1 Legal and Regulatory Aspects of Reforming Payment and Securities Settlement Systems Maria Chiara Malaguti

2 Is «The Payments System» a legal concept? «Payment» as execution of a (monetary) obligation  Cash, bank money, … «Payment instrument» as the vehicle to execute the tranfer of money  Banknotes, cheques, wire transfers, … « Payment system» as the set of arrangements to provide the service of executing payment operations by an intermediary  Correspondent banking, clearing houses,...

3 A B Underlying obligation Cash Often the only recognized Legal tender Cheque Negotiable instrument Wire transfer Credit transfer Debit transfer Each payment instrument has special features: potentially specific legislation

4 Payment by Fiduciary Money Clearing House Bank A Bank B Client B1 Client B2 Client A Correspondent banking (by agreement: agency) Mandate to pay Clearing Central Bank Settlement

5 «The Payments System» in law: a three-level situation Operator to operator Finality of payment by fiduciary money and circulation of instruments (as cheques) Bank to client Agency relation and limits on mandate to pay/receive payment; transparency Bank to bank Bi-multilateral netting: systemic risk; settlement and role of central bank as lender of last resort

6 … what about securities? Investor Custodian Cash clearing and settlement Broker ABroker B Stock Exchange CCP (if any) CSD Funds transfer Cash transfer into Central Bank money Settlement Order to buy DVP Novation

7 Some legal barriers: netting and validity of contractual clauses Bilateral netting and legal «compensation» Bilateral netting and «current accounts» Mutuality and bilateralism: «mutuality» if set-off on behalf of clients? Multilateral netting and legal compensation Lack of bilateralism and mutuality Solution: netting by novation

8 Some legal barriers: netting by novation and central counterparty Central counterparty liable towards each party instead of counterparty? Central counterparty a b c d e f g g

9 Some legal barriers: finality of settlement, the «zero hour» and effects of bankruptcy Retroactivity of bankruptcy effects Par condicio of creditors

10 Some legal barriers: the transfer of ownership of securities by book entry Need for transfer of paper-based document? The question of centralized immobilization

11 Some legal barriers: collateralization Repos versus pledge? Repos and Sell-BuyBacks Master Agreements and link with each single order

12 «The Payments System» as a regulatory concept Bank ABank B BankC Clearing Final settlement by Central Bank Insolvency risk Credit risk Liquidity risk Systemic risk

13 «The Payments System» and «The Post-Trading of Securities» as the same regulatory space? The payments system The securities system

14 supervisionoversight On the single operator to guarantee individual stability On the system as such to guarantee global stability Central banks Supervisory authorities Central banks Financial markets regulatory authorities

15 Tools for oversight RegulationMoral suasion Cooperation Self- regulation

16 Some regulatory issues: how to organize oversight? Banking or non- banking activity? Institutional or functional approach?

17 Some regulatory issues: Consolidation or Competition? Cost-effectiveness Choice of providers Centralised risk management Reduction of systemic risk Leave the market free to consolidate, but: Fair and open access Sufficient pressure for innovation

18 Sectors for legal and regulatory intervention Recognition of fiduciary money and payment instruments Netting, clearing and insolvency Electronic transfers/E-money Regulation of payment services and of securities post-trading Regulation: supervision and oversight Consolidation and competition Rules on conflict of laws

19 For tailor-made solutions according to country legal environment.. Order of priorities in legal and regulatory reform With a global understanding of laws on property, contracts, corporate action, negotiable instruments, fiduciary relationships, financial institutions…

20..with an eye to openess to foreign investments and inter-operability Restrictions on the location Barriers related to taxation Rules on conflict of laws