DRAFT Circular PFMI adoption

EXPLANATORY NOTE

1. The Bangko Sentral ng Pilipinas (BSP) has been given authority under Republic Act No. 11127 or the National Payment Systems Act (NPSA) to oversee the payment systems in the Philippines and exercise supervisory and regulatory powers for the purpose of ensuring the stability and effectiveness of the monetary and financial system. In pursuit of this authority, the BSP adopted a phased-in approach in the development of enabling policies and regulatory framework pursuant to the NPSA.

2. The first phase of the policy development plan was focused on fundamental regulations. Section 10 Registration of Payment System Operators of the NPSA was implemented by the BSP with the issuance of BSP Circular No. 1049 dated 09 September 2019 on the Registration of the Operators of Payment Systems (OPS). The more detailed set of guidelines on registration and notification requirements for OPS was released through Memorandum No. M-2019-023 dated 25 September 2019. The issuance was consistent with BSP's thrust to promote ease of doing business and was a product of consultative efforts with payment industry stakeholders. Since the policy issuance up to 04 December 2020, one hundred and six (106) OPS have been issued their Certificate of Registration. Consequent thereto, the BSP issued BSP Circular No. 1089 dated 07 July 2020 or the Payment System Oversight Framework (PSOF), which is the main policy that implements the NPSA. It sets out the BSP's regulatory approach to overseeing payment systems, citing several sections of the NPSA including powers of the Bangko Sentral, adoption of international standards and practices (IASP), and coordination with other government agencies and foreign regulators, among others.

3. The BSP is now in the second phase where it shall issue supplemental regulations which anchor on the PSOF. There are three key issuances on this phase, namely the governance framework, the adoption of relevant Principles for Financial Market Infrastructures (PFMI), and the reporting framework.

4. Local adoption of the relevant PFMI for designated payment systems. Consistent with the provision under the NPSA and the PSOF on the adoption of IASPs, the BSP issues a regulation requiring the adoption of relevant PFMI by payment systems to be designated by the BSP either as Systemically Important Payment System (SIPS) or Prominently Important Payment System (PIPS). With this issuance, the designated payment system shall be able to demonstrate adequate governance and risk management in the following areas: access of participants to the system, management of liquidity, credit, operational, settlement and general business risks, efficiency of the payment system, and transparency. It shall likewise enable the designated payment system (DPS) to be more resilient to financial crises and participant defaults. The issuance also promotes the application of the assessment methodology prescribed by the Committee on Payments and Market Infrastructures (CPMI) and the Technical Committee of the International Organization of Securities Commissions (IOSCO), the standard-setting bodies that issued the PFMI.

5. The BSP is soliciting from the industry and relevant stakeholders, comments on the draft Circular on the Local Adoption of the PFMI for Designated Payment Systems. The solicitation period closes on 15 January 2021.

Annex A

CIRCULAR NO. _____

Series of 2020

Subject:

Adoption of the Principles for Financial Market Infrastructures (PFMI)

The Monetary Board, in its Resolution No. ____ dated _____________ 2020, approved the Adoption of the Principles for Financial Market Infrastructures (PFMI) by designated payment systems pursuant to Circular No. 1089 or the Payment System Oversight Framework (PSOF), and Republic Act (R.A.) No. 11127 or the National Payment Systems Act (NPSA).

Section 1. The following section shall be created in the Manual of Regulations for Payment Systems (MORPS):

504 Adoption of the Principles for Financial Market Infrastructures (PFMI)1

Policy Statement. In line with its thrust of ensuring the safety, efficiency and reliability of the national payment system (NPS), the Bangko Sentral shall require the adoption of the PFMI by the participants of designated payment systems (DPS) pursuant to the Payment System Oversight Framework (PSOF), and the National Payment Systems Act (NPSA). The Bangko Sentral shall likewise utilize the PFMI assessment methodology to determine the observance of relevant principles by the DPS as well as identify possible risks and induce changes in the NPS. In cases involving non-payment system FMIs and cross-border FMIs, adoption of the PFMI may be subject of cooperative arrangements with other regulatory authorities.

Definition of Terms. For purposes of this policy issuance, the terms defined under Section 4 of R.A. No. 11127 and Section 101 of the Manual of Regulations for Payment Systems (MORPS) shall apply.

Relevant Principles. The PFMI is a set of international standards designed to strengthen financial market infrastructures (FMIs) and make them more resilient to financial crises, and participant defaults. In general, the standards are principles-based, but also provide specific minimum requirements to achieve the same base level of risk management across different FMIs and countries.2

1 International standards for financial market infrastructures, i.e., payment systems, central securities depositories, securities settlement systems, central counterparties and trade repositories, issued by the Committee on Payments and Market Infrastructures (CPMI) and the Technical Committee of the International Organization of Securities Commissions (IOSCO).

2 Principles for Financial Market Infrastructures, Bank for International Settlements (BIS) and IOSCO, 2012.

While the PFMI consists of twenty-four (24) principles, the required adoption by the DPS shall extend only to principles relevant to payment systems in the country, as provided in Appendix 1 of this Circular. These applicable principles are classified into eight (8) broad categories, namely:

a. General organization ? Principles under this category provide guidance on how the DPS shall generally be organized to establish a strong foundation for the comprehensive management of risks in the DPS. This covers principles on legal basis, governance, and risk management framework.

b. Credit and liquidity risk management ? Adoption of the relevant principles under this category provides a high degree of confidence that the DPS will be able to operate and serve as a source of financial stability even under stressful conditions.

c. Settlement ? By adopting the principles under this category, issues on settlement risk and the finality of transactions in the DPS are expected to be addressed.

d. Default management ? This requires the adoption of appropriate rules and procedures in the DPS to manage the default of a participant.

e. General business risk and operational risk management ? Principles under this category are designed to: (1) protect participants and the financial system from the risk that a DPS could suddenly cease operations as a result of business losses that are not related to participant defaults; and (2) strengthen the requirements on operational reliability and resilience.

f. Access ? Relevant principles under this category address the need for fair and open access to the DPS and the management of risks posed by alternative access arrangements.

g. Efficiency ? Principles in this category enable the DPS to be efficient and effective in meeting the requirements of its participants and the market it serves.

h. Transparency ? This requires that relevant information shall be provided to the participants of the DPS, the authorities, and the public to enable informed and sound decision making as well as foster confidence in the market it serves.

Adoption by DPS. The PFMI shall be adopted by payment systems designated by the Bangko Sentral pursuant to the PSOF and the NPSA. Adoption of applicable principles shall depend on whether it is designated as a systemically important payment system (SIPS) or prominently important payment system (PIPS). Appendix 1 of this Circular provides which principles shall be adopted by a SIPS or PIPS.

Critical Service Providers (CSPs). In certain cases, the operational reliability of a DPS may be dependent on the performance of providers of services that are critical to its operations. Examples of these are providers of information technology (IT) and messaging services. In this respect, the Bangko Sentral sets forth the following expectations from CSPs3 to provide guidance and help ensure that operations of a CSP are held to the same standards as if it were provided by the DPS itself.

3 Adopted from Annex F of the Principles for Financial Market Infrastructures, Bank for International Settlements (BIS) and IOSCO, 2012.

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1. Risk identification and management ? A CSP is expected to identify and manage relevant operational and financial risks to its critical services and ensure that its risk management processes are effective.

2. Information Security ? A CSP is expected to implement and maintain appropriate policies and procedures, and devote sufficient resources to ensure the confidentiality and integrity of information and the availability of its critical services in order to fulfill the terms of its relationship with the DPS.

3. Reliability and resilience - A CSP is expected to implement appropriate policies and procedures, and devote sufficient resources to ensure that its critical services are available, reliable and resilient. Its business continuity management and disaster recovery plans should therefore support the timely resumption of its critical services in the event of an outage so that the service provided fulfills the terms of its agreement with the DPS.

4. Technology planning ? The CSP is expected to have in place robust methods to plan for the entire lifecycle of the use of technologies and the selection of technological standards.

5. Communication with users ? A CSP is expected to be transparent to its users and provide them sufficient information to enable users to understand clearly their roles and responsibilities in managing risks related to their use of a CSP.

Assessment by the Bangko Sentral. The Bangko Sentral shall adopt the PFMI assessment methodology (AM) to evaluate the observance of the relevant principles by a DPS as well as identify possible risks and induce changes in the NPS. In performing the PFMI assessment, the Bangko Sentral shall utilize the pertinent AM's rating scale as laid out in Appendix 2 of this Circular.

Enforcement Action. The Bangko Sentral may deploy enforcement actions to ensure compliance with the provisions of this Section and bring about timely corrective actions. Any violation of this Section shall subject the participants of a payment system and/or its directors, officers, and/or employees to the sanctions set forth in Sections 36 and 37 of R.A. No. 7653, as amended, and Sections 19 and 20 of R.A. No. 11127, as appropriate.

Section 2. This Circular shall take effect fifteen (15) calendar days following its publication either in the Official Gazette or in a newspaper of general circulation.

FOR THE MONETARY BOARD:

Date _____________

BENJAMIN E. DIOKNO Governor

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Appendix 1

Applicability of Principles for Financial Market Infrastructures (PFMI)1 to Designated Payment Systems2

Principle

General Organization

Principle No. 1 ? Legal Basis An FMI should have a well-founded, clear, transparent, and enforceable legal basis for each material aspect of its activities in all relevant jurisdictions. Principle No. 2 ? Governance An FMI should have governance arrangements that are clear and transparent, promote the safety and efficiency of the FMI, and support the stability of the broader financial system, other relevant public interest considerations, and the objectives of relevant stakeholders. Principle No. 3 ? Framework for the comprehensive management of risks An FMI should have a sound risk-management framework for comprehensively managing legal, credit, liquidity, operational, and other risks.

SIPS2 ? ?

?

Credit & Liquidity Risk Management

Principle No. 4 ? Credit risk An FMI should effectively measure, monitor, and manage its credit ?

exposures to participants and those arising from its payment, clearing,

and settlement processes.

Principle No. 5 ? Collateral

An FMI that requires collateral to manage its or its participants' credit exposure should accept collateral with low credit, liquidity, and market

?

risks. An FMI should also set and enforce appropriately conservative

haircuts and concentration limits.

Principle No. 7 ? Liquidity risk

An FMI should effectively measure, monitor, and manage its liquidity

risk. An FMI should maintain sufficient liquid resources in all relevant ? currencies to effect same-day and, where appropriate, intraday and

multiday settlement of payment obligations with a high degree of

confidence under a wide range of potential stress scenarios that should

include, but not be limited to, the default of the participant and its

PIPS2 ? ?

?

1 International standards for financial market infrastructures, i.e., payment systems, central securities depositories, securities settlement systems, central counterparties and trade repositories, issued by the Committee on Payments and Market Infrastructures (CPMI) and the Technical Committee of the International Organization of Securities Commissions (IOSCO) in April 2012. 2 A payment system may be designated by the Bangko Sentral either as a: (1) Systemically Important Payment System (SIPS), or (2) Prominently Important Payment System (PIPS) pursuant to the Payment System Oversight Framework and the National Payment Systems Act.

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