WESTERN HEMISPHERE PAYMENTS AND SECURITIES CLEARANCE38837 AND SETTLEMENT INITIATIVE CENTRE FOR LATIN AMERICAN MONETARY STUDIES THE WORLD BANK Public Disclosure Authorized
PAYMENTS AND SECURITIES
Public Disclosure Authorized CLEARANCE AND SETTLEMENT SYSTEMS IN ECUADOR Public Disclosure Authorized
DECEMBER 2002 Public Disclosure Authorized PAYMENTS AND SECURITIES CLEARANCE AND SETTLEMENT SYSTEMS IN ECUADOR PAYMENTS AND SECURITIES CLEARANCE AND SETTLEMENT SYSTEMS IN ECUADOR
WESTERN HEMISPHERE PAYMENTS AND SECURITIES CLEARANCE AND SETTLEMENT INITIATIVE CENTRE FOR LATIN AMERICAN MONETARY STUDIES THE WORLD BANK First English edition, 2004 © Centro de Estudios Monetarios Latinoamericanos y Banco Mundial, 2004
Publicado también en español
Centro de Estudios Monetarios Latinoamericanos, 2003 Durango 54, México, D.F. 06700 All rights reserved Derechos reservados conforme a la ley
ISBN 968-6154-93-0
Printed and made in Mexico Impreso y hecho en México Foreword
Following a request from the Western Hemisphere Finance Ministers, the World Bank (WB) launched in January 1999 the Western Hemisphere Payments and Securities Clearance and Settlement Initiative. The World Bank in partnership with the Centre for Latin American Monetary Studies (CEMLA) leads this initiative. Its objective is to describe and assess the payments systems of the Western Hemisphere with a view to identifying possible improvement measures in their safety, efficiency and integrity. To carry out this mandate an International Advisory Council (IAC) was established in March 1999 comprised of experts in the field from several institutions. In addition to representatives from the WB and CEMLA this Council includes members from the: Bank for International Settlements, Bank of Italy, Bank of Portugal, Bank of Spain, Council of Securities Regulators of the Americas (COSRA), De Nederlandsche Bank, European Central Bank, Federal Reserve Board, Federal Reserve Bank of New York, Inter-American Development Bank, International Monetary Fund, International Organization of Securities Regulators (IOSCO), Securities Commission of Spain, Swiss National Bank and U.S. Securities Commission (SEC).
To assure quality and effectiveness, the Initiative includes two important components. First, all studies are conducted with the active participation of country officials and the project builds on the existing work being undertaken in the respective countries. Second, the Initiative draws on international and national expertise on the subject, through the IAC, to provide guidance, advice and alternatives to current practices.
The Initiative has undertaken a number of activities in order to respond to the Western Hemisphere Finance Ministers’ request. These include: the preparation of public reports containing a systematic in-depth description of each country’s payments clearance and settlement systems; the delivery of recommendations reports to country authorities on a confidential basis; the organization of IAC meetings to review country studies and provide input for future work; the organization of workshops focusing on issues of particular interest; the creation of a web-page (www.ipho-whpi.org) to present the outputs of the Initiative and other information of interest in the payments systems area; and the promotion of working groups to ensure a continuation of the project activity.
CEMLA has been acting as Technical Secretariat of the Initiative and is playing a major role in making the process sustainable and capable of extension to all the countries in the Hemisphere. To this end, the Initiative has helped strengthen CEMLA’s in-house expertise. Additionally, practitioners in payments and securities clearance and settlement in some countries in the Region have participated in the studies under the Initiative, through CEMLA coordination, and this has contributed to the broadening of knowledge and the transfer of know-how within the Region. The endeavors of the working groups in coordination with CEMLA will maintain the infrastructure created under the Initiative and provide a permanent forum for the countries in the Region to discuss, coordinate, and add a collective impetus to the work in the area of payments and securities clearance and settlement systems.
This Report “Payments and Securities Clearance and Settlement Systems in Ecuador” is one of the public reports in the series and was prepared under the coordination of CEMLA and the World Bank. The Banco Central del Ecuador also participated actively in its preparation.
Kenneth Coates David de Ferranti Cesare Calari Director General Vicepresident, LAC Vicepresident, Financial Sector CEMLA World Bank World Bank Acknowledgments
The mission that prepared this Report visited Quito and Guayaquil in August 2002 and consisted of two teams that worked on a coordinated basis in the payments and securities clearance and settlement area. José Antonio García (CEMLA and WGPS-LAC*) coordinated the production of this Report. Other members of the international team were Massimo Cirasino (World Bank), Mario Guadamillas (World Bank), Carlos Melegatti (Central Bank of Costa Rica and WGPS-LAC) and Jan Woltjers (Bank of the Netherlands). In the area of payments, the international team worked in close cooperation with the local team comprising officers of the Central Bank of Ecuador (Banco Central del Ecuador, BCE). Pablo Narváez (Director, Domestic Banking Services) coordinated this local team, which also included Carlos Andrade and Mónica Maldonado. In the area of securities settlement, the local team included Yolanda Cevalllos (Custodian of the BCE) and Rosa María Herboso (Deputy Superintendent for Securities of the Superintendencia de Compañías of Ecuador).
* Working Group on Payment System Issues of Latin America and the Caribbean. Ecuador Report December 2002
TABLE OF CONTENTS
1 ECONOMIC AND FINANCIAL MARKET OVERVIEW ...... 1 1.1 OVERVIEW OF RECENT REFORMS ...... 1 1.2 MACROECONOMIC BACKGROUND ...... 2
1.3 FINANCIAL SECTOR ...... 3 1.3.1 Historic Evolution of the Ecuadorian Financial System ...... 3 1.3.2 Financial System during the Nineties ...... 5 1.4 CAPITAL MARKETS ...... 7
1.5 MAJOR TRENDS IN PAYMENT SYSTEMS ...... 8 1.6 MAJOR TRENDS IN SECURITIES CLEARANCE AND SETTLEMENT SYSTEMS ...... 10
2 INSTITUTIONAL ASPECTS ...... 12 2.1 GENERAL LEGAL FRAMEWORK ...... 12 2.1.1 Payments ...... 12 2.1.2 Securities ...... 12 2.1.3 Derivatives ...... 13 2.1.4 Specific Legal Issues Related to Clearance and Settlement...... 13 2.1.4.1 Netting ...... 13 2.1.4.2 Zero Hour Rule and Settlement Finality ...... 13 2.1.4.3 Digital Documents and Signatures ...... 13 2.1.4.4 Novation ...... 13 2.2 THE ROLE OF FINANCIAL INSTITUTIONS: PAYMENTS ...... 14 2.2.1 The Banking Sector...... 14 2.2.2 Other Institutions that Provide Payment and Settlement Services ...... 14 2.2.2.1 Specialized subsidiaries and other firms supporting the banking business ...... 14 2.2.2.2 Finance Companies or Investment and Development Corporations ...16 2.2.2.3 Savings and Loans Mutual Associations for Housing ...... 16 2.2.2.4 Savings and Loans Cooperatives that perform financial intermediation activities with the public ...... 17 2.3 THE ROLE OF FINANCIAL INSTITUTIONS: SECURITIES ...... 17 2.3.1 Securities Market Participants ...... 17 2.3.2 Exchanges ...... 19 2.3.3 Securities Clearance and Settlement Institutions ...... 20 2.4 MARKET STRUCTURE AND REGULATION ...... 20 2.5 THE ROLE OF THE CENTRAL BANK ...... 20 2.5.1 Monetary Policy and Other Functions ...... 20
iii Ecuador Report December 2002
2.5.2 Involvement in the Payments System...... 20 2.6 THE ROLE OF THE BANKING SUPERVISORY AUTHORITY...... 22 2.6.1 Supervision of Financial Entities ...... 23 2.6.2 Payments System Oversight ...... 23 2.6.3 Anti-Money Laundering Measures ...... 23 2.7 THE ROLE OF THE DEPOSIT INSURANCE AGENCY ...... 24
2.8 THE ROLE OF THE SECURITIES REGULATOR ...... 24 2.8.1 National Securities Council ...... 24 2.8.2 Superintendence of Companies ...... 25 2.9 THE ROLE OF OTHER PRIVATE AND PUBLIC SECTOR ENTITIES ...... 25 2.9.1 The Ministry of Economy and Finance...... 25 2.9.2 The Bankers’ Association ...... 26 2.9.3 Credit Reporting Systems ...... 27
3 PAYMENT MEDIA USED BY NON-FINANCIAL ENTITIES ...... 28 3.1 CASH ...... 28
3.2 PAYMENT MEANS AND INSTRUMENTS OTHER THAN CASH ...... 28 3.2.1 Cheques ...... 28 3.2.2 Direct Credits/Debits ...... 29 3.2.3 Payment Cards ...... 30 3.2.4 ATMs and EFTPOS...... 30 3.2.5 Remittances ...... 31 3.2.6 Others ...... 31 3.3 NON-CASH G OVERNMENT PAYMENTS ...... 31
4 PAYMENTS: INTERBANK EXCHANGE AND SETTLEMENT CIRCUITS ...... 33 4.1 THE REGULATORY FRAMEWORK FOR CLEARINGHOUSES ...... 33 4.2 LOW VALUE PAYMENT TRANSFER SYSTEMS ...... 33 4.2.1 Cheques ...... 33 4.2.1.1 Clearing and Settlement Process ...... 33 4.2.1.2 Risk Management Mechanisms ...... 34 4.2.2 Interbank Payment System (SPI)...... 35 4.2.2.1 Clearing and Settlement Process ...... 35 4.2.2.2 Risk Management Mechanisms ...... 35 4.2.3 ATMs and EFTPOS...... 35 4.2.4 Budget Execution System (SEP) ...... 36 4.3 LARGE VALUE PAYMENT TRANSFER SYSTEMS ...... 38 4.3.1 Functioning of the Various Subsystems ...... 38 iv Ecuador Report December 2002
4.3.1.1 Funds Transfers through the closed SWIFT users group ...... 38 4.3.1.2 Funds Transfers using Paper Formats at the BCE Window ...... 39 4.3.1.3 Funds Transfers using Magnetic Media (Diskette) ...... 39 4.3.2 Settlement Process ...... 39 4.3.3 Risk Management Mechanisms ...... 39 4.4 CROSS-BORDER PAYMENT SETTLEMENT SYSTEMS ...... 40
4.5 MAJOR PROJECTS AND POLICIES BEING IMPLEMENTED ...... 40 4.5.1 Creation of Internal and External Committees to Support the Reform Effort ...... 41 4.5.1.1 Payments System Committee ...... 41 4.5.1.2 Inter-Institutional Payments System Committee ...... 41 4.5.2 New Payment Systems and Supporting Mechanisms ...... 42 4.5.2.1 On Line and Real Time Payments System (SPL) ...... 42 4.5.2.2 Net Balance Payment System (SPN) ...... 43 4.5.2.3 Clearinghouses’ System (SCC) ...... 43 4.5.2.4 Bilateral Credit Lines System (LBC) ...... 44
5 SECURITIES, MARKET STRUCTURE AND TRADING ...... 45 INSTRUMENTS 5.1 FORMS OF SECURITIES ...... 45 5.2 TYPES OF SECURITIES ...... 45 5.2.1 Shares and Other Securities Representing Equities ...... 45 5.2.2 Debt Securities ...... 46 5.2.2.1 Securities Issued by the Public Sector ...... 46 5.2.2.2 Securities Issued by the Private Sector ...... 46 5.3 SECURITIES IDENTIFICATION CODE ...... 47 5.4 TRANSFER OF OWNERSHIP ...... 47
5.5 PLEDGE OF SECURITIES AS COLLATERAL ...... 48 5.5.1 Repos...... 48 5.6 TREATMENT OF LOST, STOLEN OR DESTROYED SECURITIES ...... 48 5.7 LEGAL MATTERS CONCERNING CUSTODY ...... 49 5.7.1 Protection of Securities Under Custody in case of Bankruptcy or Insolvency of the Custodian ...... 49 5.7.2 Fungibility ...... 49 5.7.3 Elimination of Physical Delivery ...... 49 MARKET STRUCTURE AND TRADING SYSTEMS 5.8 PUBLIC OFFERING OF SECURITIES ...... 49 5.9 PRIMARY MARKET ...... 50
5.10 SECONDARY MARKET ...... 50
v Ecuador Report December 2002
5.11 Stock Exchange Trading ...... 50 5.11.1 Quito Stock Exchange (BVQ) ...... 51 5.11.2 Guayaquil Stock Exchange (BVG) ...... 51 5.12 OVER THE COUNTER MARKET (OTC) ...... 52 5.13 RECENT TRENDS IN THE MARKET ...... 52 6 CLEARANCE AND SETTLEMENT CIRCUITS FOR GOVERNMENT AND CORPORATE SECURITIES ...... 54 6.1 ORGANIZATIONS AND INSTITUTIONS ...... 54 6.1.1 Quito and Guayaquil Stock Exchanges ...... 54 6.1.2 DECEVALE ...... 54 6.1.3 The BCE as a Securities Custodian ...... 54 6.2 SECURITIES R EGISTRATION AND CUSTODY PROCEDURES ...... 55 6.2.1 Registration in the Securities Market Registry ...... 55 6.2.2 Registration and Custody of Securities at the CSDs ...... 55 6.2.2.1 Deposit Accounts ...... 55 6.2.2.2 Deposit Account Information ...... 56 6.2.3 Administration of the Deposited Securities ...... 56 6.2.4 Securities Transfers ...... 56 6.2.5 Pledges and other Limitations over the Deposited Securities ...... 57 6.2.6 Securities Withdrawal ...... 57 6.3 SECURITIES CLEARANCE AND SETTLEMENT PROCESSES ...... 57 6.3.1 Settlement Modalities ...... 57 6.3.2 Settlement Procedures ...... 58 6.3.3 Flow Chart of Settlement Processes ...... 59 6.4 GUARANTEE SCHEMES ...... 60 6.4.1 Procedures to Solve Settlement Failures ...... 60 6.4.2 Securities Lending ...... 61 6.5 INTERNATIONAL LINKS AMONG CLEARANCE AND SETTLEMENT INSTITUTIONS ...... 61 6.6 MAJOR PROJECTS AND POLICIES BEING IMPLEMENTED CONCERNING CUSTODY, CLEARING AND SETTLEMENT ...... 61 6.6.1 Securities Custody System (SCTV) ...... 61 7 THE ROLE OF THE CENTRAL BANK IN CLEARANCE AND SETTLEMENT SYSTEMS ...... 63 7.1 RESPONSIBILITIES ...... 63
7.2 SETTLEMENT ...... 63 7.3 THE RISK CONTROL POLICY ...... 63
7.4 THE ROLE OF THE BCE IN CROSS-BORDER PAYMENTS ...... 64
7.5 PRICING POLICIES ...... 65 vi Ecuador Report December 2002
8 SUPERVISION OF SECURITIES CLEARANCE AND SETTLEMENT SYSTEMS ...... 66 8.1 SECURITIES REGULATOR SUPERVISORY AND STATUTORY RESPONSIBILITIES ...... 66 8.1.1 Responsibility over the Stock Exchanges and the CSD...... 67 8.1.2 Information Obligations...... 67 8.1.3 Sanctioning Capacity ...... 68 8.2 SELF-REGULATORY ORGANIZATIONS SUPERVISORY AND STATUTORY RESPONSIBILITIES ...... 69 8.2.1 Stock Exchanges ...... 69 8.2.2 Central Securities Depositories ...... 69
APPENDIX: STATISTICAL TABLES ...... 71
LIST OF ABBREVIATIONS ...... 83
GLOSSARY ...... 85
TABLES IN THE TEXT
TABLE 1: MACROECONOMIC INDICATORS ...... 3 TABLE 2: BCE’S CONVERSION OF PRIVATE SECTOR OBLIGATIONS ...... 5
TABLE 3: STATUS OF THE EXCHANGE OF BANKNOTES AND COINS DUE TO DOLLARIZATION ...... 28
TABLE 4: CHEQUES PROCESSED BY THE BCE...... 29 TABLE 5: EVOLUTION OF THE SPI ...... 29
TABLE 6: DOMESTIC BANKS D ESIGNATED AS CORRESPONDENTS BY THE BCE ...... 32 TABLE 7: OUTSTANDING SECURITIES CIRCULATING IN THE NATIONAL MARKET ...... 52
TABLE 8: STOCK EXCHANGE TRADED VALUES AT THE N ATIONAL LEVEL ...... 52 TABLE 9: INTERBANK LARGE VALUE TRANSFER FEES AT THE BCE ...... 65
FIGURES IN THE TEXT
FIGURE 1: MARKET STRUCTURE AND REGULATION ...... 21 FIGURE 2: ORGANIZATIONAL STRUCTURE OF THE SUPERINTENDENCE OF BANKS AND INSURANCE ...... 22
FIGURE 3: ORGANIZATIONAL STRUCTURE OF THE DEPUTY SUPERINTENDENCE FOR SECURITIES MARKETS OF THE SUPERINTENDENCE OF COMPANIES ...... 26
FIGURE 4: GOVERNMENT PAYMENTS PROCESSES THROUGH THE SEP ...... 37
FIGURE 5: SETTLEMENT OF SECURITIES TRANSACTIONS MADE AT THE STOCK EXCHANGES (WITH DELIVERY OF THE PHYSICAL SECURITIES) ...... 59
vii Ecuador Report December 2002
1 ECONOMIC AND FINANCIAL MARKET OVERVIEW
1.1 OVERVIEW OF RECENT REFORMS
Ecuador, similar to other Latin American countries, experienced deep economic transformations during the Nineties. The most significant reform was probably the official adoption of the United States dollar (USD) as the national currency in January 2000. From that date on, the USD replaced the domestic currency in all its three functions, i.e., as a reserve of value, unit of account and as a payment and exchange mean.
In 1999, as a consequence of a rapidly developing banking crisis and the subsequent credit crunch, the decline in real income due to the real exchange rate depreciation, significant private capital outflows and the decline in oil export prices, the Ecuadorian economy entered into a severe recession. The imbalances in the main macroeconomic variables had been present for some years, but by the end of 1998 the external shocks (like the natural meteorological phenomenon knows as “el Niño”) faced by the economy contributed to the deepening of such imbalances.
The pressures over the exchange rate increased by mid 1999, and in a short time span the interbank interest rates increased from 60 to 150 percent. Thus, the frequent macroeconomic imbalances, the expectations of the economic agents regarding the depreciation of the domestic currency, the difficulties in reaching an agreement with the International Monetary Fund (IMF) and internal political problems derived in a sharp turn in the way the monetary policy was handled.
At the beginning of 2000, the Central Bank of Ecuador (Banco Central del Ecuador, BCE) abandoned its traditional functions of issuing the domestic currency, controlling inflation and managing the nation’s monetary, credit and foreign exchange policy when the country adopted the dollarization scheme.
In this scheme, the amount of money circulating in the economy depends on foreign exchange flows, which in turn is regulated by the arbitrage of the domestic and external interest rates. The scheme also entails the full integration of the domestic financial system with international capital markets.
Thus, the BCE was charged with a new set of responsibilities related to fostering the economic stability of the country with a long-term vision. Among these functions, some of the most relevant are follow-up the macroeconomic program, elaborating of all statistics associated with the economic system, contributing in the design of policies and strategies for the development of the nation and implementing the new monetary regime of the Republic, which in turn entails the administration of the national payments system, investing the freely available currency reserves, and acting as the depository of public funds and as fiscal and financial agent for the government.
For the progressive substitution of the domestic currency, the Sucre, with the USD, a fix exchange rate of S/.25,000 per USD was adopted.1 Since then, interest rates have declined to a level between
1 Throughout all this Report, the “USD” symbol will be used to represent the United States dollar and the “S/.” one for the Sucre, the Ecuadorian currency that was in circulation until January 2000.
1 Ecuador Report December 2002
15 and 18 percent, the expansion of the monetary base has been only marginal and the banking system has experienced new deposit inflows.
1.2 MACROECONOMIC B ACKGROUND
Ecuador’s economy is small and it is open to foreign trade. Its population is close to 15.2 million inhabitants. The national production is distributed as follows: the primary sector with 30.7 percent, the secondary or industrial sector with 19.6 percent and the services sector with 49.7 percent. The oil sector represents approximately one half of the total production of the primary sector.
Before August 1992, the economic situation of the country was characterized by persistent fiscal deficits, low economic growth, high levels of inflation and a segmented financial market. Starting that month, Ecuador launched an economic stabilization program whose main purpose was to reduce inflation. For this purpose, the exchange rate became the nominal anchor of the economy. Also, significant efforts were made to strengthen the fiscal and external positions and to reform the public sector.
The program was successful in the medium term. Inflation declined from 66 percent in October of 1992 to 22 percent in August of 1995. The set of reforms generated economic and exchange rate stability. During 1993 and 1994 foreign capital net inflows reached nearly USD 700 million per year. Deposits in domestic currency also increased substantially, leading to a significant growth of credit. During these years, the banking system underwent a deep transformation process, not only because of capital inflows but also because of the reforms to the Securities Market Law (SML) and the Financial Sector Institutions General Law (Ley General de Instituciones del Sistema Financiero, LGISF), which entailed financial liberalization and de-regulation.
Between 1992 and 1995, the economy regained growth, coupled with price stability and a stronger external sector. After 1995, this tendency was affected by unexpected external shocks, such as the war with Peru, the 1996 energy crises that affected the whole productive sector and a complex internal political scenario. These factors reduced capital inflows, which in turn led to a reduction in credit.2 Interest rates rose, producing a severe liquidity shortage. At the same time, economic agents were losing confidence on the management of monetary policy.
After being stagnant in 1998, in 1999 the Ecuadorian economy entered into a deep recession. In the latter year, the economy faced a crisis in the overall financial system. Banks were particularly affected during this crisis. Due to the pressures over the exchange rate, the authorities replaced the existing crawling peg exchange rate regime with one of free-floating. This measure was not only unsuccessful at stabilizing the exchange rate. Instead, it led to a series of speculative attacks to the nominal exchange.
During 1999, the exchange rate depreciated in approximately 200 percent in terms of Sucres per USD. An additional 25 percent depreciation followed in the first week of January 2000.
2 The growth rate of M2 between December 1994 and December 1995 decreased from 81.7 percent to 41.8 percent.
2 Ecuador Report December 2002
The government issued USD 1,400 million in bonds in order for the Deposit Insurance Agency (Agencia de Garantías de Depósitos, AGD) to inject new capital to troubled banks, to pay the depositors of banks that were shut down and to cover the withdrawals made by foreign creditors.
Between November and December of 1999, the issuance of new currency grew at a 25 percent rate, which was nearly four times the monthly average growth rate during 1998. As of December 1999, the annual growth rate of this variable was 146 percent.
In 1999, the gross domestic product (GDP) decreased nearly 6 percent, reflecting the significant declines in investment and private consumption. Unemployment nearly doubled in twelve months, reaching 14.4 percent in December 1999. Annual inflation as measured by consumer prices was 36.1 percent in 1998 and 96.1 percent in 2000. As per producer prices, inflation rose from 35 percent in 1999 to 301 percent in 2000.
1.3 FINANCIAL SECTOR
1.3.1 Historic Evolution of the Ecuadorian Financial System
The foreign debt crises that emerged at the beginning of the Eighties evidenced the overall instability and insolvency of the Ecuadorian financial institutions. To avoid the generalized bankruptcy of the Table 1: Macroeconomic Indicators3
1998 1999 2000 2001 Sep-2002 (b) Real GDP (in USD million) 16,541 15,499 15,934 16,749 17,303 Real GDP (annual growth rate) 2.1 -6.3 2.8 5.1 3.3 GDP per capita (in USD) 2,035 1,429 1,338 1,729 1,968 Exports FOB (annual growth rate) -20.2 5.9 10.7 -5.0 7.5 Imports FOB (annual growth rate) 13.1 -46.4 24.3 45.1 20.6 Deficit (-) or surplus (+) in the Current Account of the Balance of Payments (as % of the GDP) -0.6 -0.6 -0.1 -3.2 0.6 Consumer Prices Index (annual growth rate) 36.1 52.2 96.1 37.5 12.5 Unemployment (in %) 11.5 14.4 9.0 10.9 9.2 Outcome of the Non-Financial Public Sector (as % of the GDP) -5.2 -4.9 1.4 0.4 1.3 Public Sector deficit (as % of the GDP) -0.6 -0.6 -0.1 -3.2 0.6 External Debt (year-end outstanding balance in USD million) 13,062 13,372 10,987 11,338 11,337 (a) M1 (in Sucres billion) 1,211 763 … … … (a) M2 (in USD million) 5,218 3,255 … … … (a) Memo: Exchange rate, Sucres per USD (year-end) 6,780 20,100 25,000 … … Source: BCE. (a) Starting 2000, Ecuador fully dollarized its economy. (b) As of December 2002 (preliminary figure).
3 The following conventions for notation are used throughout the Report: “n.a.” indicates data that are not available; “…” stands for data that are not applicable; “neg” (negligible) indicates where data are very small relative to other relevant data in the table concerned.
3 Ecuador Report December 2002
system, the government designed and implemented several mechanisms, the most relevant being the exchange of outstanding and already expired liabilities for other liabilities in special foreign currency accounts held at the BCE, the granting of extraordinary cash advances and the refinancing of the private external debt.
First, the BCE committed itself to providing foreign currency out of its reserves for the private sector to service its external debt. The BCE backed those private debts that had been registered with it as of May 13, 1982. The Monetary Board made foreign currencies available at the exchange rate being used to pay foreign liabilities. It was established that the currencies would be sold in the free foreign exchange market and that the transaction would be financed by charging the credit lines granted by the international financial market or through the national private financial market. The Monetary Board also authorized the opening of a rediscount credit line in Sucres to finance the exchange rate differential caused by the devaluation of the Sucre.
However, due to the suspension of the international capital inflows, the aggravation of the balance of payments crisis and the quick depreciation of the currency, in June 1983 the Monetary Board authorized the refinancing of the private external debt to avoid bankruptcies and to recover the stability of the financial sector and of the exchange rate. This mechanism comprised three alternatives for private sector debtors, including the possibility for these debtors to exchange their USD-denominated liabilities for Sucre-denominated liabilities with the BCE. The latter were denominated “Stabilization Loans, Alternatives A, B and C”. The loans made by the BCE would have maturities equivalent to the ones the nation had been able to agree with the international banking community. At the same time, the government, through the BCE, became directly responsible for servicing the private sector debt with international banks. At the outset, in this scheme the BCE charged a fee for the foreign exchange risks it was undertaking from the moment of the conversion of the private sector debts into Sucres and until the repayment of the associated Stabilization Loans.
In October 1984, the Monetary Board changed the conditions for the repayment of the external debts that were converted into Sucres. Maturity was extended to 7 years, the interest rate was kept at 16 percent,4 the exchange rate was fixed at S/.100 per USD, and the grace period was extended from 1.5 years to 4.5 years. Thus, the BCE undertook all the foreign exchange risk for a long time, thereby granting an important subsidy to the private sector. Nearly USD 1,500 million of private sector external debt was converted into Sucres under these terms. All associated costs and losses were finally absorbed by the federal government. The overall debt was finally restructured under the Brady Plan and debt service resumed in 1995.
In June 1985, the BCE introduced a mechanism to sell foreign exchange futures to private sector debtors of direct foreign loans. This mechanism was based on a fixed quotation equal to the one prevailing in the official market at the date of the agreement, plus an exchange risk commission of a maximum of 38 Sucres per USD.
Neither in this scheme, nor in those that were implemented for the refinancing of the private sector’s external debt, financial institutions’ shareholders shared the corresponding costs.
4 At the time, market rates were above 28 percent.
4 Ecuador Report December 2002
Table 2: BCE’s Conversion of Private Sector Obligations (in USD)
1986 1987 1988 Face value of converted external debt 13,338,711 89,713,093 251,169,229 Secondary market value of the external debt 8,803,549 39,742,900 83,542,574 Subsidy 4,535,162 49,970,193 167,626,655 Source: BCE.
By mid 1987, a structural adjustment program for the financial sector was implemented with the following objectives:
· To reorganize and strengthen the financial sector.
· To reduce the financial institutions’ dependence on the BCE, by restricting the rediscount lines available for private banks
· To improve the conditions for capital markets.
In August 1988, the Monetary Board repealed in all its parts the Resolutions linked to the acquisition of special accounts in foreign currencies by the BCE and banned the acquisition of such accounts with the purpose of paying the liabilities held by private banks.
1.3.2 Financial System during the Nineties
During the past ten years, the Ecuadorian financial system has gone through a significant transition and change period. The banking sector has kept a growing pace, while finance companies (sociedades financieras) have decreased substantially.
In 1992, in continuation of the corrective program for the financial system, a new policy was implemented to achieve five additional targets:
· Promoting greater efficiency and competition in the financial market.
· Improving and strengthening the supervision of financial institutions.
· Fostering mechanisms to provide incentives for the mobilization of medium and long-term resources.
· Developing financial instruments to facilitate the transmission of internal savings to productive investments.
· Expanding access to credit and to other financial services.
The Monetary Regime and State Bank Law (Ley de Régimen Monetario y Banco del Estado) and the Banks’ General Law (Ley General de Bancos) were reformed in June 1992 and May 1994, respectively,
5 Ecuador Report December 2002
to promote the dynamism and soundness of the Ecuadorian financial entities. With this new legal framework, the country experienced a substantial growth in terms of the number of financial intermediaries, which in turn increased competition in banking and financial intermediation services.
A new Financial Sector Institutions General Law (LGISF) was enacted in May of 1994, replacing the Banks’ General Law of 1927. The older law had been used together with a series of regulations and other legal dispositions, and these turned insufficient for adequately regulating the financial system in light of the new economic conditions in the country and the world. The LGISF aims at promoting a competitive and efficient financial system that is capable of creating and developing those financial instruments and services that are necessary to enhance internal savings and to efficiently channel those resources towards productive activities and investment. Moreover, it aims at transforming the overall structure of the sector by promoting the creation of multiple banks and financial groups, and by benefiting from the economies of scale and economies of scope to better face globalization both at the domestic and international levels.
The economic and exchange rate stability experienced between 1992 and 1994 encouraged banking deposits denominated in Sucres, which in turn gave an impulse to internal credit. However, the increased availability of resources was not beneficial in that financial intermediaries, in order to increase their market share, started granting loans to new and unknown clients without the proper risk analysis. In consequence, asset quality heavily deteriorated. The mismatching of assets and liabilities also increased the exposure of the financial system to foreign exchange, liquidity and interest rate risks. Those institutions deemed as small and vulnerable by market participants started facing difficulties to access private funding and in many cases they were forced to recur to the liquidity facilities provided by the BCE.
In the following years, the financial system did not find a structural solution for its problems. New events and situations, such as the high volatility in the price of the Ecuadorian oil exports, increasing fiscal deficits, inflationary problems and others were major obstacles in this regard. Moreover, the lack of economic growth compelled the authorities to focus economic policies on this latter problem, leaving behind the solutions for the financial sector.
As a consequence, in 1998 the financial sector finally went into a severe crisis triggered by the bankruptcy and shut down of two banks. The Asian and Russian crises of that year summed up with the problems the sector had been accumulating since 1995. A heavy demand of USD by the economic agents produced a significant rise in interest rates applicable to the liquidity facilities the BCE was providing through its money desk. Many institutions were forced to recur to these facilities as foreign financial institutions had closed funding alternatives for domestic banks. As a result, the substantial increase in the credit of the BCE turned into a major monetary expansion.
Facing the possibility of a major financial collapse, in March 1999 Ecuadorian authorities declared a banking holiday in which the maturities of all customer deposits in domestic banks and their corresponding offshore subsidiaries were rescheduled to one year. The same policy was applied to savings that were invested in mutual funds. In the meanwhile, the authorities, in an attempt to restore the confidence of the public, hired international audit firms to study what the real situation of the banking system was.
6 Ecuador Report December 2002
In light of the continuing lack of confidence in the banking sector and in the overall economic policies, at the beginning of 2000 the National Government took the decision of fully dollarizing the Ecuadorian economy.
1.4 CAPITAL MARKETS
In order to foster the development of the capital market, in May 1993 the National Government published the Securities Market Law (Ley de Mercado de Valores). The issuance of the SML fostered the creation of brokerage houses (casas de valores), which are authorized and supervised by the Superintendence of Companies (Superintendencia de Compañías). The SML also allows banks to create subsidiaries that may act as brokerage houses.
The SML establishes the regulatory framework for both the organized exchange and the over-the- counter (OTC ) segments of the securities market, as well as for stock exchanges, industry associations, brokerage houses, mutual funds management firms, central securities depositories (CSDs) and risk rating firms. It also regulates the trading of debt instruments and equities, the investments of the public sector in the securities markets, securitization, securities issuances, related companies, responsibilities, violations, sanctions and a sector-specific tax regime.
The SML states that the regulatory body of the securities market is the National Securities Council (Consejo Nacional de Valores, CNV), which is charged with establishing the general policies for the securities market and its functioning.5 The Superintendence of Companies is the agency in charge of executing the general policies issued by the CNV.6 Thus, the Superintendence of Companies and the Superintendence of Banks and Insurance, within their corresponding statutory responsibilities, are the regulatory agencies of securities market participants.
During the first two years of formally operating (1993-1994), the securities market was clearly dominated by equities due to the privatization and subsequent listing of several public sector firms. In 1995, however, the decline in share prices and the decision to stop new privatizations started to reverse the latter trend, thereby fostering the dominance of debt instruments.
In July 1998, the SML was reformed with the following purposes:
· Increasing market transparency and investor protection.
· Providing a legal framework for the creation and operation of new mechanisms and instruments to foster the development of the securities market (e.g., securitization, mercantile trusts, etc.).
· Bringing to the country and the national market new financial mechanisms that, by enhancing the liquidity of financial instruments, could bring more dynamism to social sectors such as construction, communications, health, etc.
5 Articles 5 and 9 of the SML of 1993. 6 Article 10 of the SML of 1993.
7 Ecuador Report December 2002
Notwithstanding the new SML and the dollarization of the economy, the securities market has not yet regained a growing path. On the contrary, total traded value in the domestic securities market declined from USD 5,346 million in 1999 to USD 1,682 million in 2002.
At present, nearly 44 percent of the total traded value belongs to short-term debt securities issued by the public sector, mainly Government Bonds (Bonos del Estado) and Treasury Certificates (Certificados del Tesoro, CETES). Private debt securities represent nearly 55 percent of total traded value and equities the remaining 1 percent. As of December 2002, the outstanding amount of Government Bonds and CETES was USD 2,466 million, of which CETES represented less than 1 percent.
Trading is held at two stock exchanges, the Quito Stock Exchange and the Guayaquil Stock Exchange. By the end of 2002, there were 32 brokerage houses operating in the country. Of this total, 17 were registered with the Quito Stock Exchange, 15 with the Guayaquil Stock Exchange and 17 with both. Approximately 80 percent of the brokerage houses are linked to a banking group.
1.5 MAJOR T RENDS IN PAYMENT SYSTEMS
Cash and cheques are the major means of making payments in Ecuador. The BCE operates the cheque clearinghouse and manages nearly 5,300 current accounts in its system. Besides financial institutions, all public sector institutions are obliged to hold their funds at the BCE.
Both large value payments as well as retail payments are channeled through the cheque clearing system. Cheque clearing and the physical exchange of documents are distributed in 17 zones selected on the basis of geographical distribution of banking infrastructure. Settlement is centralized in the headquarters of the BCE in Quito and its Guayaquil branch. The 17 zones send to one of these offices the result of the clearing session for settlement at the current accounts held in the BCE. Final settlement of the cheque clearinghouse occurs at 1:30 p.m. of T+1, being “T” the day in which cheques were presented for collection at banking branches.
Besides the cheque clearinghouse, the BCE operates other current account funds transfer systems: i) manual “window” facilities; ii) a proprietary SWIFT system; and, iii) a partially automated facility known as “diskette”, in which the information associated to a payment is captured by the paying party in a magnetic device which then is sent to the BCE for processing. All together, these mechanisms process a daily average of 1,293 transactions for an approximate value of USD 91 million, which represents 84 percent of the amount settled each day at the cheque clearinghouse.
The SWIFT closed users group system is the most significant system with 330 transactions per day representing nearly USD 48 million, on average. Although the BCE has developed an interface between this SWIFT-based system and its current accounts system, transactions are not settled on real-time but rather on specific cut-off times throughout the day.
The window facility processes 400 transactions on a regular day for a total value of USD 35 million. This facility entails the use of paper-based documents known as “papeletas”, a paper form containing
8 Ecuador Report December 2002
standard payment instructions. Processing is fully manual and the transactions are settled on a gross basis as they arrive to the BCE’s premises.
The “diskette” facility is mainly used by public sector institutions. The information these institutions enter into a diskette does not allow for straight through processing (STP). Once the diskette is loaded into the current accounts system of the BCE, system operators must perform a series of manual procedures to complete settlement. Nearly 50 transactions of this type are processed every day by the BCE.
As regards retail payment instruments, payments with cards are common in urban areas although the card base is relatively small (16 cards for every 100 inhabitants). Many institutions are involved in the development of innovative payment products such as e-money. Some domestic banks are already providing home banking services for their clients.
Three major automated teller machine (ATM) networks exist within the country and are interoperable. The combined network comprises 819 of a total of approximately 840 ATMs in the country. These networks as well as several other retail systems such as the electronic funds transfers at the point of sale (EFTPOS) system settle their transactions at the BCE.
Banred is a private sector firm that provides transaction processing and clearing services for one ATM network. It also provides a variety of payment services to its members, including tax collections for government agencies and interconnection facilities through which the government may make payments through the network’s member banks.
The BCE is playing a major role in reforming the payments system in Ecuador and a set of new systems have been or will be launched shortly. These include:
· A real-time gross settlement (RTGS) system.
· A multilateral net interbank clearance and settlement system.
· An electronic clearing and settlement system for retail payments.
· A new system for private ACHs to settle their balances in the current accounts their members hold at the BCE.
· An interbank bilateral credit lines system through which banks may grant credit to each other for any of the systems operated by the BCE.
· Improving the custody services currently being provided by the BCE to foster the settlement of securities transactions on a delivery-versus-payment (DVP) basis.
The main goal of the reform effort is the reduction of the dependency on cash and cheques for retail and large value payments. More generally, the reform aims at improving the safety and efficiency of the payment services the BCE provides.
9 Ecuador Report December 2002
1.6 MAJOR TRENDS IN SECURITIES CLEARANCE AND SETTLEMENT SYSTEMS
The SML includes the legal framework for securities clearance and settlement in its article 69 (“Of the Nature, Authorization and Operational Requirements), Title XIII (“About Central Securities Depositories for Securities Clearance and Settlement”). This law states that private companies may be created, with the authorization and under the ongoing supervision of the Superintendence of Companies, to receive in deposit the securities registered in the Securities Market Registry (Registro del Mercado de Valores, RMV) for custody and safeguard, to offer settlement and book entry transfer services of these securities and to act as a securities clearinghouse.
DECEVALE S.A. is the only CSD approved by the Superintendence of Companies. It was created in 1994 by the two stock exchanges and some other financial institutions. The Superintendence of Companies issued its regulations, as it is not considered a self-regulatory organization. Since its incorporation, however, it has only performed the custody of the dematerialized securities issued by the National Finance Corporation (Corporación Financiera Nacional, CFN). These securities represent less than 1 percent of total outstanding securities in the market.
The BCE is currently the main central custodian for public and private sector securities.7 It is the custodian for approximately 75 percent of the outstanding Government Bonds and 25 percent of the CETES. The rest remain in custody with private sector institutions or with the investors themselves. The government issues securities through a global note or jumbo certificate that is sent to the BCE for custody, and once the securities are auctioned it produces individual certificates for the amount actually placed.
At the stock exchanges, securities clearance and settlement is performed by the exchanges themselves by means of the delivery of physical certificates for the securities leg and transfers on the current accounts the exchanges hold at the BCE for the cash leg. Regular settlement may occur in the same day the transaction was made (T) up to three days later (T+3), depending of the type of securities being traded. Once the exchanges receive the physical certificates from the investors and verify their authenticity, they instruct the BCE to make the corresponding debits and credits in the current accounts of the banks acting as settlement agents for the participating brokerage houses. If settlement of the cash leg is effected, then the exchanges deliver the securities to the buyer. Both stock exchanges have created a general-purpose fund that may be used to cover failures in the settlement of the cash leg of securities transactions. As per the securities leg, the Guayaquil Stock Exchange has a buy-in procedure while the Quito Stock Exchange only compensates the fulfilling party by reimbursing to it the fees associated with the failed transaction.
As per the securities under custody at the BCE, at present ownership transfers can only occur on a free-of-payment basis, as there is no interconnection between the custody system and the current accounts system of the BCE.
7 The BCE is currently developing a new system called Securities Custody System (Sistema de Custodia de Títulos Valores, SCTV). The design of this system will also allow the handling of equities.
10 Ecuador Report December 2002
The BCE recognizes that in order to enhance the efficiency and safety of the securities clearance and settlement system, as well as to provide participants with effective mechanisms to facilitate liquidity management, it needs to develop automated clearing and settlement services for all securities transactions to be settled on a DVP basis. For this purpose, the BCE is currently developing the Securities Custody System (Sistema de Custodia de Títulos Valores, SCTV), which will enable transactions with securities under the custody of the BCE to be settled on a DVP basis by means of automated interfaces between the SCTV and the upcoming RTGS system. The BCE is expecting to release the SCTV in May 2003.
11 Ecuador Report December 2002
2 INSTITUTIONAL ASPECTS
2.1 GENERAL LEGAL FRAMEWORK
2.1.1 Payments
The Monetary Regime and State Bank Law (Ley de Régimen Monetario y Banco del Estado) states that the BCE is the official depository of public sector funds and of the banking reserve requirements. Thus, the BCE is the financial and fiduciary agent for the government and it is responsible for managing the current accounts held by financial and non-financial entities. In this role, it must provide all the necessary facilities for the proper, timely and safe execution of the transactions over these accounts and at the same time it must control the overall risks in the system.
The Financial Sector Institutions General Law (LGISF) of 1994 and its reforms state the requirements for the creation and functioning of the institutions comprising the national financial system and the types of operations they are allowed to perform. It also establishes the functions of the Superintendence of Banks and Insurance as a technical and autonomous agency charged with the supervision and control of public and private financial institutions.
The Regulations Code of the BCE sets and regulates its operational responsibilities towards the National Clearing System, the reserve requirement, interbank transactions, public sector current accounts and conventional payment instruments. There are no legal or regulatory dispositions dealing with the oversight powers of the central bank over payment systems.
Within the legal framework for payments, it is also worth mentioning the Cheque Law of 1975, and the regulations and manuals issued by the Superintendence of Banks and Insurance.
2.1.2 Securities
The 1998 SML and the regulations stemming from it set the rules for the issuance, placement, trading and registration of securities. For legal purposes, a security is defined as the right or set or rights, mainly of an economic nature, that are negotiable in the securities market. Among others, this definition would include shares, obligations, bonds, certificates, mutual funds quotas, futures, options, other securities stemming from securitization processes and any others that the CNV defines as securities.8
In the legal definition, the rights incorporated in negotiable securities are specific and autonomous. Therefore, holders of securities are entitled to these explicit rights only. Any limitation to the free negotiation and/or circulation of the securities that is not established by the law does not have any legal effects and it is deemed as inexistent.
The scope of application of the SML covers the whole securities market, including transactions in organized exchanges and in the OTC market, stock exchanges themselves, industry associations,
8 Article 2 of the SML.
12 Ecuador Report December 2002
brokerage houses, mutual funds management firms, trusts, risk rating agencies, issuers, external auditors and all other entities participating in the securities market.
2.1.3 Derivatives
At present financial derivatives are not being traded in Ecuador.
2.1.4 Specific Legal Issues Related to Clearance and Settlement
2.1.4.1 Netting
Neither bilateral netting nor multilateral netting are explicitly recognized in the Ecuadorian laws. The BCE is currently developing a regulation for netting. However it is uncertain whether such this regulation would be recognized by a court of law in, for example, a bankruptcy proceeding.
2.1.4.2 Zero Hour Rule and Settlement Finality
The Cheque Law explicitly states the timing of settlement finality for the cheque clearinghouse. However, there is no such a definition for other payment systems.
On the other hand, in the Ecuadorian laws there are no explicit references to the so-called zero hour rule, which voids the transactions already settled and considered final during the day an entity is declared in bankruptcy. For this reason, neither the judicial courts nor the intervening authority can take retroactive actions over transactions already executed, except for cases in which fraud can be demonstrated.
2.1.4.3 Digital Documents and Signatures
In April 2002, the Ecuadorian Congress enacted a law on electronic transfers and signatures, Law No. 67. This Law, whose specific name is “Electronic Commerce, Signatures and Data Messages Law” (Ley de Comercio Electrónico, Firmas y Mensajes de Datos) regulates data messages, digital signatures, certification services, electronic and telematic hiring, the provision of electronic services through information networks and the protection of the users of these systems and services.
Data messages have the same legal validity as physical documents. The information contained in any of these messages, either directly or in an indirect manner in the form on an attachment that is accessible through a direct electronic link, is also valid for all legal purposes.
Digital signatures are also equally valid as hand-written signatures, and in consequence they may be used as evidence in judicial trials.
2.1.4.4 Novation
There are no dispositions regarding novation in the Ecuadorian legal framework.
13 Ecuador Report December 2002
2.2 THE ROLE OF FINANCIAL INSTITUTIONS: PAYMENTS
2.2.1 The Banking Sector
Banks are the main agents in the payments system. According to the LGISF, the purpose of banks is to carry out financial intermediation functions in the short, medium and long term. Some of the operations they are authorized to perform in connection with the payments system are the following:
· Receiving sight deposits from the public. These deposits may be withdrawn on demand through cheques or other payment instruments and means.
· Receiving time deposits, collections, payments and funds transfers.
· Issuing bank drafts drawn on their own offices or on other domestic and foreign financial institutions.
· Acting as issuers of credit, debit, and other payment cards and as operators of payment cards systems.
Banks are entitled to participate in the cheque clearinghouse by holding a current account at the BCE. All banks are supervised by the Superintendence of Banks and Insurance (Superintendencia de Bancos y Seguros, SBS).
As of December 2002, there were 25 banks in operation. Out of this number, there were 20 private domestic banks, 3 public banks and 2 foreign banks (Citibank and Lloyds Bank). As of the same date, there were 25 head offices, 136 branches, 486 agencies (i.e. limited purpose branches), 165 service windows, 840 ATMs and nearly 3 million accounts. Deposits are concentrated in the five largest banks of the country, which together represent a 70 percent share of the system. The latter share increases to 88 percent when the ten largest banks are considered (refer to the Series B Tables in the Statistical Appendix for more details on the structure of the Ecuadorian banking system).
The National Development Bank (Banco Nacional de Fomento, BNF) is an autonomous public sector financial institution whose purpose is to stimulate and accelerate the social and economic development of the country by providing enhanced credit facilities to sectors such as agriculture, craftsmanship, small industry, among others. Moreover, in those cities where the BCE has no physical presence, the BNF, through its branch network, is the official depository of the tax, municipal, judicial and all other public sector funds. The BNF may also operate clearinghouses if designated by the BCE.
2.2.2 Other Institutions that Provide Payment and Settlement Services
2.2.2.1 Specialized subsidiaries and other firms supporting the banking business
There are some specific firms that support and complement the banking business, although they are not authorized to perform financial intermediation activities on their own. In other words, these
14 Ecuador Report December 2002
are firms whose sole purpose is to provide services that facilitate banking activities for financial institutions, or through which the latter may perform some activities with the overall public, except for deposit taking. In this regard, it is worth mentioning the following firms that have a direct role in the provision of payment services:
Banred
Banred was created in 1994 with the merger of two ATM networks, Redbanc S.A. and Multired Cía Ltda. Thus, Banred initiated its operations as an interbank ATM network, although at present it offers a variety of electronic funds transfer services and information services to financial institutions and to the government. At present, 18 banks, the BCE and several public sector entities are interconnected through Banred.
Some of the most relevant services offered by Banred are the following:
· An ATM network. In 1994, ATM managed a network of 255 ATMs in 27 cities throughout the country. At present, it manages more than 800 ATMs in 70 cities.
· The “Interconnection Service” with the BCE offers the country’s financial entities the possibility of communicating with this institution to carry out foreign trade transactions. Through this service, financial institutions designated by the BCE as its correspondents process inquiry and document authorization transactions related to imports and exports. Currently, there are 15 banks offering this service.
· Since July 1998, Banred participates as the connecting interface among the national customs service and the banks Pichincha, Guayaquil, Austro, Produbanco and Bolivariano.
· Through Banred, member banks currently transfer the funds associated with a government subsidy known as “bono solidario”.9 Payments associated with this subsidy amount to approximately USD 200 million per month.
Servipagos
This is an auxiliary company of the financial system that began operating in April 1998. The banks Produbanco and Banco Popular10 currently own 67 and 33 percent, respectively, of Servipagos. Servipagos is currently in the process of opening its equity to other four banks.
Servipagos provides enhanced collection and payment solutions through the telephone, numerous agencies, the Internet and other distribution channels. By gathering remote clients in low cost agencies, it is able to reduce transaction costs both for the economic agents and for financial institutions. Servipagos offers its services through an on-line connection with the host of the
9 This is a cash subsidy that the government gives to the less-favored people of the Nation. 10 Produbanco is currently undergoing a reorganization process conducted by the Deposit Insurance Agency (AGD). The AGD is selling the share of Produbanco in Servipagos.
15 Ecuador Report December 2002
financial institutions.11 Thus, Servipagos’ service windows actually function as tellers for the firms that hire its services. At present, it has a network of 30 agencies in Quito and Guayaquil and a transactional call center with nationwide coverage. Some of its major clients are banks, telecommunication and utilities firms such as Produbanco, Citibank, Proinco, Andinatel, EMAP, Pacifictel, Emelec, Ecapag, Emelgur and many other commercial and industrial firms.
Servipagos serves the public all 365 days of the year from 8:00 a.m. to 8:00 p.m. from Monday to Saturday, and from 10:00 a.m. to 4:00 p.m. on Sundays and holidays.
Unicredit Mastercard
Unicredit Mastercard processes the transactions that are made in the Cirrus ATM network. The firm also owns Datafast, which processes the payments made with Mastercard credit and debit card. Mastercard payment cards have a 90 percent market share in Ecuador, both in terms of volume and value of transactions. Datafast has approximately 10,000 affiliated merchants with 3,000 EFTPOS (again, nearly 90 percent of the country’s total). Only Mastercard cards may be processed at these terminals.
Remittances Agencies
Delgado Travel, Money Gram, Western Union and some other firms provide cash transfer services to Ecuador for Ecuadorians residing in the USA and in some European countries. Delgado Travel is an Ecuadorian firm with an extensive branch network in Ecuador and in those foreign cities with a significant number of Ecuadorian immigrants. Thus, it is able to offer a front-end service for its customers. All other firms have a local partner like a bank or some retail store.
According to BCE estimates, in 2002 family remittances amounted to USD 1,397 million. During the last five years, the value of family remittances has been growing nearly 20 percent per year.
2.2.2.2 Finance Companies or Investment and Development Corporations
These firms may perform most of the functions and activities authorized to commercial banks. They are only forbidden to take sight deposits from the public and to grant loans on a current account. As of December 2002, there were 10 of these firms operating in the country with a total of 53 branches (10 main offices or headquarters, 19 full branches, 20 agencies and 2 extension windows).
2.2.2.3 Savings and Loans Mutual Associations for Housing
These institutions may perform all the activities included in article 51 of the LGISF (i.e., activities authorized to banks), with the exception of securities trading, foreign exchange trading either on their own account or on behalf of third parties, repo transactions, issuance or negotiation of travelers’
11 Through the transactional switch of Banred, which allows it to send the transactions that are processed in physical branches to the authorizing bank. It then receives the answer through the same means.
16 Ecuador Report December 2002
cheques or underwriting of share or debt issuances. As of October 2002, there were 6 of these entities operating in the country with a total of 62 offices (6 headquarters, 1 full branch, 43 agencies and 11 extension windows).
2.2.2.4 Savings and Loans Cooperatives that perform financial intermediation activities with the public
Savings and loans cooperatives may perform all the activities described in paragraph 2.2.2.3 above. As of October 2002, there were 27 cooperatives under the supervision of the SBS with a total of 95 offices (27 headquarters, 22 full branches, 41 agencies and 5 extension windows) and 5 ATMs.
2.3 THE ROLE OF FINANCIAL INSTITUTIONS: SECURITIES
2.3.1 Securities Market Participants
Private and public issuers: open stock and “mixed economy”12 firms are entitled to publicly offer shares in primary issue.13 On the other hand, open stock, limited responsibility, mixed economy and other firms may publicly offer debt securities in the primary market. Mutual funds management firms may publicly offer mutual funds to be represented in participation units or quotas.
Institutional investors: the following are considered institutional investors: public and private banks and finance companies, savings and loans mutual associations for housing, savings and loans cooperatives that perform financial intermediation activities with the public, insurance and reinsurance firms, mutual funds management firms, trusts and any other person or firm that the CNV deems as performing relevant activities in the securities market. Institutional investors operate in stock exchanges through brokerage houses and in the OTC market through “operators” (i.e., dealers). Institutional investors must provide the CNV all the information regarding their securities transactions.
Stock exchanges: according to the SML, stock exchanges are non-for-profit corporations that must be authorized and supervised by the Superintendence of Companies.14 Their purpose is to provide their members with all the mechanisms and services that are necessary to carry out securities trades.
Stock exchanges must have a minimum net worth of 300,000 Constant Value Units (Unidades de Valor Constante, UVCs)15 and at least 10 members, which necessarily must be brokerage houses authorized by the Superintendence of Companies. The net worth of a stock exchange is divided
12 Firms whose shareholders are both private sector individuals or other firms and the public sector. 13 According to article 4 of the Regulation for Securities Public Offerings, shares may be offered to the public by newly incorporated firms to raise capital or by the already existing firms that want to increase their capital base. 14 Article 44, Title X of the SML. 15 At the moment this Report was prepared, an UVC was equal to USD 2.6289. Therefore, the minimum net worth of stock exchanges was approximately USD 800,000.
17 Ecuador Report December 2002
into negotiable quotas of identical value. Brokerage houses are not allowed to hold more than one quota in a single stock exchange.
Stock exchanges are governed by a Board of Directors that is elected by the assembly. The Board of Directors is responsible for fostering the development of the securities market, setting the institutional policies, issuing self-regulatory rules and sanctioning its members whenever they fail to comply with the laws, rules and policies.
Intermediation agents: only brokerage houses are considered securities intermediaries. Brokerage houses are open stock corporations authorized and supervised by the Superintendence of Companies. They are entitled to hold transactions either at organized exchanges or at the OTC market, on their own behalf or on behalf of third parties. They must have a minimum net worth of 40,000 UVCs.16 They must comply with all the parameters, indexes, relations and other solvency and prudential regulations issued by the CNV.
The financial groups and other private financial institutions may create a brokerage house as long as the latter is constituted as an independent subsidiary of the entity heading the financial group. The LGISF sets limits to ownership shares.
Brokerage houses are mainly entitled to perform the following activities:
· Manage securities portfolios or third party cash accounts to invest them in securities market instruments following the instructions of their clients.
· Buy and sell securities on their own behalf.
· Underwrite operations with public and private sector institutions and with mutual funds.
· Offer consultancy and information services on securities intermediation, securities and finance, securities portfolios, acquisitions, mergers, spin-offs and other securities market transactions. Moreover, promote financing sources for individuals or firms and for public sector entities.
· Lend funds out of their own resources to clients for securities purchasing purposes. Only those securities registered in the RMV are eligible for this purpose and the brokerage houses must hold these securities until their clients deliver the corresponding funds.
· Perform price stabilization activities only at the moment of a primary securities issue.
· Carry out repo transactions as established by the CNV rules.
· Perform market-marking activities with shares listed in a stock exchange.
16 Approximately USD 105,156.
18 Ecuador Report December 2002
On the other hand, carrying out financial intermediation and deposit-taking activities, performing those activities belonging to mutual funds management firms and trusts, trading securities not registered at the RMV, guaranteeing returns on investments and taking on client losses, among others, are prohibited activities for brokerage houses.
The National Finance Corporation (CFN): the CFN is an autonomous public financial institution authorized to participate actively in new investment areas and capital markets. As per the securities markets, its most important functions are the following:
· Grant loans, cash advances, discounts, rediscounts and other credit facilities for productive and services activities through the eligible financial institutions.
· Foster the development of financial and non-financial products that support the development of the exporting sector.
· Grant financing to foreign importers of Ecuadorian goods and services by opening credit lines to foreign banks.
· Collect resources in the capital market through the issuance of securities in foreign currency or in UVCs, obligations, bonds, fiduciary certificates and others. Funds collected through these means are then made available to those sectors that are considered as a priority for the national development.
· Securitize its own assets or those of third parties.
· Buy and sell securities issued by public and private sector institutions.
· Act as a financial and investment agent for public sector entities and to provide civil or commercial fiduciary services to the National Government and other institutions.
The CFN has its headquarters in Quito, a main branch in Guayaquil and nine regional offices located in the major cities of the country.
2.3.2 Exchanges
In Ecuador the securities market comprises the “organized exchange” segment (i.e., exchanges) and the Over-the-Counter (OTC). The organized segment is composed of the sell/ buy offers and the trades with securities registered in the RMV and listed in the stock exchanges. Transactions are performed by authorized intermediation agents (i.e., brokerage houses). The OTC market, on the other hand, comprises transactions performed by authorized intermediation agents and institutional investors with securities registered in the RMV. Those transactions that are made directly between the final buyer and seller are considered of a “private market” nature.
At present, there are two stock exchanges, the Guayaquil Stock Exchange (Bolsa de Valores de Guayaquil, BVG) and the Quito Stock Exchange (Bolsa de Valores de Quito, BVQ).
19 Ecuador Report December 2002
Both stock exchanges quote the ECUINDEX, the main stock market price index of Ecuador.
2.3.3 Securities Clearance and Settlement Institutions
Central securities depositories (CSDs) are open stock companies authorized by and under the control of the Superintendence of Companies. Their purpose is to receive in deposit the securities registered in the RMV for custody and safeguard, to offer settlement and book entry transfer services of these securities and to act as a securities clearinghouse.
To constitute a CSD, a minimum initial paid-in capital of UVCs 100,000 is required. This capital must be divided into nominative shares that may be the property of stock exchanges, brokerage houses, other financial institutions, eligible public sector institutions, issuers registered in the RMV and other persons and firms authorized by the CNV. The CFN, when authorized by the CNV, may become a promoter or shareholder of CSDs.
DECEVALE is the only CSD approved by the Superintendence of Companies. It was created in 1994 by the two stock exchanges and some other financial institutions. Since it began operations it has only performed the custody of a single dematerialized securities issue and it has not been able to implement the full fledge of activities of a CSD.
On the other hand, the BCE has developed a system for the custody of government and BCE securities and for some obligations issued by private entities. So far, this system only allows the transfer of securities between the custody and pledge accounts of the same participant or free-of-payment securities transfers between the custody accounts of two participants.
2.4 MARKET STRUCTURE AND REGULATION
The regulators of the financial system are the BCE, the SBS, the CNV and the Superintendence of Companies. Figure 1 shows the distribution of the regulatory and supervisory responsibilities among the Ecuadorian authorities.
2.5 THE ROLE OF THE CENTRAL BANK
2.5.1 Monetary Policy and Other Functions
The Constitution of Ecuador and the Monetary Regime and Government Bank Law state that the BCE is the entity responsible for the monetary, financial and foreign exchange policies in the country. However, since the adoption of the USD as the national currency in 2000 the BCE has abandoned its monetary policy functions and currently its main duty is the implementation of the new monetary regime of the nation, aiming at preserving its sustainability in the long run.
2.5.2 Involvement in the Payments System
The BCE is the official depository of public sector funds and of the banking reserve requirements. In this role, it acts as the administrator of the current accounts that the financial institutions and others hold with it.
20 Ecuador Report December 2002
Figure 1: Market Structure and Regulation
AUTHORITIES
Board of Directors of the BCE BCE Banking Board SBS CNV Superintendence of Companies
PRIVATE CONTROL ENTITIES
Risk Rating Agencies External Auditors
LAWS AND REGULATIONS
ISSUERS INTERMEDIARIES INSTITUTIONAL INVESTOR -Banks and Financial -Banks and Financial Institutions Institutions -Brokerage Houses -Banks and Financial Institutions -Open stock and Mixed -Insurance and Reinsurance Economy Firms SITES Firms -Limited Liability Firms -Firms acting as Guarantors -Mutual Funds -Stock exchanges -Mutual Funds Managing -The State (BCE, CFN, -OTC Market Firms and Trust Ministry of Finance) -Other Institutions ENTITIES SUPPORTING (IESS; ISFA, Foreing INTERMEDITATION institutions, etc.)
-Decevale
Source: Own elaboration.
Thus, the BCE is the regulator, operator and settlement agent of the various mechanisms that are available to transfer funds between such current accounts, like the cheque clearinghouse, the SWIFT closed user groups system and the “window” and the “diskette” facilities.
In the Monetary Regime and Government Bank Law there are no explicit dispositions as per the oversight powers of the central bank over the payment systems operated by the private sector. For retail payment systems operated by private institutions, the BCE only acts as settlement agent, as it is also the case for the cash leg of securities market transactions.
In recent years, the BCE has been undertaking a major reform of the Nation’s payment systems in order to increase their efficiency and reduce the new set of systemic risks that are present in the context of the dollarization regime.
21 Ecuador Report December 2002
2.6 THE ROLE OF THE BANKING SUPERVISORY AUTHORITY
The first banking supervisory authority appeared in 1914 with the creation of the Banking Fiscal Marshall, whose mission was to oversee the issuance and payment of privately issued bank notes. In 1927, the Banking Law was enacted and gave origin to the Superintendence of Banks.
This institution is now called the Superintendence of Banks and Insurance (Superintendencia de Bancos y Seguros, SBS) and its duties are established in the LGISF of 1994. The SBS is a technical organ with administrative, economic and financial autonomy. It is charged with the supervision and control of public and private financial institutions, as well as of the insurance and reinsurance firms established in the Constitution and in the laws.
The governing body of the SBS is the Banking Board, integrated by the Superintendent of the SBS, who also chairs it, the General Manager of the BCE, two other members designated by the nation’s President and a fifth member that is designated by the other four. Figure 2 shows the organizational structure of the SBS.
Figure 2: Organizational Structure of the Superintendence of Banks and Insurance
Banking Board
Superintendence of Banks and Insurance
General Deputy
National Corporate Financial Institutions Insurance National Services National Deputy Deputy Department
National Strategy and Management Department National Risk National Legal Management Department National Technological Department Resources Department National Studies and Statistics Social Security Department Department
Source: SBS.
22 Ecuador Report December 2002
2.6.1 Supervision of Financial Entities
The SBS has the following powers as per the financial institutions under its supervision and control:
· Approve the institutions’ bylaws and any changes thereof.
· Look after the stability, soundness and correct functioning of the institutions and watch over their compliance with the relevant rules, regulations and laws.
· Establish preventive supervision programs and perform unrestricted inspections to verify the accurateness of the information the institutions send the BCE.
· Establish and maintain a central credit risk information registry.
· Maintain a financial information center available to the overall public and establish the minimum parameters for implementing a system of uniform risk ratings for the supervised institutions.
· Require the supervised institutions to propose and then implement the corrective measures that are necessary. Moreover, it may impose administrative sanctions to the institutions, their directors, and managers and even to debtors if they fail to comply with the applicable rules and regulations.
· Initiate legal action, if applicable, against the directors and managers of supervised institutions.
2.6.2 Payments System Oversight
The LGISF does not state specific duties for the SBS as per the oversight of payment systems. Article 180 of this law only states that the SBS will verify the accurateness of the information the financial institutions provide to the BCE upon request of the latter. It also gives unlimited powers to the SBS to become fully acquainted with the modus operandi of all the businesses of supervised institutions.
2.6.3 Anti-Money Laundering Measures
The Drug Enforcement Law (Ley de Sustancias Estupefacientes y Psicotrópicas), its Regulation for implementation and subsequent reforms are the key drivers of the efforts against money laundering and other crimes associated with illegal drug traffic.
The National Drug Control Council (Consejo Nacional de Control de Sustancias Estupefacientes y Psicotrópicas, CONSEP) is the coordinator and operator of the national strategy against money laundering. On the other hand, the General Attorney issues the compulsory regulations aiming at controlling money laundering.
There is already the regulation for the National Department for the Processing of Protected Information (Dirección Nacional de Procesamiento de Información Reservada, UPIR-DN). Once
23 Ecuador Report December 2002
this Department is created, it will collect information on financial transactions, actions, contracts and others, in accordance with the limits or amounts established for this purpose. Once this information is processed, analyzed and verified by the UPIR-DN, it will be sent to authorities such as the SBS and the Superintendence of Companies for further investigation, in order to determine the existence of any related criminal offenses.
2.7 THE ROLE OF THE DEPOSIT INSURANCE AGENCY
The Agencia de Garantías de Depósitos (AGD) is an autonomous public entity. Its governing body is a Board of Directors that comprises the Superintendent of the SBS, who also chairs it, the Minister of Economy and Finance, a member of the Board of Directors of the BCE and a citizens’ representative designated by the nation’s President.
The AGD guarantees the reimbursement of deposits and of the interests accrued as of the payment date, according to the following schedule.
· For the first year of the enactment of the AGD law, the AGD will guarantee 100 percent of the deposits of individuals and firms.
· For the second year, it will guarantee 50 percent of the deposits above USD 8,000 and a 100 percent of the deposits below that amount.
· For the third year, it will guarantee 25 percent of the deposits above USD 8,000 and a 100 percent of the deposits below that amount.
· From the fourth year on, it will only guarantee the deposits below the USD 8,000 threshold.
It is also worth mentioning that several types of deposit are excluded from any form of guarantee, including deposits of shareholders and managers of financial institutions. Moreover, debtors in arrears that also hold deposits that are guaranteed by the AGD will be reimbursed only for any positive amount that is left after the AGD performs a netting process of the corresponding amounts.
The AGD protection bears no cost for depositors. On the other hand, for financial institutions it has a differentiated cost, based on the risk ratings the SBS assigns monthly. Thus, financial institutions must pay an annual premium equal to 0.65 percent of the average deposits plus any risk premium as determined by the SBS rating.
2.8 THE ROLE OF THE SECURITIES R EGULATOR
2.8.1 National Securities Council
The Comisión Nacional de Valores (CNV) is charged with establishing the general policies for the securities market and with supervising its overall functioning. The CNV also issues the complementary rules and administrative resolutions that are necessary for the implementation of the SML.
24 Ecuador Report December 2002
The CNV was created in 1993 with the enactment of the SML of that same year. It is comprised by the Superintendent of Companies, who also chairs it, the Superintendent of the SBS, the Chairperson of the Board of Directors of the BCE, a representative of the nation’s President and three other members of the private sector designated by the nation’s President.
2.8.2 Superintendence of Companies
The Superintendence of Companies was created in 1964 with the enactment of the first Corporations Law, which established special rules for the creation of limited liability and mixed economy companies, among others.
In 1993, with the enactment of the SML, the Superintendence of Companies also becomes responsible for the application and administration of this law through its controlled body: Deputy Superintendence for Securities Markets (Intendencia del Mercado de Valores).
The Deputy Superintendence for Securities Markets is the organ in charge of applying the policies issued by the CNV. Thus, notwithstanding it functions under the umbrella of the Superintendence of Companies, its governing body is directly the CNV. Figure 3 shows the Organizational Structure of this Deputy Superintendence.
If the Superintendence of Companies takes action against an institution whose primary regulator is the SBS, then it will act through the latter institution or in a joint manner.
2.9 THE ROLE OF OTHER PRIVATE AND PUBLIC SECTOR ENTITIES
2.9.1 The Ministry of Economy and Finance
The Ministry of Economy and Finance is one of the major players in the payments system. Through the Budget Execution System of the BCE, the Ministry of Finance has been able to modernize the administration of the public finances by harmonizing the responsibilities and powers in managing public funds.
The Economy Department allots public budget resources from a Single Treasury Account to the current accounts that the public sector institutions hold at the BCE. The BCE then disperses the funds to eligible correspondent banks in order for public sector institutions to make their payments and any collections.
As regards securities, all issuances of bonds or other securities of the National Government or other public sector institutions, except for the BCE, are controlled solely by the Ministry of Economy and Finance. On the other hand, this must previously approve all securities issued by financial institutions.
The Ministry of Economy and Finance sends all documents it has received in connection with public sector issuances to the nation’s General Attorney and to the Board of Directors of the BCE, who must give an opinion within 15 days. Without these opinions the securities cannot be issued in the market place.
25 Ecuador Report December 2002
Figure 3: Organizational Structure of the Deputy Superintendence for Securities Markets of the Superintendence of Companies
SUPERINTENDENT OF COMPANIES NATIONAL SECURITIES COUNCIL (In its role as CNV Chairperson)
DEPUTY SUPERINTENDENCE FOR DEPUTY SUPERINTENDENCE FOR SECURITIES MARKETS (QUITO) SECURITIES MARKETS (GUAYAQUIL)
Securities Securities Intermediaries Intermediaries Market Registry Market Registry Office Office Office Office
Securities Issuers, Public Securities Issuers, Public Market Legal Offer and Rating Market Legal Offer and Rating Office Office Office Office
Securities Institutional Securities Institutional Market Studies Investors Market Advisor’s Investors and Promotion Office Office Office Office
Source: Own elaboration with information of the Superintendence of Companies.
All public sector issuances must include a clause by which a trust contract with the BCE is created in order for the latter to make subsequent interest and principal payments.
2.9.2 The Bankers’ Association
The Private Banks Association of Ecuador (Asociación de Bancos Privados del Ecuador, ABPE) is a non-for-profit industry association that was created in 1965 to defend the rights and interest of its members. It also provides several services to its members.
The ABPE holds regular meetings with the authorities and among its members. The Chairperson of the ABPE is a member of the Inter-institutional Payments System Committee, whose purpose is to approve the objective and scope of the programs for the improvement of the national payments system, to supervise the implementation time schedule and to watch over the fulfillment of the stated objectives, as well as the inter-institutional coordination.
26 Ecuador Report December 2002
2.9.3 Credit Reporting Systems
The SBS operates a credit reporting system know as the “Risks Central” (Central de Riesgos). The system, established in 1997, collects information on loans of all sizes and contains records on more than 1 million individuals and 15,200 firms. Information regarding the borrower’s status in the latest reported month is available to supervised financial institutions on line or in computer disks.
In 2002 the SBS issued a new regulation that enables development of private credit registries.17 The new regulation allows establishment of private credit bureaus and requires licensing of such bureaus by the SBS. It is envisaged that both positive and negative information will be shared among bank and non-bank creditors. This regulation also allows private sector operators to access de data at the Central de Riesgos. Even though no credit registry has been implemented so far, several major credit bureaus from the region are currently trying to tap the market including TransUnion, Equifax, Experian, Datacredito from Colombia and Dominican Republic, as well as the local company Multibureau.
17 Regulation Nro. JB-2002-516.
27 Ecuador Report December 2002
3 PAYMENT MEDIA USED BY NON-FINANCIAL ENTITIES
3.1 CASH
Since January 2000, the BCE has been exchanging the former national currency in circulation for USD. The exchange process was over by September 2002 and it encompassed 98.8 percent of the Sucres in circulation.
In order to maintain an adequate stock of coins for the normal functioning of the very low value transactions, the BCE hired two foreign manufacturers, the Casa de la Moneda of Mexico and the Royal Bank of Canada to produce USD 84.5 million in coins. In Ecuador these coins are of identical value to the coins issued by the USA.
Table 3: Status of the Exchange of Banknotes and Coins due to Dollarization (currency in circulation as of December 2001)
Banknotes Coins Denomination Units Denomination Units Units (coins (USD) (USD) (USD coins) issued by the BCE) 100 636,029 1 67 - 50 198,778 0.50 20,942 59,000,000 20 1,896,978 0.25 39,230 104,000,000 10 3,256,558 0.10 43,251 199,000,000 5 4,240,450 0.05 81,974 152,000,000 2 1,005 0.01 133,368 150,000,000 1 21,138,920 TOTAL 31,378,718 318,832 664,000,000 Source: BCE.
3.2 PAYMENT MEANS AND INSTRUMENTS OTHER THAN CASH
3.2.1 Cheques
In Ecuador, cheques are used for both large value and retail payments. In retail payments, only cash is more important than cheques as a payment instrument in terms of volume of transactions. Currently, nearly 134,000 interbank cheques are processed every day by the cheque clearinghouse operated by the BCE. The daily gross value of these cheques is approximately USD 109 million, which translates into an average value per cheque of USD 810.
Before dollarization, the BCE operated two cheque clearinghouses, one for Sucres and the other for USD. The Sucres-denominated cheque clearinghouse ceased operations by mid 2001 (see Table 4).
28 Ecuador Report December 2002
Table 4: Cheques Processed by the BCE
1998 1999 2000 2001 2002 Cheques denominated in Sucres (volume of transactions) 43,117,265 24,201,363 12,885,941 33,991 ... Cheques denominated in Sucres (value of transactions in USD million) 21,818 8,322 1,491 1 … Cheques denominated in USD (volume of transactions) 541,366 548,132 14,936,889 32,645,460 35,446,452 Cheques denominated in USD (value of transactions in USD million) 2,109 1,370 8,780 22,712 28,736 TOTAL VOLUME 43,658,631 24,759,495 27,822,830 32,679,451 35,446,452 TOTAL VALUE (in USD million) 23,927 9,692 10,271 22,713 28,736 Source: BCE.
At present, it takes 48 hours for final beneficiaries to receive funds in their accounts when paid with cheques. This is applicable to those living in cities where there is a clearing session. Cheque processing from other cities may take longer due to the additional time necessary for the presentation of the physical cheque in some clearinghouse. 3.2.2 Direct Credits/Debits
Payments through direct debits are not yet much common in Ecuador. Some banks offer their clients the service of pre-authorized charges to pay for services such as utilities (water, energy, telephone), cable TV or private school tuition. Both the payer and the payee must have an account at the same bank that offers this service.
As regards direct credit transactions, in August 2002 the BCE launched the Interbank Payment System (Sistema de Pago Interbancario, SPI) to facilitate interbank retail credit-type payments such as payrolls. The SPI allows the electronic transfer of funds from a current account in one bank to a current or savings account at another bank. The system is explicitly of a retail nature as it does not allow for transfers directly amongst banks and there is a USD 10,000 limit per transaction (see Table 5).
In the future, the BCE expects the SPI to become the vehicle through which debit-type payments may be channeled as well.
Table 5: Evolution of the SPI
Jul-2002 Aug-2002 Sep-2002 Oct-2002 Nov-2002 Dec-2002 Monthly transactions (actual figure) … 1 135 143,136 70,067 48,485 Monthly transactions (accrual of actual figures) … 1 136 143,272 213,339 261,824 Monthly transactions (estimated accrual figures) 25,000 52,500 82,750 116,025 152,628 192,890 Ratio of actual vs. estimated accrued figures 0.0% 0.0% 0.2% 123.5% 139.8% 135.7% Source: BCE.
29 Ecuador Report December 2002
3.2.3 Payment Cards
As of October 2002, there were approximately 836,000 credit cards in the country.18 Credit cards are regulated by the Regulation for the Creation and Functioning of Credit Card Firms19 and are supervised by the SBS.
There are also approximately 1,300,000 debit cards in circulation (approximately 1 card per every 10 inhabitants). This figure is equivalent to the number of bank current accounts. Debit cards may be used for a variety of purposes including ATM cash withdrawals or inquiries and as payment instruments through EFTPOS terminals.
Regarding other types of payment cards, there are also credit and service cards issued by several department stores and other retailers. These cards may only be used as a payment vehicle at the issuer’s premises. Prepaid cards are used exclusively for telephone services so far. No data is available on these alternative payment methods.
3.2.4 ATMs and EFTPOS
The three major ATM networks in the country are Nexos, for cards issued by Banco del Pichincha, Cirrus, for credit and debit cards issued with the Mastercard brand, and Banred for the debit cards issued by all other banks. The three networks are interoperable through the Banred system. By the end of 2002, the combined network consisted of 819 ATMs and processed a daily average of 25,000 transactions for a total value of nearly USD 700,000.
There are other 21 ATMs that belong to some savings and loans cooperatives. These ATMs are not interoperable with the Banred network as Banred’s internal policies establish that all its members must be institutions being supervised by the SBS. The savings and loans cooperatives that own these ATMs do not fulfill this requirement.
Besides cash withdrawals, most ATMs throughout the country also allow payments with credit or debit cards to current or savings accounts and transfers between the various accounts of the same client. It is expected that customers will also be able to make other types of payments (e.g. utilities) through the Banred network in the near future.
As regards EFTPOS terminals, Datafast, owned by Unicredit Mastercard, processes payments made with Mastercard credit and debit cards in 3,000 EFTPOS terminals through the country. Datafast has a market share of 90 percent both in terms of volume and value of transactions and of EFTPOS terminals. There is another network managed by Banco del Austro, which is not interoperable with that of Datafast.20 Manual processing of payments made with credit and debit cards (i.e. paper vouchers) is still common, accounting for nearly 40 percent of total transactions.
18 According to the Quarterly Credit Card Report issued by the SBS on September 30, 2002. All figures in this report are preliminary. 19 Resolution 91-119 RO 795 of October 22, 1991. 20 Only payments with Mastercard cards may be processed at the Datafast EFTPOS terminals.
30 Ecuador Report December 2002
3.2.5 Remittances
Like other countries in the Region, Ecuador receives a significant amount of remittances. During 2002, BCE estimates indicate the country received USD 1,397 million for this concept, which represented 28 percent of exports and 5.7 percent of the GDP of that same year. The average value of a transaction of this nature is between USD 200-300, and authorities believe that nearly 600,000 Ecuadorians residing abroad regularly send money to their families back home. The upward trend in remittances has been particularly significant over the last two to three years.
Delgado Travel and Western Union are the major players in this market. They hold bank accounts in those countries with a significant number of Ecuadorian immigrants. Thus, the amounts the immigrants send to their families go through at least two banking systems (i.e., USA and Ecuador, and in the case of European countries through that of one of these countries, USA and Ecuador) before the beneficiaries may cash them in.
Costs are relatively high. As mentioned before, two or even more banking systems are involved in every transaction. Moreover, in the case of remittances from European countries and others, transactions are also subject to foreign exchange conversion fees. Some years ago, the BCE signed an agreement with Delgado Travel through which the correspondent banks of the latter in the USA, Spain and other countries would channel the corresponding funds directly through the BCE. This agreement in no longer in operation.
At present, firms in this market are not subject to any particular regulatory controls, except for those controls associated with anti-money laundering that are enforced by the CONSEP.21
3.2.6 Others
Firms involved in foreign trade may register payments associated with customs duties and others through a database managed by Banred. In order to move forward through the customs process, these firms recur to the terminals Banred has in most entry ports of the nation. Through the terminals, the authorities may certify the payments that have been made at Banred’s member banks and follow- up on the amounts collected by the latter. Between 90 and 140 transactions of this kind are certified every day at Guayaquil’s seaport, the largest customs district in the nation.
Finally, in Ecuador payments using postal instruments are not common.
3.3 NON-CASH G OVERNMENT PAYMENTS
In October 1995 the BCE launched the Budget Execution System (Sistema de Ejecución Presupuestaria, SEP), which established the methodology and processes for public sector’s collections
21 Delgado Travel and other similar firms are in fact regulated by the SBS. However, supervision is not associated to their activities with remittances but rather with their charter type. For example, Delgado Travel is incorporated in Ecuador as a foreign exchange house, which by law falls under the supervision of the SBS.
31 Ecuador Report December 2002
and payments through the nation’s commercial banks. By this means, the BCE reoriented its functions, transferring the payment and collection operations of public sector institutions to the national banking system, which in the corresponding regulations is referred to as “the correspondent banking network of the BCE”.
Table 6: Domestic Banks Designated as Correspondents by the BCE (as of December 2002)
No. Institution No. Institution 1 AMAZONAS 8 MULTIBANCO B.G. 2 AUSTRO 9 PACIFICO 3 BOLIVARIANO 10 PICHINCHA 4 FOMENTO 11 PRODUCCIÓN 5 INTERNACIONAL 12 RUMIÑAHUI 6 LOJA 13 TERRITORIAL 7 MACHALA Source: BCE.
The SEP enables individual public sector institutions to manage directly their authorized budgets. Thus, by eliminating the former procedures, which for every transaction necessarily involved the Ministry of Economy and Finance, the SEP has had a significant impact in terms of reduction of costs and delays for all parties (i.e. public sector institutions, the BCE and the Ministry of Economy and Finance itself).
The SEP is also a supporting management tool for authorities as it enables them to better follow up on the tax collections, budget allotments, budget execution and credit possibilities, among others.
For the BCE, the implementation of the SEP greatly reduced the number of cheques drawn on BCE current accounts. In 2002 a total of USD 2,850.7 million were executed through the SEP.
32 Ecuador Report December 2002
4 PAYMENTS: INTERBANK EXCHANGE AND SETTLEMENT CIRCUITS
4.1 THE R EGULATORY FRAMEWORK FOR C LEARINGHOUSES
Cheque clearance and settlement is ruled by the Cheques Law of 1975 and by the Clearinghouse Regulation issued by the General Manager of the BCE on the basis of what established in the Title VIII “Clearance System”, Book I “Monetary – Credit Policy” of the Regulations Code of the BCE.
Participation of banks in the cheque clearinghouse is mandatory, while for the finance companies is voluntary. The latter may elect a representative to act on their behalf. In December 2002, 23 banking entities were channeling payment transactions through the cheque clearinghouse, including the National Development Bank (Banco Nacional de Fomento, BNF) and the BCE itself.
There are no regulations for other clearinghouses.
4.2 LOW V ALUE PAYMENT TRANSFER SYSTEMS
4.2.1 Cheques
Cheque clearing and the physical exchange of cheques are distributed in 17 zones throughout the country. These zones are selected on the basis of geography and the available banking infrastructure. The correspondent banking network manages the exchange and clearance sessions at these 17 zones. Settlement occurs at the current accounts held at the BCE.
4.2.1.1 Clearing and Settlement Process
The clearing and settlement process is partially automated.
· At 8:00 p.m. of day T (the day in which the cheque is received for collection), the banks’ representatives, properly empowered, meet for the exchange session.
· Bank representatives prepare a summary list and a diskette, in which all necessary information is recorded. After physical exchange, the multilateral net balances per zone are calculated using a simple computer procedure.
· Each of the 17 zones, then, sends their outcomes to the BCE. Each zone has been pre- assigned either to the Quito headquarters or the Guayaquil branch for this purpose.
· At 7:00 a.m. of T+1, the BCE executes settlement on the current accounts it holds for the participants. The BCE settles each of the 17 outcomes on a gross basis. Thus, banks with a multilateral net debit position in one particular zone may not offset it with a multilateral net credit position in another zone.
33 Ecuador Report December 2002
Up to this point, settlement is not final as the rejected items session (i.e. due to lack of sufficient funds, inexistent accounts, processing errors, etc.) is yet to take place. In this regard, it is worth mentioning that neither cheques nor bank accounts are standardized at the system level.
The rejected items session corresponding to the cheques presented for collection on day T ends at 1:30 p.m. of T+1. With this information, the BCE then makes the necessary adjustments to the preliminary settlement and executes final settlement at 4:00 p.m. of T+1.
BCE regulations on cheque clearance and settlement are limited to the interbank level and do not reach the relationships of banks with their clients. For this reason, there is no standard as per the moment in which funds are to be credited to the final beneficiaries, although for the most part they are available by T+3.
4.2.1.2 Risk Management Mechanisms
There are no possibilities for current account overdrafts and the BCE does not provide regular credit facilities.
There is a “Liquidity Fund” that was created in order to face potential defaults at the cheque clearinghouse. This fund has been constituted with the contributions of the participants, equivalent to 1 percent of the liabilities subject to the reserve requirement.
In case of a default, the defaulting party may automatically use a portion of the Liquidity Fund up to the amount of its own contributions to the fund. If this portion turns out to be insufficient, the entity may then request a loan to the Liquidity Fund Management Committee.
The Liquidity Fund is available not only for the cheque clearinghouse but also for the international payment transactions made through the ALADI system (see Section 7.3). Several changes are currently being planned for this fund, including that the Liquidity Fund be available only for the domestic deferred net settlement (DNS) payment systems (i.e. the cheque clearinghouse and the SPI).
Another relevant change being planned has to do with the methodology under which the contributions to the fund are determined. The new methodology being proposed is as follows.
Being:
X = 1 percent of the liabilities subject to the reserve requirement. Y = net debit position in DNS systems for a certain period.
Contribution to the Liquidity Fund = MAX [X,Y]
By considering the individual exposures to the various clearinghouses, in principle the Liquidity Fund would allow for settlement to take place in the event of the failure of several large participants.
34 Ecuador Report December 2002
4.2.2 Interbank Payment System (SPI)
The Sistema de Pago Interbancario (SPI) was launched in August 2002 and it is the first tangible product of the payments system reform efforts of the BCE. The SPI is a DNS interbank payment system for retail payments. Individual payment transactions for more than USD 10,000 may not be channeled through the SPI.
The SPI is an electronic system that is accessible through a private communications network using public key infrastructure (PKI) in an Internet technology framework. Standard credit-type payment messages are sent to the BCE through this network.
4.2.2.1 Clearing and Settlement Process
Clearing and settlement processes are similar to those of the cheque clearinghouse, although in the case of the SPI all processes are fully automated.
· From 8:00 a.m. and until noon, through the BCE communications network the participants send to each other files with detailed instructions of the funds to be credited to each institution’s customers.
· Between noon and 1:00 p.m., the SPI makes a cut-off and automatically calculates the multilateral net positions and executes a preliminary settlement on the current accounts at the BCE. Participants with a multilateral net debit position have until midnight to fund such positions.
· Participants receiving payment instructions have until 11:00 a.m. of T+1 to reject transactions on the basis of the non-existence of the beneficiary’s account, the account being closed, etc.
· Once the returned items session is over, the BCE executes final settlement by making the necessary adjustments to the preliminary multilateral net positions.
4.2.2.2 Risk Management Mechanisms
The BCE does not allow current account overdrafts nor provides regular credit facilities.
As mentioned before, there is a proposal that the Liquidity Fund be made available to support settlement at the SPI as well.
4.2.3 ATMs and EFTPOS
Banred processes the transactions made in 819 of the 840 ATMs in the country. At 7:00 p.m. the system makes a cut-off of the daily transactions and calculates the interbank bilateral positions.
35 Ecuador Report December 2002
Banred then produces credit and debit vouchers for all possible bilateral combinations and sends them to the BCE for settlement. These items are processed as part of the returned items session of the cheque clearinghouse.
Currently, Banred has not established any risk management mechanisms to deal with potential defaults by any of its member banks.
On the other hand, Unicredit Mastercard processes and clears the transactions made in the Cirrus ATM network. Also, through Datafast, its subsidiary, it processes payment transactions made with Mastercard credit and debit cards.
The system makes a cut-off at 8:00 p.m. and then calculates the multilateral net positions. Unicredit Mastercard holds a current account at the BCE that serves as a pass-through account for the settlement of these multilateral net positions. Settlement occurs no later than 11:00 a.m. of T+1. However, it is worth mentioning that credit and debit positions are not settled simultaneously, and in the absence of a settlement fund or other risk management tools Unicredit Mastercard often has to fund net debit positions.
As part of its reform efforts, the BCE is designing a designated system for payment obligations stemming from private clearinghouse arrangements to be settled in central bank money. The main features of this system, the “Clearinghouses’ System” (Sistema de Cámaras de Compensación, SCC), are further explained in Section 4.5.3 of this Report.
4.2.4 Budget Execution System (SEP)
The SEP is used as the channel for the collections and payments of public sector institutions, which at the end-level are operated by the commercial banks comprising the “correspondent banking network of the BCE”.
The SEP is made-up of three phases:
1. Budget Formulation: in this phase public sector institutions program their expenses and make a cash flow statement on the basis of the expected income stream.
2. Budget Execution: public sector institutions hold an account at the BCE to receive their allotments on the basis of the authorized budgets.
3. Payment of Obligations: public sector institutions open an account at any commercial bank designated by the BCE as its correspondent. The funds of the public sector institutions are transferred to these accounts to pay individuals and firms.
The BCE, as the official depository of the public funds, holds the available balances of the public sector institutions. Following detailed payment instructions, it then transfers the funds to the banks
36 Ecuador Report December 2002
Figure 4: Government Payments Processes through the SEP Payment Process Using the Banks Network
Ministry of Central Private Finance Entity Bank Bank Beneficiary
Cash Information Information Credit Program Transmission Transmission Notice
Information Invoices Credit Credit to the to Account Entity’s Current Transmission Templates of Execution Account
Cheques Payment Transfer Payment Detail and Verification Order Transfer Order
Payment Balances Payment Detail Detail Verification Verification
Transfer Debit to Account Payment Charge Order of Execution
Private Bank Credit to the Credit Beneficiary’s Credit Account Account
Source: BCE. designated as correspondents. The transfer is made on the day the funds are payable to the final beneficiary. So, the commercial banks are not able to benefit from the float.
The BCE, at any time and when it deems it convenient, may carry out operational and technical inspections as per the activities the commercial banks perform as BCE correspondents. Correspondent banks are obliged to provide all the information that is requested and cooperate as needed for this
37 Ecuador Report December 2002
purpose. They must also inform on the outcome of these inspections in order for the authorities to issue the necessary corrective actions.
4.3 LARGE V ALUE PAYMENT T RANSFER SYSTEMS
The BCE operates three mechanisms for large value payments (i.e., those above USD 500).22 These are the traditional “window” or paper-based facilities, a funds transfer system between BCE current accounts in which payment instructions are sent through a closed SWIFT users group network, and a partially automated system known as “diskette”.
During 2002, these mechanisms altogether processed a daily average of 1,293 transactions for a total value of USD 91 million (for detailed information on the volumes and values processed by each of these systems see Tables A10 and A11 of the Statistical Appendix).
The BCE settles its own transactions with financial intermediaries and the large value payments among them through the Settlement and Execution System (Sistema de Liquidación y Ejecución, SLE). Transactions are irrevocable from the moment they are accepted for settlement by the system, which depends solely on the availability of the necessary funds in the SLE by the participating banks. Thus, the BCE is not exposed to any form of credit risk.
On the other hand, the SLE integrates the operations of the various operational areas of the BCE. The credit, investments, banking services, open market operations, international operations, issuance, financial risks and accounting departments are all interconnected through the SLE.
All software applications are the property of the BCE and it has exclusive powers over their structure and any modifications thereof. Thus, the BCE determines message formats, operational rules and any other aspects the Central Bank deems relevant as the system operator. The banks are responsible for deploying the hardware and appliances required to establish the on line interconnection.
4.3.1 Functioning of the Various Subsystems
4.3.1.1 Funds Transfers through the closed SWIFT users group
The financial institutions connected to the closed SWIFT users group send instructions to the BCE to debit their current account and to credit another account at the BCE. Payment instructions are sent on line and in real time. Participants may send instructions through this subsystem from 9:00 a.m. to 2:30 p.m.
Although the BCE developed an interface between the closed SWIFT users group and its own current accounts system, payment instructions are not settled in real time but rather at specific cut-off hours during the day.
22 As mentioned before, the cheque clearinghouse also processes large value payments as well as low value cheques.
38 Ecuador Report December 2002
This subsystem settles a daily average of 330 transactions for a total value of USD 48 million.
4.3.1.2 Funds Transfers using Paper Formats at the BCE Window
Payment instructions are received by the BCE’s payment services window from 9:00 a.m. to 3:00 p.m.
This subsystem entails the physical delivery of paper formats containing standard information: the name of the payer, transaction type (i.e. on own behalf, on behalf of third parties or internal transfer), the name of the payee, amount, date, authorized signatures and authentication code.
The security of this subsystem is based on the last two elements. The signatures and the authentication code are duly verified by the BCE with its own signatures registry and with the agreed encoding formula, which is different for all entities.
Thus, payment transactions are processed on a fully manual basis. On a regular day, this subsystem settles 400 transactions for a total value of USD 35 million.
4.3.1.3 Funds Transfers using Magnetic Media (Diskette)
Public sector institutions mainly use this subsystem. The BCE receives the diskettes at its payment services window from 9:00 a.m. to 6:00 p.m.
Once the diskette is loaded into the current accounts system of the BCE, the system operators must perform a series of manual procedures to complete the settlement of the payment instructions.
Approximately 563 transactions of this type are processed every day by the BCE for a total value of USD 8 million.
4.3.2 Settlement Process
Once all controls are made, the BCE officers in charge of operating the system enter each payment order type (“SWIFT”, “Window” or “diskette”) into the SLE. Transactions are settled on a gross basis as they arrive to the BCE’s system or to its physical premises. However, in some occasions payment orders are processed in batches, particularly during the last two hours of the operating day, since payment instructions tend to concentrate at this moment of the day.
Once payment transactions have been settled, the participants may check their transactions and outstanding balances through the Internet or through an automated telephone audio system.
4.3.3 Risk Management Mechanisms
The BCE may not act as a regular lender of last resort as it does not have the power to issue currency. Therefore, to face potential settlement failures it developed a mechanism denominated
39 Ecuador Report December 2002
“Financial System Liquidity Recycling Mechanism” (Mecanismo de Reciclaje de Liquidez del Sistema Financiero). This mechanism allows the transfer of liquidity, through the BCE, from banks with a liquidity surplus to other banks with liquidity needs. Every week the BCE auctions Central Bank Securities (Títulos del Banco Central, TBCs) in order to collect liquidity from the financial institutions. Then, through a reverse repo with TBCs it delivers back, also through an auction, these resources.
Regarding operational risks, for the “windows” facility the BCE established a back office function to ensure that all transfers made through this means are executed timely and that the information entered into the system by the BCE officer is identical to that included in the original paper format. On the other hand, the BCE does not accept any responsibility for the payment transactions that are executed through the “SWIFT” or the “diskette” facilities.
4.4 CROSS-BORDER PAYMENT SETTLEMENT SYSTEMS
The majority of the cross-border payments in Ecuador are made through the traditional system of foreign correspondent banks. Private commercial banks in Ecuador are connected to the international SWIFT network and/or have access to a telex system to make and receive cross-border payments, using either foreign correspondent banks or their own branches abroad.
The BCE plays an important role in cross-border payments through the ALADI system. The latter system is described in detail in Section 7.3 of this Report.
4.5 MAJOR PROJECTS AND POLICIES BEING IMPLEMENTED
The adoption of the USD as the official currency in Ecuador has forced the authorities to undertake a deep revision and modernization of the national payments system. Thus, the BCE has been working on a major reform with the following general objectives:
· Increase the efficiency of payment mechanisms in the country by inducing a reduction of transaction and operational costs, as well as of the time needed to complete settlement.
· Integrate all payment systems at the national level and achieve compliance with international standards.
· Standardize operational procedures, conditions and possibilities for the financial institutions as well as for non-financial firms and individuals.
· Increase the levels of safety and effectiveness.
· Make the payments system more dynamic, facilitating the introduction of new payment instruments and financial mechanisms.
40 Ecuador Report December 2002
4.5.1 Creation of Internal and External Committees to Support the Reform Effort
As an integral part of the payments system reform project, the BCE created two Committees, at different levels, to undertake the executive responsibilities for the approval of the objectives and scope of the individual projects, to supervise the fulfillment of the time schedule and the achievement of the planned objectives, and to coordinate the various stakeholders.
Thus, there is a Payments System Committee and an Inter-Institutional Payments System Committee. The first one is of a strategic nature and it is comprised solely by BCE senior officials. The other is comprised by representatives of the BCE and by the major stakeholders of the payments system.
4.5.1.1 Payments System Committee
This Committee is made-up by one of the BCE Board members, the General Manager, the Manager of the Major Branch, the Banking General Director, the Research General Director, the General Auditor, the Legal Adviser and the Director of Domestic Banking Services.
Its main functions are the following:
· Define and spread the institutional policies regarding the participation of the BCE in the national payments system.
· Approve the objectives, definitions, scope and work plans of the projects proposed by the BCE staff in relation to the reform of the national payments system. Also, follow-up on the work plans and time schedules that have been set for these projects.
· Get acquainted with the operational rules that are needed for the implementation of the systems and presenting them to the relevant authority or body for approval. Also, present to the BCE Board of Directors the regulations related with the payments system.
· Take the final decision on the potential conflicts that could arise at the internal level because of the related projects.
4.5.1.2 Inter-Institutional Payments System Committee
This Committee is comprised by the Chairman of the Board of Directors of the BCE or another Board member, the General Manager of the BCE, one representative from the Private Banks Association, the Finance Companies Association, the Association of Cooperatives under the supervision by the SBS, the Guayaquil Stock Exchange, the Quito Stock Exchange and a representative designated by the public sector financial institutions.
Its main functions are the following:
· Get acquainted with the projects proposed by the BCE to innovate or improve the current payment mechanisms and instruments, make recommendations on these and, eventually, be informed on the execution and progress of these projects.
41 Ecuador Report December 2002
· Form working groups to analyze and spread the proposals related to the payments system. Working groups representatives participate with decision powers on behalf of the institution or sector they represent.
· Establish the most adequate mechanisms for the disclosure of the issues being discussed by the Committee.
4.5.2 New Payment Systems and Supporting Mechanisms
In order to implement the new payment systems being proposed, the has been developing a virtual communications network to facilitate the connections and communications between the BCE and the participating financial and non-financial institutions.
The SPI already described in Section 4.2 of this Report is the first tangible product of the reform effort. The other systems considered in the overall reform to the payments system are described below.23
4.5.2.1 On Line and Real Time Payments System (SPL)
The On Line and Real Time Payment System (Sistema de Pagos en Línea y Tiempo Real, SPL) will allow electronic transfers of funds in real time among current accounts in the BCE.
The main features of the SPL are the following:
· Settlement will be done on a gross basis, i.e., one by one.
· In order for payments to be settled, the originator will be required to have full availability of the necessary funds. There will be no possibilities for current account overdrafts or of BCE credit.
· At the beginning of each day, the SPL participants’ accounts will be credited with the available balances in their current accounts at the BCE. During the operating hours, participants will only be able to order debits to their accounts.
· Payments in the SPL are considered final once they are settled by the system.
· The BCE will be able to credit the current accounts of the participants as a result of direct transactions between the Central Bank and such participants (e.g., cash deposits, repos, settlement of clearinghouse balances, etc.).
· The balances of DNS systems will be settled through the SPL.
23 The SPI is an integral part of the BCE’s reform project. Nevertheless, as it is already operational it was included in Section 4.2.
42 Ecuador Report December 2002
· The SPL will allow transactions with a future value date. On the value date, these payment orders will be the first to be entered into the system for settlement.
The preliminary design of the SPL does not include a queuing system for those payments that cannot be settled due to insufficient funds in the account of the originator. On the other hand, to manage liquidity in this and the other systems operated by the BCE the participants may recur to the Bilateral Credit Lines System described in Section 4.5.2.4 below.
4.5.2.2 Net Balance Payment System (SPN)
The Net Balance Payment System (Sistema de Pagos por Valores Netos, SPN) will allow the electronic funds transfers among financial system institutions to be netted, either bilaterally or multilaterally, and on this basis the system will affect the current accounts these institutions hold with the BCE.
The main features of the SPN are the following:
· For funds transfers to be accepted by the system, full and immediate availability of funds will not be required.
· Funds transfers with a future value date may be entered into the SPN.
· At the moment a transfer of funds is registered in the SPN, the ordering party will have to indicate the type of net settlement (i.e. bilateral or multilateral) it wishes to apply. If the indication is “bilateral settlement”, the transfer will be settled during the day and before the cut-off hour, at the moment the ordering party receives another transfer from the counterparty that was the beneficiary of the first transfer. If one or more of these transactions are still pending by the cut-off hour, they will be settled on a multilateral net basis at this precise moment. If the indication is “multilateral settlement”, the transfer will be netted and settled on the basis of the payment orders that were sent and received on that same day, which then will be settled at the cut-off hour.
4.5.2.3 Clearinghouses’ System (SCC)
Through the Clearinghouses’ System (Sistema de Cámaras de Compensación, SCC), non-banking institutions like stock exchanges, savings and loans cooperatives, Banred and others that provide specialized payment services to commercial banks will be able to send to the BCE the bilateral or multilateral net positions resulting from their clearing for settlement. For this purpose, the BCE will give these institutions a “specialized clearinghouse” status.
The SCC is expected to function as follows:
· The BCE will issue the necessary regulations and will be entitled to approve the operational rules of the specialized clearinghouses.
· Every institution recognized as a specialized clearinghouse will be responsible for the operational processing of individual transactions and of the clearing process that generates the net positions to be sent to the BCE for settlement.
43 Ecuador Report December 2002
· The BCE’s automated system will validate the integrity and consistency of the data, as well as the settlement of the positions in the current accounts.
· The BCE will not guarantee any payment obligations in case a participant is unable to settle its position(s).
4.5.2.4 Bilateral Credit Lines System (LBC)
The purpose of this mechanism is that the participants first recur to bilateral loans from peers before trying to access the credit of the Liquidity Fund that was described in Section 4.2.1.2 of this Report.
The LBC is an electronic mechanism through which financial institutions may register liquidity surpluses as a credit line available to other participants. Any disbursements are to be deducted immediately from the current account of the grantor. Thus, credit lines registered at the LBC do not allow for any possibility of current account overdrafts.
Financial institutions will register a global credit line for payment system settlement purposes and will be able to set limits per debtor and transaction type.
· The terms of the credit lines will be negotiated freely and under the full responsibility of the parties.
· Credit lines being granted by the participants and registered in the LBC will constitute orders to the BCE to make the corresponding funds transfers once the latter verifies that the transaction complies with the established limits and conditions.
· The corresponding quotas will be automatically debited from the grantor and credited to the debtor once the conditions for disbursement are met and once the relevant parties are notified by the BCE. These transfers are irrevocable from the moment they are made by the BCE.
· In no case the simple fact that credit lines and the corresponding limits are registered in the LBC nor the fact that the BCE transfers funds as a result of the implied orders constitute a BCE guarantee or make the Central Bank liable for any of the resulting obligations.
· If all the conditions for disbursement are met and there are not sufficient funds in the current account of the grantor, the BCE will, then, transfer the funds to the debtor up to the amount that is available in the grantor’s account.
· If a creditor decides to cancel or suspend its global credit line, no transactions associated with that global credit line will be permitted any more. On the other hand, if a creditor decides to reactive its global credit line under the original conditions, transactions associated with that credit line will resume as well.
· During the operating hours, the creditors will not be able to suspend their credit lines or to reduce their overall size or those of the specific limits.
· The debtor, once it reimburses the amount of the credit line, must register the payment in the LBC.
44 Ecuador Report December 2002
5 SECURITIES, MARKET STRUCTURE AND TRADING
INSTRUMENTS
5.1 FORMS OF SECURITIES
The SML defines a security as the right or set or rights, mainly of an economic nature, that are negotiable in the securities market, including, among others, shares, obligations, bonds, certificates, mutual funds quotas, futures, options, other securities stemming from securitization processes and any others determined by the CNV.24
In the legal definition, the rights incorporated in negotiable securities are specific and autonomous. For a right to be represented in a negotiable security, physical representation (i.e., a physical certificate) is not necessary. Therefore, securities can be represented in book entry form.
Securities may be issued as nominative securities, to the order or in bearer form. In the case of nominative securities, the legal transfer of ownership occurs through entries at the issuer’s registry. Securities to the order only require the endorsement of the securities, while the simple delivery is enough for bearer securities.
5.2 TYPES OF SECURITIES
At the organized exchange securities market, the following are the most relevant instruments.
5.2.1 Shares and Other Securities Representing Equities
Shares: shares are issued by open stock companies that are controlled by the Superintendence of Companies or the SBS. Shares are only backed-up with the firm’s paid-in capital. Shares may only be issued in a nominative form and there are only two types: common or preferred, according to what established in the company’s bylaws.
Common shares represented by securities grant to their holders the same basic rights as to any other shareholder, as stated in the laws. They provide preferential rights in the subscription of new paid-in capital and can be incorporated in fully negotiable preferential certificates.
Preferred shares give special rights associated with dividend payments and in the event of the liquidation of the company, although they do not give voting rights.
24 Article 2 of the SML.
45 Ecuador Report December 2002
5.2.2 Debt Securities
5.2.2.1 Securities Issued by the Public Sector
These are credit securities issued by the Ecuadorian State or any other public sector entity. These securities are redeemable and issued with a fixed maturity, they accrue a fixed or floating interest rate in USD and interest payments are made by means of coupons. The issuance of these securities must be authorized by the Ministry of Economy and Finance. Trading is made through the country’s stock exchanges or brokerage houses.
There are different types of public securities, each one with a specific purpose, although they all share the above-mentioned basic characteristics. The main types of public securities are the following:
State Bonds: these are issued by the government through the Ministry of Economy and Finance for the financing of specific government programs or projects or of the fiscal deficits. Maturity goes from 5 to 10 years.
Central Bank Securities (TBCs): these are zero-coupon bonds, denominated in USD. Through the issuance and placement of TBCs, the BCE collects excess liquidity from some financial institutions and then recycles it back to the financial system through reverse repos.
CFN Obligations: these are issued by the National Finance Corporation (Corporación Financiera Nacional, CFN) to fund the working capital of the industrial sector. These obligations are collateralized with securities or mortgages and maturities go from 2 to 5 years.
5.2.2.2 Securities Issued by the Private Sector
Deposit Certificates: the maturity of these securities may be freely agreed by the parties, although in no case maturity may be less than 30 days. They can be issued as nominative securities, to the order or in bearer form. Deposit certificates are callable before maturity if previously agreed by the parties.
Bills of Exchange: these are credit certificates, generally issued by corporate clients, which are delivered to the private banks. The private banks guarantee the securities upon insolvency of the issuer. These are non-interest bearing, short-term securities (up to 90 days).
Promissory Notes: these are documents through which the issuer commits itself to pay a certain amount, with a fixed interest rate at a pre-specified date. Promissory notes may also be traded at a discount. Banks may issue their own promissory notes through the stock exchanges.
Bankers’ Acceptances: these are bills of exchange or promissory notes drawn by the customers of banks or of finance companies and that are accepted by banks. By accepting these instruments, a bank agrees to pay the face value of the obligation if the issuer fails to pay.
46 Ecuador Report December 2002
Mortgage Certificates: these are issued by the private banks and repayment is guaranteed by the cash flows of mortgage loans that were granted by the issuing bank. These are long-term securities paying a fixed interest rate.
Debentures: these can be issued by open stock companies, limited liability companies or financial institutions. Obligations are amortized within a certain specific period and pay a fixed interest rate, either biannually or annually. They can be issued at par, at a premium or at a discount. At maturity, the issuers have two alternatives: recognizing a yield or converting the obligations into shares.
Mutual Funds Quotas: these are variable-rate securities issued by mutual funds representing a share in these funds and are freely negotiable.
5.3 SECURITIES IDENTIFICATION CODE
The CNV is empowered by the SML to establish a national securities numbering system that complies with the international standards.
At present, securities in Ecuador carry the International Securities Industry Numbering (ISIN) codes. Thus, according to this numbering system the securities are identified by a 12-digit code as follows:
Country prefix: first 2 characters from left to right Security’s own code following 9 characters Verifying digit last character to the right
5.4 TRANSFER OF OWNERSHIP
Nominative Securities
In the case of nominative securities, the holder must fulfill a series of requirements in order to be able to exercise his rights. Nominative securities must include the name of the holder. The issuer must have a registry with the names of the holders of its securities. Thus, legal ownership is determined on the basis of the name that appears at the registry of the issuer and on the nominative security itself.
Securities payable to the order
These securities are issued in favor of a particular person and they also include a clause stating that the security is “payable to the order”, or some other formula stating that they are negotiable through endorsement and the subsequent delivery.
Securities payable to the bearer
For this type of securities, ownership is transferred solely by the physical delivery of the securities. The holder only needs to exhibit the security to prove that the investor is the legal owner and to exercise the corresponding economic rights.
47 Ecuador Report December 2002
Immobilized and dematerialized securities
Ownership transfers of these types of securities occur by means of book entries. Such transfers have the same legal effects than the physical delivery of the securities.
Once the holder or an authorized representative of the brokerage house representing the holder issue a transfer order through written or electronic means, such a transfer is perfected when the corresponding entry is made at the depository’s registry.
On the other hand, for all securities that are deposited in a CSD the legal owner shall be the person that appears as such at the depositor’s registry.
5.5 PLEDGE OF SECURITIES AS COLLATERAL
Article 230 of the SML states that for securities to be pledged as collateral it is only necessary to record the corresponding lien in the relevant registry. For ordinary pledges, this action has the same legal effects as displacing the ownership of the securities from the original holder.
Pledges need to be made following to the rules that are set in the Commercial Code.
5.5.1 Repos
Repurchase agreements are not defined in the Ecuadorian laws but only in regulations. Article 2 of the CNV Regulation for Exchange-Traded Repos states that the “exchange-traded repo” is a transaction that is made through the stock exchanges and it comprises the temporary sale of securities registered at the RMV and at the stock exchanges, with an unconditional agreement to repurchase such securities at a pre-established price and maturity, which in no case may extend beyond 180 days. The two legs of a repo transaction are considered interdependent and margin calls are applied.
If the original selling party fails to fulfill the second leg of the transaction then a penalty interest rate is applied, and the counterparty is then authorized to sell the underlying securities at a stock exchange for repayment. If the sale proceedings are not enough to cover the agreed price plus the penalty interests, the relevant stock exchange will seize the guarantees that were previously posted by the selling party. A special rule in this Regulation states that the latter function of stock exchanges is to be transferred to the CSDs when dealing with securities in book entry form.
5.6 TREATMENT OF LOST, STOLEN OR DESTROYED SECURITIES
The SML states that the holder of a security is responsible for the authenticity, integrity and truthful ownership of the securities. Once these securities are deposited in a CSD, the latter becomes fully responsible for their custody and safeguard until the securities are withdrawn from its premises. In
48 Ecuador Report December 2002
fulfilling these duties, the CSD must guarantee the authenticity of the transfers, pledges or other liens it may record in its system.25
5.7 LEGAL MATTERS CONCERNING C USTODY
5.7.1 Protection of Securities Under Custody in case of Bankruptcy or Insolvency of the Custodian
Article 73 of the SML states that in case of the liquidation of a CSD, the Superintendence of Companies will determine whether the deposited securities will be temporarily administered by that CSD or by another entity to be designated by the Superintendence itself. In no case the deposited securities are considered as part of the values subject to the bankruptcy proceedings.
5.7.2 Fungibility
Article 76 of the SML indicates that the securities in book entry form that belong to the same issue and that have identical characteristics are considered fungible. Thus, the holders that appear in the CSD’s registry are entitled to their corresponding share in the overall issue and not to any particular securities.
5.7.3 Elimination of Physical Delivery
The SML authorizes the issue of dematerialized securities and their representation in a book entry form. Ownership transfers occur by means of book entries. Such transfers have the same legal effects than the physical delivery of the securities.
MARKET STRUCTURE AND TRADING SYSTEMS
5.8 PUBLIC OFFERING OF SECURITIES
The following requirements must be met in order to make a public offering of securities:
· Debt securities or those stemming for securitization processes must have a risk rating. The securities issued or guaranteed by the BCE or the Ministry of Economy and Finance as well as securities representing equities are exempt from this requirement.26
· Both the issuer and the securities being offered must be registered in the RMV.
· Prior to the offer, the issuer must have circulated an investment prospectus previously approved by the Superintendence of Companies.
25 Articles 62 and 63 of the SML. 26 The CNV may decide to apply this requirement also to this kind of securities.
49 Ecuador Report December 2002
The Superintendence of Companies will proceed with the registration once the issuers provide complete, true and sufficient information about their financial and legal situation.
Securities to be issued by public sector institutions through a public offering need only to be registered in the RMV. No further requirements need to be met. The issuance and trading of securities by the Central Government and the BCE are subject to the rules contained in the corresponding laws.
5.9 PRIMARY MARKET
The securities market in Ecuador is dominated by government securities. As of December 2002 the outstanding balance of the internal public debt was USD 2,644.8 million. Approximately 99 percent of this amount is constituted by State Bonds issued by the Deposit Insurance Agency (AGD).
The BCE issues TBCs every week. The amount of TBCs to be placed at each week’s auction is variable since the BCE only has to comply with the quarterly limit established by the Monetary Board. The current quarterly limit is USD 30 million.
Brokerage houses are the only intermediaries that are authorized to offer primary and secondary market securities directly to investors. However, institutional investors may participate directly in the primary debt market as long as they do not perform securities intermediation transactions.27
5.10 SECONDARY MARKET
According to the legal definition,28 the secondary market comprises the transactions or trades that are made after the securities were placed in the market for the first time. As mentioned before, only brokerage houses may offer directly to the investors the securities that are traded in the secondary market.
The secondary market in Ecuador is characterized by numerous cross transactions, i.e., transactions in which both the selling and buying parties are clients of the same brokerage house.
During 2002, government and BCE securities represented nearly 44 percent of the total value traded. Debt instruments issued by private sector institutions represented 55 percent while equities stood for the remaining 1 percent (see Tables 7 and 8).
5.11 S TOCK EXCHANGE T RADING
Securities are traded in “exchange rounds” (ruedas de bolsa), a centralized mechanism for securities trading in which all securities brokers and public officials gather simultaneously, for a certain time
27 The SML defines “securities intermediation” as the activity whose purpose is to link the demand for and the offer of securities. 28 Article 29 of the SML.
50 Ecuador Report December 2002
span, to offer, demand or trade securities on behalf of their corresponding brokerage house or public sector institution. There are two types of exchange rounds, the “outcry round” and the “electronic round”.
At present, most securities are traded through the SINEL and DATATEC electronic systems. The Quito Stock Exchange uses the SINEL system while both the Guayaquil and Quito exchanges use the DATATEC system. Private sector institutions may trade securities through any of these systems. Public sector institutions, on the other hand, may only trade securities through the DATATEC system. This last situation is explained by the fact that DATATEC complies with what established in articles 34 and 35 of the State De-centralization and Social Participation Law (Ley de Descentralización del Estado y Participación Social). These articles state that the investments, placement of resources and asset sales and purchases of the public financial sector must be evenly distributed between the Mountain and East (Sierra y Oriente) Region and the Coast and Islands (Costa e Insular) Region through interconnected auctions among the stock exchanges established in the country.
5.11.1 Quito Stock Exchange (BVQ)
Debt securities and equities are traded at the Quito Stock Exchange. Transactions may take the form of regular or cross transactions, spot or term.
Outcry Exchange Round: this is also known as the floor round or “Outcry Pregón”. These rounds are held every working day from 12:30 p.m. to 2:00 p.m.
Electronic Trading System (SINEL): also known as the “electronic round”, it operates every working day from 9:00 a.m. to 4:00 p.m.
Currently, nearly all trades with private sector securities are made through the SINEL.
5.11.2 Guayaquil Stock Exchange (BVG)
Debt securities and equities are traded at the Guayaquil Stock Exchange as well. Transactions can be either regular or cross transactions, spot or term.
Outcry Round: debt securities and equities are traded every working day with the physical presence of brokers from 11:30 a.m. to 2:00 p.m. These “floor transactions” have been gradually automated with the introduction of a device that makes an optic reading of brokers’ bids.
Electronic Exchange System: this is a continuous trading system operating every working day from 9:30 a.m. to 4:00 p.m. Trading takes place through the DATATEC system.
Auctions Mechanisms: auctions are held at the BVG’s floor with a special schedule that goes from 3:00 p.m. to 4:30 p.m. Several auctions may take place on a single day and each of them lasts for thirty minutes.
51 Ecuador Report December 2002
5.12 OVER THE COUNTER M ARKET (OTC)
The SML defines the OTC market as the one where securities trades outside the stock exchanges are made with the participation of the authorized securities intermediaries and institutional investors, and with securities registered in the RMV.
Only brokerage houses may intermediate securities either in the organized exchange market or in the OTC market. Financial sector institutions may trade securities on their own behalf, but they cannot intermediate securities on behalf o third parties in the OTC market.
An issuer may place debt securities through brokerage houses in the organized exchange market or directly in the OTC market. Shares that are listed in the stock exchanges may only be traded through brokerage houses at the stock exchanges. Finally, debt securities with maturities exceeding 360 days must also be traded at the stock exchanges.
5.13 RECENT TRENDS IN THE MARKET
In recent years, the securities markets of Ecuador have been experiencing a decline in their levels of activity, particularly as regards to the equities market (see Tables 7 and 8 below).
Table 7: Outstanding Securities Circulating in the National Market (in USD million)
1998 1999 2000 2001 2002 (a) Government Securities 2,782 3,304 2,834 2,406 2,645 (b) Private Debt Securities 1,318 500 312 n.a. 1,116 (b) Shares 1,556 399 704 1,417 1,842 Sources: BCE, BVG and BVQ. (a) Face value. (b) Year-end market value.
Table 8: Stock Exchange Traded Values at the National Level (in USD million)
1998 1999 2000 2001 2002 Debt Securities 2,169 5,337 2,753 1,753 1,662 Government n.a. n.a. n.a. 354 735 Private n.a. n.a. n.a. 1,399 927 Equities 65 9 18 10 20 Total 2,234 5,346 2,771 1,763 1,682 Sources: BVQ y BVG.
As regards the OTC market, although there is no precise information about its size the authorities believe it is not very relevant. This assumption is based on the limitations that have been imposed
52 Ecuador Report December 2002
to OTC trading, some of which were explained in the previous sections, in particular the one that forces securities with maturities over 360 to be traded at the stock exchanges. In this regard, it is worth mentioning that government securities, the most relevant securities in the market, are all issued with maturities over 1 year. It is also worth remembering what established in the State De- centralization and Social Participation Law, that securities transactions of the public financial sector must be performed through the stock exchanges established in the country.
53 Ecuador Report December 2002
6 CLEARANCE AND SETTLEMENT CIRCUITS FOR GOVERNMENT AND CORPORATE SECURITIES
6.1 ORGANIZATIONS AND INSTITUTIONS
6.1.1 Quito and Guayaquil Stock Exchanges
The Guayaquil Stock Exchange (BVG) was created in 1969 as an initiative of the National Finance Corporation (CFN). The BVG was the first stock exchange in the country to implement the electronic system for the automation of the outcry exchange rounds for equities. As of December 2002, the BVG had 18 shareholders and its capital amounted to USD 1,335,278.
The Quito Stock Exchange (BVQ) was also incorporated in 1969 as an open stock firm. In May 1994, it underwent a legal transformation to become the “Civil Corporation of the Quito Stock Exchange”. As of December 2002, the BVQ had a capital of USD 1,514,709 and it had 49 shareholders.
The BVG has 17 member brokerage houses and the BVQ has 15. A total of 17 brokerage houses are members of both stock exchanges. Both stock exchanges are interconnected through the DATATEC system.
6.1.2 DECEVALE
DECEVALE is the only CSD approved by the Superintendence of Companies and was incorporated in 1994. However, since then it has been operating only as a custodian of the dematerialized securities issued by the CFN. The securities transfer function by means of book entries has not yet been established.
6.1.3 The BCE as a Securities Custodian
The Monetary Regime and State Bank Law states that the BCE is the official depository of the public sector funds as well as the fiscal and financial agent of the government. On the basis of this law, the BCE has developed its own system for the custody of government securities.
As of December 2002, nearly 75 percent of the outstanding State Bonds were under the custody of the BCE as well as almost 25 percent of the CETES. The BCE is also the custodian of its own securities and of some other securities issued by private sector institutions.
The custody system of the BCE does not allow for the full fledge of activities of a modern CSD under a delivery-versus-payment (DVP) framework. It only allows the transfer of securities among the custody and guarantee accounts of a same participant and free-of-payment securities transfers among the custody accounts of two participants.
54 Ecuador Report December 2002
6.2 SECURITIES REGISTRATION AND CUSTODY PROCEDURES
6.2.1 Registration in the Securities Market Registry
Registration in the Securities Market Registry (Registro del Mercado de Valores, RMV) is a necessary condition for securities to be traded in the organized exchange market or in the OTC market. Therefore, all securities object of a public offering, their issuers and all other securities market participants must be registered at the RMV. By registering in the RMV the participants commit themselves to disclose any information as required by the CNV rules and to comply with all other requirements.
A risk rating of debt securities must be obtained by their issuers prior to registration. The SML contains a few exceptions to this rule. The Superintendence of Companies registers the institutions under its supervision and control once they have complied with all the requirements.
Registration of securities issued by the government and by other public sector institutions is automatic and mandatory. These issuers only have to show the legal underpinning authorizing each issue and provide a description of the main features of the securities being issued.
Documents and all other information contained in the RMV are available for consultation to the general public. In some cases, however, the CNV may decide to preserve the confidentiality over some information.
6.2.2 Registration and Custody of Securities at the CSDs
As mentioned in Section 6.1.2, DECEVALE has never established the whole range of functions of a modern CSD. Securities transactions are settled by the stock exchanges themselves by means of the delivery of the physical certificates representing the securities. As a matter of fact, at the moment this Report was being prepared DECEVALE was under suspension by the Superintendence of Companies to act as a CSD.
The descriptions in the following paragraphs and up to Section 6.2.5 are based solely on the concepts included in the SML rather than on the actual market practices.
6.2.2.1 Deposit Accounts
The deposit contract is perfected with the delivery of the physical certificates or of the electronic records in the case of dematerialized securities to the CSD. The CNV sets the rules for the security codes that the electronic records containing dematerialized securities must comply with.
The CSD then proceeds to open an account for each participant. Each account is then divided in as many other accounts and sub-accounts as required by the direct participant and on the basis of the features of the deposited securities themselves (e.g., class, series, issuer, etc.).
55 Ecuador Report December 2002
Stock exchanges, brokerage houses, financial institutions, institutional investor and the securities issuers registered in the RMV may become direct participants of a CSD. The CNV may authorize other types of firms to become direct participants as well.
The depositor must guarantee the authenticity, integrity and ownership of the securities. Once these are delivered to the CSD, the latter becomes responsible for the authenticity of the transfers, pledges or other limitations it records in its system.
6.2.2.2 Deposit Account Information
If requested by the depositor, the brokerage house acting as nominee, the Superintendence of Companies, the SBS or a judicial order, the CSD must provide account statements containing the transactions that have been made. Moreover, the CSD must issue a certification of the securities under its custody upon request of a depositor. These certificates are non-negotiable and must include a phrase stating the purpose for which they were issued and an expiration date that must not exceed 30 days. These certificates are valid for all cases in which the laws require the participants to show the physical securities.
In no case, any sort of interest may be created over these certificates. The deposited securities stated in these certificates are blocked by the CSD until the expiration of the certificate.
6.2.3 Administration of the Deposited Securities
The CSD exercises the patrimonial rights embedded in the deposited securities on behalf of the depositors. Thus, when applicable, it collects interest payments, dividends, principal payments and others.
On the other hand, the CSD may not exercise other types of rights such as participating in shareholder assemblies, impugning social agreements, etc. It may not do so even if it has been given a mandate by its depositors.
6.2.4 Securities Transfers
Securities transfers at the CSD must follow the principles of successiveness and priority of registration.
The successiveness principle states that in order for securities to be transferred, they must have been previously recorded as belonging to the selling party. Moreover, in order to record the creation, modification or extinction of the rights embedded in the securities, the latter must have been previously recorded as the property of the buying party.
The priority of registration principle states that once an entry is made, no other entry associated with the same securities and that corresponds to a prior event may be entered. Moreover, the first action that is received by the CSD will have preference over all other actions subsequently received. Thus, the CSD must perform the transactions according to the order in which they were received.
56 Ecuador Report December 2002
For all purposes, the person or institution that appears in the CSD records as the owner of certain securities shall be considered as the legal owner.
6.2.5 Pledges and other Limitations over the Deposited Securities
Securities pledges or other actions limiting the full ownership of deposited securities occur by entering the corresponding lien in the relevant account. This record is equivalent to displacing the ownership of the securities from their holder.
6.2.6 Securities Withdrawal
In case a depositor requires the withdrawal of a physical security, DECEVALE first makes sure there are no custody-related fees due and then delivers the physical security.
In the case of dematerialized securities, DECEVALE makes sure no fees are due and makes an ownership transfer. Transfers may also be made to different sub-accounts of the same holder.29
6.3 SECURITIES CLEARANCE AND SETTLEMENT PROCESSES
6.3.1 Settlement Modalities
Quito Stock Exchange (BVQ)
Spot Transactions: these transactions must be settled no later than T+3, i.e., during the third working day following the transaction day. All equities are settled under this mode.
Term Transactions: settlement may go from 14 and up to 180 calendar days following the transaction day.
Guayaquil Stock Exchange (BVG)
Same Day Transactions: these are also know as “sight transactions” and are settled on the same day in which the transaction was made.
Spot Transactions: these transactions are settled in T+3.
Term Transactions: settlement date goes from 5 working days up to 360 calendar days. The General Director of the BVG communicates every month the debt securities and equities that have been authorized to be traded as term transactions. Participants may trade their securities as “principal only” or “full sale”. In principal only transactions, the rights that come along with the securities remain with the seller, while in the other case these rights are transferred to the buyer after T+3.
29 In case the holder has an account with more than one direct participant.
57 Ecuador Report December 2002
Both stock exchanges settle securities transactions under a model similar to the DVP Model II of the BIS.30 In both stock exchanges brokerage houses may agree to postpone settlement to overcome problems such as delays in the delivery of the securities on behalf of the custodian or the delivery of the wrong securities.
6.3.2 Settlement Procedures
At the BVG, transaction hours are from 9:30 a.m. to 4:00 p.m. and there are three different hours for the settlement of transactions: 3:30, 5:00 and 6:00 p.m.
The electronic trading system of the exchange matches and confirms the transactions. On the value date (T), at 3:30 p.m. brokerage houses with a multilateral net debit position stemming from the transactions made on T, T-3 or term transactions with this value date transfer the necessary funds, through their banks, to the current account the BVG has at the BCE. Brokerage houses have real time access to their multilateral positions. The BVG also provides them with a daily account statement that describes all the payments to be received by it in the future.
Those brokerage houses that were not able to gather the necessary funds as of this moment still can do so for the second settlement session which occurs at 5:00 p.m. Alternatively, the parties can reach a mutual agreement to defer settlement.
Settlement of the securities leg occurs with the delivery of the physical securities. The selling brokerage houses must have previously delivered to the BVG the securities they intend to sell. The Cashier of the Department of Custody and Settlement of the BVG verifies that the settlement of the cash leg has been made and then it proceeds with the delivery of the physical securities.31
Settlement procedures at the BVQ are similar except for the following:
· Trading hours are from 9:00 a.m. to 4:00 p.m.
· There is a single session for securities settlement that occurs at 3:30 p.m. Thus, the securities with a same day value date must be traded no later than 3:30 p.m.
In both stock exchanges, there is a significant number of cross transactions, which do not entail the physical delivery of the securities since both the selling and buying parties are customers of the same brokerage house.
30 “Delivery-versus-Payment in Securities Settlement Systems”, Committee on Payment and Settlement Systems of the Central Banks of the Group of Ten Countries, Bank for International Settlements, September 1992. 31 The BVG has reached an agreement with some banking entities for the latter to provide verification services for securities transactions. The so-called “verifying banks” receive and verify the securities, with which it is no longer necessary to take the securities to the BVG’s own premises. The verifying banks can also be in charge of delivering the physical securities to the buyers.
58 Ecuador Report December 2002
6.3.3 Flow Chart of Settlement Processes
Figure 5: Settlement of Securities Transactions made at the Stock Exchanges (with Delivery of the Physical Securities)
Selling Brokerage 1. Selling Bid Stock Exchange 1. Buying Bid Buying Brokerage House Trading System House
2.Additional 2. Additional information Exchange information Back Office 3. Delivery of the Physical Securities Settlement Department 4. Settlement of the cash 4. Settlement of the cash leg through banks Current Account leg through banks at the BCE Settlement 5. Entrega de los títulos Department
6. Transactions Reports
Issuer
Source: Own elaboration.
Chart description:
1. Brokerage houses enter their bids into the electronic trading system of the exchanges.
2. Once a transaction is matched, the information is transmitted to the back office of the exchanges. The selling broker inputs the name of the selling customer and the transaction’s settlement date. The buying broker inputs the name of the buying customer and the amount of the fee.
3. The selling brokerage house sends the physical securities and all other necessary documents to the relevant stock exchange.
4. Every day the exchanges calculate the multilateral net amount of funds that each brokerage house must deliver or receive according to the transactions that are due on that day. Brokerage houses with a multilateral net debit position transfer the necessary funds, through their banks, to the exchange’s account at the BCE. The exchanges then credit the bank accounts of the brokerage houses with a multilateral net credit position.
59 Ecuador Report December 2002
5. Once the settlement of the cash leg has been completed, the Settlement Department of the exchanges delivers the securities.
6. On the same day that the transactions were made, the stock exchanges send this information to the securities issuers.
6.4 GUARANTEE SCHEMES
According to the SML, the stock exchanges must require their members to create a guarantee fund in order to assure the fulfillment of their obligations with the stock exchange itself and with their customers.32
The guarantee fund is available not only for settlement failures but also to cover losses that could arise if, for example, brokerage houses do not perform the transactions according to the order they receive from their customers or if brokerage houses misuse the securities or funds that are made available to them by their customers.
The BVG has a general guarantee fund, which corresponds to the fund required by the SML, in which each member brokerage house has a cumulative contribution of approximately USD 13,000. There is also another fund of USD 3,000 per brokerage house to cover minor failures or mistakes.
The BVQ also has the general guarantee fund required by the SML and the amount each brokerage house has contributed with is also USD 13,000. The BVQ also has another fund to cover failures in the settlement of the cash leg of securities transactions. This fund is integrated with a share of the fees that are charged by the brokerage houses. As of September 2002 this last fund had cumulative contributions of nearly USD 10,000 per brokerage house.
For term transactions with securities, the BVQ requires brokerage houses to deliver to it securities or other banking assurances as collateral. This collateral shall not be less than 5 percent of the strike amount of the transaction and it should be maintained for the whole term of the transaction. In the BVG, the parties that enter into a term transaction must assure settlement by posting collateral no later than three days after the transaction was agreed upon. The size of the collateral will depend on the type of the securities being negotiated and on the transaction type.
6.4.1 Procedures to Solve Settlement Failures
For transactions made at the BVG, in case there is a settlement failure on the cash leg of the transaction the BVG uses the general guarantee fund. The BVG first uses the contributions of the failed brokerage house and if this is not enough it then uses the contributions of all other brokerage houses on a pro- rata basis. In case the guarantee fund as a whole is not enough to cover the settlement failure, then the BVG would unwind the failed transaction.
32 Article 52 of the SML.
60 Ecuador Report December 2002
In case the failure occurs on the securities leg of the transactions, the BVG has established a buy-in procedure on behalf of the selling brokerage house. The contributions this party has made to the general guarantee fund are used to cover any losses due to replacement cost risk.
For transactions made at the BVQ, as it was mentioned before there is a specific fund for failures in the settlement of the cash leg. In case of a default, the buyer of the securities has 72 hours to solve the problem. If the buyer does not come up with a solution then the BVQ takes the securities and sells them in the market place. Any losses are to be covered with the contributions the defaulting party has made to the settlement fund.
In case the failure occurs on the settlement of the securities leg, the BVQ directly unwinds the transactions and only compensates the buyer with the fees that the transaction would have produced.
6.4.2 Securities Lending
There are no securities lending mechanisms neither in the Quito Stock Exchange nor in the Guayaquil Stock Exchange.
6.5 INTERNATIONAL LINKS AMONG CLEARANCE AND SETTLEMENT INSTITUTIONS
At present, there are no connections between DECEVALE and other CSDs located in other countries.
6.6 MAJOR PROJECTS AND POLICIES B EING IMPLEMENTED C ONCERNING CUSTODY, CLEARING AND SETTLEMENT
6.6.1 Securities Custody System (SCTV)
At present, there is no link among the custody system of the BCE and its current accounts system. For this reason, only free-of-payment securities transfers can be made in the custody system of the BCE.
As part of its reform efforts, the BCE is planning on making major changes to its custody system in order to allow for the transactions with securities in its custody33 to be settled under a DVP framework. For this purpose, the BCE intends to develop an interface between the custody system and the upcoming RTGS system (i.e., the On-line and Real Time Payments System (SPL)).
The new system will be named “Securities Custody System” (Sistema de Custodia de Titulos Valores, SCTV) and its main features will be the following:
· For a securities transaction to be settled, both the transfer order and the counterparty’s confirmation accepting the transaction will be required.
33 The design of the SCTV would also allow it to handle equities.
61 Ecuador Report December 2002
· The system will allow for on-line and real time inquiries and transactions.
· DVP will be achieved by integrating the securities transfers in the custody accounts with the funds transfers in the current accounts.
At the moment this Report was being prepared, the BCE had already completed the automation of the custody system and it was completing the testing phase. The BCE expects the SCTV to be fully operational and integrated with the SPL by mid 2003.
62 Ecuador Report December 2002
7 THE ROLE OF THE CENTRAL BANK IN CLEARANCE AND SETTLEMENT SYSTEMS
7.1 RESPONSIBILITIES
The Constitution of the Republic of Ecuador entitles the Central Bank of Ecuador (BCE) to establish, control and apply the financial policy, as well as to approve the necessary regulations for its implementation. The BCE determines and regulates the limits and the general conditions for the operations it holds with financial institutions and also for the operations among those institutions, including the rules for clearing and settlement mechanisms.
7.2 SETTLEMENT
The BCE supervises and controls the current accounts that the financial institutions hold with it. The BCE is the settlement agent of all payment systems that settle in these current accounts, like the large value system (i.e., the SLE), the cheque clearinghouse and the SPI.
At present, the BCE is not actively involved in the payment systems and mechanisms operated by other entities, such as payment cards. However, as part of its overall reform program the BCE has included a specific mechanism to become the formal settlement agent for these systems. Thus, with the implementation of the Clearinghouses System (Sistema de Cámaras de Compensación, SCC), the BCE is planning to become the final settlement agent of the bilateral or multilateral positions that are generated by the operators of private clearinghouses. By undertaking this responsibility, the BCE will be entitled to determine which clearinghouses qualify for this purpose and to approve their operational rules.
Finally, the BCE coordinates with the Ministry of Economy and Finance and other organisms the operation of the Budget Execution System (Sistema de Ejecución Presupuestaria, SEP) already explained in Section 4 of this Report.
7.3 THE RISK C ONTROL POLICY
As the BCE is no longer the issuer of the national currency, a key element of its risk control policy is for it not to undertake any credit risks in the payment systems it operates. Thus, for interbank payment orders that are processed in the large value systems the originator must necessarily have the required funds in its account, while for the DNS systems there are no possibilities of overdrafts or of BCE credit.
The dollarization of the economy also limits the capacity of the BCE to act as a lender of last resort for liquidity contingencies. The BCE has therefore created two contingency mechanisms, the Liquidity Fund for DNS systems and the Mechanisms for the Recycling of the Liquidity of the Financial System for the large-value systems (see Section 4). Both mechanisms have been created solely with the contributions of the participants and the BCE only acts as a facilitator for the redistribution of the liquidity throughout the system.
63 Ecuador Report December 2002
Finally, the BCE has established a series of standards and controls to prevent operational risks and it also has established a back office function to guarantee the proper processing of paper-based interbank payment instructions (i.e., the “Window” system).
7.4 THE ROLE OF THE BCE IN C ROSS-BORDER PAYMENTS
The BCE is a member country of the Latin American Association for Integration (Asociación Latinoamericana de Integración, ALADI), a system for the clearing and settlement of multilateral cross-border payments related to the intra-regional trade of 12 countries: Argentina, Brazil, Bolivia, Chile, Colombia, Dominican Republic, Ecuador, Mexico, Paraguay, Peru, Uruguay and Venezuela. In 1965, the central banks of these countries subscribed the “Reciprocal Payments and Credits Agreement” (Convenio de Pagos y Créditos Recíprocos) with the basic objective of reducing the cross-border transfer of foreign currencies among themselves. Through this agreement, members offer system participants the guarantees of convertibility, transferability and reimbursement.
Under the ALADI system, these central banks accept payment documents associated with the intra- regional trade, mainly those related to credit letters denominated in USD. The central bank of the country where the export was originated deposits funds, on behalf of the central bank of the importing country, in the commercial bank participating in the foreign trade transaction. Each country’s central bank also authorizes its financial institutions to send commercial transactions directly through ALADI as authorized institutions.
These transactions result in net accrued positions in USD among central banks. Every four months the Operations Center, located in the central bank of Peru, makes a cut-off of multilateral balances among central banks through the Automated System Supporting the ALADI Reciprocal Payments and Credit Agreement (Sistema Computarizado de Apoyo al Convenio de Pagos y Créditos Recíprocos ALADI, SICAP/ALADI). Funds are settled in the Federal Reserve Bank of New York, the correspondent bank of all ALADI member central banks. There are bilateral net debit limits (used credit lines) among counterparties. If a party exceeds this limit, the debtor central bank must make prepayments to reduce the amount and maintain itself within the limit. In recent years, due to the favorable growth of international reserves several central banks have been making prepayments even in those cases in which the maximum debt limits were not exceeded.34
The SICAP/ALADI allows the automation of the information regarding ALADI transactions as well as others related to the reciprocal relationships among member central banks. It also provides members with information on debits, credits, balances, number and interest calculations, extraordinary settlements, multilateral use of risk margins and authorized institutions tables, both for the current period and historical information.
On the other hand, in order to minimize the risks being undertaken by central banks by guaranteeing operations, in 1997 the ALADI members created the Future Commitments System (Sistema de
34 By doing this, the central banks also reduce their financial costs as debit balances are subject to interest payment.
64 Ecuador Report December 2002
Compromisos a Futuro, SICOF), through which the operators must indicate in advance the operations they will enter into the system.
In the sixties, nearly a third of all intra-regional foreign trade payments was cleared and settled through ALADI. In these years only some of the member countries were export-oriented and the ALADI agreement contributed to a more efficient use of international reserves. At the end of the seventies this figure increased to nearly 75 percent of total payments and it reached its maximum during the eighties with approximately 90 percent. However, during the Nineties the portion of international foreign trade payments channeled through the ALADI decreased significantly, reaching only 16.6 percent in 1997. This situation is due in part to the availability of new and more convenient financing methods and to the increase in the stock of international reserves in many of the region’s central banks. In 1998 the BCE made collections through ALADI for an amount equivalent to 6 percent of Ecuador’s intra-regional exports and made payments for an amount equivalent to 14 percent of the country’s intra-regional imports. For 2002 these figures had declined to 2 and 9 percent, respectively.
7.5 PRICING POLICIES
Each year the BCE sets the fees it will charge to the participants of the cheque clearinghouse. At present, there is a flat annual rate of USD 500 applicable to all participants. This amount is charged directly to the participants’ current accounts.
For the services it offers trough the SICAP–ALADI, the BCE charges an annual flat rate of USD 300. Payments must be made on the first 15 days of each year by the banks and finance companies interested in maintaining the “authorized institution” status for its main office or branches. This fee must be paid by each of the offices of a financial institution that hold the “authorized institution” status.
Finally, Table 9 below shows the charges the BCE applies for the services it provides in relation to interbank large value payments.
Table 9: Interbank Large Value Transfer Fees at the BCE
Concept Amount (in USD) “Window” (to be paid by the originator) 2.40 Proprietary SWIFT (to be paid by the originator) 1.20 “Diskette” (to be paid by the originator) 7.20 Distribution of budgetary allotments and others (to be paid by the originator) 1.20 Source: BCE.
65 Ecuador Report December 2002
8 SUPERVISION OF SECURITIES CLEARANCE AND SETTLEMENT SYSTEMS
8.1 SECURITIES REGULATOR SUPERVISORY AND STATUTORY RESPONSIBILITIES
The National Securities Council (CNV) is the entity in charge of issuing the general policies for the securities market and of regulating its functioning, while the Deputy Superintendence for Securities Markets of the Superintendence of Companies is the executive body of such general policies. Notwithstanding this Deputy Superintendence functions under the umbrella of the Superintendence of Companies, it is governed directly by the CNV.
The main responsibilities of the CNV are the following:
· Issuing the complementary rules and administrative resolutions that are necessary for the application of the SML, as well as the general rules on the basis of which the authorized market participants shall issue their self-regulatory rules.
· Establishing the parameters, index, ratios and all other solvency and prudential rules for the entities regulated by the SML. Also, issuing the accounting rules for securities market participants.
· Regulating the registrations in the RMV and overseeing its proper maintenance. Also, establishing a national securities numbering system that complies with the international standards.
· Approving the organizational structure of the Deputy Superintendence for Securities Markets of the Superintendence of Companies.
· Fostering the development of the securities market by implementing development and training policies and mechanisms. Also, promoting new stock issuances and other financing alternatives through the securities market and the design and implementation of new financial instruments to be used in this market.
· Establishing the general rules for the administration and application of sanctions.
As per the Superintendence of Companies, its main functions in the securities market are the following:
· Carrying out inspections of the firms, entities and all other persons participating in the securities market.
· Investigating the possible violations to the SML and to the regulations and other rules stemming from it by the institutions under its direct control or by any other persons participating
66 Ecuador Report December 2002
either directly or indirectly in the securities market. Also, if applicable, sanctioning these actions.
· Authorizing securities public offerings.
· Authorizing the creation and functioning of stock exchanges, brokerage houses, risk rating agencies, CSDs, mutual funds management firms, trusts, external auditors and all other individuals or firms that participate in the securities market.
· Organizing and maintaining the RMV.
· Requiring and providing information on the activities of the individuals or firms under its direct control.
8.1.1 Responsibility over the Stock Exchanges and the CSD
According to the SML, stock exchanges and securities market industry associations may issue their self-regulatory rules having only to comply with the general rules that the CNV will issue for this purpose.
On the other hand, as it was mentioned before the Superintendence of Companies is the entity in charge of authorizing the functioning of stock exchanges and CSDs. The Superintendence of Companies is also authorized to carry out inspections to these institutions. The SML grants it broad powers and immunity to verify the transactions, accounting books and working papers, information and any other documents or instruments. In this regard, the banking and securities secrecy laws are not applicable to its activities. The Superintendence may require the supervised institutions to comply with the corrective measures it deems necessary.
The Superintendence of Companies may also require the suspension or modification of the self- regulatory rules that have been issued by the stock exchanges and industry associations if it considers that such rules could harm the development of the market, or if such rules contradict other laws or regulations.
After previous consultation with the Ministry of Economy and Finance, the Superintendent of the SBS, the General Manager of the BCE and the Chairpersons of the nation’s stock exchanges, the Superintendence of Companies may dictate the temporary suspension, up to 7 days, of the transactions in the securities market if it considers there is an emergency situation producing distortions that induce heavy price fluctuations.
8.1.2 Information Obligations
The Superintendence of Companies is empowered by the SML to require and provide information on the activities of the individuals or firms under its direct control. Moreover, the Superintendence must have an information center that is accessible to the overall public.
67 Ecuador Report December 2002
The Superintendence must, on the other hand, regulate and supervise the advertising of the institutions under its control. In this regard, it must ensure that such advertisements reflect the real legal and economic features of the relevant products or services in order to avoid misinformation and unfair competition.
8.1.3 Sanctioning Capacity
Those individuals or firms that infringe the SML, its regulations, the resolutions issued by the CNV and all other rules related to the securities market can be subject to civil, administrative and even criminal penalties and sanctions.
The Superintendence of Companies has powers to apply administrative sanctions. Some of the most relevant actions that could derive in administrative sanctions and penalties are the following:
· Holding a securities public offering without having complied with all the requirements that have been established for this purpose.
· Holding intermediation activities with securities not registered in the RMV, except for those cases explicitly stated in the SML.
· Making an inadequate disclosure of the information that is required by the SML and its complementary rules.
· Not preserving the confidentiality of insider information or misusing this information.
· Trading securities without complying with the rules set forth in the SML, its regulations and other relevant rules, and particularly without complying with the “purchasing notice” procedures for those cases in which such a notice is required.
· Not carrying out the instructions received from their customers to hold transactions in the securities market.
· Violating the rules dealing with risk ratings.
· Infringing the rules that regulate the activities of CSDs.
· Incurring in monopolistic or oligopolistic behaviors as per the setting of fees and other charges to customers.
Articles 208 and 209 of the SML describe the graduation of the administrative sanctions to be applied by the Superintendence of Companies on the basis of the severity of the infractions. Sanctions may range from verbal or written reprimands to fines of up to UVCs 10,000,35 or in the most severe cases an irrevocable prohibition to participate in securities market activities.
35 Approximately USD 27,000.
68 Ecuador Report December 2002
8.2 SELF-REGULATORY ORGANIZATIONS SUPERVISORY AND STATUTORY RESPONSIBILITIES
Self-regulation is described in the SML as the power that is given to stock exchanges and securities market industry associations, once recognized by the CNV, to issue their own regulations and internal rules, as well as to exercise control activities over their members and to establish sanctions within their corresponding competences.
Thus, the stock exchanges and industry association are entitled to issue their internal and operational rules, after the approval of their governing bodies only. These regulations enter into force five days after their members and the Superintendence of Companies have received the relevant notification.
Self-regulatory rules must include at least rules that deal with ethics, discipline, self-control, surveillance, sanctions and market best practices. Infringements to these self-regulatory rules are to be sanctioned by the self-regulatory organization, independently of any additional sanctions the supervisory authority may decide to apply.
8.2.1 Stock Exchanges
The purpose of stock exchanges is to contribute to the creation of an informed, competitive, transparent and integrated securities market.
The Quito Stock Exchange (BVQ) has issued an ethics code to which securities intermediaries, issuers and other participants must adhere. This code includes general principles related to ethics, lawfulness, honesty, professionalism, secrecy, conflicts of interest and the avoidance of price manipulation. It also contains sets of detailed principles for both securities intermediaries and for issuers.
In case of inobservance of these principles, the Ethics and Discipline Court of the BVQ may apply the following sanctions, independently of the sanctions that the SML and other regulations consider for cases like this:
· To stock exchange members, suspension of the authorization to operate in the stock exchange or the expulsion from the stock exchange.
· To issuers, suspension or cancellation of their registration and listing in the stock exchange.
8.2.2 Central Securities Depositories
The regulation for DECEVALE was issued by the CNV, as CSDs are not considered self-regulatory organizations. Thus, CSDs may only issue very specific rules that, nevertheless, must be previously approved by the Superintendence of Companies.
69 Ecuador Report December 2002
APPENDIX: STATISTICAL TABLES
The first series (A) are payment and securities clearance and settlement statistics in Ecuador. The second series (B) are more general statistics of the financial system.
Starting 2002, the Working Group on Payment System Issues of Latin America and the Caribbean (WGPS-LAC), has been working on a document on Comparative Statistical Tables on Payments and Securities Clearance and Settlement Systems for the Region’s countries. For the latter, the statistical tables of individual countries are being updated periodically and may be reviewed at the WHI’s web site: www.ipho-whpi.org.
SERIES A Payments and securities clearance and settlement statistics
A1 Basic Statistical Data ...... 73 A2 Settlement Media Used by Non-banks ...... 73 A3 Settlement Media Used by Credit/Deposit Taking Institutions ...... 74 A4 Institutional Framework ...... 74 A5 Bank Notes and Coins ...... 74
A6 Cash Dispensers, ATMs and EFTPOS Terminals ...... 75 A7 Number of Payment Cards in Circulation ...... 75 A8 Indicators of Use of Various Cashless Payment Instruments (volume of transactions) ...... 76 A9 Indicators of Use of Various Cashless Payment Instruments (value of transactions) ...... 77 A10 Payment Instructions Handled by Selected Interbank Transfer Systems (volume of transactions) ...... 77 A11 Payment Instructions Handled by Selected Interbank Transfer Systems (value of transactions) ...... 78 A12 Securities and Accounts Registered at the Central Securities Depositories ...... 78
A13 Securities in Custody at the BCE ...... 78 A14 Transfer Instructions Handled by Securities Settlement Systems (volume of transactions) ...... 78 A15 Transfer Instructions Handled by Securities Settlement Systems (value of transactions) ...... 78
71 Ecuador Report December 2002
A16 Participation in SWIFT by Domestic Institutions ...... 79 A17 SWIFT Message Flows To / From Domestic Users ...... 79
SERIES B Financial system general statistics
B1 Number of Financial Entities ...... 80 B2 Number of Current, Savings and Term Accounts ...... 80 B3 Private Banks - Assets ...... 80 B4 Private Banks - Deposits ...... 81 B5 Capital ...... 81 B6 Credit to the Private Sector ...... 81 B7 Stock Market ...... 82 B8 Bond Issuances ...... 82 B9 Operations in ALADI ...... 82
72 Ecuador Report December 2002
Table A1: Basic Statistical Data*
1998 1999 2000 2001 2002 Population (in millions) 12.2 12.4 12.6 12.2 12.5 GDP (in USD million) 23,635 16,674 15,933 21,054 24,417 GDP per Capita (in USD) 2,035 1,429 1,338 1,729 1,968 (a) Exchange Rate: (Sucres/USD) year-end 6,765.0 19,858.0 25,000 ...... year average 5,438.2 11,767.8 25,000 ...... Source: BCE. (a) Beginning January 2000, Ecuador adopted the USD as its official currency.
Table A2: Settlement Media Used by Non-banks (in Sucres million (1998-1999) and USD million (2000-2002), year-end)
1998 1999 2000 2001 Sep-2002 (a) Bank Notes and Coins Issued 5,689,445 13,410,226 700 27 37 Transferable Deposits in Local (a) Currency 15,036,906 21,673,637 ...... Households 12,910,827 18,584,309 ...... Business Sector 1,392,896 2,181,471 ...... Others 733,183 907,857 ...... (a) Narrow Money Supply (M1) 32,421,206 51,645,037 2,659 3,372 4,003 Transferable Deposits in Foreign (a) Currency 11,694,855 16,561,174 2,674 3,345 3,966 Households 10,109,626 14,735,584 2,086 2,427 2,993 Business Sector 880,110 898,419 89 40 20 Others 705,119 927,171 500 878 953 Broad Monetary Aggregate (M3) 34,862,060 63,040,835 5,333 5,439 6,463 Source: BCE. (a) Beginning January 2000, Ecuador adopted the USD as its official currency.
* The following conventions for notation are used throughout the Statistical Appendix: “n.a.” indicates data that are not available; “…” stands for data that are not applicable; “neg” (negligible) indicates where data are very small relative to other relevant data in the table concerned.
73 Ecuador Report December 2002
Table A3: Settlement Media Used by Credit/Deposit Taking Institutions (in USD million, year-end)
1998 1999 2000* 2001 Sep-2002 Required Reserves held at the Central Bank 2,160 1,331 1,574 919 1,049 (a) In local currency 1,728 1,065 ...... In foreign currency 432 266 1,574 919 1,049 of which, usable for settlement: 2,201 1,591 1,833 ...... (a) In local currency 1,761 1,326 ...... In foreign currency 440 265 1,833 919 1,049 Excess Reserves held at the Central Bank 373 (6) 259 ...... (a) In local currency 186 (5) ...... In foreign currency 186 (1.25) 259 35 ... Central Bank Loans to Financial Institutions 448 1,851 38 ...... Transferable Deposits at Other Entities 4 ...... Source: BCE. (a) Items in local currency were converted into USD at the year-end exchange rate of each year.
Table A4: Institutional Framework December 2001 October 2002 Value of Value of accounts accounts Number of Number of Number (in USD Number of Number of Number (in USD institutions branches of accounts thousands) institutions branches of accounts thousands) Central Bank 1 3 4,942 1,017,591 1 3 5,310 1,290,196 Commercial Banks 25 896 3,450,092 6,359,118 25 896 2,950,270 5,005,625 Stated-owned banks 3 160 144,113 177,300 3 160 151,698 177,300 Private banks 20 730 3,238,330 4,868,800 20 730 3,238,330 3,647,568 Branches of foreing banks 2 6 67,649 592,208 2 6 59,005 500,563 Non-Banking Financial Institutions 47 884 ... 720,810 47 884 ... 750,844 Post Office n.a. n.a...... n.a. n.a...... Source: SBS.
Table A5: Bank Notes and Coins (in Sucres million (1998-1999) and USD million (2000-2002), year-end) 1998 1999 2000* 2001 Oct-2002 (a) Total Bank Notes Issued 597,429 1,379,847 649 ...... Total Coins Issued 66,051 32,605 51 27 37 Bank notes and coins held at banks n.a. n.a. 116 143 122 Bank notes and coins held outside banks n.a. n.a. 380 423 526 Source: BCE. (a) Beginning January 2000, Ecuador adopted the USD as its official currency.
74 Ecuador Report December 2002
Table A6: Cash Dispensers, ATMs and EFTPOS Terminals (year-end)
1998 1999 2000 2001 Oct-2002 Cash Dispensers and ATMs Number of networks 1 1 1 1 1 Number of terminals 597 790 753 714 856 Volume of transactions 21,505,893 17,208,691 15,506,767 11,706,947 8,959,197 Value of transactions (in USD) n.a. 132,480,000 165,600,000 207,000,000 248,400,000 EFTPOS Number of networks 1 1 1 1 1 Debit Cards 1 1 1 1 1 Credit Cards 1 1 1 1 1 Number of terminals n.a. n.a. n.a. n.a. n.a. Source: Banred.
Table A7: Number of Payment Cards in Circulation (year-end)
1998 1999 2000 2001 Oct-2002 Cards with a cash function 655,200 1,092,000 1,430,000 1,560,000 1,625,000 Cards with a debit/credit function 1,096,471 1,289,347 1,670,000 1,949,954 2,066,764 of which: Debit Cards 624,000 1,040,000 1,300,000 1,150,265 1,230,852 Credit Cards 472,471 249,347 370,000 799,689 835,912 Cards with a cheque-guarantee function ...... Retail and fidelity cards ...... Stored-value cards ...... Sources: Banred and credit card issuing firms.
75 Ecuador Report December 2002
Table A8: Indicators of Use of Various Cashless Payment Instruments (volume of transactions) 1998 1999 2000 2001 2002 Cheques issued 43,658,631 24,749,495 27,822,830 32,679,451 32,645,460 (a) In local currency 43,117,265 24,201,363 12,885,941 33,991 ... In foreign currency 541,366 548,132 14,936,889 32,645,460 29,327,750 Payments with cards 1,096,471 1,289,349 n.a. 3,429,457 4,844,305 Debit 624,000 1,040,000 n.a. n.a. n.a. Credit 472,471 249,349 256,535 n.a. n.a. Paper-based credit transfers 3,361,138 3,697,252 4,346,617 n.a. n.a. Initiated by clients 3,193,081 3,512,389 3,863,628 n.a. n.a. Interbank / large value 168,057 184,863 482,989 439,076 450,200 Paperless credit transfers 1,116,185 1,227,804 2,175,158 1,825,372 1,344,655 Initiated by clients 620,103 682,113 185,032 166,632 103,435 Interbank / large value 496,082 545,691 1,990,126 1,658,740 1,241,220 Direct Debits ...... E-money ...... Sources: BCE and Financial Institutions. (a) Beginning January 2000, Ecuador adopted the USD as its official currency.
76 Ecuador Report December 2002
Table A9: Indicators of Use of Various Cashless Payment Instruments (value of transactions, in Sucres million (1998-1999) and USD million (2000-2002))
1998 1999 2000 2001 2002 Cheques issued 147,926,061 108,194,942 10,271 22,725 28,736 (a) In local currency 147,923,952 108,193,571 1,491 13 ... In foreign currency 2,109 1,370 8,780 22,712 28,736 Payments with cards n.a. n.a. n.a. n.a. n.a. Debit n.a. n.a. n.a. n.a. n.a. Credit 18,898 12,467 1,239 1,487 1,784 Paper-based credit transfers 22,877 57,192 59,382 n.a. n.a. (b) Initiated by clients 5,719 14,298 14,846 n.a. n.a. Interbank / large value 17,158 42,894 44,537 27,819 21,727 Paperless credit transfers 2,463 4,210 10,520 23,502 24,829 Initiated by clients 616 1,053 2,630 7,223 8,443 Interbank / large value 1,847 3,158 7,890 16,279 16,386 Direct Debits ...... E-money ...... Sources: BCE and Financial Institutions. (a) Beginning January 2000, Ecuador adopted the USD as its official currency. (b) Estimates.
Table A10: Payment Instructions Handled by Selected Interbank Transfer Systems (volume of transactions)
1998 1999 2000 2001 2002 (a) Low value system (SPI) ...... 261,824 in local currency ...... in foreign currency ...... 261,824 Large value system (SLE) 27,630 182,795 173,532 152,021 132,682 (b) in local currency 24,867 181,849 45,603 ...... in foreign currency 2,763 946 127,929 152,021 132,682 Source: BCE. (a) The BCE launched the SPI in August 2002. (b) Beginning January 2000, Ecuador adopted the USD as its official currency.
77 Ecuador Report December 2002
Table A11: Payment Instructions Handled by Selected Interbank Transfer Systems (value of transactions, in Sucres million (1998-1999) and USD million (2000-2002)) 1998 1999 2000 2001 2002 (a) Low value system (SPI) ...... 154 in local currency ...... in foreign currency ...... 154 Large value system (SLE) 66,804,188 165,459,064 10,999 19,611 18,770 (b) in local currency 66,803,100 165,445,592 465 ...... in foreign currency 1,088 13,472 10,534 19,611 18,770 Source: BCE. (a) The BCE launched the SPI in August 2002. (b) Beginning January 2000, Ecuador adopted the USD as its official currency.
Table A12: Securities and Accounts Registered at the Central Securities Depositories December 2002 Volume Value (in USD thousands) Dematerialized Securities in Custody 30 1,080.6 Other Securities in Custody 112 11,970.4 Source: DECEVALE.
Table A13: Securities in Custody at the BCE December 2002 Volume Value (in USD thousands) Government and Central Bank Securities in Custody 16,640 2,312.6 Other Securities in Administration 1,268 6.3 Other Securities in Custody 329,414 786.7 Other Securities in Guarantee 26 5.8 Source: BCE.
Table A14: Transfer Instructions Handled by Securities Settlement Systems (volume of transactions) At the moment this Report was prepared, the information was not available under this format
Table A15: Transfer Instructions Handled by Securities Settlement Systems (value of transactions) At the moment this Report was prepared, the information was not available under this format
78 Ecuador Report December 2002
Table A16: Participation in SWIFT by Domestic Institutions
1998 1999 2000 2001 2002 Domestic SWIFT users 27 27 19 16 16 Members 27 27 17 9 9 Sub-members ...... 2 7 7 Participants ...... SWIFT users worldwide 6,557 6,797 7,125 7,199 7,322 Members 2,980 2,214 2,288 2,241 n.a. Sub-members 2,720 2,763 2,978 3,027 n.a. Participants 857 1,820 1,859 1,931 n.a. Sources: BCE and SWIFT.
Table A17: SWIFT Message Flows To / From Domestic Users
1998 1999 2000 2001 2002 Total messages sent 22,633 36,290 157,291 149,986 183,351 Of which: Category I 22,633 36,290 157,291 149,986 183,351 Category II ...... Total messages received 22,633 36,290 157,291 149,984 126,000 Of which: Category I 22,633 36,290 157,291 149,984 126,000 Category II ...... Total Domestic Traffic 943 2,358 121,291 112,984 145,934 Memo: Global SWIFT Traffic 907,617,576 1,015,105,357 1,223,771,421 n.a. n.a. Sources: BCE and SWIFT.
79 Ecuador Report December 2002
Table B1: Number of Financial Entities 1998 1999 2000 2001 2002 Private Financial Institutions 144 132 115 111 97 Private Banks 36 29 27 23 22 Finance Companies 26 24 13 13 10 Mutual Institutions 7 7 7 7 6 Savings and Loans Cooperatives 25 26 26 26 27 Financial Services Institutions 25 23 21 21 16 General Deposit Warehouses 8 7 7 7 7 Commercial Leasing Companies 0 0 0 0 0 Credit Card Issuing Firms 1 1 1 1 1 Foreign Exchange Houses 13 13 11 11 6 Credit Guarantors 3 2 2 2 2 Source: SBS.
Table B2: Number of Current, Savings and Term Accounts
December 2001 October 2002 Current Savings Term Current Savings Term Accounts Accounts Accounts Accounts Accounts Accounts Central Bank 4,942 ...... 5,310 ...... Commercial Banks 934,776 2,070,055 517,514 925,364 1,659,034 365,872 Of which: State-owned banks 32,253 111,860 ... 39,023 115,328 ... Private banks 902,523 1,958,195 517,514 886,341 1,543,706 365,872 Source: BCE.
Table B3: Private Banks - Assets (in Sucres million (1998-1999) and USD million (2000-2002))
1998 1999 2000 2001 Oct-2002 Total Assets 62,910,430 107,293,900 5,367 6,339 6,271 Cash items 7,703,707 15,018,370 878 1,099 1,127 Interbank Funds Sold 590,286 773,552 0 1 3 Investments 11,270,521 20,152,802 735 1,025 978 Loan and leasing portfolios 29,901,127 47,172,971 1,906 2,499 2,661 Other Debtors 824,239 1,180,442 40 30 34 Other collectable items 1,017,591 2,671,176 392 206 330 Seized Fixed Assets 595,234 2,122,714 183 133 131 Operational Fixed Assets 4,281,170 7,269,817 491 594 370 Other Assets 6,726,556 10,932,056 742 752 637 Source: Private Banks.
80 Ecuador Report December 2002
Table B4: Private Banks - Deposits (in Sucres million (1998-1999) and USD million (2000-2002))
1998 1999 2000 2001 Oct-2002 Total Deposits 30,949,303 54,165,956 2,901 3,361 3,929 Sight Deposits 9,314,633 11,207,972 2,268 2,443 3,041 Current Accounts 4,698,417 6,648,851 1,283 1,356 1,848 Savings 3,970,850 4,099,171 626 918 1,170 Other Deposits 640,775 458,473 359 15 23 Guarantee Deposits 4,591 1,477 0 154 0 (a) Term Deposits 8,547,849 11,669,030 … … … Repos 1,373,196 2,862,410 93 40 26 Funds belonging to cardholders 10,720 5,932 … … … Deposits in foreign currency 11,702,905 28,420,612 541 878 862 Source: Private Banks. (a) Includes shares, permanent and temporary participations. The classification of this item changed starting in year 2000.
Table B5: Capital (in USD million)
1998 1999 2000 2001 Oct-2002 National Financial System 820 314 368 374 349 Private banks 692 248 303 302 273 Finance Companies 44 15 13 16 18 (a) Mutual Institutions 29 20 20 25 25 (a) Savings and Loans Cooperatives 55 31 33 31 33 Sources: BCE y SBS. (a) For these institutions, net worth is considered here as capital since they do no have a paid-in equity.
Table B6: Credit to the Private Sector (in Sucres million (1998-1999) and USD million (2000-2002))
1998 1999 2000 2001 Oct-2002 (a) Total Credit 29,768,147 45,567,167 5,147 5,654 4,987 Loan Portfolio 29,231,870 43,173,529 4,283 5,109 4,444 Current 28,879,089 39,655,041 2,492 2,889 3,319 In arrears 2,856,395 26,511,053 2,281 2,220 1,125 Loan loss provisions (2,503,614) (22,992,565) (490) - - Others 539,277 2,393,638 864 545 543 Sources: BCE and Private Banks. (a) For 1998 and 1999 the figures include loans in local and in foreign currency.
81 Ecuador Report December 2002
Table B7: Stock Market
1998 1999 2000 2001 Oct-2002 Value of new equity public offerings (in USD million) 78 97 1 5 4 Volume of Traded Shares (in thousands) 943,291 432,229 46,248 264,850 850,757 Number of Transactions 1,414 492 137 70 243 Source: Guayaquil Stock Exchange.
Table B8: Bond Issuances (in Sucres million (1998-1999) and USD million (2000-2002))
1998 1999 2000 2001 Oct-2002 Total Amount Issued 2,188,556 2,869,211 223 2,811 2,537 Issues in local currency 502,388 254,681 82 ...... Pledge Bonds 2,692 1,559 62 ...... Development Bonds 31 11 11 ...... Mortgage Certificates 235,587 168,570 4 ...... Collateral Bonds 76,875 77,811 4 ...... Obligations 187,203 6,730 0 ...... Issues in foreign currency 1,686,168 2,614,530 141 2,811 2,537 Source: Private banks.
Table B9: Operations in ALADI (in USD million and percentages)
1998 1999 2000 2001 Aug-2002 Ecuador – Total Exports 4,203.0 4,451.0 4,926.0 4,678.4 3,277.7 Intra-regional Exports 878.0 828.9 1,079.8 1,071.4 594.6 As % of total exports 21 19 22 23 18 Collections through ALADI 52.2 24.8 22.5 13.3 9.5 As % of intra-regional exports 6 3 2 1 2 As % of total exports 1 1 0 0 0 Ecuador – Total Imports 5,575.7 3,017.3 3,721.2 5,362.9 4,296.2 Intra-regional Imports 1,700.1 1,016.3 1,396.0 1,916.9 1,677.1 As % of total imports 30 34 38 36 39 Payments through ALADI 246.1 195.1 203.1 217.6 146.7 As % of intra-regional imports 14 19 15 11 9 As % of total imports 4 6 5 4 3 Source: BCE.
82 Ecuador Report December 2002
LIST OF ABBREVIATIONS
ABPE Asociación de Bancos Privados del Ecuador (Private Banks Association of Ecuador) ACH Automated Clearing House ADRs American Depository Receipts AGD Agencia de Garantías de Depósitos (Deposit Insurance Agency) ALADI Asociación Latinoamericana de Integración (Latin American Association for Integration) ATM Automated Teller Machine BCE Banco Central del Ecuador (Central Bank of Ecuador) BIS Bank for International Settlements BNF Banco Nacional de Fomento (National Development Bank) BVG Bolsa de Valores de Guayaquil (Guayaquil Stock Exchange) BVQ Bolsa de Valores de Quito (Quito Stock Exchange) CAMELS Capital, Assets, Management, Earnings, Liquidity, Sensibility to Market Risks CETES Certificados del Tesoro (Treasury Certificates) CFN Corporación Financiera Nacional (National Finance Corporation) CNV Consejo Nacional de Valores (National Securities Council) CONSEP Consejo Nacional de Control de Sustancias Estupefacientes y Psicotrópicas (National Drug Control Council) CPI Consumer Price Index CPSIPS Core Principles for Systemically Important Payment Systems CPSS Committee on Payment and Settlement Systems CSD Central Securities Depository DNS Deferred Net Settlement DVP Delivery versus Payment EFTPOS Electronic Funds Transfer at the Point of Sale FDI Foreign Direct Investment FATF Financial Action Task Force GDP Gross Domestic Product IAS International Accounting Standards IMF International Monetary Fund ISIN International Securities Industry Numbering
83 Ecuador Report December 2002
LBC Sistema de Líneas Bilaterales de Crédito (Bilateral Credit Lines System) LGISF Ley General de Instituciones del Sistema Financiero (Financial Sector Institutions General Law) NACHA National Automated Clearing House Association OMOs Open Market Operations OTC Over-the-Counter PKI Public Key Infrastructure POS Point of Sale PVP Payment versus Payment RMV Registro del Mercado de Valores (Securities Market Registry) RTGS Real Time Gross Settlement SBS Superintendencia de Bancos y Seguros (Superintendence of Banks and Insurance) SCC Sistema de Cámaras de Compensación (Clearinghouses’ System) SCTV Sistema de Custodia de Títulos Valores (Securities Custody System) SEP Sistema de Ejecución Presupuestaria (Budget Execution System) SICAP Sistema Computarizado de Apoyo al Convenio de Pagos y Créditos Recíprocos de ALADI (Automated System Supporting the ALADI Reciprocal Payments and Credits Agreement) SICOF Sistema de Compromisos a Futuro (Future Commitments System) SINEL Sistema de Negociación Electrónica (Electronic Trading System) SLE Sistema de Liquidación y Ejecución (Settlement and Execution System) SML Securities Market Law SPI Sistema de Pago Interbancario (Interbank Payment System) SPL Sistema de Pagos en Línea y Tiempo Real (On-line and Real-Time Payment System) SPN Sistema de Pagos por Valores Netos (Net Balance Payment System) STP Straight Through Processing SWIFT Society for Worldwide Interbank Financial Telecommunication TBCs Títulos del Banco Central (Central Bank Securities) UPIR-DN Dirección Nacional de Procesamiento de Información Reservada (National Department for the Processing of Protected Information) USA United States of America UVCs Unidades de Valor Constante (Constant Value Units)
84 Ecuador Report December 2002
GLOSSARY
In January 2001, the Committee on Payment and Settlement Systems (CPSS) of the Bank for International Settlements (BIS) published a combined glossary for payments and securities clearance and settlement terms. The Glossary can be found on the BIS web site: www.bis.org. The Western Hemisphere Payments and Securities Clearance and Settlement Initiative (WHI), on the basis of the glossary produced by the CPSS, also produced a uniform glossary of terms in Spanish in order to avoid unnecessary proliferation of terminology and definitions. The latter can be found at the WHI’s web site: www.ipho-whpi.org.
Below are some terms not mentioned in that Glossary and/or that are peculiar to the Ecuadorian context:
Credit and Debit Vouchers: physical documents containing instructions to credit or debit the current accounts of financial institutions at the BCE. These vouchers are settled as part of the rejected items session of the cheque clearinghouse. These vouchers are typically issued by the operators of ATM networks and card systems to settle the resulting interbank balances.
Cut-off times: the specific times of the day or intervals throughout the operating hours in which a payment system processes a clearance and settlement cycle.
Diskette: a funds transfer mechanism operated by the BCE in which institutions that hold a current account with it, mainly public sector institutions, deliver a diskette with information on payments to be made. BCE personnel load this diskette into its system and after completing several manual procedures the payment instructions are posted in the current accounts.
Dollarization: a process implemented by the Ecuadorian authorities in January 2000 by which the USD replaces the former national currency in all its three functions, i.e., as a reserve for value, unit of account and medium of exchange or payment.
ECUINDEX: the value index of the stock exchanges of Ecuador.
Liquidity Fund: a mechanism in the BCE that allows financial institutions to access emergency funds when they are facing difficulties to settle their positions at the cheque clearinghouse. Participants have automatic access to their own contributions to the fund, which are equal to 1 percent of all liabilities subject to reserve requirements. If they need additional funds, they may apply for a loan to the Fund’s Management Committee.
85 Ecuador Report December 2002
Market-making: a function that is performed by some financial intermediaries and consisting in that the intermediaries stand ready to buy and sell certain securities at any time, thereby increasing the liquidity of the secondary market for those securities.
Mechanism for the Recycling of a BCE mechanism to re-circulate liquidity in the financial system Liquidity in the Financial System: and that was created because of the lack of a lender of last resort in the Ecuadorian economy after going to full dollarization in 2000. In this mechanism, every week the BCE auctions TBCs to collect liquidity from some participants. Then, through a reverse repo with TBCs as the underlying security it auctions back these resources to financial institutions. Originator: customer of an originating institution who uses payment services and produces instructions to be executed by the receiving institution. Papeletas: paper documents that the institutions holding an account at the BCE deliver to the latter with standardized payment instructions. Payments System: the set of payment systems in a country. Receiver: is the final person or firm who receives a debit or credit in his account, according to the instructions sent by the originating institution. Securitization: a process by which an otherwise illiquid financial asset is transformed into negotiable securities. Underwriting: the process through which a financial intermediary, generally a brokerage house or investment bank, that place securities in the market guarantees a minimum price to the issuer of the securities. Verifying banks: these institutions provide reception and verification services to the Guayaquil Stock Exchange so that physical securities no longer must be taken to the exchange’s premises.
Window : a funds transfer system at the BCE in which the institutions that have a current account at the central bank deliver paper formats containing payment instructions at the premises of the BCE.
86 ISBN 968-6154-93-0