Public Disclosure Authorized Public Disclosure Authorized FINANCIAL INFRASTRUCTURE SERIES PAYMENT SYSTEMS POLICY AND RESEARCH GUIDELINES FOR THE SUCCESSFUL Public Disclosure Authorized REGIONAL INTEGRATION OF FINANCIAL INFRASTRUCTURES January 2014 Public Disclosure Authorized GUIDELINES FOR THE SUCCESSFUL REGIONAL INTEGRATION OF FINANCIAL INFRASTRUCTURES January, 2014 ©2014 The International Bank for Reconstruction and Development / The World Bank 1818 H Street NW Washington DC 20433 Telephone: 202-473-1000 Internet: www.worldbank.org E-mail: [email protected] All rights reserved. This volume is a product of the staff of the International Bank for Reconstruction and Development/ The World Bank. The findings, interpretations, and conclusions expressed in this volume do not necessarily reflect the views of the Executive Directors of The World Bank or the governments they represent. The World Bank does not guarantee the accuracy of the data included in this work. 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All other queries on rights and licenses, including subsidiary rights, should be addressed to the Office of the Publisher, The World Bank, 1818 H Street NW, Washington, DC 20433, USA; fax: 202-522-2422; e-mail: [email protected]. Book cover and interior design by Michele de la Menardiere. FOREWORD Cross-border financial activities continue to intensify worldwide, keeping pace with the liberalization of trade and finance and with the growth of regional economic communities and free-trade zones. This scenario has prompted authorities and private sector stakeholders in various countries to pursue the integration of their financial infrastruc- tures. Operators, participants and customers of financial systems, along with regulators and oversight bodies, are all aware that such initiatives have the potential to produce significant benefits such as cost reduction, improved risk- management, and extended reach of services. Financial infrastructure integration supports the expansion of trade and investment flows and ultimately contributes to the deepening and broadening of regional financial and capital markets. Yet, several efforts to integrate financial infrastructures across borders have failed to provide many of their expected benefits and other projects remain non-operational despite the significant amount of time and money invested in them. Observing that flawed projects are often repeated, even in vastly different country contexts, led the World Bank to convene an international group of regulators and practitioners - the “G25 Panel of Experts” - to share and help codify the lessons learned from many experiences of regional, cross-regional, and global integration of financial infrastructures. Their first-hand insights are reflected in this report, complemented by the observations of World Bank staff and others. We hope that they will provide valuable factual and anecdotal input for addressing the challenges to achieve successful regional integration. The Guidelines for the Successful Regional Integration of Financial Infrastructures presented in this report have been derived directly from those experiences and insights. They provide a set of practical steps to assist stakeholders who are considering the merits of regional financial infrastructure integration, as well as those who are already involved in such efforts. In publishing this report, I would like to thank the Payment Systems Development Group team led by Massimo Cirasino, part of the World Bank’s Financial Inclusion and Infrastructure Global Practice. I would particularly like to recognize the efforts of World Bank staff members Jose Antonio Garcia, Marco Nicolì and Ceu Pereira. Special thanks go to Gertrude Tumpel-Gugerell, the Chairperson of the G25 Panel of Experts, and to each of the members of that panel for their efforts in putting together these guidelines. Klaus Tilmes Acting Vice President and Head of Network Financial and Private Sector Development The World Bank and International Finance Corporation TABLE OF CONTENTS Abbreviations v I. INTRODUCTION AND SUMMARY 1 1.1. KEY ELEMENTS IN RELATION TO REGIONAL FI INTEGRATION, 2 1.1.1 Drivers of Regional FI Integration, 3 1.1.2 Potential Benefits of Regional FI Integration, 3 1.1.3 Barriers, Risks and Other Challenges that Can Prevent Successful Regional FI Integration , 4 1.2. THE GUIDELINES FOR SUCCESSFUL REGIONAL INTEGRATION OF FINANCIAL INFRASTRUCTURES, 5 1.3. ORGANIZATION OF THE REPORT, 9 II. DRIVERS AND BENEFITS OF THE REGIONAL INTEGRATION OF FINANCIAL INFRASTRUCTURES 11 2.1 WHAT DRIVES REGIONAL FINANCIAL INFRASTRUCTURE INTEGRATION?, 11 2.2 POTENTIAL BENEFITS OF REGIONAL FINANCIAL INFRASTRUCTURE INTEGRATION, 12 III. GENERAL MODELS AND TRENDS OF REGIONAL INTEGRATION OF FINANCIAL INFRASTRUCTURES 19 3.1 FORMS OF INTEGRATION, 19 3.2 MODELS OF REGIONAL INTEGRATION OF FIS FOR PAYMENTS, 20 3.2.1 Payment Settlement Infrastructures, 20 3.2.2 Payment Clearing Infrastructures, 23 3.2.3 Retail Payment Transaction Services, 26 3.3 MODELS OF REGIONAL INTEGRATION OF FIS FOR SECURITIES AND DERIVATIVES, 28 3.3.1 Trading Infrastructures, 28 3.3.2 Central Securities Depositories and Securities Settlement Systems, 30 3.3.3 Central Counterparties, 33 3.3.4 Trade Repositories, 35 IV. LESSONS LEARNED: BARRIERS, RISKS AND OTHER CHALLENGES FOR EFFECTIVE REGIONAL FI INTEGRATION 37 4.1 BARRIERS TO EFFICIENT AND SAFE REGIONAL FINANCIAL INTEGRATION, 37 4.1.1 Legal and Regulatory Barriers, 38 4.1.2 Differences in Financial Market Organization, Practices and Technical Standards, 39 4.2 PROJECT PLANNING AND PROJECT MANAGEMENT CHALLENGES, 39 4.2.1 Developing a Strong Business Case, 39 4.2.2 Costs and Funding, 41 iii iv REGIONAL INTEGRATION GUIDELINES 4.2.3 Inadequate or Diminishing Commitment of Key Stakeholder Groups, 42 4.3 RISKS IN REGIONAL FINANCIAL INTEGRATION, 43 V. THE GUIDELINES FOR SUCCESSFUL REGIONAL INTEGRATION OF FINANCIAL INFRASTRUCTURES 47 5.1 ENABLING AND INSTITUTIONAL GUIDELINES, 47 5.2 PLANNING GUIDELINES, 49 5.3 DESIGN GUIDELINES, 52 5.4 IMPLEMENTATION GUIDELINES, 54 5.5 SUSTAINABILITY GUIDELINES, 55 ANNEX 1: Members of the G24 Panel of Experts, 57 ANNEX 2: Cross-border Integration Experiences of Financial Infrastructures for Payments, 58 ANNEX 3: Cross-border Integration Experiences of Financial Infrastructures for Securities and Derivatives, 64 ANNEX 4: Comparative Table of Cross-Border Financial Infrastructure Integration Projects, 72 ANNEX 5: Graphical Representations of Horizontal and Vertical Integration of Securities Trading, Clearing and Settlement Systems, 77 ANNEX 6: Legal and Regulatory Framework Harmonization Efforts, 79 ANNEX 7: Overview of Technical Standards Relevant for Regional FI Integration, 80 ANNEX 8: Glossary of Selected Terms, 82 List of Figures Figure 1: Decentralized Payments System, 21 Figure 2: Centralized Payments System, 22 Figure 3: Integration of CCPs: Peer-to-peer Model, 32 Figure 4: Integration of CCPs – Participant CCP model, 34 Figure 5: A Governance and Planning Framework for Regional FI Integration, 50 Figure 6: HKMA’s Pilot Platform for the Settlement of Cross-Border Securities Trades, 67 Figure 7: SADC Cross-Border DVP Settlement for Public Debt Securities, 69 Figure 8: Horizontal and Vertical Integration in the Central and Eastern European Stock Exchange Group (CEESEG), 77 Figure 9: Horizontal and Vertical Integration in NYSE Euronext (BE, FR, NL), LCH.Clearnet SA, Euroclear ESES, 77 Figure 10: Horizontal and Vertical Integration in NasdaqOMX, 78 List of Boxes Box 1: Definition of Financial Infrastructures, 2 Box 2: Main Drivers for regional FI Integration, 3 Box 3: Potential Direct Benefits of Regional FI integration, 4 Box 4: A Currency for Final Settlement in Cross-Border FI Arrangements, 24 Box 5: Main Types of Standards Relevant for Regional FI Integration, 40 Box 6: Key Elements to be Substantiated by the Business Case Analysis, 41 Box 7: Key Elements of the Business Framework for the new Regional FI Arrangement, 54 ABBREVIATIONS ABMI Asian Bond Market Initiative CPSS Committee on Payment and ACH Automated Clearing House Settlement Systems (www.bis.org/cpss/) ALADI Latin American Integration CSD Central Securities Depository Association (Asociación CSM Clearing and Settlement Mechanism Latinoamericana de Integración) DNS Deferred Net Settlement (ww.aladi.org) DTC Depository Trust Company AMF Arab Monetary Fund DTCC Depository Trust & Clearing ASEAN Association of Southeast Asian Corporation (www.dtcc.com) Nations (www.asean.org) DVP Delivery versus Payment ATM Automated Teller Machine EACH European Association of CCP Clearing BCBS Basel Committee on Banking Houses (www.eachorg.com) Supervision (www.bis.org/bcbs/) EACHA European Automated