_SECURITIES CLEARANCE AND SE7 LEMENTSYSTEMS_

# **INTRODUCTION**

This paper presents a methodology to assess securities clearance and settlement systems based on international standards and best practices. The first part of the paper discusses the major components of a typical system and identifies those issues that determine the extent to which the system satisfies the critical needs of all stakeholders for safety, soundness, certainty and efficiency at an acceptable level of cost. The issues identified during this discussion provide the foundation upon which the assessment methodology is constructed. Although clearance and settlement systems in all countries have a range of common features and functions, it is also clear that local realities stemming from historical developments as well as legal and cultural precedents can have a significant influence on the specifics of a particular national system. With this in mind, the assessment methodology described in this paper should be applied in a way that takes account of both international standards and local realities as it is evident that no specific common system can satisfy the total needs of all countries.

The primary policy, organizational, and operational facets of securities clearance and settlement systems can be identified through a structured analysis of the answers to four distinct but interconnected questions:

- What is the objective and scope of a securities clearance and settlement system;

- Who are the participants, what roles do they play, and what expectations do they have;

- What procedures are required to satisfy participant needs; and

- What inherent risks are involved and how can they be mitigated at an acceptable cost.

# **OBJECTIVE,** SCOPE, **AND ELEMENTS'**

A payment system can be defined as the collection of institutions, instruments, rules, procedures, standards, and technical means used to exchange financial value between two parties discharging an obligation.<sup>2</sup> A securities clearance and settlement system can be considered as part of the overall payment mechanisms of a country in that it satisfies the main features of this overall definition. In this case the exchange of financial value consists both of the exchange of securities (equity, fixed income, or derivatives) and the exchange of liquid funds (usually cash or sight deposits).

Regulation and oversight of payment services have traditionally been viewed as one of the three pillars of central banking. The other two are the conduct of monetary policy and active prudential supervision<sup>3</sup> of deposit taking institutions. In terms of securities, government securities have traditionally received close attention from the central banks due to the role that they play as the government's bank as well as the agent of the government in regard to public debt management. Many central banks have enlarged their role in the payments systems field beyond the regulatory and supervisory aspects and provide operational services that supplement or complement services provided by the private sector. The specific role filled

- I _This section benefits from the presentation of Keppler, R.H., 1999,_ Transforming Payment Systems: The Building Blocks and the World Bank's Role, _World Bank/Federal Reserve Bank of New York (FRBNY) Seminar held at FRBNY, April 13-16, 1999._

- _2 Vid. Listfield, R. and F. Montes-Negret,_ Modernizing Payment Systems in Emerging Economies, _August 1994, Policy Research Working Paper #1936, The World, Bank, Financial Sector Development Department._

- _3 Vid. Padoa-Schiopa, 1992,_ La Moneta e it Sistema de Pagamenti.

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