Latin American Capital Markets

248 ANDREW HOOKplemented in countries throughout the world. In the context of evolving technologyand internationally endorsed core principles, more standardized RTGS systems arebeing developed for small and medium-size financial sectors. Hybrid payment systems,which retain elements of netting, but which are almost functionally equivalent toRTGS systems, are also being developed.These systems enhance the risk managementof deferred net settlement systems and seek to economize on the need for liquidityfor settlement purposes. One such system, EAD, has been developed in Germany,while the Clearing House Inter-Bank Payments System (CHIPS) is also moving towarda real-time hybrid net settlement system.The adoption of the Target payment system in Europe for the euro is the firstcase of an extensive cross-border payment system, although there have been severalprivately operated systems on a smaller scale.The Target system, introduced in 1999,makes use of a system of cross-collateral held at the central banks in order to facilitateliquidity management.The major private sector initiative, the CIS system, is progressingwith the formation of a bank and clearing organization, but the pilot has yetto be undertaken.The CIS is designed to settle both legs of foreign exchange transactionsfor the major currencies so as to reduce or eliminate the principal risk thatcurrently exists for most transactions.Derivatives exchanges are likely to be an integral part of the new financial infrastructure,as they have been developing rapidly, taking advantage of the new technologies.Although a few of the older style open outcry pits continue, particularly inChicago, the systems of choice are electronic trading systems. Eurex has demonstratedthe potency of electronic exchanges, and this is clearly the direction of the future.Tothe extent that derivatives exchanges are successful, and many are, there willbe an incentive for other clearing and settlement institutions to tap into this flow ofbusiness through mergers, acquisitions, or strategic partnerships.In the United States, the SEC has decided to reduce settlement risk by mandatingthat the settlement period for securities should be shortened to T+1 fromT+3.This decision will have a major impact on financial sector infrastructure over thenext five years, requiring major adjustments in most firms' internal operations as wellas measures common to the entire market Estimates of the cost for preparation forT+1 for the financial sector in the United States range from $8 billion to $9 billion,as new systems are introduced throughout the industry.The switch over is currentlyscheduled for mid-2004. Institutions and authorities in other countries are already examiningthe implications for their own markets, with the likelihood that a similar T+1settlement period will be introduced in many of them.The shift to a T+1 settlement period involves the whole market and the examinationof each step in transaction processing to reduce the time and chance oCopyright © by the Inter-American Development Bank. All rights reserved.For more information visit our website: www.iadb.org/pub