Importance of CSD/SSS and Payment Systems from a Central Bank perspective Global Conference of Central Securities Depositories May 21, 2015

Introduction Given the international regulatory changes to market participants and the markets where they operate, it is important to review how a sound interaction among Financial Market Infrastructures (FMI) contributes to the accomplishment of financial authorities’ objectives. This presentation aims to analyze the role that CSD/SSS play among Central Bank´s different mandates and to present Banco de Mexico’s experience.1 1/ CSD stands for Central Securities Depositories and SSS for Securities Settlement Systems

Value of transactions processed by selected systems Introduction Settlement volumes shows the importance of securities markets as a channel for intermediating and investing, and also as a tool for liquidity management. Value of transactions processed by selected systems (number of times equivalent to the GDP) System1 Country Times GDP, 2013 Euroclear Bank BE 865.8 CREST GB 162.8 RBI (SSS) IN 109.8 SELIC BR 107.7 Indeval MX 76.7 CDS CA 63.2 Euroclear France FR 62.1 BOJ JP 46.1 Monte Titoli IT 40.0 CCASS HK 24.7 Euroclear Sweden SE 24.6 Clearstream Banking AG DE 21.2 NBB SSS 20.9 NBES US 17.6 Source: Bank for International Settlements 1/ Considered systems that settle amounts higher to 10 times its GDP.

Daily average value of transactions Daily average transactions Introduction PS and SSS in Mexico settle around 300 USD billion every day. From this, 230 USD billion correspond to SSS transactions, equivalent to settle in around 5.5 days the Mexican GDP. Daily average value of transactions (USD billion) Daily average transactions (thousands) Source: Banco de México Source: Banco de México

Introduction To illustrate the importance of PS and CSD/SSS for the implementation of Central Bank´s objectives, the following slides presents: An overview of the PS and CSD/SSS interaction in México A review of Banco de México objectives and policy tools, and their relationship with the PS and CSD/SSS

1 2 3 Financial stability Index Central Banks objectives and CSD/SSS Overview of the Mexican Payment Systems 1 Central Banks objectives and CSD/SSS 2 Conclusions 3 Financial stability

Overview of the Mexican PS and CSD/SSS Banco de México operates the RTGS payment system (SPEI) and Indeval the SSS (DALI). Next slides presents the interactions among both systems: i) funding the SSS; ii) Cash and securities settlement; iii) withdraws to the PS; and iv) end of day transactions. Payment System CSD/SSS 1 2 n 1 2 n 1 2 n Cash account at Banco de México Cash account at INDEVAL/DALI Security account at INDEVAL/DALI

Overview of the Mexican PS and CSD/SSS i. Funding the SSS 1. At the beginning of the day, Banco de México and market participants transfer resources to INDEVAL/DALI cash account. INDEVAL credits resources to each participants in the respective Dali’s cash accounts 1 2 1 2 n 1 2 n 1 2 1 2 n Cash account at Banco de México Cash transfer Cash account at INDEVAL/DALI Security transfer Security account at INDEVAL/DALI

Overview of the Mexican PS and CSD/SSS ii. Cash and securities settlement 3. Along the day, INDEVAL/DALI’s participants settle securities and cash at their accounts. 3 1 2 n 1 2 n 3 1 2 n 3 Cash account at Banco de México Cash transfer Cash account at INDEVAL/DALI Security transfer Security account at INDEVAL/DALI

Overview of the Mexican PS and CSD/SSS iii. Withdraws to the PS 4 At any time, INDEVAL/DALI’s participants transfer cash from their INDEVAL/DALIs’ accounts to Banco de México accounts. 4 1 2 n 1 2 n 4 4 1 2 n Cash account at Banco de México Cash transfer Cash account at INDEVAL/DALI Security transfer Security account at INDEVAL/DALI

Overview of the Mexican PS and CSD/SSS iv. End of day transactions At the end of the day, participants INDEVAL/DALI’s resources are transferred to INDEVAL/DALI’s account at Banco de México. INDEVAL/DALI transfer resources to participant’s cash accounts at Banco de México. 5 6 1 2 n 1 2 n 6 5 1 2 n Cash account at Banco de México Cash transfer Cash account at INDEVAL/DALI Security transfer Security account at INDEVAL/DALI

Overview of the Mexican PS and CSD/SSS The previously described interaction between Banco de México and INDEVAL, along with the following key features of DALI, allows the Central Bank to implement several of its policy objectives. Key features of INDEVAL/DALI system Type of securities held Intraday finality DVP method Cash settlement Communication protocols Bonds, government securities, equities, certificates of deposits Yes (settlement cycles occurs every 2 minutes or less) Simultaneous net settlement of securities and money (DVP3) Central bank money (MXN) ISO: 15022 and use of electronic signatures

1 2 3 Index Central Banks objectives and CSD/SSS Conclusions Overview of the Mexican Payment Systems Central Banks objectives and CSD/SSS 2 Well-functioning payment systems a Central government financial agent b Monetary stability c d Financial stability Conclusions 3

Central Banks objectives and CSD/SSS Central Banks are in the need to utilize and support CSD/SSS and PS services to comply with their mandates and to employ their policy tools Mandates: Well-functioning payment systems Central government financial agent Monetary stability Financial stability Policy tools: Open market operations Lending facilities Purchase and sale of securities Reserve requirements Long term deposits

1 2 3 Index Central Banks objectives and CSD/SSS Conclusions Overview of the Mexican Payment Systems Central Banks objectives and CSD/SSS 2 Well-functioning payment systems a Central government financial agent b Monetary stability c d Financial stability Conclusions 3

a.- Well-functioning PS PS are necessary for the well-functioning of the financial system and play a key role in the economy by facilitating transactions among agents. Central Banks’ play different roles on the promotion of payment systems’ smooth functioning: v Regulator and supervisor Operator of payment systems and provider of settlement facilities Intraday liquidity provider

a.- Well-functioning PS The Payment Systems Law empowers Banco de México to supervise and regulate systemically important payment and securities settlement systems. Given the systemic importance of INDEVAL/DALI for the stability of our financial system, Banco de México’s policy is such infrastructure must comply with the best international practices: nowadays the Principles for Financial Market Infrastructures (PFMIs) by CPMI-IOSCO. Currently, INDEVAL, in coordination with Banco de México and the National Banking and Securities Commission, has been implementing a working plan for a better compliance of the PFMIs.

a.- Well-functioning PS In the Mexican Financial System, banks can obtain liquidity from Banco de México. Banco de México employs two instruments to provide intraday liquidity to the PS. Fully collateralized intraday overdrafts on participant’s Central Bank current accounts Intraday repo operations Banco de México’s liquidity provision is aimed to avoid payment delays and concentration of unsettled payments at the end of the day.

a.- Well-functioning PS i.- Collateralized intraday overdrafts 1.- Banks transfer Monetary Regulatory Deposit (MRD) to their current accounts 3.- Transfer resources to their accounts 2.- Intraday overdraft collateralized by their MRD. 4.- At the end of the day, Banks replenish resources at their current accounts Cash account at SPEI Cash account at INDEVAL/DALI Cash transfer

a.- Well-functioning PS ii.- Intraday repo operations 2.- Banco de México request securities transfer from banks’ INDEVAL/DALI accounts 4.- At the end of the they Banks return cash and Banco de México returns securities 1.- Banks solicit intraday repo 3.- Banco de México transfer cash to Banks’ INDEVAL/DALI cash accounts Information transfer Cash transfer Security transfer

1 2 3 Index Central Banks objectives and CSD/SSS Conclusions Overview of the Mexican Payment Systems Central Banks objectives and CSD/SSS 2 Well-functioning payment systems a Central government financial agent b Monetary stability c d Financial stability Conclusions 3

b.- Central government financial agent Across jurisdictions, Central Banks fulfill a wide range of functions about the custody, settlement and other financial services.1 In some countries these functions are shared with private institutions. 1/ Other financial services includes: financial and payment agent for the Central Government

b.- Central government financial agent Banco de México’s Law establishes that the Central Bank is the financial and payment agent for the Federal Government. Banco de México does not operate a securities settlement system. To carry out its mandate, it uses INDEVAL/DALÍ infrastructure for the following activities: Act as the issuing and paying agent for securities Manage the custody of these securities through INDEVAL’s electronic book entry system.1 Pay interest on securities Is worth mentioning that the Ministry of Finance is fully responsible for the management of federal government debt. 1/ Central bank holds physical certificates that back federal government securities

1 2 3 Index Central Banks objectives and CSD/SSS Monetary stability Overview of the Mexican Payment Systems Central Banks objectives and CSD/SSS 2 Well-functioning payment systems a Central government financial agent b Monetary stability c d Financial stability Conclusions 3

c.- Monetary stability Banco de México’s main objective is to safeguard the purchasing power of the Mexican currency. Open Market Operations are the main tool to control the supply of money in the financial system. Banco de México employs repo operations for its lending/borrowing auctions. The term agreement is aimed to smooth liquidity interventions for the next days.1 To carry out this function, Central Bank uses INDEVAL/DALÍ infrastructure. 1/ Additionally, Banco de México utilizes MRD collateralized overdrafts for it’s monetary policy implementation.

c.- Monetary stability Short term repo operations: liquidity provision 4.- Banks instructs securities transfer from their INDEVAL/DALI’s accounts 1.- Banco de México discloses lending amount to be auctioned 2.- Banks send their postures 3.- Banco de México assigns postures 4.- Banco de México transfer cash to Banks’ current accounts Information transfer Cash transfer Security transfer

1 2 3 Index Central Banks objectives and CSD/SSS Financial stability Overview of the Mexican Payment Systems Central Banks objectives and CSD/SSS 2 Well-functioning payment systems a Central government financial agent b Monetary stability c Financial stability d Conclusions 3

d.- Financial stability The Financial System supports economic growth by providing facilities for carrying out economic transactions A healthy Financial System requires solvent financial intermediaries, robust financial market infrastructures, deep markets, and strong legal framework. To foster the sound development of the Financial System, Central Banks are empowered to: Monitor and regulate financial intermediaries Promote reforms and issue new regulation for financial markets

d.- Financial stability i.- Financial intermediaries Banco de México provides support to banks’ exceptional liquidity needs through the discount window, i.e. collateralized lending using INDEVAL/DALI infrastructure. The new Liquidity Coverage Ratio, established by Banco de México, has the potential to increase demand for liquid securities settled through INDEVAL/DALI.1 Increase the collateralization of exposures would reduce the amount of collateral available for other uses. As institutions, place greater focus on optimizing the use of collateral, design of CSD/SSS may contribute to the proper functioning of collateral markets. 1/ Banks must hold sufficient liquid assets to cope with a liquidity stress event for, at least, 30 days.

d.- Financial stability ii.- Exchange rate markets Banco de México sterilizes extraordinary foreign currency inflows with repos through INDEVAL/DALI. 4.- Banco de México instructs securities transfer from its INDEVAL/DALI’s account 1.- Banco de México discloses borrowing amount to be auctioned 2.- Banks send their posture 3.- Banco de México assigns posture 4.- Banks’ transfer cash to their current accounts Information transfer Cash transfer Security transfer

d.- Financial stability iii.- Derivative markets Central banks and other regulators have been highlighted the importance of identifying, measuring, and mitigating risks in OTCD markets that will have some impact on CSD/SSS. The regulatory changes that have taken place during the last 5 years: Mandate for central clearing of standardized contracts. Higher capital and margin requirements for non-centrally cleared transactions: In México: Banco de México has declared and required standardized contracts to be cleared through CCPs (MXN-IRS, phase-in during 2016). CNBV is implementing Basel III capital requirements for centrally and non- centrally cleared derivatives (09/2015). Mexican Financial Authorities are planning the implementation of margin requirements for non-centrally cleared transactions.

d.- Financial stability iii.- Derivative markets Central clearing for OTC derivatives, and margin requirements for non centrally cleared derivatives will increase collateral demand. However, even when studies suggest no high-quality collateral scarcity, both a liquid securities lending market and a robust CSD/SSS infrastructure are essential for an smooth implementation of the OTCD reforms. Higher needs of collateral are reshaping its mobility across markets and also jurisdictions. Cross-margining is one example, that consist of procedures for collateralizing contracts among different CCPs through separate accounts (even cross-border). By recognizing inter-market hedged positions, It increases the overall efficiency of the clearing and settlement process, and increases liquidity in the form of net settlements. CSD/SSS must follow-up this evolving environment and get ready to facilitate new collateral mobility mechanisms.

1 2 3 Index Central Banks objectives and CSD/SSS Conclusions Overview of the Mexican Payment Systems Central Banks objectives and CSD/SSS 2 Conclusions 3

Conclusions A sound interoperability among PS and CSD/SSS facilitate the accomplishment of Central Bank’s functions. INDEVAL/DALI are key components for the smooth functioning of the Mexican Financial System. Banco de México will continue to work with INDEVAL/DALI in the implementation of risk mitigating measures and fulfillment of PFMIs.