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Environmental Issues Influencing the Reform: the Constraints. Legal and Regulatory Framework . Maria Chiara Malaguti. Is « The Payments System » a legal concept?. « Payment » as execution of a (monetary) obligation Cash, bank money, ….

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Environmental Issues Influencing the Reform: the Constraints

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Environmental Issues Influencing the Reform: the Constraints

Legal and Regulatory Framework

Maria Chiara Malaguti

Is «The Payments System» a legal concept?

«Payment» as execution of a (monetary) obligation

  • Cash, bank money, …

«Payment instrument» as the vehicle to execute the tranfer of money

  • Banknotes, cheques, wire transfers, …

«Payment system» as the set of arrangements to provide the service of executing payment operations by an intermediary

  • Correspondent banking, clearing houses, .. .

Underlying obligation




Often the only recognized

Legal tender


Negotiable instrument

Wire transfer

Credit transfer

Debit transfer

Each payment instrument

has special features:


specific legislation

Payment by Fiduciary Money

Central Bank



Clearing House

Bank B

Bank A

Correspondent banking

(by agreement: agency)

Mandate to pay

Client B2

Client B1

Client A

«The Payments System» in law: a three-level situation

Operator to operator

Finality of payment by fiduciary money and circulation of instruments (as cheques)

Bank to client

Agency relation and limits on mandate to pay/receive payment; transparency

  • Bank to bank

  • Bi-multilateral netting: systemic risk; settlement and role of central bank as lender of last resort

… what about securities?

Stock Exchange


Broker A

Broker B

Order to buy


CCP (if any)

Funds transfer





Cash clearing

and settlement

Cash transfer into Central Bank money

Some legal barriers:netting and validity of contractual clauses

Bilateral netting and legal «compensation»

Bilateral netting and «current accounts»

Mutuality and bilateralism: «mutuality» if set-off on behalf of clients?

Multilateral netting and legal compensation

Lack of bilateralism and mutuality

Solution: netting by novation

Some legal barriers:netting by novation and central counterparty









Central counterparty

Central counterparty

liable towards each party

instead of counterparty?

Some legal barriers:finality of settlement, the «zero hour» and effects of bankruptcy

  • Retroactivity of bankruptcy effects

  • Par condicio of creditors

Some legal barriers:the transfer of ownership of securities by book entry

  • Need for transfer of paper-based document?

  • The question of centralized immobilization

«The Payments System»as a regulatory concept

Bank A

Bank B


Credit risk

Liquidity risk

Insolvency risk


Systemic risk

Final settlement by Central Bank



On the single

operator to




On the system

as such

to guarantee

global stability

Central banks

Supervisory authorities

Central banks

Financial markets

regulatory authorities

Tools for oversight


  • Moral suasion


  • Self-regulation

Banking or non-banking activity?

Institutional or functional approach?

Some regulatory issues:how to organize oversight?

Some regulatory issues:Consolidation or Competition?


Choice of providers

Centralised risk management

Reduction of systemic risk

Leave the market free to consolidate, but:

Fair and open access

Sufficient pressure for innovation

Sectors for legal and regulatory intervention

  • Recognition of fiduciary money

  • Regulation of specific instruments of payment according to specificities

  • Electronic transfers

  • Regulation of payment services (clearing/netting; settlement finality; zero hour)

  • Regulation: supervision and oversight

  • Consolidation and competition

  • Rules on conflict of laws

For tailor-made solutions according to country legal environment..

  • Order of priorities in legal and regulatory reform

  • With a global understanding of laws on property, contracts, corporate action, negotiable instruments, fiduciary relationships, financial institutions…

..with an eye to openess to foreign investments and inter-operability

  • Restrictions on the location

  • Barriers related to taxation

  • Rules on conflict of laws

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