Prior to the mid-1990s, changes in the Brazilian payment system were motivated by the need to cope with high inflation rates. During that time, the system achieved significant technological progress, especially aimed at enhancing the speed of processing financial transactions. In the reform carried out by the Banco Central do Brasil in 2001 and 2002, the focus shifted to risk management. In this vein, the launch of the Sistema de Transferência de Reservas - STR (Reserves Transfer System), on April 22, 2002, marked the beginning of a new phase of the Brazilian payment system. With this system, Brazil entered in the group of countries where interbank funds transfers can be settled irrevocably and unconditionally, i.e. with finality, on a real-time basis. This fact by itself provides settlement risk reduction for interbank transactions and consequently systemic risk reduction, that is, reduction of the risk that the bankruptcy of a bank causes the bankruptcy of other banks, namely domino effect. In the scope of the reform, there was another important change, as the completion of funds transfers between reserves accounts nowadays depends on the existence of sufficient balance in the account of the sending participant. Therefore, overdrafts are no longer allowed.

Real-time settlement is also being used in transactions with federal government securities carried out in the Sistema Especial de Liquidação e de Custódia - SELIC (Special System for Settlement and Custody), which came to be possible with the connection between this system and STR. Therefore, since April 2002, SELIC has been a DVP model 1 securities settlement system.

The Brazilian payment system reform, however, goes beyond the launch of STR and the SELIC's modus operandi changes. To reduce the systemic risk, the main goal of the reform, legal changes were also made. For example, Law 10,214, enacted in March 2001, recognized multilateral netting in the environment of a clearing and settlement system and set forth that, in all multilateral netting system which is considered systemically important by the Banco Central do Brasil, the corresponding clearinghouse must act as central counterparty.

All these changes intended to strengthen the financial system, following the reform started in 1995 with PROER (Program for Restructuring and Strengthening of the National Financial System) and later with PROES (Program for Reducing the Presence of the State Public Sector in Banking Activity). These government-sponsored programs aimed to strengthen the financial institutions mainly through mergers and transfers of controlling interest, and to reduce public sector presence in banking activities, respectively.

More recently, the Banco Central do Brasil has been acting in order to promote the development of the retail payment systems, mainly to take advantage of gains of efficiency relating to, for example, larger use of electronic payment instruments, better use of ATM and POS networks, and higher level of integration among the related clearing and settlement systems1.

1 For details, see the “Report on the Brazilian Retail Payment System”, from May 2005, available at