The Payments System Reform in the Dominican Republic
The present Payments System in the Dominican Republic must be adapted to the evolution of the markets and the new international rules with respect to handling of risks, for this reason it is necessary to introduce a series of reforms.
Therefore, reforms are oriented to extend and to improve operating rules, norms and procedures, as well as, to establish and to make more efficient the clearing and settlement infrastructure that guarantee, as a whole, the real purpose of payments, reducing in that way the risks associated.
The reform will include, for purposes of final settlement, retail as well as large value payments, applicable to all instruments.
This reform is an initiative of the Central Bank of the Dominican Republic with the support of the World Bank, to improve the national Payments System, and it is based on the Core Principles established by the Committee on Payment and Settlement Systems (CPSS) of the Bank for International Settlements (BIS), and on research by the Center for Latin American Monetary Studies (CEMLA) and by the Western Hemisphere Payments and Securities Clearance and Settlement Initiative (IHO).
Main Goals of the Reform
In 2001, the BCRD requested that the World Bank and to the Western Hemisphere Payments and Securities Clearance and Settlement Initiative (IHO) undertake a diagnosis of the Dominican Republic’s Payments System, in order to gather the opinions of experts regarding the conditions of that System.
- To provide efficient mechanisms for the interchange of financial resources between the parties to a transaction.
- To assure the firmness and irrevocability of payments and settlement.
- To define a legal and procedural framework that it regulates, standardizes, clarifies and systematizes the SIPARD components.
- To allow the administration, reduction and prevention of risks related to with SIPARD.
In response to that request, an IHO mission visited Santo Domingo in January, 2002 and carried out an evaluation of the Dominican Republic’s Payment Systems, identifying possible measures to improve the security, efficiency and integrity of the National Payments System.
As a result of the diagnosis, the reform of the country’s Payments System was considered to be a necessity. On March 9, 2004, Loan Agreement No. 7216-DO for the “Technical Assistance for Financial Sector Enhancement” program was signed, by the Government of the Dominican Republic and the World Bank. This agreement was approved by the National Congress in August, 2005.
In addition to the diagnosis, the international mission established the guidelines for the preparation of the report titled "Dominican Republic’s Payments and Securities Clearance and Settlement Systems" (Yellow Book), point of departure for the reform process of a national payments system.
The Yellow Book has a systematic and thorough description of the Dominican Republic’s Payments and Securities Clearance and Settlement Systems" in March 2003, on which date it was officially published by the Center for Latin American Monetary Studies (CEMLA).
- The system should have a well-founded legal basis under all relevant jurisdictions.
- The system’s rules and procedures should enable participants to have a clear understanding of the system’s impact on each of the financial risks they incur through participation in it.
- The system should have clearly defined procedures for the management of credit risks and liquidity risks, which specify the respective responsibilities of the system operator and the participants and which provide appropriate incentives to manage and contain those risks.
- The system should provide prompt final settlement on the day of value, preferably during the day and at a minimum at the end of the day. *
- A system in which multilateral netting takes place should, at a minimum, be capable of ensuring the timely completion of daily settlements in the event of an inability to settle by the participant with the largest single settlement obligation. *
- Assets used for settlement should preferably be a claim on the central bank; where other assets are used, they should carry little or no credit risk and little or no liquidity risk.
- The system should ensure a high degree of security and operational reliability and should have contingency arrangements for timely completion of daily processing.
- The system should provide a means of making payments which is practical for its users and efficient for the economy.
- The system should have objective and publicly disclosed criteria for participation, which permit fair and open access.
- The system’s governance arrangements should be effective, accountable and transparent.
* Systems should seek to exceed the minima included in these two Core Principles.
Responsibilities of the Central Bank
- The central bank should define clearly its payment system objectives and should disclose publicly its role and major policies with respect to systemically important payment systems.
- The central bank should ensure that the systems it operates comply with the Core Principles.
- The central bank should oversee compliance with the Core Principles by systems it does not operate and it should have the ability to carry out this oversight.
- The central bank, in promoting payment system safety and efficiency through the Core Principles, should cooperate with other central banks and with any other relevant domestic or foreign authorities.
To access the BIS website, go to http://www.bis.org/publ/cpss34s.pdf
Importance of Payment Systems
Please refer to the World Bank and CEMLA Report entitled: “Systemically Important Payment Systems in Latin America and the Caribbean: Results of the Self-Assessment Exercises.
Real Time Gross Settlement (RTGS)
The RTGS system will be the backbone of the SIPARD, operated by the BCRD. It will receive input from the participating institutions’ settlement accounts in the BCRD. It will allow real-time settlement of the operations conducted through any of the payment instruments in use.
This system processes and settles, individually and in the shortest possible time, the interbank funds transfer instructions that have been sent by each participant.
Large-value payments are settled one by one, (Real Time Gross Settlement) while retail payments are settled by batch on a deferred net settlement basis during pre-established hours. RTGS provides the links between different services or systems (large-value, retail-value) thus making possible their final settlement.
The automation of payment systems, under this modality, offers an efficient mechanism to mitigate systemic and liquidity risks during the settlement process.
Regional Payments System Project
The BCRD is active member of Central American Monetary Council (CMCA) and is participating in the development of the regional project titled "Strengthening and Harmonization of Payment Systems". One of the main aspects of this initiative is the fact that, in addition to strengthening the national payment systems, it serves as support for the process of regional financial integration of the member countries: Costa Rica, Nicaragua, El Salvador, Guatemala, Honduras and Dominican Republic.