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Environmental Issues Influencing the Reform: the Constraints

Environmental Issues Influencing the Reform: the Constraints. Legal and Regulatory Framework . Maria Chiara Malaguti. Is « The Payments System » a legal concept?. « Payment » as execution of a (monetary) obligation Cash, bank money, ….

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Environmental Issues Influencing the Reform: the Constraints

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  1. Environmental Issues Influencing the Reform: the Constraints Legal and Regulatory Framework Maria Chiara Malaguti

  2. Is «The Payments System» a legal concept? «Payment» as execution of a (monetary) obligation • Cash, bank money, … «Payment instrument» as the vehicle to execute the tranfer of money • Banknotes, cheques, wire transfers, … «Payment system» as the set of arrangements to provide the service of executing payment operations by an intermediary • Correspondent banking, clearing houses, .. .

  3. Underlying obligation A B Cash Often the only recognized Legal tender Cheque Negotiable instrument Wire transfer Credit transfer Debit transfer Each payment instrument has special features: potentially specific legislation

  4. Payment by Fiduciary Money Central Bank Settlement Clearing Clearing House Bank B Bank A Correspondent banking (by agreement: agency) Mandate to pay Client B2 Client B1 Client A

  5. «The Payments System» in law: a three-level situation Operator to operator Finality of payment by fiduciary money and circulation of instruments (as cheques) Bank to client Agency relation and limits on mandate to pay/receive payment; transparency • Bank to bank • Bi-multilateral netting: systemic risk; settlement and role of central bank as lender of last resort

  6. … what about securities? Stock Exchange Investor Broker A Broker B Order to buy Novation CCP (if any) Funds transfer CSD DVP Settlement Custodian Cash clearing and settlement Cash transfer into Central Bank money

  7. Some legal barriers:netting and validity of contractual clauses Bilateral netting and legal «compensation» Bilateral netting and «current accounts» Mutuality and bilateralism: «mutuality» if set-off on behalf of clients? Multilateral netting and legal compensation Lack of bilateralism and mutuality Solution: netting by novation

  8. Some legal barriers:netting by novation and central counterparty c d b e a g f g Central counterparty Central counterparty liable towards each party instead of counterparty?

  9. Some legal barriers:finality of settlement, the «zero hour» and effects of bankruptcy • Retroactivity of bankruptcy effects • Par condicio of creditors

  10. Some legal barriers:the transfer of ownership of securities by book entry • Need for transfer of paper-based document? • The question of centralized immobilization

  11. «The Payments System»as a regulatory concept Bank A Bank B BankC Credit risk Liquidity risk Insolvency risk Clearing Systemic risk Final settlement by Central Bank

  12. supervision oversight On the single operator to guarantee individual stability On the system as such to guarantee global stability Central banks Supervisory authorities Central banks Financial markets regulatory authorities

  13. Tools for oversight Regulation • Moral suasion Cooperation • Self-regulation

  14. Banking or non-banking activity? Institutional or functional approach? Some regulatory issues:how to organize oversight?

  15. Some regulatory issues:Consolidation or Competition? Cost-effectiveness Choice of providers Centralised risk management Reduction of systemic risk Leave the market free to consolidate, but: Fair and open access Sufficient pressure for innovation

  16. Sectors for legal and regulatory intervention • Recognition of fiduciary money • Regulation of specific instruments of payment according to specificities • Electronic transfers • Regulation of payment services (clearing/netting; settlement finality; zero hour) • Regulation: supervision and oversight • Consolidation and competition • Rules on conflict of laws

  17. For tailor-made solutions according to country legal environment.. • Order of priorities in legal and regulatory reform • With a global understanding of laws on property, contracts, corporate action, negotiable instruments, fiduciary relationships, financial institutions…

  18. ..with an eye to openess to foreign investments and inter-operability • Restrictions on the location • Barriers related to taxation • Rules on conflict of laws

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