"Payment and Settlement Systems (Finality and Netting) (Amendment) Bill" - Second Reading Speech by Mr Ong Ye Kung, Minister for Education (Higher Education and Skills) and Second Minister for Defence, on behalf of Mr Tharman Shanmugaratnam, Deputy Prime Minister and Minister-in-charge of the Monetary Authority of Singapore, on 8 January 2018

1   Mr Speaker, on behalf of the Minister-in-Charge of MAS, I beg to move, “That the Bill be now read a second time”.

BACKGROUND

2   One of MAS’ key supervisory objectives is to ensure that critical payment and settlement systems function smoothly during times of disruption.  Disruption can occur, for example, when a participant in a payment and settlement system becomes insolvent.  A case in point was in 1995 – when the insolvency of Barings transmitted its financial losses to counterparties in the European Monetary Union clearing system.

3   When a participant in a payment and settlement system becomes insolvent, the liquidator of the insolvent participant may try to reverse or “claw back” payments made by that participant – even if the transaction was put through before the participant declared insolvency.  This may have knock-on impact on systemic stability and create significant uncertainty and risk for other participants. 

4   Fifteen years ago, MAS enacted the Payment and Settlement Systems (Finality and Netting) Act (“FNA”) to address this problem.  The FNA made provision for the protection of payment and settlement systems from disruptions that may generate systemic risks in the financial system.  The FNA was designed to be technology-neutral, allowing MAS to designate critical payment and settlement systems regardless of the technology used.  A designated system consists of: (i) participants, which are financial institutions; (ii) a settlement institution that maintains the participants’ accounts and settles funds, usually MAS; and (iii) an operator to run the system, such as Banking Computer Services Pte Ltd. 

5   Five payment and settlement systems have been designated so far: (i) the Continuous Linked Settlement System (“CLS”) – the international foreign exchange settlement system; (ii) the New MAS Electronic Payment System (“MEPS+”) – our nation’s sole large value Singapore Dollar real-time gross settlement system used by banks and financial institutions; (iii) the Singapore Dollar Cheque Clearing System; (iv) the US Dollar Cheque Clearing and Settlement System; and (v) the Interbank GIRO System.  All these systems are critical to the functioning of Singapore’s financial and payments landscape.

6   Since the enactment of the FNA fifteen years ago, there has been a proliferation of faster payments systems with different settlement models and longer business hours.  Taking these developments into account, the Bill aims to achieve the following: First, enhance the protection of payment transactions by extending the period during which transactions enjoy finality and hence, protect a wider range of transactions from insolvency law in a liquidation event.  Second, set out clear criteria for MAS to designate such systems, and third, strengthen MAS’ administrative powers.  The amendments take into account foreign and domestic developments since 2002, in the areas of insolvency protection and regulatory controls for designated systems.  We have incorporated feedback from a public consultation conducted in August 2017.

7   To clarify, the scope of the FNA and the Bill does not directly cover the regulation of customer-facing retail payment or remittance service providers.  Such activities are currently regulated under two separate Acts - the Payment Systems (Oversight) Act and the Money-Changing and Remittance Businesses Act respectively.  In November 2017, MAS commenced a separate public consultation proposing to streamline the regulation of payment and remittance service providers under a single new Payment Services Bill.  MAS aims to introduce this new Payment Services Bill in Parliament for first reading in late 2018, after considering feedback from the public consultation.

8   Mr Speaker, I will now go through the main amendments proposed in the Bill.

FIRST, ENHANCED INSOLVENCY PROTECTION

Extension of Protection of Transfer Orders, Netting and Settlement in a Designated System

9   The key components of a transaction are: (i) the transfer order – a payment instruction from a participant such as a bank; (ii) netting – which is the process of calculating net debit or credit amount from the multitude of transfer orders sent and received by the participant; and (iii) settlement – the discharge of payment obligations.

10   Currently, the FNA does not protect a designated system if it continues to process, net or settle transactions beyond the calendar day on which a participant becomes insolvent.  Such transactions may be affected by the application of insolvency law and this poses financial risks to the participants.

11   The Bill introduces an amendment to mitigate this risk by extending insolvency protection of the key elements in a payment cycle – transfer orders, netting and settlement – by one business day beyond the day on which a participant becomes insolvent.  This will cater to systems which operate in multiple time zones or where an insolvency of a participant occurs close to the end of a day and spans into the next day. 

12   For example, if on 2 January, a participant’s foreign parent bank goes into insolvency in a foreign jurisdiction at 10:50am New York time, this is 11:50pm Singapore time. The operator of the designated system may be unaware of the insolvency of its participant’s foreign parent bank since this occurred outside office hours on 2 January.  In a 24/7 payment system, transactions from the now insolvent participant would continue into 3 January, whereupon transactions from this participant would be settled.  Without the amendment, the settled transactions on 3 January could be unraveled by liquidators since it is after the date of insolvency.  This amendment will provide finality and added protection to the participants’ transactions.

Conferring Protection on Collateral Security 

13   Credit risk arises when a participant pays out funds to customers in real-time but receives funds from its counterparty in interbank settlement on a deferred basis.  An example is the Fast and Secure Transfer System (FAST) where customers receive funds immediately while the participants only settle with each other twice a day on weekdays.  Such risks are mitigated by having participants provide collateral to the designated system so that these collateral can be drawn upon for settlement in the event of any default by a participant.  The Bill introduces amendments to extend insolvency protection to designated systems which utilise collateral. 

Conferring Protection from Liability

14   The Bill introduces amendments to provide that an operator, settlement institution, collateral holder of a designated system or an officer or employee of such an entity will not incur liability for any act or omission which was done with reasonable care and in good faith in the execution or purported execution of any relevant function, duty or power under the FNA.  

SECOND, CLARITY IN DESIGNATION

Designation Criteria

15   The Bill introduces criteria for designation, to provide greater clarity to the industry and stakeholders.  Designation will focus on critical systems, where a disruption in the operations of such a system may transmit further disruption to its participants, or to the wider financial system or affect public confidence in other payment systems. MAS intends to designate FAST and NETS EFTPOS debit card system in 2018, as they meet the criteria for designation.

Prohibition on Holding Out as a Designated System

16    The amendments will also prohibit an operator or a settlement institution of a non-designated system from claiming to be an operator or settlement institution of a designated system.  Holding out to be an operator or settlement institution of a designated system could mislead participants to think that there is statutory protection from insolvency law.  The penalty will be a maximum fine of $100,000 or imprisonment for a term of up to 2 years or both.

THIRD, STRENGTHENED ADMINISTRATIVE POWERS

17    The Bill introduces amendments that will strengthen MAS’ administrative powers over a participant, operator, settlement institution and collateral holder.  These include MAS’ powers to obtain information and issue directions to rectify outstanding issues.  The participant, operator, settlement institution and collateral holder of a designated system will have an obligation to notify MAS in the event of a potential insolvency.  The Bill will also introduce a requirement for a designated system to seek approval from MAS before rules which govern the essential roles, responsibilities and operations of a designated system can be implemented or amended.

CONCLUSION

18   This Bill will enhance the insolvency protection of designated payments systems.  Together with the improved administrative powers conferred on MAS, the Bill will help maintain confidence in designated systems and preserve the stability of Singapore’s financial system.

19   Mr Speaker, I beg to move.

Last Modified on 08/01/2018