2. Dipom Department of Banking Operations and Payments System 1 Brazilian Payment System Implementation Aspects Washington D.C., November 2003 Eduardo Fernandes – Central Bank of Brazil Mr. Eduardo Fernandes Head of Department World Bank Brazilian Payment System Implementation Aspects Mr. Eduardo Fernandes Washington D.C., November 2003World Bank

3. Dipom Department of Banking Operations and Payments System 2 1) Background 2) Challenges 3) The Reform 4) The Process Outline

4. Dipom Department of Banking Operations and Payments System 3 Brazil’s efficient payment system is a legacy of the high inflation period that has reduced settlement lagsBrazil’s efficient payment system is a legacy of the high inflation period that has reduced settlement lags Achievement of a sound financial system after the restructuring of the banking industry (1995- 1998)Achievement of a sound financial system after the restructuring of the banking industry (1995- 1998) Internationalization of financial marketsInternationalization of financial markets Macroeconomic stabilityMacroeconomic stability Background

5. Dipom Department of Banking Operations and Payments System 4 Absence of a sound legal basisAbsence of a sound legal basis No secured large-value funds transfer systemNo secured large-value funds transfer system Clearinghouses without proper risk controlClearinghouses without proper risk control No final settlement: possibility of unwindingNo final settlement: possibility of unwinding Inadequate contingency arrangementsInadequate contingency arrangements Solving payment system problems without making noise to monetary policySolving payment system problems without making noise to monetary policy Challenges

6. Dipom Department of Banking Operations and Payments System 5 High credit risk incurred by the CB, since intraday credit (overdraft) was available without collateral and unlimitedHigh credit risk incurred by the CB, since intraday credit (overdraft) was available without collateral and unlimited Central Bank was not prepared to monitor intraday balancesCentral Bank was not prepared to monitor intraday balances Reduce systemic risk without efficiency lossReduce systemic risk without efficiency loss Shift credit risk from the CB to the marketShift credit risk from the CB to the market Avoid moral hazardAvoid moral hazard Challenges

7. Dipom Department of Banking Operations and Payments System 6 Establishment of a sound legal basis (Law 10,214)Establishment of a sound legal basis (Law 10,214) Recognition of multilateral nettingRecognition of multilateral netting Collateral pledged at clearinghouses is outside of the bankruptcy lawCollateral pledged at clearinghouses is outside of the bankruptcy law Systemically important payment and settlement systems become central counterpartiesSystemically important payment and settlement systems become central counterparties CB has a mandate to designate themCB has a mandate to designate them Central counterparties must assure final settlementCentral counterparties must assure final settlement Adequate contingency arrangementsAdequate contingency arrangements The Reform - I

8. Dipom Department of Banking Operations and Payments System 7 Systems in the CB will operate under RTGS modeSystems in the CB will operate under RTGS mode  Reserve and settlement accounts (STR)  Government securities book-entry system (SELIC) Systemically important clearings with settlement accounts in CBSystemically important clearings with settlement accounts in CB Bank reserve and clearing settlement accounts monitored in real-timeBank reserve and clearing settlement accounts monitored in real-time No overdrafts allowedNo overdrafts allowed Accountholders must authorize all debits on their reserve accountsAccountholders must authorize all debits on their reserve accounts The Reform - II

9. Dipom Department of Banking Operations and Payments System 8 Sources of intraday liquidity (2003) = US$100 billionSources of intraday liquidity (2003) = US$100 billion Interest free intraday credit in the CB through repo operations (US$75 billion)Interest free intraday credit in the CB through repo operations (US$75 billion) Reserve requirements intraday available (US$25 billion)Reserve requirements intraday available (US$25 billion) Demand of intraday reserves (2003) = US$14 billionDemand of intraday reserves (2003) = US$14 billion The STR system will be message drivenThe STR system will be message driven Adoption of the best international practicesAdoption of the best international practices The Reform - III

10. Dipom Department of Banking Operations and Payments System 9 Improvement of clearinghouses risk control devices through adopting:Improvement of clearinghouses risk control devices through adopting: u credit limits u collaterals u DvP or PvP methods u Certainty of settlement (in case of systemically important payment systems)  Data processing systems with robust contingency plans The Reform - IV

11. Dipom Department of Banking Operations and Payments System 10 Cost of reserves accounts fragilities, which amounted billions of dollars in 1994-1998’s banking crises In 1998: diagnosis of all risks involved in internal (CB) and external (market) systems Systemic risk involved in rejecting overdrafts of participants’ net positions from clearinghouses Each diagnosis was sent to the internal and external systems’ managers for their remarks The Process - I

12. Dipom Department of Banking Operations and Payments System 11 CB was invited to join CPSS’ Task Force on Payment System Principles and Practices, which considered what principles should govern the design and operation of payment systems in all countries.CB was invited to join CPSS’ Task Force on Payment System Principles and Practices, which considered what principles should govern the design and operation of payment systems in all countries. In 1999: presentation of the diagnosis to CB’s Board of DirectorsIn 1999: presentation of the diagnosis to CB’s Board of Directors The Board created a full time Working Group for restructuring Brazilian Payment SystemThe Board created a full time Working Group for restructuring Brazilian Payment System The Process - II

13. Dipom Department of Banking Operations and Payments System 12 Board of Directors announced the beginning of Brazilian payment system restructuringBoard of Directors announced the beginning of Brazilian payment system restructuring Other CB’s areas involved in the process: Accounting, IT, Open Market, Foreign Exchange, Legal Department, Banking, Supervision etc.Other CB’s areas involved in the process: Accounting, IT, Open Market, Foreign Exchange, Legal Department, Banking, Supervision etc. Partnership with financial system, clearinghouses and other participantsPartnership with financial system, clearinghouses and other participants Smooth transition without any contracts breakdownSmooth transition without any contracts breakdown Disclosure the new roles and major policiesDisclosure the new roles and major policies Approbation of the new legal basis (Law 10,214)Approbation of the new legal basis (Law 10,214) The Process - III

14. Dipom Department of Banking Operations and Payments System 13 May 2000, disclosure of a Technical Note on Monetary Policy: rebuilding the instrumentsMay 2000, disclosure of a Technical Note on Monetary Policy: rebuilding the instruments Announcement of the implementation schedule Setting up of new private clearinghouses and adaptation of the existing ones as a result of the reform processSetting up of new private clearinghouses and adaptation of the existing ones as a result of the reform process Test of the new technological environment (network, digital certificate, cryptography, queuing, optimization routine etc) to CB and market systemsTest of the new technological environment (network, digital certificate, cryptography, queuing, optimization routine etc) to CB and market systems The Process - IV

15. Dipom Department of Banking Operations and Payments System 14 August 2000, public hearing of clearinghouses regulation Revision of the Technical Note on Monetary Policy: adding market feedback Disclosure of Technical Note on retail payments in order to take large values away from clearinghouse of checks and other documents The Process - V

16. Dipom Department of Banking Operations and Payments System 15 In order to monitor the network operating and to promote its continuous development, 3 technical working groups have been constituted in partnership with the market, dealing with network, messages and security CB is the responsible for their coordination Adoption of the best international practices The Process - VI

17. Dipom Department of Banking Operations and Payments System 16 Involvement 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% jun/99ago/99out/99dez/99fev/00abr/00jun/00ago/00out/00dez/00fev/01abr/01jun/01ago/01out/01 Announcement Technical Note- Monetary Policy Legal Basis Clearings Regulation- Public Hearing Revision Technical Note- Monetary Policy Technical Note- Compe The Process - VII

18. Dipom Department of Banking Operations and Payments System 17 Further Information eduardo.fernandes@bcb.gov.br

19. Dipom Department of Banking Operations and Payments System 18 Further Information Thank you very much