Published Date: 29 January 2008

Keynote Speech by Ms Teo Swee Lian, Deputy Managing Director, Prudential Supervision, MAS

Keynote Speech by Ms Teo Swee Lian, Deputy Managing Director,
Prudential Supervision, MAS at Payments Asia Summit 2008
Tuesday 29th January 2008, Sheraton Towers Singapore

Payment Systems in Asia – What is in the Regulators’ Field of vision?

Part I: Introduction

1.  Good morning Mr Chris Skinner, Chairman, ladies and gentlemen.  I would like to thank ICBI for inviting me to the inaugural Payments Asia Summit 2008.  I am pleased to speak at this important event, on the topic of the Regulators’ field of vision in the area of Payment Systems.

2.      Today, it is globally recognized that payment systems form a critical part of market and economic infrastructure.  They are necessary for the settlement of financial market transactions and payments of economic activities, as well as for the conduct of monetary policy operations.  Any compromise in the integrity or smooth functioning of payment systems could cause disruptions leading to a severe loss of money and confidence. Hence effective oversight of these critical systems is necessary.

3.      Central banks oversee payment systems through the process of monitoring, assessing and bringing about changes to achieve the objective of promoting safety and efficiency.  Today there is a wide spectrum of payment systems with different risk profiles.  This means that the intensity and manner of regulatory oversight would need to be calibrated in accordance with the risk profiles.

4.      It would also be unrealistic to believe that central banks can improve the safety and efficiency of payment systems without the cooperation of the private sector.  Indeed, continuous communication and collaboration between central banks and the industry are essential in achieving these objectives.

5.      I will first give an overview of the approach taken by most central banks for the oversight of payment systems, and then highlight three key areas that central banks in Asia are focusing on at the moment. 

Part II: Approach

6.      Central banks focus most of their oversight efforts on systemically important payment systems, which would include national large-value payment systems like Fedwire, Target 2 and our MAS Electronic Payment System as well as global FX settlement systems like CLS. These essential systems for financial markets are also channels for the transmission of shocks across domestic and international financial systems, thereby affecting financial stability.  The risk of such shocks has become even greater with the increasing interdependence of financial systems throughout the world.

7.      It is critical that systemically important payment systems are well-designed and efficiently operated to mitigate these risks.  Hence, central banks place significant emphasis on the safety of high-value payment systems and globally connected payment systems, to avoid systemic disturbances.

8.       In 2001, the Bank for International Settlements (BIS) Committee on Payment and Settlement Systems (CPSS) published a set of standards, the “Core Principles for Systemically Important Payment Systems”, which serve as guidelines to improve the safety and efficiency in the design and operation of systemically important payment systems.

9.      Moving on to the other end of the payment system spectrum, we have retail payment systems that typically handle low value transactions but have high transaction volumes.  These systems pose relatively lower risks as any disruption in one of them poses little systemic impact to the economy or the financial sector. 

10.   However, we should be mindful that losses and inconveniences to consumers arising from frequent operational disruptions or failures in these retail payment systems can translate into larger losses in the long run, through the erosion of consumer confidence.  Hence, central banks take a more active interest in the efficiency and consumer protection aspects of such systems because they are often widely used by the general population.

11.  Let me turn to the question of what intensity of oversight is appropriate.  A very high degree of central bank intervention may ensure that retail payment systems are safe, highly secured and run smoothly at all times, but it would also result in higher cost to the industry which would eventually be passed on to consumers.

12. Some central banks have taken the approach of focusing on the efficiency of retail payment systems while removing unnecessary regulatory hurdles in the industry, and generally take a less active role in the safety aspects. Indeed such an approach has provided opportunities for greater developments and innovation to take place. For example, over the last few years, we have seen the proliferation of many innovative online payments such as those provided by the established credit card networks as well as newer ones like Paypal.  These provide consumers with a lot of convenience and make the whole payment process a lot more efficient.

Part III: Collaboration among central banks & the industry


13.     I will now discuss three areas relating to payment systems that central banks, and the industry, are collaborating on.  They are (1) connected large value payment systems, (2) regional retail payment tie ups and (3) crisis management.

14.     Central banks do not just focus their oversight activities on domestic payment systems. Instead, considerable attention has been given to global and regional collaborations and initiatives. One prime example of collaboration between central banks, as well as the industry, is the efforts to eliminate Foreign Exchange (FX) settlement risk.  It first came into focus during the infamous Herstatt incident in 1974 when a German bank collapsed before making payments on the US dollar obligation of its FX transactions after already receiving the Deutsche Mark payments.  

15.     Volumes in the FX market are very large and continue to grow. In 1995, the triennial Central Bank Survey of Foreign Exchange and Derivatives Activity1  put the average daily global turnover in traditional FX market segments at an estimated US$1.2 trillion. In 2007, the survey2  showed that volumes have grown to US$3.2 trillion. To address central banks’ concern about the huge FX settlement risk involved, a group of financial institutions which called themselves the “Group of 20” joined forces in around 1996 to come up with a payment-versus-payment solution to address the concern.  Continuous Linked Settlement, or CLS, was conceived and eventually came into operation in 2002.  Today 70 of the world’s largest financial groups have a direct stake in this joint initiative.3   

16.    Co-operation in this area also extends to central banks.  Given the cross-border and multi-currency nature of CLS, it is overseen through a cooperative oversight arrangement involving 20 central banks, led by the Federal Reserve Bank of New York.4  Of the 15 currencies settled in CLS, 6 are from countries in Asia Pacific.5  

17.    An essential part of payment system oversight involves monitoring the progress made by the industry in reducing payment risks.  In order to examine the extent to which reduction in systemic risk has been achieved, the BIS Committee on Payment and Settlement Systems (CPSS) organized a survey to study the level of FX settlement exposures faced by institutions.

18.    The survey reported that 55% of the total FX settlement obligations of the surveyed institutions were settled through CLS.  This reflects a significant improvement from the first survey conducted in 1997 when the majority of trades were settled through correspondent arrangements.

19.    Despite this impressive progress, the survey concluded that there was still room for improvement, both to reduce FX settlement risk, and to improve controls within institutions.  The report recommended, amongst other things, that FX committees and industry groups could continue to develop services for settling FX trades that contribute to the risk-reducing efforts of individual institutions.  Similarly, it also suggested that central banks should, where necessary, further enhance local payments’ law and the operations of high-value payment systems in support of safer and more efficient settlement of FX trades.

20.   The findings and recommendations of the report are also important to Asia as its FX turnover has been growing over the years and accounts for 20% of global FX turnover.

21.   One observation we could make from the development in mitigating FX settlement risk is that the creation of an industry solution and infrastructure would not have been successful if not for effective industry-regulator collaboration. The success and effectiveness of this collaboration should inspire and motivate us to work together on future joint projects to address the need for further improvement in the settlement of FX trades as well as in other areas.

Regional cross border tie up of retail payment systems

22.  Besides collaboration at the global level, regional cooperation is also instrumental in building efficient and reliable cross-border payment services that allow for the smooth functioning of trade and businesses across countries.

23.  I am pleased to see that retail payment service operators in Indonesia, Malaysia, Singapore and Thailand are working together to build linkages between their systems to facilitate cross-border funds transfers.  Such an initiative would create more choices for consumers in making cross-border fund transfers, which could translate to lower costs.

24.  The initiative has also brought central banks in these countries together, to establish a common framework that will provide clarity on guidelines, rules and regulations with respect to cross-border transfers. I understand that a few other Asian countries have also shown interests in joining this cross-border arrangement.

25.  I note that later today, conference participants here will have the opportunity to talk about cross border payments, clearing and settlement.  I believe that there will be interesting discussions on this topic, and there will be many good ideas and important lessons we can learn from each other.

Crisis Management

26.   Before I begin to discuss the area of crisis management, let me borrow a quote from the famous book on strategy, “The Art of War”.  “The general who wins the battle makes many calculations in his temple before the battle is fought. The general who loses, makes but few calculations beforehand.”  Many things may have changed in the 2,500 years since those words were said, but the fundamental truth remains, that without a thoughtful plan, our payment systems may not be able to function smoothly when faced with unexpected events.

27.  Crises can happen anywhere, at any time, and often occur when they are least expected.  Hence it is important to be prepared for various forms of crises, ranging from a terrorist attack to a natural disaster like an earthquake to financial turmoil like the sub-prime crisis.

28. The US sub-prime crisis caused a sharp spike in financial market volatility and a significant tightening of global liquidity conditions in mid-August last year.  As increasing market volatility persists in the FX market, CLS’s role in eliminating FX settlement risk has become even more important.  We saw CLS set four settlement volume records from August 2007 till now.  By November 2007, CLS Bank was settling on average over 500,000 instructions each day 6, up from about 300,000 instructions in May 2006.7  

29.  However, imagine what could happen if payment systems, such as the national RTGS system or CLS, were unable to handle sudden surges of settlement volume and encounter operational failures.  Delayed payments or gridlock would exacerbate an already nervous market situation. Many institutions would cut back on transactions and cause even more liquidity problems.  

30.  Moreover, payment systems have become increasingly interdependent, and a disruption that initially affected only one system may spread to other clearing and settlement systems.  In times of crisis, it is important for payment systems stakeholders such as operators and participants to have in place a robust business continuity framework and well-tested business continuity plans (BCP) to ensure the continuation of critical operations in the event of operational disruptions.

31.  Given the possible contagion effect that can be triggered by a crisis, each stakeholder involved should communicate and align their respective crisis management arrangements. Central banks and financial regulators need to collectively discuss and cooperate on crisis management arrangements.  The sharing of experience, knowledge and expertise in managing crises will strengthen the region’s ability to cope with major operational disruption, distressed financial institution and market disruption. 

32.  Therefore, central banks in Asia recognise that regional crisis protocols, activation processes as well as information sharing arrangements are possible areas for cooperation. When the actions and objectives of all stakeholders are aligned, valuable resources can then be properly channelled where they are most needed in a crisis.

Part V: Conclusion

33.  I would like to end by saying that both central banks and the industry play important roles in the development and smooth functioning of payment systems.  Apart from adopting a risk-based approach for the oversight of their payment systems, promoting global and regional collaborations are also in the field of vision of central banks.

34.  Globalisation has provided opportunities for payment service providers to collaborate and develop more sophisticated systems.  However it means that there is a greater need for regulatory co-operation and collaboration to oversee and facilitate such developments. 

35.  With greater collaboration both among central banks, and with the industry, we can all benefit from each other's experience.  The synergy generated will without doubt be invaluable to each stakeholder involved.

36.  On this note, I wish all participants the very best for a fruitful learning experience at this conference and a most enjoyable stay here in Singapore. 

37.  Thank you.

Triennial Central Bank Survey of Foreign Exchange and Derivatives Market Activity 1998 – Final results. http://www.bis.org/publ/r_fx98.htm

2 Triennial Central Bank Survey of Foreign Exchange and Derivatives Market Activity 2007 – Final results. < http://www.bis.org/press/p071219.htm>

CLS Corporate Communication "Shinhan Bank becomes Shareholder of CLS Group" Nov 2007. <
http://www.cls-group.com/news/article.cfm?objectid=633062C2-DFD7-7652-38ACD16D9EA95DD2&origin=26E70E8A-14C7-4247-BC9E9B0B321D4D68 >

4 Committee on Payment and Settlement Systems "Central bank oversight of payment and settlement systems" Bank of International Settlement 2005.


6 CLS Corporate Communication "Shinhan Bank becomes Shareholder of CLS Group" Nov 2007. <http://www.cls-group.com/news/article.cfm?objectid=633062C2-DFD7-7652-38ACD16D9EA95DD2&origin=26E70E8A-14C7-4247-BC9E9B0B321D4D68 >

7 CLS Corporate Communication "CLS Bank settles new record volume" Jun 2006.<http://www.cls-group.com/news/article.cfm?objectid=F716FBAD-C064-152A-5A938C982CD0C7B3&origin=26E70E8A-14C7-4247-BC9E9B0B321D4D68>