Banco de México s Policies and Functions Regarding Financial Market Infrastructures 1

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1 Banco de México s Policies and Functions Regarding Financial Market Infrastructures August 2016 Banco de México s Policies and Functions Regarding Financial Market Infrastructures 1

2 NOTE This text is provided for readers convenience only. Discrepancies may possibly arise between the original document and its translation to English. The original and unabridged document in Spanish is the only official document. Banco de México s Policies and Functions Regarding Financial Market Infrastructures 2

3 Contents Contents Introduction Banco de México s general objectives with regard to FMIs Content and structure of the document Overview of FMIs Types of FMIs Principles that apply to FMIs Landscape of FMIs in Mexico Payment systems Central securities depositories and securities settlement systems Central counterparties Trade repositories Cross border payment systems and foreign currency payment systems Banco de México and its relationship with FMIs The central bank s multiple roles in FMIs Banco de México s policies and objectives concerning FMIs Intraday liquidity provision Supervision Systemically important FMIs in Mexico SPEI SIAC DALI CCV Asigna Banco de México s Derivatives Trade Repository Retail payment infrastructures in Mexico National Electronic Clearinghouse (CCEN) Clearinghouses for card payments Clearinghouses for mobile payments Payment technologies Cross border and foreign currency denominated payments Banco de México s policy regarding cross border and foreign currency denominated payments Domestic U.S. dollar interbank payment system (SPID) Banco de México s Policies and Functions Regarding Financial Market Infrastructures 3

4 7.3. Directo a México Continuous Linked Settlement Foreign correspondent banking Information technology security Background Risks to cybersecurity Banco de México s policy regarding cybersecurity Final considerations Statistical appendix Annex List of acronyms Banco de México s Policies and Functions Regarding Financial Market Infrastructures 4

5 1. Introduction In order to make better use of a society s resources, payment mechanisms that allow its members to complete financial transactions in a simple, safe, inexpensive and fast way should be available. Considering this social necessity, the Banco de México Law establishes as two of the central bank s purposes fostering the proper functioning of payment systems, and promoting the financial system s sound development, implying that Banco de México must ensure that financial market infrastructures (FMIs) function properly. FMIs are multilateral arrangements among participating institutions, including the operators of the infrastructures used for clearing, settlement and registering of payments, securities operations, derivatives contracts, and other financial transactions. FMIs usually establish a set of common rules and procedures, a technological infrastructure, and a suitable and specialized risk management framework. FMIs are composed of payment systems, central securities depositories, securities settlement systems, central counterparties, and trade registers. This document describes the Mexican FMIs, their interrelationships and the type of transactions they carry out. Additionally, the different roles of the central bank with respect to FMIs are described, and the objectives of Banco de México for each FMI are detailed. This information allows authorities, participants, and the general public to become familiar with the structure of the systems used to process financial transactions, thereby contributing to the proper functioning of financial systems and the economy in general. In order to comply with its mandate, Banco de México adheres to an overall policy guiding its functions as regulator, supervisor, user, and operator of FMIs. These functions involve a great number and diversity of actions due to the variety of FMIs and their participants. As a regulator, the central bank implements rules that apply to FMIs and their participants, analyzes new technologies that could be used to improve the efficiency and safety of FMIs, and analyzes statistical information concerning the transactions executed in FMIs in order to detect risks and identify potential improvements. These activities involve coordination with other authorities, mainly for those cases in which the infrastructure is regulated in conjunction with several authorities. As a supervisor, Banco de México ascertains whether or not FMIs and their participants comply with established rules. Finally, Banco de México performs the role of operator of the most important payment system in the country, SPEI. Economic activity depends on the proper operation of FMIs, both for processing financial system transactions and for operations carried out by individuals. This document aims to describe Banco de México s policy as well as its regulatory and supervisory functions to achieve properly functioning FMIs. In addition, by publishing this document, Banco de México complies with its obligations of: Accountability, by describing the way Banco de México tries to achieve the aim of fostering the proper functioning of payment systems Public disclosure of policies, in order to increase trust in the payment systems Improved transparency with regard to regulated entities, in order to facilitate the risk management of FMIs and their participants, and to help them comply with regulation comprehensively. Banco de México s Policies and Functions Regarding Financial Market Infrastructures 5

6 1.1. Banco de México s general objectives with regard to FMIs Article 2 of the Banco de México Law establishes that the central bank's purpose is to provide the country's economy with domestic currency, in the pursuit of the stability of the purchasing power of that currency. Additionally, the central bank has the purpose of promoting the sound development of the financial system and fostering the proper functioning of the payment systems. Accordingly, the proper functioning of FMIs is present in several of Banco de México s key responsibilities. Monetary policy is instrumented by means of some of the most important FMIs in the country, namely SPEI, SIAC and DALI; the issuance of regulation and supervisory activities with regard to FMIs contributes to the development of financial stability; regulating the use of electronic payment systems promotes their efficiency and competition; and finally, the disclosure of timely and relevant information on FMIs provides certainty and transparency to financial institutions and the general public Content and structure of the document This document defines Banco de México s objectives, policies and functions with respect to FMIs, and provides descriptions of the main FMIs that operate in México. This document aims to facilitate a deeper knowledge of the interaction between the central bank and the FMIs. Thus, the document is not a periodic report on the Mexican FMIs up to a specific date, nor is it a report on Banco de México s particular actions during a given time period. The rest of the document is organized as follows: Overview of FMIs contains a more complete definition of the different types of FMIs. Additionally, it includes an introduction to the Principles for Financial Market Infrastructures (PFMIs), which are high level standard recommendations for the proper management of risk inherent in FMIs. Landscape of FMIs in Mexico presents a general description of Mexican FMIs, including their interrelationships. Banco de México and its relationship with FMIs contains a description of the different roles the central bank plays in relation to FMIs. It also includes explanations of the objectives and policy for each FMI. Additionally, this section describes Banco de México s policy for intraday liquidity provision. This intraday liquidity provision is a facility that allows participants to maintain the resources needed to pay the liabilities they incur in FMIs. Finally, the section includes the supervisory objectives and tasks carried out by Banco de México aimed at both participants and infrastructures. Systemically important FMIs are those that, in the event of a grave design or operational failure, can affect the stability of the financial system in one or more jurisdictions and, consequently, their economic activity. Systemically important financial market infrastructures in Mexico contains a subsection for each of Mexico s systemically important FMIs: SPEI, DALI, CCV, Asigna, and SIAC. Each subsection includes the description of the infrastructure, the relevant regulation, the applicable PFMIs, the role played by Banco de México, and the tools used to regulate and supervise the infrastructure. Banco de México s Policies and Functions Regarding Financial Market Infrastructures 6

7 Similarly, Retail payment infrastructures in Mexico contains a description of these infrastructures, their regulation, the best practices that apply to them, the roles played by Banco de México, and the tools used to regulate and supervise them. Additionally, a subsection has been included for new payment technologies. Cross border and foreign currency denominated payments deals with three infrastructures: Directo a México, the system that processes cross border payments from the United States to Mexico; the CLS, which settles foreign exchange transactions; and the SPID, which started operations in April Finally, the section includes a subsection for Banco de México s policy on foreign correspondent services. Lastly, Information technology security describes the risks related to the safe and efficient operation of FMIs, as well as the importance of mitigating, preventing, and, when necessary, rapidly recovering from an event in which an information security risk materializes. Lastly, it describes Banco de México s policy on this issue. 2. Overview of FMIs This section provides definitions and a classification of financial market infrastructures. Additionally, it describes a set of recommendations that guide the regulation and supervision of some of the FMIs. These recommendations, known as the Principles for Financial Market Infrastructures 1 (PFMIs), are a set of high level guidelines for the proper management of risks inherent in FMIs. According to the Committee for Payments and Market Infrastructures (CPMI) 2 definition, a financial market infrastructure is a multilateral system among participating institutions, including the operator of the system, used for the purposes of clearing, settling, or recording payments, securities, derivatives, or other financial transactions Types of FMIs FMIs are classified as payment systems, central securities depositories, securities settlement systems, central counterparties, and trade repositories Payment Systems A payment system is a set of instruments, procedures and rules for transferring funds among two or more participants. The system includes the participants and the operator. Payment systems typically base their operation on agreements among two or more participants and the 1 The Principles were published by the Bank for International Settlements Committee on Payment and Settlement Systems (CPSS) and the International Organization of Securities Commissions (IOSCO), in April The CPMI is one of the permanent committees of the Bank for International Settlements (BIS). This committee was established in 1980 as the Committee of Payment and Settlement Systems. The main objective of CPMI is to promote the safety and efficiency of FMIs, and to serve as a forum for cooperation among central banks in oversight, policy and operational matters. The CPMI issues standards of global scope in these areas. Banco de México is one of the 25 CPMI member institutions. Banco de México s Policies and Functions Regarding Financial Market Infrastructures 7

8 operator of the mechanism; funds are transferred through an agreed operational infrastructure. Payment systems can be categorized, according to their settlement structure, into those that perform a clearing process before the settlement and those that perform gross settlement. In order to operate a clearing system, an automated clearinghouse is needed. An automated clearinghouse is a central entity or a centralized processing mechanism by means of which financial institutions agree to process payments or other financial liabilities for their settlement on a net basis. This results in benefits from the perspective of managing the liquidity of the assets that the system operates; that is, it diminishes the amount of liquidity needed for a given operational level. Some automated clearinghouses take on important risk management responsibilities for the whole system, since, as part of their operation, financial liabilities arise that are not immediately paid. A typical example of an automated clearinghouse is the system for interbank check processing. Another common type of payment system is a real time gross settlement (RTGS) system. These systems settle payments in a continuous way, one by one, in the order they are received, assuming that the payer possesses the required funds. Due to the characteristics of this form of settlement, participants liquidity needs are generally high compared to those in automated clearinghouses. However, one of the advantages of these systems is that credit risk is eliminated, since, during the settlement process, the payer account is debited and the receiver account is credited simultaneously. Nowadays, a large number of countries have at least one system of this type, usually operated by the central bank. From the perspective of final users, who are the clients of the direct participants, payment systems can be categorized into those that process transactions in real time, and those that process transactions in a deferred way. Both netting settlement systems and gross settlement systems can operate under any of these structures. 3 The decision of which structure should be used depends on business models and risk management plans. In an RTGS system, final users typically receive real time services, since this does not pose any risk; in contrast, providing realtime services under a deferred settlement system makes risk management more difficult in case of participant default. This risk can be attenuated by executing the clearing process very frequently and by implementing control procedures for eliminating credit risk among participants. It is important to note that payment systems have traditionally been classified by the value of the payments they process; that is, as large value payment systems and retail payment systems. Large value payment systems describe those in charge of settling transactions produced by financial institutions and firms which, given their importance to the financial system, are considered urgent; thus, exclusive RTGS systems were used for this purpose in order to avoid risks. Retail payment systems refer to those dedicated to processing payments carried out by the general public, usually by means of a deferred settlement system, since those payments are not considered urgent. This classification of payment systems was important in the past, but technological advances have allowed operating risks to be controlled in just one system processing both large value and retail payments. SPEI, the RTGS system operated by Banco de México, benefits the general public through the security and efficiency of real time processing. 3 Clearing systems can have very frequent clearing and settlement cycles that occur nearly in real time. Banco de México s Policies and Functions Regarding Financial Market Infrastructures 8

9 Securities settlement systems A securities settlement system (SSS) is a system that allows the transfer, clearing and settlement of transactions with securities between participants accounts, based on a set of predetermined multilateral rules. In addition, SSSs usually perform other functions, such as confirmation of trade instructions and confirmation of settlement instructions Central securities depositories A central securities depository (CSD) is a system that creates and manages securities accounts and provides centralized safekeeping services and other services related to securities, such as managing securities amortizations. CSDs help to guarantee the integrity of the securities issued; that is, they guarantee that securities are not created improperly or destroyed, nor are their details modified by accident or for the purposes of fraud. In many countries, the entities that operate a CSD also operate an SSS. Both SSSs and CSDs usually operate through one or more central entities. However, it is possible for them to operate by means of decentralized structures through new technologies in which both registry and settlement can be made among the participants without the use of any central structure Central counterparties A central counterparty (CCP) is an entity that stands between the counterparties of contracts traded in a financial market, and so becomes the buyer for each seller and the seller for each buyer. In this way, the counterparty risks in that market are concentrated in a single entity, simplifying risk analysis and allowing for better management from a systemic perspective, since by concentrating the risks, some risk factors may compensate for others. Since the main function of a CCP is to manage counterparty risk, this entity should have sound structures to measure, limit, oversee, and control this type of risk, as well as any other risks that may arise during operation. Any disruption could be extended to the whole market the CCP serves, and potentially to the entire financial system. In this way, CCPs can reduce risks, but at the expense of concentrating them in systemically important entities; that is why it is essential to have strict risk controls in place Trade repositories A trade repository (TR) is an entity that maintains a central electronic registry of trade data. A TR can help to improve transparency with respect to transactional information for the relevant authorities and the general public as well. In this way, TRs promote financial stability and contribute to detecting and averting risks in the market they serve. TRs have become more significant in the Over the Counter (OTC) derivatives market. 4 One such recent technology is the distributed ledger, which consists of a shared database stored in various locations. Each location may have its own identical copy of the ledger, and the changes made to it are reflected in all copies of the ledgers within moments of being executed. For example, assets can be financial or legal in nature. Permissions regarding the assets on the ledger are based on cryptographic keys and signatures. Banco de México s Policies and Functions Regarding Financial Market Infrastructures 9

10 2.2. Principles that apply to FMIs The Principles for Financial Market Infrastructures (PFMIs) are a set of 24 recommendations issued jointly in 2012 by the CPMI and the International Organization of Securities Commissions (IOSCO). 5 These high level recommendations for FMIs aim to improve their security and efficiency, promote adequate risk management, limit systemic risk, and promote transparency and financial stability. Some of the principles are applicable to all types of FMIs, whereas other principles apply only to specific types. 6 Banco de México, as a permanent member of the CPMI, participated in the creation of these principles and considers them an important basis for the achievement of its objectives; thus, this central bank has sought to reflect them in regulations it issues and in its policies on FMIs. What follows are brief descriptions of each principle, grouped by the topic they cover (CPMI IOSCO, Principles for Financial Market Infrastructures, April 2012) General organization Principle 1, legal basis: An FMI should have a well founded, clear, transparent, and enforceable legal basis for each material aspect of its activities in all relevant jurisdictions. Principle 2, governance: An FMI should have governance arrangements that are clear and transparent, promote the safety and efficiency of the FMI, and support the stability of the broader financial system. Principle 3, framework for the comprehensive management of risks: An FMI should have a sound risk management framework for comprehensively managing legal, credit, liquidity, operational, and other risks Credit and liquidity risk management Principle 4, credit risk: An FMI should effectively measure, monitor, and manage its credit exposures to participants and those arising from its payment, clearing, and settlement processes. Principle 5, collateral: An FMI that requires collateral to manage its or its participants credit exposure should accept collateral with low credit, liquidity, and market risks. Principle 6, margin: A CCP should cover its credit exposures to its participants for all products through an effective margin system that is risk based and regularly reviewed. This principle applies only to CCPs. Principle 7, liquidity risk: An FMI should effectively measure, monitor, and manage its liquidity risk Settlement Principle 8, settlement finality: An FMI should provide clear and certain final settlement, at a minimum by the end of the value date. Principle 9, money settlements: An FMI should conduct its money settlements in central bank money where practical and available. If central bank money is not used, an FMI should 5 The IOSCO is an organization of securities and futures markets regulatory bodies. Its members cover over 100 countries, and it is recognized as the global standard setter for the securities sector. Mexico s National Banking and Securities Commission (CNBV), is a member of the IOSCO. 6 The list of Principles that apply to each type of FMI can be found in the Annex. Banco de México s Policies and Functions Regarding Financial Market Infrastructures 10

11 minimize and strictly control the credit and liquidity risk arising from the use of commercial bank money. Principle 10, physical deliveries: An FMI should clearly state its obligations with respect to the delivery of physical instruments or commodities and should identify, monitor, and manage the risks associated with such physical deliveries Central securities depositories and exchange of value settlement systems Principle 11: central securities depositories: A CSD should have appropriate rules and procedures to help ensure the integrity of securities issues and minimize and manage the risks associated with the safekeeping and transfer of securities. A CSD should maintain securities in an immobilized or dematerialized form for their transfer by book entry. Principle 12: exchange of value settlement systems: If an FMI settles transactions that involve the settlement of two linked obligations (for example, securities or foreign exchange transactions), it should eliminate principal risk by conditioning the final settlement of one obligation upon the final settlement of the other, for example by applying a delivery versus payment mechanism in securities transactions Default management Principle 13, participant default rules and procedures: An FMI should have effective and clearly defined rules and procedures to manage a participant default. These rules and procedures should be designed to ensure that the FMI can take timely action to contain losses and liquidity pressures and continue to meet its obligations. Principle 14, segregation and portability: A CCP should have rules and procedures that enable the segregation and portability of positions of a participant s customers and the collateral provided to the CCP with respect to those positions General business and operational risk management Principle 15, general business risk: An FMI should identify, monitor, and manage its general business risk and hold sufficient liquid net assets funded by equity to cover potential general business losses so that it can continue operations and services as a going concern if those losses materialize. Principle 16, custody and investment risks: An FMI should safeguard its own and its participants assets and minimize the risk of loss on and delay in access to these assets. An FMI s investments should be in instruments with minimal credit, market, and liquidity risks. Principle 17, operational risk: An FMI should identify the plausible sources of operational risk, both internal and external, and mitigate their impact through the use of appropriate systems, policies, procedures, and controls. Systems should be designed to ensure a high degree of security and operational reliability and should have adequate, scalable capacity. Business continuity management should aim for timely recovery of operations and fulfilment of the FMI s obligations, including in the event of a wide scale or major disruption Access Principle 18, access and participation requirements: An FMI should have objective, riskbased, and publicly disclosed criteria for participation, which permit fair and open access. Principle 19, tiered participation arrangements: An FMI should identify, monitor, and manage the material risks to the FMI arising from tiered participation arrangements. Banco de México s Policies and Functions Regarding Financial Market Infrastructures 11

12 Principle 20, FMI links: An FMI that establishes a link with one or more FMIs should identify, monitor, and manage link related risks Efficiency and effectiveness Principle 21, efficiency and effectiveness: An FMI should be efficient and effective in meeting the requirements of its participants and the markets it serves. Principle 22, communication procedures and standards: An FMI should use, or at a minimum accommodate, relevant internationally accepted communication procedures and standards in order to facilitate efficient payment, clearing, settlement, and recording Transparency Principle 23, disclosure of rules, key procedures, and market data: An FMI should have clear and comprehensive rules and procedures and should provide sufficient information to enable participants to have an accurate understanding of the risks, fees, and other material costs they incur by participating in the FMI. All relevant rules and key procedures should be publicly disclosed. Principle 24: disclosure of market data by trade repositories: A TR should provide timely and accurate data to relevant authorities and the public in line with their respective needs. 3. Landscape of FMIs in Mexico Mexico possesses an extensive and well developed financial system, in which multiple FMIs of the different types described in the previous section operate. This section describes the general characteristics of the main FMIs in Mexico as of January Payment systems Interbank electronic payment system (SPEI) SPEI is managed by Banco de México, and its participants consist mainly of banks, non bank financial institutions and Banco de México. 7 SPEI is the country s main payment system. It processes both the high value payments of financial institutions and treasuries of large companies, as well the retail payments of the general public. SPEI implements the vast majority of the interbank funds transfers of the country, both in number and value. SPEI has extensive operating hours, allowing it to handle payment requirements from financial market participants as well as those of the general public. For retail payments, SPEI will begin operating 24 hours a day, 7 days a week, in November SPEI settles payments very quickly, nearly in real time, using money maintained by participants at the central bank. 7 The Federal Treasury sends payment orders to SPEI, through Banco de México, to pay pensions and salaries, and to pay providers of services to government agencies. Banco de México s Policies and Functions Regarding Financial Market Infrastructures 12

13 Account Holders Service System (SIAC) SIAC is the system used by Banco de México to manage the accounts that banks, other financial institutions, and public sector entities maintain at the central bank. Although SIAC was initially used as a payment system, nowadays this function has been almost entirely transferred to SPEI, which is better suited to this task. The main function of SIAC in relation to FMIs is liquidity provision to banks, thereby facilitating the processing of transactions in the financial system. The liquidity Banco de México provides through SIAC, both intraday and longer term, is completely guaranteed with high quality assets from debtor banks (see Section 4 c). At any time during operating hours, participants can transfer the liquidity they obtain from SIAC to SPEI, or to the account that the SSS (DALI) maintains in SPEI National Electronic Clearinghouse (CCEN) The CCEN, the acronym by which the National Electronic Clearinghouse is known in Spanish, is a clearinghouse owned and operated by Cecoban, a private company held by a group of commercial banks. The CCEN clears interbank checks, direct debits, deferred credit transfers, and interbank cash purchases. Any bank in Mexico can be a participant in the CCEN, as long as it has been previously certified by Cecoban. The final CCEN settlement is made in the accounts the banks have in SIAC Interbank card transactions system (processors) Processors of interbank card transactions are responsible for handling card payment transactions. In this sense, interbank transactions are those in which the issuing bank of the card is not the same bank that manages the point of sale terminal (POS). Interbank transactions are processed, cleared, and settled by processors Prosa and E Global, private entities whose owners are commercial banks. Settlement of the interbank card transaction processors takes place in commercial banks accounts Payment systems for interbank transfers by means of mobile devices (clearinghouses) Clearinghouses for interbank payments made through mobile devices are responsible for processing interbank transactions requested through mobile devices. In December 2013, the regulation issued by Banco de México for authorizing clearinghouses for interbank payments made through mobile devices came into effect. This regulation establishes rules concerning the organization, functioning and operation these clearinghouses must observe. Currently, one such authorized entity is Transfer Central securities depositories and securities settlement systems Securities Deposit, Administration and Settlement System (DALI) DALI is a securities settlement system run by the company S. D. Indeval, the central securities depository. DALI s main functions are the custody of equity and debt instruments issued in Mexico, and settlement of securities transactions. Among its participants are pension fund administrators, banks, broker dealers, insurance companies, surety companies, Banco de Banco de México s Policies and Functions Regarding Financial Market Infrastructures 13

14 México, and foreign banks. Participants in DALI can process operations with their own securities as well as their clients. Participants can keep the liquidity they need to operate in DALI in SPEI. Additionally, participants can transfer funds from accounts in DALI to those in SPEI, and subsequently request a liquidity transfer from SPEI back to SIAC Central counterparties Central Securities Counterparty (CCV) The CCV, the acronym by which the central securities counterparty is known in Spanish, is the entity in charge of clearing and settling all equities operations traded on the Mexican Stock Exchange (BMV). As a CCP, its main function is to position itself between the original counterparties of any transaction to become the buyer for every seller and the seller for every buyer. The CCV is part of the BMV Group. CCV direct participants (settlement agents) 8 include banks and broker dealers, which conduct operations in their own name or on behalf of their clients Asigna Asigna is the central counterparty for operations traded on the Mexican Derivatives Exchange (MexDer), as well as for operations it accepts via electronic platforms for derivatives trading. Asigna is part of the BMV Group. As with the CCV, Asigna s main function is to stand between the original counterparties of transactions to become the buyer for every seller and the seller for every buyer of derivatives contracts Trade repositories Banco de México s Derivatives Trade Repository Banco de México maintains a repository of information of derivative transactions traded by Mexican counterparties at broker dealers and banks. The purpose of this repository is to maintain timely and accurate information on those operations traded in the derivatives market. This repository provides information to other financial authorities and the general public Cross border payment systems and foreign currency payment systems Directo a México In 2004, Banco de México and the United States Federal Reserve set up a mechanism to transfer money from the United States to Mexico. By means of this system, any bank or credit union in the United States participating in Directo a México can send payments to any individual with a bank account in Mexico. 8 Settlement agents are CCV stockholders that, in addition to carrying out their own operations, can set up arrangements with non settlement agents to become responsible for the operations carried out by the latter, up to a limited amount. Credits and debits resulting from the settlement process, both in cash and securities, take place in the settlement agents accounts. Banco de México s Policies and Functions Regarding Financial Market Infrastructures 14

15 Settlement in dollars takes place in a payment system in the United States (FedACH), while settlement in pesos occurs in SPEI. The foreign exchange operation takes place at a Mexican development bank, using contracts that minimize foreign exchange risk under conditions of market volatility Continuous Linked Settlement system (CLS) The CLS is an international foreign exchange settlement system. It is operated by the CLS Bank, which is based in New York. CLS settles transactions in 17 of the most important currencies trading on foreign exchange markets. The settlement of each transaction s currency leg takes place in accounts held in the respective currency s issuing central bank, by means of the corresponding payment system. In this way, settlement of pesos occurs in SPEI U.S. Dollar Interbank Payment System (SPID) The SPID is a payment system which started operating in April This system is operated by Banco de México and allows banks in Mexico to send electronic transfers between U.S. dollar accounts within Mexico which these banks maintain on behalf of firms. Participation in the SPID is exclusive to banks in Mexico. The SPID has stringent controls for anti money laundering and combating the financing of terrorism (AML/CFT). It operates from 8:00 a.m. to 2:00 p.m. every business day in Mexico. In the SPID, payments are settled using U.S. dollars that have been deposited in central bank accounts by way of correspondent banks in the United States. The following chart shows the main FMIs in Mexico and their interrelationships. Banco de México s Policies and Functions Regarding Financial Market Infrastructures 15

16 4. Banco de México and its relationship with FMIs This section describes Banco de México s various roles with respect to FMIs, the main policy issues for the FMIs, and the central bank s objectives for FMIs. It also describes the provision of intraday liquidity and the central bank s supervision of FMIs and their participants The central bank s multiple roles in FMIs Banco de Mexico performs the following main roles with respect to FMIs: regulator, supervisor, operator, and user. Banco de México as a regulator All the national FMIs are regulated by the central bank. In some cases, the regulatory role lies entirely with Banco de Mexico, whereas in others, the central bank shares its responsibilities as a regulator with another authority. As a regulator, the central bank both proposes and issues regulation. Additionally, it authorizes the internal rules governing the operation of FMIs and their participants. The details concerning Banco de Mexico s regulatory activities are described in the following sections. Banco de México as a supervisor Banco de México takes measures to monitor compliance with regulation related to FMIs, both by operators and participating financial institutions. The details concerning Banco de Mexico s supervisory activities are presented in the following sections. Banco de México s Policies and Functions Regarding Financial Market Infrastructures 16

17 Banco de México as an operator Banco de México is the administrator and operator of SPEI and SIAC. The central bank provides electronic funds transfer services through SPEI. Additionally, it provides liquidity to banks and access to central bank accounts for financial institutions and some public entities through SIAC. Furthermore, the central bank and the United States Federal Reserve jointly manage and operate the system that allows users to send money to Mexico, namely, Directo a México. Lastly, Banco de México operates the Derivatives Trade Repository. Banco de México as a user The central bank implements monetary policy through the national FMIs. The results of the open market operations through which liquidity is provided are formalized as collateralized loans; the resources are credited to banks through SIAC, or alternatively, repos are settled in DALI. Liquidity withdrawal operations are formalized as deposits with resources from banks SIAC accounts. Banco de México, in its role as the financial agent of the federal government, manages and places federal government bonds in domestic currency. Additionally, it acts as a placement agent for the Institute for the Protection of Bank Savings (known by its acronym in Spanish as the IPAB). To conduct these activities, Banco de México uses the DALI system. In the same role, the central bank sends the Federal Treasury s payments through SPEI. Furthermore, the central bank sends its own payments through SPEI to employees and suppliers. Additionally, Banco de México is involved in international committees concerning FMIs and it is a board member of the national CSD and SSS. In the first case, participation allows the central bank to be abreast of the latest issues and to have a voice in any decisions to be made, seeking the most beneficial outcome for Mexico. The main group in which the central bank participates as a member is the Committee on Payments and Market Infrastructures (CPMI) of the Bank for International Settlements (BIS). Banco de México is a shareholder and board member of Indeval, the company that manages and operates the national SSS, DALI. Moreover, the central bank has the right to a veto on Cecoban s board of directors Banco de México s policies and objectives concerning FMIs Policies with respect to systemically important FMIs Systemically important FMIs are those that may affect the stability of the financial system in the event of unexpected circumstances. These FMIs must comply with the Principles for Financial Market Infrastructures published by the CPSS IOSCO in The central bank s policy for determining the systemically important FMIs considers the value and nature of the operations they process. These FMIs are the securities settlement system (DALI), the central counterparty (CCV and Asigna), the Derivatives Trade Repository operated by Banco de México, and SPEI. In particular, the CCV is considered a systemically important FMI because it is the only Mexican CCP which operates in the stock market. Similarly, Asigna is the only Mexican CCP that operates in the derivatives market, and is thus considered systemically important Policy with respect to retail payment system infrastructures Retail payment infrastructures do not have the potential to destabilize the financial system in the face of operational problems because the settled amounts are relatively low. However, Banco de México s Policies and Functions Regarding Financial Market Infrastructures 17

18 because of the large volume of payments processed and their extensive use in retail trading, they are important to economic activity. The central bank s policy on this kind of infrastructure requires adopting best practices in the field, including the PFMI. Additionally, Banco de México s policy is to encourage these infrastructures to seek synergies and economies of scale Banco de México s particular objectives concerning FMIs In accordance with the provisions of Article 2 of the Banco de México Law, the bank s general aim with respect to payment systems is to foster their proper operation and promote the sound development of the financial system as a whole. Banco de México considers FMIs to be among the entities it should monitor in line with its legal powers and considering the trends that led the Committee on Payment and Settlement Systems (CPSS) to change its name to the Committee on Payments and Market Infrastructures (CPMI). The proper functioning of FMIs is a necessary but insufficient condition to achieve stability for the financial system as a whole. The Banco de México s objective with respect to FMIs is for these to be secure and efficient in the aim of strengthening and promoting fair competition, as well as fostering innovation and the development of better services in their respective market industries, thereby contributing to the public good through increased financial stability, economic efficiency and financial inclusion. Banco de México also has the goal of strengthening the FMIs business continuity framework to ensure a high level of availability and transparency with participants and the general public in all matters related to their rules, as well as risks and benefits associated with their use. Additionally, the central bank has particular objectives for each FMI in the country. SPEI SPEI has the purpose of settling its participants and participants customers payments in a timely, efficient, secure and inexpensive way, considering both retail payments and those associated with financial markets, with the following specific objectives: The system and its participants should process payments in real time The system must not generate credit or liquidity risks The system should offer a high level of service to users and participants, including business continuity plans and adequate risk management The system should facilitate the provision of services and information to its clients regarding sent transfer orders DALI Operations should be settled in a timely manner The system should implement a delivery versus payment structure, with the aim of eliminating the principal risk The system should not generate credit or liquidity risks Banco de México s Policies and Functions Regarding Financial Market Infrastructures 18

19 CCV and Asigna The central counterparty should centralize clearing and settlement in securities and derivative financial instruments under a central counterparty framework, in order to lessen the default risk of the obligations of intermediaries. The central counterparty should have a clear and solid risk management framework, which covers the central counterparty s responsibilities and the participants responsibilities, and appropriate incentives should be in place to manage and contain the risks Banco de México s Derivatives Trade Repository The repository should register and store information regarding transactions with derivative financial instruments The repository should provide relevant information on derivatives transactions to the authorities and the general public to reinforce public policy objectives and improve the transparency of the financial market SIAC CCEN The system should manage the current accounts of depositors at Banco de México The system should provide liquidity to banks for FMI operations The system should have a solid framework in order to manage risks that arise from providing liquidity to banks The system should clear and settle checks, deferred electronic transfers and direct debits The system should have a solid credit and liquidity risk management framework The system should allow to any bank to participate, and its services should be efficient Clearinghouses for card transactions and electronic transfers initiated with a mobile device The clearinghouses should process card transactions and mobile payments in a timely manner The clearinghouses should have a solid clearing and settlement structure for card transactions and mobile payments The terms governing participation in payment processing services should be equitable Clearinghouses that process the same type of transactions should be interoperable 4.3. Intraday liquidity provision The intraday liquidity provision arrangement for FMIs to function properly is described in this section. At the close of operating hours for the SIAC, DALI and SPEI systems, the sum of the various systems current account balances should be zero. At the open, banks can obtain intraday liquidity by either overdrawing their current account at the central bank for up to the value of the collateral they pledge to the central bank, or through intraday repo transactions with the central bank. The banks can transfer liquidity between the SIAC, DALI and SPEI systems Banco de México s Policies and Functions Regarding Financial Market Infrastructures 19

20 according to their needs at any time during the operating day. At the close, their balances in the SPEI and DALI systems are transferred to SIAC, where banks can take the necessary measures to reduce their current account balances or overdrafts. The overdraft mechanism allows banks to overdraw their SIAC current accounts, provided that these overdrafts are guaranteed by banks deposits with Banco de México; chief among these are monetary regulation deposits (DRM, as they are known in Spanish). Additionally, deposits resulting from open market operations and from the process of determining the Interbank Interest Rate (the TIIE, as it is known in Spanish) can serve as collateral. The use of overdrafts does not generate costs for banks except when the overdraft remains beyond the end of the day; in that case, an interest rate of twice the representative market rate is applied. The mechanism of intraday repos involves Banco de México s automatic acceptance of intraday repo transactions with banks. In these operations, banks sell securities to the central bank and promise to repurchase them the same day. The settlement of repo transactions occurs in DALI, where the ownership of the assets is transferred to Banco de México and, in return, the banks receive the resources in their DALI account. Participants then recover their securities with operations settled in DALI before closing time; banks must have the necessary liquidity in the system in order to do this. Banco de México only accepts securities issued by the federal government, IPAB or by the central bank itself, which have very low credit and liquidity risk in the secondary market. 9 Additionally, in order to mitigate market risk, Bank of México applies a haircut to the securities purchase price. The central bank does not charge an interest rate to banks for resources obtained through this mechanism, except when the bank does not repurchase the security the same day; in that case, twice the representative market rate applies (as is the case with the overdraft mechanism). Banco de México only charges a fixed fee to recover the operating costs for each intraday repo transaction Supervision There are four statutes authorizing the central bank to supervise FMIs: i. The Banco de México Law establishes as one of the central bank s purposes the aim of fostering the proper functioning of the payment systems, and it empowers the bank to supervise intermediaries and financial institutions based on regulations the central bank issues. ii. The Payment Systems Law authorizes the central bank to monitor the supervisory systems subject to this law. iii. The Securities Market Law empowers the central bank to request information and authorize changes to the internal regulations of central counterparties and securities settlement systems within the scope of its powers. iv. The Transparency and Regulation of Financial Services Law empowers the central bank to supervise clearinghouses. 9 Monetary Regulation Bonds L are securities issued by Banco de México in order to regulate liquidity in the money market and implement monetary policy. These securities are only negotiable with Banco de México directly, and therefore no secondary market for them exists. Banco de México s Policies and Functions Regarding Financial Market Infrastructures 20

21 Banco de México supervises both the administrators of FMIs as well as their participants. This is an essential tool the central bank uses to achieve its objectives; supervision allows the bank both to verify that the behavior set out in provisions and best practices is followed, and to evaluate the effectiveness of regulation in order to propose adjustments when necessary. In the event an infringement is detected during the supervision process, the corresponding sanctions are imposed in order to inhibit such conduct Supervision of FMIs The central bank supervises both existing and planned FMIs in order to ensure that their operation adheres to the regulation and best practices required by the financial authorities related to security and efficiency. With respect to retail payment FMIs, Banco de México s supervision process also seeks to promote competition among payment service providers. As for SPEI, Banco de México performs self assessment. In addition, the bank reviews the selfassessments conducted by the administrators of DALI, CCV, and Asigna systems. Furthermore, on the basis of the results of the self assessments, Banco de México takes measures in SPEI and coordinates the actions taken by the administrators of DALI, CCV, and Asigna to comply with the Principles for Financial Market Infrastructures (PFMIs). Additionally, Banco de México oversees the chamber operated by Cecoban and the clearinghouses that process card transactions and mobile payments to ensure compliance with the regulatory provisions. Off site supervision Supervision activities include the collection and analysis of qualitative and quantitative information, monitoring of operations and market development, and authorization of internal rules and operating manuals of FMIs. The intention is to evaluate whether the operation and administration of each FMI adheres to best practices for its type and thus ensure its secure and efficient operation. An important aspect of supervision by Banco de México is to ensure that FMIs comply with the best practices established in the PFMIs; to achieve this, the central bank uses the assessment methodology developed by the CPMI and IOSCO. On site supervision In addition to the actions described above, Banco de México uses on site visits to inspect compliance with regulations regarding payment systems. Thus, supervision activities are conducted in a deeper and more thorough manner. The central bank also conducts on site supervision at the clearinghouses that process card operations and mobile payments as part of the authorization process Supervision of FMI participants Banco de México supervises FMI participants to ensure quality and transparency in the provision of services to their customers in order for them to operate safely and efficiently, as well as to protect the public interest. Off site supervision Supervision activities include monitoring the behavior of FMI participants through systematic reviews of information, including analysis of information stored by the central bank and the Banco de México s Policies and Functions Regarding Financial Market Infrastructures 21