INFORMATION MANUAL OF THE RECIPROCAL PAYMENTS AND CREDITS AGREEMENT

I - INSTITUTIONAL FRAMEWORK
The Reciprocal Payments and Credits Agreement was initially supported institutionally by the Montevideo Treaty of 1960 which created The Latin American Free Trade Area -ALALC-. At this stage, the Conference of Contracting Parties - highest political body of ALALC at the time - gave it shape through the creation of the Council for Financial and Monetary Policy, a body specialized in this matter, to which it granted resolutive capacity in matters of its competence.

Under this framework, the Second Meeting of the Council for Financial and Monetary Policy of ALALC, held in Mexico, September 1965, approved and subscribed by the member central banks the Reciprocal Payments and Credits Agreement, also known as the Mexico Agreement.

When ALALC was replaced by The Latin American Integration Association - ALADI- upon signature of the Montevideo Treaty of 1980, the new intergovernmental body, successor to the former, assumed to all effects its legal status and results.

ALADI therefore continued, under new guidelines, the course set by ALALC IN 1960, aimed at promoting and extending regional economic integration and having as target the establishment of a Latin American common market.

To this end, it promoted the establishment and progressive perfecting of an area of economic preferences at the regional level, which was developed through the discharge of the basic functions set forth by the Treaty of Montevideo of 1980 and the application of three fundamental mechanisms, viz.:

a) A regional tariff preference with respect to third countries;

b) Regional agreements, all member countries participating thereof;

c) Partial agreements with the participation of some (two or more) countries of the area.

To complete the institutional framework wherein operate the financial and monetary mechanisms of ALADI currently in force, it should be mentioned that this Association develops its objectives and carries out its tasks through the operation of three political and one technical body.

Its political bodies are:

- The Council of Ministers of Foreign Affairs, supreme body which adopts the decisions which correspond to the upper echelons of the economic integration process;

- The Evaluation and Convergence Conference, which is responsible for examining and promoting the operation of the mechanisms contemplated in the 1980 Montevideo Treaty; and

- The Committee of Representatives, permanent forum in charge of adopting the necessary measures for implementing the Treaty and its complementary policies.

The technical body is:

The General Secretariat which has the authority to propose and evaluate studies, as well as to carry them out and to conduct negotiations, aimed at accomplishing the targets set forth.

In this new institutional scenario Resolutions 2 and 6 of the Committee of Representatives were adopted in 1981: In the former the competent bodies which had taken part in financial and monetary matters during the ALALC process were transitorily maintained; in the latter, the following bodies were created in substitution thereof:

- The Council for Financial and Monetary Affairs, formed by the highest authorities of the Central Banks, responsible among other functions for "governing" the Reciprocal Payments and Credit Agreement; and

- An advisory body, the Consultative Committee on Financial and Monetary Affairs, formed by officials from the international areas of the same Central Banks, responsible for considering and recommending to the "Council" the measures to be applied in matters of a technical nature, concerning the Agreement.

The technical, administrative and coordination functions of these bodies, are supplied by the General Secretariat of ALADI.

II - ALADI PAYMENTS AGREEMENT

1. What is the Payments Agreement?

It is an Agreement subscribed on August 25, 1982 within the Council for Financial and Monetary Affairs of ALADI, by the Central Banks of Argentina, Bolivia, Brazil, Colombia, Chile, Ecuador, Mexico, Paraguay, Peru, Uruguay, Venezuela and the Dominican Republic. This Agreement replaced without interruption of continuity the "Reciprocal Payments and Credits Agreement of ALALC countries" signed in Mexico on September 22, 1965, on the basis of which the operation of a multilateral payments clearing, in convertible and freely transferable currencies, had been created among the mentioned central banks.

Under the Reciprocal Payments and Credits Agreement, international payments derived from trade transactions of the countries of member central banks, consisting of commodities originating therein and services performed by resident persons (included in agreements entered into by pairs or groups of central banks), are processed and cleared at four-monthly periods, in such a manner that at the end of every four-monthly period (clearing period) only the overall balance of the central bank of each country with respect to the others, is transferred or received,.depending on whether there be a deficit or a surplus.

The Agreement establishes a System formed by three fundamental components: A Multilateral Payments Clearing Mechanism, a System of Guarantees and a Mechanism for the transitory financing of balances derived from multilateral clearing: the Automatic Settlements Program; concerning the characteristics, operation and connection thereof comments are to be found further on. (See Figure 1).

2. What are its objectives?

The Payments Agreement was originally conceived with a view to starting "a formal multilateral cooperation among central banks of the region so as to reach, in successive stages, financial and monetary integration through the constitution of financial bodies for the establishment of a more advanced cooperation".

To this end the basic targets established for the Agreement were: to stimulate financial relations among the countries of the region, to facilitate the expansion of its reciprocal trade and to systematize mutual consultation in monetary, exchange and settlements basis.

Furthermore, the Agreement highlights the fact that the establishment of the multilateral clearing of payments mechanism is aimed, among other purposes, at the following:

a) To facilitate the channeling of settlements and intensify economic relations among their respective countries;

b) To reduce international currency flows among participantes; and

c) To stimulate financial relations among financial institutions of the region.

FIGURE 1

3. What transactions does the Agreement cover?

Article 2 of Agreement sets forth that trade transactions: commodities originated and services performed by persons resident therein (included in agreements entered into by pairs or groups of central banks), may be channeled through the System.

Furthermore it refers to financing operations involving commercial transactions through document discount in a third member country or in a third non member country (instrument discount mechanism) as well as to commercial triangulation payments among member countries.

Finally, it bans the channeling of purely financial transactions, by which it should be understood such operations as imply a transfer of funds unrelated to a commercial transaction.

On the other hand, the Agreement itself limits admissible transactions to such as are conducted through those "instruments" referred to in the Regulations, issued or endorsed by Authorized Institutions.

4. What guarantees protect Agreement payments?

The guarantees contemplated in the Agreement are those concerned with convertibility of national currencies into United States dollars, transferability of the latter through the Mechanism and with reimbursement and payment of operations processed as per Agreement through Central Banks, these being one of the most relevant elements of its operation.

The Reimbursement Guarantee merits special mention because of the certainty it affords the exporter of timely collection of monies due, thereby constituting a first supporting element of intra regional trade. Through it, Authorized Institutions of the exporting country may finance their customers in the certainty that the respective "instruments" shall be reimbursed when due. This guarantee even gives that same exporter the possibility of offering direct credit to the importer, under the figure of suppliers' credit, thus increasing competitiveness vis-à-vis the international market.

5. How may transactions be channeled thereby?

5.1 Regional Mechanism

It should be borne in mind that it is a mechanism applicable to relations among certain given countries (the twelve indicate hereinbefore), and this determines the requirement of consigning origin of goods for commercial transactions and residence of intervening persons in any of the regional countries for the exchange of services (included in agreements entered into by pairs or groups of central banks).

The channeling of payments through the Agreement is voluntary. Nonetheless, on certain occasions, some Central Banks, at their convenience, have temporarily made it mandatory. In the event of its being voluntary, economic operators may request an authorized commercial bank that their transactions be channeled through the Agreement thus benefiting from the advantages and guarantees therein contained.

5.2 Instruments that may be used

Exchange operations channeled through Agreement should be endorsed by such valid documentation as is therein required, in other words, the "instruments". These are:

Payment orders
Nominal drafts
Letters of credit
Documentary credits
Letters endorsed by banks
Promissory Notes derived from commercial transactions

All these instruments shall contain a statement to the effect that they are reimbursable through the Agreement.

The diversity of instruments affords ample flexibility in the use of the payments mechanism, as it is possible to opt for any of them depending on the nature of the transaction, its maturity, volume and importance, nature of relations between importer and exporter, and commercial traditions prevailing in each country; it offers furthermore, a wide range of operational expenses.

Payment orders are generally used for sight drafts and for channeling "simple collections"- an instrument which is not directly contemplated in the Agreement- once the importer has deposited the respective countervalue in national currency.

Nominative drafts are generally applied to personal transfers.

Letters of credit, documentary credits and letters endorsed by banks are more usual in the case of transactions for larger volumes and may eventually be negotiated, so that payment is settled in the short term.

Finally promissory notes derived from commercial transactions, are applicable to transactions which include median and long term payments and to covering, among other items, the trade in capital goods and equipment and public sector transactions. This "instrument" in the mode of promissory notes for discount transactions, is utilized as support for the financing of commercial transactions carried out between two countries through the intervention of an Authorized Institution of a third country (Instrument Discount).

6. How does the Payments System operate?

6.1 Payments mechanism

The Payments mechanism operates as follows:

a) Reciprocal credit lines

On the basis of the procedures set forth by the Agreement, each central bank establishes with each of the others within the System, a reciprocal credit line expressed in United States dollars which varies from case to case, in conformity with the importance of the commercial flows established among their respective countries. Currently, all central banks member have bilateral credit lines which are in force and operative. Said "credit lines" allow for the channelling of payments among members, covering the daily balances between two Central Banks.

In no case, however, is the eventual exhaustion of a "credit line" tantamount to the suspension of transactions channelled thereby. These continue to be processed by the System in an irrevocable manner.

Should any central bank surpass the limits of a "credit line" agreed upon with another bank, upon request of the latter and within a given period prior to the closing of the "four-monthly period", it must settle the excess incurred in convertible currencies. Alternatively, the Agreement contemplates for such a case as this, and as shall be seen hereinafter, a multilateral "credit lines" mechanism concerning the margins that a central bank may have with other Central Banks, but this possibility is optional and subject to agreement of the parties concerned.

b) Authorized Institutions

On the other hand an all-inclusive authorization is granted therein to the commercial banking system to channel directly, through the Mechanism, the transactions contemplated by the Agreement. For this purpose the central banks direct those institutions in their country which grant the authority to operate, to go so far in some cases as to include in the list all institutions comprised in the respective banking system.

Authorized Institutions are responsible, totally and exclusively, for carrying out transactions that are or have been channeled under the Agreement and its Regulation. If an "instrument" is channeled through the agreement but has not been issued in conformity with the provisions therein contained, both the Authorized Institution which has issued it and the one receiving it or paying it, are responsible for the non compliance thereof, have no right to reimbursement and the settlement of their dispute is their sole responsibility; this without detriment to such penalties or punitive measures as may be applied to them by the competent authority of their respective country.

c) Channelling of transactions and Clearing (Figure 2)

In the case of a commercial transaction, the channelling procedure is as follows:

On due date of a transaction, the exporter has to be reimbursed by its commercial bank (bank or authorized institution) against presentation of valid documentation (instruments). In turn the exporter's commercial bank obtains reimbursement from his country's central bank and the latter enters a credit in its favor and a debit to be charged to the importer's central bank, for whose account it has settled the amount due. The central bank that has been debited must be reimbursed by the importer's commercial bank and the latter by the importer.

In order to comply with the above procedure, each central bank keeps an account with each of the others, wherein it enters the amounts paid to exporters in its country, through an "authorized bank", on behalf of the importers' central banks, that is to say, its "credits" vis-à-vis those central banks. Moreover, on a separate account it registers the payments notified by each of the other central banks, in other words, its own "debits". The daily difference between "credits" and "debits" of a central bank is covered by a bilateral "credit line" established by pairs of central banks with respect to each other.

Multilateralization operates through a primary assessment of bilateral balances at the close of the "four-monthly period", at which time bilateral positions are cleared, resulting in a single debit or credit balance for each central bank, to be transferred or received as the case may be.

d) Interest on debits entered

It has been established that interest is to be paid on debits among Central Banks. Currently the effective rate is LIBO at four-months (British Bankers' Association), determined by simple arithmetical average of the registry of first three months and fifteen days of each period, plus one percentile point.

e) Agent Bank and Common Correspondent Bank

One Central Bank acts as Agent of the System and carries out the multilateral clearing: this bank is the Central Reserve Bank of Peru. There is also one common correspondent: The Federal Reserve Bank of New York, through which debit and credit balances are settled.

FIGURE 2
CYCLE OF AGREEMENT OPERATIONS

I - COMMERCIAL TRANSACTION AND AGREEMENT PAYMENT (DURING PERIOD)

II - DAILY BILATERAL CLEARING BETWEEN CENTRAL BANKS (DURING PERIOD)

III - MULTILATERAL CLEARING (END OF PERIOD)

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A.I.: Institution Authorized to operate through Agreement.
L/C: Letter of credit.
BCRP: Central Reserve Bank of Peru.
FRB: Federal Reserve Bank of New York.

6.2 SICAP/ALADI

It is important to point out that, as from May 1989, the Agreement is supported by the "ALADI Computerized Information Support System to the Reciprocal Payments and Credits Agreement" (SICAP/ALADI).

This System includes an Operations Center, located in Lima, in the headquarters of the Central Reserve Bank of Peru; Regional Centers operating in each of the Central Banks and a Statistical-Informative and Coordination Center located in the General Secretariat of ALADI.

SICAP/ALADI is formed by a series of computer software which, through the use of data transmission media, render possible the automatic data processing concerning Payments Agreement transactions as well as others concerning the reciprocal relations among member Central Banks. Its basic function is to make possible the daily updating and information regarding Account balances among member Central Banks. It furthermore registers and exchanges information concerning instruments received by authorized institutions of a country for settlement through the Agreement, prior to the reimbursement request. It furthermore supplies them in a methodical and detailed manner, with multiple and varied information concerning the movements which have taken place during a current period (debits, credits, balances, calculation of numerals and interests, refunds, extraordinary settlements, multilateral use of credit lines, authorized institutions, etc.), as well as with such historic data as refers to former periods.

SICAP/ALADI has optimized various aspects of the Payments Agreement operation, among which should be highlighted the timeliness and soundness of the information that travels through the System, as well as the reduction in communication costs among the member Central Banks. On the other hand, it is to be expected that its wealth in data compilation will gradually and progressively lead to a particularly valuable data source concerning the evolution of intra regional commercial and financial transactions.

7. Other aspects of the Payments Mechanism

7.1 Mechanism for the multilateral use of credit lines

As stated hereinbefore, when a Central Bank is debited by another in excess of the corresponding reciprocal credit line, the creditor may claim payment of said amount prior to the four- monthly period closing. Said excess is payable in cash, through direct remittance of amount (extraordinary settlement) or, prior consultation with the parties concerned, through the Multilateral use of the Credit Line Margins Mechanism.

Through this latter mechanism, is achieved a better use of the available credit lines open to each Central Bank and the multilateral cooperation among members increases.

This mechanism basically permits the substitution of debts. A debtor Central Bank (C) which has exceeded the reciprocal credit line with a second Central Bank (B), requests a third transferor Central Bank , with which it has an available credit margin (A), to substitute part or the whole of the debt with the "Debtor-in-excess Bank". The "transferor Bank" is then debited by the "Creditor-in excess Bank", which the former in turn transfers to the ""Debtor-in-excess Bank". Concomitantly, the "Debtor-in-excess Central Bank" receives a credit or credit entry from the "Debtor-in-excess Bank" for the same amount, and thus reduces the original debit balance with the latter returning to its line of credit margin. (See Figure 3)

FIGURE 3
MULTILATERAL USE OF CREDIT MARGINS MECHANISM

Procedure:

1. Once the excess occurs, C requests B the use of the mechanism.
2. B communicates to C the A potentials with respect to its credit line margins, preferently those with which B has the smallest margin (larger debit balances chargeable to it).
3. C selects A in consideration of the credit line margin available and requests the respective authorization.

7.2 Instrument discount mechanism

This Agreement Mechanism is of particular importance in giving financial support to intra regional trade. It was originally implemented under Article 2 of the Agreement (Resolution 57 of the Council for Financial and Monetary Affairs -- September 1989) and was subsequently incorporated into the Regulations in September 1993 ("Promissory notes for transactions involving discount of commercial "instruments" issued or endorsed by "authorized institutions" (PE)).

To the favorable conditions created by the operation of the reimbursement guarantee, this Mechanism adds a better use of the resources available to the commercial banks (Authorized Institutions) of the member countries thus making it possible for such resources to be channeled in financial support of transactions in intra regional trade.

It is based on a payments instrument financed through a commercial transaction between two member countries whereby the exporter's Authorized Commercial Bank offers the respective document for discount to an Authorized Institution of a third member country. In case of acceptance, with the prior approval of central banks involved, the Commercial bank holding the original instrument issues an additional instrument, linked with it and subject to same maturity, ("Promissory notes for transactions involving discount of commercial "instrument" issued or endorsed by "authorized institutions" (PE)) in favor of the taker Institution of the third country; said instrument may also be channeled through the Agreement and the holder receives against it the corresponding funds. Both maturities, that of the commercial instrument and that of the financial instrument, must be simultaneous, therefore reimbursement to the exporter by its financing Authorized Institution and to the latter by its Central Bank, take place on the same date.

In this manner, on the one hand, the Commercial Bank of the exporter's country anticipates reception of funds and may continue to offer to finance its customers or to anticipate payment to the exporter. On the other, the Commercial Bank of the third member country can place the funds it has available for credits as convenient (See Figure 4).

7.3 Commercial triangulation Payments

The possibility of using this commercial triangulation mode was incorporated into the Payments Agreement in September 1992.

Commercial triangulation is a mode of international trade whereby a vendor, domiciled in a third member country, exports goods having origin in one member country to another member country. These transactions are subject to the prior approval of the importer's and vendor's central banks. The goods flow directly from the country of origin to the importer country, but payments through the Agreement mechanisms are settled from the importer country to the vendor country. Ultimately this operation is tantamount to the commercial financing of importer by the vendor, making use of the reimbursement guarantee offered by the Agreement. The exporter, in turn, receives cash from the vendor.

In the following page there is a graph (Figure 5) which presents in a simplified manner, trade and payment flows under this type of transaction.

FIGURE 4

DISCOUNT IN A THIRD COUNTRY
(Financial Triangulation)

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L/C: Letters of credit.
PE: Promissory notes for discount transactions of instruments derived from commercial transaction issued or endorsed by authorized institutions.

FIGURE 5

FINANCING THROUGH COMMERCIAL TRIANGULATION
Simplified Process

1. COMMERCIAL TRANSACTION FLOW

2. TRIANGULATION PAYMENTS FLOW

8. Automatic Payments Program

On March 1991, the Council for Financial and Monetary Affairs of ALADI approved a Protocol Modifying the Payments Agreement in force as from May 1, 1991, establishing thereby a multilateral and automatic mechanism with a view to giving support to lack of liquidity situations which might arise, , with respect to any of its member central banks and thus preventing them from meeting their due payments at the multilateral clearing; it supplies, furthermore, corrective measures to attend to these unusual situations, which go beyond what the System may reasonably or possibly sustain.

The "Automatic Payments Program" consists in delaying payment of debit balances of a Central Bank over an additional four-monthly period, during which the respective amounts due must be canceled in four equal and consecutive payments at each month's end. This Automatic Payments Program may be used, by the same central bank, as often as twice during six Clearing periods (two years).

This mechanism constitutes an important extension of the multilaterality degree of cooperation developed through the Payments Agreement. It allows for an equitable distribution of risk and renders possible eventual general corrective action against it, aimed at meeting the urgencies and consequences which used to characterize the forced negotiation of bilateral arrangements outside the System, previously stipulated in cases of non compliance by any of its members upon maturity.

According to the past system if a Central Bank were unable to meet its debit balance at the Multilateral Clearing, it was excluded thereof at end of period and the Clearing was conducted exclusively among the others. The debtor Central Bank was compelled to conduct, outside the Agreement, the pertinent bilateral arrangements with each of its creditors and during the following period, it would continue operating normally.

Consequently it occurred that an excluded Central Bank would enter into arrangements of deferred payment with its creditors and, should it have any creditor balances with others, it would receive said amounts immediately.

The Automatic Payments Program corrects this situation by determining that if a debtor Central Bank during the multilateral clearing has any partial creditor balances, these balances would then be distributed on a proportional basis amongst its own creditors, thus reducing the respective amounts; the remainder, constitutes the debt contemplated by the Program, which, if not settled within the term prescribed, is maintained within the System and is added to the debits entered during the next four-monthly period.

In future the Agreement protection shall cover at all times, all transactions processed thereby, irrespective of whether the debtor central bank at a multilateral clearing does or does not meet its debts when due, as a result of liquidity problems.

9. Settlement of disputes

In September 1994, the Council for Financial and Monetary Affairs of ALADI, approved the Protocol for Settlement of Disputes among Central Banks, which covers disputes arising among participating Central Banks on compliance with the provisions contained in the Agreement in the Regulations and in Council Resolutions or omission thereof, concerning operations transacted after signature of this Protocol, which shall remain open to the voluntary signature of all members.

In May 1997, when all Central Banks had endorsed it, the mechanism was incorporated into the rules governing Agreement.

10. Benefits have resulted from Agreement application

The Agreement has served one of its main objectives: to facilitate limited use of convertible currencies in the commercial transactions among member countries thus contributing to the development thereof.

Furthermore, in granting full payment guarantee to transactions channeled thereby, the Agreement has promoted a minimal risk contingency and resulted in considerable expediency, to the benefit of those engaged in economic transactions in the region.

On the other hand, it has contributed to reduce the cost of commercial transactions, through the elimination of the traditional triangular banking process with institutions outside the region, plus eliminating the need for credit insurance on exports. Consequently it has brought about the wide participation of banking institutions established in the member countries (authorized institutions), in opening, confirming and negotiating letters of credit concerning intra regional trade.

This has resulted in an increased bond between commercial banks of the region, which have established or extended their intra regional relations in order to facilitate their participation providing capital for regional trade therefore turning into valuable data sources on commercial opportunities among the countries in the area.

With respect to the member central banks, the Agreement has resulted in closer knowledge and a high degree of cooperation and support among them, thus making it possible to develop other financial integration mechanisms; in the future it shall, no doubt, contribute to deepening this process.

Finally, we could sum up by saying that the favorable evolution of the Agreement and the efficient operation of its guarantees, - particularly the one that refers to timely reimbursement upon maturity of sums thereby processed by virtue of the country and commercial risks coverage -, have generated an attitude of confidence in those engaged in economic transactions with respect to the certainty of receiving paymentfor exports

11. Internal Regulations

This presentation is based on the general principles of the Reciprocal Payments and Credits Agreement and its Regulations.

Nonetheless, it should be borne in mind that the Agreement contemplates the possibility that the Central Banks regulate, in their countries, the internal mode of payments to be made. This means that the Central Banks, in the use of this possibility and in accordance with its basic regulations, such as those concerning reimbursement guarantees, may restrict, according to their internal needs, such transactions as may be channeled through the Agreement, as well as the instruments to be used.

Therefore the natural consultation channel for anyone engaged in economic transactions, as to the details of the Agreement and its operation at each country level, is that of authorized commercial banks, which in turn receive instructions from their own Central Banks.

Accessorily, the ALADI General Secretariat is a source of consultation as to scope of the rules governing the Agreement thus aiming at a uniform use of the mechanism throughout the region.