Survey TABLE VIII.2: AREAS OF THE NATIONAL PAYMENT SYSTEMS BEING REFORMED Countries reforming their national payments system Legal and regulatory framework Largevalue funds transfer systems Retail payment systems Securities settlement systems FX settlement mechanisms Payment system oversight # % # % # % # % # % # % # % Other Worldwide total (120) 80 67% 65 54% 79 66% 65 54% 28 23% 61 51% 29 24% By income High income (41) 16 39% 13 32% 27 66% 21 51% 2 5% 10 24% 4 10% Upper-middle income (28) 19 68% 13 46% 16 57% 10 36% 8 29% 19 68% 6 21% Lower-middle income (32) 28 88% 23 72% 24 75% 19 59% 10 31% 24 75% 12 38% Low income (19) 17 89% 16 84% 12 63% 15 79% 8 42% 8 42% 7 37% By region East Asia and Pacific (10) % 8 80% 7 70% 7 70% 7 70% 8 80% 4 40% Europe and Central Asia (15) 13 87% 7 47% 8 53% 7 47% 2 13% 13 87% 5 33% Latin America & Caribbean (19) 14 74% 11 58% 10 53% 8 42% 5 26% 11 58% 4 21% Middle East & North Africa (12) 9 75% 5 42% 10 83% 7 58% 2 17% 7 58% 1 8% South Asia (4) 2 50% 3 75% 3 75% 1 25% 0 0% 3 75% 1 25% Sub-Saharan Africa (25) 22 88% 21 84% 19 76% 17 68% 10 40% 14 56% 12 48% Euro area countries (14) 4 29% 5 36% 10 71% 10 71% 0 0% 1 7% 1 7% Other EU members (8) 3 38% 0 0% 3 38% 2 25% 0 0% 1 13% 0 0% Other developed countries (13) 3 23% 5 38% 9 69% 6 46% 2 15% 3 23% 1 8% By population size >30 million (33) 22 67% 18 55% 25 76% 16 48% 10 30% 20 61% 9 27% >5 million, <30 million (44) 25 57% 25 57% 27 61% 25 57% 11 25% 15 34% 9 20% 5 million or less (43) 33 77% 22 51% 27 63% 24 56% 7 16% 16 60% 11 26% Some of the most noteworthy elements that can be drawn from Table VIII.3 are as follows: Reforms to large-value payment systems are at an advanced stage, with more than 40% of the new systems already in the implementation phase. About 40% of reforms to the various types of retail payment systems are also in the implementation stage. An identical percentage of the reforms in this area are in either the conceptual stage or the stage in which functional definitions have been completed. As in 2008, most retail payment systems undergoing reform, either ACHs, cheque systems or payment cards systems, show similar progress. Tables VIII.4 and VIII.5 show information solely for the 120 countries that reported having embarked on reforms. Section VIII. Reforming the National Payments System

156 132 PAYMENT SYSTEMS WORLDWIDE TABLE VIII.3: STAGE OF THE REFORMS BEING UNDERTAKEN Countries reforming their national payments system Conceptual stage Requirements/ functionalities have been defined Development (for systems being developed inhouse) Procurement (systems being purchased from vendors) Implementation # # # # # LARGE VALUE RTGS SYSTEM 54 countries worldwide reforming this area RETAIL SYSTEMS ACH 48 countries worldwide reforming this area RETAIL SYSTEMS CHEQUE CLEARINGHOUSE 36 countries worldwide reforming this area RETAIL SYSTEMS PAYMENT CARD SYSTEMS 42 countries worldwide reforming this area SECURITIES SETTLEMENT SYSTEMS 54 countries worldwide reforming this area FOREIGN EXCHANGE SETTLEMENT MECHANISMS 23 countries worldwide reforming this area Note: Some central banks indicated more than one stage for the same area being reformed. The results in this table show only the latest stage reported. Table VIII.4 shows the causes underlying reform efforts. Six typical causes or factors were given in the survey questionnaire, ranging from the need to reduce risks and/or improve efficiency to demands from the various sectors for improved payment services to accommodating technological innovations. In this regard, PSDG experience shows that, in most cases, the factors underlying a reform effort are multiple rather than unique. Survey results are consistent with PSDG findings, as most countries selected two or more of the options that were given. While all factors seem relevant, improving the efficiency of the national payments system was highlighted as a relevant factor by 83% of all countries. This number is consistent with the results in chapters II and VI of this study. In particular, once the majority of central banks have implemented modern systems (e.g. RTGS systems and/or modern securities depositories) which enable them to reduce systemic risks in the payments system and, more generally, in financial markets, more reformers appear to be targeting efficiency improvements.

157 Global Survey TABLE VIII.4: FACTORS THAT TRIGGERED THE REFORMS BEING UNDERTAKEN The need to reduce systemic risk Need to improve the overall efficiency of the payment system Demands from the market for better payment / settlement services Demands from endusers for better payment and settlement services Demands from government institutions for better payment services Response to technological innovations Other Countries reforming their national payments system # % # % # % # % # % # % # % Worldwide total (120) 76 63% % 61 51% 56 47% 46 38% 83 69% 19 16% By income High income (41) 23 56% 28 68% 16 39% 14 34% 8 20% 19 46% 11 27% Upper-middle income (28) 18 64% 23 82% 12 43% 14 50% 8 29% 23 82% 4 14% Lower-middle income (32) 21 66% 30 94% 18 56% 16 50% 15 47% 24 75% 0 0% Low income (19) 14 74% % 15 79% 12 63% 15 79% 17 89% 4 21% By region East Asia and Pacific (10) 8 80% % 7 70% 6 60% 7 70% 9 90% 0 0% Europe and Central Asia (15) 8 53% 12 80% 9 60% 7 47% 4 27% 12 80% 4 27% Latin America & Caribbean (19) 14 74% 16 84% 5 26% 6 32% 5 26% 13 68% 2 11% Middle East & North Africa (12) 9 75% % 6 50% 6 50% 6 50% 8 67% 0 0% South Asia (4) 2 50% 4 100% 4 100% 4 100% 1 25% 4 100% 0 0% Sub-Saharan Africa (25) 19 76% 24 96% 18 72% 17 68% 17 68% 22 88% 3 12% Euro area countries (14) 5 36% 9 64% 7 50% 4 29% 4 29% 4 29% 7 50% Other EU members (8) 2 25% 3 38% 2 25% 3 38% 0 0% 4 50% 1 13% Other developed countries (13) 9 69% 10 77% 3 23% 3 23% 2 15% 7 54% 2 15% By population size >30 million (33) 21 64% 27 82% 22 67% 22 67% 17 85% 28 85% 6 18% >5 million, <30 million (44) 27 61% 37 84% 20 45% 18 41% 15 64% 28 64% 5 11% 5 million or less (43) 28 65% 36 84% 19 44% 16 37% 14 63% 27 63% 8 19% The percentage of countries where reforms aim at improving efficiency levels is higher in lower-middle and low income countries. From a regional perspective, the percentage is similar across regions, with the exception of EU countries (especially non-euro EU members). The second most relevant factor that triggered reforms, according to the respondents, is technological innovation with 69%. In the previous survey the equivalent figure was 55%. Interestingly, low income and larger countries, especially in SA, EAP and SSA region, appear to be especially motivated to incorporate new technologies into their national payments system. This same factor is considered less compelling in high income countries. Nonetheless, the need to reduce systemic risk is still an important driving force behind reform efforts, as indicated by more than 60% of countries undergoing reforms. Currently, reducing systemic risk is less of a Section VIII. Reforming the National Payments System

158 134 PAYMENT SYSTEMS WORLDWIDE TABLE VIII.5: APPROACH FOLLOWED IN THE LATEST REFORM EFFORT Broad/ holistic Systemspecific Big bang approach Gradualist Strategic (goal-based) Starting from the operational particularities in the country Countries reforming their national payments system # % # % # % # % # % # % Worldwide total (120) 37 31% 43 36% 8 7% 61 51% 78 65% 27 23% By income High income (41) 11 27% 23 56% 6 15% 24 59% 26 63% 7 17% Upper-middle income (28) 12 43% 9 32% 0 0% 14 50% 20 71% 7 25% Lower-middle income (32) 11 34% 5 16% 2 6% 15 47% 20 63% 7 22% Low income (19) 3 16% 6 32% 0 0% 8 42% 12 63% 6 32% By region East Asia and Pacific (10) 4 40% 0 0% 0 0% 3 30% 9 90% 0 0% Europe and Central Asia (15) 8 53% 5 33% 2 13% 8 53% 10 67% 5 33% Latin America & Caribbean (19) 7 37% 5 26% 0 0% 10 53% 13 68% 5 26% Middle East & North Africa (12) 2 17% 5 42% 1 8% 6 50% 6 50% 2 17% South Asia (4) 3 75% 0 0% 0 0% 3 75% 2 50% 2 50% Sub-Saharan Africa (25) 3 12% 9 36% 0 0% 10 40% 15 60% 7 28% Euro area countries (14) 5 36% 8 57% 3 21% 10 71% 13 93% 0 0% Other EU members (8) 0 0% 4 50% 2 25% 1 13% 2 25% 2 25% Other developed countries (13) 5 38% 7 54% 0 0% 10 77% 8 62% 4 31% By population size >30 million (33) 15 45% 9 27% 2 6% 17 52% 27 82% 5 15% >5 million, <30 million (44) 11 26% 17 40% 2 5% 23 53% 24 56% 12 28% 5 million or less (43) 11 26% 17 40% 4 9% 21 49% 27 63% 10 23% Note: Not all of the countries undertaking reforms answered this question. Hence, percentages may not add up to 100%. concern for higher income countries, but it is relevant in low income countries, and from a regional perspective in the EAP, SSA, MNA and LAC regions. Table VIII.4 also shows that many reformers are responding to demands from market participants for improved payment and settlement services, and a smaller proportion to similar demands from endusers or from government institutions. According to survey information, and consistent with 2008 results, responsiveness to demands from all these groups is, as a whole, greater in low income countries. Further, Table VIII.5 discusses the approach payment systems reformers have been following in their latest reform efforts. Three elements underlying a reform effort were specified in the survey: scope, pace of change, and broadness of objectives. Central banks were asked to indicate one of the two extreme approaches for each of these elements (i.e. holistic vs. system-specific for

159 Global Survey the scope, big bang vs. gradualist for the pace of change, and strategic vs. operational-based for broadness of objectives). Though not possible to infer from survey data, it is likely that some respondents may have felt more comfortable in indicating some midpoint rather than one of the two extremes. 88 Survey data show the following overall results: Contrary to what was observed in 2008, slightly more countries prefer a system-specific approach to the broad or holistic approach when it comes to setting out the scope of the reform. This is especially the case in high income countries, and may be interpreted as these countries being involved in the fine tuning of one or more specific systems. More countries (78 vs. 27) indicate they are following a strategic approach, rather than trying to solve specific operational problems. Preference for one of the two approaches is particularly stronger when it comes to the pace of change: 51% of the countries indicate they prefer change occurring not so rapidly, thereby adopting a gradualist approach, in contrast to the 7% adopting the so-called big-bang approach. 88 Not all of the 119 countries reforming their payment system answered this question. One potential cause may have been the absence of a mid-point option in the questionnaire for each of these elements. Section VIII. Reforming the National Payments System

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161 CONCLUDING REMARKS The Global Survey results show that in recent years many countries, regardless of income level, have made important progress in areas such as legal framework, large-value payment systems, and central bank-operated securities depositories/ssss. All these are areas of a national payments system where the central bank is able to exert an important degree of intervention either as a central agent ensuring proper coordination and cooperation, as a regulator and overseer, or when due to risk management, efficiency and neutrality considerations, among others, the central bank tends to be the best alternative to act as a system operator. There is still significant room for improvement, in particular with regard to retail payment systems and instruments. In this sector, market forces alone have not been able to achieve the objectives of efficiency and reliability of the payments system. Indeed, survey results show that the level of development in retail payment systems is strongly correlated to a country s overall level of development in the financial sector. In order to accelerate progress in this area, the payments system overseer (i.e. the central b ank) must be entrusted with, and have sufficient powers and resources to make up for a specific type of failure in the market for payment services, i.e. the coordination failures. As many countries worldwide have embarked on, or are embarking on, projects to reform and modernize their payment systems, domestic policymakers are faced with the formidable task of how best to design, or influence the design by the private sector, of payment system infrastructures in fast-changing technological and institutional environments. These tasks become increasingly complex as competition and innovation constantly push to the limit the search for better combinations of efficiency, reliability, safety, and system stability in the provision of payment services to larger numbers of individual users and institutions. The reform of payments and securities settlement systems is an important undertaking. The output will affect the majority of the people in a country and, in particular, the major stakeholders such as the central bank, the Treasury, other regulators, banks and financial institutions, corporations and final customers. It also involves relatively large investment costs. A collaborative and cooperative approach is the only way in which risks can be managed and desired payment system objectives met. A well-structured collaborative approach, through the creation of National Payments Councils or similar bodies, will create synergy, stimulate learning and provide a basis for optimizing benefits through cooperation and consensus building. Close and effective cooperation among relevant 137

162 138 PAYMENT SYSTEMS WORLDWIDE authorities is also a key factor in promoting safety and efficiency in payment systems. Appropriately reforming each national payments system will also create the conditions for increased harmonization, which will serve as a basis for an eventual integration among different payment systems, both domestically and internationally. In this last regard, it is important to stress that any integration of payment systems should be based on the existence of common features in all relevant areas (legal, technical standards, risk control mechanisms, liquidity provision, access policies, governance, organizational arrangements, operational aspects, reliability and business continuity, etc.). Based on international experience, and that of the World Bank s PSDG, in regional and sub-regional payment system integration projects, working first on building sound national payment systems on the basis of international standards and best practices is the best way to make an eventual integration across countries feasible and for it to proceed smoothly.

163 Global Survey ANNEX I: THE QUESTIONNAIRE I. LEGAL AND REGULATORY FRAMEWORK I.1 What pieces of legislation have direct/explicit references to payment and securities settlement systems in the country? These include, for example, laws defining the powers and obligations of the Central Bank, main public policies in the area of payment and securities settlement systems, rights and obligations of other payment services providers, etc. (mark with an X all that apply) a. Central Bank Law b. Banking Law c. Payment Systems Law d. Securities Markets Law e. Civil Code and/or Commerce Code f. Central Bank Regulations having the power of Law g. Consumer Protection Law h. Competition Law i. Anti-Money Laundering/Counter Financing of Terrorism (AML/CFT) Law j. Other (please specify) I.2 Do legal provisions cover the following specific issues? (mark with an X all that apply) a. Clarity of timing of final settlement especially when there is an insolvency b. Legal recognition of (bilateral and multilateral) netting arrangements c. Recognition of electronic processing of payments (for example, can electronic signatures/ documents be used as evidence in the court of law?) d. Non-existence of any zero hour or similar rules e. Enforceability of security interests provided under collateral arrangements and of any relevant repo agreements f. Protection from third-party claims of securities and other collateral pledged in a payment system g. Consumer protection for retail payment services h. Fair and competitive practices in provision of payment services Annex I

164 140 PAYMENT SYSTEMS WORLDWIDE I.3 Do the provisions in the previous questions (mark with an X all that apply) a. Apply only to payment systems operated by the Central Bank b. Apply to all systemically important payment systems c. Apply to all payment systems in the country I.4 Do legal provisions cover the following specific issues related to securities settlement? (mark with an X all that apply) a. Dematerialization of securities b. Immobilization of securities c. Securities ownership transfers through book entries d. Finality of settlement (securities and funds transfers) e. Protection of custody arrangements from third-party claims in the event of bankruptcy of the custodian e.g. securities deposit accounts in the Central Securities f. Depositories (CSDs) e. Securities lending arrangements g. Novation 1 h. Protection of the operation of the securities settlement system in the event of the insolvency of a system participant 1.5 Has a court in the jurisdiction ever failed to uphold the legal basis of the activities or arrangements under 1.2 and 1.4 above? (please indicate YES or NO) If so, for what reasons? I.6 Central Bank empowerment to oversee payment and securities settlement systems in the country (mark with an X all that apply) a. The Central Bank has no formal powers to perform payment system oversight b. Oversight powers are to be found in the Central Bank Law c. Oversight powers are to be found in the Payment Systems Law d. Oversight powers are to be found in other laws e. Empowerment is general, in the context of ensuring the adequate and safe functioning of payment systems in the country 1 A process through which the original obligation between a buyer and a seller is discharged through the substitution of a Central Counterparty (CCP) as seller to buyer and buyer to seller creating two new contracts.

165 Global Survey f. Empowerment is explicit, granting it powers to operate, regulate, and oversee payment systems I.7 Please indicate any other authority that is legally empowered to supervise or oversee payment and securities settlement systems (mark with an X all that apply) a. Securities regulator b. Ministry of Finance c. Anti-trust authority d. Other (please specify) I.8 If you wish to provide additional comments to your answer(s) for questions I.6 and I.7, in particular with regard to securities settlement oversight, please do so in the space below I.9 Which of the following payment service providers are subject to AML/CFT regulations? a. Commercial banks b. Money remitters c. Exchange bureaus d. Credit unions e. Microfinance Institutions (MFIs) f. Post Office g. Mobile phone operators h. Other (please specify) Annex I

166 142 PAYMENT SYSTEMS WORLDWIDE I.10 Are non-bank payment and securities settlement services providers a) required to be registered; b) required to obtain a specific license from the Central Bank or any other relevant authority; c) not required to either be registered or licensed (please indicate YES or NO and specify the responsible authority in the last column) Non-bank financial institutions (NBFIs) Clearinghouses Central counterparties (CCPs) Central securities depositories (CSDs) Institution Registration License None Authority Money transfer operators (MTOs) (e.g. Western Union, Money Gram) Payment card processing companies Mobile phone operators 1 Telecommunication companies 2 Other (e.g. internet-based) (please specify) 1 When they provide payment services. 2 When they provide payment services. II. LARGE-VALUE FUNDS TRANSFERS SYSTEMS II.1 What is the main system used in the country for large-value funds transfers? (mark with an X all that apply). If more than one system could be considered as systemically important 2, please also indicate an approximate share of large-value payments that are channeled through each system in terms of value a. Real-Time Gross Settlement (RTGS) system b. Cheque Clearinghouse c. Other (please describe the main features) 2 Following the CPSS Core Principles Report, it is likely that a system is of systemic importance if at least once of the following is true: i) it is the only payment system in a country, or the principal system in terms of the aggregate value of payments; ii) it handles mainly payments of high individual value; iii) it is used for the settlement of financial market transactions or for the settlement of other relevant payment systems.

167 Global Survey THE FOLLOWING QUESTIONS REFER TO RTGS SYSTEMS. If a cheque clearinghouse is used to process large-value payments please proceed to section III. If you answer positively to II.1.C, please proceed to II.19. Also, if an RTGS is being planned or is currently under implementation, please complete section VIII. II.2 Please indicate who is the operator of the RTGS system (i.e. Central Bank or other), who acts as settlement agent, and the year in which the RTGS system began operations on a full scale. If there is more than one RTGS system, please provide the information for each of them Operator Settlement Agent Year RTGS 1 RTGS 2 RTGS 3 II.3 Please provide the following statistical data for 2009 and, if applicable, for 2008, 2007, 2006, 2005 and If there is more than one RTGS system, please make a separate table for each of them Total number of transactions/settled payments In local currency In foreign currency (if applicable. Please indicate the foreign currency or currencies) Total value settled In local currency In foreign currency (if applicable. Please indicate the foreign currency) II.4 Please indicate the primary means through which direct RTGS participants send their payment orders for processing (mark with an X all that apply) a. SWIFT international network b. SWIFT closed users group c. Proprietary telecommunications network d. Other electronic means (e.g. , etc.) (Please specify) _ e. Other paper means (please specify) _ 3 Please specify if fiscal or calendar year. If fiscal, please indicate the period. Annex I

168 144 PAYMENT SYSTEMS WORLDWIDE II.5 Pricing and charges (mark with an X all that apply) a. The RTGS operator makes no charges for the processing/settlement of payment orders b. Charges are applied with no particular relation to cost recovery c. The pricing policy aims at partial recovery of the operational cost of the system d. The pricing policy aims at full recovery of the operational cost of the system e. The pricing policy aims at full recovery of the operational cost of the system plus partial recovery of the investment costs f. The pricing policy aims at recovering all costs (operational + investment) in full g. The pricing policy aims at recovering all costs in full plus profits/opportunity cost II.6 In case of a positive answer to any of the items e), f), or g) in question II.5, please indicate how many years were considered for: a. The recovery of investment costs b. To start generating a profit II.7 What are the main sources of liquidity during the day? (mark with an X all that apply) a. Opening balances and funds received from other participants during the day b. Participants can use a part of their reserve requirements during the day c. Participants can use all their reserve requirements balance during the day d. Lines of credit between banks e. The RTGS operator allows collateralized current account overdrafts f. The RTGS operator allows uncollateralized current account overdrafts g. The RTGS operator grants collateralized credit, either in the form of a loan or a repo h. The RTGS operator grants uncollateralized credit, either in the form of a loan or a repo i. Other (please specify) II.8 How does the RTGS operator manage the credit risk that may arise as a result of applying some of the mechanisms discussed in the previous question? (mark with an X all that apply) a. Suitable collateral 4 is required in all cases b. Collateral is required in all cases, but collateral does not always have suitable quality c. Current account overdrafts/credit is limited, but no collateralization is required d. There are no limits or collateralization requirements for account overdrafts/credit 4 In this context, suitable collateral should be interpreted as being liquid should a default occur. It also implies that the value of such collateral is marked to market on a daily basis and haircuts applied where appropriate.

169 Global Survey II.9 II.10 II.11 How does the RTGS operator deal with intraday liquidity that is not repaid by the end of the system s operating day? (mark with an X all that apply) a. The RTGS operator seizes the collateral immediately thereafter b. The RTGS operator transforms the intraday credit into overnight at market rates c. The RTGS operator transforms the intraday credit into overnight at penalty rates d. Other (please specify) If a participant does not have enough balance (and/or credit) in its current account with the RTGS operator to process new payments, what mechanism becomes applicable? (mark with an X all that apply) a. The payment order is rejected immediately b. The payment order goes into a queue for later processing (see question II.11) c. Other (please specify) Queuing arrangements and prioritization (mark with an X all that apply). If the RTGS system does not have a queuing mechanism, please proceed to question II.12 a. A centralized queuing mechanism is used b. A First In, First Out (FIFO) resolution algorithm is used c. Bilateral offsetting is used as resolution algorithm d. Multilateral offsetting is used as resolution algorithm e. Both bilateral and multilateral offsetting is used f. The offsetting mechanism is triggered automatically every certain period of time g. The offsetting mechanism is triggered automatically by non-time-related parameters h. The offsetting mechanism can be triggered manually by the RTGS operator i. Participants can set priorities to their payment orders j. Participants can change the priorities to their payment orders once these orders are in a queue waiting to be settled Annex I

170 146 PAYMENT SYSTEMS WORLDWIDE II.12 Is the pricing policy used to incentivize the smooth flow of payment orders through the system, e.g. are participants charged different prices based on the time of the day when their payments are processed? (please indicate YES or NO) II.13 Participants have access to information on their settlement balances and available credit/overdrafts during the day (please indicate YES or NO) II.14 II.15 II.16 II.17 Resilience and business continuity (mark with an X all that apply) a. Routine procedures are in place for periodical data back-ups b. Tapes and other storage media are kept in sites other than the main processing site c. Back-up servers have been deployed at the main processing site d. A fully equipped alternate processing site exists e. The RTGS operator has documented a formal business continuity plan f. Business continuity arrangements include procedures for crisis management and information dissemination g. Business continuity arrangements are regularly tested What is the targeted performance level for full system recovery (Indicate in MINUTES, otherwise indicate Not Applicable or N/A) RTGS access rules and policies (mark with an X all that apply) a. There is an explicit access/exclusion policy for the RTGS system b. Access to the RTGS is granted on the basis of institutional standing (i.e. whether the applicant is a bank, or some other specific type of financial institution) c. Access to the RTGS is granted on the basis of the fulfillment of a set of objective criteria to ensure a safe and sound operation of the system (e.g. capital requirements, technological capacity, internal risk controls, appropriate management, etc) d. Formal rules or arrangements are in place to allow the RTGS operator to exclude a system participant in a timely fashion RTGS participants (mark with an X all that apply) a. All commercial banks have direct access to the RTGS system b. All commercial banks have direct access to Central Bank credit c. Banks (other than commercial banks) have direct access to the RTGS system d. Banks (other than commercial banks) have direct access to Central Bank credit e. Non-bank institutions have direct access to the RTGS system

171 Global Survey f. Non-bank institutions have direct access to Central Bank credit Please use space below to specify the Non-Bank Financial Institutions (NBFIs) II.18 Is there a specific RTGS Users Group in place for the RTGS operator to better address participants needs? (please indicate YES or NO) PLEASE ANSWER THE FOLLOWING QUESTIONS FOR NON-RTGS LARGE-VALUE PAYMENT SYSTEMS OPERATING IN YOUR COUNTRY (The following questions are applicable only if you answered positively to Question II.1.c) II.19 II.20 Features of the settlement systems for large-value payments (mark with an X all that apply) a. Settlement of payments is executed on a gross basis but not in real time b. Settlement of payments is processed on a net basis at the end of the day c. Payments are settled in multiple clearing sessions during the day d. Payments are settled through accounts kept with the Central Bank e. Final settlement of net positions takes place through an RTGS system f. Final settlement takes place in Central Bank money, but not through an RTGS system g. Final settlement takes place in commercial bank money Please indicate the primary means through which participants send their payment orders for processing (mark with an X all that apply) a. SWIFT International Network b. SWIFT closed users group c. Proprietary telecommunications network d. Other electronic means (e.g. , etc.) (Please specify) e. Other paper means (please specify) II.21 If a participant does not have enough balance (and/or credit) in its settlement account to process new payments, what mechanism becomes applicable? (mark with an X all that apply) a. The payment order is rejected immediately b. The payment order is delayed until funds are available c. The settlement institution/system operator extends immediate credit Annex I

172 148 PAYMENT SYSTEMS WORLDWIDE d. Credit is collateralized e. Credit is extended up to certain limits f. Other (please specify) II.22 Please indicate which of the following dependencies are applicable to each of the systems indicated above (mark with and X all that apply and use space to explain as needed) a. The system s availability is dependent on another system which is linked to it b. The system is dependent on liquidity provision from another system c. System is highly dependent on network availability d. The system s availability is dependent on electricity e. The system is dependent on liquidity provision by the Central Bank III. RETAIL PAYMENT SYSTEMS III.1 Please provide the following statistical data Total number of Automated Teller Machines (ATMs) in the country Total number of Point of Sale (POS) terminals in the country Total number of debit cards Total number of credit cards Total number of ATM networks Total number of POS networks

173 Global Survey For the following table, please include information on both intrabank and interbank transactions. If only interbank transaction information is available, please indicate so at the bottom of the table. Total number of transactions Cheques Direct credits/credit transfers Direct debits Payments by debit card Payments by credit card Total value settled (please indicate currency) Cheques Direct credits/credit transfers Direct debits Payments by debit card Payments by credit card III.2 III.3 Cheque clearinghouse main features (mark with an X all that apply) a. Cheque clearinghouse is operated by the Central Bank b. Cheques are standardized c. Processing of cheques is automated, but physical exchange is required d. Processing of cheques is automated, and cheque truncation is used e. Multilateral net balances are calculated f. Net balances are calculated and settled once a day g. Net balances are calculated and settled more than once each day h. Final settlement of net positions takes place through a Real-Time Gross Settlement (RTGS) system i. Final settlement takes place in Central Bank money, but not through an RTGS system j. Customer accounts are credited no later than T+2 If a special procedure for large-value cheques has been implemented, please answer the following. Otherwise, proceed to question III.4 (mark with an X all that apply) a. As part of this procedure, large-value cheques can be settled with same-day value b. As part of this procedure, large-value cheques are processed on a gross-basis c. As part of this procedure, net balances are calculated and settled more than once a day d. There is a settlement guarantee fund for large-value cheques processed under this procedure (on a net basis) Annex I

174 150 PAYMENT SYSTEMS WORLDWIDE III.4 Cheque clearinghouse risk controls (mark with an X all that apply) a. No specific risk management mechanism is in place b. In the event a participant is unable to settle its debit position, an unwinding procedure would be initiated c. Participants have access to information on their preliminary position in the clearinghouse during the day d. There are limits in place to protect netting systems from significant exposures e. There is a specific guarantee fund in place for the system f. Risk management mechanisms in place ensure completion of daily settlements in case of the inability to settle by participant with the largest single settlement obligation g. The Central Bank or the operator provides ultimately liquidity to the system Note: If there is more than one ACH in the country, please provide separate answers for each of them for questions III.5 and III.6 III.5 III.6 Automated Clearing House (ACH) for direct credits and/or direct debits main features (mark with an X all that apply) a. An ACH for direct credits and/or direct debits is not available in the country (i.e. direct credits and direct debits are only available at the intrabank level) b. The ACH is operated by the Central Bank c. The ACH allows the processing of both direct credits and direct debits d. Non-bank institutions (e.g. National Treasury) can be direct participants in the ACH (please specify) e. Net balances are calculated and settled at least once a day f. Final settlement of net positions takes place through an RTGS system g. Final settlement takes place in Central Bank money, but not through an RTGS ACH risk controls (mark with an X all that apply) a. No specific risk management mechanism is in place. In the event a participant is unable to settle its debit position, an unwinding procedure would be initiated b. Participants have access to information on their preliminary positions in the clearinghouse during the day c. There are limits in place to protect netting systems from excessive exposures d. There is a specific guarantee fund in place for the system

175 Global Survey e. Risk management mechanisms are in place to ensure completion of the daily settlement in case of inability to settle by the participant with the largest single settlement obligation f. The Central Bank or the operator provides liquidity to the system ultimately III.7 Payment card systems main features (mark with an X all that apply) a. Local brands dominate the marketplace for payment cards b. International brands (Visa, Mastercard, etc.) dominate the marketplace c. There is at least one payment card switch operating in the country III.8 Payment card systems: ATMs and POS (please rank from 1 to 3, being 1 the highest grade and 3 the lowest) a. Interoperability 5 of ATM systems in the country b. Interoperability 6 of POS terminals in the country c. Payment cards are actually used extensively as payment instruments (and not only for cash withdrawals at ATMs) III.9 If you wish to provide comments or clarifications in relation to any of the items on questions III.7 and III.8 please do so in the space below III.10 Please indicate which of the following services are provided through ATMs in the country (mark with an X all that apply) a. Cash withdrawals b. Bill payments c. Cash deposits d. Purchases (e.g. tickets, airtime) e. Credit transfers Other (please specify) 5 In the context of this survey, full interoperability of ATMs means that all payment and cash withdrawal cards issued by banks in the country can be used seamlessly (though probably at a cost) at all ATMs in the country. 6 In the context of this survey, full interoperability of POS terminals means that all payment cards issued by banks in the country can be used seamlessly in any POS terminal in the country. Annex I

176 152 PAYMENT SYSTEMS WORLDWIDE III.11 How are domestic ATM transactions processed in your country? (mark with an X all that apply) a. International payment networks dominate the processing of domestic ATM transactions b. Domestic payment networks dominate the processing of domestic ATM transactions c. There are no domestic ATM payment networks d. Most large banks operate their own ATM payment networks and do not participate in the domestic ATM payment switch(es) e. A few large banks operate their own ATM payment networks and do not participate in the domestic ATM payment switch(es) f. Most of the banks participate in the domestic ATM payment switch(es) III.12 How are domestic POS transactions processed in your country? (mark with an X all that apply) a. International payment networks dominate the processing of domestic POS transactions b. Domestic payment networks dominate the processing of domestic POS transactions c. There are no domestic POS payment networks d. Most large banks operate their own POS payment networks and do not participate in the domestic POS payment switch(es) e. A few large banks operate their own POS payment networks and do not participate in the domestic POS payment switch(es) f. Most of the banks participate in the domestic POS payment switch(es) III.13 Would you consider the interchange fees prevailing in the card industry high? III.14 If so, have any actions been taken or are in the process of being taken to address this issue? III.15 For the three main (in terms of volumes) payment switches in the country complete the table to the right (please follow the instructions in the Attribute column)

177 Global Survey Attribute Switch 1 Switch 2 Switch 3 Transactions supported (indicate YES if supported, NO if not supported) Clearing of POS transactions Clearing of ATM transactions Clearing of transactions initiated through internet Clearing of transactions initiated through other remote channels like mobile phones Clearing of funds transfer transactions Other (please specify) Ownership structure (mark with an X the one that best describes the ownership structure) Settlement features (mark with an X the one that best describes the settlement features) Pricing model (mark with an X the one that best reflects the pricing model) Other services (answer YES if provided, NO if not provided; for all the listed other services) Consortium of a few large banks Consortium of all major banks (say 80% of all banks) Central Bank Other Government bodies (please specify) Other private sector entities (please specify) Final settlement of net positions takes place through an RTGS system Final settlement takes place in Central Bank money, but not through an RTGS Final settlement takes place in commercial bank money Final settlement takes place in another country Free of charge Partial cost recovery Full cost recovery Full cost recovery in addition to building a surplus Other (please specify) Operate ATM terminals Operate POS terminals Manage merchant relationships ATM cash management Act as counterparty 1 for transactions cleared through the network Provide settlement guarantee Provide transaction statistics and related analytical reports Conduct market research Other (please specify) 1 Contractually the switch operator is the central counterparty for all the transactions cleared by it, and takes on the financial liability in case of settlement failures. Annex I

178 154 PAYMENT SYSTEMS WORLDWIDE III.16 What is the role of the Central Bank in the payment switch(es)? (mark with an X all that apply) a. No role b. Observer c. Stakeholder d. Member of corporate board e. Advisory board member f. Provider of settlement services g. Operator of the payment switch(es) h. Overseer i. Other (please specify) III.17 Does the Central Bank or Government mandate utilization of a designated national payment switch for the clearing of all domestic transactions? (mark with an X all that apply) a. Yes, by regulation b. Yes, by moral suasion c. No III.18 Which of the following institutions offers non-cash payment instruments? (mark with an X all that apply) a. Commercial banks (private and/or state-owned) b. Non-Bank Financial Institutions (NBFIs, i.e. cooperatives, savings & loans, consumer credit) c. Post Office d. Non financial institutions e. Other (please specify) III.19 Please provide your opinion on the average cost of non-cash payment instruments and services for individuals (please indicate 1 for zero or negligible; 2 for low; 3 for medium; 4 for high) a. Opening a bank current account b. Maintaining a bank current account (annual fees) c. Direct credit (e.g. wire transfer) d. Direct debit

179 Global Survey e. Cheque f. Credit cards Annual fee Individual transaction g. Debit cards Annual fee Individual transaction h. Pre-paid cards Annual fee Individual transaction i. ATM cash withdrawals fees Own bank ATM Other bank ATM j. Other ATM services fees Own bank ATM Other bank ATM k. Other instruments (e.g. mobile payment. Please specify) III.20 If you wish to provide comments or clarifications in relation to any of the items on question III.19, please do so in the space below III.21 Which of the following measures are in place to prevent fraud in retail non cash-based means of payment? (mark with an X all that apply) a. Industry-led standards b. Common efforts by the banking industry and merchants associations c. Legal requirements applicable to payment service providers/users d. Other (please specify) Annex I

180 156 PAYMENT SYSTEMS WORLDWIDE III.22 Government payments main features. Indicate the use of paper and electronic payment instruments for various government payments (mark with an X to all that apply) Mainly cash Mainly paper based payment instrumentscheques, payment orders Mainly electronic payment instrumentspayment cards, EFT, and other e-payment schemes Government-to-person payments Public sector salaries Pensions and transfer payments Cash transfers and social benefits Person-to-government payments Taxes Utility payments Payment for services, etc. Governmen-to-business payments Procurement of goods and services Tax refunds Business-to-government payments Taxes Utilities Benefits transfers III.23 If government payments are handled mainly through cash or paper based payment instruments, are there plans to migrate these to electronic payments in the near term? Please elaborate on the main eatures of this migration 7 III.24 Please specify if the process of collection (taxes, etc.) and distribution (transfer payments, etc.) of government payments is handled through a centralized treasury account. If yes, please also specify the government agency or department responsible for this function 7 The World Bank is setting up a Task Force to extract best practice on Government Payments throughout the world. To help with this new initiative, we would appreciate your input in this regard.

181 Global Survey IV. FOREIGN EXCHANGE SETTLEMENT SYSTEMS IV.1 General (mark with an X all that apply) a. One foreign currency accounts for 90% or more of total Foreign Exchange (FX) transactions b. The Central Bank offers current account services to banks and/or other institutions in at least one major foreign currency c. There are restrictions on FX dealings, and the FX market is not very active IV.2 Please provide the following statistical data for the main foreign currency that is traded in the interbank/wholesale market in your country Total traded amounts (please indicate currency) Over the counter (OTC) market Exchange-traded IV.3 If a centralized foreign currency market exists in the country, please answer the questions below. Otherwise, please proceed to question IV.4 (mark with an X all that apply) a. One foreign currency accounts for 90 % or more of total transactions b. Settlement of foreign currency deals at the exchange are settled by the exchange c. Settlement of FX deals occurs on a Payment Versus Payment (PVP) basis solely through settlement accounts at the Central Bank d. Settlement of FX deals occurs on a PVP basis through a combination Central Bank (domestic leg) and foreign correspondent banks e. Settlement of FX deals occurs on a PVP solely through foreign correspondent banks f. There is no PVP procedure in place IV.4 OTC markets (mark with an X all that apply) a. There is an organized mechanism or procedure for FX traded to be settled on a PVP basis (e.g. a common foreign correspondent bank) b. The time lag between the confirmation of settlement of the foreign currency leg and the domestic currency leg does not exceed 2 hours Annex I

182 158 PAYMENT SYSTEMS WORLDWIDE c. The time lag between the confirmation of settlement of the foreign currency leg and the domestic currency leg exceeds 2 hours but is less than 24 hours d. The time lag between the confirmation of settlement of the foreign currency leg and the domestic currency leg exceeds 24 hours e. No significant information is available on the risks in the foreign currency market V. CROSS-BORDER PAYMENTS AND INTERNATIONAL REMITTANCES Cross-Border Payments V.1 Integration of payment systems for cross-border payments (mark with an X all that apply) a. Have any systems established links for cross border settlement Yes No (If yes please specify) _ b. If plans are in the pipeline, please indicate when this will be implemented Within 2 years More than 2 years (If yes please specify) V.2 Use of the international SWIFT network (mark with an X all that apply) a. 90% or more of commercial banks in your country are connected to SWIFT b. Less than 90% but more than 50% of commercial banks are connected to SWIFT c. Some banks or other financial institutions can use SWIFT through the Central Bank s own connection to SWIFT d. Some banks or other financial institutions can use SWIFT through a SWIFT Service e. Bureau operated by the Central Bank or another institution

183 Global Survey Remittances Note: For the purpose of this Survey, International Remittances are cross-border person-to person payments of relatively low value, due to their importance as a lifeline for migrant families in the developing world we have separated them from the other cross-border payments. V.3 Please provide the following statistical data (in USD). If either outflows or inflows of remittances are not very relevant, please indicate so with neg Total remittance outflows (sent) Total remittance inflows (received) V.4A Which of the following Remittance Service Providers 8 (RSPs) are allowed to offer inbound remittance services? (mark with X-D if services are provided directly or with X-A if through agents) a. Commercial banks b. International Money Transfer Operators (MTOs) (e.g. Western Union, Money Gram) c. Local MTOs d. Exchange bureaus e. Credit Unions f. Microfinance Institutions (MFIs) g. Post Office h. Mobile phone operators i. Retail stores (Supermarket, Pharmacies, Gas stations) as agents of MTOs j. Other (please specify) 8 According to the World Bank-CPSS General Principles for International Remittance Services, RSPs are defined as any person or institution providing such a service [Remittance Transfers] as a business. There are many different ways in which remittance transfers can be made, including, among others, cash payments using individuals who provide this service to their local immigrant communities, services from specialized global money transfer operators, bank-to bank transfers and card payments. However, the RSP term does not cover those whose services are based on purely physical transfers of cash (eg. where a person travelling back to the home country carries the cash on behalf of the sender, or where cash is sent by post or courier from one country to another). Annex I

184 160 PAYMENT SYSTEMS WORLDWIDE V.4B Which of the following RSPs are allowed to offer outbound remittance services? (mark with X-D if services are provided directly or with X-A if through agents) a. Commercial banks b. International MTOs (e.g. Western Union, Money Gram) c. Local MTOs d. Exchange bureaus e. Credit unions f. MFIs g. Post Office h. Mobile phone operators i. Retail stores (supermarket, pharmacies, gas stations) as agents of MTOs j. Others (please specify) V.5A Please rank from 1 to 10, with 1 being the most relevant and 10 the least relevant, the various RSPs in your country according to market share for inbound remittances a. Commercial banks b. International MTOs (e.g. Western Union, Money Gram) c. Local MTOs d. Exchange bureaus e. Credit unions f. MFIs g. Post Office h. Mobile phone operators i. Retail stores (supermarket, pharmacies, gas stations) as agents of MTOs j. Others (please specify) V.5B Please rank from 1 to 10, with 1 being the most relevant and 10 the least relevant, the various RSPs in your country according to market share for outbound remittances a. Commercial banks b. International MTOs (e.g. Western Union, Money Gram) c. Local MTOs

185 Global Survey d. Exchange bureaus e. Credit Unions f. MFIs g. Post Office h. Mobile phone operators i. Retail stores (supermarket, pharmacies, gas stations) as agents of MTOs j. Other (please specify) V.6A Please rank from 1 to 6, with being 1 the most relevant and 6 the least relevant, the various payment mechanisms and instruments used for sending remittances in your country a. Cash b. Cheque or similar payment instrument c. Current account transfers d. International payment cards linked to a current account in the sending country e. enabling the recipient to withdraw cash locally from ATMs f. International prepaid cards (not linked to a current account) that enable the recipient to withdraw cash locally from ATMs g. Mobile phone based payment mechanisms (e.g. m-wallet or mobile phone as access channel to a bank account) h. Other (e.g. cheques, bank drafts, money orders. Please specify) V.6B Please rank from 1 to 6, with being 1 the most relevant and 6 the least relevant, the various payment mechanisms and instruments used for receiving remittances in your country a. Cash b. Cheque or similar payment instrument c. Current account transfers d. International payment cards linked to a current account in the sending country enabling the recipient to withdraw cash locally from ATMs e. International prepaid cards (not linked to a current account) that enable the recipient to withdraw cash locally from ATMs Annex I

186 162 PAYMENT SYSTEMS WORLDWIDE f. Mobile phone based payment mechanisms (e.g. m-wallet or mobile phone as access channel to a bank account) g. Other (e.g. cheques, bank drafts, money orders) (please specify) V.7 Transparency of remittance services (mark with an X all that apply) a. RSPs are legally required to disclose fees applied (please specify if applicable to sending side and receiving side or sending side only) b. RSPs are subject to different legal requirements as to fees disclosed, depending on the destination country c. RSPs are legally required to disclose Foreign Exchange rate applied d. RSPs are legally required to disclose taxes applied e. RSPs are legally required to disclose speed of the transfer f. RSPs are legally required to disclose available complaint mechanisms g. RSPs must inform customers on the details of the transaction before they perform it h. RSPs must provide customers with receipt containing the details of the transaction Please use space below for any explanatory notes (as needed) with regard to V.7.b V.8 Consumer protection (mark with an X all that apply) a. Legislation on consumer protection is in place b. A specific legislation on consumer protection for financial services is in place c. Best practices code for the protection of financial services users is in place d. Best practices code is applicable also to remittance services e. There is a public authority (consumer protection agency, financial ombudsman, etc) overseeing and implementing the relative legislation

187 Global Survey V.9 Which type of access to clearing and settlement systems do the following RSPs have in your country? (mark with an X all that apply and specify who owns/manages the system in the last column) 9 Institution Direct access Indirect access Special access (please specify) No access Ownership/ management Commercial banks International money transfer operators Local money transfer operators Exchange bureaus Microfinance institutions (MFIs) Post office Credit unions Mobile operators Retail stores Other (please specify) V.10 Regulation of RSPs (mark with an X all that apply) a. All RSPs have to be registered with a competent authority b. All RSPs have to be licensed by a competent authority c. All RSPs need only to comply with Anti-Money Laundering (AML) regulations d. RSPs are not required to comply with any particular law or regulation other than those of general applicability to other types of businesses V.11 Competition environment (mark with an X all that apply) a. Exclusivity agreements/conditions 10 are present in the market b. Specific legislation is in place to address anti-competitive behaviors and conditions (e.g. exclusivity agreements) c. RSPs have to be incorporated as banks. 9 Access to payment system infrastructure can be granted on a direct or indirect basis. Direct access means that the RSP is itself a direct participant in the system, submits its payment instructions directly to the system, and is responsible for settling them. Indirect access means that the RSP is not itself a direct participant in the system but instead uses another institution that is a direct participant to act on its behalf i.e. the RSP is a customer of the direct participant. In addition, for non-systemically important payment systems that are relevant to remittances, the systems and their overseers could have adopted a special access policy that includes certain non-bank RSPs and other institutions that generally have a significant reach into the community (e.g. credit unions, rural microfinance institutions, credit cooperatives, national postal systems). 10 Exclusivity conditions are where an RSP allows its agents or other RSPs to offer its remittance service only on condition that they do not offer any other remittance service. Annex I

188 164 PAYMENT SYSTEMS WORLDWIDE d. RSPs have to meet stipulated capital requirements e. Agents are allowed to disburse funds in foreign currency V.12 Which are the relevant authorities in the regulation and oversight of the market? (mark with an X all that apply) a. Central Bank b. Ministry of Finance c. Ministry of Industry and Commerce d. Banking supervision authority e. Anti-Trust authority f. Other (please specify) VI. SECURITIES SETTLEMENT SYSTEMS VI.1 General (mark with an X all that apply) a. The securities market (government securities, equities, corporate bonds and derivatives ) is at a nascent stage, characterized by only a few or none primary issuances, and few or none secondary market trades b. One or more stock exchanges are currently operating in the country c. The great majority (say 90% or more of negotiable securities in the country are immobilized or dematerialized in one or more Central Securities Depositories (CSDs) d. There is a single CSD for all types of securities in the country e. There are two or more CSDs, each handling only certain types of securities (e.g. one CSD for securities issued by the private sector, another CSD for government securities, etc) f. There are two or more CSDs, each handling all types of securities g. There is one or more clearing institution for securities operating in the country h. There is one or more Central Counterparties (CCPs) operating in the country i. At least one securities settlement system does not directly settle in Central Bank money, but uses one or more settlement banks to settle the payment obligations

189 Global Survey Please answer questions VI.2 to VI.5 separately for each CSD operating in your country. VI.2 CSD General (mark with an X all that apply) a. The CSD handles: Government Securities Corporate Securities Both b. The CSD is operated by: The Central Bank The Stock Exchange Other Private Entity c. The CSD is used regularly to facilitate ownership transfers stemming from secondary market transactions d. The CSD is used for securities traded at the stock exchange only e. The CSD is used to settle also Over The Counter (OTC) transactions VI.3 CSD Settlement (mark with an X all that apply) a. A rolling settlement cycle of T+3 or shorter is used for all securities trades b. A rolling settlement cycle of T+3 or shorter is used for the majority of the securities trades c. The CSD has a real-time interface with the Real-Time Gross Settlement (RTGS) system (if applicable) d. Model 1 Delivery Versus Payment (DVP) 11 is used e. Model 2 DVP 12 is used f. Model 3 DVP 13 is used g. No DVP is used h. For either Model 2 or Model 3, a guarantee fund or other risk management mechanism (other than the CCP) is in place to ensure settlement will take in the event the participant with the largest debit obligation is unable to settle its position i. A securities lending mechanism has been implemented 11 Transfer instructions for both securities and funds are settled on a trade by trade (gross) basis, with final (unconditional) transfer of securities from the seller to the buyer (delivery) occurring at the same time as final transfer of funds from the buyer to the (delivery) occurring at the same time as final transfer of funds from the buyer to the seller (payment). 12 Transfer instructions are settled on a gross basis with final transfer of securities from seller to buyer (delivery) occurring throughout the processing cycle while funds transfer instructions settle on a net basis, with final transfer of funds from buyer to seller (payment) occurring at the end of the processing cycle. 13 Transfer instructions for both securities and funds are settled on a net basis with final transfers of both securities and funds occurring at the end of the processing cycle. Annex I

190 166 PAYMENT SYSTEMS WORLDWIDE VI.4 CSD Participation and custody arrangements (mark with an X all that apply) a. Commercial banks are direct participants in the CSD b. Broker-dealers are direct participants in the CSD c. Other financial institutions can be direct participants d. Beneficial owners 14 are identified at the individual level in the CSD (i.e. there are sub-accounts for each individual holding securities operated by the CSD) e. Beneficial owners cannot be identified at the individual level in the CSD, but direct participants are required to segregate their own holdings from those of their customers VI.5 CSD - Resilience and business continuity (mark with an X all that apply) a. Routine procedures are in place for periodic data back-ups b. Tapes and other storage media are kept in sites other than the main processing site c. Back-up servers have been deployed at the main processing site d. A fully equipped alternate processing site exists e. The CSD operator has documented a formal business continuity plan f. Business continuity arrangements include procedures for crisis management and information dissemination g. Business continuity arrangements are regularly tested VI.6 Clearing institution for securities transactions. For each of the following instruments please indicate a) the entity responsible for the clearing process and b) whether settlement is done by the commercial bank, Central Bank or other financial institution. Instrument Clearing Settlement Securities traded at the stock exchange(s) Securities traded in electronic trading platforms Derivatives traded at the stock exchange(s) Government securities Foreign exchange (FX) transactions OTC securities transactions OTC derivatives, including credit default swaps (CDS) 14 Beneficial owners refer to the real owners of the securities and include individuals and institutional investors.

191 Global Survey Please answer question VI.7 to VI.9 separately for each CCP operating in your country. VI.7 CCP General (mark with an X all that apply) a. The CCP operates in more than one jurisdiction b. The CCP rules clarify the applicable law governing the contractual relationships between the CCP and participants c. The CCP legally becomes the buyer to every seller and the seller to every buyer (via novation 15 or open offer 16 ) d. The CCP provides multilateral netting facilities, i.e. the CCP calculates the net settlement positions among its participants e. Commercial banks are direct participants in the CCP f. Broker-dealers are direct participants in the CCP g. Other financial institutions can be direct participants h. There are minimum capital requirements for participants VI.8 CCP Management of credit exposures (mark with an X all that apply) a. The CCP applies margin requirements to limit its credit exposures b. The CCP marks to market participants outstanding contracts at least once a day c. There is a guarantee fund, consisting of contributions of the participants of the CCP d. In addition to the margin requirements and (eventually) a guarantee fund, the CCP maintains other financial resources including own funds 17 to be able to withstand a default by the participant with the largest exposure e. The CCP conducts regular stress tests to check the adequacy of resources in the event of a default in extreme market conditions f. The CCP holds securities in a manner that minimizes risk of loss and ensures prompt access to securities. g. The CCP s default procedures define an event of default and the method for identifying that default h. In the event of default, arrangements are in place to facilitate the prompt transfer, close out or hedging of the defaulting participant s positions 15 Novation replaces the original contract between the buyer and seller shortly after the trade with two new contracts between the CCP and the buyer and the CCP and the seller (see also footnote 3). 16 Open offer implies that buyer and seller have never entered into a bilateral contractual relationship. In this situation, the CCP is considered to have stepped in between them at the time the transaction was executed. 17 E.g. capital. Annex I

192 168 PAYMENT SYSTEMS WORLDWIDE i. The CCP uses a CSD that provides DVP settlement for the transactions cleared j. Payment obligations are directly settled in Central Bank money VI.9 CCP Resilience and business continuity (mark with an X all that apply) a. Routine procedures are in place for periodic data back-ups b. Tapes and other storage media are kept in sites other than the main processing site c. Back-up servers have been deployed at the main processing site d. A fully equipped alternate processing site exists e. The CCP has documented a formal business continuity plan f. Business continuity arrangements include procedures for crisis management and information dissemination g. Business continuity arrangements are regularly tested VI.10 Regulatory and oversight (mark with an X all that apply) a. There is a specific public sector agency in charge of regulating securities markets b. The securities market law applies to all securities negotiated in the country c. The securities market law applies only to securities issued by the private sector; securities issued by the government and/or the Central Bank are regulated by special laws/decrees d. The securities regulator is empowered to license and supervise all stock exchanges e. The securities regulator is empowered to license and supervise all CSDs f. The securities regulator is empowered to license and supervise securities CCPs g. The securities regulator shares supervisory and oversight responsibilities with the Central Bank for securities settlement systems h. The securities regulator does not have oversight powers over the derivatives CCP i. The stock exchange has been granted the status of Self-Regulatory Organization (SRO) j. Private CSDs have been granted the status of SRO k. The CCP has been granted the status of SRO VII. PAYMENT SYSTEM OVERSIGHT AND COOPERATION VII.1 General (mark with an X all that apply) a. The Central Bank s payment system oversight function has been established and this is performed regularly and in an on-going basis

193 Global Survey b. There is a specific unit or department within the Central Bank responsible for payment system oversight c. The payment system oversight function is segregated from payment system operational tasks either through organizational means or via independent reporting lines VII.2 Objectives of payment system oversight (mark with an X all that apply) a. The Central Bank has set down its objectives in carrying out the payment system oversight function in a regulation or policy document b. Objectives only include the safety and efficiency of relevant payment systems c. Objectives also include the pursuit of a higher level of competitiveness among system participants, avoid collusive practices, consumer protection, and other specific issues VII.3 Scope of payment system oversight (mark with an X all that apply) a. Payment system oversight is exercised over Central Bank-operated systems only b. Payment system oversight is performed over all systemically important funds transfer systems c. Payment system oversight is performed over all systemically important payment systems, including securities settlement systems and settlement of Foreign Exchange (FX) transactions d. Payment system oversight is performed over all relevant payment systems in the country as long as such systems are operated by commercial banks e. Payment system oversight is performed over all relevant payment systems in the country regardless of whom the operator of such systems is VII.4 Instruments of payment system oversight (please rank the relevance of instruments from 1 to 3, 1 being highly relevant and 3 less relevant ) a. Monitoring b. Dialogue and moral suasion c. Production and publication of statistics and other payment system reports d. Issue of regulations e. Application of sanctions f. On-site inspections VII.5 Cooperation with other relevant authorities (mark with an X all that apply) a. There is no significant cooperation with other relevant authorities (e.g. bank supervisors, securities regulators) in the context of payment system oversight activities Annex I

194 170 PAYMENT SYSTEMS WORLDWIDE b. Cooperation with other relevant authorities occurs mostly in an informal/ad-hoc basis c. Cooperation with other relevant authorities is ensured through a formal mechanism, such as a Memorandum of Understanding (MOU) or is required by law d. Cooperation involves mostly regular meetings and exchange of opinions and views e. Besides regular meetings and exchange of opinions and views, cooperation also involves regular information exchanges, prior notice of regulatory action, joint inspection VII.6 Cooperation with other stakeholders (mark with an X all that apply) a. A formal National Payments Council is in place b. Although not formalized, the Central Bank holds regular meetings with stakeholders at a senior level to discuss strategic issues for the payment system c. The Central Bank consults stakeholders on particular operational issues. Sometimes this includes the creation of an ad-hoc task force or working group. d. The Central Bank consults stakeholders sporadically and/or mostly on a bilateral basis e. The Central Bank consults almost exclusively with the bankers association f. Other (please specify) VII.7 Which of the statements best reflects the involvement of Central Bank in the pricing of payment services (mark with an X all that apply)? No involvement Statement Retail Payments Large Value Payments Remittances Limited to collection of information Limited to voicing opinions Actively regulate (please specify types of fees) Other (please specify)

195 Global Survey VIII. PLANNED AND ON-GOING REFORMS TO THE NATIONAL PAYMENTS SYSTEM The purpose of this section is to address those cases in which new payment and securities settlement systems are being designed or implemented. If your Central Bank is planning to, or is already involved in, reforming any of the components of the national payments system in a major way (i.e. other than regular or normal adjustments and improvements to the existing systems), please answer the following questions. VIII.1 What elements of the national payments system are being reformed? (mark with an X all that apply) a. Legal and regulatory framework b. Large-value funds transfer systems c. Retail payment systems d. Securities settlement systems e. Foreign exchange settlement systems f. Payment system oversight g. Other (e.g. cross-border payments and remittances. Please specify) VIII.2 In your experience, what factors triggered the planned or on-going reform to the above-mentioned elements of the national payments system? (mark with an X all that apply) a. The need to reduce systemic risk b. The need to increase the overall efficiency of the payment system c. Response to demands from market participants for better payment/settlement services d. Response to demands from end-users (e.g. individuals, small and medium enterprises) for better payment and settlement services e. Response to demands from government institutions for better payment services f. Response to technological innovations (e.g. upgrading of outdated equipment/systems, availability of more efficient delivery mechanisms) g. Other (please specify) VIII.3 What is the approach followed in the current reform effort? (mark with an X all that apply) a. Broad/holistic approach or system-specific b. Big bang approach or gradualist c. Strategic (goal-based) or starting from the operational particularities in the country Annex I

196 172 PAYMENT SYSTEMS WORLDWIDE VIII.4 What is the current status of the reform process? (please indicate with an X as appropriate) Conceptual Stage Requirements/ functionalities have been defined Actual Development (for new systems being developed in-house) Procurement (for new systems being purchased from vendors) Implementation Legal and regulatory framework Large-value funds transfer systems RTGS Other (specify) Retail payment systems ACH Cheque clearing Payment card systems Other (specify) Securities settlement systems Foreign exchange settlement systems

197 Global Survey ANNEX II: CLASSIFICATION OF COUNTRIES ACCORDING TO LEVEL OF PER CAPITA INCOME 1. HIGH INCOME Australia Austria Bahamas, The Belgium Canada Cayman Islands Croatia Cyprus Czech Republic Denmark Estonia Finland France Germany Greece Hong Kong (China) Hungary Ireland Israel Italy Japan Korea, Rep. of Kuwait Latvia Luxembourg Macao (China) Malta Netherlands New Zealand Norway Oman Poland Portugal San Marino Saudi Arabia Singapore Slovak Republic Slovenia Spain Sweden Switzerland Taiwan (China) Trinidad and Tobago United Arab Emirates United Kingdom United States 2. UPPER-MIDDLE INCOME Albania Argentina Azerbaijan Bosnia and Herzegovina Botswana Brazil Bulgaria Chile Colombia Costa Rica Dominican Republic Fiji Iran, Islamic Rep. of Jamaica Kazakhstan Lebanon Libya Lithuania Macedonia FYR Malaysia Mauritius Mexico Montenegro Namibia Peru Romania Russian Federation Serbia Seychelles South Africa Turkey Uruguay Venezuela, R. B. 3. LOWER-MIDDLE INCOME Angola Armenia Belize Bolivia China Cote d Ivoire (BCEAO) Ecuador Egypt, Arab Rep. of El Salvador Georgia Guatemala Honduras India Indonesia Iraq Jordan Kosovo Lesotho Moldova Mongolia Morocco Nigeria Pakistan Philippines Samoa Senegal (BCEAO) Sri Lanka Sudan Swaziland Thailand Timor-Leste Ukraine Vanuatu West Bank and Gaza Yemen, Republic of Annex III

198 174 PAYMENT SYSTEMS WORLDWIDE 4. LOW INCOME Benin (BCEAO) Burkina Faso (BCEAO) Burundi Cambodia Congo, Dem. Rep. of Eritrea Ethiopia Ghana Guinea Bissau (BCEAO) Kenya Kyrgyz Republic Madagascar Malawi Mali (BCEAO) Mauritania Mozambique Nepal Niger (BCEAO) Rwanda Sierra Leone Tanzania Togo (BCEAO) Uganda Zambia Zimbabwe

199 Global Survey ANNEX III: CLASSIFICATION OF COUNTRIES ACCORDING TO GEOGRAPHICAL REGION 1. EAST ASIA AND PACIFIC (EAP) Cambodia China Fiji Indonesia Malaysia Mongolia Philippines Samoa Thailand Timor-Leste Vanuatu 2. EUROPE AND CENTRAL ASIA (ECA) Albania Armenia Azerbaijan Bosnia and Herzegovina Croatia Georgia Kazakhstan Kosovo Kyrgyz Republic Macedonia FYR Moldova Montenegro Russian Federation Serbia Turkey Ukraine 3. LATIN AMERICA AND CARIBBEAN (LAC) Argentina Bahamas, The Belize Bolivia Brazil Cayman Islands Chile Colombia Costa Rica Dominican Republic Ecuador El Salvador Guatemala Honduras Jamaica Mexico Peru Trinidad and Tobago Uruguay Venezuela, R. B. 4. MIDDLE EAST AND NORTH AFRICA (MNA) Egypt, Arab Rep. of Iran, Islamic Rep. of Iraq Jordan Kuwait Lebanon Libya Morocco Oman Saudi Arabia United Arab Emirates West Bank and Gaza Yemen, Republic of 5. SOUTH ASIA (SA) India Nepal Pakistan Sri Lanka Annex IV

200 176 PAYMENT SYSTEMS WORLDWIDE 6. SUB-SAHARAN AFRICA (AFR) Angola Benin (BCEAO) Botswana Burkina Faso (BCEAO) Burundi Congo, Dem. Rep. of Cote d Ivoire (BCEAO) Eritrea Ethiopia Ghana Guinea Bissau (BCEAO) Kenya Lesotho Madagascar Malawi Mali (BCEAO) Mauritania Mauritius Mozambique Namibia Niger (BCEAO) Nigeria Rwanda Senegal (BCEAO) Seychelles Sierra Leone South Africa Sudan Swaziland Tanzania Togo (BCEAO) Uganda Zambia Zimbabwe 7. EURO AREA 1 Austria Belgium Cyprus Finland France Germany Greece Ireland Italy Luxembourg Malta Netherlands Portugal Slovak Republic Slovenia Spain 1 As of December OTHER EU MEMBERS Bulgaria Czech Republic Denmark Estonia Hungary Latvia Lithuania Poland Romania Sweden United Kingdom 9. OTHER DEVELOPED COUNTRIES (ODC) Australia Canada Hong Kong (China) Israel Japan Korea, Rep. of Macao (China) New Zealand Norway San Marino Singapore Switzerland Taiwan (China) United States

201 Global Survey ANNEX IV: CLASSIFICATION OF COUNTRIES ACCORDING TO POPULATION SIZE 1. MORE THAN 30 MILLION INHABITANTS Argentina Brazil Canada China Colombia Congo, Dem. Rep. of Egypt, Arab Rep. of Ethiopia France Germany India Indonesia Iran, Islamic Rep. of Iraq Italy Japan Kenya Korea, Rep. of Mexico Morocco Nigeria Pakistan Philippines Poland Russian Federation South Africa Spain Sudan Tanzania Thailand Turkey Uganda Ukraine United Kingdom United States 2. BETWEEN 5 MILLION AND 30 MILLION INHABITANTS Angola Australia Austria Azerbaijan Belgium Benin (BCEAO) Bolivia Bulgaria Burkina Faso (BCEAO) Burundi Cambodia Chile Cote d Ivoire (BCEAO) Czech Republic Denmark Dominican Republic Ecuador El Salvador Eritrea Finland Ghana Greece Guatemala Honduras Hong Kong (China) Hungary Israel Jordan Kazakhstan Kyrgyz Republic Libya Madagascar Malawi Malaysia Mali (BCEAO) Mozambique Nepal Netherlands Niger (BCEAO) Peru Portugal Romania Rwanda Saudi Arabia Senegal (BCEAO) Serbia Sierra Leone Slovak Republic Sri Lanka Sweden Switzerland Taiwan (China) Togo (BCEAO) Venezuela, R. B. Yemen, Republic of Zambia Zimbabwe 3. LESS THAN 5 MILLION INHABITANTS Albania Armenia Bahamas, The Belize Bosnia and Herzegovina Botswana Cayman Islands Costa Rica Croatia Cyprus Estonia Fiji Georgia Guinea Bissau (BCEAO) Ireland Jamaica Kosovo Kuwait Latvia Lebanon Lesotho Lithuania Luxembourg Macao (China) Macedonia FYR Malta Mauritania Mauritius Moldova Mongolia Montenegro Namibia New Zealand Norway Oman Samoa San Marino Seychelles Singapore Slovenia Swaziland Timor-Leste Trinidad and Tobago United Arab Emirates Uruguay Vanuatu West Bank and Gaza Annex V

202 178 PAYMENT SYSTEMS WORLDWIDE ANNEX V: CHRONOLOGICAL LIST OF COUNTRY RESPONSES TO THE GLOBAL PAYMENT SYSTEMS SURVEY JULY 2010 Cambodia Dominican Republic AUGUST 2010 Armenia Australia Austria Azerbaijan Brazil Bulgaria Colombia Croatia Cyprus Czech Republic Estonia Ethiopia Finland Georgia Germany Guatemala Jordan Korea, Rep. of Latvia Lithuania Macedonia FYR Malta Mexico Moldova Mozambique Netherlands Poland Portugal Samoa San Marino Seychelles Singapore Slovenia South Africa Spain United Arab Emirates West Bank and Gaza Zambia Zimbabwe SEPTEMBER 2007 Argentina Bolivia Burundi Canada Chile Congo, Dem. Rep. of Ecuador El Salvador Ghana Greece Hong Kong (China) Hungary Iran, Islamic Rep. of Iraq Israel Japan Kazakhstan Kosovo Kyrgyz Republic Lesotho Madagascar Malawi Mauritius Montenegro Namibia New Zealand Pakistan Peru Romania Russian Federation Rwanda Saudi Arabia Serbia Sierra Leone Sweden Switzerland Taiwan (China) Thailand Trinidad and Tobago Turkey Uganda United Kingdom Uruguay United States Yemen, Republic of OCTOBER 2007 Belgium Belize Botswana Costa Rica Denmark France Honduras India Ireland Italy Jamaica Kuwait Lebanon Libya Luxembourg Nepal Norway Oman Philippines Slovak Republic Swaziland Timor-Leste Vanuatu

203 Global Survey NOVEMBER 2007 Albania Angola Bosnia and Herzegovina Cayman Islands Fiji Indonesia Kenya Macao (China) Sri Lanka Sudan Tanzania Ukraine Venezuela, R.B. DECEMBER 2010 Bahamas, The BCEAO China Egypt, Arab Rep. of Malaysia Mauritania Mongolia Morocco Nigeria MARCH 2011 Eritrea Annex IIII

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