31 January 2018
On 8 January 2018, the Payment and Settlement Systems (Finality and Netting) (Amendment) Bill (“Bill”) was passed in Parliament.
The Payment and Settlement Systems (Finality and Netting) Act (“FNA”) provides for the protection of payment and settlement systems from disruptions that may generate systemic risks in the financial system. The Bill aims amend the FNA to:
- 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;
- Set out clear criteria for the Monetary Authority of Singapore (“MAS”) to designate payment and settlement systems; and
- Strengthen MAS’ administrative powers.
Enhanced insolvency protection
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. To mitigate this risk, the FNA will be amended by extending insolvency protection of 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.
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. To mitigate such risks, participants provide collateral to the designated system that can be drawn upon for settlement should a participant default. The FNA will be amended to extend insolvency protection to designated systems which utilise collateral.
The FNA will also be amended 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 of any function, duty or power under the FNA.
Clarity in designation criteria
To provide greater clarity to the industry and stakeholders, the criteria for designation are set out in the Bill. Designation will focus on critical systems as 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. It is stated in the Second Reading Speech that MAS intends to designate FAST and NETS EFTPOS debit card system in 2018, as they meet the criteria for designation.
Strengthen MAS’ administrative powers
Among other things, the Bill enhances 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 be required to notify MAS of potential insolvency. A designated system will also be required to seek MAS approval before rules which govern the essential roles, responsibilities and operations of a designated system can be implemented or amended.
- Payment and Settlement Systems (Finality and Netting) (Amendment) Bill
- Second Reading Speech - Payment and Settlement Systems (Finality and Netting) (Amendment) Bill