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Payment and Securities Settlement Systems

A payment and settlement system is the infrastructure in place allowing for the transfer of monetary value between parties fulfilling mutual obligations and is, therefore, vital to the functioning of interbank, money, and capital markets. Designing a payment system infrastructure in fast-changing technological and institutional environments becomes increasingly complex as competition and innovation require an always changing combination of efficiency, reliability, safety, and system stability. Individual Middle East and North Africa (MENA) countries have been undertaking individual country payment system reforms, as well as exploring the gains achieved by adopting integrated frameworks for regional payment and securities settlement systems.

A number of findings are included in this comprehensive overview. The legal and regulatory framework for payment and securities settlement systems in the MNA region is one of the weakest in the world. Specific payment systems laws are not commonly present among institutional arrangements, and as a result, key issues such as settlement finality, bilateral and multilateral netting, and non-existence of zero-hour rules are not adequately addressed. Cheques are still used for large-value payments in virtually all the national payments systems in the region and remain the principal instrument for large-value payments in one out of three countries in the region, according to the World Bank Global Payment Systems Survey. Central banks in the region have established Real Time Gross Settlement (RTGs) systems to settle large-value inter-bank payments. However, several RTGS systems need to be updated and made more efficient, so that all relevant market participants use them intensively.
Many countries in the region do not have any regulatory agency or supervisory function over securities other than the self-regulation of the stock exchange, undermining trust in the system and hindering future development of the securities market. The legal foundation of oversight of clearance and settlement systems is not always solid as well. Consequently, the authority of the central banks can be compromised in enforcing any general rules or directives they might impose on the overall national payments system.

Several recommendations are proposed to address these issues. Central banks in MENA need to broaden their focus to include the promotion of competition in the payment services market and the protection of consumer interests. Policy makers need to consider reviewing the legal and regulatory framework to identify barriers to improvements in efficiency or safety, and cooperate with relevant public and private entities to ensure that such a framework keeps pace with market developments. Cooperation among regulators is an essential component to ensuring the integrity of the oversight function and is lacking in most MENA countries. Strengthening oversight can be accomplished by establishing a regulatory agency or function over securities other than the self-regulation of the stock exchange. Because it is difficult and costly for cheque systems to substantially reduce systemic risk and comply with international standards, the launch of RTGS systems is recommended as a better option than focusing efforts on creating guarantee funds or other risk-management tools for systemically important cheque clearinghouses. Securities immobilization or dematerialization at securities depositories has been largely accomplished in the region, but additional efforts are needed to achieve greater standardization. A standardized settlement cycle must be clearly fixed and identified for all the trades executed in the securities markets, and true delivery versus payment should be achieved. The authorities of countries with a competitive and efficient remittance market need to share best practices with the other countries in the region, in the broader spirit of regional collaboration and integration.

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