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---

### INTRODUCTION — overview and purpose
- Expansion of trade and financial flows within Latin America and the Caribbean (LAC) can boost economic growth and mitigate risks from external shocks, including those linked to global fragmentation.
- LAC trades much less than other regions/countries with similar characteristics, particularly at the intra-regional level in both goods and services (IMF, 2023).
- High costs of cross-border payments contribute to trade underperformance.
- Modernization of payment systems could make cross-border transactions (including remittances) faster, cheaper, more transparent, and more inclusive, but new technologies cannot substitute for prudent and credible macroeconomic policies.
- The G20 Roadmap for Enhancing Cross Border Payments (endorsed October 2020; updated 2023) comprises 19 building blocks (BBs) and prioritizes:
  - (i) payment system interoperability;
  - (ii) legal, regulatory, and supervisory frameworks; and
  - (iii) cross-border data exchange and message standards.

### TRADE AND FINANCIAL LINKS IN LAC — diagnosis and empirical links
- Trade integration findings:
  - LAC's trade in goods and services with the world rose from around 30 percent of GDP in 1995 to 47 percent in 2019, but still lags other Emerging Markets and Developing Economies (EMDEs).
  - Intra-regional goods trade accounts for only 14 percent of LAC's total goods trade.
  - Primary commodities account for more than 40 percent of merchandise exports (except for Mexico).
  - WHD REO (2023): intra-regional trade is between 40 percent (for goods) and 50 percent (for services) lower than in regions with similar economic and geographical characteristics.
- Empirical link between payment costs and trade:
  - Box 1 (gravity model with remittance fees as proxy for cross-border transaction costs): a reduction in remittance fees by 1 percentage point would lead to an increase in trade by 15.2 percentage points (statistically significant at the 1 percent level).
- Complementary digital payments findings (Aguilar et al., memeo, 2023; panel of 90 economies, 2014-19):
  - A 1 percentage point increase in digital payments’ use is associated with:
    - 0.04 pp increase in growth rates of total factor productivity.
    - 0.10 pp increase in growth rates of GDP per capita.
    - 0.06 pp reduction in the share of informal unemployment.
  - Implication: Digitalization of payment systems and improvements in cross-border payments can enhance financial inclusion, access to credit, and formalization.

### EXISTING REGIONAL PAYMENT ARRANGEMENTS AND LESSONS
- General characteristics:
  - Regional clearing mechanisms between central banks have been used to settle net balances, allowing day-to-day international payments while central banks extend credit and settle (in US dollars) over a settlement period.
  - Arrangements differ in settlement period length, invoicing currencies, and provisions for debt repayments.
  - Although use of these arrangements has declined, their operational characteristics offer lessons for new designs.
- Historical and selected contemporary arrangements:
  - Central American Clearing House (CACH): Start 1961, Termination 1984; collapsed as sovereign risks built up.
  - Caribbean Community Multilateral Clearing Facility (CMCF): Start 1977, Termination 1983; collapsed amid balance of payments support use and credit-limit breaches.
  - Reciprocal Payments and Credits Agreement (CCR): Start 1965, agreement reformed 1982, ongoing (but usage declined).
  - Local Currency Payments System (SML): Start 2008, ongoing.
  - Interconnected System of Payments (SIP): Start 2011, ongoing.
  - Unified System of Regional Payments Compensation (SUCRE): Start 2009, ongoing (Ecuador exited SUCRE in 2018).
- Eastern Caribbean Currency Union (ECCU) experience:
  - Implemented integrated systems for retail (ECACH) and wholesale (RTGS) transactions.
  - Cash and checks still represent 80 percent of ECCU retail payment methods.
  - Customer charges for credit/debit cards and account transfers stand at 4-6 percent per transaction (global average reported at 1-2 percent).
  - ECCB initiated a pilot project for a Central Bank Digital Currency (CBDC); ECACH is investigating a fast payment system.
- CARICOM pilot using PAPSS:
  - November 2023: CARICOM central bank governors announced a pilot for Caribbean intraregional payments using PAPSS (Pan-African Payment and Settlement System), facilitated by Afreximbank.
  - The pilot is slated for rollout at the end of 2024 and aims to support local-currency cross-border payments within the Caribbean and between the Caribbean and Africa.

### RECIPROCAL PAYMENTS AND CREDITS AGREEMENT (CCR) — design, evolution, risks
- Origins and objectives:
  - CCR origins date to 1965; the 1982 agreement reformed the 1965 system and was signed among twelve ALADI members.
  - Main objectives: stimulate financial relations among member countries, facilitate expansion of reciprocal trade, and conserve hard currency.
- Operational design and risks:
  - Relies on credit lines covering daily balances between central banks over a four-month period; net balances settled in US dollars at period end.
  - Offers temporary liquidity benefits but risks buildup of sovereign arrears; net creditors assume risk of delays/default at end of the four-month period.
- Evolution and decline:
  - By late 1970s, more than three fourths of intraregional trade used CCR; by late 1980s, close to 91 percent of intra-regional import transactions went through CCR.
  - Use fell rapidly in the 1990s due to capital account liberalization, deeper FX markets, improved reserve adequacy, and reluctance to assume credit risk.
  - Settlements before the four-month period increased from less than 10 percent at end of 1980s to more than 90 percent in mid-1990s.
  - Brazilian central bank announced its exit from CCR in 2019 citing low usage and buildup of public sector credit risks.

### LOCAL CURRENCY PAYMENTS SYSTEM (SML) — purpose, mechanics, usage
- Purpose and design:
  - SML settles international payments within Mercosur in local currencies; bilateral agreements prescribe authorized transactions and operational details.
  - Original Brazil–Argentina agreement signed in 2008; subsequent bilateral agreements: Brazil–Uruguay 2014, Argentina–Uruguay 2015, Paraguay–Uruguay 2015, Brazil–Paraguay 2018, Argentina–Paraguay 2021.
  - As of 2023, most bilateral agreements updated to include both goods and services.
  - Primary goals: deepen Brazilian Real–Argentinian Peso market, reduce costs for SMEs, incentivize private sector financial products to deepen local-currency markets.
- Operational mechanics:
  - Utilizes trade invoicing in local currency and netting agreements with short settlement periods.
  - Exports invoiced in both local currencies in most agreements; exception: Brazil–Argentina SML where export values are invoiced only in the exporter’s currency.
  - Exporter receives payment in their local currency; importer pays in their local currency.
  - Exchange rate conversions use a daily reference exchange rate (“SML rate”) determined by central banks.
  - Central banks net SML transactions in US dollars daily; no extended settlement period, limiting sovereign exposure (some credit risks remain).
- Usage patterns and limitations:
  - SML usage rose sharply after introduction and increased steadily until 2013 when it began to stagnate; recent years show volumes increased further with heterogeneity across pairs.
  - SML usage as a share of all goods exports:
    - Brazil: hovered around 5 percent.
    - Uruguay and Paraguay: even lower than Brazil.
  - SME participation in SML (De Barra (2020)):
    - Brazil–Argentina operations: 10 percent.
    - Brazil–Uruguay operations: a bit below 25 percent.
  - Reasons for low SML usage include:
    - Preference for US dollars to hedge local currency instability and match dollar-denominated cost structures.
    - Commodity trade predominance priced in US dollars.
    - Import controls and parallel exchange rates in Argentina reducing SML attractiveness.
    - Limited awareness of export financing/options (e.g., Letters of Credit) for SML exporters and high interest rates in Brazil making BRL-priced financing costly when receivables are not USD-denominated.
    - Lack of export financing is a major obstacle for SMEs.

### INTERCONNECTED SYSTEM OF PAYMENTS (SIP) — overview and adoption
- Overview:
  - SIP is a payment system among Central American Monetary Council (CMCA) members; began operations in 2011 to modernize and harmonize CMCA payment systems and promote regional financial integration.
  - Links central banks’ RTGS systems and uses the US dollar for its settlement accounts.
  - SIP links existing RTGS systems through SWIFT messaging; design similar to TARGET but uses a foreign currency (US dollar).
  - Participating financial institutions must maintain a settlement account in US dollars.
- Usage and adoption:
  - Despite a small pickup in recent years, SIP usage has remained relatively low.
  - Possible reasons: limited incentives for banks to use SIP versus correspondent banking channels and lack of awareness among households and corporates.

### Good practices for cross-border payment arrangements (ten recommendations)
- 1. Standardization and interoperability (e.g., ISO 20022).
- 2. Regulatory compliance, including AML measures.
- 3. Swift and efficient settlement, leveraging real-time systems and technologies (blockchain, digital monies, fast payment systems).
- 4. Minimizing settlement risks with clear rules on final settlement timing and unwinding limits.
- 5. Cost efficiency, including adoption of cost-effective technologies.
- 6. Customer authentication and security (strong authentication, encryption).
- 7. Transparency and disclosure on fees, exchange rates, and processing times.
- 8. Adequate incentives for private sector collaboration and innovation; Brazil’s Pix cited as a design that mandated participation and enabled private-sector product innovation.
- 9. Financial inclusion and awareness to broaden access to cross-border payment services.
- 10. Continuous innovation through pilots using smart contracts and artificial intelligence.

### Potential cross-border payment arrangements and systems — interlinking and multilateral platforms
- Interlinking Payment Systems:
  - Concept: leverage APIs and ISO 20022 to allow PSPs from different countries to transact without direct participation in each other’s systems.
  - Four models: single access point, bilateral link, hub and spoke, common platform (BIS 2022b).
  - Key challenges: harmonizing API protocols and ISO 20022 implementations; governance and oversight across jurisdictions; currency conversion model choice given high exchange rate volatility in LAC.
  - Examples:
    - Directo a Mexico (2004): bilateral link between U.S. Fed ACH and Banco de México; payments initiated via FedACH in US dollars, transferred to Banco de México, posted to receiver’s account in pesos on the next banking day; fee of US$0.67 per transaction; no maximum amount per transaction.
    - India–Singapore FPS interlinking (February 2023): links India’s UPI and Singapore’s PayNow; users can transfer up to the equivalent of about US$725 daily using UPI ID, mobile number, or virtual payment address.
    - Project Nexus: global initiative proposing connection of fast payment systems via a single API connection to the Nexus platform.
  - Governance: G20 prioritizes governance and oversight of FPS interlinking; BIS CPMI interim report (October 2023) highlights needs for strategic alignment, coherence, scalability, business viability, inclusiveness, and multi-jurisdictional oversight design.
- Multilateral Platforms:
  - Definition: multi-jurisdictional platforms allowing PSPs from several jurisdictions to participate under cooperative governance and a single rulebook.
  - Existing LAC examples:
    - Eastern Caribbean Central Bank RTGS common platform for the Eastern Caribbean dollar.
    - SIP as a hub-and-spoke arrangement settling transactions across RTGS systems in Central America and the Dominican Republic in US dollars.
  - Box 2 describes currency conversion arrangements and PvP mechanisms.

### BOX 2 — Currency conversion arrangements, PvP, mCBDC, and XC platforms
- Types of currency conversion arrangements:
  - Single-currency, multi-currency, cross-currency arrangements.
- Payment versus Payment (PvP) mechanism:
  - PvP ensures final transfer in one currency occurs if and only if final transfer in another currency takes place (BIS, 2012).
  - PvP reduces funding costs through netting; existing arrangements mainly for wholesale payments; efforts ongoing to expand 24/7 settlements and include emerging market currencies.
- PvP in LAC example:
  - Brazilian B3 FX clearinghouse (2002): private solution limited to domestic participants; net settlement in Brazilian real and U.S. dollars for spot transactions; supported by exposure limits, margins, default funds, and loss-sharing agreements.
- mCBDC arrangements and mBridge:
  - mBridge pilot: launched by Hong Kong Monetary Authority, Bank of Thailand, Central Bank of the UAE, Digital Currency Research Institute of the People’s Bank of China, and BIS Innovation Hub in Hong Kong.
  - Pilot activity: 20 commercial banks carried out over US$22 million worth of payment and FX PvP transactions for corporate clients using CBDCs issued via mBridge.
  - Demonstrated practical application and highlighted policy, legal, and regulatory issues, including direct access to central bank funds, data privacy, and governance.
  - Policy implication: need for international cooperation to coordinate and integrate cross-border functionalities at an early stage.
- Exchange and Contracting (XC) Platforms:
  - Concept: cross-border and multicurrency contracting via a trusted single ledger (Adrian et al., 2022).
  - Uses ‘Certificates of Escrow’ (CEs) issued by central banks against reserves in a one-to-one ratio to eliminate intermediary risks and interoperability issues.
  - Project Agorá (BIS, April 2024): launched with seven central banks and private sector partners to explore tokenization, programmable platforms, and smart contracts for international payments.
- Implications for LAC payment infrastructure and CBDC rollout:
  - Several central banks enhanced wholesale payment systems and introduced retail Fast Payment Systems (FPS).
  - Retail FPS examples and metrics:
    - Pix (Brazil, November 2020):
      - Access for more than 700 banks and non-banks licensed by the BCP.
      - No system-imposed transaction value limit; P2P and P2G payments are free.
      - Merchant transaction cost averages about 25 basis points (compared to 2.2 percent charged by credit cards and 1.1 percent charged by debit cards).
      - Coverage: 85 percent of Brazil’s adult population and 15 million firms.
      - Brought 70 million newcomers to electronic transfers.
    - CoDi (Mexico, 2019): open to financial institutions that are members of Banco de Mexico’s RTGS (SPEI); use free for individuals and merchants.
    - Paraguay’s SIPAP (2013) and SPI (2022):
      - SPI enables instant availability 24/7/365 without fees, aliases addressing, multiple payment instruments, exclusive local currency operations with maximum value of PYG 5 million (about USD 700).
      - SPI uses deferred settlement with participants’ reserve accounts mirroring RTGS accounts; access linked to RTGS participation (24 banks and non-bank financial institutions).
      - By December 2023, weekend operations represented 18 percent of the week’s operations and those held between 6pm and 6am about 24 percent of the day’s transactions.
  - Cross-border integration developments:
    - Fintech in Argentina enables retailers to use Pix in reals at an exchange rate determined at purchase.
    - A card processor in Paraguay (Bancard) started accepting Pix as a means of payment in early 2024; example flow: Brazilian client pays with Pix → Brazilian bank debits → Brazilian bank transfers value to a Paraguayan bank (P2P).
  - CBDC rollout status in LAC:
    - Bahamas: Sand Dollar launched October 2020; issuance/adoption less than 0.3 percent of currency in circulation.
    - Jamaica: Retail CBDC rolled out in 2022; wallet providers ensure data protection and privacy; limited to domestic transactions in Jamaican Dollar.
    - ECCU (Dcash): completed pilot; preparing Dcash 2.0 over an 18-24 month testing period.
    - Brazil (BCB): Drex wholesale CBDC platform targeted for late 2024 or early 2025 with pilots: Lift Challenge and Pilot Drex.

### NEXT STEPS — principles, regional options, and policy recommendations
- Key principles and recommended actions:
  - Establish rules for cross-border governance (accountability of risk decisions and decision-making power).
  - Harmonize regulatory frameworks to minimize legal complexities.
  - Build cross-border payment arrangements in line with standards issued by industry and public standard setting bodies, including common messaging standards and protocols.
  - Facilitate collaboration on interoperability of digital financial assets by adopting a common technology stack.
  - Foster collaboration among central banks, financial institutions, and PSPs.
  - Embrace digital technologies and fintech solutions; FuSSE project by the IDB and BIS aims to assist countries in acquiring necessary technologies.
  - Implement robust risk management practices and common security standards and protocols.
  - Promote financial inclusion and broader accessibility through awareness campaigns and educational initiatives.
  - Implement mechanisms for continuous monitoring and evaluation of regional cross-border payment arrangements.
  - If capital flow measures are justified, ensure integration into cross-border payment systems and new technologies does not create loopholes.
- Design considerations:
  - No one-size-fits-all: undertake cost-benefit analysis to decide optimal solutions and phasing (BIS, 2022c).
  - Consider focusing on subregions within LAC (the Caribbean, Central America and Mexico, Mercosur) to identify tailored pathways.
  - Build arrangements consistent with standards (e.g., ISO20022) and common messaging standards and protocols.
- Regional-specific options:
  - Caribbean — dual approach:
    - Option 1: Interlink wholesale payment systems (e.g., ECCB-RTGS) for larger transactions; manage counterparty/liquidity risks via limits or guarantee funds.
    - Option 2: Interlink retail CBDCs for smaller cross-border transactions; requires legal basis, access conditions, transaction limits, and interoperability coordination.
  - Mercosur:
    - Interlink fast payment systems given proliferation of retail FPS and Pix use in border areas.
    - Expand SML beyond intra-industry operations of large regional firms to allow higher value cross-border transactions.
    - Removal of substantial balance of payments’ restrictions in Argentina would support these efforts.
  - Central America and SIP:
    - SIP is a good basis for wholesale transactions across borders; explore including payments/settlements in local currencies and bilateral linking with Mexico and the U.S.
- Role of Open Finance and API standardization:
  - Wider application of Open Finance regulations can streamline cross-border payments.
  - Adoption is gaining traction in Brazil, Chile, Colombia, Ecuador, and Mexico.
  - Cross-border Open Finance can simplify and automate Know-Your-Customer processes, requiring aligned regulatory standards and standardized API protocols.

### SUMMARY — expected benefits and cautions
- New technologies cannot substitute for sound and credible macroeconomic policies, but strategic use can significantly lower transaction costs and times for LAC countries.
- Improvements in economic efficiency could enhance regional and global trade connections.
- Adoption of innovative cross-border payment systems and comprehensive Open Finance regulations could enable individuals and businesses in LAC to transfer payments and financial assets more easily in any amount, at any time and through any device.
- An integrated approach promises a more interconnected payment system that facilitates trade and an efficient regional financial landscape.

*Source: IMF Working Paper — Cross-Border Payments Integration in Latin America and the Caribbean (INTRODUCTION and early sections).*

### INTRODUCTION _____________________________________________________________________ 3

### INTRODUCTION

### Overview and purpose
- Expansion of trade and financial flows within Latin America and the Caribbean (LAC) can boost economic growth and mitigate risks from external shocks, including those linked to global fragmentation.
- LAC trades much less than other regions/countries with similar characteristics, particularly at the intra-regional level in both goods and services (IMF, 2023).
- High costs of cross-border payments contribute to trade underperformance.
- The paper argues that modernization of payment systems could make cross-border transactions (including remittances) faster, cheaper, more transparent, and more inclusive, but stresses that new technologies cannot substitute for prudent and credible macroeconomic policies.
- The G20 Roadmap for Enhancing Cross Border Payments (endorsed October 2020; updated 2023) comprises 19 building blocks (BBs) and prioritizes: (i) payment system interoperability; (ii) legal, regulatory, and supervisory frameworks; and (iii) cross-border data exchange and message standards.

### Key analytical thrusts
- Provides an overview of intraregional trade and financial links in LAC, existing regional payment arrangements/initiatives, observed barriers to payment systems’ integration, and potential solutions explored in other regions (e.g., interlinking payment systems, multilateral platforms).
- Evaluates feasibility of introducing those solutions in LAC in light of recent efforts to modernize payment systems.

---

### TRADE AND FINANCIAL LINKS IN LATIN AMERICA AND THE CARIBBEAN

### Trade integration diagnosis
- LAC's trade in goods and services with the world rose from around 30 percent of GDP in 1995 to 47 percent in 2019, but still lags other Emerging Markets and Developing Economies (EMDEs).
- Intra-regional goods trade accounts for only 14 percent of LAC's total goods trade—considerably lower than Europe and Central Asia and East Asia and the Pacific and similar to Sub-Saharan Africa.
- Primary commodities account for more than 40 percent of merchandise exports (except for Mexico).
- WHD REO (2023) shows intra-regional trade is between 40 percent (for goods) and 50 percent (for services) lower than in regions with similar economic and geographical characteristics, with underperformance smaller in Mercosur.

### Empirical link between payment costs and trade
- High cross-border payment fees are identified as a specific and additional factor limiting trade integration in LAC.
- Box 1 (gravity model with remittance fees as proxy for cross-border transaction costs) results:
  - A reduction in remittance fees by 1 percentage point would lead to an increase in trade by 15.2 percentage points (statistically significant at the 1 percent level).

### Complementary findings on digital payments
- Aguilar et al. (mimeo, 2023) (panel of 90 economies, 2014-19) finds:
  - A 1 percentage point (pp) increase in digital payments’ use is associated with increases in growth rates of total factor productivity of 0.04 pp and in growth rates of GDP per capita of 0.10 pp.
  - It would lead to a 0.06 pp reduction in the share of informal unemployment.
- Implication: Digitalization of payment systems and improvements in cross-border payments can enhance financial inclusion, access to credit, and formalization.

---

### EXISTING REGIONAL PAYMENT ARRANGEMENTS AND INITIATIVES IN LAC

### General characteristics and lessons
- Regional clearing mechanisms between central banks have been used to settle net balances, allowing day-to-day international payments while central banks extend credit and settle (in US dollars) over a settlement period.
- Arrangements differ in settlement period length, invoicing currencies, and provisions for debt repayments.
- Although use of these arrangements has declined, their operational characteristics offer lessons for new designs.

### Historical and contemporary arrangements (selected)
- Central American Clearing House (CACH): Start 1961, Termination 1984.
  - Worked well for almost two decades; collapsed as sovereign risks built up (Nicaragua's incapacity to settle debts), suspension in 1992.
- Caribbean Community Multilateral Clearing Facility (CMCF): Start 1977, Termination 1983.
  - Collapsed as members used it as Balance of Payments support; six-month settlement period and credit-limit breaches contributed to failure.
- Reciprocal Payments and Credits Agreement (CCR): Start 1965, agreement reformed 1982, ongoing.
- Local Currency Payments System (SML): Start 2008, ongoing.
- Interconnected System of Payments (SIP): Start 2011, ongoing.
- Unified System of Regional Payments Compensation (SUCRE): Start 2009, ongoing (note: Ecuador exited SUCRE in 2018).

### Eastern Caribbean Currency Union (ECCU) experience
- Implemented integrated systems for retail (ECACH) and wholesale (RTGS) transactions.
- Cash and checks still represent 80 percent of ECCU retail payment methods.
- Customer charges for credit/debit cards and account transfers stand at 4-6 percent per transaction (global average reported at 1-2 percent).
- ECCB initiated a pilot project for a Central Bank Digital Currency (CBDC); ECACH is investigating a fast payment system.

### CARICOM pilot using PAPSS
- In November 2023, CARICOM central bank governors announced a pilot for Caribbean intraregional payments using PAPSS (Pan-African Payment and Settlement System), facilitated by Afreximbank.
- The pilot is slated for rollout at the end of 2024 and aims to support local-currency cross-border payments within the Caribbean and between the Caribbean and Africa.

---

### RECIPROCAL PAYMENTS AND CREDITS AGREEMENT (CCR)

### History and objectives
- CCR origins date to 1965; the 1982 agreement reformed the 1965 system and was signed among the twelve ALADI members (Argentina, Bolivia, Brazil, Chile, Colombia, Dominican Republic, Ecuador, Mexico, Paraguay, Peru, Uruguay and Venezuela).
- Main objectives: stimulate financial relations among member countries, facilitate expansion of reciprocal trade, and conserve hard currency.

### Operational design and risks
- Relies on credit lines covering daily balances between central banks over a four-month period; net balances settled in US dollars at period end.
- Offers temporary liquidity benefits but risks buildup of sovereign arrears; net creditors assume risk of delays/default at end of the four-month period.
- Amendments over time tried to mitigate credit risks, but reliance on credit lines remains core.

### Evolution and decline
- CCR use grew strongly in first three decades; by late 1970s, more than three fourths of intraregional trade used CCR; by late 1980s, close to 91 percent of intra-regional import transactions went through CCR.
- Use fell rapidly in the 1990s due to capital account liberalization, deeper FX markets offering competitive terms, improved reserve adequacy, and central banks’ reluctance to assume credit risk.
- Settlements before the four-month period increased from less than 10 percent at end of 1980s to more than 90 percent in mid-1990s.
- Brazilian central bank announced its exit from CCR in 2019 citing low usage and buildup of public sector credit risks.

---

### LOCAL CURRENCY PAYMENTS SYSTEM (SML)

### Purpose and design
- SML settles international payments within Mercosur in local currencies; bilateral agreements prescribe authorized transactions and operational details (these differ across pairs).
- Original agreement between Brazil and Argentina signed in 2008; subsequent bilateral agreements: Brazil with Uruguay in 2014, Argentina with Uruguay in 2015, Paraguay with Uruguay in 2015, Brazil with Paraguay in 2018, and Argentina with Paraguay in 2021. As of 2023, most bilateral agreements updated to include both goods and services.
- Primary goals: deepen Brazilian Real–Argentinian Peso market, reduce costs for SMEs, and incentivize private sector financial products to deepen local-currency markets.

### Operational mechanics
- Utilizes trade invoicing in local currency and netting agreements with short settlement periods.
  - Exports are invoiced in both local currencies in most agreements; exception: Brazil–Argentina SML where export values are invoiced only in the exporter’s currency.
  - Exporter receives payment in their local currency; importer pays in their local currency.
- Exchange rate conversions use a daily reference exchange rate (“SML rate”) determined by central banks; SML relies on interbank transactions and offers a competitive daily exchange rate.
- Central banks net SML transactions in US dollars daily; no extended settlement period, limiting sovereign exposure (some credit risks remain, e.g., operational continuity on non-working days).

### Usage patterns
- SML usage rose sharply after introduction and increased steadily until 2013 when it began to stagnate.
- Recent years show volumes increased further (context implies heterogeneity and asymmetry across pairs; detailed numeric flows are presented in the source figure).

---

### POLICY INSIGHTS AND IMPLICATIONS FROM THE INTRODUCTION AND EARLY SECTIONS

- Modernization of domestic payment systems and rollout of retail and wholesale innovations (including CBDCs and fast payment systems) can reduce cross-border transaction costs and support trade integration.
- New payment technologies should be implemented alongside prudent macroeconomic and external stability policies to prevent disruptions in cross-border flows.
- Regional arrangements that reduce hard-currency needs (e.g., invoicing in local currencies, short settlement netting) can support trade but must be designed to limit sovereign credit risk exposure.
- Interoperability, strengthened legal/regulatory frameworks, and cross-border data/message standards (aligned with the G20 19 BBs and its three priority themes) are central to enhancing cross-border payments in LAC.

*Source: IMF Working Paper — Cross-Border Payments Integration in Latin America and the Caribbean (INTRODUCTION and early sections).*

### introduction of Paraguay and Uruguay in the

### Introduction of Paraguay and Uruguay in the mechanism

### Small and Medium Local (SML) usage: patterns and limitations
- Bulk of flows consist of exports from Brazil to Argentina; trade with Uruguay and Paraguay is more balanced.
- SML usage as a share of all goods exports:
  - Brazil: hovered around 5 percent.
  - Uruguay and Paraguay: even lower than Brazil.
- SME participation in SML (De Barra (2020)):
  - Brazil–Argentina operations: 10 percent.
  - Brazil–Uruguay operations: a bit below 25 percent.
- No notable increase in local currency invoicing following SML introduction (referenced as Figure 4).

- Reasons for low SML usage:
  - Preference for US dollars to hedge local currency instability and match dollar-denominated cost structures (e.g., US dollar financial liabilities).
  - Commodity trade predominance, which is primarily priced in US dollars.
  - Import controls and parallel exchange rates in Argentina, including stringent import financing requirements and preferential exchange rate regimes (e.g., agricultural exporters partially allowed to use the more depreciated parallel exchange rate), reducing SML attractiveness.
  - Availability of letters of credit and export financing:
    - Some SML exporters in Brazil were unaware whether they can obtain credit/counterparty insurance (e.g., Letter of Credit) from commercial banks, indicating limited program awareness and limited bank incentives to create SML-linked products.
    - High interest rates in Brazil lead exporters to use pre- and post-shipment financing programs priced in BRL that assume repayment based on USD-denominated receivables; absence of USD receivables makes such financing more expensive.
    - Lack of export financing is a major obstacle for SMEs lacking internal resources to finance trade operations.

### Interconnected System of Payments (SIP)
- Overview:
  - SIP is a payment system among Central American Monetary Council (CMCA) members.
  - Began operations in 2011 with goals to modernize and harmonize CMCA payment systems and promote regional financial integration.
  - Links central banks’ Real-Time Gross Settlement (RTGS) systems and uses the US dollar for its settlement accounts.
  - SIP links existing RTGS systems through SWIFT messaging; design similar to TARGET (launched in 1999) but uses a foreign currency (US dollar) rather than a common participant currency.
  - Participating financial institutions must maintain a settlement account in US dollars.
- Usage and adoption:
  - Despite a small pickup in recent years, SIP usage has remained relatively low.
  - Possible reasons include limited incentives for banks to use SIP versus their correspondent banking channels and lack of awareness among households and corporates.

### Good practices for cross-border payment arrangements
- Ten recommended practices:
  1. Standardization and interoperability (e.g., ISO 20022).
  2. Regulatory compliance, including AML measures.
  3. Swift and efficient settlement, leveraging real-time systems and technologies (blockchain, digital monies, fast payment systems).
  4. Minimizing settlement risks with clear rules on final settlement timing and unwinding limits.
  5. Cost efficiency, including adoption of cost-effective technologies.
  6. Customer authentication and security (strong authentication, encryption).
  7. Transparency and disclosure on fees, exchange rates, and processing times.
  8. Adequate incentives for private sector collaboration and innovation; Brazil’s Pix cited as a design that mandated participation and enabled private-sector product innovation.
  9. Financial inclusion and awareness to broaden access to cross-border payment services.
  10. Continuous innovation through pilots using smart contracts and artificial intelligence.

### Potential cross-border payment arrangements and systems
- Overview: focus on interlinking payment systems and multilateral platforms (including mCBDC and XC payment platforms).

- A. Interlinking Payment Systems
  - Concept: leverage APIs and ISO 20022 to allow Payment Service Providers (PSPs) from different countries to transact without direct participation in each other’s systems.
  - Four models: single access point, bilateral link, hub and spoke, common platform (BIS 2022b).
  - Key challenges: harmonizing API protocols and ISO 20022 implementations; governance and oversight across jurisdictions; currency conversion model choice given high exchange rate volatility in LAC.
  - Examples:
    - Directo a Mexico (established in 2004): bilateral link between U.S. Fed ACH and Banco de México; payments initiated via FedACH in US dollars, transferred to Banco de México, posted to receiver’s account in pesos on the next banking day; fee of US$0.67 per transaction; no maximum amount per transaction.
    - India–Singapore FPS interlinking (February 2023): links India’s UPI and Singapore’s PayNow; users can transfer up to the equivalent of about US$725 daily using UPI ID, mobile number, or virtual payment address via bank accounts or e-wallets; participating banks and non-bank firms facilitate inward and outward remittances; claims to use scalable cloud-based infrastructure with non-bank participation.
    - Project Nexus: global initiative proposing connection of fast payment systems via a single API connection to the Nexus platform, enabling access to all other countries in the network without custom bilateral connections.
  - Governance: G20 has prioritized governance and oversight of Fast Payment Systems interlinking; BIS CPMI interim report (October 2023) highlights needs for strategic alignment, coherence, scalability, business viability, inclusiveness, and multi-jurisdictional oversight design.

- B. Multilateral Platforms
  - Definition: multi-jurisdictional platforms allowing PSPs from several jurisdictions to participate, avoiding reliance on multiple intermediaries; require cooperative governance, a single rulebook, extended operating hours, and AML/CFT compliance arrangements.
  - Existing examples in LAC:
    - Eastern Caribbean Central Bank RTGS common platform for the Eastern Caribbean dollar (wholesale common platform within a currency union).
    - SIP (Central American Monetary Council) as a hub-and-spoke arrangement settling transactions across RTGS systems in Central America and the Dominican Republic in US dollars.
  - Note: Box 2 (in source) describes alternative currency conversion arrangements and the Payment versus Payment (PvP) mechanism for settling cross-border transactions.

*Source: IMF Working Paper excerpt — Cross-Border Payments Integration in Latin America and the Caribbean*

### Box 2. Currency Conversion Arrangements and PvP Mechanism

### Box 2. Currency Conversion Arrangements and PvP Mechanism

### Types of currency conversion arrangements
- Single-currency: one currency is used for settlement with conversions done by a PSP.
- Multi-currency: transactions across different countries or currencies are processed in parallel.
- Cross-currency: payer and payee transact in different currencies, often incorporating FX conversion mechanisms like PvP (Payment versus Payment) such as in the case of Directo a Mexico.

### Payment versus Payment (PvP) mechanism
- Definition: PvP ensures that the final transfer of a payment in one currency occurs if and only if the final transfer of a payment in another currency or currencies takes place (BIS, 2012).
- Characteristics:
  - Can be centralized or decentralized.
  - Aims to reduce funding costs through netting.
  - Current PvP arrangements are mostly for wholesale payments and vary in operational hours and currency inclusivity.
  - Ongoing efforts to expand 24/7 settlements and include emerging market currencies, with potential extension into retail payments.

### PvP in Latin America and the Caribbean (LAC)
- Example: Brazilian B3 FX clearinghouse (2002)
  - Private solution limited to domestic participants and regulated by the Central Bank of Brazil (BCB).
  - Operates as a central clearing with net settlement only in Brazilian real and U.S. dollars for spot transactions between banks and some other financial institutions (but not non-bank PSPs).
  - Supported by explicit exposure limits, margins, default funds, and loss-sharing agreements.

### Multi-Central Bank Digital Currency (mCBDC) arrangements and mBridge
- Purpose: Enhance cross-border payments through wholesale and retail CBDCs, leveraging central banks’ established payment infrastructures (BIS, 2022c).
- mBridge pilot:
  - Launched by Hong Kong Monetary Authority, the Bank of Thailand, the Central Bank of the United Arab Emirates, the Digital Currency Research Institute of the People’s Bank of China, and the BIS Innovation Hub in Hong Kong.
  - The mBridge ledger connects central banks with financial entities directly.
  - Pilot activity: 20 commercial banks from Hong Kong SAR, Mainland China, the UAE, and Thailand carried out over US$22 million worth of payment and FX PvP transactions for their corporate clients using CBDCs issued via mBridge.
  - Demonstrated practical application and highlighted policy, legal, and regulatory issues, including direct access to central bank funds, data privacy, and governance.
  - Underscored legal complexities introduced by a new digital currency and the multi-CBDC platform, indicating need for regulatory adjustments.
  - As mBridge moves toward a minimum viable product (MVP) and a production-ready system, it continues to refine and address these challenges.
- Policy implication:
  - Confirms need for international cooperation to coordinate and integrate cross-border functionalities at an early stage.
  - Central banks have timely opportunities to decide on cross-border access (i.e., by foreigners/nonresidents to domestic wholesale or retail CBDC) and interoperability between different CBDCs (BIS 2022c).

### Exchange and Contracting (XC) Platforms
- Conceptual model to guide cross-border and multicurrency contracting arrangements via a trusted single ledger (Adrian et al., 2022).
- Objectives:
  - Improve multilateral transactions.
  - Centralize payment and settlement.
  - Reduce FX costs.
  - Leverage smart contracts and cryptographic methods for enhanced privacy.
- Key design features:
  - Uses ‘Certificates of Escrow’ (CEs) issued by central banks against reserves in a one-to-one ratio to eliminate intermediary risks and interoperability issues.
  - Settlements occur by transferring CEs between accounts and aim for instant or assured future settlements through PvP and DvP mechanisms.
  - Allows participation by banks and non-bank institutions across jurisdictions without requiring changes to domestic systems.
- Project Agorá (BIS, April 2024):
  - Launched with seven central banks and private sector partners.
  - Explores tokenization, programmable platforms, and smart contracts to improve international payments by integrating tokenized central and commercial bank deposits within a unified ledger.
  - Emphasizes testing under real-world operational and regulatory conditions to enhance transaction speed, integrity, and cost-efficiency while maintaining system integrity.

### Implications for LAC payment infrastructure and CBDC rollout
- Recent domestic payment modernization in LAC:
  - Several central banks enhanced wholesale payment systems (examples and dates listed in source).
  - Introduction of retail Fast Payment Systems (FPS) enabling retail customers to send/receive payment transfers in a few seconds and 24/7 in some cases.
- Retail FPS and outcomes (selected examples and metrics):
  - Pix (Brazil, November 2020):
    - Access for more than 700 banks and non-banks licensed by the BCP.
    - Real-time payments via mobile interface using phone number or QR code.
    - No system-imposed transaction value limit (participants can set individual limits).
    - P2P and P2G payments are free; merchant transaction cost averages about 25 basis points (compared to 2.2 percent charged by credit cards and 1.1 percent charged by debit cards).
    - Coverage: 85 percent of Brazil’s adult population and 15 million firms.
    - Enhanced financial inclusion by bringing 70 million newcomers to electronic transfers.
  - CoDi (Mexico, 2019):
    - Open only to financial institutions that are members of Banco de Mexico’s RTGS (SPEI); third parties can develop payment-request applications.
    - Use is free for individuals and merchants.
  - Paraguay’s SIPAP (2013) and SPI (2022):
    - SIPAP supports wholesale and retail RTGS business hours operations.
    - SPI launched in 2022 enables instant availability 24/7/365 without fees, easy addressing (aliases), multiple payment instruments, exclusive local currency operations with maximum value of PYG 5 million (about USD 700).
    - SPI uses a deferred settlement model with participants’ reserve accounts mirroring RTGS accounts to mitigate liquidity risk.
    - Access linked to participation within the RTGS system (SIPAP), i.e., 24 banks and non-bank financial institutions.
    - By December 2023, weekend operations represented 18 percent of the week’s operations and those held between 6pm and 6am about 24 percent of the day’s transactions.
- Cross-border integration developments:
  - Fintech in Argentina enables retailers to use Pix in reals at an exchange rate determined at purchase.
  - A card processor in Paraguay (Bancard), a technical participant in SIPAP, started accepting Pix as a means of payment in early 2024; example flow: Brazilian client pays with Pix → client’s Brazilian bank debits → Brazilian bank transfers value to a Paraguayan bank (P2P).
- CBDC rollout status in LAC:
  - Many central banks exploring retail or wholesale CBDCs (2022 regional survey in Appendino et al. (2023) referenced in source).
  - Bahamas: Sand Dollar officially launched October 2020; holding limits in monthly transactions; exclusively for domestic purposes with limited foreign-tourist accounts; issuance/adoption less than 0.3 percent of currency in circulation.
  - Jamaica: Retail CBDC rolled out in 2022 to promote financial inclusion; relies on central bank’s RTGS; held in CBDC wallets issued by banks/authorized PSPs; does not earn interest; exchangeable one-for-one with bank notes and coins; no fees for CBDC transactions; wallet providers ensure data protection and privacy; limited to domestic transactions in Jamaican Dollar.
  - ECCU (Dcash): Completed pilot and preparing Dcash 2.0 over an 18-24 month testing period in a controlled setting to ensure reliability and efficiency; ECCB reflecting on insights including an outage during the first quarter of the pilot.
  - Brazil (BCB): Given Pix’s success, BCB focusing on wholesale CBDC platform (Drex) as a “smart” platform using public blockchain infrastructure, tokenization, and programmability; Drex would launch in late 2024 or early 2025 with pilots: Lift Challenge and Pilot Drex.

*Source: wpiea2024119-print-pdf - Box 2. Currency Conversion Arrangements and PvP Mechanism*

### 2022. The forthcoming Dcash 2.0 would include enhanced functionality and interoperability within the domestic

### Next Steps in Cross-Border Payment Integration

### Key principles and recommended actions
- Establish rules for cross border governance (i.e., the accountability of risk decisions and the exercise of decision-making power).
- Harmonize regulatory frameworks to minimize legal complexities and facilitate smoother cross-border transactions.
- Build cross-border payment arrangements in line with standards issued by industry and public standard setting bodies, including common messaging standards and protocols, to ensure compatibility and interoperability among different payment systems.
- Facilitate collaboration on interoperability of digital financial assets by adopting a common technology stack (Budau and Tourpe, 2024).
- Foster collaboration among central banks, financial institutions, and payment service providers to collectively address challenges and work towards common goals.
- Embrace digital technologies and fintech solutions to streamline cross-border payment processes, reducing reliance on manual and paper-based methods. The FuSSE project by the IDB and BIS aims to assist countries in the region in acquiring the necessary technologies.
- Implement robust risk management practices and common security standards and protocols to protect against fraud, money laundering, and cybersecurity threats.
- Promote financial inclusion and broader accessibility through awareness campaigns and educational initiatives.
- Implement mechanisms for continuous monitoring and evaluation of regional cross-border payment arrangements, updating them based on emerging technologies, market dynamics, and stakeholder feedback.
- If capital flow measures are justified, ensure their integration into cross-border payment systems and new technologies does not create loopholes.

### Design considerations and analytical approach
- No one-size-fits-all approach: undertake cost-benefit analysis to decide optimal solutions and phasing (BIS, 2022c).
- Consider focusing on subregions within LAC (the Caribbean, Central America and Mexico, Mercosur) to identify tailored pathways.
- Build arrangements consistent with standards (e.g., ISO20022 adoption noted elsewhere in the document) and common messaging standards and protocols for interoperability.

### Caribbean: dual approach leveraging CBDCs and wholesale interlinking
- Option 1 — Interlink wholesale payment systems (e.g., ECCB-RTGS) for larger transactions intermediated through financial institutions and designated PSPs.
  - The relative stability of subregion currencies would protect against exchange rate risks.
  - Counterparty/liquidity risks (e.g., those triggered by the CMCF mechanism in the early 1980s) could be managed through limits on transaction values or on (negative) balances carried by each central bank.
  - Alternative: adopt a hub-and-spoke or single arrangement via capitalization or constitution of a guarantee fund by each country under centralized management, calibrated (e.g., increased) based on observed trends.
  - Example initiative: November 2023 meeting of the Caricom central bank governors announced a pilot for Caribbean intraregional payments leveraging the Pan-African Payment and Settlement System (PAPSS) offered by the African Export-Import Bank (Afreximbank).
  - Hub-and-spoke or unified systems face larger implementation challenges and are more viable if relatively large trade and/or financial relations are projected.
- Option 2 — Interlink retail CBDCs for smaller cross-border transactions between individuals and (small) firms.
  - Regional central banks need to set up an appropriate legal basis, determine access conditions for non-resident participants and transaction limits, and coordinate interoperability conditions across retail CBDC systems.
  - CBDC design and rollout have tended to a strong domestic (and retail) focus, making interoperability non-trivial.

### Mercosur: interlink fast payment systems and expand SML
- Interlinking fast payment systems is attractive given the proliferation of retail fast payment systems, expanded use of Brazil’s Pix in border areas, and potential removal of substantial balance of payments’ restrictions in Argentina.
- Key non-technical issue: agree on governance and oversight arrangements to manage risks and ensure compliance with each jurisdiction’s AML/CFT and CFM provisions.
- Exchange rate volatility (particularly in Argentina) can be partially addressed via real time payments or near 24/7 funds’ transfers.
- Models and benchmarks: interlinking model applied between India and Singapore FPS, India and Nepal, or project Nexus.
- Expand use of the SML system beyond intra-industry operations of large regional firms to allow higher value cross-border transactions and enhance the regional value chain.
- Removal of substantial balance of payments’ restrictions in Argentina would support these efforts, though other measures could also be envisaged.
- Expected outcomes: marginally reduce FX volatility risks and lower transaction costs, supporting international trade within the region.

### Central America and the SIP platform
- The SIP payment system constitutes a good basis to foster wholesale transactions across borders.
- Explore the possibility of including payments/settlements in local currencies.
- The SIP could help create a bilateral linking arrangement between Central American countries, Mexico and the U.S.

### Role of Open Finance and API standardization
- Wider application of Open Finance regulations can streamline cross-border payments, enhancing the flow of capital and trade.
- Open Finance empowers clients by enabling secure transfer of financial data between entities.
- Adoption is gaining traction in Latin America with Brazil, Chile, Colombia, Ecuador, and Mexico implementing Open Finance regulations; others are in adoption processes or considering implementation.
- Cross-border Open Finance promises to simplify and automate Know-Your-Customer processes, facilitating cheaper and faster cross-border transactions.
- This requires aligning regulatory standards and guaranteeing interoperability among diverse financial systems via standardized API protocols.

### Summary and expected benefits
- New technologies cannot substitute for sound and credible macroeconomic policies, but their strategic use can significantly lower transaction costs and times for LAC countries.
- Improvements in economic efficiency could enhance regional and global trade connections.
- Adoption of innovative cross-border payment systems and comprehensive Open Finance regulations could empower individuals and businesses in the LAC region to transfer payments and financial assets more easily in any amount, at any time and through any device.
- An integrated approach promises a more interconnected payment system that facilitates trade and an efficient regional financial landscape.

*IMF Working Paper excerpt: Cross-Border Payments Integration in Latin America and the Caribbean*

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_Source: https://www.imf.org/-/media/files/publications/wp/2024/english/wpiea2024119-print-pdf.pdf_