General Overview
Law 964 of 2005 entitled "Law of Securities Market", was enacted on July 8, 2005 (CNGC Boletin 62, 2005)
By helping to modernize payment systems through electronic services aimed at facilitating
transactions for financial brokers and capital markets and making them more efficient, safer and
economical, Banco de la República has become a pioneer in Latin America. It now directly
operates several systems: CUD (Deposit Account System), DCV (Central Securities Depository
), Cedec (the Electronic Check Clearing System), Cenit (Clearing System for Electronic Interbank Transfers), SEN (Electronic Trading System for government bonds) and SON (System for International Operations ) . Some of these systems coexist with private competitors. (BRC July 2005)
Payment services in Colombia are carried out through a variety of entities, types of institutions, and service suppliers that in turn come under the umbrella of multiple regulating entities. Currently, there are no general regulations that normalize implementation of the payment services provision (independently of the type of entity offering them). Rather, regulation has focused on the types of institutions that are generally defined on the basis of the services they provide. These services are provided essentially by the Central Bank, credit institutions, and other service providers owned by commercial banks. Consequently, the legal framework now in force governing the activities of payment services is extensive and involves several control and supervisory bodies (Banco de la República, Banking Superintendency, Securities Superintendency, Guarantee Fund for Financial Institutions (Fondo de Garantías de Instituciones Financieras), Superintendency of Corporations (Superintendencia de Sociedades). (CEMLA 2001)
The check system has significantly reduced its "systemic importance" but the BRC (the Central Bank of Colombia) should continue its effort to reduce the use of checks among intermediaries and broaden the use of electronic payments. The high value of some of the checks settled and the fact that this instrument is sometimes used by financial intermediaries to settle payments confirm that additional efforts to encourage electronic payments are needed. (FSSA Update 2005)
The Principles
I. The system should have a well-founded legal basis under all relevant jurisdictions. |
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Law 964 of 2005 entitled "Law of Securities Market", was enacted on July 8, 2005 (CNGC Boletin 62, 2005)
In its 2005 FSSA Update (at which time the Law of Securities Markets was in draft form), the IMF observed that it addresses most of the weaknesses identified in the legal framework for the payment system and improve compliance with CPSS standards. It covers issues such as the legal validation of multilateral netting, the protection of the system against bankruptcy procedures, settlement finality, protection of collateral arrangements, pledge, segregation of accounts, the legal definition of repos, central counterparties, and novation. It also extends this legal basis for funds and foreign exchange settlement systems. However, it does not address the lack of legal basis for the BRC's oversight function. (FSSA update 2005)
The BRC should seek clear legislative authority for the oversight of clearance and settlement systems. This would provide the central bank with the legal authority to ensure the development and operation of payment mechanisms that effectively contribute to the integrity, efficiency and safety of all financial markets and the operation of monetary policy. (FSSA Update 2005)
In its update, the IMF noted that RTGS system was being developed and measures to limit settlement risk in the check clearing system had been introduced. (FSSA Update 2005)
Regulation has focused on the types of institutions that are generally defined on the basis of the services they provide. These services are provided essentially by the Central Bank, credit institutions, and other service providers owned by commercial banks. Consequently, the legal framework now in force governing the activities of payment services is extensive and involves several control and supervisory bodies (Banco de la República, Banking Superintendency, Securities Superintendency, Guarantee Fund for Financial Institutions (Fondo de Garantías de Instituciones Financieras), Superintendency of Corporations (Superintendencia de Sociedades). (CEMLA 2001)
There are permanent mechanisms for the oversight of the payments system among the different supervisory authorities. However, there is no formal general legal framework to regulate the coordination among them. In general, it can be said that the function of payments system oversight has not been regulated in detail in Colombia, and the responsibilities have been adapted according to the traditional functions exercised by each of the authorities involved in the supervision of the banking system. (CEMLA 2001)
II. 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. |
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Consistent with its responsibility as monetary authority and its role in preserving financial stability, and as direct provider of the large-value payment system and other low-value payment applications, the Banco de la República (BRC, the Central Bank) permanently oversees the payment systems, especially following the evolution of the risks present in them. This is done through the collection of information on payment flows and an ongoing dialogue with users and financial institutions. When the Central Bank directly provides payment services, it meets its regulatory and supervisory objectives, on one hand, by means of subscription by participants of bilateral contracts and, on the other, through cooperation with the private sector and moral suasion. The bilateral contracts explicitly establish all participant obligations and responsibilities and the conditions for their operations, service pricing, and sanctions for non-compliance. (CEMLA 2001)
The Banking Superintendency (Superintendencia Bancaria) falls under the Ministry of Finance and Public Credit. As a supervisory authority of financial, insurance, and social security activity, its responsibilities include Ensuring the confidence of the public in the financial, insurance, and social security system, and ensuring that the institutions that comprise it permanently maintain economic soundness and appropriate liquidity to meet their obligations. To this end, the Banking Superintendency gives priority to the early detection of the different risks (financial and operational risks and those stemming from the payments system). (CEMLA 2001)
III. 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. |
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In recent years the Banco de la República has played an active role in reducing risks in the payments system. The most important measure has been the launch of the Real Time Gross Settlement (RTGS) system, which has significantly reduced credit (counterparty) risk. To guarantee the smooth functioning of the RTGS system, in 1998 a mechanism of provision of intraday liquidity, based on repos, was adopted, followed by other measures implemented in more recent years. These measures have contributed to reducing the liquidity risk in the system. As of 2001, the RTGS system had no queuing facility; thus, when a participant does not have the funds in its account to process the payment, the transaction is rejected. However, the transaction can be successively reactivated by the participant without having to be processed again by the system, since the operation is held in the system's memory. (CEMLA 2001)
The Banking Superintendency (Superintendencia Bancaria) falls under the Ministry of Finance and Public Credit. As a supervisory authority of financial, insurance, and social security activity, its responsibilities include ensuring the confidence of the public in the financial, insurance, and social security system, and ensuring that the institutions that comprise it permanently maintain economic soundness and appropriate liquidity to meet their obligations. To this end, the Banking Superintendency gives priority to the early detection of the different risks (financial and operational risks and those stemming from the payments system). (CEMLA 2001)
IV. 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. (Systems should seek to exceed the minima included in this Core Principle.) |
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There is no information publicly available that directly addresses this principle.
In order to permit an on-line connection in real time of the financial and securities intermediaries with the Bank, the Banco de la República's Electronic Services (Servicios Electrónicos del Banco de la República, SEBRA) was established. This is the remote entry port to the central bank's electronic applications that permits communication with the Bank in order to carry out transactions in a speedy, safe, and efficient manner, eliminating instructions on paper. (CEMLA 2001)
The Banco de la República has adopted several measures to guarantee the smooth functioning of the RTGS system, such as authorizing access for authorized institutions (Agentes Colocadores de Operaciones de Mercado Abierto de Expansión) to a mechanism that provides additional liquidity oriented to the payment system: the intraday repos. Although the cost of these operations was originally high (and therefore its use was limited), in May 1999 the interest rate was revised and reduced to 0.1 percent. It is worth repeating that the Banco de la República is not authorized (by the Constitution) to carry out operations with financial entities at no cost and without charging interest rates, and it cannot authorize overdrafts on reserve accounts. This provision also affects the intraday repos. (CEMLA 2001)
In mid-1999, the intraday sequencing of payments and intraday provisions for the operations between capital market intermediaries and the Banco de la República was revised to ensure that the financial system could start the day with sufficient liquidity to smoothly carry out its operations. The settlement of repo operations with the Banco de la República was moved from 4:00 a.m. to 2:30 p.m., soon after the funds stemming from cheque clearing are released (approximately 1:00 p.m.) and many hours after knowing the results of the repo auction (approximately 11:30 a.m.), which are the main sources of liquidity for financial entities. With the approval of measures also described on Chapter 4 of the CEMLA 2001, efficient liquidity facilities are being provided to the financial sector for the orderly functioning of payment arrangements. According to Banco de la República estimates, these facilities should be enough to cover the risks of inability to settle by one or more participants and in the near future allow private securities and OTC transactions to be settled smoothly according to a DvP model. It is also important to note that since the end of 2000 the use of intraday repos has grown very quickly. This means that financial institutions are starting to understand the importance of these instruments for the orderly evolution of payment system operations. (CEMLA 2001)
CENIT clears all payment orders received by its 24 authorized entities (banks, DTN, and in the future the Social Security Institute) in three daily clearing sessions according to a multilateral netting scheme. At the end of each cycle (1:00 p.m., 4:00 p.m. of T+0, and 9:00 a.m. of T+1 for returned items) CENIT settles the net balances on the reserve accounts at the Banco de la República. Both payment orders and returned items are settled with the same day of value of the transaction, and the receiving entities are obliged by regulation to credit the account of the final beneficiary with the same value date. As mentioned, the last cycle for returns occurs at 9:00 a.m. of T+1, since many banks run their internal accounting processes at night; but the date of value is recorded at the Banco de la República as T+0 in all cases. (CEMLA 2001)
V. 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. (Systems should seek to exceed the minima included in this Core Principle.) |
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Under Colombian law, bilateral netting is explicitly seen as a way to extinguish obligations when two persons present reciprocal debit positions. Multilateral netting is permitted in cases where multiple and reciprocal entities hold debit and credit positions and participate in a payment system and there is an agreement among them, also provided that the agreement respects the provisions of the law. (CEMLA 2001)
Netting operates under the provisions of the law even when the counterparties do not know each other. Both debts are reciprocally extinguished when they both have the same qualities: 1. That both debts be in cash or fungible goods of same characteristics. 2. That both debts be liquid. 3. That both debts be demandable, that is, maturity expired, or the condition to which they were subject was fulfilled or failed. In Colombia netting is legal and operates automatically without explicit solicitation of the counterparties between themselves or a third party. It is sufficient that the three requisites described above be present to make it happen. (CEMLA 2001)
Netting can be restricted in some cases, including when one of the parties refuses the netting, and when the netting could prejudice the rights of third parties. The implicit refusal of netting occurs when the debtor accepts with no reservations the transfer by the creditor of his rights to a third party, since in this case the debtor will not be able to oppose the netting to the creditor. In addition, may not take place if the debits to be cleared are not payable in the same place. In this case netting occurs only if both are in cash. (CEMLA 2001)
Two automated clearinghouses for electronic transfers (ACHs) operate in Colombia according to the NACHAM format, (NACHA adapted to pesos): ACH Colombia, owned by several commercial banks, and the Sistema de Compensación Electrónica Nacional Interbancaria (CENIT), administered by the Banco de la República. ACH Colombia began operating in 1996 and executes around 300,000 credit transfers per month for a value of $1.6 billion. Debit transfers are currently being implemented. CENIT was launched at the end of 1999 and monthly it executes around 15,000 credit transfers, at an approximate value of $2 trillion . Notwithstanding the smaller volume of operations cleared and settled through CENIT, it processes a greater value of payments, since the national Treasury (DTN) channels its payments to the decentralized entities in charge of administering the national budget through CENIT. (As mentioned in Section 3.2.6, in the near future the DTN will directly pay the final beneficiaries through CENIT, without using intermediaries). (CEMLA 2001)
CENIT clears all payment orders received by its 24 authorized entities (banks, DTN, and in the future the Social Security Institute) in three daily clearing sessions according to a multilateral netting scheme. At the end of each cycle (1:00 p.m., 4:00 p.m. of T+0, and 9:00 a.m. of T+1 for returned items) CENIT settles the net balances on the reserve accounts at the Banco de la República. Both payment orders and returned items are settled with the same day of value of the transaction, and the receiving entities are obliged by regulation to credit the account of the final beneficiary with the same value date. As mentioned, the last cycle for returns occurs at 9:00 a.m. of T+1, since many banks run their internal accounting processes at night; but the date of value is recorded at the Banco de la República as T+0 in all cases. (CEMLA 2001)
VI. 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. |
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There is no information publicly available that directly addresses this principle.
VII. The system should ensure a high degree of security and operational reliability and should have contingency arrangements for timely completion of daily processing. |
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There is no information publicly available that directly addresses this principle.
The Banco de la República cheque-clearing system has high standards of security and redundancy, and several contingency plans calibrated according to the problem encountered. (CEMLA 2001)
The ACH Colombia system operates with radio and fiber optic links and redundant hardware. Information is encrypted and user profiles have been adopted to ensure security. (CEMLA 2001)
VIII. The system should provide a means of making payments which is practical for its users and efficient for the economy. |
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There is no information publicly available that directly addresses this principle.
The Bank has participated in the provision of services since the beginning of the 1990s, with the objective of working actively to modernize the payments system in Colombia, specifically through the development of new, more sophisticated automated applications and the provision of electronic services aimed at facilitating the transactions made by financial intermediaries and the capital market, and making them safer, more efficient, and cheaper. (CEMLA 2001)
IX. The system should have objective and publicly disclosed criteria for participation, which permit fair and open access. |
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Access to the interbank clearing systems (cheques and ACH) is restricted to commercial banks and mortgage banks. To be allowed to participate in the system, these institutions must demonstrate that they have adequate operational capacity and skills, and they need to comply with the high IT standards imposed by the Banco de la República. It should be noted that the authorized entities can use the services of other corporations that have the technical capacity to process the information required and/or to attend requests of the Interbank Clearing Service, to which end they must provide the Banco de la República with the information required in the operational processes. However, the authorized entity remains responsible to the Banco de la República, the other authorized entities, the users, and the judicial or administrative authorities for compliance with the obligations enumerated in the Interbank Clearing Service Norms. (CEMLA 2001)
In July 1998 the Banco de la República decided to implement a system based on real time gross settlement (RTGS) for all payment transactions transiting in the reserve accounts. The new system would also offer online access to account balances. Since then, all transactions lacking enough funds are automatically rejected. Although there are no queuing arrangements, the latter transactions are maintained within the system in a "pending activation" (pendiente por activar) mode, so that they can be reinserted in the system again as many times as necessary (process known as repique). (CEMLA 2001)
X. The system's governance arrangements should be effective, accountable and transparent. |
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There is no information publicly available that directly addresses this principle.
A. 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. |
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In 2005, the IMF pointed out that the Central Bank of Colombia (BRC) should seek clear legislative authority for the oversight of clearance and settlement systems. This would provide the central bank with the legal authority to ensure the development and operation of payment mechanisms that effectively contribute to the integrity, efficiency and safety of all financial markets and the operation of monetary policy. (FSSA Update 2005)
Moreover, the BRC should publicly disclose its objectives relating to all significant payment system matters along with its implementation strategies. To this end, the central bank should provide guidance to private sector organizations on the governance, day-by-day management, the diminishing of risks, and the policies that must be satisfied by all transactions. The BRC should continue to play an active role in leading the payments system reform in the country. (FSSA Update 2005)
Consistent with its responsibility as monetary authority and its role in preserving financial stability, and as direct provider of the large-value payment system and other low-value payment applications, the Banco de la República permanently oversees the payment systems, especially following the evolution of the risks present in them. This is done through the collection of information on payment flows and an ongoing dialogue with users and financial institutions. When the Central Bank directly provides payment services, it meets its regulatory and supervisory objectives, on one hand, by means of subscription by participants of bilateral contracts and, on the other, through cooperation with the private sector and moral suasion. The bilateral contracts explicitly establish all participant obligations and responsibilities and the conditions for their operations, service pricing, and sanctions for non-compliance. (CEMLA 2001 2001)
The Deposit Accounts (Cuentas de Depósito) service in national currency, which represents the large-value payment system, has been operating since 1992 and gives service to public and private corporations that need to handle operations with Banco de la República. To open a deposit account, it is necessary to sign a deposit contract with the Bank. Since July 1998, all payment instructions in this system are processed based on the principle of Real Time Gross Settlement System (RTGS), so that if the payer does not have enough funds in its account, the payment order is rejected. (CEMLA 2001 2001)
B. The central bank should ensure that the systems it operates comply with the Core Principles. |
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There is no information publicly available that directly addresses this principle.
In 2005, the IMF pointed out that the Central Bank of Colombia (BRC) should seek clear legislative authority for the oversight of clearance and settlement systems. This would provide the central bank with the legal authority to ensure the development and operation of payment mechanisms that effectively contribute to the integrity, efficiency and safety of all financial markets and the operation of monetary policy. (FSSA Update 2005)
C. 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. |
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There is no information publicly available that directly addresses this principle.
In 2005, the IMF pointed out that the Central Bank of Colombia (BRC) should seek clear legislative authority for the oversight of clearance and settlement systems. This would provide the central bank with the legal authority to ensure the development and operation of payment mechanisms that effectively contribute to the integrity, efficiency and safety of all financial markets and the operation of monetary policy. (FSSA Update 2005)
D. 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. |
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There is no information publicly available that directly addresses this principle.
Mechanisms exist for cooperation among the different authorities involved in the financial sector, namely the Central Bank, the banking supervisory authority, the securities regulator, and the deposit guarantee fund, to monitor the payments system. However, there is no formal legal framework for such cooperation. (CEMLA 2001 2001)
Colombia