central banks and the dynamic world of payments and securities settlement systems

4th Conference on Payments and Securities Settlement Systems Ohrid, republic of Macedonia, 20 June 2011

Central Banks and the Dynamic World of Payments and Securities Settlement Systems

Michael van Doeveren

John Shephard-Berron 1926-2010

Agenda

Definitions & Objectives Roles of Central Banks in Payment Systems Financial Crisis Global Dependencies Financial Integration Discussion Points

Role of Central Banks

IT´S ALL ABOUT

FINANCIAL STABILITY and CONFIDENCE

Mission of the Central Bank

De Nederlandsche Bank:Safeguarding the stability of the financial systemand the institutions that are part of it, by Contributing to the monetary policy of the

Eurosystem Supervising the financial soundness and

integrity of financial institutions Promoting the smooth functioning of the payment

system

Payment Systems Policy

Main Goal to promote reliable, efficient and secure payment and

securities settlement systems

Other Goals: central bank specific• Crime prevention• Effective competition• Consumer protection• Reachability & Accessibility• Research and statistics (knowledge centre)

How to Achieve Policy Objectives?

OPERATIONS

OVERSIGHT

CATALYST

Operational role of a Central Bank

Issuance and distribution of cash Operator large value payment system Settlement services retail transactions Cash settlement securities transactions Clearing services retail payments Operator securities settlement system Other securities related services Public sector payments

Oversight ‘A central bank activity focused on the safety and

efficiency of payment and securities settlement systems, in particular to reduce systemic risk’.

Catalyst

There is a case for intervention, but not necessarily via regulation or operations

‘Guide’ the market, by promoting initiatives and cooperation

Between stakeholders Between other public authorities

• Government• Competition authorities

Importance of Payment Systems

Payment systems …

… facilitate the exchange of goods and services… are necessary to conduct monetary policy

… can be transmission channels of ‘disturbances’ (financial crises)

Payment System (1)

Funds Transfer System: a formal arrangement based on a private contract or legislation, with multiple membership, common rules and standardised arrangements, for the transmission, clearing, netting and/or settlement of monetary obligations arising between its members.

Source:ECB

Payment System (2)

• The set of instruments, banking procedures and interbank funds transfer systems which facilitate the circulation of money in a country or currency area.

Source: ECB

Payment Chain

buyer seller

good/service

debit paymentinstruction

bank bank

paymentinstruction

debit credit

creditpaymentinformation

paymentinformation

clearing

Retail versus wholesale payments

Low value ↔ Large value

High volume ↔ Low volume

Consumers and ↔ Financial institutions businesses

Time less important ↔ Time critical

Low systemic risk ↔ High systemic risk

Payments Pyramid - Eurosystem

0

20

40

60

80

100

120

Equens

RPS

BI-COM

SIT

OTHER

0

500

1.000

1.500

2.000

2.500

3.000

3.500

TARGET2

Euro1

PNS

Average daily number of transactions (millions)

Average daily value of transactions (EUR billions)

Wholesale PSSource: ECB

Retail PS

Wholesale PS Retail PS

Wholesale: 0,6% in terms of number…..

…..but 97,7% in terms of value

1

10

100

1.000

10.000

1 10 100 1.000 10.000 100.000

Payments Pyramid - Eurosystem

TARGET2

EURO1

SNCE

SICOI

EQUENS

SIT

Distribution of payment systems

Wholesale PS

Retail PS

billions

thousands

Large Value Payment Systems

International comparison- Value of transactions (EUR Billions)

0

100.000

200.000

300.000

400.000

500.000

600.000

700.000

800.000

2004 2005 2006 2007 2008

CHAPS Euro

BOJ-NET

CHIPS

Fedwire

CLS

TARGET

EURO1

Bron: BIS

Wholesale Payments

DNS: Deferred Net Settlement (nettting)•Multilateral, usually at the end of the day

RTGS: Real Time Gross Settlement•continuous (real-time) settlement of funds transfers individually on an order-by-order basis

Hybride Systems

Wholesale Payments

TRENDS/ISSUES Liquidity management

•Real time settlement → higher demands on liquidity management

•TARGET2: range of tools to control, monitor and manage liquidity

Operational resilience and business continuity management as a result of global interdependencies.

Trends in Retail Payments in the EU

Source: ECB

Payment transactions in the euro area (billions)

0

2

4

6

8

10

12

14

16

18

20

22

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

debit and credit cards

credit transfers

direct debits

cheques

E-money purchases

Issues in Retail Payments

Efficiency Security More Electronification and less paper based:

Internet banking and card payments Innovations: products and markets Political influence, legislation and standards Business models –interchange fees

Securities Chain

trading

clearing

settlement

Agreement to exchange securities for funds

Calculation of obligations

Delivery of securities and payment of funds

Securities Settlement Systems

LVPS

CSD

BANK A BANK B

A system which allows the transfer of securities,either free of payment (FOP) or against payment (delivery versus payment)

Source: ECB

Securities Settlement Systems

Trends/Issues

• Settlement risks (DVP)• Securities Legislation: MiFID etc.• Multiple platforms • Cross border links (global interdependencies)• Settlement of derivatives: role for CCPs

Financial Crisis

Key words: EXCESSIVE OPTIMISM

EXCESSIVE RISK APPETITE

ASPECTS Relative Stability (the great moderation, Bernanke) Search for Yield Easing Criteria for Credit (subprime, alt-a etc) Innovations (originate-to-distribute model, monoliners etc)

FINANCIAL CRISIS

15 september 2008

Lehman Brothers †

Trigger of severe loss of confidence,wave of contagion

FINANCIAL CRISIS

Crisis Management•Provision Liquidity •Nationalizations•Savings Guarantee •Capital Injections & Debt Guarantees• Interest rates ↓

In order toUNDERPIN CONFIDENCE

PSSS functioned quite well

FINANCIAL CRISIS

What´s Next? Credit crunch Stock Markets Banking Sector Insurance sector House prices Pension funds

World recession Protection Greece/country risks Euro?

Recommendations of Financial Stability Forum

Improve Risk Management Enlarge Transparency Further Cooperation between Public Authorities Reform supervision Improve Crisis Management

NSCC

Clearnet

LondonClearingHouse

CDiCG

CCAS

JSCC

Austraclear

Euroclear

SIS

CREST

Clearstream

SCLV

Monte Titoli

OM-VPC

VPS

VP

HKSCCJasDec

Chess

CDP

CDS

CHAPS

FedWire

SIC

ELLIPSTBF/ TOP

BI REL

SLBE

LVTS

RTGSPLUS

LIPS-Gross

MEPS

BoJ-NetRITS RTGS

CLS Bank

DEBES

E/ K RIX

BoF-RTGS

APK

SWIFT-RTGS

ARTIS

OeKB

HERMES

BOGS/ CSD

SPGT

SITEMEInterbolsa

EuroCCP

DTC

CCPs

CSDs

RTGS

CLS

TARGET

CSD Links

2nd wave CLS currency

Payments and Securities Infrastructure

WEB OF GLOBAL INTERDEPENDENCIES

(LVPSs, CCPs, CSDs, Banks)

WITH TIGHT DEADLINES

(RTGS, DVP, PVP)

Key words

● Technological developments

● Globalization

● Consolidation in financial sectorSource: BIS, The Interdependencies of payment and settlement

systems 2008

CPSS REPORT ON INTERDEPENDENCIES

Figure 6: Profile of Institutions’ Activities and Access Choices, 2006(by country, with number of financial institutions* in parentheses)

Very Significant

InternationalSettlement

Activity

CH (1)FR (1)JP (1)US (1)

DE (1)NL (1) UK (1)US (1)

Significant InternationalSettlement

Activity

CH (1)NL (1)

IT (1) FR (2)JP (1)

UK (1)

Moderate InternationalSettlement

Activity

BE (2)IT (2)JP (1)NL (1)SG (1)US (3)

CA (5)DE (2)FR (1)SE (3) UK (1)

DE (1)JP (1)UK (1)

Mixed Approach: Significant self-clearing in multiple currency zones,

but moderate levels of direct participation

Primary reliance oncorrespondentsand custodiansbeyond home

currency; direct participation in CLS

and one or more ICSDs

Domestic, plus one or two of: EUR, USD, or

YEN

Domestic, plus more than threeCPSS currencies

Significant self-clearing in most

CPSS currencies, and

beyond

* At the highest holding company level

Figure 6: Profile of Institutions’ Activities and Access Choices, 2006(by country, with number of financial institutions* in parentheses)

Very Significant

InternationalSettlement

Activity

CH (1)FR (1)JP (1)US (1)

DE (1)NL (1) UK (1)US (1)

Significant InternationalSettlement

Activity

CH (1)NL (1)

IT (1) FR (2)JP (1)

UK (1)

Moderate InternationalSettlement

Activity

BE (2)IT (2)JP (1)NL (1)SG (1)US (3)

CA (5)DE (2)FR (1)SE (3) UK (1)

DE (1)JP (1)UK (1)

Mixed Approach: Significant self-clearing in multiple currency zones,

but moderate levels of direct participation

Primary reliance oncorrespondentsand custodiansbeyond home

currency; direct participation in CLS

and one or more ICSDs

Domestic, plus one or two of: EUR, USD, or

YEN

Domestic, plus more than threeCPSS currencies

Significant self-clearing in most

CPSS currencies, and

beyond

* At the highest holding company level

Figure 6: Profile of Institutions’ Activities and Access Choices, 2006(by country, with number of financial institutions* in parentheses)

Very Significant

InternationalSettlement

Activity

CH (1)FR (1)JP (1)US (1)

DE (1)NL (1) UK (1)US (1)

Significant InternationalSettlement

Activity

CH (1)NL (1)

IT (1) FR (2)JP (1)

UK (1)

Moderate InternationalSettlement

Activity

BE (2)IT (2)JP (1)NL (1)SG (1)US (3)

CA (5)DE (2)FR (1)SE (3) UK (1)

DE (1)JP (1)UK (1)

Mixed Approach: Significant self-clearing in multiple currency zones,

but moderate levels of direct participation

Primary reliance oncorrespondentsand custodiansbeyond home

currency; direct participation in CLS

and one or more ICSDs

Domestic, plus one or two of: EUR, USD, or

YEN

Domestic, plus more than threeCPSS currencies

Significant self-clearing in most

CPSS currencies, and

beyond

* At the highest holding company level

Financial European integration – why?

Euro Area: 17 National Markets

Limitations on Competition

Diseconomies of Scale

Inefficiencies with reference to cross-border flows of money, securities and collateral

Financial European integration – how?

1. Institutional arrangements

2. Financial markets

3. Infrastructures →payment and securities settlement systems

Infrastructures• Essential for Financial Stability• Central Banks Play Key Role

Guidelines for payment system development

The role of the banking sector Effective planning and project implementation Developing the institutional framework Designing a safe and efficient payment

infrastructure

Source: Report of BIS-CPSS, General guidance for payment system development, 2005

Dutch National Forum on the Payment System

Objective: contributing to an efficient organisation of the Dutch retail payment system from a social point of view

Isues regarding• Efficiency• Security• Technological developments• Reachability & Accessibility

Results of the Dutch National Forum

• Rounding-off to nearest 5 cents• Joint information brochures• Report on availability of banking services• Guideline for user-friendly EFTPOS terminals• Support for National SEPA Migration Plan• Warning for security risks overlay services• A lot of research with regard to efficiency,

accessibility and security of payment instruments

Discussion points

• What are recent changes in your country with respect to payments and securities settlement systems?

• How does your central bank fill in the different roles in PSSS?

• Do you agree with the need of bringing together stakeholders for the development of payment and securities settlement system? How do you organise this?