A 2004 World Bank report notes that there are two systemically important payments systems in Honduras, the Electronic Checks Clearing House, and the funds transfer system. However, the report observes that payments systems in the country have no legal basis to enable modern, reliable operation. The report adds that electronic documents and signatures have no legality and checks are still cashed physically. Settlement finality has no legal certainty and netting arrangements have no legal recognition. The Central Bank of Honduras (CBH) has neither defined nor implemented its payment systems oversight objectives and responsibilities. Further, there are no formal cooperation arrangements among different financial sector supervisory authorities and private sector entities. The report advises Honduras to define and implement a payments system policy and the oversight objectives of the CBH. The Honduran government has declared its intent to modernize and upgrade its payments system infrastructure. A regional technical assistance project under the aegis of the Inter-American Development Bank Fund has been active since 2003 to strengthen and harmonize the payments systems in Costa Rica, the Dominican Republic, El Salvador, Guatemala, Honduras, and Nicaragua.

General Overview

A 2004 World Bank report notes that the two systemically important payment systems in Honduras are the Electronic Checks Clearing House (CEPROBAN), owned by the commercial banks, and the funds transfer system associated with the accounts of financial institutions and the government at the Central Bank of Honduras (CBH). Both systems clear large value transactions and a disruption on any could trigger systemic destabilization. The 2004 World Bank report finds that "the legal basis of the payment systems in Honduras is incomplete and lacks the elements required for a modern operation" (p. 68). The report adds that electronic documents and signatures have no legality and checks are still cashed physically. Settlement finality also has no legal certainty and netting arrangements have no legal recognition. The CBH has neither defined nor implemented its payment systems oversight objectives and responsibilities. Further, there are no formal cooperation arrangements among different financial sector supervisory authorities and private sector entities.

The 2004 World Bank report recommends that the CBH "define a payments system policy, stating clearly its objectives (such as achieving finality for certain classes of payments) and the instruments (gross and net settlement systems for different types of payments, their respective operational rules, etc.) to reach them" (pp. 68-69). The report also calls for clarity in the designation of the oversight function and the establishment of enforcement instruments. In a 2004 Letter of Intent to the International Monetary Fund (IMF), the government of Honduras stated that the CBH "will upgrade the payments system. Plans will be prepared by December 2005 to separate large-value and low-value payments. Large value payments will be moved to a parallel payments system with adequate risk management mechanisms." Subsequently, in 2007, the IMF reported that the CBH "plans an upgrade of the payment system infrastructure." The report praised such efforts by the Honduran authorities. The FIRST Initiative website provides information on a technical assistance project funded by the Multilateral Investment Fund of the Inter-American Development Bank to strengthen and harmonize the payments systems in Costa Rica, the Dominican Republic, El Salvador, Guatemala, Honduras, and Nicaragua. The project, which had a starting date of December 2003, aimed at being "a means of preventing systemic financial crises in the region." It intended to "create suitable conditions for a platform of basic standards for development of a regional payments system." The website states that this project is still active.

The Principles

I. The system should have a well-founded legal basis under all relevant jurisdictions.

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The 2004 World Bank report finds that "the legal basis of the payment systems in Honduras is incomplete and lacks the elements required for a modern operation" (p. 68). The report adds that electronic documents and signatures have no legality and checks are still cashed physically. Settlement finality also has no legal certainty and netting arrangements have no legal recognition.

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.

II

There is insufficient information publicly available as to Honduras's compliance with this principle.

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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A 2003 World Bank report observes that "the Honduran payments system shows a substantial level of exposure to credit, legal, and operational risks" (p. 8). The report, therefore, recommends Honduras to initiate a comprehensive reform "to reduce and better manage these risks in order to prevent the worst-case scenario of a possible disruption in the system" (p. 8).

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.)

II

The 2004 World Bank report finds that settlement finality in Honduras has no legal certainty and netting arrangements have no legal recognition. However, there is insufficient information publicly available as to Honduras's compliance with this principle.

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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The 2004 World Bank report finds that settlement finality in Honduras has no legal certainty and netting arrangements have no legal recognition.

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.

II

There is insufficient information publicly available as to Honduras's compliance with 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.

NC

The 2003 World Bank report observes that "the Honduran payments system shows a substantial level of exposure to credit, legal, and operational risks" (p. 8). The 2004 World Bank report also finds that settlement finality in Honduras has no legal certainty and netting arrangements have no legal recognition. In this context, the government of Honduras, in a Letter of Intent to the IMF in 2004, declared that "large value payments will be moved to a parallel payments system with adequate risk management mechanisms."

VIII. The system should provide a means of making payments which is practical for its users and efficient for the economy.

II

There is insufficient information publicly available as to Honduras's compliance with this principle.

IX. The system should have objective and publicly disclosed criteria for participation, which permit fair and open access.

II

There is insufficient information publicly available as to Honduras's compliance with this principle.

X. The system's governance arrangements should be effective, accountable and transparent.

II

There is insufficient information publicly available as to Honduras's compliance with 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.

NC

The 2004 World Bank report observes that the CBH has neither defined nor implemented its payment systems oversight objectives and responsibilities. Further, there are no formal cooperation arrangements among different financial sector supervisory authorities and private sector entities. The report recommends that the CBH "define a payments system policy, stating clearly its objectives (such as achieving finality for certain classes of payments) and the instruments (gross and net settlement systems for different types of payments, their respective operational rules, etc.) to reach them" (pp. 68-69). The report also calls for clarity in the designation of the oversight function and the establishment of enforcement instruments.

B. The central bank should ensure that the systems it operates comply with the Core Principles.

II

There is insufficient information publicly available as to Honduras's compliance with this principle.

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.

II

There is insufficient information publicly available as to Honduras's compliance with this principle.

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.

NC

The 2004 World Bank report observes that there are no formal cooperation arrangements among different financial sector supervisory authorities and private sector entities with regard to payments systems in Honduras.