Regional Trading Blocs and Economic Integration

Regional Trading Blocs and Economic Integration

 

 

From Asia’s Rise in the New World Trade Order

Asia Rising

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From What is Regional Trade Blocs or Free Trade Agreements?

As trade integration across countries is intensifying, we hear more and more about Free Trade Agreements (FTAs) and Regional Trade Blocs (RTBs). As their name suggests these RTBs/FTAs are arrangements aimed for faster trade liberalisation at regional levels.

Countries are convinced that trade is an engine of growth and they are searching for arrangements that promote trade.

The WTO that contains 162 countries is the most popular one; a truly multilateral forum for trade liberalisation. But the history of WTO led trade liberalisation shows that the organisation is facing difficulty in bringing further trade liberalisation because of conflicting interest among large number of countries.

This has led to interest in trade liberalisation within a limited number of countries that may be regionally close together. These regional trade promoting arrangements advocate more tariff cuts and removal of other restrictions within the group while maintaining restrictions against the rest of the world.

Though many regional trade agreements like the EU, NAFTA and ASEAN were established before or around the time of WTO’s formation, there is mushrooming of RTBs in recent years. Recently formed Trans Pacific Partnership (TPP) shows this increasing affinity towards RTBs. Many RTBs like the TPP would like to make advanced level trade liberalisation and hence they are not satisfied with the slow pace of trade liberalisation within the WTO.

What are Regional Trade Blocs (RTBs)?

Regional Trade Blocs or Regional Trade Agreements (or Free Trade Agreements) are a type of regional intergovernmental arrangement, where the participating countries agree to reduce or eliminate barriers to trade like tariffs and non-tariff barriers.  The RTBs are thus historically known for promoting trade within a region by reducing or eliminating tariff among the member countries.

Over the last few decades, international trade liberalisations are taking place in a serious manner through the formation of RTBs. They are getting wide attention because of many important international developments. First, now the world is trying hard to escape from the ongoing great recession phase. Second is the failure of the WTO to take further liberalisation measures on the trade liberalisation front.

The EU, NAFTA, ASEAN, SAFTA etc are all examples for regional integration. The triad of North America, Western Europe, and Asia Pacific have the most successful trade blocs. Recently signed Trans Pacific Partnership is a powerful RTB. Similarly, another one called RCEP is in negotiation round. India has signed an FTA with the ASEAN in 2009. Simultaneously, the country has signed many bilateral FTAs.

Different types of RTBs

All regional trade blocs don’t have the same degree of trade liberalisation. They may differ in terms of the extent of tariff cutting, coverage of goods and services, treatment of cross border investment among them, agreement on movement of labour etc.

The simple form of regional trade bloc is the Free Trade Area. The Free Trade Area is a type of trade bloc, a designated group of countries that have agreed to eliminate tariffs, quotas and preferences on most (if not all)goods and services traded between them.

From the lowest to the highest, regional trade integration may vary from just tariff reduction arrangement to adoption of a single currency. The most common type of regional trade bloc is the free trade agreement where the members abolish tariffs within the region. Following are the main types of regional economic integrations.

Classification of RTBs

Preferential trading union: Here, two or more countries form a trading club or a union and reduce tariffs on imports of each other ie, when they exchange tariff preferences and concessions.

Free trade union or association: Member countries abolish all tariffs within the union, but maintain their individual tariffs against the rest of the world.

Customs union: countries abolish all tariffs within and adopt a common external tariff against the rest of the world.

Common market: in addition to the customs union, unrestricted movement of all factors of production including labour between the member countries. In the case of European Common Market, once a visa is obtained one can get employed in France or Germany or in any other member country with limited restrictions.

Economic union: The Economic Union is the highest form of economic co-operation. In addition to the common market, there is common currency, common fiscal and monetary policies and exchange rate policies etc. European Union is the example for an Economic Union. Under the European Monetary Union, there is only one currency- the Euro.

At present, out of the total regional trade arrangements FTAs are the most common, accounting for nearly 90 per cent.

 

From Regionalism in a globalizing world: an Asia-Pacific perspective

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From Asia’s Rise in the New World Trade Order

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From The world’s free trade areas – and all you need to know about them

International trade is a driving force behind economic growth, and two so-called “mega-regional” trade deals are dominating public debate on the issue: the Trans-Pacific Partnership (TPP) and the Transatlantic Trade and Investment Partnership (TTIP).

But there are around 420 regional trade agreements already in force around the world, according to the World Trade Organization. Although not all are free trade agreements (FTAs), they still shape global trade as we know it.

 Global exports and trade agreements

Image: The Economist

 

What exactly are free trade areas?

The OECD defines a free trade area as a group of “countries within which tariffs and non-tariff trade barriers between the members are generally abolished but with no common trade policy toward non-members”.

The free movement of goods and services, both in the sense of geography and price, is the foundation of these trading agreements. However, tariffs are not necessarily completely abolished for all products.

 

Which are the world’s major free trade areas?

 

The North American Free Trade Agreement (NAFTA)

 

Free trade between the three member nations, Canada, the US and Mexico, has been in place since January 1994. Although tariffs weren’t fully abolished until 2008, by 2014 total trilateral merchandise trade exceeded US$1.12 trillion.

According to the US government, trade with Canada and Mexico supports more than 140,000 small and medium-size businesses and over 3 million jobs in the US. Gains in Canada are reportedly even higher, with 4.7 million new jobs added since 1993. The country is also the largest exporter of goods to the US.

 US Trade with NAFTA Partner 1993-2012

Image: Congressional Research Service

 

However, the Council on Foreign Relations suggests that the impact on Mexico is harder to assess. Per capita income has not risen as fast as expected; nor has it slowed Mexican emigration to the US. However, farm exports to the US have tripled since 1994, and the cost of goods in Mexico has declined. The cost of basic household goods has halved since NAFTA came into force, according to estimates by GEA, a Mexican economic consulting firm.

 

Association of Southeast Asian Nations Free Trade Area (AFTA)

 

The AFTA was signed in January 1992 in Singapore. The original members were Brunei, Indonesia, Malaysia, Philippines, Singapore and Thailand. Four countries have subsequently joined: Vietnam, Laos, Myanmar and Cambodia.

The bloc has largely removed all export and import duties on items traded between the nations. It has also entered into agreements with a number of other nations, including China, eliminating tariffs on around 90% of imported goods.

 The ASEAN AFTA

Image: ASEAN Briefing

 

The AFTA nations had a combined GDP of US$2.3 trillion in 2012, and they’re home to 600 million people. The agreement has therefore helped to dramatically reduce the cost of trade for a huge number of businesses and people.

 

Southern Common Market (MERCOSUR)

 

Although MERCOSUR was envisaged as a Latin American single market, enabling the free movement of people, goods, capitals and services, this vision is yet to become reality. Internal disputes have slowed progress towards removing tariffs and the free movement of people and goods.

But MERCOSUR is still one of the world’s leading economic blocs, and has a major influence on South American trade and the global economy.

 

Common Market of Eastern and Southern Africa (COMESA)

 

Formed in December 1994, the organization aims to develop natural and human resources to benefit the region’s population. Its primary focus, according to the United Nations, is to establish a large economic and unit to overcome barriers to trade.

With 19 member states, and an annual export bill in excess of $80 billion, the organization is a significant market place, both within Africa and globally.

 COMESA Member States

Image: United Nations

 

COMESA utlimately aims to remove all barriers to intra-regional trade, starting with preferential tariffs and working towards a tariff-free common market and economic union.

 

What about the European Union?

 

The EU is a single market, which is similar to a free trade area in that it has no tariffs, quotas or taxes on trade; but a single market allows the free movement of goods, services, capital and people.

The EU strives to remove non-tariff barriers to trade by applying the same rules and regulations to all of its member states. The region-wide regulations on everything from working hours to packaging are an attempt to create a level playing field. This is not necessarily the case in a free trade area.

 The European Union

Image: BBC

 

The creation of the single market was a slow process. In 1957, the Treaty of Rome established the European Economic Community (EEC) or Common Market. However, it was not until 1986 that the Single European Act was signed. This treaty formed the basis of the single market as we know it, as it aimed to establish the free-flow of trade across EU borders. By 1993 this process was largely complete, although work on a single market for services is still ongoing.

Today, the EU is the world’s largest economy, and the biggest exporter and importer. The EU itself has free trade agreements with other nations, including South Korea, Mexico and South Africa.

 The State of EU Trade

Image: European Union

 

What about the TPP and TTIP?

 

Once fully ratified, the Trans-Pacific Partnership is set to become the world’s largest trade agreement. The TPP already covers 40% of global GDP, and trade between member nations is already significant.

However, by removing tariffs and other barriers to trade, the agreement hopes to further develop economic ties and boost economic growth.

 The Trans-Pacific Trade Deal

Image: Reuters

 

The Transatlantic Trade and Investment Partnership is a deal currently being negotiated between the EU and the US. If reached, it would itself become the world’s largest trade agreement – covering 45% of global GDP.

Like the TPP, it aims to cut tariffs and regulatory barriers to trade. Among these is the removal of customs duties, according to the EU’s negotiation factsheet.

The Center for Economic Policy Research has estimated that the deal would be worth $134 billion a year for the EU and $107 billion for the US – although opponents have disputed these figures.

 Transatlantic Negotiations

Image: Brookings

As the World Economic Forum’s E15 Initiative has highlighted, effective global trade is central to economic growth and development. Trade agreements are an integral part of making this a reality.

From Regional Trade Agreements and the Multi-polar Global Order:
Implications for South Korea’s Economy

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From Regional Trade Agreements and the Multi-polar Global Order:
Implications for South Korea’s Economy

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From Regional Trade Agreements: Promoting conflict or building peace?

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Key Terms:

  • Rising Powers
  • Global Economic Governance
  • Mega-Regionals
  • World Trade Organization (WTO)
  • Transatlantic Trade and Investment Partnership (TTIP)
  • Transpacific Trade and Investment Partnership (TPP)
  • MFN (Most Favored Nation)
  • PTA (Preferred Trading Agreement)
  • FTA (Free Trade Agreement)
  • RTA (Regional Trade Agreement)
  • MTS (Multi Lateral Trade System)
  • BTA (Bilateral Trade Agreement)
  • Belt and Road Initiative
  • Regional Comprehensive Economic Partnership (RCEP)
  • ASEAN
  • AEC
  • APEC
  • BRICS
  • EU
  • SAARC
  • MERCOSUR
  • Free Trade Area of the Asia-Pacific (FTAAP)
  • NAFTA
  • ASEAN+3
  • ASEAN+6
  • Custom Unions
  • Common Markets
  • Economic Unions
  • GATT
  • WTO
  • SADC
  • COMESA
  • ECOWAS
  • ECCAS/CEEAC
  • SACU
  • AFTA
  • SAPTA/SAFTA

Key Sources of Research:

 

 

What is Regional Trade Blocs or Free Trade Agreements?

http://www.indianeconomy.net/splclassroom/107/what-is-regional-trade-blocs-or-free-trade-agreements/

 

 

 

The world’s free trade areas – and all you need to know about them

2016

WEF

https://www.weforum.org/agenda/2016/05/world-free-trade-areas-everything-you-need-to-know/

 

Regional trade agreements: Blessing or burden?

Caroline Freund, Emanuel Ornelas

02 June 2010

http://voxeu.org/article/regional-trade-agreements-blessing-or-burden

 

 

 

Regional Trade Agreements: Promoting conflict or building peace?

Oli Brown
Faisal Haq Shaheen
Shaheen Rafi Khan
Moeed Yusuf

October 2005

Click to access security_rta_conflict.pdf

 

 

 

Regional trade agreements

WTO

https://www.wto.org/english/tratop_e/region_e/region_e.htm

 

A COMPLETE GUIDE TO THE REGIONAL TRADE AGREEMENTS OF THE ASIA-PACIFIC

WRITTEN BY TIM MARTYN
MARCH 2001

Click to access martyn.pdf

 

 

 

Globalization and the Growth in Free Trade Agreements

SHUJIRO URATA

2002

Click to access Globalization_and_FTA.pdf

 

 

 

Regional trade agreements: blessing or burden?

 

Click to access cp313.pdf

 

 

 

Mexico’s Free Trade Agreements

M. Angeles Villarreal
Specialist in International Trade and Finance

April 25, 2017

Click to access R40784.pdf

 

 

Regional Trade Agreements in a Multilateral Trade Regime: An Overview

Parthapratim Pal

Click to access survey_paper_RTA.pdf

 

 

 

REGIONAL TRADE INTEGRATIONS: A Comparative Study of African RTAs

Sannassee R., Boopendra S and Tandrayen Verena

Click to access 15.pdf

 

 

 

Trade Blocks and the Gravity Model: A Study of Economic Integration among Asian
Developing Countries

E. M. Ekanayake

Amit Mukherjee

Bala Veeramacheneni

Click to access 9180KU76078V3656.pdf

 

 

Free Trade Agreements, the World Trade Organization and Open Trade

Michael SUTTON

Click to access 04sutton.pdf

 

 

 

REGIONAL TRADE BLOCS THE WAY TO THE FUTURE?

ALEJANDRO FOXLEY

Click to access regional_trade_blocs.pdf

 

 

 

Regional Trade Agreements and the WTO

Ildikó Virág-Neumann

2009

Click to access 32_Neumann-Virag.pdf

 

 

 

PREFERENTIAL TRADE AGREEMENTS AND THE WTO: IMPETUS OR IMPEDIMENT?

Committee on International Trade

Principal Drafters:
Helena Sullivan, Chair
Stuart Shroff
Mark Du
Albert Bloomsbury

THE ASSOCIATION OF THE BAR OF THE CITY OF NEW YORK
42 WEST 44TH STREET, NEW YORK, NY 10036

Click to access 20071935-PreferentialTradeAgreementsandtheWTO.pdf

 

 

 

Regional Trade Agreements and the Multi-polar Global Order:
Implications for South Korea’s Economy

Dr. Mi Park

Click to access 84.full.pdf

 

 

 

Rising Powers in the Global Trading System – China and Mega-Regional Trade Negotiations

Clara Brandi

2016

Click to access vol1.1.Clara-Brandi.pdf

 

Asia’s Rise in the New World Trade Order

The Effects of Mega-Regional Trade Agreements on Asian Countries

Part 2 of the GED Study Series:

Effects of Mega-Regional Trade Agreements

Click to access NW_Asia_s_Rise_in_the_New_World_Trade_Order.pdf

 

 

 

 

Regional Trade Agreements: Development Challenges and Policy Options

By Antoni Estevadeordal, Kati Suominen, Christian Volpe Martinicus,
December 2013

 

http://e15initiative.org/publications/regional-trade-agreements-development-challenges-and-policy-options/

http://e15initiative.org/themes/regional-trade-agreements/

 

 

 

Regional Trade Agreements

https://ustr.gov/trade-agreements/wto-multilateral-affairs/wto-issues/regional-trade-agreements

 

 

 

What are mega-regional trade agreements?

WEF

https://www.weforum.org/agenda/2014/07/trade-what-are-megaregionals/

 

Regional trade agreements, integration and development

2017

 

Click to access ser_rp2017d1_en.pdf

 

Mega-Regional Trade Agreements and the Future of the WTO

Chad Brown
PIIE

http://onlinelibrary.wiley.com/doi/10.1111/1758-5899.12391/epdf

https://piie.com/commentary/speeches-papers/mega-regional-trade-agreements-and-future-wto

 

 

CHINA’S NEW REGIONAL TRADE AGREEMENTS

Agata Antkiewicz

John Whalley

December 2004

 

Click to access w10992.pdf

 

 

CHINA’S REGIONAL AND BILATERAL TRADE AGREEMENTS

Chunding Li Jing

Wang John Whalley

January 2014

 

Click to access pt.pdf

 

 

Currency Unions and Regional Trade Agreements: EMU and EU Effects on Trade

Reuven Glick

Federal Reserve Bank of San Francisco

October 2016

Click to access wp2016-27.pdf

 

Regionalism in a globalizing world: an Asia-Pacific perspective

Dilip Das

2001

http://wrap.warwick.ac.uk/2038/

 

Global Financial Safety Net: Regional Reserve Pools and Currency Swap Networks of Central Banks

Global Financial Safety Net: Regional Reserve Pools and Currency Swap Networks of Central Banks

 

You can read this post from two perspectives

  • Geo Strategic (International Financial and Economic Architecture)
  • Financial and Economic stability / Macro-prudential Policy

 

Recent Financial Crisis has exposed the fact that global financial liquidity can be in shortage.  Since US Dollar is the global currency and is used in more that 40 percent of all financial transactions globally.

Asian Countries faced dollar shortage during 1997-1998 asian financial crisis.  Recent Global Financial crisis caused dollar shortage in advanced countries.  US Central Bank Federal Reserve responded by setting up currency swap lines with central banks of other countries.  These swap lines were made permanent in 2013.

After Asian financial crisis in 1997, many countries in developing world started accumulating FX reserves.  There was also a swap agreement (known as Chiang Mai Initiative) which was set up between ASEAN countries in south east Asia.

Nations also go to IMF to get conditional financing which they do not like to do.  New Trend is toward regional pooling of financial resources.  Latest example is BRICS CRA.

Even advanced economies such as EU have established European Stability Mechanism (ESM).

Chiang Mai Initiative has been revamped as Chiang Mai Initiative Multilateralism (CMIM).

 

Financial and Economic Stability / Macro Prudential Policy

A. Reserve Pools

  • Chiang Mai Initiative (CMI)
  • Chiang Mai Initiative Multi-Lateralism (CMIM)
  • BRICS Contingent Reserve Arrangement (CRA)
  • European Stability Mechanism (ESM)

B. Currency Swap Lines

  • Federal Reserve Central Bank US Dollar Swap Lines
  • PBOC China Central bank RMB Swap Lines

C. Global

  • IMF Financing

D. Self Insurance

  • Nation’s Foreign Exchange (FX) Reserves

 

From The decentralised global monetary system requires an efficient safety net

The global financial safety net as a set of protection mechanisms

The current decentralised system also lacks a central authority that is actively integrated and, above all, contractually bound into the maintenance of the monetary system by providing temporary liquidity, such as the IMF in the Bretton Woods system. Instead, various protection mechanisms have evolved because the current system has not led to greater external stability of national economies and the global economy. The problem of volatile capital flows became particularly clear once again in the course of the financial crisis of 2008 and 2009. For emerging market economies, the warning of a sudden reversal of capital flows has been omnipresent ever since the Asian crisis. However, the last crisis has demonstrated that even for industrialised countries their developed financial markets are a significant contagion mechanism for crisis developments. The following are regarded as key elements of the global financial safety net:11

International reserves. These include official foreign exchange and gold reserves as well as claims on inter-national financial institutions such as the IMF that can be rapidly converted into foreign currency under the countries’ own responsibility. •

Bilateral swap arrangements between central banks.  In a currency swap two central banks agree to exchange currency amounts, e.g. US dollars for euros. They agree on a fixed date in the future on which they will reverse the transaction applying the same exchange rate. During the term central banks can make foreign currency loans to private banks. •

IMF programmes and regional financing arrangements (e.g. European Stability Mechanism, Chiang Mai Initiative Multilateralisation Agreement, BRICs CRA, Arab Monetary Fund, Latin American Reserve Fund). They make financial resources available to the members to tackle balance of payments difficulties, manage crises and prevent regional contagion effects. Depending on their design, they may impose conditions and requirements for economic policy measures on the recipient countries. Some regional programmes require a combination with IMF funds.

The most important element of the protection mechanisms: international reserves

International reserves are by far the largest element of the global safety net.12 The lack of predictability and robustness of other elements has led to an over-accumulation of reserves. After the Asian crisis, upper middle income countries in particular built up reserves. While China holds a major portion of the reserves in this group of countries, all other countries also boosted their reserves significantly. As a result of central bank interventions in the foreign exchange market, reserves have decreased since the year 2013.

The renaissance of bilateral swap arrangements

Bilateral swap arrangements were used by the US Treasury as early as in 1936 to supply developing countries with bridging loans. During the Bretton Woods period, the Fed introduced a network of swap lines known as reciprocal currency arrangements to prevent a sudden and substantial withdrawal of gold by official foreign institutions.13 A swap protected foreign central banks from the exchange rate risk when they had obtained excess and unwanted dollar positions. It allowed them to dispense with the temporary conversion of dollars into gold. Between 1973 and 1980, the swap lines were used instead of US currency reserves to finance interventions by the Fed in the foreign exchange market. Gains and losses were shared with the other central bank when the Fed drew on a line. However, the G10 central banks could try to use the swap arrangements to influence the US foreign currency market interventions, so the Fed stopped using them in the mid-1980s. All existing swap lines except those with Canada and Mexico were ended in 1998. After the terror attacks of September 11, 2001, the Fed established swap lines with the European Central Bank and the Bank of England for 30 days and expanded the existing line with the Bank of Canada. Currency swaps were used here for the first time to restore liquidity in financial markets. During the global financial crisis, the Fed then financed the lender-of-last-resort actions of other central banks in industrialised and emerging market economies, with the latter assuming the credit risk. The international reserves of many central banks at the start of the crisis were smaller than the amounts they borrowed under the swap lines. In 2013 the swap arrangements between the six most important central banks were converted into standing arrangements. All these swap arrangements have one thing in common: they signal the central banks’ willingness to cooperate with each other, whether it be in defence of the parities under the Bretton Woods system, to avert speculative attacks on the Fed, or with the aim of providing dollar liquidity during the financial crisis. China has also set up a far-reaching system of swap arrangements, mainly with the aim of pushing ahead with the internationalisation of the renminbi. But from the perspective of these central banks, the agreements with the Bank of England, the Monetary Authority of Singapore, the Reserve Bank of Australia and the ECB also serve the goal of being able to provide renminbi liquidity in their area of responsibility when needed Swaps represent a powerful and flexible tool of central banks that issue reserve currencies to regulate international capital flows. Central banks are the only institutions capable of changing their balance sheets quickly enough to keep pace with the volatility of international capital flows. Swaps are unsuitable, however, for longer-lasting crises, sovereign debt crises and to finance balance of payments imbalances. That is why they would be the most suitable tool for emerging market economies, as they are more likely to face abrupt changes in capital flows. Nevertheless, so far only the most important central banks that issue reserve currencies have been able to access unlimited swaps. Granting them is determined by the mandate of the central banks and they represent contractual, not institutional agreements. Accordingly, the central banks are able to choose their contractual partners, and there is no central independent authority to supervise swap arrangements. The swap arrangements for central banks in industrial countries that do not issue a reserve currency can therefore be expected to be reinstated in the event of a global shock, while they are less likely to be employed in case of a regional shock. Their use is even less predictable for systemic emerging market economies.

 

Growth of Global Financial Safety Net

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Features of Instruments in the Global Financial Safety net

 

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Use of GFSN in various shock Scenarios

  • Balance of Payment shock
  • Banking Sector FX Liquidity shock
  • Sovereign Debt shock

 

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US Dollar Swap Lines

These six central banks have permanent US Dollar swap lines since 2013.

  • USA (Fed Reserve),
  • Canada (BoC),
  • Japan (BoJ),
  • Switzerland (SNB),
  • EU (ECB),
  • UK(BOE)

 

During the global financial crisis, the Federal Reserve extended swap arrangements to 14 other central banks. The ECB drew very heavily, followed by the BoJ. At one point during the crisis in 2009, outstanding swaps amounted to more than $580 billion and represented about one-quarter of the Fed’s balance sheet. The novel element of this effort was the extension of swaps to four countries outside the usual set of advanced-country central banks: Mexico, Brazil, South Korea and Singapore.16 Mexico previously had a standing swap facility with the Federal Reserve by virtue of geographic proximity and the North American Free Trade Agreement, but the new arrangement expanded the amount that Mexico’s central bank could draw and the Fed’s swaps with Brazil, South Korea and Singapore broke new ground. The swaps in general were credited with preventing a more serious seizing up of interbank lending and financial markets during 2008 to 2009 (Helleiner 2014, 38–45; Prasad 2014, 202–11; IMF 2013a; 2014a, Box 2). The Federal Reserve board of governors considered the “boundary” question at length, torn between opening itself up to additional demands for coverage from emerging markets and creating stigma against those left outside the safety net. Fed officials used economic size and connections to international financial markets as the main criteria for selecting Brazil, Mexico, Singapore and South Korea. Chile, Peru, Indonesia, India, Iceland and likely others also requested swaps but were denied. The governors wanted to deflect requests by additional countries to the IMF, which coordinated its announcement of the SLF with the Fed’s announcement of the additional swaps at the end of October 2008. Governors and staff saw in this tiering a natural division of labour that coincided with the resources and analytical capacity of the Fed and IMF.17 The ECB extended swaps to Hungary, Poland, Sweden, Switzerland and Denmark, in addition to its arrangement with the United States. The BoJ extended swaps as well, notably to South Korea after the Federal Reserve announced its Korean swap. The PBoC began to conclude a set of swap agreements with Asian and non-Asian central banks that would eventually number more than 20 and amount to RMB 2.57 trillion. Only those swaps with the central banks of Hong Kong, Singapore and South Korea are known to have been activated (Zhang 2015, 5). Boosting the role of the renminbi in international trade was the express objective of these swaps, although their establishment also helped to secure market confidence during unsettled times. The proliferation of swaps resulted in a set of star-shaped networks of agreements among central banks that were linked by Fed liquidity (Allen and Moessner 2010). Although a number of the swaps in the network were activated, only those swaps of the Federal Reserve were heavily used during the crisis. The “fortunate four” emerging market countries among the Fed 14 were each covered for amounts up to $30 billion, but only temporarily. When the Fed later declined to renew the swaps,  these countries became as vulnerable to liquidity shortfalls as the others. So, when South Korea took the chair of the G20 in 2010, its government proposed that the central bank swaps be multilateralized on a more permanent basis. It argued this would be increasingly necessary to stabilize the global financial system and would be in the interest of swap providers and recipients alike. Specifically, during the preparations for the G20 summit, South Korean officials proposed that the advanced-country central banks provide swaps to the IMF, which would conduct due diligence and provide liquidity to qualifying central banks. In this way, the global community could mobilize enough resources to address even a massive liquidity crunch and central banks would avoid credit risk.

In late 2013, six key-currency central banks made their temporary swap arrangements permanent standing facilities. Each central bank entered into a bilateral arrangement with the five others, comprising a network of 30 such agreements.18 But they prefer to maintain a constructive ambiguity with respect to whether they would re-extend swap arrangements to the other central banks that were covered during the global financial crisis, including Brazil, Mexico,19 South Korea and Singapore (Papadia 2013).

 

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During the global financial crisis of 2008-2009, Federal Reserve extended USD swap lines to several central banks.  The financial institutions in these countries faced USD shortages as the normal channels of money markets froze during crisis.

 

US Dollar Swap amounts extended during 2008-2009 Global Financial Crisis

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China RMB Swap Lines

During the 2007-8 global financial crisis, the international monetary system experienced an acute US dollar shortage that severely curtailed global trade and pressured international banking business (McCauley and McGuire, 2009; McGuire and von Peter, 2009). The US authorities, in response to the elevated strain in the global market, have arranged dollar swap lines with major central banks to mitigate the global dollar squeeze (Aizenman and Pasricha, 2010; Aizenman, Jinjarak and Park, 2011). On Thursday, October 31, 2013, the network of central banks comprises the Bank of Canada, the Bank of England, the Bank of Japan, the European Central Bank, the Federal Reserve, and the Swiss National Bank agreed to convert their bilateral liquidity swap arrangements to standing arrangements until further notice.1 The dollar squeeze critically illustrated the danger of operating a US-centric global financial system. Against this backdrop, China has actively implemented measures of promoting the cross-border use of the Chinese currency, the renminbi (RMB), to reduce its reliance on the US dollar. The aggressive policy move was considered a clear signal of China’s efforts to internationalize RMB (Chen and Cheung, 2011; Cheung, Ma and McCauley, 2011). In 2009, China launched the scheme of cross-border trade settlement in RMB to encourage the denomination and settlement of international trade in its own currencies. One practical issue of settling trade in RMB is the limited availability of the currency outside China. China at that time had strict regulations on circulating the RMB across its border. To facilitate its RMB trade settlement initiative, China signed its first bilateral RMB local currency swap agreement with the Bank of Korea in December 2008, and the second one with Hong Kong in January 2009. Since then, China has signed various swap agreements with economies around the world.2

 

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BRICS CRA

The 5th and 6th BRICS summits in 2013–2014 marked a watershed in the evolution of the BRICS group with the establishment of the first BRICS institutions. These included the BRICS New Development Bank, the CRA, the BRICS Business Council and the Think Tanks Council. Although this has weakened the ‘political talk shop’ perception of the group, critics have questioned whether these institutions will have a substantive effect. In particular, doubts have been cast upon the effectiveness of the CRA.

The CRA is modest in size in comparison to the IMF and other similar arrangements such as the Chiang Mai Initiative Multilateralization (CMIM). At this stage the BRICS countries have committed $100 billion to the CRA, with China committing $41 billion, Russia, Brazil and India $18 billion each and South Africa $5 billion. The CMIM reportedly has a reserve pool of $240 billion and the IMF resources of $780 billion. It has been noted that with BRICS’s foreign reserves standing at about $5 trillion, a commitment of 16% would take the CRA pool to $800 billion.

 

From GLOBAL AND REGIONAL FINANCIAL SAFETY NETS: LESSONS FROM EUROPE AND ASIA

ASEAN +3 CMIM

ASEAN + Japan Korea China

The embryo of an Asian regional safety net arrangement has existed since 1977, when the five founding members of the ASEAN signed the ASEAN Swap Arrangement (ASA)5. Following the Asian crisis and after aborted discussion on the creation of an Asian Monetary Fund, Japan launched the New Miyazawa Initiative in October 1998 amounting to about $35 billion, which was targeted at stabilising the foreign exchange markets of Indonesia, the Republic of Korea, Malaysia, the Philippines, and Thailand6. The initiative was particularly valuable in containing instability in Malaysia’s financial sector, since that country had refused an IMF Stand-By Arrangement. The Japanese manoeuvre was deemed somewhat mutinous, since the IMF was very critical of Malaysia’s approach. But it also cemented the idea that Asia could gather enough resources to sandbag itself during a crisis period so long as Asian countries were united and managed to roll out timely and credible support mechanisms. In Asian countries under IMF programmes, the conditionality associated with the loans included severe fiscal cuts, deep structural reforms, and substantial increases in interest rates to stabilise currency markets. The economic and social cost of the adjustment was so high and abrupt that it provoked social unrest in a number of countries. This would reverberate strongly in the months that followed and leave a lasting scar in relations between Asian countries and the IMF7. This experience fuelled both a willingness to self-insure through accelerated reserve accumulation and to strengthen regional arrangements to reduce the reliance on global financial safety nets. Building on this lesson, the CMI was formalised in May 2000 during the ASEAN+3 Finance Ministers Meeting8. It largely built on the original ASA and bilateral swap agreements involving the PRC, Japan, and the Republic of Korea but was grounded in a broader programme that also included developing Asia’s local currency bond market and introduced a regional economic review and policy dialogue to enhance the region’s surveillance mechanism (Kawai and Houser 2007). The initiative included the new ASEAN members, increasing the total number of parties to the arrangement from 5 to 10. Table A.1 in the appendix highlights the evolution of the CMI. The question of cooperation between the CMI and the IMF quickly became quite heated, with a number of countries arguing that strong ties to the Fund would defeat the initial purpose of the initiative (Korea Institute of Finance, 2012), but the ties were kept nonetheless both to mitigate moral hazard (Sussangkarn, 2011) and to ensure some consistency with conditionality attached to the IMF’s own programmes. After the formal creation of the CMI in 2000, the era of Great Moderation that followed to some degree doused further ambitions to strengthen regional arrangements. As a result, when the global financial crisis hit in 2008, the Asian regional financial safety net proved too modest to play a meaningful role.

Indeed, instead of seeking support under CMI, the Bank of Korea and the Monetary Authority of Singapore sought a swap agreement with the US Federal Reserve for some $30 billion each. The Republic of Korea concluded bilateral agreements with Japan and the PRC that were not related to the CMI. Similarly, Indonesia established separate bilateral swap lines with Japan and the PRC to shore up its crisis buffer and did not resort to the CMI for credit support (Sussangkarn, 2011). The plan to consolidate the bilateral swap arrangements and form a single, more solid, and effective reserve pooling mechanism – which had initially been put forward by the finance ministers of the ASEAN+3 in May 2007 in Kyoto – was accelerated and evolved in several iterations before the final version was laid out more than two years later. In December 2009, the CMI was multilateralised and the ASEAN+3 representatives signed the Chiang Mai Initiative Multilateralisation (CMIM) Agreement, which effectively became binding on March 24, 2010 (BSP, 2012). These successive transformations have strengthened the initiative, but it remains largely untested. In addition, other aspects of any credible regional financial arrangement, such as surveillance capacity and coordination of some basic economic policies, remain relatively embryonic.

 

 

From GLOBAL AND REGIONAL FINANCIAL SAFETY NETS: LESSONS FROM EUROPE AND ASIA

 

EU ESM

The history of European financial safety nets cannot be dissociated from the history of European monetary integration. With this perspective in mind, it dates back to the late 1960s and has been an ongoing debate to this day. The history of European political integration at every turn is marked by failed projects or actual mechanisms of financial solidarity, ranging from loose exchange rate arrangements to the project of a full-fledged European Monetary Fund. The advent of the monetary union was precisely designed to reduce the need for financial safety nets within the euro area. But the architectural deficiencies of the euro area and the lack of internal transfers have required the establishment of alternative mutual insurance mechanisms since the onset of the euro crisis in 2010. In 2008, when the global financial crisis hit, Hungary had accumulated important external imbalances and large foreign exchange exposures. It had to seek financial assistance almost immediately and initiated contacts with the IMF. The total absence of coordination with European authorities came as an initial shock because it showed that despite decades of intense economic, political, and monetary integration, EU countries could still come to require international financial assistance. The experience pushed European institutions to unearth a forgotten provision of the Maastricht Treaty to provide financial assistance through the Balance of Payments Assistance Facility9. This created preliminary and at first ad-hoc coordination between the IMF and the European Commission, which was then rediscovering design and monitoring of macroeconomic adjustment programmes. Despite the rapid use of this facility and the emergence of a framework of cooperation with the IMF, contagion from the global financial crisis continued for months and prompted some Eastern European leaders to seek broader and more pre-emptive support10, which failed. However, beyond official sector participation, there was a relatively rapid realisation that cross-border banking and financial retrenchment could become a major source of financial disruption and effectively propagate the crisis further – including back to the core of Europe, as large European banks were heavily exposed to Eastern Europe through vast and dense networks of branches and subsidiaries. In response, in late February 2009, under the leadership of the European Bank for Reconstruction and Development (EBRD), the European Investment Bank (EIB) and the World Bank decided to establish what was known as the Vienna Initiative. This was designed as a joint multilateral and private sector coordination and enforcement mechanism to reduce the risk of banking sector sudden stops. In particular, it compelled cross-border European banks to continue to provide appropriate liquidity to their branches and subsidiaries in Central and Eastern Europe. The formalisation of such an arrangement11 quite early in the crisis has certainly proven the case for coordination of financial institutions in emerging-market economies, especially when a relatively small number of institutions have a disproportionate impact on capital flows. But with the crisis spreading to the euro area, starting with Greece in the fall of 2010, new regional arrangements proved necessary. The lack of instruments forced European officials to first consider bilateral assistance from member states. The idea of involving the IMF was initially violently rejected 9 on intellectual and political grounds12 but proved inevitable. In a number of successive iterations, more solid regional arrangements were designed (Bijlsma and Vallée 2012). Table A.2 in the appendix shows the evolution of European regional financial safety nets.

 

List of Regional Financial Agreements (RFA)

rr5

 

rr

 

rr7

rr14

 

Key Terms:

  • RMB
  • Bilateral Currency Swaps
  • Reserve Pooling
  • CMI
  • CMIM
  • BRICS CRA
  • AMRO
  • IMF SDR Basket
  • Currency Internationalization
  • Global Liquidity
  • Funding Liquidity
  • Market Liquidity
  • BRICS NDB
  • CHINA AIIB
  • Regional Integration
  • Multilateralism
  • Multipolar
  • FX Swap Networks
  • Central Banks
  • Reserve Currency
  • Global Financial Safety Nets (GFSN)
  • Foreign Exchange Reserves
  • Regional Financial Agreements (RFA)
  • Regional Financial Networks (RFN)
  • Bilateral Currency Swap Agreement (BSA)
  • RMB (Renminbi also known as Yuan)
  • International Lender of Last Resort (ILOLR)
  • Regional Financial Safety Net (RFSN)
  • Multilateral Financial Safety Net (MFSN)
  • National Financial Safety Net (NFSN)

 

Key Sources of Research:

 

Self-Insurance, Reserve Pooling Arrangements, and Pre-emptive Financing

Sunil Sharma

 

Click to access sharma.pdf

 

 

Regional Reserve Pooling Arrangements

Suman S. Basu Ran Bi

Prakash Kannan

First Draft: 8 February, 2010 This Draft: 7 June, 2010

 

Click to access Prakash.pdf

 

 

Toward a functional Chiang Mai Initiative

15 May 2012

Author: Chalongphob Sussangkarn, TDRI

http://www.eastasiaforum.org/2012/05/15/toward-a-functional-chiang-mai-initiative/

 

 

The International Financial Architecture and the Role of Regional Funds

Barry Eichengreen

University of California, Berkeley

August 2010

 

Click to access intl_finan_arch_2010.pdf

 

 

Examining the case for Reserve Pooling in East Asia: Empirical Analysis

Ramkishen S. Rajan, Reza Siregar and Graham Bird

2003

 

Click to access 0323.pdf

 

 

Financial Architectures and Development: Resilience, Policy Space and Human Development in the Global South

by Ilene Grabel

2013

 

Click to access hdro_1307_grabel.pdf

 

 

International reserves and swap lines: substitutes or complements?

Joshua Aizenman,
Yothin Jinjarak, and Donghyun Park,

March 2010

 

Click to access ajp-ir-sw-0301.pdf

 

 

How can we fix the global financial safety net?

WEF

https://www.weforum.org/agenda/2015/10/how-can-we-fix-the-global-financial-safety-net/

 

 

Regional Monetary Cooperation: Lessons from the Euro Crisis for Developing Areas?

Sebastian Dullien

Barbara Fritz

Laurissa Mühlich

 

Click to access WEA-WER2-Dullien.pdf

 

 

The Global Dollar System

Stephen G Cecchetti

 

Click to access Polp61.pdf

 

 

The Future of the IMF and of Regional Cooperation in East Asia

Yung Chul Park, Charles Wyplosz

2008

 

Click to access 20081111-12_Y-C_Park-C_Wyplosz.pdf

 

 

China’s Bilateral Currency Swap Agreements: Recent Trends

Aravind Yelery

 

http://journals.sagepub.com/doi/pdf/10.1177/0009445515627210

 

 

The Spread of Chinese Swaps

CFR

 

https://www.cfr.org/international-finance/central-bank-currency-swaps-since-financial-crisis/p36419#!/

 

 

Chiang Mai Initiative Multilateralization

Click to access CMIM.pdf

 

 

The Chiang Mai Initiative

Click to access 3iie3381.pdf

 

 

Beyond the Chiang Mai Initiative: Prospects for Regional Financial and Monetary Integration in East Asia

 

Click to access Session-2_1-4.pdf

 

 

Currency internationalisation: an overview

 

Peter B Kenen

 

Click to access arpresearch200903.01.pdf

 

 

 

Why Was the CMI Possible?

Embedded Domestic Preferences and Internationally Nested Constraints in Regional Institution Building in East Asia

Saori N. Katada

 

Click to access 1f1966fe-1c48-4d32-a463-ea268ecb2903.pdf

 

 

Emergent International Liquidity Agreements: Central Bank Cooperation after the Global Financial Crisis

Daniel McDowell

 

Click to access mcdowell_eln.pdf

 

 

Regional Financial Cooperation in Asia

Daikichi Momma

 

Click to access Session_2_Momma.pdf

 

 

East Asian Economic Cooperation and Integration: Japan’s Perspective

Takatoshi Ito

 

Click to access 41RegionalCoop.pdf

 

 

What Motivates Regional Financial Cooperation in East Asia Today?

JENNIFER AMYX

 

http://www.eastwestcenter.org/system/tdf/private/api076.pdf?file=1&type=node&id=32049

 

 

Evaluating Asian Swap Arrangements

Joshua Aizenman, Yothin Jinjarak, and Donghyun Park

No. 297 July 2011

 

Click to access adbi-wp297.pdf

 

 

Regional Monetary Cooperation in East Asia Should the United States Be Concerned?

Wen Jin Yuan Melissa Murphy

 

Click to access 101129_Yuan_RegionalCoop_WEB.pdf

 

 

Chiang Mai Initiative as the Foundation of Financial Stability in East Asia

Click to access 17902.pdf

 

 

COMPLEX DECISION IN THE ESTABLISHMENT OF ASIAN REGIONAL FINANCIAL ARRANGEMENT

Iwan J Azis

 

Click to access p02.pdf

 

 

Chiang Mai Initiative Multilateralization

December 2013

 

Click to access ChiangMaiInitiative_0.pdf

 

 

 

RMBI or RMBR?
Is the Renminbi Destined to Become a Global or Regional Currency?

Barry Eichengreen

Domenico Lombardi

 

Click to access RMBI_or_RMBR_-_Eichengreen.pdf

 

 

 

Monetary and financial cooperation in Asia: taking stock of recent ongoings

Ramkishen S. Rajan

 

http://citeseerx.ist.psu.edu/viewdoc/download?doi=10.1.1.473.361&rep=rep1&type=pdf

 

 

FINANCIAL CRISES AND EAST ASIA’S FINANCIAL COOPERATION

 

By Park Young-joon

 

Click to access ParkYJ.pdf

 

 

MONETARY INTEGRATION IN EAST ASIA

Peter B. Kenen
Ellen E. Meade

 

Click to access Kenen.pdf

 

 

Regional cooperation for financial and exchange rates stability in East Asia

 

Kenichi Shimizu

Click to access WP_FG7_2013_01_Dezember_Kenichi_Shimizu.pdf

 

 

ASIAN FINANCIAL CO-OPERATION

Address by Mr GR Stevens

 

Click to access bu-1105-3.pdf

 

 

The Rise of China and Regional Integration in East Asia

 

https://www.researchgate.net/publication/290788291_The_Rise_of_China_and_Regional_Integration_in_East_Asia

 

 

REGIONAL FINANCIAL COOPERATION IN EAST ASIA: THE CHIANG MAI INITIATIVE AND BEYOND

 

Click to access Bulletin02-ch8.pdf

 

 

Financial RegionaliSm: a Review oF the iSSueS

Domenico lombaRDi

2010

 

Click to access 11_global_economy_lombardi.pdf

 

 

The layers of the global financial safety net: taking stock

2016

 

Click to access eb201605_article01.en.pdf

 

 

Regional Financial Arrangements for East Asia: A Different Agenda from Latin America

By Yung Chul Park

 

Click to access 00510.pdf

 

 

Elasticity and Discipline in the Global Swap Network

Perry Mehrling

Working Paper No. 27 November 12, 2015

 

Click to access WP27-Mehrling.pdf

 

 

 Swap Agreements & China’s RMB Currency Network

https://www.cogitasia.com/swap-agreements-chinas-rmb-currency-network/

 

 

Central Bank Currency Swaps and the International Monetary System

Christophe Destais

 

Click to access CentralBankCurrencySwap_ChristopheDestais.pdf

 

 

Renminbi internationalisation – The pace quickens

Click to access Renminbi-internationalisation-The-pace-quickens.pdf

 

 

What Will China’s RMB Bilateral Currency Swap Deals Lead To?

 

https://www.chinamoneynetwork.com/2013/11/08/what-will-chinas-rmb-bilateral-currency-swap-deals-lead-to

 

 

Emergent International Liquidity Agreements: Central Bank Cooperation after the Global Financial Crisis

Daniel McDowell

 

Click to access mcdowell_eln.pdf

 

 

Currency Swap of Central Bank: Influence on International Currency System

 

Click to access 20160316142214_202.pdf

 

 

Building Global and Regional Financial Safety Nets

February 2016

Yung Chul Park

 

Click to access 35E%20Yung%20Chul%20Park£∫Building%20Global%20and%20Regional%20Financial%20Safety%20Nets%20%20Final.pdf

 

 

RMBI or RMBR?

Is the Renminbi Destined to Become a Global or Regional Currency?

Barry Eichengreen

Domenico Lombardi

 

Click to access RMBI_or_RMBR_-_Eichengreen.pdf

 

 

China’s Bilateral Currency Swap Lines

Yin-Wong Cheung, Hung Hing Ying  LIN Zhitao

ZHAN Wenjie

2016

 

Click to access GRU%232016-013%20_YW.pdf

 

 

Internationalisation of the Chinese Currency: Towards a Multipolar International Monetary System?

Lucia Országhová

 

Click to access biatec_01_2016_orszaghova.pdf

 

 

Central bank: China currency swap deals surpass 3t yuan

http://english.gov.cn/state_council/ministries/2015/06/11/content_281475125318660.htm

 

 

The International Lender of Last Resort for Emerging Countries: A Bilateral Currency Swap?

Camila Villard Duran

Click to access WP_108%20-%20The%20International%20Lender%20of%20Last%20Resort%20for%20Emerging%20Countries%20-%20Camila%20Duran.pdf

 

Click to access Duran%20-%20The%20International%20Lender%20of%20Last%20Resort%20for%20Emerging%20Countries.pdf

 

 

Entry of yuan into SDR may give a boost to global liquidity

http://www.marketwatch.com/story/entry-of-yuan-into-sdr-may-give-a-boost-to-global-liquidity-2016-10-17

 

 

Redback Rising: China’s Bilateral Swap Agreements and RMB Internationalization

Steven Liao
Daniel E. McDowell

 

Click to access yuan_isq.pdf

 

 

International reserves and swap lines: substitutes or complements? 

Joshua Aizenman
Yothin Jinjarak,  Donghyun Park

March 2010

 

Click to access ajp-ir-sw-0301.pdf

 

 

The Asian Monetary Fund Reborn? Implications of Chiang Mai Initiative Multilateralization

William W. Grimes

2011

 

Click to access Grimes.pdf

 

 

Avoiding the next liquidity crunch: how the G20 must support monetary cooperation to increase resilience to crisis

Camila Villard Duran

 

Click to access GEG%20Villard%20Duran%20October%202015.pdf

 

Stitching together the global financial safety net

Edd Denbee, Carsten Jung and Francesco Paternò

2016

 

Click to access fs_paper36.pdf

 

 

Why Are There Large Foreign Exchange Reserves?  The Case of South Korea

Franklin Allen

Joo Yun Hong

 

Click to access 01_KSSJ_11-02-03.pdf

 

 

Federal Reserve Policy in an International Context

Ben S. Bernanke

 

Click to access Bernanke.pdf

 

 

The dollar’s international role: An “exorbitant privilege”?

Ben S. Bernanke

Thursday, January 7, 2016

https://www.brookings.edu/blog/ben-bernanke/2016/01/07/the-dollars-international-role-an-exorbitant-privilege-2/

 

 

TRADE AND DEVELOPMENT REPORT, 2015

Making the international financial architecture work for development

 

Click to access tdr2015ch3_en.pdf

 

 

Global Economic Governance in Asia: Through the Looking Glass of the European Sovereign Debt Crisis

China in Global Financial Governance: Implications from Regional Leadership Challenge in East Asia

Takashi Terada

 

Click to access China-in-Global-Financial-Governance-Implications-from-Regional-Leadership-Challenge-in-East-Asia-by-Takashi-Terada.pdf

 

 

Central Bank Currency Swaps Key to International Monetary System

http://andrewsheng.net/Article_Central_bank_currency_swaps_key_to_IMS.html

 

 

The Federal Reserve’s Foreign Exchange Swap Lines

Michael J. Fleming and Nicholas J. Klagge

 

Click to access ci16-4.pdf

 

 

Central Bank Liquidity Swaps

https://www.newyorkfed.org/markets/liquidity_swap.html

 

 

Central Bank Dollar Swap Lines and Overseas Dollar Funding Costs

Linda S. Goldberg, Craig Kennedy, and Jason Miu

 

http://citeseerx.ist.psu.edu/viewdoc/download?doi=10.1.1.422.11&rep=rep1&type=pdf

 

 

eXperience With foreign currency liquidity-providing centrAl bAnK sWAps

 

Click to access art1_mb201408_pp65-82en.pdf

 

 

Banking on China through Currency Swap Agreements

October 23, 2015

By Cindy Li

http://www.frbsf.org/banking/asia-program/pacific-exchange-blog/banking-on-china-renminbi-currency-swap-agreements/

 

 

TESTING THE GLOBAL CENTRAL BANK SWAP NETWORK

http://www.perrymehrling.com/2015/07/testing-the-global-central-bank-swap-network/

 

 

The impact of international swap lines on stock returns of banks in emerging markets

Alin Marius Andries1 Andreas M. Fischer2 Pınar Ye ̧sin

June 2015

 

Click to access sem_2015_07_09_Andries_Fischer_Yesin.n.pdf

 

 

Why Did the US Federal Reserve Unprecedentedly Offer Swap Lines to Emerging Market Economies during the Global Financial Crisis? Can We Expect Them Again in the Future?

Hyoung-kyu Chey

 

Click to access 11-18.pdf

 

 

International reserves and swap lines: substitutes or complements? 

Joshua Aizenman,
Yothin Jinjarak,  Donghyun Park

July 2010

 

Click to access 037b0b0312cfb51cee7dffd5c3399332a669.pdf

 

 

Central Bank Dollar Swap Lines and Overseas Dollar Funding Costs

Linda S. Goldberg Craig Kennedy Jason Miu

 

Click to access 9a564d30e508dcd3799ceb7a99b5e2c2e273.pdf

 

 

Central Bank Liquidity Swaps

https://www.clevelandfed.org/newsroom-and-events/publications/economic-trends/2011-economic-trends/et-20111219-central-bank-liquidity-swaps.aspx

 

 

Central bank currency swaps key to international monetary system

April 2014

Author: Andrew Sheng, Fung Global Institute

http://www.eastasiaforum.org/2014/04/01/central-bank-currency-swaps-key-to-international-monetary-system/

 

 

Evaluating Asian Swap Arrangements

Joshua Aizenman, Yothin Jinjarak, and Donghyun Park

No. 297 July 2011

 

Click to access adbi-wp297.pdf

 

 

Central Bank Liquidity Swaps Overview

Yubo Wang

February 15, 2010

 

Click to access Central_Bank_Liquidity_Swaps_201002.pdf

 

 

The implications of cross-border banking and foreign currency swap lines for the international monetary system

 

Már Guðmundsson:

Click to access MGpresentation.pdf

 

 

The Politics of Rescuing the World’s Financial System: The Federal Reserve as a Global Lender of Last Resort

J. Lawrence Broz

 

2014

Click to access broz2014.pdf

 

 

From Exorbitant Privilege to Existential Trilemma

 

https://doc.research-and-analytics.csfb.com/docView?language=ENG&format=PDF&sourceid=em&document_id=1067001821&serialid=FdgDLSRBS51YJLr69%2BcO6H1iGqGyLNuzqEDE5DwoUt8%3D

 

 

The dollar is now everyone’s problem

September 29, 2014

http://www.moneyandbanking.com/commentary/2014/9/29/the-dollar-is-now-everyones-problem

 

 

The Global Dollar System

Stephen G Cecchetti

 

Click to access Polp61.pdf

 

 

Central Bank Swaps and International Dollar Illiquidity

Andrew K. Rose Mark M. Spiegel∗

March 14, 2012

 

Click to access RSGJE.pdf

 

 

DOLLAR FUNDING AND THE LENDING BEHAVIOR OF GLOBAL BANKS

VICTORIA IVASHINA DAVID S. SCHARFSTEIN JEREMY C. STEIN

First draft: October 2012 This draft: March 2015

 

Click to access ISS%20revision%20march%202015%20FINAL_7529aa88-fe19-4fd1-8427-43b83c5d8589.pdf

 

 

THE INTERNATIONALIZATION OF THE RENMINBI AND THE RISE OF A MULTIPOLAR CURRENCY SYSTEM

By Miriam Campanella

 

Click to access WP201201_1.pdf

 

 

Dollar Illiquidity and Central Bank Swap Arrangements During the Global Financial Crisis

Andrew K. Rose Mark M. Spiegel

August 2011

 

Click to access wp11-18bk.pdf

 

 

Central Bank Dollar Swap Lines and Overseas Dollar Funding Costs

Linda S. Goldberg, Craig Kennedy, Jason Miu

Click to access w15763.pdf

 

 

US Dollar Swap Arrangements between Central Banks

 

Click to access box-b.pdf

 

 

Currency Swaps with Foreign Central Banks

 

BY RENEE COURTOIS

 

Click to access policy_update.pdf

 

 

Central Banks Make Swaps Permanent as Crisis Backstop

Jeff Black

October 31, 2013

https://www.bloomberg.com/news/articles/2013-10-31/ecb-makes-crisis-cash-lines-at-central-banks-permanent

 

 

Swap Lines Underscore the Dollar’s Global Role

 

Click to access 12q1currencyswaps.pdf

 

 

Central bank co-operation and international liquidity in the financial crisis of 2008-9

by William A Allen and Richhild Moessner

Monetary and Economic Department

May 2010

 

Click to access work310.pdf

 

 

Financial instability, Reserves, and Central Bank Swap Lines in the Panic of 2008

Maurice Obstfeld Jay C. Shambaugh  Alan M. Taylor

 

Click to access ObstfeldShambaughTaylorAEAPP.pdf

 

 

The Federal Reserve as Global Lender of Last Resort, 2007-2010

 

J. Lawrence Broz

 

Click to access Broz_Fed.pdf

 

 

Lenders of Last Resort and Global Liquidity

Rethinking the system

 

Click to access outreach_obstfeld_dec09.pdf

 

 

The Fed’s FX swap facilities have been quiet… too quiet?

https://ftalphaville.ft.com/2016/07/13/2169137/the-feds-fx-swap-facilities-have-been-quiet-too-quiet/

 

 

Swap Lines Underscore the Dollar’s Global Role

 

Click to access 12q1currencyswaps.pdf

 

 

THE EVOLUTION OF THE FEDERAL RESERVE SWAP LINES SINCE 1962

Michael D. Bordo Owen F. Humpage Anna J. Schwartz

2014

 

Click to access w20755.pdf

 

 

How China Covered The World In “Liquidity Swap Lines”

http://www.zerohedge.com/news/2015-05-17/how-china-covered-world-liquidity-swap-lines

 

 

The Federal Reserve’s Foreign Exchange Swap Lines

Michael J. Fleming  Nicholas Klagge

April 1, 2010

https://papers.ssrn.com/sol3/papers2.cfm?abstract_id=1597320

 

 

The Federal Reserve as Global Lender of Last Resort, 2007-2010

 

J. Lawrence Broz

 

Click to access dp-30.pdf

 

 

The Fed’s Role in International Crises

Donald Kohn

Thursday, September 18, 2014

https://www.brookings.edu/on-the-record/the-feds-role-in-international-crises/

 

 

Options for meeting the demand for international liquidity during financial crises

 

Click to access r_qt1009g.pdf

 

 

The Chiang Mai Initiative Multilateralization: Origin, Development and Outlook

Chalongphob Sussangkarn

No. 230 July 2010

 

Click to access adbi-wp230.pdf

 

 

The Amended Chiang Mai Initiative Multilateralisation (CMIM) Comes Into Effect on July 17, 2014

 

Click to access rel140717a.pdf

 

 

Note on Chiang Mai Initiative Multilateralization (CMIM)* 

Chalongphob Sussangkarn

 

Click to access Chalongphabs_Note.pdf

 

 

SOURCES AND EVOLUTION OF THE CHIANG MAI INITIATIVE

 

Vyacheslav Amirov

Click to access 7.pdf

 

 

The Chiang Mai Initiative

PIIE

Click to access 3iie3381.pdf

 

 

Why Was the CMI Possible?

Embedded Domestic Preferences and Internationally Nested Constraints in Regional Institution Building in East Asia**

Saori N. Katada

 

Click to access 1f1966fe-1c48-4d32-a463-ea268ecb2903.pdf

 

 

From the Chiang Mai Initiative to an Asian Monetary Fund

Masahiro Kawai

No. 527 May 2015

 

Click to access adbi-wp527.pdf

 

 

Asian Monetary Fund: Getting Nearer

By Pradumna B. Rana

 

Click to access CO11079.pdf

 

 

Panel on Financial Affairs Meeting on 2 November 2009

 

Background Brief
on Hong Kong’s participation in Chiang Mai Initiative Multilateralization

 

Click to access fa1102cb1-144-e.pdf

 

 

The Chiang Mai Initiative Multilateralisation: Origin, Development and Outlook

 

 

 

Much Ado about Nothing? Chiang Mai Initiative Multilateralisation and East Asian Exchange Rate Cooperation

Wolf HASSDORF

 

Click to access 06Hassdorf.pdf

 

 

Financial Safety Nets in Asia: Genesis, Evolution, Adequacy, and Way Forward

Hal Hill and Jayant Menon

 

Click to access wp_econ_2012_17.pdf

 

 

Financial Community Building in East Asia

The Chiang Mai Initiative: Its Causes and Evaluation

 

EPIK 2010 Economics of Community Building

Yoon Jin Lee

 

Click to access YoonJinLee.pdf

 

 

FROM “TAOGUANG YANGHUI” TO “YOUSUO ZUOWEI”:

CHINA’S ENGAGEMENT IN FINANCIAL MINILATERALISM

HONGYING WANG

 

Click to access cigi_paper_no52.pdf

 

 

Foundation of Regional Integration: Common or Divergent Interests?

Yong Wook Lee

 

Click to access -_foundation_of_regional_integration__1_.pdf

 

 

CMIM and ESM: ASEAN+3 and Eurozone Crisis Management and Resolution Liquidity Provision in Comparative Perspective

Ramon PACHECO PARDO

 

Click to access CBFL-WP-RPP01.pdf

 

 

An Overview of Regional Financial Cooperation: Implication for BRICS Contingent Reserve Arrangement

Zhang Liqing,NianShuting

 

Click to access 20160316142109_641.pdf

 

 

CMIM-Asian Multilateralism and Cooperation

Keynote speech by Dr. Junhong Chang, AMRO Director, at the 6th Asia Research Forum
1 July 2016

http://www.amro-asia.org/keynote-speech-by-dr-junhong-chang-amro-director-at-the-6th-asia-research-forum-cmim-asian-multilateralism-and-cooperation/

 

 

Financial RegionaliSm: a Review oF the iSSueS

Domenico lombaRDi

 

Click to access 11_global_economy_lombardi.pdf

 

 

Practices of Financial Regionalism and the Negotiation of Community in East Asia

Mikko Huotari

 

Click to access op8_huotari_feb-2012_end.pdf

 

 

Financial Integration in Emerging Asian Economies

Gladys Siow

 

Click to access 032-ICEBI2012-A10048.pdf

 

 

Regional Monetary Cooperation: Lessons from the Euro Crisis for Developing Areas?

Sebastian Dullien

Barbara Fritz

Laurissa Mühlich

 

Click to access WEA-WER2-Dullien.pdf

 

 

The Need and Scope for Strengthening Co-operation Between Regional Financing Arrangements and the IMF

 

Ulrich Volz

 

Click to access DP_15.2012.pdf

 

 

Towards institutionalization: The BRICS Contingent Reserve Arrangement (CRA)

http://www.postwesternworld.com/2013/05/12/the-politics-of-the-brics-contingency-reserve-arrangement-cra/

 

 

The BRICS Contingent Reserve Arrangement and its Position

in the Emerging Global Financial Architecture

NIColETTE CATTANEo, MAyAMIko BIzIwICk & DAvID FRyER

 

https://www.saiia.org.za/policy-insights/752-policy-insights-10-the-brics-contingent-reserve-arrangement-and-its-position-in-the-emerging-global-financial-architecture/file

 

 

Financial Architectures and Development:

Resilience, Policy Space and Human Development in the Global South

by Ilene Grabel

 

Click to access hdro_1307_grabel.pdf

 

 

Financial Regionalism in East Asia

 

Click to access VOLZ.pdf

 

 

Enhancing the Effectiveness of CMIM and AMRO: Selected Immediate Challenges and Tasks

Reza Siregar and Akkharaphol Chabchitrchaidol

No. 403 January 2013

 

Click to access 2013.01.17.wp403.enhancing.effectiveness.cmim_.amro_.pdf

 

 

Regional and Global Liquidity Arrangements

Ulrich Volz / Aldo Caliari (Editors)

 

Click to access regional_funds_oct2010.pdf

 

 

A regional reserve fund for Latin America

Daniel Titelman, Cecilia Vera, Pablo Carvallo and Esteban Pérez Caldentey

 

Click to access RVI112Titelmanetal_en.pdf

 

 

Financial Crises as Catalysts for Regional Integration? The Chances and Obstacles for Monetary Integration in ASEAN+3 and MERCOSUR

Sebastian Krapohl  Daniel Rempe

 

Click to access KrapohlRempe.pdf

 

 

Financial Integration

 

Click to access Financial%20Integration.pdf

 

 

Framework of the ASEAN Plus Three Mechanisms Operating in the Sphere of Economic Cooperation

Prof. Dr. Vyacheslav V. Gavrilov

 

Click to access CALE20DP20No.207-110826.pdf

 

 

Regional Integration in Europe and East Asia: Experiences of Integration and Lessons from Functional Multilateralism

Uwe Wissenbach

 

Click to access 13-2-02_Uwe_Wissenbach.pdf

 

 

General Overview: “Financial Risk and Crisis Management after the Global Financial Crisis”

 

Click to access Jun2016No9.pdf

 

 

Remaking the architecture: the emerging powers, self-insuring and regional insulation 

GREGORY T. CHIN

 

Click to access chin1.pdf

 

 

The Origins and Transformation of East Asian Financial Regionalism

 

http://dspace.uni.lodz.pl:8080/xmlui/bitstream/handle/11089/18824/6-069_084-Klecha-Tylec.pdf?sequence=1&isAllowed=y

 

 

Regional Financial Arrangement: An Impetus for Regional Policy Cooperation

Reza Siregar and Keita Miyaki

 

Click to access MPRA_paper_51050.pdf

 

 

Role of Regional Institutions in East Asia

 

Click to access RPR_FY2011_No.10_Chapter_11.pdf

 

 

Asia’s new financial safety net: Is the Chiang Mai Initiative designed not to be used?

Hal Hill, Jayant Menon

25 July 2012

http://voxeu.org/article/chiang-mai-initiative-designed-not-be-used

 

 

Will the new BRICS institutions work?

 

https://www.weforum.org/agenda/2014/08/brics-new-development-bank-contingent-reserve-agreement/

 

 

BRICS NEW DEVELOPMENT BANK AND CONTINGENT RESERVE ARRANGEMENT

 

Click to access 150428BRICS_Bank.pdf

 

 

The Contingent Reserve Arrangement and the International Monetary System

Manmohan Agarwal

 

Click to access 2ead896b5e52456a098bbd2d0b25774b.pdf

 

 

The BRICS Bank and Reserve Arrangement: towards a new global financial framework?

2014

 

Click to access EPRS_ATA(2014)542178_REV1_EN.pdf

 

 

China’s Bilateral Currency Swap Lines

Lin Zhitao Zhan Wenjie Yin-Wong Cheung

CESIFO WORKING PAPER NO. 5736 CATEGORY 7:MONETARY POLICY AND INTERNATIONAL FINANCE JANUARY 2016

 

 

Elasticity and Discipline in the Global Swap Network

Perry Mehrling Barnard College and INET

November 6, 2015

Click to access Global-Swap-Network.pdf

 

 

A Proposal for a New Regional Financial Arrangement: The Reserve Liquidity Line

Young-Joon Park

2014

 

 

International Liquidity in a Multipolar World

Barry Eichengreen

 

 

 

International Liquidity Swaps: Is the Chiang Mai Initiative Pooling Reserves Efficiently ?

Emanuel Kohlscheen and Mark P. Tayl

Click to access liquidity_swaps.pdf

Click to access twerp_752.pdf

 

 

International Reserves and Swap Lines in Times of Financial Distress: Overview and Interpretations

Joshua Aizenman

No. 192 February 2010

Click to access adbi-wp192.pdf

 

 

Coordinating Regional and Multilateral Financial Institutions

C. Randall Henning

 

Click to access wp11-9.pdf

 

 

The Asian Monetary Fund Reborn? Implications of Chiang Mai Initiative Multilateralization

William W. Grimes

Click to access Grimes.pdf

 

 

REGIONAL LIQUIDITY MECHANISMS IN DEVELOPING COUNTRIES

Gustavo Rojas de Cerqueira César

Click to access PWR_v4_n3_Regional.pdf

 

 

Much Ado about Nothing? Chiang Mai Initiative Multilateralisation and East Asian Exchange Rate Cooperation

Wolf HASSDORF

Click to access 06Hassdorf.pdf

 

 

Global Liquidity: Public and Private

Jean-Pierre Landau

 

Click to access Jackson-Hole-Print.pdf

 

 

Safety for whom? The scattered global financial safety net and the role of regional financial arrangements

Mühlich, Laurissa; Fritz, Barbara

 

http://www.ssoar.info/ssoar/bitstream/handle/document/48298/ssoar-2016-muhlich_et_al-Safety_for_whom_The_scattered.pdf?sequence=1

 

 

The International Financial Architecture and the Role of Regional Funds

Barry Eichengreen

August 2010

 

Click to access intl_finan_arch_2010.pdf

 

 

The evolving multi-layered global financial safety net : role of Asia

 

 

 

The decentralised global monetary system requires an efficient safety net

Click to access Fokus-Nr.-147-November-2016-monetäres-System_EN.pdf

 

 

Asian Regional Financial Safety Nets? Don’t Hold Your Breath

Iwan J Azis

Click to access ppr017e.pdf

 

 

STITCHING TOGETHER THE GLOBAL FINANCIAL SAFETY NET

Minouche Shafik,

Deputy Governor, Bank of England

26th February 2016

 

Click to access 31E%20Minouche%20Shafik£∫Stitching%20Together%20The%20Global%20Financial%20Safety%20Net.pdf

 

 

The Global Financial Safety Net through the Prism of G20 Summits

Gong Cheng

European Stability Mechanism

Click to access MPRA_paper_68070.pdf

 

 

ADEQUACY OF THE GLOBAL FINANCIAL SAFETY NET

 

 The Evolving Multi-layered Global Financial Safety Net: Role of Asia

Pradumna B. Rana

 

Global Financial Safety Nets: Where Do We Go from Here?
Eduardo Levy-Yeyati and Eduardo Fernández-AriasFriday,
January 14, 2011
 Strengthening the Global Financial Safety Net

 

The Global Liquidity Safety Net

Institutional Cooperation on Precautionary Facilities and Central Bank Swaps

Click to access new_thinking_g20_no5_web.pdf

 

 

Inadequate Regional Financial Safety Nets Reflect Complacency

Iwan J. Azis

No. 411 March 2013

 

Click to access adbi-wp411.pdf

 

 

Stitching together the global financial safety net

by Edd Denbee, Carsten Jung and Francesco Paternò

 

Click to access QEF_322_16.pdf

 

 

GLOBAL AND REGIONAL FINANCIAL SAFETY NETS: LESSONS FROM EUROPE AND ASIA

CHANGYONG RHEE, LEA SUMULONG AND SHAHIN VALLÉE

 

Click to access WP_2013_02.pdf

 

 

Financial Safety Nets in Asia: Genesis, Evolution, Adequacy, and Way Forward

 

Hal Hill and Jayant Menon

No. 395 November 2012

Click to access adbi-wp395.pdf

 What we really know about the global financial safety net

 

Beatrice Scheubel, Livio Stracca

04 October 2016

Global Financial Safety Nets: Where Do We Go from Here?

Eduardo Fernandez-Arias

Eduardo Levy Levy-Yeyati

November 2010

Global Financial Safety Nets
How can countries cooperate to mitigate contagion and limit the spread of crises?November 7, 2011

 

What do we know about the global financial safety net? Rationale, data and possible evolution

 Global Financial Safety Net

Evolving Networks of Regional RTGS Payment and Settlement Systems

Evolving Networks of Regional RTGS Payment and Settlement Systems

 

Globalization has created incentives for nations to form regional economic unions to take advantage of scale and resource pooling.

There are a lot of efforts underway to develop and implement regional RTGS between central banks.  There are several models for integration.

  • Many States, Many Currencies – Hong Kong SAR
  • Many States, Single Currency – EU uses EURO and Central America uses USD, SADC uses South African RAND

RTGS systems designed to facilitate such economic integration.

  • RTGS – RTGS – Interlink model – Hong Kong, ASEAN 5
  • RTGS-RTGS – SSP Single Shared Platform model – EU

 

 

 

From  Payment System Interoperability and Oversight: The International Dimension

Several factors may prompt the international interlinking of PSIs. In most cases, linking national PSIs to achieve international interoperability of certain payment services comes from a country’s decisions to exploit the benefits of international economic and financial integration (i.e., greater international trade and investment activities, attraction of foreign investment capital, risk diversification, and deepening and broadening domestic financial and capital markets), since integration requires economic units to have convenient access to cross-border payment service facilities. A powerful driver to regional PSI interlinking is constituted by the political agreements among countries in a region on a broad, long-term economic and financial development cooperative program. Usually, in this case, the efforts to link payment system (as well as other financial market) infrastructures are supported actively by a core group of countries in organized regional development policy and planning forums.5 In some cases, interlinking may result from decisions by national financial authorities to address the demand from market participants (and/or their customers, including asset managers, other securities servicers, and other types of businesses) for cross-border access to international markets at lower end-to-end transaction costs.

Cross-border transactions can be made possible by establishing bilateral links between national PSIs.8 Perhaps the simplest form of PSI interlinking is achieved when two central banks agree on a scheme to support or facilitate cross-border transactions. This likely requires linking the large-value transfer systems of the countries involved by developing technical interfaces between them. Some other solutions are possible which link national payment systems through central bank bilateral accounts, whereby participating central banks hold settlement accounts either with one another or with a common commercial bank.

More advanced solutions for PSI interlinking are characterized by the adoption of a unified scheme and a common technical-operational facility to process the transactions defined under the scheme. The common (regional or global) technical-operational facility follows one of two basic architectures: the decentralized model, or the single or fully centralized model. Arrangements adopting a decentralized model for regional, cross-regional and/or global payments link existing national settlement systems (Figure 1). These normally feature different degrees of sophistication and complexity. Most decentralized regional payment systems are designed in a “hub-spoke” structure, in which there is a central administrative and technical-operational facility referred to as the “hub entity”, which links the participating systems.9 The interlinking mechanism is usually a standardized messaging and connectivity technology, which links account management and the various national operating systems together, while participants access the hub entity through the national settlement infrastructure of their jurisdiction.

In the centralized platform model, the national payment system infrastructures are replaced by a single international system (Figure 2). In this case, it is more appropriate to talk about international payment system integration. Participants access the system directly through the relevant telecommunications network or indirectly through any direct participant in the system. Centralized platforms are mostly identified with international integration projects, most notably regional, which have evolved into monetary unions with the use of a regional currency. They minimize or even eliminate the distinction between cross-border and domestic payments, and allow for processing both types of transactions in the same system seamlessly.

Various examples illustrate the different technical modalities of interlinking discussed above. One example of bilateral links between national payment systems is the linking of the Hong Kong Monetary Authority’s U.S. dollar real-time gross settlement (RTGS) system with the RTGS systems of other central banks in the region, specifically Bank Negara Malaysia’s RENTAS and Bank Indonesia’s BI-RTGS. These systems operate on a common operating platform. Their links, which are independent from each other, allow payment-versus-payment settlement between the national currencies of those countries and the U.S. dollar. Other illustrative examples are the East African Payments System (EAPS), which shows the case of national payment systems linked through the holding of bilateral accounts among central banks, and the Sistema de Pagos en Moneda Local involving the national RTGS systems of Argentina and Brazil, which is an example of the national payment systems linked through their respective central banks which hold settlement accounts with a common commercial bank. Currently, two SML systems are operational: one linking the RTGS systems of Argentina and Brazil, and other linking the RTGS systems of Brazil and Uruguay.

Other cases exemplify the decentralized and centralized models of international payment system integration. Schemes with a decentralized settlement system involving multiple parties have been developed in regions where there is a regional currency, as well as for settling cross-border payments denominated in a single foreign currency. The most well-known example of a unified scheme with a decentralized settlement system for a regional currency was the original TARGET in Europe, which linked the Euro RTGS systems of EU national central banks. Another example is the Sistema de Interconexión de Pagos in Central America and the Dominican Republic, which uses a decentralized architecture for settling cross-border payments in U.S. dollars.11

With regard to the centralized model of PSI interlinking (or integration), relevant examples are TARGET2 and EURO1 supporting euro denominated payments in the European Union,12 the STAR-UEMOA for the West African CFA Franc throughout the West African Economic and Monetary Union, and the RTGS system of the Eastern Caribbean Central Bank (ECCB) for the EC dollar in the Eastern Caribbean Currency Union. Over the past decade, centralized payment system infrastructures have also been developed regionally, where no regional currency existed, to facilitate settlement of domestic, regional, and cross-regional payments in more than one settlement currency (e.g., RAPID in the United Arab Emirates, and CHATS in Hong Kong). Finally, an example of a unified global system for settlements denominated in multiple currencies is CLS Bank International, which links the national RTGS systems of the participating jurisdictions/currencies, with a strong reliance on the legal agreement of the rulebook and the technical standards.

The Southern African Development Community (SADC) regional payment integration project in the Southern African region captures aspects of a centralized model. The project develops on the International Payments Framework (IPF) concept to construct a regional payment infrastructure composed of a regional automated clearing house (ACH) and settlement system.14 The current architecture consists of the SADC Integrated Regional Electronic Settlement System (SIRESS), an electronic central system that facilitates cross border trade in the SADC region. SIRESS, and excludes domestic inter-bank payments and settlements. It allows participating banks to settle regional transactions denominated in South African Rand (ZAR) within SADC countries, on an RTGS basis. The system is operated by the South African Reserve Bank (SARB) on behalf of the SADC Committee of Central Bank Governors, with SARB also acting as the ZAR settlement bank. It is a safe and efficient payment/settlement system which reduces the cost to banks since there is no correspondent bank (intermediary) involved.15 The project should eventually evolve into a single regional payment settlement infrastructure, in tandem with the planned monetary union.

The prototypal regional systems for retail payments were multilateral arrangements governed by service agreements and operational protocols of limited standardization between participating banks in different countries. For example, TIPANET, which was designed as a cross-border retail payment service for credit transfers between cooperative banks in Europe and Canada, provided participating members with somewhat lower cost and faster payment delivery than the usual correspondent banking arrangements of that time.16 The widespread growth of credit and debit card payment schemes since the late 1980s provided a second wave of regional and crossregional PSI linkages and integration.

Some regional cross-border arrangements have developed across direct (horizontal) linkages between national schemes. This is the case of the arrangement linking the Interac debit card system in Canada, the NYCE Payments Network and PULSE systems in the United States, and Union Pay in China for access by the schemes’ cardholders to the cross-border debit and ATM networks. Global card payment schemes such as VISA and MasterCard provide cross-border interoperability in transaction systems for credit and debit payments and ATM cash withdrawals for cardholders and (vertical) integration of these systems with proprietary clearing and settlement systems. As global card payment schemes, they deal with domestic, regional, and cross-regional payments.17

Regional and cross-regional interlinking of national and funds transfer systems in general is a fairly recent development. Some, such as EBA Clearings’ STEP2 in Europe and SICA-UMEOA in the West African Monetary and Economic Union, are single regional schemes and systems for both domestic and cross-border payments among member countries using the euro and the CFA franc, respectively. Others are generally constructed through (horizontal) bilateral linkages between national ACHs. These linkages allow the ACH members in one country to transmit customer payments, typically via credit transfers, to end-receivers holding accounts with ACH members in other countries. The network architecture for regionally or cross-regionally linked payment clearing infrastructure and for single regional ACHs can be either a hub-spoke arrangement with a central hub connection, a centralized network structure, or a distributed bilateral network structure, which contemplates the operation of large providers of payment clearing and processing services (Box 1). Another example, in Europe, is the Single Euro Payments Area (SEPA) scheme compliant clearing and settlement mechanisms (CSMs). Services offered by competing CSMs, based on the SEPA payment schemes, are governed by market forces and are outside the remit of the European Payments Council (EPC). The EU regulation provides that, within the EU, a PSP reachable for a national euro credit transfer or direct debit shall be reachable for euro credit transfers or direct debits initiated through a PSP located in any member state. Any PSP participating in any of the EPC SEPA Schemes (SEPA Credit Transfer, SEPA Direct Debit), under the relevant scheme adherence agreement with the EPC and the relevant EPC SEPA Scheme Rulebook, is permanently obligated to comply with reachability from its readiness date. Each PSP needs to determine how to achieve full reachability for the EPC SEPA Scheme(s) it has adhered to. There are several ways for PSPs to send and receive euro payment transactions to and from other PSPs across SEPA. PSPs can choose and use any solution or combination of solutions, directly or indirectly, as long as reachability and compliance with the EPC SEPA Schemes are effectively ensured.

 

Main Regions with Regional RTGS Systems

  • EU TARGET2
  • Hong Kong SAR
  • West Africa – WAMZ
  • East Africa – EAPS
  • South Africa (SADC) – SIRESS
  • ASEAN AEC – ASEAN 5 RTGS
  • Central America – USD based RTGS – SIP

 

crossbor3crossbor4

 

Europe TARGET2 

Since the establishment of the European Economic Community in 1958 there has been a progressive movement towards a more integrated European financial market. This movement has been marked by several events. In the field of payments, the most visible were the launch of the euro in 1999 and the cash changeover in the euro area countries in 2002.
The establishment of the large-value central bank payment system TARGET was less visible, but also of great importance. It formed an integral part of the introduction of the euro and facilitated the rapid integration of the euro area money market.
A unique feature of TARGET2 is the fact that its payment services in euro are available across a geographical area which is larger than the euro area. National central banks which have not yet adopted the euro also have the option to participate in TARGET2 to facilitate the settlement of transactions in euro. When new Member States join the euro area the participation in TARGET2 becomes mandatory. The use of TARGET2 is mandatory for the settlement of any euro operations involving the Eurosystem.
As of February 2016, 25 central banks of the EU and their respective user communities are participating in, or connected to, TARGET2:
The 20 euro area central banks (including the ECB) and
five central banks from non-euro area countries: Bulgaria, Croatia, Denmark, Poland and Romania.

 

 

 

Hong Kong RTGS System

System Links

Hong Kong’s financial infrastructure is designed to cater for cross-border as well as domestic economic activities. Links with payment systems and debt securities systems in other economies provide an easily accessible payment and settlement platform for cross-border economic transactions and financial intermediation.

Payment Links

Links with Guangdong (including Shenzhen) – Launched in phases since January 1998, these links cover cross-border RTGS payments in Hong Kong dollars and US dollars, and cheque clearing in Hong Kong dollars, US dollars and renminbi, with Guangdong Province including Shenzhen.1 The use of these links, which helps expedite payments and remittances between Hong Kong and Guangdong, has been rising gradually with the increasing economic integration between Hong Kong and the Mainland.

Cross-border payment arrangements with Mainland – Cross-border payment arrangements involving the Mainland’s Domestic Foreign Currency Payment System were established in March 2009 to facilitate foreign currency funding and liquidity management of Mainland banks and commercial payments. The cross-border payment arrangements currently cover four currencies – the Hong Kong dollar, US dollar, euro and British pound.

Link with Macau – The one-way joint clearing facility for Hong Kong dollar and US dollar cheques between Hong Kong and Macau was launched in August 2007 and June 2008 respectively, reducing the time required for clearing Hong Kong dollar and US dollar cheques drawn on banks in Hong Kong and presented in Macau from four or five days to two.

Link with Malaysia – A link between the Ringgit RTGS system in Malaysia (the RENTAS system) and the US dollar RTGS system in Hong Kong came into operation in November 2006. The link helps eliminate settlement risk by enabling PvP settlements of foreign exchange transactions in ringgit and US dollars during Malaysian and Hong Kong business hours. This is the first cross-border PvP link between two RTGS systems in the region.

Link with Indonesia – The PvP link between Hong Kong’s US dollar RTGS system and Indonesia’s Rupiah RTGS system was launched in January 2010. The link helps eliminate settlement risk by enabling PvP settlements of foreign exchange transactions in Rupiah and US dollars during Indonesian and Hong Kong business hours.

Link with the Continuous Linked Settlement (CLS) system – The CLS system, operated by CLS Bank International, is a global clearing and settlement system for cross-border foreign exchange transactions. It removes settlement risk in these transactions by settling them on a PvP basis. The Hong Kong dollar joined the CLS system in 2004.

Regional CHATS – This is an extension of the RTGS systems in Hong Kong in the regional context. Regional payments in Hong Kong dollars, US dollars, euros and renminbi can use the RTGS platform in Hong Kong to facilitate cross border/cross bank transfers in those currencies.

Link with Thailand

In 2014, Hong Kong started operating PvP link between HK’s US dollar RTGS system and Thailand’s BAHT RTGS system.

 

regionalrtgs

 

 

US FEDWIRE RTGS System

This is surprisingly subtle.

When, for instance, when bank A in the Richmond Federal Reserve district sends $1000 in reserves to bank B in the Minneapolis Federal Reserve district, reserves are taken out of bank A’s account at the Richmond Fed and placed into bank B’s account at the Minneapolis Fed.

Now, bank A’s reserves are a liability on the books of the Richmond Fed, while bank B’s reserves are a liability on the books of the Minneapolis Fed. Without any offsetting change, therefore, the process would result in the Richmond Fed discharging a liability and the Minneapolis Fed gaining a liability – and if this continued, regional Fed assets and liabilities could become highly mismatched.

The principle, then, is that there should be an offsetting swap of assets. It would be too complicated to swap actual assets every time there is a flow of reserves between banks in different districts. (There’s over $3 trillion in transactions every day on Fedwire, the Fed’s RTGS system – and if even a fraction of those are between different districts, the amounts are really enormous.) Instead, in the short run the regional Feds swap accounting entries in an “Interdistrict Settlement Account” (ISA). In the example above, the Minneapolis Fed’s ISA position would increase by $1000, while the Richmond Fed’s ISA position would decrease by $1000, to offset the transfer of liabilities.

So far, this is all very similar to the controversial TARGET2 system in the Euro area, in which large balances between national banks have recently been accumulating. The American system is different, however, because ISA entries are eventually settled via transfers of assets. Every April, the average ISA balance for each regional Fed over the past year is calculated, and this portion of the balance is settled via a transfer of assets in the System Open Market Account (the main pile of Fed assets, run by the New York Fed). Hence, if in April the Minneapolis Fed has an ISA balance of +$500, but over the past year it had an average balance of +$2000, its balance is decreased (by $2000) to -$1500, and it has an offsetting gain of $2000 in SOMA assets.

As this example shows, since it is average balances over the past year that are settled, not the current balances, ISA balances do not necessarily go to zero every April. Historically, they were fairly tiny anyway, but since QE brought dramatic increases in reserves, these balances have sometimes been large and irregular. In the long run, though, the system prevents any persistent imbalances from accumulating.

(Note: the process in April is a little bit more complicated than I describe, since some minor transfers of gold certificate holdings are also involved. Basically, gold certificates are transferred between regional Feds to maintain a constant ratio of gold certificates to federal reserve notes; the transfers of SOMA assets are adjusted to account for this. Wolman’s recent piece for the Richmond Fed is one of the few sources that describes the system in detail.)

 

Twelve Districts of Federal Reserves

Federal Reserve Banks

  • Boston
  • New York
  • Philadelphia
  • Cleaveland
  • Richmond
  • Atlanta
  • Chicago
  • St. Louis
  • Minneapolis
  • Kansas City
  • Dallas
  • St. Francisco

Structure of Federal Reserve

Inter district Settlement Account Balances

 

 

East African Community

EAC Payment and Settlement Systems Integration Project (EAC-PSSIP)

 

The East African Community Secretariat has received financing from the African Development Fund (ADF) toward the cost of the establishment of EAC Payment and Settlement Systems Integration Project (EAC- PSSIP) and intends to apply part of the agreed amount for this grant to payments under the contract for Audit Services for the EAC Payment and Settlement Systems Integration Project (EAC-PSSIP).

The EAC-PSSIP is an integral part of the EAC Financial Sector Development and Regionalisation Project’s (FSDRP) higher objective of broadening and deepening the financial sector and is aimed at complementing the integration of the regional financial market infrastructure to facilitate the undertaking of cross border funds transfer in support of the economies of the region as a whole. The project objective is to contribute to the modernization, harmonization and regional integration of payment and settlement systems.

The project specifically aims at: enhancing convergence and regional integration of payment and settlement systems; and strengthening a harmonized legislative and regulatory financial sector capacity in the Partner States. The Project is structured under the following components: Component 1: Integration of Financial Market Infrastructure; Component 2: Harmonization of Financial Laws and Regulations; and Component 3: Capacity Building.

The project commenced its operation in January, 2014 and it was officially launched in March, 2014.

Towards A Single Currency

The latest development is the 2013 Monetary Union protocol, which sets out the terms for the introduction of a single currency by 2024. The IMF has stated that greater integration is “expected to help sustain strong economic growth and improve economic efficiency. A larger regional market will lead to economies of scale, lower transaction costs, increased competition, and greater attractiveness as a destination for FDI.” The first step towards this goal has already been taken. In May 2014 the East African Payment System (EAPS) was launched. The new system will facilitate real-time cross-border payments between member states. Initially, the EAPS was operational between Kenya, Tanzania and Uganda, linking the Tanzania Interbank Settlement System, the Kenya Electronic Payment and Settlement System, and the Uganda National Interbank Settlement. Lucy Kinunda, director of national payment systems at the Tanzanian central bank, told the local press, “We see the enthusiasm among commercial banks and traders building up as it facilitates intra-regional trade by reducing costs and risks in money transfers across border.”

While there is much expectation for the single currency and the political and economic integration it will bring, the main challenge will be the process of macroeconomic convergence. There has been substantial variation in inflation and economic growth rates within the EAC. For Kenya, there will also be a challenge in meeting the macroeconomic criteria laid out in the Monetary Union Protocol. In the decade to the end of 2013, Kenya only achieved the inflation target of below 8% in 2010 and 2013. The country fares better on the ratio of public debt to GDP, maintaining a ratio below the target level of 50% every year between 2008 and 2013. The member states have almost a decade to meet the convergence criteria.

 

Member States

  • Burundi
  • Kenya
  • Rawanda
  • Tanzania
  • Uganda

 

 

 

SADC – Southern African Development Community – uses RAND as settlement Currency

The Southern African Development Community (SADC) aims to achieve economic development, peace and security, alleviate poverty, and enhance the standard and quality of life of the peoples of Southern Africa through regional integration. Current status In order to achieve the above objective, a comprehensive development and implementation framework – the Regional Indicative Strategic Development Plan (RISDP) – was formulated in 2001 guiding the regional integration over a period of fi fteen years (2005-2020). The RISDFP outlines key integration milestones in fi ve areas: free trade area, customs union, common market, monetary union and single currency. The free trade area was achieved in August 2008, meaning that for 85% of intra-regional trade there is zero duty. The second milestone, to establish a customs union, has been postponed, with a new target date of sometime in 2013. Although the ultimate goal of monetary union with a single currency is several years away, the SADC Payment System integration project is already in motion. This has strategic objectives to: harmonise legal and regulatory frameworks to facilitate regional clearing and settlement arrangements; implement an integrated regional cross-border payment settlement infrastructure; and establish a co-operative oversight arrangement based on the harmonised regulatory framework. The first phase of the cross-border payment settlement infrastructure (SIRESS) went live for the Common Monetary Area countries that use the South African rand (South Africa, Lesotho, Namibia and Swaziland) in July 2013. The new system allows the settlement of payment transactions in a central location using rand as the common settlement currency. Next steps – towards an Economic Union If successful, the new system will be rolled out to the rest of the SADC Member States as the region advances towards its eventual establishment as an economic union. In parallel, the immediate next step is the establishment of the SADC customs union, which presents a number of challenges; the major one is the establishment of a single Common External Tariff, which requires convergence of all individual tariff policies into a single and uniform tariff regime.

The first stage of the Sadc Integrated Regional Electronic Settlement System (SIRESS), being the first go-live involving countries in the Common Monetary Area (CMA) namely Lesotho, Namibia, South Africa and Swaziland, was initiated in July 2013. Phase Two involved Malawi, Tanzania and Zimbabwe going live in April 2014 followed by Mauritius and Zambia which went live in September 2014 under Phase Three. Since the launch of Siress, 43% of payments in the Sadc region are now executed through the system, which settles payments in South African rand. By April 2015 Siress had reached the ZAR1 trillion (US$85,1 billion) settlement mark. This phenomenal growth of Siress is emblematic of the growing importance and influence of regional payment systems in general, the rationale of which is the subject of this article.

 

Member States

  • Angola
  • Botswana
  • Congo
  • Lesotho
  • Madagascar
  • Malawi
  • Mauritius
  • Mozambique
  • Namibia
  • Seychelles
  • South Africa
  • Swaziland
  • Tanzania
  • Zambia
  • Zimbabwe

As of 2015, 9 out of the 15 countries have joined the RTGS system.

  • Lesotho
  • Malawi
  • Namibia
  • Mauritius
  • Soth Africa
  • Swaziland
  • Tanzania
  • Zambia
  • Zimbabwe

 

sadc_member_states_lowres

 

 

 

ECOWAS – West Africa Monetary Zone (WAMZ)

The Economic Community of West African States (ECOWAS)’ Monetary Cooperation Programme (EMCP) provided the blueprint for the economic integration of the countries of West Africa. Amongst other measures, the EMCP called for the creation of a single monetary zone in the sub-regions known as the West African Monetary Zone (WAMZ). The WAMZ was created in April 2000 with the goal to establish an economic and monetary union of the member countries. In 2001, WAMZ created the West African Monetary Institute (WAMI) to undertake preparatory activities for the establishment of the West African Central Bank (WACB), and the launching of a monetary union for the Zone. The WAMZ programme aims to increase trade among the ECOWAS/WAMZ member countries, reduce transaction costs for the users of payment systems, domesticate cross-border transactions within the WAMZ through the use of a single currency, develop safe, secure and effi cient payment systems that conform to global standards and build a payment system that will facilitate monetary policy management for the WACB.

Ahead of the establishment of the WACB, having a modernised, safe and stable financial infrastructure in place is a prerequisite to introduce a monetary union successfully. To this effect, a grant of about USD 30 million from African Development Bank Fund was approved for the WAMZ Payments System Development Project, which aims to improve the basic infrastructure of the fi nancial sector through upgrade of the payment systems of our countries – The Gambia, Guinea, Sierra Lone and Liberia. The system components of the project include Real-Time Gross Settlement (RTGS) system, Automated Clearing House (ACH) / Automated Cheque Processing (ACP) systems, Central Securities Depository (CSD) / Scripless Securities Settlement (SSS) systems, Core Banking Application (CBA) system and infrastructure upgrade (telecommunication and energy). The Gambia’s high-value payment system went live in July 2012 and Sierra Leone is currently going through the implementation. The target date of the project completion in all four countries is June 2014.

Member States

  • Ghana
  • Nigeria
  • Gambia
  • Guinea
  • Sierra Leone
  • Liberia

 

 

 

COMESA – Common Market for East and Southern Africa

The COMESA launched the COMESA Customs Union in 2009 and the COMESA Regional Payment and Settlement System (REPSS) to facilitate crossborder payment and settlement between Central Banks in the COMESA region. The new system provides a single gateway for Central Banks within the region to effect payment and settlement of trades.

Member States

Burundi, Comoros, DRC, Djibouti, Egypt, Eritrea, Ethiopia, Kenya, Libya, Madagascar, Malawi, Mauritius, Rwanda, Seychelles, Sudan, Swaziland, Uganda, Zambia, Zimbabwe

 

 

 

ECOWAS – WAEMU/UEMOA – West African Economic and Monetary Union

created as a single monetary zone is the West African Economic and Monetary Union (WAEMU) / Union Economique et Monétaire Ouest Africaine (UEMOA). The WAEMU was established to promote economic integration among member countries and a common market that share West African francs (CFA francs) as a common currency, monetary policies, and French as an official language. It is a trade zone agreement to encourage internal development, improve trade, establish uniform tariffs for goods, establish a regional stock exchange and a regional banking system.

The UEMOA/WAEMU has successfully implemented macro-economic convergence criteria and an effective surveillance mechanism; adopted a customs union and common external tariff; and combined indirect taxation regulations, in addition to initiating regional structural and sectoral policies. Uniquely amongst Africa’s regionalisation projects, UEMOA/WAEMU has a single central bank, Banque Centrale des Etats de l’Afrique de l’Ouest (BCEAO), which governs all of the fi nancial institutions across the Union. As part of the project for modernisation of the payment and financial infrastructure, the BCEAO launched a regional Real Time Gross Settlement (RTGS) system in 2004 and the regional Automated Clearing House (ACH) system in 2008.

Member States

Benin, Burkina Faso, Ivory Coast, Guinea-Bissau, Mali, Niger, Senegal, Togo

 

 

 

Central America

SIP — A NEW INTEGRATED REGIONAL PAYMENT SYSTEM

  • Guatemala
  • Costa Rica
  • Honduras
  • El Salvador
  • Nicaragua
  • Dominican Republic

Uses US Dollar as settlement Currency.

mapasip

 

The SIP is a novel framework in the Americas, with several elements that dis- tinguish it from other cross-border arrangements: it involves participants in various countries, allows for payment flows in all directions among participants, uses an RTGS concept for its ‘hub’ and interlinks exclusively central bank RTGS systems, not ACHs, and uses a foreign currency for its settlement accounts.

There may certainly be some doubts as to whether the degree of existing commercial integration among the countries of Central America and the Dominican Republic will suffice to make SIP a commercially viable proposition.

But one can see the SIP as part of a wider initiative which seeks to develop the financial infrastructure with a view to furthering a regional financial market. The SIP will be an integral part of the local payment systems of CMCA member countries and, as such, will widen the coverage of available services to the benefit of participants of the national payment systems. Furthermore, the SIP could act as a direct stimulus for those banks that operate in only one of the member countries to offer affordable cross-border payment services to its clients and thus assist in the strengthening of regional financial integration.

 

 

Asia – South East Asia – ASEAN 5

Payment issues: Deputy Trade Minister Bayu Krisnamurthi (second right), accompanied by Artajasa president director Arya Damar (right), inspects a booth during the Integrated Payment System seminar in Jakarta on Wednesday. The seminar aimed at informing business players about the integrated payment system ahead of the ASEAN Economic Community in 2015. (Antara/Prasetyo Utomo)

Bank Indonesia (BI) is currently developing tools to create a more time-efficient and low-cost payment system ahead of the launch of the ASEAN Economic Community (AEC) in 2015, when there will be a free flow of goods, services and people among ASEAN member countries.

‘€œWe are working to develop a more integrated national payment system before having an integrated payment system within the ASEAN region,’€ BI payment system executive director Rosmaya Hadi said at a seminar held by electronic payment service provider PT Artajasa Pembayaran Elektronik on Wednesday.

With the new system, the Indonesian banking industry will have a new real-time gross settlement system (RTGS) in which bank customers can carry out multi currency transactions on a real-time basis, she said.

‘€œWith this system, a bank customer can carry out multicurrency transactions in only minutes through non-cash payments,’€ she said, adding that BI would launch the new system this year.

Rosmaya also said the Indonesian central bank and its counterparts in five ASEAN members, including Malaysia, the Philippines, Singapore and Thailand, had agreed to prepare for an integrated payment system.

‘€œCentral banks of the ASEAN 5 have formed task forces on trade settlements, retail payments, monthly remittances, capital market settlements and standardization to formulate a set of regulations and schemes with which we will have an ASEAN integrated payment system,’€ she said.

Under the regional integrated payment system, people in ASEAN will be able to make financial transactions through ATMs, credit cards or electronic money without sacrificing much time and money.

According to a report by the ASEAN Working Committee on Payment and Settlement Systems (WC-PSS), the integrated payment system will reduce bank charges (such as foreign exchange spread among ASEAN currencies and handling fees), and encourage regulated non-bank remittance service providers to adopt international/common standards in retail payment systems.

Of all the ASEAN member countries, only Indonesia, the Philippines and Thailand currently have full ATM interoperability, according to an Asian Development Bank Institute report published in 2013.

‘€œWhen the AEC commences, ASEAN member countries will have greater need for an integrated payment system as people from across the region will have to carry out transactions from and to their home countries,’€ said Deputy Trade Minister Bayu Krisnamurthi at a similar event.

The AEC, also known as the ASEAN single market, will commence at the end of 2015. Under the AEC, the ASEAN 5 and Brunei Darussalam will have free trade agreements, while Cambodia, Laos, Myanmar and Vietnam will fully participate in the community in 2018.

Artajasa president director Arya Damar said that Indonesia should also develop its banking sector to tap its large market by utilizing more cashless transactions, otherwise other ASEAN countries’€™ banks would do so.

Citing BI data, Artajasa said that with a total of 800,000 local branches, commercial banks in Indonesia could reach only 20 percent of the total working-age population of around 150 million people.

‘€œMeanwhile, with only 15,000 ATMs, Malaysian commercial banks can reach 66 percent of its total working-age population,’€ he said.

Thai commercial banks, with around 66,000 ATMs, can reach about 30 percent of Of Thailand’€™s total working-age population, he added. (koi)

 

SINGAPORE – The five largest members of ASEAN – Indonesia, Malaysia, Singapore, the Philippines and Thailand – have agreed to implement an integrated payment system to enable real time gross settlement (RTGS) systems to be in effect by next year.

“With this system, a bank customer can carry out multi-currency transactions in minutes through non-cash payments,” said Rosmaya Hadi with Bank Indonesia.

The ASEAN 5 Central Banks are currently working on establishing protocols for intra-trade settlement, retail payments, monthly remittances, capital market settlements and standardization to enable the system to be up and running by the time the ASEAN Economic Community (AEC) unification occurs next January.

“When the AEC commences, ASEAN member countries will have greater need for an integrated payment system as people from across the region will have to carry out transactions from and to their home countries,” according to Deputy Trade Minister Bayu Krisnamurthi.

Under the system, individual users across ASEAN will be able to make financial payments through ATMs, credit cards, or electronic money without spending a significant amount of time or money doing so. As ASEAN currently has no plan to establish a unified currency, this program is expected to increase multi-currency transactions.

ASEAN members are also developing their ATM networks; Indonesia, for example, has an ATM reach of 20 percent of its total working population of 150 million, compared with 66 per cent for Malaysia.

Indonesia, Malaysia and Thailand are currently the only ASEAN members to have full ATM integration according to the Asian Development Bank. This will soon change as the other ASEAN member nations work towards greater integration.

Member States

Indonesia, Thailand, Phillipines, Singapore, Malaysia and Brunei Darussalam in 2015

Cambodia, Laos, Myanmar and Vietnam to join in 2018

 

 

 

ASEAN +3 Cross Border Infrastructure

In Delhi in May 2013, the Finance Ministers and Central Bank Governors of the Association of Southeast Asian Nations (ASEAN), the People’s Republic of China (PRC), Japan, and the Republic of Korea—collectively known as ASEAN+3—agreed to set up a Cross-Border Settlement Infrastructure Forum (CSIF) to discuss detailed work plans and related processes for the improvement of cross-border settlement in the region, which included the possibility of establishing a regional settlement intermediary (RSI). Members, observers, and the CSIF Secretariat are listed in Appendix 1.

Based on the intensive discussions among CSIF members, the first report, Basic Principles on Establishing a Regional Settlement Intermediary and Next Steps Forward, was published by the Asian Development Bank in May 2014 after being endorsed by the ASEAN+3 finance ministers and Central Bank governors at their 17th meeting held in May 2014 in Astana. The members agreed that the central securities depository (CSD)–real-time gross settlement (RTGS) linkages, which connect national CSD systems and RTGS systems in a flexible

way, would be an achievable model for cross-border settlement infrastructure in the short term and medium term. This model linking existing infrastructure enables local bonds to be settled in delivery versus payment (DVP) via central bank money, which ensures the safety of settlement and is compliant with international standards, as well as being cost- efficient. As such, the CSD–RTGS linkages are to be studied as the most feasible model for implementing the RSI in ASEAN+3.

The Joint Statement of the 17th ASEAN+3 Finance Ministers and Central Bank Governors Meeting reads as follows:

We welcomed the recommendations submitted by the Cross-Border Settlement Infrastructure Forum (CSIF) and the direction of developing the implementation roadmap of CSD-RTGS linkages as short-term and medium-term goals and integrated solution as a long-term goal for making it possible to deliver securities smoothly and safely versus payment across borders. We are of the view that this is a practical and efficient approach to advance regional settlement infrastructure that promotes cross-border securities transactions in the region.

The 4th and 5th CSIF meetings were held in Hong Kong, China (September 2014) and Manila (January 2015), respectively. Specific topics to develop an implementation plan for the CSD–RTGS linkages—such as a desktop study, possible road map—were discussed at these meetings. As an initial step, the Bank of Japan (BOJ) and the Hong Kong Monetary Authority (HKMA) agreed to conduct a desktop study.

 

 

Regional Integration in South Asia:  BIMSTEC, SAARC, SAPTA, SAFTA

 

January 1, 2016, marked the tenth anniversary of the South Asian Free Trade Area (Safta). The agreement, which was reached in January 2004 at the 12th Saarc Summit in Islamabad, Pakistan, came into force on January 1, 2006, and became operational after the agreement was ratified by seven nations (Afghanistan, the eighth member, ratified it in May 2011).

It created a free trade area for the people of eight South Asian nations and aimed at reducing custom duties of all traded goods to zero by 2016.  That year is here but the South Asian nations see trade among them making up a meagre five per cent of their total transactions.

The purpose of Safta was to promote common contract among the member-nations and provide them with equitable benefits. It also aimed at increasing the level of cooperation in economy and trade among the Saarc nations by lowering the tariff and barriers and give special preference to the least developed countries in the Saarc region.

Safta had a potential

At a time when regional trade blocs and free trade area have emerged as models of cooperative economic growth, the Safta had offered a great opportunity to take forward the process of South Asian integration.

But South Asia has too much problems

But South Asia is a unique regional entity in the entire world. It is a region which has remained a prisoner of the past and pressing geopolitical realities involving India, Pakistan and China.

Thanks to the relentless rivalry between India and Pakistan and the latter’s proximity to the Chinese who have included the strategy of containing India in its scheme of things in South Asia, the idea of integration of South Asia in other forms have remained elusive.
Other smaller countries like Nepal, Bengladesh, Maldives and Sri Lanka, too, have played the China card against India time and again, hurting the prospects of mutual confidence.

In such an atmosphere of suspicion, achieving what the Safta had envisioned a decade back has been next to impossible. Despite a free trade pact since 2006, trade among South Asian nations makes up five percent of their total trade. They share few transport and power connections between them.

We saw how Saarc fell apart at its 2014 summit

We saw how the Saarc was split during the 18th summit held in Kathmandu in 2014 end when India and Nepal accused Pakistan of creating an obstacle on the way of regional integration by refusing to sign three multilateral agreements, including road trade and sharing of electricity.

Indian Prime Minister Narendra Modi even went to the extent of warning at that time, saying the integration would happen through the Saarc or without it.

He found backing in the Nepali ranks. India then went ahead with ties (visa, energy, road) with other neighbours like Nepal and Bangladesh and also promised to cut its trade surplus with the South Asian nations. But in all, Modi expressed displeasure that the progress was too slow.

Despite the presence of instruments like Safta and Bimstec (Bay of Bengal Initiative for Multi-Sectoral Technical and Economic Cooperation), South Asia has only languished. The state of affairs in connectivity, financial infrastructure including banking and mobility of people and goods have remained stuck in the complex cobweb of customs, visa and transit norms.

India, too, is responsible for the poor state of affairs

India, being the largest nation in South Asia, has been equally guilty by not attaching much significance to the forum in the past, as it did in nurturing relation with the West and Russia. There has been a sheer lack of continuity in the country’s successive governments’ priorities towards South Asia.

For most, a combative policy towards Pakistan and dominating approach towards the smaller neighbours have been the most-after stand. No wonder, opportunities like Safta were lost without a trace.

Can Narendra Modi govt turn the tables around?

However, the Narendra Modi regime has attached much importance to the issue of South Asian integration which is a silver lining. The way India’s PM invited all South Asian heads of states or representatives to his swearing-in ceremony or kicked off his foreign tours with visits to small states like Bhutan and Nepal or suddenly landed in Lahore to reach out to his Pakistani counterpart-all these suggest that his government aspires to see a better surroundings.

Yes, there have been a serious goof-up by India’s foreign-policy makers in Nepal in the wake of its ratifying a new constitution, which has left the Himalayan neighbour distraught, but yet going by PM Modi’s general intent of improving the state of South Asian cooperation, the decade-old Safta could still have a future.

As of now, the wait will be for the 19th Saarc summit in Islamabad later this year.

 

Towards South Asia Economic Integration

Payment systems to facilitate South Asian integration

SAARC Payment Initiative

Asian Clearing Union

A review of the Asian Clearing Union

 

 

 

 

Key Sources of Research:

 

TARGET2

https://www.ecb.europa.eu/paym/t2/shared/pdf/professionals/SIBOS_13_Target2_HQ.pdf?ddee08326301ecfe43123f036ade4322

 

 

 

Regional Monetary Co-operation in the Developing World Taking Stock

Barbara Fritz / Laurissa Mühlich

2014

Click to access Paper-Stocktaking-Regional-Monetary-Cooperation-Fritz-Muehlich-22-07-14-end.pdf

 

 

 

 

Redefining the Landscape of Payment Systems

Summary of Proceedings of the World Bank Conference

2009

 

Click to access 705740ESW0P1100Cape0Town0April02009.pdf

 

 

 

PAYMENT SYSTEMS TO FACILITATE SOUTH ASIAN INTRA- REGIONAL TRADE

Ashima Goyal

September 2014

 

Click to access Development%20Paper_1403.pdf

 

 

 

 

Regional Integration and Economic Development in South Asia

 

Click to access regional-integration-economic-development-south-asia.pdf

 

 

 

Creating an Association of Southeast Asian Nations Payment System: Policy and Regulatory Issues

Tanai Khiaonarong

No. 422 May 2013

 

Click to access adbi-wp422.pdf

 

 

 

 

BASIC PRINCIPLES ON ESTABLISHING A REGIONAL SETTLEMENT INTERMEDIARY AND NEXT STEPS FORWARD

CROSS-BORDER SETTLEMENT INFRASTRUCTURE FORUM

ADB

 

Click to access establishing-regional-settlement.pdf

 

 

 

PAYMENT AND SECURITIES SETTLEMENT SYSTEMS IN THE MIDDLE EAST AND NORTH AFRICA

MASSIMO CIRASINO AND MARCO NICOLÌ

JUNE 2010

 

Click to access MENAFlagshipPaymentsandSettlementsSystems12_20_10.pdf

 

 

 

HKMA RTGS System Links

 

http://www.hkma.gov.hk/eng/key-functions/international-financial-centre/infrastructure/system-links.shtml

 

 

 

Payments Systems and Intra African Trade

 

Click to access chap8.pdf

 

 

 

Africa Payments: Insights into African transaction flows

SWIFT

 

 

 

PAYMENT SYSTEMS DEVELOPMENT IN THE WEST AFRICAN MONETARY ZONE (WAMZ)

BY TEMITOPE W. OSHIKOYA

 

Click to access Temitope_WOshikoya.pdf

 

 

 

SADC Regional payments integration Project – Annexure 6

Brian Gei-Khoibeb

 

http://209.88.21.122/documents/899832/1426693/SADC+Regional+Payments+Integration+18+06+2014.pdf/d5228610-a512-4a06-8ef2-03bba1c2be58

 

 

 

CROSS-BORDER LOW VALUE PAYMENTS AND REGIONAL INTEGRATION: ENABLERS AND DISABLERS

DR. LEO LIPIS COLIN ADAMS

 

Click to access SWIFT-Institute-Working-Paper-No-2014-005-Cross-border-LVP-Regional-Integration-Lipis_v4-FINAL.pdf

 

 

 

 

 

SADC Payments Project

 

http://www.sadcbanking.org/paymentsproject.aspx

Click to access SADC_Payments_Project.pdf

 

 

 

The development of a regional payment system in Central America: A step towards further integration and economic development.

Gregor Heinrich and Enrique Garcıa Dubon

2011

 

Click to access MPRA_paper_47398.pdf

 

 

 

Implementing Cross-border Payment, Clearing and Settlement

Systems: Lessons from the Southern African Development Community

 

Albert Mutonga Matongela

 

http://www.iiste.org/Journals/index.php/RJFA/article/viewFile/7798/7942

 

 

 

Payment System Interoperability and Oversight: The International Dimension

 

Click to access ITUFGDFS_REPORT%20ON%20Payment%20System%20InteroperabilityandOversightThe%20InternationalDimension-11-2016.pdf

 

 

 

Payment systems to facilitate South Asian integration

2014

 

Click to access WP-2015-021.pdf

 

 

 

Towards South Asia Economic Union

2015

 

Click to access Towards%20South%20Asia%20Economic%20Union.pdf

 

 

 

RBI suspends euro transactions via Asian Clearing Union

 

http://economictimes.indiatimes.com/markets/forex/rbi-suspends-euro-transactions-via-asian-clearing-union/articleshow/53001118.cms

 

 

 

Financial Infrastructure in Hong Kong

2013

Click to access facb1-657-4-e.pdf

 

 

 

PEOPLE’S REPUBLIC OF CHINA––HONG KONG SPECIAL ADMINISTRATIVE REGION

OVERSIGHT AND SUPERVISION OF FINANCIAL MARKET INFRASTRUCTURES–TECHNICAL NOTE

 

IMF Country Report No. 14/208

July 2014

FINANCIAL SECTOR ASSESSMENT PROGRAM

 

Click to access cr14208.pdf

 

 

 

PAYMENT AND SETTLEMENT SYSTEMS

Bonk of Malaysia

 

Click to access cp04.pdf

 

 

 

Financial Sector Reforms and Prospects for Financial Integration in Maghreb Countries

Amor Tahari, Patricia Brenner, Erik De Vrijer, Marina Moretti, Abdelhak Senhadji, Gabriel Sensenbrenner, and Juan Solé

 

Click to access Financial%20sector%20reforms%20IMF.pdf

 

 

 

The Southern African Development Community Integrated Regional Settlement System (SIRESS): What? How? and Why?

 

Click to access July%202013%20Economic%20Revivew.pdf

 

 

 

The Payment and Settlement Systems in the Republic of China (Taiwan)

October 2010

 

Click to access 010269422971.pdf

 

 

 

PAYMENT SYSTEMS IN JAPAN

 

2010

Click to access paymentsystems.pdf

 

 

 

The Inefficiencies of Cross-Border Payments: How Current Forces Are Shaping the Future

Written by Yoon S. Park, PHD & DBA, George Washington University

VISA

 

Click to access crossborder.pdf

 

 

 

BI prepares for ASEAN integrated payment system

The Jakarta Post

Jakarta | Thu, January 30, 2014

http://www.thejakartapost.com/news/2014/01/30/bi-prepares-asean-integrated-payment-system.html

 

 

 

ASEAN Financial Integration towards ASEAN 2025:

Call for a well-coordinated supervisory and regulatory framework

Satoru (Tomo) Yamadera

 

Click to access 4.presentation_by_satoru_yamaders_adb_0.pdf

 

 

 

UK Payments Infrastructure: Exploring Opportunities

31 August 2014

 

Click to access kpmg-infrastructure-report-for-psr.pdf

 

 

 

Payment Systems in Latin America: Advances and Opportunities

By Nancy Russell, NLRussell Associates

 

Click to access la_advances.pdf

 

 

 

PROGRESS REPORT ON ESTABLISHING A REGIONAL SETTLEMENT INTERMEDIARY AND NEXT STEPS

Implementing Central Securities Depository–Real-Time Gross Settlement Linkages in ASEAN+3

CROSS-BORDER SETTLEMENT INFRASTRUCTURE FORUM

2015

 

Click to access progress-report-regional-settlement-intermediary.pdf

 

 

 

ASEAN+3 Information on Transaction Flows and Settlement Infrastructures

ASEAN+3 Bond Market Forum Sub-Forum 2 (ABMF SF2)

December 2013

 

Click to access asean3-information-transaction-flows-settlement-infrastructures.pdf

 

 

 

 

BASIC PRINCIPLES ON ESTABLISHING A REGIONAL SETTLEMENT INTERMEDIARY AND NEXT STEPS FORWARD

CROSS-BORDER SETTLEMENT INFRASTRUCTURE FORUM

2014

 

Click to access establishing-regional-settlement.pdf

 

 

 

 

ASIAN ECONOMIC INTEGRATION REPORT

WHAT DRIVES FOREIGN DIRECT INVESTMENT IN ASIA AND THE PACIFIC?

 

Geert Almekinders, Satoshi Fukuda, Alex Mourmouras, Jianping Zhou and Yong Sarah Zhou

February 2015

 

Click to access wp1534.pdf

 

 

 

 

Guidelines for the Successful Regional Integration of Financial Infrastructures

September, 2013

 

Click to access Guidelines_for_the_Successful_Regional_Integration_of_Financia_Infrastructures_DRAFT.pdf

 

 

 

ASEAN 5 Prepares for Integrated Payment System

Posted on January 31, 2014

http://www.aseanbriefing.com/news/2014/01/31/asean-5-prepares-integrated-payment-system.html

 

 

 

Establishing an integrated payment system (real-time gross settlement) in ASEAN

Kusumo Wardhono, Dwi Tjahja

 

Click to access Complete_dissertation.pdf

 

 

 

a Practical approach to International Monetary System Reform: Building Settlement Infrastructure for Regional Currencies

Changyong Rhee and Lea Sumulong

 

Click to access BRICS_ASIA_no3.pdf

 

 

 

 

Strengthening Financial Infrastructure

Peter J. Morgan and Mario Lamberte

No. 345 February 2012

 

Click to access 09869.pdf

 

 

 

 

Why Complementarity Matters for Stability— Hong Kong SAR and Singapore as Asian Financial Centers

V. Le Leslé, F. Ohnsorge, M. Kim, S. Seshadri

2014

 

Click to access wp14119.pdf

 

 

 

 

Navigating Rise of Global RMB

JP Morgan

https://www.jpmorgan.com/cm/BlobServer/Navigate_the_Rise_of_the_Global_RMB_.pdf?blobkey=id&blobwhere=1320642032360&blobheader=application/pdf&blobheadername1=Cache-Control&blobheadervalue1=private&blobcol=urldata&blobtable=MungoBlobs

 

 

 

Cross-border payment link established with Hong Kong

2014

http://www.nationmultimedia.com/news/business/aec/30239651

 

 

 

 

Hong Kong’s role in facilitating the use of Renminbi as a currency for settling international transactions

2010

 

Click to access Yip_HK_use_of_RMB_intl_transactions.pdf

 

 

 

 

TARGET2: a global hub for processing payments in euro

ECB

https://www.ecb.europa.eu/paym/intro/news/newsletter/html/mip_qr_1_article_5_target2_global_hub.en.html

 

 

 

THE EAST AFRICAN PAYMENT SYSTEM (EAPS)

 

Click to access Bosco_EAPS.pdf

 

 

 

 

Hong Kong and Thailand launch a new cross-border payment-versus-payment link

http://www.hkma.gov.hk/eng/key-information/press-releases/2014/20140728-3.shtml

Click to access r140729c.pdf

 

 

 

Settlement Systems of East Asian Economies

 

Click to access Settlement_systems.pdf

 

 

 

 

Payments in ASEAN post AEC

Vengadasalam Venkatachalam, Head of Product Management South East Asia

https://globalconnections.hsbc.com/australia/en/articles/payments-asean-post-aec

 

 

 

 

PSSR – Payments and Settlement Systems Report

Click to access psr160624.pdf

 

 

 

 

Payment, clearing and settlement systems in Hong Kong SAR

 

Click to access d105_hk.pdf

 

 

 

 

Interdependencies of payment and settlement systems: the Hong Kong experience

 

Click to access fa2_print.pdf

 

 

 

 

Payment Systems

http://www.hkma.gov.hk/eng/key-functions/international-financial-centre/infrastructure/payment-systems.shtml

http://www.hkma.gov.hk/eng/key-functions/international-financial-centre/infrastructure/financial-infrastructure-hong-kong.shtml

 

 

 

Creating an Integrated Payment System: The Evolution of Fedwire

Adam M. Gilbert, Dara Hunt, and Kenneth C. Winch

Click to access 9707gilb.pdf

 

 

 

Federal Reserve Interdistrict Settlement

 

Click to access wolman.pdf

 

 

 

TARGET2 and Central Bank Balance Sheets

Karl Whelan

1 University College Dublin New Draft

March 17, 2013

 

Click to access T2Paper-March2013.pdf

 

 

 

Ontology and Theory for a Redesign of European Monetary Union

Sheila Dow

 

Click to access 5935449525f59deca84c16c4dce251122592.pdf

 

 

 

TARGET2: Symptom, Not Cause, of Eurozone Woes

By Thomas A. Lubik and Karl Rhodes

Click to access eb_12-08.pdf

 

 

 

The Idiot’s Guide to the Federal Reserve Interdistrict Settlement Account

http://jpkoning.blogspot.com/2012/02/idiots-guide-to-federal-reserve.html

 

 

 

Mutual aSSiStance betWeen Federal reServe bankS

1913-1960 aS ProlegoMena to the target2 debate

Barry Eichengreen, Arnaud Mehl, Livia Chiţu and Gary Richardson

 

https://www.ecb.europa.eu/pub/pdf/scpwps/ecbwp1686.pdf?1ad840394e67a3aedb6e1b1fa9401431

 

 

 

Interpreting TARGET2 balances

by Stephen G Cecchetti, Robert N McCauley and Patrick M McGuire

Monetary and Economic Department December 2012

 

Click to access work393.pdf

Cross Border/Offshore Payment and Settlement Systems

Cross Border/Offshore Payment and Settlement Systems

 

There are several ways by which international payment transactions are done around the globe.

Main mechanisms for payment and settlements are as follows:

  • Correspondent Banks Network – loosely coupled network of private banks.
  • Clearing Bank Model -using international clearing banks – China’s RMB Clearing Banks
  • Cross border RTGS – used mainly in regional economic and monetary blocs such as EMU – TARGET2.
  • Clearing House model – Offshore Payment, Clearing, and settlements through systems such CHIPS in USA and CIPS in China.

 

Central Banks also have created a Currency Swap network for providing liquidity in international financial markets.

Recently, there has been a decline in correspondent banks network transactions.  Many global banks have withdrawn correspondent relationships with other banks due to increased regulations.

There is also a newer trend in using ACH networks for international transactions.  SEPA in Europe and FedGlobal ACH in USA are two examples.

SWIFT and CLS bank also play a critical role in international payments.

There is also very large OTC FX market in which 5.1 trillion USD per day are traded.  I am not yet sure about the clearing and settlements of these transactions.

There are some newer technology platforms which have started providing Global payment services.  Earthport in UK and Ripple Labs are two such examples.

 

Large Value Transfer Methods (B2B Transfers)

  • Cross border, Same Currency – TARGET2, SEPA, EURO1
  • Offshore, currency specific – CHIPS for USD, CIPS for RMB
  • Cross border, multiple currencies – SWIFT, CLS
  • Offshore Clearing Houses – Hong Kong, Singapore, London, Japan, Frankfurt, USA
  • OTC FX markets (FX SWAPS, FX SPOT, FX Forward, FX Futures)
  • Network of Correspondent Banks
  • Network of Clearing Houses
  • CB FX Swap Network
  • Intra bank payment networks: Multinational Banks (Branch or subsidiary in a foreign country)
  • FEDGlobal ACH
  • Hawala System

 

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Regional Blocs (where new RTGS are being developed)

  • East Africa Community (EAC)
  • West African Monetary Zone (WAMZ)
  • Common Market for East and South Africa (COMESA)
  • South African Development Community (SADC) – SIRESS RTGS
  • Automated Clearing House in Common Monetary Area (CMA)
  • ASEAN  AEC ?
  • South Asian (Asian Clearing Union) ?

 

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LVPS used for International Payments

  • EURO1 ( Pan Europe)
  • euroSIC (Frankfurt) used for Euro transactions between countries in EU but not in EMU.
  • FXYCS (Japan)
  • EAF (Germany)
  • SIC (Switzerland)
  • CHIPS ( USA)
  • CHAPS (UK)
  • LVTS (Canada)
  • CIPS (China)

 

 

I am not sure how many of these networks are currently operational since countries in EU have migrated to TARGET2 since 2008.

G-LVTN (Global Large Value Transfer Networks)

  • ELLIPS (Belgium)
  • IIPS (Canada)
  • SNP (France)
  • EAF2 (Germany)
  • Ingrosso (Italy)
  • Top (Netherland)
  • RIX (Sweden)
  • SIC (Switzerland)
  • CHAPS (UK)
  • CHIPS (USA)
  • FXYCS (Japan)

 

There are several newer solutions for international payment and money remittances at retail level.  B2C and C2C international money transfers.  They are listed here along with old solutions but are not discussed in this post.

New and Old Solutions (Retail B2C, C2C)

  • Block chain
  • Ripple
  • Earthport
  • Transferwise
  • Xoom (A Paypal service)
  • Paypal
  • Bitcoins
  • Western Union (Old)
  • MoneyGram (Old)
  • Money2India/ICICI Bank
  • State Bank of India
  • Global ACH with FX Conversion
  • International ACH Transactions

 

 

China CIPS

One of the main reasons for this discrepancy is the inadequacy of the infrastructure for cross-border renminbi payments. Cross-border payments are currently made via a patchwork of clearing hubs and correspondent banks. These payments are hindered by complicated routing procedures, the need to maintain multiple foreign correspondent accounts, liquidity shortages in some offshore RMB centers, different hours of operations between clearing centers, a lack of common standards between international and Chinese domestic payment systems, and China’s capital controls.

Despite these hurdles, the use of the renminbi as an international payments currency has continued to grow rapidly. In the first half of 2015, there were more than RMB 5.7 trillion (USD 866.7 billion) worth of payments made to and from China using the renminbi. Currently, around a third of payments between China and the Asia Pacific region are conducted using renminbi. These numbers are projected to increase substantially over the coming years due to the desirability for Chinese businesses to use their own currency for trade transactions.

The increased use of the renminbi has led to around RMB1.5 trillion (USD 231 billion) in offshore renminbi deposits, with the largest amounts in Hong Kong, Taiwan and Singapore, respectively. As more renminbi accumulate outside of China, investors will increase their demands for channels to repatriate funds back onshore.

China’s Cross-border Inter-bank Payment System (CIPS) seeks to address many of the existing problems facing cross-border renminbi payments. CIPS provides one-point entry by participants and a central location for clearing renminbi payments It allows participation by both onshore and offshore banks and provides direct access to China National Advanced Payment System (CNAPS). These features reduce the need for banks to navigate complicated payment pathways via offshore clearing hubs or through correspondent banks. This should result in faster payment processing and reduced costs for cross-border payments.

CIPS is a real time gross settlement system, meaning that banks settle payments immediately between each other on a gross rather than a net basis. This reduces credit risks that can arise in systems where payments are netted before settlement.

Payment messages sent within CIPS are written in both English and Chinese. This eliminates the necessity of translating messages into Chinese before they can be transmitted to CNAPS. CIPS utilizes the ISO20022 messaging standard, a widely used international messaging scheme for cash, securities, trade and foreign exchange transactions. CIPS will also utilize SWIFT bank identifier codes, rather than CNAPS clearing codes. These factors will allow CIPS to smoothly process payments flowing between offshore banks using SWIFT and mainland banks using CNAPS. As a result, cross-border payments made through CIPS should be able to achieve straight through processing.

CIPS operating hours will extend from 9:00am to 8:00pm Shanghai-time. This allows the system to overlap with business hours in Europe, Africa, Oceania, and Asia. Banks within these jurisdictions will be able to settle renminbi transactions during their business day. Though North and South America are not currently covered, the People’s Bank of China (PBoC) has stated that an expansion of CIPS’ operating hours is possible.

As of the launch in October 2015, CIPS had 19 direct participants and 176 indirect participants. The initial direct members of CIPS include 11 Chinese banks and the Chinese subsidiaries of 8 foreign banks. There is currently only one American bank that is a direct participant in the system, Citibank. Of the indirect participants, 38 were Chinese banks and 138 are foreign banks.

Details on plans for the future development of CIPS are sparse. Chinese officials have spoken of a Phase II for CIPS that will improve liquidity management and the efficiency of cross-border clearing and settlement. PBoC officials have also stated that Phase II will include longer operating hours, support for securities settlement and central counterparties.

The creation of CIPS is an important milestone on the renminbi’s road to becoming a major global currency. It has the potential to significantly improve the efficiency of cross-border payment transactions and increase liquidity in the offshore market. CIPS provides a more direct pathway for processing transactions, improving speed and lowering fees. Liquidity in the offshore renminbi market will be improved due to the large number of participating financial institutions and the direct link the system has with CNAPS.

The fact that the renminbi has progressed so quickly despite the underlying deficiencies in the payments infrastructure is a testament to the global demand for the currency. CIPS seeks to rectify these deficiencies and is likely to play a critical role in the renminbi’s future growth as an international payments currency.

 

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USA  CHIPS

The Clearing House Interbank Payments System (CHIPS) is a bank-owned, privately operated electronic payments system.

CHIPS is both a customer and a competitor of the Federal Reserve’s Fedwire service.

The average daily value of CHIPS transactions is about $1.2 trillion a day.

The Clearing House Interbank Payments System (CHIPS) is an electronic payments system that transfers funds and settles transactions in U.S. dollars. CHIPS enables banks to transfer and settle international payments more quickly by replacing official bank checks with electronic bookkeeping entries. As of January 2002, CHIPS had 59 members, including large U.S. banks and U.S. branches of foreign banks.

History

The New York Clearing House Association, a group of the largest New York City commercial banks, organized CHIPS in 1970 for eight of its members with Federal Reserve System membership. Participation in CHIPS expanded gradually in the 1970s and 1980s to include other commercial banks, Edge corporations, United States agencies and branches of foreign banks, and other financial institutions.
Until 1981, final settlement, or the actual movement of balances at the Federal Reserve, occurred on the morning after a transfer. Sharply rising settlement volumes raised concerns that next-day settlement exposed funds unduly to various overnight and over-weekend risks. In August 1981, the Federal Reserve agreed to provide same-day settlement to CHIPS participants through Fedwire, the Fed’s electronic funds and securities transfer network.

The number of CHIPS members has fallen from about 140 in the late 1980s, mainly because of consolidations in the banking industry. Membership might have fallen even more sharply if CHIPS had not acted in 1998 to eliminate a requirement that members maintain an office in New York City.

CHIPS is governed by a ten-member board consisting of senior officers of large banks that establishes rules and fees and admits and reevaluates participants. CHIPS handles about 240,000 transactions a day with a total dollar value of about $1.2 trillion. Historically, CHIPS specialized in settling the dollar portion of foreign exchange transactions, and CHIPS estimates that it handles 95 percent of all U.S. dollar payments moving between countries. However, the CHIPS focus has shifted to domestic business since CHIPS introduced intraday settlement in January 2001.

Intraday Settlement

Until January 2001, CHIPS conducted all of its settling at the end of the business day. Now, however, CHIPS provides intraday payment finality through a real-time system. CHIPS settles small payments, which can be accommodated by the banks’ available balances, individually. Other payments are netted bilaterally (e.g., when Bank A has to pay $500 million to Bank B, and Bank B has to pay $500 million to Bank A), without any actual movement of funds between CHIPS participants.

Other payments are netted multilaterally. Suppose Bank A must pay $500 million to Bank B, and Bank A is also expecting to receive $500 million from Bank C. Without netting, Bank A would send $500 million to Bank B, and it would thus experience a decline in its available cash while it was awaiting the payment from Bank C.

Using the CHIPS netting system, however, Bank A submits its $500 million payment for Bank B to a payments queue, where it waits until Bank C’s offsetting payment is received. The effect of matching and netting these payments is that Bank A’s cash position is simultaneously reduced by its payment to Bank B and increased by receipt of its payment from Bank C. The overall effect on Bank A’s cash position is thus zero.
Payments for which no match can be found are not made until the end of the day, but each payment is final as soon as it is made. To facilitate the working of the intraday netting system, each participant pre-funds its CHIPS account by depositing a certain amount between 12:30 and 9:00 a.m. The size of this “security deposit,” which is recalculated weekly, is set by CHIPS based on the number and size of the bank’s recent CHIPS transactions, and none of it can be withdrawn during the day. At the end of the day, CHIPS uses these deposits to settle any still-unsettled transactions. Any participant that has a negative closing position at the end of the day (that is, it owes more than what it has in its security deposit) has 30 minutes to make up the difference. The 30-minute period is referred to as the final prefunding period. If any banks do not meet their final prefunding requirement, CHIPS settles as many of the remaining payments as possible with funds that are in the system, and any payments still unsettled must be settled outside of CHIPS.

Banks that have positive closing positions at the end of the day receive the amounts that they are due in the form of Fedwire payments. Because the ultimate CHIPS settlements are provided by Fedwire, CHIPS is a customer, as well as a competitor, of Fedwire. The vast majority of CHIPS members are also Fedwire participants, and the daily value of CHIPS transfers is about 80 percent of Fedwire’s non-securities transfers.

CHIPS has recently added electronic data interchange (EDI) capability to its payment message format. EDI allows participants to transmit business information (such as the purpose of a payment) along with their electronic funds transfers.

 

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USA FedGlobal ACH Payments

To facilitate this mapping process, the Federal Reserve Bank of Atlanta joined with U.S. and foreign depository institutions, international clearing and settlement service providers, and other interested parties to form the International Payments Framework Association (IPFA). The IPFA is a nonprofit membership association comprising 29 members representing Brazil, Canada, Europe, Japan, South Africa, the United Kingdom, and the United States whose purpose is to create a framework for bridging national formats for non-urgent international credit transfers. IPFA establishes rules, standards, and operating procedures for the exchange of these payments. The first effort by IPFA was to create rules that would facilitate a bridge between the IAT format for ACH credit transfers and the payment format, ISO 20022, which supports the several retail networks within the single euro payments area (also known as SEPA), under the SEPA credit transfer scheme. The next step underway is to leverage the framework created for the United States and SEPA in order to add other countries—such as Brazil, Canada, and South Africa—that want to exchange payments with the United States or SEPA ACH networks.

The Reserve Banks, through FedGlobal, launched their first commercial international ACH service with Canada in 1999.43 The service began as a pilot program for outbound commercial ACH transfers from the United States to Canada and became a production service in December 2001. Subsequent to the Canadian service, the Reserve Banks launched individual services to Europe,Mexico, Panama, and Latin America, covering 34 countries in total.44 In 2010, the Reserve Banks processed 1.3 million international ACH transfers—accounting for about 20 percent of the total volume of international payments being cleared and settled through the U.S. ACH network.45

The Reserve Banks offer FedGlobal account-to-account services to Canada, Mexico, Panama, and 22 countries in Europe. The Reserve Banks offer FedGlobal A2R services to Argentina, Brazil, Colombia, Costa Rica, El Salvador, Guatemala, Honduras, Mexico, Nicaragua, Peru, and Uruguay.

 

 

Europe Cross Border LVPS

  • Target 2
  • Euro1
  • SEPA
  • CLS/SWIFT
  • STEP 2
  • STEP 1

 

EU EBA Clearing – EURO1, STEP1, STEP2, MyBank

EBA Clearing is a provider of pan-European payment infrastructure with headquarters in Paris. It is wholly owned by its shareholders.

Its initial mission consisted in the operation of the clearing and settlement system for single euro transactions of high value EURO1, which the Euro Banking Association (EBA) had transferred to EBA Clearing for the launch of the system in 1999. Besides EURO1, EBA Clearing also owns and operates STEP1, a payment system for single euro payments for small and medium-sized banks, and STEP2, a Pan-European Automated Clearing House (PE-ACH) for euro retail payments. In March 2013, EBA CLEARING launched MyBank, an e-authorisation solution for online payments, which is geared at facilitating the growth of e-commerce across Europe.[1]

Both EURO1 and STEP2 have been identified as Systemically Important Payment Systems (SIPS) by the European Central Bank (ECB). EBA CLEARING is also planning to deliver a pan-European instant payments infrastructure solution in the course of 2017.

The organisation is based in Paris and has representative offices in Brussels, Frankfurt and Milan.

EURO1
EURO1 is a RTGS-equivalent large-value payment system on a multilateral net basis, for single euro transactions of high priority and urgency, and primarily of large amount. EURO1 is owned and operated by EBA CLEARING. It is open to banks that have a registered address or branch in the European Union and fulfil a number of additional requirements. EURO1 is subject to German law (current account principle/single obligation structure) and is based on a messaging and IT infrastructure provided by SWIFT.

STEP1
Since 2000, EBA CLEARING has been offering a payment service named STEP1 for small and medium-sized banks for single euro payments of high priority and urgency. The technical infrastructure is the same as that of the EURO1 system, both use the messaging and IT infrastructure of SWIFT.

STEP2
STEP2 was put into operation in 2003 with Italian payment system provider SIA S.p.A. It processes mass payments in euro. STEP2 is a Pan-European Automated Clearing House (PE-ACH). This means that it complies with the principles set by the European Payments Council (EPC) for a PE-ACH Compliant Clearing and Settlement System.

From the beginning of Single Euro Payments Area (SEPA) on 28 January 2008, STEP2 has been offering SEPA Credit Transfer processing services across all SEPA countries through its SEPA Credit Transfer (SCT) Service. Since 2 November 2009, the transposition date of the Payment Services Directive, EBA CLEARING has been processing SEPA Direct Debits with its STEP2 SDD Core and STEP2 SEPA Direct Debit (“Business to Business”) Services. Through its SEPA Credit Transfer and Direct Debit offerings, STEP2 provides banks across Europe with one channel through which they can send and receive their SEPA Credit Transfers and SEPA Direct Debits. The STEP2 platform reaches nearly 100 percent of all banks that have signed the SCT and SDD Scheme Adherence Agreements of the European Payments Council (EPC).

MyBank
MyBank is a pan-European e-authorisation solution for online payments that was launched in March 2013 by EBA CLEARING. The solution enables customers across Europe to pay for their online purchases via their regular online or mobile banking environment without having to disclose confidential data to the merchant or other third parties. The solution can be used for authorising SEPA Credit Transfers as well as the creation of SDD mandates. At a later stage, MyBank may also be used for transactions in currencies other than euro or for e-identity services.

Today, MyBank is owned and managed by PRETA S.A.S., a wholly owned subsidiary of EBA CLEARING.[2]

 

From ECB website

ECB identifies systemically important payments systems

21 August 2014

Four systems were identified: TARGET2, EURO1, STEP2-T and CORE(FR);

Goal is to ensure efficient management of risks and sound governance arrangements
The European Central Bank (ECB) has identified four key payment systems that are now under the new ECB Regulation on oversight requirements for systemically important payment systems (SIPS), which entered into force on 12 August 2014. The regulation covers large-value and retail payment systems in the euro area operated by both central banks and private entities, and aims at ensuring efficient management of legal, credit, liquidity, operational, general business, custody, investment and other risks as well as sound governance arrangements, namely with a view towards promoting the smooth operation of safe and efficient payment systems in the euro area.

The four systems identified today are: TARGET2, operated by the Eurosystem; EURO1 and STEP2-T, operated by EBA CLEARING; and CORE(FR), operated by STET, a joint initiative of six major French banks. They were identified according to the combination of at least two of four main criteria, i.e. the value of payments settled, market share, cross-border relevance and provision of services to other infrastructures. The Eurosystem will review this list annually on the basis of updated statistical data.

 

 

From CLS Bank & the World of FX Settlement

 

Starting my career as a trader on Wall Street, one of the big mysteries I had, was just how all these trades on the NYSE got executed and reported. Within the maze of specialist booths and flying paper, trades were being crossed and buyers and sellers were recognized. While the occasional errors occur, the wild system is highly efficient at reporting and settling trades.

In the world of OTC, settlement represents a larger factor, as participants are not bound by a central exchange system that insures against counterparty risk. As such, companies are on their own to ensure that trades are settled correctly with their counterparties, and an exchange of funds takes place.

In Forex Magnates’s Q1 2013 Industry Report, we took a look at the world of FX settlement and post-trade flow and researched CLS Bank and Traiana. We wanted to know just what they did, and how their products help FX players handle their settlement needs, create efficient markets, and lower overall transaction costs. In this first part, we focus on CLS Bank.

CLS Bank

Launched in 2002, CLS Bank was created as a private sector initiative, to deliver and operate services to mitigate settlement risk in the FX market. Owned and operated by member institutions and working alongside central banks, CLS offers members the ability to settle trades within a central location, thus, providing efficiencies to FX markets.

To understand what CLS does, it is first important to know how settlement works. Settlement is the process in which the payment and securities of a transaction are delivered. Within the securities world, this occurs in a three day window. For example, if a trader buys 100 shares of IBM stock at $100/share, the broker has three days to collect the $10,000 from the client, transfer it to the seller, and collect the shares back for the client.

Within FX, settlement does not involve securities, but instead different currencies. Therefore, in a EUR/USD trade, the seller sends dollars while receiving euros. For OTC participants, one of the greatest worries is settlement risk, which occurs when a counterparty is unable or unwilling to provide either the payment or transfer of securities.

While a deal between two parties can easily be voided, thus limiting impact of a problematic counterparty, the greater concern is the systemic risk. As traders are simultaneously trading with multiple parties, if one party fails to honor a transaction, it can affect counterparties and could prevent them from having the funds and/or securities to settle other trades.

Jake Smith, Head of Communications at CLS, explained that “FX settlement risk is also known as ‘Herstatt Risk’ ”. The name is derived from the failure of a privately owned German bank in 1974. At the time, Bankhaus Herstatt had received delivery of Deutsche marks from US counterparty banks, but had been put into receivership before the corresponding dollars were sent, due to the time zone difference.” Smith explained that, while this occurred nearly 40 years ago, “due to volumes growing substantially since that time, settlement risk has grown significantly.”

To mitigate this risk, CLS was created. Currently, there are over 60 members, who represent some of the largest financial institutions from around the world. CLS provides a central settlement network for FX transactions between its members and their customers. To facilitate settlement, all members are required to have a single multi-currency account with CLS, supporting the 17 currencies that are settled by its system.

Settlement

After conducting a trade, members send transactional details to CLS Bank, including trade details, counterparties, and settlement data. On the day of settlement, CLS Bank multilaterally nets all the instructions between the settlement members, calculating each institution’s pay-in obligations for the day, to ensure settlement of all their instructions on a payment-versus- payment basis. As settlement completes, pay-out of multi-laterally netted long balances will occur.

Example: GBP/USD = 1.50, EUR/USD = 1.25
Member 1: Buys 1,000,000 GBP/USD from Member 2
Member 2: Buys 1,000,000 EUR/USD from Member 3
Member 3: Buys 1,000,000 GBP/USD from Member 1

Member 1: Owes 1.5M USD & 1M GBP, collects 1.5M USD & 1M GBP
Member 2: Owes 1.25M USD & 1M GBP, collects 1M EUR & 1.5 USD
Member 3: Owes 1.5M USD & 1M EUR, collects 1.25M USD & 1M GBP

CLS then multi-laterally nets the total obligations:
Member 1: Pays 0.0
Member 2: Pays 1M GBP
Member 3: Pays 0.25M USD & 1M EUR

These obligations are funded into each member’s respective multi-currency account.

Settlement occurs
CLS then redistributes the obligations to the corresponding members
Member 1: Receives 0.0
Member 2: Receives 1M EUR & 0.25M USD
Member 3: Receives 1M GBP

By multi-laterally netting (also known as trade compression) payment obligations for each currency, CLS eliminates the need to fund trades on an individual basis per currency, resulting in approximately 96% netting efficiency. This increases to 99% with In/Out Swaps (an In/Out Swap is an intraday swap consisting of two equal and opposite FX transactions.)

That means, that for every $1 trillion of In/Out swaps settled, members need to provide funding for less than $10 billion, and $40 million for spot FX. With CLS handling nearly $5 trillion worth of daily settlements, the netting rates are a key element in allowing firms to grow their transactional volumes, while substantially reducing the amount of funding required. According to Smith, “CLS believes this safer and efficient process is one of the factors that led to the increase in FX volumes over the last 10 years.”

Smith explained that CLS provides a number of benefits to the FX industry, including, settlement risk mitigation, multi-lateral netting, operational and IT efficiencies, business growth opportunities, and the ability to develop industry solutions best practices, common standards and rules that benefit the FX market.

Within settlement risk mitigation also comes credit recognition. By being CLS members, credit departments have a greater understanding of each other and the counterparty risk. This allows firms to allocate less risk between trades to other members. For example, while a bank may decide to trade up to $10 billion with another member, they are more likely to limit their trade exposure to non-members.

In terms of operational efficiencies, a key factor is with regard to CLS’s one rule and oversight committee. Having one set of guidelines for members and central banks, provides all participants with a clearer understanding of their counterparties. When adding a new currency, the corresponding central bank needs to follow the standardized guidelines. These rules provide protection for members who benefit from the increased transparency a participating central bank will need to follow.

Regulatory Recognition

In July 2012, the critical role that CLS plays in global financial markets was recognised by the US Department of the Treasury’s Financial Stability Oversight Council, when it designated CLS as a systemically important Financial Market Utility (FMU). CLS’s importance was highlighted further in November 2012, with the announcement of the US Treasury Department’s exemption of FX swaps and forwards from the clearing requirements required for many financial products under the Dodd-Frank legislation. The role that CLS plays in the mitigation of FX settlement risk was believed to be a contributing factor towards that decision.

Technology

CLS’s increased investment in technology, has enabled it to materially expand peak capacity as it updated core technologies, to meet the elevated standards required of a systemically important FMU. The result is that CLS can now accommodate trade matching volumes of up to five times the average daily volume, and process 20 per cent of a peak day’s volume in a one hour period.

Furthermore, CLS has put in place a flexible technology infrastructure, which enables “capacity on demand”, supporting future software upgrades to be delivered to increase capacity in a matter of days and weeks. This structure, allows CLS to pay for technology only when required, while fulfilling obligations to the market to settle all eligible FX settlement instructions.

The need to build capacity was demonstrated on January 22, 2013, when CLS settled more than 2.6 million instructions, 18 per cent more than the previous high, recorded on 19 September, 2012.

Future

Looking to the future, as emerging markets grow, CLS has received interest from settlement members to include additional currencies. As such, CLS has been evaluating the addition of the Brazilian real, Chilean peso, Chinese renminbi, Russian ruble and Thai baht, amongst others.

Another area where CLS is extending its services is in same day settlement. A significant percentage of USD/CAD trades are intra-day and are not currently included in CLS settlement, due to the time of day. CLS is developing a same day settlement service between US and Canadian dollars to address this settlement risk, which has a proposed launch date in late 2013.

 

 

From The complexity of correspondent banking

Correspondent Banking Network

Correspondent banking, which can be broadly defined as the provision of banking services by one bank (the “correspondent bank”) to another bank (the “respondent bank”), is essential for customer payments, especially across borders, and for the access of banks themselves to foreign financial systems. The ability to make and receive international payments via correspondent banking is vital for businesses and individuals, and for the G20’s goal of strong, sustainable, balanced growth. At the extreme, if an individual bank loses access to correspondent banking services, this may affect its viability and if a country’s banks more generally face restricted access then it may affect the functioning of the local banking system. In addition, loss of correspondent banking services can create financial exclusion, particularly where it affects flows such as remittances which are a key source of funds for people in many developing countries.

Banks have traditionally maintained broad networks of correspondent banking relationships, but there are growing indications that this situation might be changing. In particular, some banks providing these services are reducing the number of relationships they maintain and are establishing few new ones. The impact of this trend is uneven across jurisdictions and banks. As a result, some respondent banks are likely to maintain relationships, whereas others might risk being cut off from international payment networks. This implies a threat that cross-border payment networks might fragment and that the range of available options for these transactions could narrow.

Rising costs and uncertainty about how far customer due diligence should go in order to ensure regulatory compliance (ie to what extent banks need to know their customers’ customers – the so-called “KYCC”-) are cited by banks as among the main reasons for cutting back their correspondent relationships. To avoid penalties and the related reputational damage correspondent banks have developed an increased sensitivity to the risks associated with correspondent banking. As a consequence, they have cut back services for respondent banks that (i) do not generate sufficient volumes to overcome compliance costs; (ii) are located in jurisdictions perceived as very risky; or (iii) provide payment services to customers about which the necessary information for an adequate risk assessment is not available.

The regulatory framework, and in particular the AML/CFT (Anti-Money Laundering/Counter Financing of Terrorism) requirements and the related implementing legislation and regulations in different jurisdictions, are taken as given in this report. It is acknowledged that these requirements, as agreed by the competent authorities, along with strict implementation, are necessary to prevent and detect criminal activities and ensure a healthy financial system.

 

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From Redefining the Landscape of Payment Systems

Regional Integration of Payment Systems

Cross-border and cross-currency commercial and financial payments have traditionally been made through regional and global correspondent banking networks. Correspondent banking networks typically involve multiple levels of intermediation to link national payment systems. Similar arrangements exist for cross-border securities and other market-based transactions. Such decentralized, highly-tiered cross-border arrangements for payment and securities transfer, clearing and settlement involve substantial liquidity, operating and user costs. Moreover, the services provided are often too slow and unreliable for the rising volume of payments associated with closer regional commercial and financial ties. Consequently, more tightly organized and integrated regional and even inter-regional payment and securities infrastructures are developing as a result of integration initiatives in the African, Asian and Latin American regions, among others. The discussions around the theme of regional integration of systems extended even further to the need for harmonized development of central bank payment system and monetary policies.

 

Integration in Wholesale Systems

The regional integration of national payment systems directly links the large-value payment systems of the participating countries. The link-up is through a distributed payment communications network involving either bilateral connectivity and system-to-system intra-regional payment settlement or connectivity to a central hub operating an intra-regional clearing and settlement facility. With large-value payment systems typically operated by national central banks, the distributed connectivity model of a regional payment system can substitute for the private correspondent banking network. The correspondent central banking arrangement concentrates intra-regional payments into a single central bank correspondent that participates in a network having more standardized service levels and agreements than the private system (i.e. correspondent banking). Over the medium-term, relative liquidity, operating and user costs should generally be lower and intra-regional payment settlement faster and more predictable than in the private system. A centralized model with a regional settlement bank can facilitate even greater standardization and more effective settlement risk control and, given a common settlement currency, permits multilateral netting that can lower liquidity costs even more as payment values and volumes rise.

The successful regional integration of national large-value payment systems does, however, require several pre-conditions. In addition to the obvious business case, the most critical pre-conditions are the harmonization of key institutional and structural elements in the national systems of the member countries and a sustainable commitment to the regional payment system, and the regional commercial and financial initiatives that underpin it. Experiences cited in a number of regional payment system initiatives indicate that unreasonable expectations of immediate pay-offs from integration and inadequate harmonization of key institutional elements during network expansion, such as those involving sound legal and oversight requirements, cause commitment to the project to waver and can sometimes cause the initiative to collapse. Organized and focused collaboration among all the key stakeholders and cooperation among the overseers of the national payment systems of the member countries is considered critical to sustaining commitment to the regional integration program.

Although several national securities depositories and securities settlement systems have developed bilateral system-to-system links in recent years, only a few have begun to integrate regionally or inter-regionally into an organized multilateral system. While the most developed cross-border systems are within the Eurozone, others have begun to develop elsewhere, as in the South African Development Community. The discussion concerning the role of CCPs in securities and derivatives settlement extended to consideration of regional, and even global, developments.

 

 

Integration of Retail Payment Systems

Aside from the major global card payment systems, which are expanding their products and services into new payment applications for cross-border retail payments, there are only a few bilateral and multilateral system-to-system links that facilitate the clearing and settling of cross-border payments. Correspondent banking arrangements, even for the ultimate settlement of cross-border card payments, are still the primary network arrangements for the ultimate settlement of cross-border retail payments. The regional integration of large-value payment systems, in conjunction with the integration of retail and large-value payment systems at the national level, has spawned some initiatives for the regional integration of national retail payment systems. The SEPA (Single European Payment Area) initiative is perhaps the most ambitious of these integration initiatives. Triggered by policy action and driven by industry initiatives, SEPA is aimed at creating a single integrated market for retail payment instruments and services throughout the Eurozone. The most critical challenges faced by the SEPA initiative have been the set-up of public and private sector collaboration mechanisms for decision-making, user support from public sector administrations, and the harmonization of national legal barriers. SEPA-compliant credit and debit transfers are now in place and work is proceeding on the introduction of SEPA-compliant card payments and on the development of SEPA-based online and mobile payment channels.

 

Transnational Payment Systems

While once there were only domestic payment channels in each country, we have witnessed the emergence of transnational systems such as TARGET, CLS (Continuous Linked Settlement), the Federal Reserve’s International ACH Project, known as FedACH International and the proposed pan-European automated clearinghouse known as PE-ACH. On the other end of the spectrum, card systems such as those operated by Visa and MasterCard are truly global in scope and have been expanding from consumer based transactions into commercial payments for more than a decade. Transnational systems have traditionally focused on providing payments within a region or to a small number of countries and usually support a single currency. Although none of these systems are yet global in scope, it is likely they will continue to expand their coverage to additional countries and currencies. Networks such as Visa and MasterCard are examples of global payment systems that also support multiple currencies, though they are primarily used for retail payments and ad hoc/T&E commercial transactions. Recently, in countries like Switzerland and Hong Kong13, new arrangements have been developed for the settlement of local payments in foreign currency. These arrangements neither fit perfectly in the traditional category of “correspondent banking” or in that of “payment systems”. The main common characteristic of these arrangements or systems is that they do not settle in central bank money but across accounts held with a commercial bank and that they are based on clearly defined and transparent rules for payment activities. Compared to traditional correspondent banking, these new solutions are standardized and settle payments in real time with continuous finality. In 1999, Swiss financial institutions established a cross-border solution in order to facilitate their cash management in euros. This solution involves a fully licensed bank in Germany, Swiss Euro Clearing Bank (SECB). To process euro transactions, SECB uses the euroSIC platform in Switzerland, which is often referred to as the euro payment system of Switzerland. EuroSIC is a replication of the Swiss franc RTGS system, Swiss Interbank Clearing (SIC). SIC and euroSIC are operated by Swiss Interbank Clearing AG. SECB is the settlement institution and shares the role of settlement agent with the operator SIC AG. SECB is also the liquidity provider in euroSIC. It extends intraday and overnight credit to the participants of euroSIC against collateral. SECB provides a link to the euro area, as it is a direct participant in RTGSPLUS through which access to TARGET is established. In Hong Kong, the U.S. dollar and euro clearing systems, USD CHATS (Clearing House Automated Transfer System) and Euro CHATS, were introduced in 2000 and 2003, respectively. They enhance the safety and efficiency of settling these foreign currencies in the local time zone. These systems are almost exact replicas of the Hong Kong dollar RTGS system (HKD CHATS). The key functions of both systems are to enable settlement of foreign exchange transactions between HK dollars, US dollars and euros in their respective currencies through a linkage with the Central Moneymarkets Unit (CMU) in Hong Kong.

The Hong Kong Monetary Authority has appointed the Hong Kong and Shanghai Banking Corporation as the settlement institution for USD CHATS and Standard Chartered Bank (Hong Kong) Limited as the settlement institution for Euro CHATS. Both institutions provide intraday liquidity to the direct participating banks by means of repos as well as overdraft facilities. One of the key benefits of both the US dollar and euro systems is the same day clearing of transactions. Also driving transnational systems is the implementation of “straight through processing (STP)” standards for transfers between banks as well as between banks and customers. To ensure simultaneous and dependable deliveries, payment-versus-payment (PVP), delivery-versus-payment (DVP), and delivery-versus-delivery (DVD) processes have also been established. The growth in transnational systems can improve the efficiency of cross-border payments by reducing clearing and settlement times, minimizing float. Better visibility of funds flows supports improved cash forecasting. Finally, standardized formats will reduce costly errors and repairs.

 

Intra bank Payments Networks – Multinational Banks

Mergers and acquisitions have been the single biggest force reshaping the global payments landscape over the past two decades. The most recent round of consolidation has left a disparity between large and small never before seen. For example, we have witnessed the emergence of mega banks such as the combining of Bank of America and Nations Bank, as well as JP Morgan Chase combining Chase Manhattan Bank, Manufacturers Hanover Bank, Morgan Guaranty Trust and Bank One. In a scale-driven, technology-intensive business like payments, the emergence of true mega-players may lead to markedly different competitive dynamics. Acting as their own transnational systems, large international banks such as JP Morgan Chase, Citibank, Bank of America, and Hongkong Shanghai Banking Corporation operate their own internal global payments networks. Through these, they can route payments to destinations in different countries. Such internal networks do not necessarily differentiate between domestic and cross-border payments as these flows are all within the bank. The trend toward consolidation in the banking sector, both globally and in domestic markets, exerts influence on payment systems. Increased concentration of payment flows may have important credit, liquidity and operational risk implications. For example, the credit exposures that arise within a payments system that does not achieve intraday finality are likely to become concentrated on a smaller number of banks. Operational problems experienced by a single large bank could have significant repercussions for other participants in the system. A concentration of payment flows in commercial banks has emerged to reflect the increasing role that modern commercial banks, especially large global banks, have played in the payment systems around the world. The volumes and values settling across their books are, in some countries, quite substantial. Such traffic has often been accompanied by increased formalization of the correspondent relations within, as well as across, national boundaries. Banks that achieve global economies of scale can further drive down per transaction costs and derive higher revenues by keeping payments within their own networks. For global corporations, it has allowed them to match their global needs with a handful of banks rather than managing a large number of local relationships.

 

From The Inefficiencies of Cross-Border Payments: How Current Forces Are Shaping the Future

A survey of major systems facilitating cross-border payments

American Express: is a publicly traded company that issues charge and credit card products both directly and through nearly 100 financial institutions around the world. American Express had $484 billion in global sales in 2005.15

CHAPS (Clearing House Automated Payment System): CHAPS, established in 1984, is the United Kingdom’s high-value payment system, consisting of two systems: CHAPS Sterling and CHAPS Euro, which provide settlement facilities for sterling and euro payments, respectively. Over a dozen large banks and building societies are “direct” or settlement members, while there are also over 400 “indirect” members – typically smaller banks and building societies – who have access to the system through a settlement member.

CHIPS (Clearing House Interbank Payment System): CHIPS is a bank-owned, privately operated, real-time, multilateral electronic payments system that transfers funds and settles transactions in U.S. dollars. CHIPS began operations in 1970 with 9 participating banks and, as of mid 2006, it processes about 300,000 payments a day with an average daily amount of $1.5 trillion. It currently has 46 participants from 19 countries around the world, including large U.S. banks and U.S. branches of foreign banks. The payments transferred over CHIPS are often related to international interbank transactions, including the payments resulting from foreign currency transactions (such as spot and currency swap contracts) and Euro placements and returns.

CLS (Continuous Linked Settlement): The CLS system is the private sector response to a G-10 strategy to reduce foreign exchange settlement risk. CLS was founded in 1997 to create the first global settlement system, eliminating settlement risk in the foreign exchange market. Formed in response to regulatory concern related to the temporal and systemic risks (Herstatt risk) associated with foreign exchange transactions, CLS simultaneously settles both sides of foreign exchange trades using a multi-currency payment-versus-payment (PVP) mechanism. CLS is a unique real-time process enabling simultaneous foreign exchange settlement across the globe, eliminating the settlement risk caused by delays arising from time-zone differences. CLS settles well over $1 trillion per day, accounting for a substantial majority of cross-currency transactions across the globe.

Eurogiro: owned by 16 banks/postal financial service companies, is an electronic payment network for postal and giro (postbank) organizations that exchange cross-border credit transfers and cash-on-delivery orders. Established in 1989, Eurogiro has more than 40 participants from 37 countries in Europe, Asia, Africa, South America and the U.S. Members act as correspondents for one another and hold reciprocal accounts with each other to execute payments.

EURO1: a private sector-owned high-value payment system, operated by the EBA Clearing Company for cross-border and domestic transactions in euro between banks operating in the European Union, and it is the largest of Europe’s four large-value, net settlement systems, processing on average 170,000 payments a day with a total value of about €170 billion. Launched in 1998, EURO1 was developed to provide an efficient, secure and cost-effective infrastructure for large-value payments in the new single currency environment of the EU. EURO1 is based on state-of-art messaging infrastructure and computing facilities supplied by SWIFT.

FedACH International Services: This international gateway arrangement service is owned and operated by the Federal Reserve System. Currently, the Federal Reserve Banks offer a suite of FedACH International Services as part of FedACH Services and provide U.S.- originating depository financial institutions with the ability to send international non-time-critical payments via the same process used to send domestic transactions for many decades. FedACH International Services offer an integrated, uncomplicated method to ensure straight-through processing (STP) of cross-border transactions, using NACHA formats that are supported by most software vendors.

Fedwire (Federal Reserve Wire Network): This is a high-speed electronic network through which the U.S. Federal Reserve provides the Fedwire Funds Service, the Fedwire Securities Service, and the National Settlement Service. The Fedwire Funds Service provides an RTGS system in which more than 9,500 participants initiate funds transfers that are immediate, final, and irrevocable when processed.

LVTS (Large Value Transfer System): The fully electronic LVTS, Canada’s real-time gross settlement system, became operational in early 1999. As Canada’s wire payment mechanism, it facilitates the electronic transfer of Canadian dollar payments across the country in real-time. Canada’s national payments system has been operated by the Canadian Payments Association (CPA) since 1980.

MasterCard: is a publicly-traded company that operates a global payment system. In addition to the MasterCard brand, the Maestro and Cirrus brands are also part of the company. MasterCard branded cards generated $1.7 trillion in global sales in 2005.16

RTGSPLUS: is the German Bundesbank’s new liquidity-saving RTGS, which became operational in November 2001. It combines the risk-reducing benefits of gross settlement of the former German RTGS system known as the Euro Link System (ELS) with the advantages of liquidity-saving processing of the former hybrid system known as Euro Access Frankfurt (EAF).

SWIFT (Society for Worldwide Interbank Financial Telecommunications): SWIFT is an industry-owned limited liability cooperative that supplies secure messaging services and interface software for financial transactions to more than 7,650 banks, securities brokers and investment managers in more than 200 countries.

SWIFT payment messages are processed by the Financial Information Network (FIN), which operates on a secure IP network called SWIFTNet. SWIFT is integrating into the ACH market segment as a payment service provider via its FileAct messaging service. ACH networks such as the EBA Clearing Company and the South African Automated Clearing Bureau are already using SWIFT’s messaging platform.

STEPS (Straight Through Euro Payment System): The STEPS program was launched by the Euro Banking Association (EBA) to offer a full range of euro payments across Europe. STEPS has evolved into two systems aimed at accommodating a broad base of processing needs within the European Union: STEP1 (a pan-European system designed to process single cross-border, low-value retail payments) and STEP2 (a pan-European ACH for bulk/high volume, low-value, cross-border and domestic interbank payments).

STEP2: a pan-European ACH solution, is a joint venture between the EBA and Italy’s ACH operator SIA. STEP2 processes high-volume, commercial and retail payment orders sent to the system via files through a secure network. Characteristics of payment orders that are processed via STEP2 are commercial and retail transfers in euro that are formatted to agreed technical standards. Accessible through SWIFTNet, STEP2 offers payment processing and settlement in euro.

TARGET (Trans-European Automated Real-time Gross Settlement Express Transfer): The Eurosystem, which comprises the European Central Bank (ECB) and the national central banks (NCBs) of the 12 EU member states which have adopted the euro, has created TARGET for large-value payments in euro. The TARGET system is a “system of systems” composed of the national payment systems of 16 of 25 countries that are currently members of the EU, the ECB payment mechanism (EPM) and an interlinking mechanism that enables the processing of payments between the linked systems.

TARGET2: The current structure of TARGET was decided on in 1994 and was based on the principles of minimum harmonization and interconnection of existing infrastructures. This was the best way of ensuring that the system would be operational from the very start of the European Economic and Monetary Union (EMU) in 1999. TARGET2 is an enhanced version of the current TARGET incorporating technical consolidation, a single system-wide pricing structure for domestic and cross-border payments, a harmonized service level, and the system-wide pooling of available intraday liquidity. The go-live date for TARGET2 is set for November 19, 2007, with gradual migration to the new system by the member states in four waves. All central banks participating in TARGET2, together with their national banking communities, are expected to be using the new system by May 2008.

Visa: is a private, membership association jointly owned by more than 20,000 member financial institutions around the world. Visa develops common standards and specifications to facilitate commerce and provide member financial institutions with the global payment platform to support transactions on 1.46 billion cards that generate more than $4.3 trillion in global transactions in over 160 countries.17

Voca: was formed in 1968 and was known as the “Bankers Automated Clearing System” or BACS which is similar to ACH in the US. BACS changed its name to Voca in 2004. Voca is one of a number of domestic ACH-type systems in Europe and owns the BACS infrastructure that processes the majority of non-RTGS, non-card, electronic credit and debit payments for B2C, C2B and B2B in the UK. VOCA performed 5 billion transactions in 2005. 28

 

China’s Central Bank RMB Currency Swap Lines

 

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China’s Offshore RMB Clearing Centers

 

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Key Sources of Research:

 

Explaining cross-border large-value payment flows: Evidence from TARGET and EURO1 data

Simonetta Rosati, Stefania Secola

 

 

The Inefficiencies of Cross-Border Payments: How Current Forces Are Shaping the Future

Written by Yoon S. Park, PHD & DBA, George Washington University

 

Click to access crossborder.pdf

 

 

 

There Is No Such Thing As An International Wire

by ERIN MCCUNE on MAY 15, 2014

http://paymentsviews.com/2014/05/15/there-is-no-such-thing-as-an-international-wire/

 

 

 

The Elements of the Global Network for Large-Value Funds Transfers

James F. Dingle

2001

 

Click to access wp01-1.pdf

 

 

 

The Payment System

ECB

 

Click to access paymentsystem201009en.pdf

 

 

 

Cross-border RMB Settlements

 

Click to access cross_border.pdf

 

 

 

China launch of renminbi payments system reflects Swift spying concerns

https://www.ft.com/content/84241292-66a1-11e5-a155-02b6f8af6a62

 

 

 

Possible RMB – Clearing model for the city of Frankfurt

RMB Initiative Frankfurt Frankfurt, December 2013

Working Group on the establishment of an RMB clearing house

 

 

 

CIPS and the International Role of the Renminbi

 

 

 

CHIPS

https://www.newyorkfed.org/aboutthefed/fedpoint/fed36.html

 

 

 

Correspondent banking July 2016

BIS

Click to access d147.pdf

 

 

 

Rethinking correspondent banking

2016

mckinsey

 

 

 

The complexity of correspondent banking

http://thefinanser.com/2015/11/the-complexity-of-correspondent-banking.html/

 

 

 

CLS Bank & the World of FX Settlement

Ron Finberg

2013

http://www.financemagnates.com/institutional-forex/execution/cls-bank-the-world-of-fx-settlement/

 

 

 

Foreign exchange trading and settlement: Past and present

by John W. McPartland, financial markets consultant

Chicago Fed Letter 2006

 

 

Settlement risk in foreign exchange markets and CLS Bank

Click to access r_qt0212f.pdf

 

 

 

 

Cross-Border Payments Perspectives

September 2011

Research conducted by Glenbrook Partners

 

Click to access Cross-Border-Payments-Perspectives-A-Glenbrook-Earthport-Research-Brief.pdf

 

 

 

Redefining the Landscape of Payment Systems

Summary of Proceedings of the World Bank Conference

 

Click to access 705740ESW0P1100Cape0Town0April02009.pdf

 

 

 

Report to the Congress on the Use of the Automated Clearinghouse System for Remittance Transfers to Foreign Countries

July 2011

 

Click to access ACH_report_201107.pdf

 

 

 

ESTABLISHING AN INTEGRATED PAYMENT SYSTEM

(REAL-TIME GROSS SETTLEMENT) IN ASEAN

A Proposal for a Cross-Border Mechanism to Support the AEC 2015

 

Click to access Complete_dissertation.pdf

http://www.rug.nl/research/portal/en/publications/establishing-an-integrated-payment-system-realtime-gross-settlement-in-asean(59f7f186-51c5-47e3-8e1a-2745e19fd998).html

 

 

 

PAYMENT SYSTEMS TO FACILITATE SOUTH ASIAN INTRA- REGIONAL TRADE

Ashima Goyal

September 2014

 

Click to access Development%20Paper_1403.pdf

 

 

 

Implementing Cross-border Payment, Clearing and Settlement Systems: Lessons from the Southern African Development Community

Albert Mutonga Matongela

 

 

 

The emerging single market in South-East Asia 

SWIFT

 

 

 

 

 

 

Regional Monetary Co-operation in the Developing World Taking Stock

Barbara Fritz / Laurissa Mühlich

Click to access Paper-Stocktaking-Regional-Monetary-Cooperation-Fritz-Muehlich-22-07-14-end.pdf

 

 

 

ASIA FINANCE 2020

FRAMING A NEW ASIAN FINANCIAL ARCHITECTURE

 

Click to access Asia_Finance_2020.pdf

 

 

 

 

Creating an Association of Southeast Asian Nations Payment System: Policy and Regulatory Issues

Tanai Khiaonarong

2013

 

Click to access adbi-wp422.pdf

 

 

 

Payments in ASEAN post AEC

 

Click to access 5-Payments-in-ASEAN-post-AEC.pdf

 

 

 

Regional Integration and Economic Development in South Asia

Sultan Hafeez Rahman

Sridhar Khatri

Hans-Peter Brunner

Click to access regional-integration-economic-development-south-asia.pdf

 

 

 

Towards South Asia Economic Union

 

Proceedings of the
7th South Asia Economic Summit (SAES)

5-7 November 2014 New Delhi, India

 

Click to access Towards%20South%20Asia%20Economic%20Union.pdf