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De Nederlandsche Bank
GENERAL FRAMEWORK AND OVERVIEW
Carlo Winder
Conference Financial Sector of Macedonia
on Payments and Securities Settlement
Systems
Ohrid
23 June 2008
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Agenda

Definitions and Concepts

Role of central banks

International developments
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Role of central banks
IT´S ALL ABOUT
FINANCIAL STABILITY
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Role of central banks
SCOPE
MONETARY STABILITY: stable currency
 FINANCIAL SECTOR STABILITY: reliable
financial institutions
 PAYMENT SYSTEM: smooth and secure
payments

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Mission of the central bank
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Safeguarding the stability of the financial
system and 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
payments system
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Payment systems policy
OBJECTIVES
MAIN GOAL
 to promote safe and efficient payment and
settlement systems
Other goals (central bank specific)
 e.g. crime prevention, effective competition,
consumer protection, accessibility
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Payment system is all about trust...
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Trust
Trust
Trust
Trust
Trust
Currency
Issuer
Payment system
Authenticity
Constitutional state
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Importance 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)
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Payment chain
CENTRAL BANK
payment
instruction
debit
bank
debit
payment
information
credit
bank
payment
information
credit
payment
instruction
seller
buyer
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good/service
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Payment chain
CENTRAL BANK
debit
credit
payment
instruction
payment
information
ACH
bank
bank
CLEARING
debit
payment
information
credit
payment
instruction
seller
buyer
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good/service
Payment chain
CENTRAL BANK
bank
bank
RETAIL PAYMENTS
buyer
seller
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Payment chain
CENTRAL BANK
WHOLESALE PAYMENTS
bank
buyer
bank
bank
bank
seller
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Payment Pyramid - Eurosystem
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Payment Pyramid - Eurosystem
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Retail versus wholesale payments
Low value
↔
Large value
High volume
↔
Low volume
Consumers and
businesses
↔
Financial institutions
Time less important
↔
Time critical
Low systemic risk
↔
High systemic risk
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RETAIL PAYMENTS
TRENDS/ISSUES
● growth of card payments
● costs of payments
● interchange fees
● innovations
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GROWTH OF CARDS PAYMENTS
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COSTS OF PAYMENTS
World Retail Banking Report 2005
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Interchange Fees
Gresham´s law of payments
Traditionally: Bad currency drives out the good
High-cost payment instruments drive out low
cost ones
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STRUCTURE OF CARD PAYMENT
Interchange
Fee
Bank A
issuer
Bank B
acquirer
Merchant
Fee
consumer
goods
retailer
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Gresham´s law of payments
UNITED STATES
Competition
between credit card
schemes 
higher prices
because of
interchange fees
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Innovations
EXAMPLES
• internet banking, on line
banking
• biometric identification
• contactless cards
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WHOLESALE PAYMENTS
DNS: Deferred Net Settlement
 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
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WHOLESALE PAYMENTS
TRENDS/ISSUES
● Liquidity management
 Real time settlement → higer demands on
liquidity management
 T2: range of tools to control, monitor and
manage liquidity
● Operational resilience, e.g. as a result of
global interdependencies
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Securities Settlement Systems
A typical settlement transaction has
 Cash Leg
 Securities Leg
and involves
 CSD: Central Securities Depository
 LVPS: Large Value Payment System
 CCP: Central Counterparty
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Securities Settlement Systems
LVPS
BANK A
BANK B
CSD
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Interfaced / Integrated Model
Interfaced
 CSD has the securities account, CB the cash
account. Communication through an interface
Integrated
 CB or CSD operates both the cash and
securities account, e.g.
 CB outsources cash settlement
 CB insources securities settlement
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Securities Settlement Systems
LVPS
BANK A
CCP
BANK B
CSD
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Securities Settlement Systems
CSDs
 settlement of securities transactions
 depository of securities
 corporate actions
CCPs
 buyer to the seller
 seller to the buyer
 often uses multilateral netting (clearing)
 contributes to efficiency, mitigates risk
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Securities Settlement Systems
TRENDS/ISSUES
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Settlement risks (DVP)
Multiple platforms
Cross border links (global
interdependencies)
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Large Value Payment Systems
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CLS
CLS: Continuous Linked Settlement
● FX Risks
● basically a ´guaranteed refund´ scheme, i.e.
you will either receive the correct currency or
a refund
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Traditional cross border transaction
NCB B
NCB A
D
BANK A1
BANK A2
BANK B1
BANK B2
C
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Correspondent banking: FX transaction
A: Japanse
correspondent
Yen
B: Japanse
correspondent
Japanese payment
system
Bank 1
Bank 2
US payment system
A: US
correspondent
US$
B: US
correspondent
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Continuous Linked Settlement CLS
CLS Bank
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FX transaction, via CLS
Bank A
A:
Settlement
member
CLS BANK
A:
Settlement
member
Yen
B:
Settlement
member
Bank B
B:
Settlement
member
US $
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POLICY OBJECTIVES OF CENTRAL BANK
MAIN GOAL
promote safe and efficient
payment and
settlement systems
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How to Achieve Policy
Objectives?

OPERATIONS

OVERSIGHT
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CATALYST
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Operational role central bank
Issuance and distribution of cash
 Operator large value transfer system
 Settlement services retail transactions
 Cash settlement securities transactions
 Clearing services retail payments
 Operator securities settlement system
 Other securities related services
 Public sector payments
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Oversight
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‘a public policy activity focused on the safety
and efficiency of systems, in particular to
reduce systemic risk’.
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Oversight
Scope central bank oversight varies:
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just systemically important systems,
including securities settlement systems
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including retail systems
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Including payment instruments
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Catalyst
Case for intervention, but not necessarily
regulation or operations
 ‘Third way’ - ‘guide’ the market, by promoting
initiatives and co-operation
 between stakeholders
 between other public authorities, e.g.
-
Government
Competition authorities
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Minimal role
Large
value
Retail
Securities
settlement
Operations
Oversight
Catalyst
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Emphasis on oversight (e.g. DNB)
Large
value
Retail
Securities
settlement
Operations
Oversight
Catalyst
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Emphasis on operations (e.g. Fed)
Large
value
Retail
Securities
settlement
Operations
Oversight
Catalyst
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International developments
KEY WORDS


Globalization
Consolidation Financial Sector
NEED FOR FURTHER COOPERATION
 National
 Supervisors
 Competition Authorities
 Government
● International
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International cooperation
Bank of International Settlements
Main Committees
 BCBS (Bazel Committee of Banking Supervisors)
 CPSS (Committee on Payment and Securities Settlement)
 CGFS (Committee on Global Financial Stability)
 Irving Fisher Committee on Central Bank
Statistics
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Financial European integration – why?
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EURO AREA: 13 National Markets
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Limitations on Competition
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Diseconomies of Scale
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Inefficiencies wrt cross-border flows of money,
securities and collateral
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Financial European integration – how?
1.
2.
3.
INSTITUTIONAL ARRANGEMENTS
FINANCIAL MARKETS
INFRASTRUCTURES →payment and
securities settlement systems
INFRASTRUCTURES
 Essential for Financial Stability
 Central Banks Play Key Role
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Financial European integration – how?
EURO AREA PROJECTS
TARGET 2
 TARGET 2 Securities
 CCBM2
 SEPA
 SECA
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THNX
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