Speech by The Deputy Prime Minister and Minister for Finance at the Second Reading of the Payment and Settlement Systems (Finality and Netting) Bill 2002
Date: 25 Nov 2002
Mr. Speaker, Sir, I beg to move, "That the Bill be now read a second time".
2 The Payment and Settlement Systems (Finality and Netting) Bill seeks to make provision for the protection of payment and settlement systems from disruptions that may lead to risks in the financial system. Proper protection of such systems is critical to the effective functioning of the financial system. The Bill strengthens the legal environment for operating stable and secure payment and settlement systems by empowering the Monetary Authority of Singapore (MAS) to designate payment and settlement systems. These designated systems will be exempted from the application of certain legal rules, including the rule in insolvency law for the unwinding of certain types of transactions.
3 Sir, before I go into the Bill proper, let me first give some background on the importance of protecting payment and settlement systems from disruptions.
Importance of Protecting Payment and Settlement Systems from Disruptions
4 Payment and settlement systems consist of sets of instruments, banking procedures and funds transfer systems that ensure the circulation of money. They are therefore an important part of the market and economic infrastructure. However, payment and settlement systems also provide a channel for shocks to be transmitted across the financial markets. This is especially true in large value inter-bank payment and settlement systems that are systemic in nature, where one disruption could trigger or transmit further disruptions in the financial system. Take for instance MEPS, the Real-Time Gross Settlement system operated by the MAS for the settlement of funds between banks. In 2001, MEPS processed a total of $11.6 trillion of payments; this was more than 75 times the Gross Domestic Product (GDP) of Singapore over the same year. Clearly, any disruption to the sound operation of MEPS would have a significant impact on Singapore's financial system. Therefore, payment and settlement systems with systemic implications like MEPS must have a robust architecture, well-planned contingency arrangements, proper operational procedures and clear rules for participants.
5 It is equally important that these payment and settlement systems have a sound legal basis. The rules, regulations and agreements relevant to such systems must be legally enforceable. In particular, transactions that have already been settled by the systems should be final and irrevocable, and must not be unwound or otherwise adjusted by any legal proceedings. Any netting arrangements in the payment and settlement systems should likewise be enforceable. While the payment and settlement systems should have contractual arrangements and rules in place to set out these provisions, existing laws can operate to override them. For instance, the law of insolvency allows a liquidator of an insolvent corporation to reverse, or "claw-back" payment transactions that have already been settled if these transactions are deemed to be unfair or to have been made at a significant undervalue. Such claw-back provisions are based on the general principle that favours the equal distribution of assets to the creditors of an insolvent corporation. This principle must, however, be balanced against the disruption that might be caused to payment and settlement systems and to the participants if it applies to a disposition made through these systems.
6 There is therefore a strong case for the law to recognise the importance of the integrity and finality of transactions in payment and settlement systems in maintaining financial stability and for the law to protect these systems from the legal risks that I have just outlined. The legislatures in countries such as Australia, U.S.A., Canada and in many European countries have already taken steps to address these legal risks by enacting similar legislation.
Enhancing Singapore's Legal Framework to Protect Designated System
7 In Singapore, section 59A of the Banking Act has provided for the finality and irrevocability of transactions made through MEPS since 1998. However, section 59A is not wide enough to cover payment and settlement systems that are not operated by MAS. We are an important international financial centre. With the continuing advancement of technology, greater competition and increased scale and sophistication of financial players, there will be new payment and settlement systems in Singapore that require the same legal protection. The Continuous Linked Settlement (CLS) system is one such system.
8 CLS is a global payment and settlement system that aims to reduce foreign exchange (FX) settlement risk. Launched in September this year with the participation of over sixty international banks and seven major currencies, CLS has already reached a daily settlement value of US$300 billion and it is expected to eventually settle a large percentage of the US$1.2 trillion a day global FX market1. The Singapore Dollar is expected to be included as a CLS currency in the second quarter of next year. The three local banks in Singapore have established the capability to join CLS as participants in December 2002. As one of the largest FX trading centres in the world, Singapore's participation in CLS will reinforce our position as a key node in the global financial system.
9 The Payment and Settlement Systems (Finality and Netting) Bill will provide an omnibus solution to the legal risks that surround the operation of payment and settlement systems by according legal protection to systems that are designated by MAS. It will allow us to provide for the integrity and finality of transactions in systems such as MEPS and CLS, as well as any new payment and settlement systems that may be introduced in the future.
10 Sir, I will now highlight the major provisions that are being introduced in this Bill.
Major Provisions in the Bill
11 Clause 3 gives MAS the power to designate payment and settlement systems to provide them with protection offered under this Bill. Clause 4 gives MAS the power to revoke the designation in certain circumstances. In determining whether to designate a system, MAS will take into account a number of factors, in particular the systemic risks associated with that system.
12 Part II of the Bill sets out the protection that is accorded to transactions effected through a designated system when a participant in that designated system is bankrupt, or in judicial management or winding up.
13 Firstly, clause 7 gives statutory backing to any rules of the designated system that provide for the finality of fund transfers into and out of the accounts of participants, as well as the finality of transactions settled in the system.
14 Secondly, clause 8 provides that the regime established by the rules of a designated system is to take precedence over the insolvency law principle of equal and pro-rated distribution of assets.
15 Clauses 9 and 10 then go on to make clear that the legal provisions providing for the "claw-back" of transactions that are unfair preferences, or transactions at an undervalue, and other like provisions, are not applicable to transactions effected through a designated system.
16 Clause 11 gives effect to the default arrangements that are provided in the rules of the designated system and provides that only the net sum, following completion of action taken under the default arrangements, shall be provable or payable.
17 Clause 12 establishes the end-date for the protection accorded by Part II. Transactions effected after the date the participant goes into insolvency will not have the benefit of the protection under Part II.
18 In Part III of the Bill, Clause 13 makes netting available to a designated system where a participant becomes insolvent. In such a situation, the operator of the designated system may net all obligations owed to or by the participant incurred before or on the date the participant goes into insolvency, with the result that only the net sum shall be provable or payable.
19 Clause 14 fortifies the position by providing that a court in Singapore is not to recognise or give effect to an order from a foreign court in so far as that order would be contrary to the provisions of the Bill.
20 Clause 15 clarifies that the protection accorded by the Bill will not affect the rights of persons arising from the underlying transaction or under the general law. For instance, if a person had made a payment to another by mistake, and this mistaken payment was routed through a designated system by banks that were participants in the designated system, the person who received the payment would not be immune from a legal action that might be available to the payer for the recovery of the mistaken payment. The Bill is intended to prevent the unwinding of transactions made through a designated system. It is not intended to accord additional legal protection or benefit to the recipient at the end of the payment chain.
21 As the protection given by the Bill will only apply to transactions entered into a designated system before or on the day a participant becomes insolvent, the system should not accept any transactions from a participant as soon as it has notification that the participant has become insolvent. To facilitate this, Clause 16 of the Bill imposes an obligation on the participant that is insolvent to give notice of that fact to the operator of the designated system.
22 Clause 17 protects MAS and its officers from liability in connection with any action taken in good faith in MAS' capacity as the designating authority.
23 Clause 18 empowers MAS to make regulations for carrying out the purpose and provisions of the Bill.
24 With the enactment of the Bill, MEPS will be a designated system and clause 19 accordingly provides for this.
25 Clause 20 deals with the migration of the current section 59A of the Banking Act to the Monetary Authority of Singapore Act. It is more appropriate for the statutory provision relating to the operation by MAS of real-time gross settlement systems such as MEPS to be in the MAS Act. This will also make it possible to extend participation in such real-time gross settlement systems to institutions other than banks. Accordingly, section 59A of the Banking Act will be repealed and a new section 29A will be inserted into the MAS Act.
26 In conclusion, Sir, the Bill provides the broad legal foundations for the operation of stable payment and settlement systems, thereby reducing the risk of systemic disruptions to Singapore's financial system. This is essential for Singapore's competitiveness and development as a major financial centre in the world.
27 Mr. Speaker, Sir, I beg to move.
1 Figures obtained from CLS Services website and BIS 2001 Triennial Central Bank Survey of Foreign Exchange and Derivatives Market Activity.