Explanatory Brief for Payment and Settlement Systems (Finality and Netting) (Amendment) Bill on 6 November 2017
1 Mr Lim Hng Kiang, Minister for Trade and Industry (Trade), and Deputy Chairman, Monetary Authority of Singapore, on behalf of Mr Tharman Shanmugaratnam, Deputy Prime Minister and Minister in charge of the Monetary Authority of Singapore (“MAS”), today moved the Payment and Settlement Systems (Finality and Netting) (Amendment) Bill (the “Bill”) for First Reading in Parliament.
2 The Payment and Settlement Systems (Finality and Netting) Act (Cap. 231) (the "FNA") was enacted in 2002 to designate systemically important payment systems, and protect transactions netted and settled in these designated systems ("DSs")1 from the application of insolvency law. The parties involved in a DS include payment participants, a settlement entity that maintains participants' accounts and settles funds, and an operator to run the system.
3 If the transactions in a DS are not protected against the application of insolvency law, the DS faces the risk that liquidation orders could unravel a multitude of payments long after the transfer orders have been netted and settled. This could have systemic stability consequences. With the protection accorded in the FNA, transactions carried out, including netting and settlement among participants, cannot be voided by the liquidator of any insolvent participant in the DS. As such, participants have certainty that transactions in the DS are final and irrevocable.
4 MAS is introducing legislative amendments to improve the protection of payment transactions by extending the timeframe within which protection is conferred on transactions in DSs in a liquidation event. These amendments also set out clear criteria for MAS to designate such systems, and strengthen MAS’ administrative powers. The amendments take into account foreign and domestic developments since 2002, in the areas of insolvency protection, finality and netting certainty, and regulatory controls for DSs.
5 MAS conducted public consultations between August and September 2017. Respondents supported the proposed amendments and the feedback received has been taken into account in finalizing the Bill.
KEY PROVISIONS IN THE BILL
6 The key proposed amendments under the Bill are as follows:
(a) Extension of protection of transfer orders, netting and settlement. Currently, the FNA does not provide protection for a DS if it continues to process, net or settle transactions beyond the calendar day on which a participant becomes insolvent. If a DS continues to process, net or settle transactions after the day of insolvency, such transactions may be affected by the application of insolvency laws. This may pose undue financial risks to the participants. The proposed amendment will mitigate this risk by extending insolvency protection of the key elements in a payment cycle – transfer orders, netting and settlement – in DSs by one business day beyond the day on which a DS participant becomes insolvent. This will cater to insolvency situations in a DS which operates in multiple time zones and provide certainty and finality to the DS’ transactions.
(b) Conferring protection on collateral security. Credit risks could arise when a DS pays out funds to customers in real-time but performs interbank settlement on a deferred basis. Such risks are mitigated by having participants provide collateral to the DS so that these collateral can be drawn upon to settle netted positions in the event of any default by a participant. The proposed amendments will introduce terms such as “collateral security” and “collateral holder” and will extend insolvency protection to DSs which utilize collateral as part of their netting and settlement processes.
(c) Designation criteria. The criteria for the designation of a DS will be set out under the FNA to provide greater clarity to the industry and stakeholders.
(d) Power to approve Rules of DSs. The Bill will include a requirement for the Rules governing a DS to be approved by MAS before such Rules can be implemented or amended. This amendment will ensure that MAS has oversight of the key documents which govern the activities and conduct of a DS.
(e) Powers of MAS. The Bill will strengthen MAS’ administrative powers over a participant, operator, settlement institution and collateral holder of a DS. These include MAS’ powers to obtain information and issue directions, and for MAS to be notified in the event of a potential insolvency.
(f) Conferring protection from liability. The Bill will provide that an operator, settlement institution, collateral holder of a DS 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. This will allow such entities/persons to effectively implement the Rules of a DS in the event of a participant’s insolvency.
(g) Penalties. The Bill provides for various penalty provisions as well as derivative liability provisions in relation to the imposition of liability on officers, employees and agents for corporate offences committed with the consent, connivance or conspiracy or neglect of the person.1 The current DSs are the Continuous Linked Settlement System (“CLS”), New MAS Electronic Payment System (“MEPS+”), Singapore Dollar Cheque Clearing System, US Dollar Cheque Clearing System, US Dollar Cheque Settlement System and the Interbank GIRO System.