1. CPSS-IOSCO’s Proposed Principles for Financial Market Infrastructures
The World Bank role and experience
ACSDA General Assembly Bermuda, 25 March 2011
Froukelien Wendt PSDG, The World Bank

2. Table of contents The importance of the new CPSS-IOSCO Principles
World Bank experience with international standards (including outcomes from the Global Payment Systems Survey 2010)
Conclusions 2

3. The importance of the new CPSS-IOSCO Principles
The importance of the new CPSS-IOSCO Principles 3

4. Importance of new CPSS-IOSCO principles
Securities and Derivatives Settlement involves a variety of risks
Legal risk
Credit risk
Stock Exchange / OTC trading
Trade Repositories
Trading and
Registration
Liquidity risk
Replace-ment cost risk
Gross
Clearing / CCP
Clearing
Gross / Net
SSS
CSD
Custody risk
Operational risk
Securities
settlement
Sound CSDs and SSS Are Essential for Financial System Stability & Development
The Global Payment Systems Survey shows that large value payments processed in a year worldwide are equivalent to more than 50 times the global GDP. RTGS systems have not only fostered growth in total amounts settled (86% between and 2006) but also allowed for a safe and efficient processing of such huge amounts (82% of the value of total payments processed worldwide)
Safe CSDs and SSS Mitigate Risks in Financial Markets
Financial market crises are likely to show their first signs in the payments system and might be absorbed then. In particular, the interbank money market as the “distributor of liquidity” relies heavily on the ability to transmit funds across the financial system rapidly and safely
Efficient CSDs and SSS Lead Countries to Huge Savings
The progressive shift from paper-based to electronic payments has an important impact on the financial sector and the economy. A study from the Central Bank of Brazil indicates that a more intensive usage of electronic-based instruments can produce a potential saving to the country of 0.7% of the GDP per year
CSDs and SSS Are Key in Developing More Inclusive Financial Systems
A sound and efficient financial infrastructure enhance access to financial services. In particular, Retail payment services are often the first entry point of the underserved into the financial sector
Business risk
Investment risk
DVP 1, 2, 3 or no DVP
RTGS / commercial bank
Cash
settlement 4

5. Importance of new CPSS-IOSCO principles
World Bank perspective
Increase safety and financial stability, by requiring FMIs to manage their risks
Increase efficiency and transparency of the payment, derivatives and securities settlement systems
Provide guidance for system development
To FMI’s and authorities worldwide
To the World Bank and IMF to assess payment and settlement systems and provide technical assistance
Ensure consistency in system development, between FMI’s and between countries
Reflect new developments
Lessons of recent crisis taken into account
New technology and risk management practices 5

6. CPSS-IOSCO Principles for FMIs Since 1990 ongoing improvement and coverage of standards
New distinct principles on liquidity and credit risks
New principle on default procedures and segregation and portability
New principle on general business risk
New principle on tiered participation 6

7. New Assessment Methodology
Role of the World Bank
Chairs Sub-group on Assessment Methodologies together with IMF
New Assessment Methodology
Key points under discussions:
How to ensure consistent assessments across assessors? Methodology could include detailed key questions for each key consideration and a list of background information, which will be tailored to the specific type of FMI (SIPS, CSD, SSS, CCP, TR)?
How to ensure appropriate and timely improvements?
Ratings could be complemented with classifications of the significance of the evaluations, such as “a serious shortcoming that needs to be rectified immediately” or an “opportunity for improvement for management to consider”?
How to prepare appropriate action plans for improvements based on priorities? 7

8. New Assessment Methodology
Role of the World Bank
Chairs Sub-group on Assessment Methodologies together with IMF
New Assessment Methodology
Timeline under discussion:
2010: evaluation of the current methodologies. Report on Assessment Methodologies delivered to the ET in July 2010
March 2011: consultative report published with key considerations (with an annex sorting them by type of FMI)
Summer 2011: Draft Assessment Methodology (process, ratings, etc.)
By end 2011: pilot assessments
Early 2012: finalized report with assessment methodology 8

9. World Bank experience and findings
World Bank experience and findings
The Global Payment Systems Survey 2010 9

10. World Bank observations for CSDs/SSS
Legal framework
Increasingly complex in a global environment
Key concepts (finality, netting) are often not sufficiently addressed
Not always co-ordination between Central Bank and Securities Regulator
Operational reliability
More attention to business continuity planning, but secondary site often too close to primary site
Credit risk
Understanding of DvP not always in line with international standards
In many cases there is no “true” DvP (e.g. lack of effective guarantees when model 2 or model 3 DvP are used). Size of additional funding not always correctly estimated
CCP function may be part of CSD of Stock Exchange 10

11. World Bank observations for CSDs/SSS
Custody risk
Provisions in the law are not always supervised by an authority
Settlement bank risk
Government securities usually settled in RTGS system
Corporate securities often settled in commercial bank money
Access to central bank money not always available to non-bank brokers
These and other issues have been brought forward during the development of the new CPSS-IOSCO Principles for FMIs 11

12. World Bank Global Payment Systems Survey 2010
Launched in July 2010
Answers received from 132 Central Banks, representing 139 countries
Topics covered:
Legal and Regulatory Framework
Large-Value Funds Transfer Systems
Retail Payment Systems
Foreign Exchange Settlement Systems
Cross-border Payments and International Remittances
Securities Settlement Systems
Payment System Oversight and Cooperation
Planned and On-going Reforms to the National Payments System
NEW: Annex 1! Survey on innovations in retail payments issued as an Annexure to GPSS. Builds on CPSS “Survey of Developments in Electronic Money and Internet and Mobile Payments”. Annex 1 is divided into 5 key areas:
Type of Products
Design Features of the Products
Statistics
Planned Reforms/New Products
Final outcomes will be soon available at
paymentsystems 12

13. Global Payment Survey 2010: sneak preview
Principle 9: An FMI should conduct its money settlements in central bank money where practical and available. If not, an FMI should minimize and strictly control credit and liquidity risk […].
Finding Global Payment Survey 2010: LAC follows global trend to increasingly settle in central bank money. North America applies alternative solutions
Both statements apply to South Africa 13

14. Global Payment Survey 2010: sneak preview
Principle 11: […] A CSD should maintain securities in an immobilized or dematerialized for their transfer by book entry. Where appropriate, a CSD should provide incentives to immobilize or dematerialize securities
Finding Global Payment Survey 2010: Level of dematerialization significantly increased in LAC countries since 2007
South Africa high level of dematerialization in both years 14

15. Global Payment Survey 2010: sneak preview
Principle 12: If an FMI settles transactions […], it should eliminate principal risk by conditioning the final settlement of one obligation upon the final settlement of the other
Finding Global Payment Survey 2010: North American CSDs settle always DvP. LAC countries behind world average in applying DvP (14% no DvP vs 8% worldwide). DvP model 1 most popular
South Africa applies DvP models 2 and 3 15

16. Global Payment Survey 2010: sneak preview
Principle 17: […] Systems should ensure a high degree of security and operational reliability. Business continuity plans should aim for timely recovery of operations, including in the event of a wide-scale disruption
Finding Global Payment Survey 2010: Clear progress has been made in all countries on the application of back-up servers, alternate sites, BCP plans and crisis management
South Africa applies all measures 16

17. Global Payment Survey 2010: sneak preview
Responsibility E: Central banks, market regulators and other relevant authorities should cooperate with each other […].
Finding Global Payment Survey 2010: Central banks and securities regulators increasingly share responsibilities, so cooperation is becoming increasingly important
Both statements apply to South Africa 17

18. Global Payment Survey 2010: sneak preview
Annex C, Recommendation 3: Rolling settlement should be adopted in all securities markets. Final settlement should occur no later than T+3.
Finding Global Payment Survey 2010: LAC follows global trend to decrease settlement cycle. The settlement cycles of T+3 is less strict applied by CSDs in North America
No information for South Africa 18

19.
Conclusions 19

20. Conclusions
The World Bank is dedicated to mitigating risks of payment and securities settlement systems in developing countries
The new CPSS-IOSCO Report with Principles for FMIs is an important guide for FMIs, authorities and external assessors (World Bank, IMF) to enhance safety and efficiency of payment and securities settlement systems (i.e. CSDs, SSS and CCPs).
The Sub-Group chaired by the World Bank/IMF aims to develop an assessment methodology for FMIs, taking full advantage of the members’ practical experience in applying the methodologies in the field as assessors. The proposal will be discussed at the level of the CPSS-IOSCO Steering Group.
The Global Survey shows increased compliance with some of the international standards - both in the America’s as well as worldwide - but a lot of improvements are still necessary. 20

21. www.worldbank.org/paymentsystems Thank you Froukelien Wendt
Payment Systems Development Group
The World Bank 21